item 14 exhibits financial statement schedules reports form 8k 14a 1 financial statements following financial statements company report deloitte touche llp independent auditors included report deloitte touche llp consolidated balance sheets june 30 1996 1995 consolidated statements operations years ended june 30 1996 1995 1994 consolidated statements stockholders equity years ended june 30 1996 1995 1994 consolidated statements cash flows years ended june 30 1996 1995 1994 notes consolidated financial statements independent auditors report board directors shareholders kensey nash corporation audited accompanying consolidated balance sheets kensey nash corporation company june 30 1996 1995 related consolidated statements operations stockholders equity deficiency cash flows three years period ended june 30 1996 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position kensey nash corporation june 30 1996 1995 results operations cash flows three years period ended june 30 1996 conformity generally accepted accounting principles deloitte touche llp philadelphia pennsylvania august 6 1996 kensey nash corporation consolidated balance sheets see notes consolidated financial statements kensey nash corporation consolidated statements operations see notes consolidated financial statements kensey nash corporation consolidated statements stockholders equity deficiency see notes consolidated financial statements kensey nash corporation see notes consolidated financial statements supplemental schedule noncash financing activities years ended june 30 1996 1994 310000 1500000 respectively converted advances borrowings credit agreement see note 6 capital lease obligations 17420 100603 96716 incurred years ended june 30 1996 1995 1994 respectively company entered new equipment leases see note 5 year ended june 30 1994 company sold 100000 shares common stock former president consideration given promissory note 800000 year ended june 30 1995 company repurchased shares common stock conjunction termination employment company consideration given company return related note see note 13 year ended june 30 1994 company repurchased 60000 shares common stock former chief executive officer conjunction termination employment company consideration given company return note amounting 491505 given officer year ended june 30 1995 company purchased remaining 60000 shares issued former officer consideration given company return related note see note 13 kensey nash corporation notes consolidated financial statements years ended june 30 1996 1995 1994 1 summary significant accounting policies business kensey nash corporation company designs develops manufactures propriety line absorbable medical devices sealing arterial punctures created cardiovascular procedures angiography angioplasty atherectomy placement stents company incorporated delaware august 6 1984 principles consolidation basis presentation consolidated financial statements include accounts kensey nash corporation kensey nash holding company intercompany transactions balances eliminated kensey nash holding company incorporated delaware january 8 1992 formed hold title certain company patents operations preparation consolidated financial statements conformity generally accepted accounting principles necessarily requires management make estimates assumptions estimates assumptions may differ actual results affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements well reported amounts revenue expense period cash equivalents cash equivalents represent cash banks shortterm investments original maturity less three months fair value financial instruments carrying amounts financial instruments including cash equivalents shortterm investments accounts receivable accounts payable shortterm debt approximated fair value june 30 1996 1995 relatively short maturity instruments fair value shortterm investments based quoted market prices investments june 30 1996 consist shortterm certificates deposits us treasury bills investments classified available sale securities except pledged collateral included restricted investments see note 9 june 30 1996 fair market value investments approximates cost inventory stated lower cost determined average cost method approximates fifo market inventory primarily includes cost material utilized processing companys products follows june 30 1996 1995 raw materials 394043 414168 work process 18800 21887 total 412843 436055 property plant equipment property plant equipment consists primarily machinery equipment leasehold improvements recorded cost maintenance repairs expensed incurred machinery furniture equipment depreciated using straightline method useful life ranging five seven years leasehold improvements amortized using straightline method lesser term lease useful life asset patents due long development cycle patents company unable measure recoverability costs incurred therefore costs expensed incurred noncompete agreement january 1992 company acquired certain assets biomaterials company approximately 204000 conjunction therewith company paid additional 100000 noncompete agreement company cost noncompete agreement amortized 5year term agreement revenue recognition revenue research development contracts recognized related costs incurred licensing fees milestone payments agreements american home products corporation ahp see note 2 recognized earnings process complete exchange taken place revenue sales recognized related product shipped advances american home products advances ahp represent payments received advance ahp agreements see note 2 revenue earned related milestone met ahp agreements income taxes company accounts income taxes provisions statement financial accounting standards sfas 109 accounting income taxes loss per share years ended june 30 1996 1995 1994 weighted average common shares outstanding increased 446437 shares number common stock equivalents issued within one year public offering exercise prices initial public offering price adjustments made common stock equivalents issued prior subsequent period common stock equivalents antidilutive effect loss per share stockbased compensation october 1995 financial accounting standards board fasb issued sfas 123 accounting stockbased compensation become effective company fiscal year 1997 statement defines fair value based method accounting employee stock option encourages entities adopt method accounting employee stock compensation plans however company elected also allows entity continue measure compensation costs plans using method prescribed apb 25 accounting stock issued employees sfas 123 adopted material impact financial position results operations company require expanded disclosure regarding companys stock based compensation plans impairment longlived assets march 1995 fasb issued sfas 121 accounting impairment longlived assets longlived assets disposed become effective companys 1997 fiscal year statement requires longlived assets reviewed impairment whenever events circumstances indicate carrying amount asset may recoverable resultant impairment would measured based fair value asset management believes adoption sfas 121 material impact companys results operations financial position initial public offering december 13 1995 company sold 2700000 shares common stock initial public offering ipo net proceeds ipo approximately 291 million continue used primarily research development including clinical trials expansion companys manufacturing capabilities repayment certain indebtedness see note 6 working capital general corporate purposes connection offering companys board directors authorized onefortwo reverse stock split shareholders effective december 6 1995 increased authorized number shares 25000000 accordingly share per share amounts retroactively restated presentation certain items 1994 1995 consolidated financial statements reclassified conform presentation 1996 consolidated financial statements 2 ahp agreements company entered strategic alliance ahp incorporates unites states foreign license agreements together license agreements research development agreement collagen supply agreement credit agreement see note 6 license agreements september 4 1991 company entered license agreements ahp develop angioseal provisions agreements parties responsible development product ahp exclusive rights manufacture market current future sizes angioseal worldwide company receives certain licensing milestone fees 110 million total set forth license agreements june 30 1996 1995 remaining milestone fee consists 105 million payment addition 30 million advance available future royalties advance well remaining milestone payment received upon premarket approval us food drug administration fda produce market angioseal united states license agreements company receives royalty payments based upon percentage revenues generated sale angio seal license agreements also provide certain minimum royalty payments first five years receiving fda approval ahp also providing company advances approximately 221413 145 million received fiscal years ended june 30 1996 1995 respectively advances shown advances companys consolidated balance sheet along advances research development agreement june 30 1995 company repaid advances proceeds ipo research development agreement company ahp entered agreement whereby ahp agreed fund certain ongoing research development costs incurred company contributes one third research development costs ahp contributes remaining twothirds prior companys ipo ahp funded companys portion costs amounts recorded advances ahp totaled 721879 june 30 1995 additional 223243 recorded advances fiscal year 1996 prior ipo company repaid 945127 research development advances proceeds ipo subsequently taken advances ahp collagen supply agreement pursuant agreement entered ahp may 1995 company agreed manufacture collagen used angioseal ahp agreed minimum purchase requirement company five years beginning may 31 1995 3 related party transactions notes receivable repaid date companys ipo see note 2 represented amounts due current former officers company classified amounts component stockholders equity deficiency consolidated balance sheet due collateralized primarily common stock common stock equivalents total interest income earned company notes 9322 26274 6560 fiscal years ended june 30 1996 1995 1994 respectively see note 13 discussion related party transactions certain former officers transactions related employee stock rights issued current former officers outside director fiscal years ended june 30 1996 1995 1994 company incurred 785524 496580 offset proceeds companys ipo 56080 143000 respectively legal fees law firm serves companys general counsel corporate legal affairs certain current former partners firm interests investment partnership owns 50000 shares outstanding common stock company held promissory note principal amount 133330 june 30 1995 including investor notes see note 6 4 accrued bonus june 30 1994 company accrued bonus 300000 paid officers key employees 1995 due lack available funds turnover certain officers employees management decided pay bonus accordingly accrual reversed fiscal 1995 included consolidated statements operations reduction selling general administrative expenses fiscal 1995 5 leases june 30 1996 future minimum annual rental commitments noncancelable lease obligations follows capital leases various types equipment follows june 30 classes property 1996 1995 office equipment 38280 20860 computer equipment 77002 equipment 99457 accumulated amortization 102692 42751 total 112047 154568 assets amortized periods ranging three five years represents lesser term lease useful life asset majority rent expense companys facility exton pennsylvania company also various office manufacturing equipment operating leases rent expense fiscal years ended june 30 1996 1995 1994 approximately 279000 251000 211000 respectively 6 notes payable line credit amounts outstanding notes payable companys credit agreement ahp credit agreement shown following table investor notes repaid proceeds ipo see note 2 june 30 1996 1995 credit agreement 6356824 4722047 investors notes 6411900 22152 total 6356824 11156099 current portion 6356824 11136385 longterm notes payable line credit 19714 credit agreement june 30 1995 company 4000000 credit agreement ahp extended 5000000 june 30 1995 june 30 1995 300000 advances june 30 1995 converted borrowings credit agreement debt outstanding credit agreement includes accrued interest 1356824 722047 june 30 1996 1995 respectively interest accrues rate prime plus 2 1025 june 30 1996 11 june 30 1995 payable maturity terms credit agreement ahp may offset future milestones advances amounts due credit agreement june 30 1996 addition patent rights angioseal pledged collateral company may pay cash dividends loans made facility mature sooner receipt premarket approval angioseal fda december 31 1996 premarket approval angioseal expected received fda fiscal 1996 company expects premarket approval early fiscal year 1997 accordingly company classified obligation current liability consolidated balance sheets june 30 1996 1995 investor notes amounts outstanding june 30 1995 represent principal accrued interest due notes held former investors due january 1995 investor notes repaid full december 1995 proceeds companys ipo company entered certain notes payable agreements finance equipment purchases computer software upgrades june 30 1995 fiscal year 1996 company repaid amounts outstanding agreements proceeds ipo 7 retirement plan company 401k salary reduction plan trust 401k plan employees least 21 years age eligible participate contributions 401k plan made employees employee salary reduction election company contributions discretionary company made contributions 401k plan date 8 income taxes company accounts income taxes sfas 109 generally provides deferred tax assets liabilities recognized temporary differences financial reporting basis tax basis companys assets liabilities expected benefits utilizing net operating loss nol carryforwards impact deferred taxes changes tax rates laws applied years temporary differences expected settled reflected financial statements period enactment significant components companys deferred taxes follows june 30 1996 1995 deferred compensation 3192262 accrued vacation 23128 20241 bonuses 130000 160000 basis difference patents 488998 33351 basis difference fixed assets 145839 216582 prepaid insurance 107789 581 680757 3556315 effective tax rate 4059 4200 deferred tax asset 276319 1493652 nol carryforwards expiring 2001 2011 5354744 3089703 5631063 4583355 less valuation allowance 5631063 4583355 0 companys entire deferred tax asset offset valuation allowance due uncertainity surrounding future earnings june 30 1996 company nol carryforwards federal state tax purposes totaling 172 10 million respectively portion nol may subject various statutory limitations usage 9 commitments contingencies company pledged 2917539 investments collateral secure certain bank loans employees used employees payment taxes incurred result receipt common stock settlement employee stock rights see notes 1 13 exchange company pledging collateral loans affected employee pledged common stock collateral company balance outstanding employee loans 2146090 june 30 1996 10 product return january 1996 result internal routing testing company ahp withdrew two production lots sale europe although neither company ahp received complaints concerning product testing withdrawn production lots determined precautionary measure withdraw remaining inventory ahps european facility connection withdrawal company recognized pretax charge 573961 consolidated statements operations year ended june 30 1996 company taken corrective action resolve issue resumed production reconstruction damaged facility see note 11 management believe impact withdrawal consolidated financial statement company 11 major damage facility january 8 1996 companys facility sustained significant damage roof collapse resulting major snowstorm production companys product halted destroyed facilities could reconstructed construction completed late march 1996 production resumed time company maintains insurance property damage business interruption policy providing coverage subject 1000 deductible property damage portion policy company recovered 1186169 final settlement property damage fiscal year 1996 remaining 686619 recorded component receivables june 30 1996 received july 1996 settlement amount 240269 represents reimbursable losses expenses company related facility damage amount presented net selling general administrative line item consolidated statement operations company also expended 729389 capital expenditures reconstruct damaged facility replace destroyed equipment year ended june 30 1996 proceeds received capitalized items presented component income separate line item consolidated statement operations along net gain property damage insurance settlement 216601 business interruption portion policy company incurred continuing fixed expenses reconstruction period covered expenses policy company recorded 287742 continuing fixed payroll costs related benefits component receivables june 30 1996 related cost products sold selling general administrative expense research development expense offset consolidated statements operations 199642 29073 59027 respectively amounts received excess continuing fixed expenses recorded income related claim settled company continues pursue additional recoveries business interruption policies related damage facility full recovery amount insurance claim still investigated filed carrier june 30 1996 12 concentration credit risk financial instruments potentially subject company significant concentrations credit risk consist primarily cash equivalents shortterm investments accounts receivable company places cash equivalents shortterm investments high quality financial institutions established guidelines relative diversification maturities maintain safety high liquidity respect trade accounts receivable receivables primarily companys strategic alliance partner ahp 97 trade receivables june 30 1996 see note 2 company performs ongoing credit evaluations remainder customers financial conditions require collateral support customer receivables fiscal year 1996 sales ahp amounted 1068381 represents 81 companys total consolidated net sales addition 100 companys research development revenue derived research development agreement ahp see note 2 loss strategic alliance ahp would material adverse impact company 13certain compensation employment agreements employment agreements certain officers company entered employment agreements certain officers provide aggregate annual base salaries 730000 june 1998 employee stock rights company certain stock appreciation plans phantom stock plans stock award obligations together employee stock rights settled full related plans canceled upon completion companys ipo phantom stock plans 439478 units equivalent one share common stock awarded employees company including 305000 current former officers directors conversion units common stock ipo value units estimated year fair market value related compensation expense recorded ipo december 1995 fiscal years ended june 30 1995 1994 compensation expense 2082518 1530263 383119 respectively recorded 1493576 1182434 45000 respectively related officers directors june 30 1995 deferred compensation liability 3192262 related plans stock appreciation plans 100000 units equivalent one share common stock awarded fiscal year ended june 1995 former officers company without cost units assigned value 800 per share upon closing ipo benefit paid participants 33333 shares companys common stock equivalent excess offering price 12 per share unit value 800 per share related compensation expense 400000 recorded fiscal year ended june 30 1995 company gave stock awards rights receive common stock valued 200000 certain consultants company recognition services company stock issued upon completion companys ipo related expense recorded component selling general administrative expense year ended june 30 1996 agreements former officers settlement agreement companys former ceo relating termination employment march 1994 company agreed pay 150000 recorded compensation expense year ended june 30 1994 june 1995 former officer surrendered 60000 shares common stock exchange cancellation outstanding promissory note plus accrued interest lieu shares received 60000 units stock appreciation plans settlement agreement companys former president relating termination employment march 1995 company agreed pay 125000 recorded compensation expense year ended june 30 1995 included accrued expenses consolidated balance sheet june 30 1995 march 1995 former officer surrendered 100000 shares common stock exchange cancellation 800000 promissory note plus accrued interest lieu shares received 40000 units stock appreciation plans year ended june 30 1994 company recorded interest referenced notes increase capital excess par value longer probable amounts would settled cash amount interest recorded capital excess par value 86839 june 30 1994 14preferred stock company authorized class undesignated preferred stock consisting 100000 shares 001 par value board directors may authorize issuance preferred stock ranks senior common stock respect payment dividends distribution assets liquidation addition board directors authorized fix limitations restrictions upon payment dividends common stock effective shares preferred stock outstanding board directors without stockholder approval issue preferred stock voting conversion rights could adversely affect voting power holders common stock june 30 1996 1995 shares preferred stock outstanding company present intention issue shares preferred stock 15employee incentive compensation plan nonemployee director stock option plan 1995 company adopted employee incentive compensation plan employee plan flexible plan provides employee plan committee broad discretion award eligible participants stockbased performancerelated incentives committee deems appropriate persons eligible participate employee plan officers employees consultants company opinion committee contribute growth success company compensation committee board directors oversees committee may grant nonqualified stock options incentive stock options combination thereof participants employee plan provides total number shares available option grants 900000 options granted provide purchase common stock prices determined compensation committee event less fair market value date grant june 30 1996 awards consist solely stock options summarized table companys board directors stockholders approved adoption companys nonemployee directors stock option plan directors plan effective september 1 1995 directors plan grants nonqualified stock options purchase common stock directors employees directors plan provides total number shares available option grants 30000 directors plan provides grant option purchase 5000 shares common stock participant nonemployee director company subsidiary directors plans effective date ii grant option purchase 2500 shares common stock date regular annual stockholder meeting effective date participant nonemployee director upon date either continuing nonemployee director subsequent meeting elected meeting serve nonemployee director options granted directors plan must provide purchase common stock fair market value date grant plans options exercisable maximum term ten years date grant vest periods four five years based grant date exercise price estimated fair value date grant compensation expense recorded related stock options years ended june 30 1996 1995 summary stock option activity plans years ended june 30 1996 1995 follows 16quarterly financial data unaudited summarized quarterly results operations company years ended june 30 1996 june 30 1995 presented quarterly total year earnings per share calculated independently based weighted average number shares outstanding period 14a2financial statement schedules omitted applicable required 14a3exhibits exhibits incorporated reference exhibit number companys registration statement form s1 registration statement 3398722 14b reports form 8k company filed form 8k january 8 1996 report damage facility record snowfall withdrawal two production lots reporting items 5 7 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 26th day september 1996 kensey nash corporation joseph w kaufmann joseph w kaufmann chief executive officer president pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 26th day september 1996 item 14 exhibits financial statement schedules reports form 8k 14a 1 financial statements following financial statements company report deloitte touche llp independent auditors included report independent auditors report consolidated balance sheets june 30 1997 1996 consolidated statements operations years ended june 30 1997 1996 1995 consolidated statements stockholders equity years ended june 30 1997 1996 1995 consolidated statements cash flows years ended june 30 1997 1996 1995 notes consolidated financial statements independent auditors report board directors shareholders kensey nash corporation audited accompanying consolidated balance sheets kensey nash corporation company june 30 1997 1996 related consolidated statements operations stockholders equity cash flows three years period ended june 30 1997 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position kensey nash corporation june 30 1997 1996 results operations cash flows three years period ended june 30 1997 conformity generally accepted accounting principles deloitte touche llp philadelphia pennsylvania august 8 1997 see notes consolidated financial statements see notes consolidated financial statements see notes consolidated financial statements kensey nash corporation consolidated statements cash flows see notes consolidated financial statements kensey nash corporation notes consolidated financial statements years ended june 30 1997 1996 1995 1 summary significant accounting policies business kensey nash corporation company designs develops manufactures proprietary line absorbable medical devices sealing arterial punctures created cardiovascular procedures angiography angioplasty atherectomy placement stents company incorporated delaware august 6 1984 principles consolidation basis presentation consolidated financial statements include accounts kensey nash corporation kensey nash holding company intercompany transactions balances eliminated kensey nash holding company incorporated delaware january 8 1992 formed hold title certain company patents operations preparation consolidated financial statements conformity generally accepted accounting principles necessarily requires management make estimates assumptions estimates assumptions may differ actual results affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements well reported amounts revenue expense period cash equivalents cash equivalents represent cash banks shortterm investments original maturity less three months fair value financial instruments carrying amounts financial instruments including cash equivalents shortterm investments accounts receivable accounts payable shortterm debt approximated fair value june 30 1997 1996 relatively short maturity instruments fair value shortterm investments based quoted market prices investments june 30 1997 consist shortterm certificates deposit government bonds us treasury bills accordance statement financial accounting standards sfas 115 accounting certain investments debt equity securities company classified entire investment portfolio availableforsale securities except pledged collateral included restricted investments see note 9 availableforsale securities reported fair value unrealized gains losses included shareholders equity june 30 1997 amortized cost approximates fair value realized gains losses included interest income inventory stated lower cost determined average cost method approximates firstin firstout market inventory primarily includes cost material utilized processing companys products follows property plant equipment property plant equipment consists primarily machinery equipment leasehold improvements recorded cost maintenance repairs expensed incurred machinery furniture equipment depreciated using straightline method useful life ranging five seven years leasehold improvements amortized using straightline method lesser term lease useful life asset effective july 1 1996 company adopted sfas 121 accounting impairment longlived assets longlived assets disposed sfas 121 requires longlived assets reviewed impairment whenever events circumstances indicate carrying amount asset may recoverable material effect financial statements adoption companys prior impairment recognition practice consistent major provisions statement patents due long development cycle patents company unable measure recoverability costs incurred therefore costs expensed incurred noncompete agreement january 1992 conjunction acquisition certain assets biomaterials company paid 100000 noncompete agreement company cost amortized 5year term agreement expired january 1997 revenue recognition revenue research development contracts recognized related costs incurred licensing fees milestone payments agreements american home products ahpsee note 2 recognized earnings process complete revenue sales recognized related product shipped income taxes company accounts income taxes provisions sfas 109 accounting income taxes initial public offering december 13 1995 company sold 27 million shares common stock initial public offering ipo net proceeds ipo approximately 291 million continue used primarily research development including clinical trials expansion companys manufacturing capabilities repayment certain indebtedness working capital general corporate purposes connection filing companys board directors authorized onefortwo reverse stock split shareholders effective december 6 1995 increased authorized number shares 25 million accordingly share per share amounts retroactively restated charge approximately 12 million recorded year ended june 30 1996 resulting settlement companys employee stock rights see note 13 conjunction therewith 456493 shares common stock issued settle awards certain notes receivable loss per share years ended june 30 1996 1995 weighted average common shares outstanding increased 446437 shares number common stock equivalents issued within one year public offering exercise prices ipo price adjustments made common stock equivalents issued period common stock equivalents antidilutive effect loss per share export sales export sales companys us operations unaffiliated customers europe totaled 1637583 867542 996183 years ended june 30 1997 1996 1995 respectively stockbased compensation effective july 1 1996 company adopted provisions sfas 123 accounting stockbased compensation sfas 123 encourages require companies record compensation cost stockbased compensation plans fair value company elected continue account stockbased compensation accordance accounting principles board opinion 25 accounting stock issued employees related interpretations permitted sfas 123 see note 15 earnings per share february 1997 financial accounting standards board fasb issued sfas 128 earnings per share statement specifies computation presentation disclosure requirements earnings per share entities publicly held common stock become effective interim year end financial statements company ending december 15 1997 company anticipate material effect financial statements result adoption statement presentation certain items 1996 1995 consolidated financial statements reclassified conform presentation 1997 consolidated financial statements 2 ahp agreements company entered strategic alliance ahp incorporates united states foreign license agreements together license agreements research development agreement collagen supply agreement credit agreement see note 6 license agreements september 4 1991 company entered license agreements ahp develop angioseal provisions agreements parties responsible development product ahp exclusive rights manufacture market current future sizes angioseal worldwide license agreements company receives royalty payments based upon percentage revenues generated sale angioseal license agreements also provide certain minimum royalty payments minimum royalty first five years receiving fda approval company received licensing milestone fees totaling 110 million set forth license agreements final milestone payment 105 million received upon premarket approval us food drug administration fda produce market angioseal united states september 30 1996 addition 30 million advance received future royalties stipulated license agreement reduced period 50 royalties earned excess minimum royalty year remainder royalties earned received cash proceeds company june 30 1997 company yet received minimum royalty year one entire 30 million recorded deferred revenue company cannot reasonably estimate excess future royalty payments minimum royalty year entire balance classified long term june 30 1997 ahp also provided company advances approximately 221413 145 million fiscal years ended june 30 1996 1995 respectively company repaid advances proceeds ipo year ended june 30 1996 research development agreement company ahp entered agreement whereby ahp agreed fund certain ongoing research development costs incurred company contributes onethird research development costs ahp contributes remaining twothirds prior ipo ahp funded companys portion costs amounts recorded advances ahp fiscal years 1996 1995 company repaid 945127 research development advances proceeds ipo subsequently taken advances ahp collagen supply agreement pursuant agreement entered ahp may 1995 company agreed manufacture collagen used angioseal ahp agreed minimum purchase requirement company five years beginning may 31 1995 3 related party transactions company earned interest income 9322 26274 fiscal years ended june 30 1996 1995 respectively certain notes receivable current former officers company repaid date companys ipo amounts classified component stockholders equity due collateralized primarily common stock common stock equivalents fiscal years ended june 30 1996 1995 company incurred 785524 496580 offset proceeds ipo 56080 respectively legal fees law firm serves companys general counsel corporate legal affairs certain current former partners firm interests investment partnership owned 50000 shares outstanding common stock company shares sold year ended june 30 1997 see note 13 discussion related party transactions certain former officers transactions related employee stock rights issued current former officers outside director 4 accrued bonus 1995 due lack available funds turnover certain officers employees management decided pay 300000 bonuses accrued june 30 1994 certain officers key employees accordingly accrual reversed included consolidated statements operations reduction selling general administrative expenses fiscal 1995 5 leases june 30 1997 future minimum annual rental commitments noncancelable lease obligations follows capital leases various types equipment follows assets amortized periods ranging three five years represents lesser term lease useful life asset majority rent expense companys facility exton pennsylvania company also various office manufacturing equipment operating leases rent expense fiscal years ended june 30 1997 1996 1995 approximately 274624 279000 251000 respectively 6 debt amounts outstanding companys credit agreement ahp credit agreement line credit shown following table credit agreement june 30 1996 company 5000000 credit agreement ahp debt outstanding credit agreement included accrued interest 1356824 june 30 1996 interest accrued rate prime plus 2 1025 june 30 1996 payable maturity loans made facility matured sooner receipt premarket approval angioseal fda december 31 1996 entire balance 6517348 including interest 1517348 repaid october 1996 following receipt fda approval september 30 1996 line credit october 1996 company entered 100000 revolving credit term loan agreement bearing interest fixed rate 875 designated purchase capital equipment february 1997 agreement replaced 500000 revolving credit term loan agreement revolver bearing interest prime rate interest 85 june 30 1997 revolver calls interest payments december 1 1997 time converts term loan due 60 monthly installments principal interest revolver collateralized first security interest equipment purchased proceeds well certain large equipment company june 30 1997 company borrowed 500000 revolver subsequent year end company modified revolver increasing 2000000 extending conversion term loan date august 1 1998 accordingly amounts due revolver classified longterm june 30 1997 facility collateralized business assets company 7 retirement plan company 401k salary reduction plan trust 401k plan employees least 21 years age eligible participate contributions 401k plan made employees employee salary reduction election company contributions discretionary company made contributions 401k plan date 8 income taxes company accounts income taxes sfas 109 generally provides deferred tax assets liabilities recognized temporary differences financial reporting basis tax basis companys assets liabilities expected benefits utilizing net operating loss nol carryforwards impact deferred taxes changes tax rates laws applied years temporary differences expected settled reflected financial statements period enactment significant components companys deferred taxes follows companys entire deferred tax asset offset valuation allowance due uncertainty surrounding future earnings june 30 1997 company nol carryforwards federal state tax purposes totaling 183 12 million respectively portion nol may subject various statutory limitations usage 9 commitments contingencies company pledged 2419965 investments collateral secure certain bank loans employees used employees payment taxes incurred result receipt common stock settlement employee stock rights see note 13 exchange company pledging collateral loans affected employee pledged common stock collateral company balance outstanding employee loans 2223059 june 30 1997 10 product return january 1996 result internal routine testing company ahp withdrew two production lots sale europe although neither company ahp received complaints concerning product testing withdrawn production lots determined precautionary measure withdraw remaining inventory ahps european facility connection withdrawal company recognized pretax charge 573961 consolidated statements operations year ended june 30 1996 corrective action taken resolve issue production resumed reconstruction damaged facility see note 11 impact withdrawal consolidated financial statements company 11 major damage facility january 8 1996 companys facility sustained significant damage roof collapse resulting major snowstorm production companys products halted destroyed facilities could reconstructed construction completed late march 1996 production resumed time company maintains property damage business interruption insurance company recovered 1186619 net 1000 deductible final settlement property damage fiscal year 1996 amount 500000 received june 30 1996 remaining 686619 recorded component receivables june 30 1996 received fiscal year 1997 settlement amount 240629 represented reimbursable losses expenses company related facility damage amount presented net selling general administrative sga line item consolidated statement operations year ended june 30 1996 company also expended 729389 capital expenditures reconstruct damaged facility replace destroyed equipment year ended june 30 1996 proceeds received capitalized items presented component income separate line item consolidated statement operations year ended june 30 1996 along net gain property damage insurance settlement 216601 company also recovered 1309882 net 1000 deductible final settlement business interruption december 1996 amount 287742 continuing fixed payroll costs related benefits incurred reconstruction period recorded component receivables june 30 1996 related cost products sold sga expense research development expense offset consolidated statements operations year ended june 30 1996 199642 29073 59027 respectively remaining 968761 net adjuster fees recorded component income separate line item consolidated statement operations year ended june 30 1997 12 concentration credit risk financial instruments potentially subject company significant concentrations credit risk consist primarily cash equivalents shortterm investments accounts receivable company places cash equivalents shortterm investments high quality financial institutions established guidelines relative diversification maturities maintain safety high liquidity respect trade accounts receivable receivables primarily companys strategic alliance partner ahp 95 trade receivables june 30 1997 see note 2 company performs ongoing credit evaluations remainder customers financial conditions require collateral support customer receivables years ended june 30 1997 1996 1995 revenues ahp represented following percentages total revenues company 13 certain compensation employment agreements employment agreements certain officers company entered employment agreements certain officers provide aggregate annual base salaries 730000 june 1998 employee stock rights company certain stock appreciation plans phantom stock plans stock award obligations together employee stock rights settled full related plans canceled upon completion companys ipo stock appreciation plans 100000 units equivalent one share common stock awarded fiscal year ended june 1995 former officers company without cost units assigned value 800 per share upon closing ipo benefit paid participants 33333 shares companys common stock equivalent excess offering price 12 per share unit value 800 per share related compensation expense 400000 recorded year ended june 30 1996 phantom stock plans 439478 units equivalent one share common stock awarded employees company including 305000 current former officers directors ipo december 1995 fiscal year ended june 30 1995 compensation expense related shares 2082518 1530263 respectively recorded 1493576 1182434 related officers directors stock awards fiscal year ended june 30 1995 company awarded rights receive common stock valued 200000 certain consultants company recognition services company stock issued upon completion companys ipo related expense recorded component sga expense year ended june 30 1996 agreements former officers june 1995 companys former ceo surrendered 60000 shares common stock exchange cancellation outstanding promissory note lieu shares received 60000 units stock appreciation plans settled connection ipo settlement agreement companys former president relating termination employment march 1995 company agreed pay 125000 recorded compensation expense year ended june 30 1995 march 1995 former officer surrendered 100000 shares common stock exchange cancellation 800000 promissory note plus accrued interest lieu shares received 40000 units stock appreciation plans settled connection ipo 14 preferred stock company authorized class undesignated preferred stock consisting 100000 shares 001 par value board directors may authorize issuance preferred stock ranks senior common stock respect payment dividends distribution assets liquidation addition board directors authorized fix limitations restrictions upon payment dividends common stock effective shares preferred stock outstanding board directors without stockholder approval issue preferred stock voting conversion rights could adversely affect voting power holders common stock june 30 1997 1996 shares preferred stock outstanding company present intention issue shares preferred stock 15 stock option plans 1995 company adopted employee incentive compensation plan employee plan flexible plan provides employee plan committee broad discretion award eligible participants stockbased performancerelated incentives committee deems appropriate persons eligible participate employee plan officers employees consultants company opinion committee contribute growth success company compensation committee board directors oversees committee may grant nonqualified stock options incentive stock options combination thereof participants employee plan provides total 12 million shares available option grants options granted provide purchase common stock prices determined compensation committee event less fair market value date grant june 30 1997 awards consist solely stock options summarized table 1995 company adopted nonemployee directors stock option plan directors plan directors plan grants nonqualified stock options purchase common stock directors employees directors plan provides total number 60000 shares available option grants directors plan provides grant option purchase 5000 shares common stock participant directors plans effective date ii grant option purchase 2500 shares common stock date regular annual stockholder meeting effective date participant upon date either continuing nonemployee director subsequent meeting elected meeting serve nonemployee director options granted directors plan must provide purchase common stock fair market value date grant plans options exercisable maximum term ten years date grant vest periods zero four years based grant date summary stock option activity plans years ended june 30 1997 1996 1995 follows fair value option grant estimated date grant using blackscholes optionpricing model following weighted average assumptions used grants following table summarizes significant option groups outstanding june 30 1997 related weighted average price remaining contractual life information follows company adopted disclosure provisions sfas 123 accounting stock based compensation accordingly compensation cost recognized companys two stock option plans compensation cost plans determined based fair market value grant date awards consistent provisions sfas 123 companys net loss earnings per share would reduced proforma amounts subsequent year end company granted 196100 stock options employee plan option price equal fair market value companys stock date grant july 23 1997 1175 per share 16 quarterly financial data unaudited summarized quarterly results operations company years ended june 30 1997 june 30 1996 presented quarterly total year earnings per share calculated independently based weighted average number shares outstanding period 14a 2 financial statement schedules omitted applicable required 14a 3 exhibits exhibit incorporated reference exhibit number companys registration statement form s1 registration statement 3398722 14b reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 29th day september 1996 kensey nash corporation joseph w kaufmann joseph w kaufmann chief executive officer president pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 29th day september 1997 item 14 exhibits financial statement schedules reports form 8k 14a 1 financial statements following financial statements company report deloitte touche llp independent auditors included report independent auditors report consolidated balance sheets june 30 2001 2000 consolidated statements income years ended june 30 2001 2000 1999 consolidated statements stockholders equity years ended june 30 2001 2000 1999 consolidated statements cash flows years ended june 30 2001 2000 1999 notes consolidated financial statements independent auditors report board directors shareholders kensey nash corporation audited accompanying consolidated balance sheets kensey nash corporation subsidiary company june 30 2001 2000 related consolidated statements income stockholders equity cash flows three years period ended june 30 2001 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted untied states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position company june 30 2001 2000 results operations cash flows three years period ended june 30 2001 conformity accounting principles generally accepted untied states america deloitte touche llp philadelphia pennsylvania august 15 2001 except note 18 date august 21 2001 kensey nash corporation consolidated balance sheets see notes consolidated financial statements kensey nash corporation consolidated statements income see notes consolidated financial statements kensey nash corporation consolidated statements stockholders equity see notes consolidated financial statements kensey nash corporation consolidated statements cash flows supplemental disclosure financing information year ended june 30 2001 company entered acquisition obligation connection acquisition thm biomedical inc see note 3 present value acquisition obligation date acquisition 3856816 see notes consolidated financial statements kensey nash corporation notes consolidated financial statements years ended june 30 2001 2000 1999 1 summary significant accounting policies business kensey nash corporation company developed assisted developing manufacturing absorbable biomaterials products leading companies orthopedic cardiology drugbiologics delivery dental wound care markets incorporation products company also independently behalf customers designs develops various new absorbable biomaterials products markets company also leader development manufacturing cardiovascular medical technology devices distal protection arterial puncture closure company developing triactivtm balloon protected flush extraction system triactiv system device designed provide distal protection saphenous vein graft treatment sufficient patient enrollment european ce mark clinical trial completed company submitting ce mark approval october 2001 company intends commercialize device second half fiscal year ended june 30 2002 fiscal 2002 clinical trials underway united states additionally company original designer developer manufacturer angioseal vascular closure device angioseal leading product arterial puncture closure manufactured marketed sold st jude medical inc device designed seal close femoral artery punctures made diagnostic therapeutic cardiovascular catheterizations company incorporated delaware august 6 1984 principles consolidation basis presentation consolidated financial statements include accounts kensey nash corporation kensey nash holding company intercompany transactions balances eliminated kensey nash holding company incorporated delaware january 8 1992 formed hold title certain company patents operations preparation consolidated financial statements conformity accounting principles generally accepted united states america necessarily requires management make estimates assumptions estimates assumptions may differ actual results affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements well reported amounts revenue expense period cash equivalents cash equivalents represent cash banks shortterm investments original maturity less three months fair value financial instruments carrying amounts financial instruments including cash equivalents shortterm investments accounts receivable accounts payable debt approximated fair value june 30 2001 2000 fair value shortterm investments based quoted market prices investments june 30 2001 consist certificates deposit government corporate obligations accordance statement financial accounting standards sfas 115 accounting certain investments debt equity securities sfas 115 company classified entire investment portfolio availableforsale securities companys entire investment portfolio reported fair value unrealized gains losses included stockholders equity see comprehensive income following summary availableforsale securities june 30 2001 investments maturities ranging 115 years realized gains losses investments years ended june 30 2001 2000 1999 certain securities pledged collateral presented restricted investments see note 10 comprehensive income company accounts comprehensive income provisions sfas 130 reporting comprehensive income sfas 130 accordingly accumulated comprehensive loss shown consolidated statements shareholders equity june 30 2001 2000 1999 solely comprised unrealized gains losses companys availableforsale securities tax effect 2001 2000 1999 comprehensive income significant inventory stated lower cost determined average cost method approximates firstin firstout market inventory primarily includes cost material utilized processing companys products follows june 30 2001 2000 raw materials 1062626 823570 work process 240451 78548 finished goods 18434 total 1321511 902118 property plant equipment property plant equipment consists primarily machinery equipment leasehold improvements recorded cost maintenance repairs expensed incurred machinery furniture equipment depreciated using straightline method useful life ranging five seven years leasehold improvements amortized using straightline method lesser term lease useful life asset impairment longlived assets longlived assets reviewed impairment whenever events circumstances indicate carrying amount asset may recoverable undiscounted expected future cash flows generated related asset less carrying value asset company measures amount impairment comparing carrying amount asset fair value estimation fair value generally measured discounting expected future cash flows rate company borrows accounts receivable allowance company trade receivable allowances 1000 0 june 30 2001 2000 company established trade receivable allowances 1000 0 wrote amounts totaling 0 239 years ended june 30 2001 2000 respectively amounts included selling general administrative expense years ended june 30 2001 2000 patents costs internally developed patents expensed incurred due long development cycle patents companys inability measure recoverability costs incurred cost acquired patents amortized remaining period economic benefit ranging 8 15 years june 30 2001 revenue recognition effective fiscal 2001 company adopted staff accounting bulletin sab 101 revenue recognition financial statements sab 101 clarifies certain conditions met order recognize revenue companys adoption sab 101 material impact results operations financial position cash flows sales revenue recognized related product shipped revenue research development contracts recognized related costs incurred advance payments received products services recorded deferred revenue recognized product shipped services performed company receives royalty historically 12 became 9 october 2000 cumulative 1000000 units sold every angioseal unit sold partner st jude medical recognize revenue accordance licensing agreement company st jude medical end month st jude medical advises us total angioseal sales dollars month accrue royalty revenue equal 9 total sales dollars reported us royalty payments received within 45 days end calendar quarter income taxes company accounts income taxes provisions sfas 109 accounting income taxes sfas 109 see note 9 earnings per share earnings per share calculated accordance sfas 128 earnings per share sfas 128 requires company report basic diluted earnings per share eps basic diluted eps computed using weighted average number shares common stock outstanding common equivalent shares options included diluted computation effect dilutive see note 15 stockbased compensation stockbased compensation cost accounted sfas 123 accounting stockbased compensation sfas 123 permits continued application intrinsic value method accounting principles board opinion 25 accounting stock issued employees apb 25 intrinsic value method compensation cost represents excess quoted market price companys common stock grant date amount grantee must pay stock companys policy grant stock options fair market value date grant see note 14 options granted nonemployees defined sfas 123 would recorded compensation expense company granted options nonemployees years ended june 30 2001 2000 1999 secondary offering may 23 2000 company sold 2700000 shares common stock secondary public offering secondary offering june 22 2000 underwriters elected exercise overallotment option additional 259000 shares net proceeds secondary offering approximately 255 million continue used primarily research development triactiv system including clinical trials repayment certain indebtedness see note 7 general corporate purposes including capital expenditures potential strategic acquisitions see note 3 derivative instruments hedging activities effective july 1 2000 company adopted sfas 133 accounting derivative instruments hedging activities sfas 133 amended established new accounting reporting standards derivative financial instruments hedging activities requires entity recognize derivatives either assets liabilities balance sheet depending companys rights obligations applicable derivative contract measure instruments fair value adoption new method accounting derivatives hedging activities material impact companys financial position operations new accounting pronouncements effective july 1 2000 company adopted financial interpretation 44 accounting certain transactions involving stock compensation fin 44 fin 44 clarifies application apb 25 certain issues adoption interpretation well guidance provided eitf 0023 impact companys financial position results operations june 2001 financial accounting standards board fasb issued sfas 141 business combinations sfas 141 sfas 142 goodwill intangible assets sfas 142 effective july 1 2001 company early adopt sfas 142 sfas 141 requires purchase method accounting used business combinations subsequent june 30 2001 specifies criteria recognizing intangible assets acquired business combination sfas 142 requires goodwill intangible assets indefinite useful lives longer amortized upon adoption standard instead tested impairment least annually intangible assets definite useful lives continue amortized respective useful lives company recorded 100036 goodwill amortization expense year ended june 30 2001 goodwill amortization expense year ending june 30 2002 would 205111 company decided early adopt sfas 142 early adoption sfas 142 result reclassification intangible assets changes amortization periods intangible assets definite lives impairment intangible assets presentation certain items 2000 1999 consolidated financial statements reclassified conform presentation 2001 consolidated financial statements 2 strategic alliance agreements company strategic alliance st jude medical inc st jude medical incorporates united states foreign license agreements together license agreements company also research development agreement collagen supply agreement expired see research development collagen supply agreement license agreements license agreements st jude medical exclusive rights manufacture market current future sizes angioseal worldwide also license agreements company receives royalty payments based upon percentage revenues generated sale angioseal license agreements also provide certain minimum royalty payments minimum royalty first five years receiving us food drug administration fda approval 1999 company received additional royalty payments supplemental royalty previous owner angioseal license agreements tyco international ltd amount 15 million hereafter st jude medical tyco international previous partner license agreements referred strategic alliance partner supplemental royalty compensate company lost angioseal sales expenses incurred period transition corporate ownership november 1998 march 1999 angioseal license agreements st jude medical payments made two equal installments march 29 1999 april 5 1999 company recorded 15 million royalty income year ended june 30 1999 research development agreement company agreement whereby strategic alliance partner funded certain ongoing research development costs incurred company contributed onethird research development costs strategic alliance partner contributed remaining twothirds agreement expired st jude medical performing remaining development work angioseal product line although company still performs contract research development st jude medical upon request collagen supply agreement pursuant agreement st jude medical company manufacture collagen used angioseal agreement contained minimum purchase requirement company price fluctuated based size cumulative quantities sold five years ended may 31 2000 although agreement expired company continues supply st jude medical collagen requirements angioseal 3 thm acquisition september 1 2000 company acquired thm biomedical inc thm developer porous biodegradable tissueengineering devices repair replacement musculoskeletal tissues approximately 105 million plus acquisition costs approximately 239000 transaction financed 66 million companys cash note payable shareholders thm amount 45 million acquisition obligation acquisition obligation due equal quarterly installments 281250 beginning december 31 2000 ending september 30 2004 accordingly present value cash payments discounted based upon companys available borrowing rate 75 3833970 recorded liability companys financial statements remaining balance 3218185 june 30 2001 acquisition accounted purchase method accounting thms results operations included company since date acquisition purchase price allocated assets acquired liabilities assumed based estimated fair values date acquisition allocation resulted goodwill approximately 34 million amortized straightline basis 17 years following summary allocation thousands assets 400 accrued expenses liabilities 702 inprocess research development 7594 excess cost net assets acquired goodwill 3384 10676 significant portion purchase price identified acquired inprocess research development iprd valuation iprd performed independent appraisal using proven valuation procedures techniques represents estimated fair market value based riskadjusted cash flows related iprd programs iprd consists four primary research development programs expected reach completion late 2002 2005 date acquisition development programs yet reached technological feasibility iprd alternative future uses accordingly costs immediately expensed consolidated statement operations acquisition date following unaudited proforma financial information assumes acquisition occurred beginning earliest period presented ended 063001 063000 total revenue 24437976 20361133 net income 12423160 3501161 basic earnings per share 119 45 diluted earnings per share 117 44 pro forma results based certain assumptions estimates pro forma results necessarily represent results would occurred acquisition taken place beginning specified periods indicative results future combined operations 4 leases june 30 2001 future minimum annual rental commitments noncancelable lease obligations follows rent expense operating leases consists rent companys facilities exton pennsylvania duluth minnesota rent expense fiscal years ended june 30 2001 2000 1999 approximately 402000 366000 360000 respectively carrying value equipment capital leases 1525 9944 june 30 2001 2000 respectively assets amortized periods ranging one four years represent lesser term lease useful life asset 5 officer loans company granted loans current officer company totaling 12 million personal use collaterilized officers stock interest loans ranges 70 775 based prime rate interest total interest income earned company loans 66166 39575 9174 years ended june 30 2001 2000 1999 respectively interest principal loans due earlier sale portion officers stock june 29 2002 6 patent acquisition agreement november 10 1997 company entered agreement patent acquisition agreement acquire portfolio puncture closure patents patent applications well rights seller preexisting licensing agreement result patent acquisition agreement beginning january 1 1998 company earns royalty fees formerly paid sellers angioseal sold royalties addition royalties already earned company license agreement strategic alliance partner terms patent acquisition agreement company issued 200000 shares common stock made cash payments totaling 12 million transfer ownership patents cash portion payable eight quarterly installments four 125000 payments followed four 175000 payments beginning march 31 1998 final quarterly payment made december 31 1999 acquired patents valued share price date patent acquisition agreement plus present value cash payments legal related costs incurred acquire patents amortized average remaining useful life acquired portfolio time acquisition 13 years 7 debt financing agreement company 50 million financing agreement bank repaid june 1 2000 proceeds secondary offering term loan company 1075000 outstanding 20 million term loan repaid june 1 2000 proceeds secondary offering acquisition obligation company 3218185 outstanding acquisition obligation see note 3 908800 current june 30 2001 8 retirement plan company 401k salary reduction plan trust 401k plan employees least 21 years age eligible participate contributions 401k plan made employees employee salary reduction election effective october 1 1999 company implemented 25 discretionary matching contribution 6 employees total compensation employee contributions employer contributions 401k plan 2001 2000 1999 70234 41379 0 respectively 9 income taxes company accounts income taxes sfas 109 generally provides deferred tax assets liabilities recognized temporary differences financial reporting basis tax basis companys assets liabilities expected benefits utilizing net operating loss nol carryforwards impact deferred taxes changes tax rates laws applied years temporary differences expected settled reflected financial statements period enactment 2001 company recognized tax benefit related realization certain deferred assets previously offset valuation allowance differences companys income tax expense benefit income tax expense benefit computed using us federal income tax rate follows significant components companys deferred tax assets follows portion companys deferred tax asset offset valuation allowance relating state nol carryforwards due restrictions imposed state uncertainty surrounding use valuation allowance reduces deferred tax assets amount represents managements best estimate amount deferred tax assets likely realized june 30 2001 company nol carryforwards federal state tax purposes totaling 54 200 million respectively expire though 2019 portion nol may subject various statutory limitations usage 10 commitments contingencies company pledged 2231251 investments collateral secure certain bank loans officers used officers payment taxes incurred result receipt common stock companys initial public offering december 1995 exchange company pledging collateral loans affected officer pledged common stock collateral company loans repayable sooner sales officers stock december 2001 balance outstanding officer loans 2154791 june 30 2001 11 concentration credit risk financial instruments potentially subject company significant concentrations credit risk consist primarily cash equivalents shortterm investments accounts receivable company places cash equivalents shortterm investments high quality financial institutions established guidelines relative diversification maturities maintain safety high liquidity respect trade royalty receivables primarily st jude medical 40 100 trade royalty receivables respectively june 30 2001 see note 2 trade receivable one customer 35 trade receivables june 30 2001 either one customers receivable balances deemed uncollectable would material adverse effect companys results operations financial condition company performs ongoing credit evaluations remainder customers financial conditions require collateral support customer receivables 12 certain compensation employment agreements company entered employment agreements certain officers provide aggregate annual base salaries 1042900 june 30 2002 13 preferred stock company authorized class undesignated preferred stock consisting 100000 shares 001 par value board directors may authorize issuance preferred stock ranks senior common stock respect payment dividends distribution assets liquidation addition board directors authorized fix limitations restrictions upon payment dividends common stock effective shares preferred stock outstanding board directors without stockholder approval issue preferred stock voting conversion rights could adversely affect voting power holders common stock june 30 2001 2000 shares preferred stock outstanding company present intention issue shares preferred stock 14 stock option plans 1995 company adopted employee incentive compensation plan employee plan flexible plan provides employee plan committee broad discretion award eligible participants stockbased performancerelated incentives committee deems appropriate persons eligible participate employee plan officers employees company opinion committee contribute growth success company compensation committee board directors oversees committee may grant nonqualified stock options incentive stock options combination thereof participants employee plan provides total 32 million shares available option grants options granted provide purchase common stock prices determined compensation committee event less fair market value date grant june 30 2001 awards consist solely stock options summarized table 1995 company adopted nonemployee directors stock option plan directors plan directors plan grants nonqualified stock options purchase common stock directors employees directors plan provides total number 410000 shares available option grants nonemployee director granted option purchase 5000 shares common stock directors plans effective date addition directors plan provides grant option purchase 7500 shares common stock date regular annual stockholder meeting effective date participant upon date participant must either continuing nonemployee director subsequent meeting elected meeting serve nonemployee director options granted directors plan must provide purchase common stock fair market value date grant plans options exercisable maximum term ten years date grant vest periods zero four years based grant date summary stock option activity plans years ended june 30 2001 2000 1999 follows fair value option grant estimated date grant using blackscholes optionpricing model following weighted average assumptions used grants year ended june 30 2001 2000 1999 dividend yield 0 expected volatility 40 65 50 80 5081 riskfree interest rate 498 613 577 expected lives employee plan 601 694 761 directors plan 601 694 761 following table summarizes significant option groups outstanding june 30 2001 related weighted average exercise price remaining contractual life information follows company adopted disclosure provisions sfas 123 accordingly compensation cost recognized companys two stock option plans compensation cost plans determined based fair market value grant date awards consistent provisions sfas 123 companys net income earnings per share would reduced proforma amounts 15 earnings per share following table shows reconciliation numerators denominators basic diluted eps calculations income numerator weighted average number shares denominator year ended june 30 2001 per share income shares amount basic eps income available common shareholders 3616742 10461552 035 effect dilutive securities options 129595 diluted eps income available common shareholders including assumed conversions 3616742 10591147 034 16 segment reporting operating segments identified components enterprise separate discrete financial information available evaluation chief operating decisionmaking group making decisions allocate resources assess performance based criteria established sfas 131 disclosures segments enterprise related information sfas 131 companys operations products aggregated single reportable segment since similar economic characteristics production processes types customers distribution methods companys primary products include biomaterials puncture closure angioseal puncture closure primarily represents angioseal device sales st jude medical biomaterials products company designs andor manufactures markets various absorbable polymer collagen products use numerous applications including orthopedic cardiology drugbiologics delivery dental wound care company also receives royalty revenue sale angioseal units strategic alliance partner research development revenue certain research development contracts grants net sales product line reconciliation total revenue follows revenue year ended june 30 2001 2000 1999 puncture closure 357905 5486977 1127641 biomaterials 14242613 7656836 6040462 net sales 14600518 13143813 7168103 research development 329754 59857 1894350 royalty income 8240809 6611685 7182969 total revenue 23171081 19815355 16245422 years ended june 30 2001 2000 1999 revenues strategic alliance partner represented following percentages total revenues company percentage total revenue year ended june 30 2001 2000 1999 net sales 48 66 research development see note 2 0 100 royalty income see note 2 100 companys revenues external customers summarized revenues attributed country based location customer one country us represented 10 companys revenues addition companys longlived assets located us revenues year ended june 30 2001 2000 1999 united states 23171081 19583759 15911292 foreign countries 231596 334130 total 23171081 19815355 16245422 17 quarterly financial data unaudited summarized quarterly results operations company years ended june 30 2001 june 30 2000 presented quarterly total year earnings per share calculated independently based weighted average number shares outstanding period 18 litigation march 1998 company together strategic alliance partner filed patent infringement claim perclose inc menlo park california perclose competitor puncture closure market 1999 company amended claim add second patent infringement suit original amended suits filed federal district court eastern district pennsylvania claim perclose infringes companys us patent nos 5676689 5861004 together patents cover system method sealing puncture blood vessel eg femoral artery company seeks damages order permanently enjoin perclose making using selling product infringes patents perclose filed four counterclaims answer complaint first counterclaim seeks declare patent invalid infringed second third counterclaims maintain company committed antitrust violations fourth counterclaim asserts company committed unfair competition us district court eastern district pennsylvania entered markman hearing order regarding claims interpretation dated december 21 2000 favor defendant perclose judge received notice parties preparing joint stipulation requesting court enter judgement noninfringement favor perclose order expedite review markman order us court appeals federal circuit upon receiving notice judge requested additional hearing held april 6 2001 judge requested briefs issues presented kensey nash filed brief motion reconsideration december 21 order april 30 2001 judge denied motion reconsideration august 21 2001 parties negotiating stipulation final judgement presented judge management unable predict final outcome suit whether resolution matter could materially affect companys results operations cash flows financial position company expensed legal costs component selling general administrative expenses services incurred 14a 2 financial statement schedules omitted applicable required 14a 3 exhibits exhibit description 11 form underwriting agreement 12 form irrevocable power attorney selling stockholder 13 form letter transmittal custody agreement 21 asset purchase agreement dated september 1 2000 among kensey nash corporation thm acquisition sub inc thm biomedical inc stockholders thm biomedical inc 31 amended restated certificate incorporation kensey nash 32 amended restated bylaws kensey nash 41 specimen stock certificate representing kensey nash common stock 51 opinion katten muchin zavis 101 kensey nash corporation third amended restated employee incentive compensation plan form stock option agreement 102 kensey nash corporation fourth amended restated nonemployee directors stock option plan form stock option agreement 103 form directors indemnification agreement 104 employment agreement dated july 1 2001 kensey nash joseph w kaufmann 105 employment agreement dated september 1 2001 kensey nash wendy f dicicco 106 employment agreement dated december 1 1998 kensey nash john e nash pe 107 employment agreement dated july 1 2001 kensey nash douglas g evans pe 108 collagen component supply agreement dated may 31 1995 kensey nash quinton instrument company 1010 license agreement united states dated september 4 1991 kensey nash american home products corporation 1011 license agreement foreign dated september 4 1991 kensey nash american home products corporation 1012 tenant lease dated november 19 1996 kensey nash marsh creek associates one lease amendment dated january 3 2000 1013 employment agreement dated march 1 2000 kensey nash caron dambruso 1014 employment agreement dated october 1 2000 kensey nash todd dewitt 232 consent katten muchin zavis included opinion filed exhibit 51 241 form power attorney exhibit incorporated reference exhibit number registration statement form s3 registration statement 33335494 exhibit incorporated reference exhibit number current report form 8k filed sec november 30 2000 exhibit incorporated reference exhibit number registration statement form s1 registration statement 3398722 exhibit incorporated reference exhibit definitive proxy statement filed sec november 2 2000 schedules omitted required applicable information scheduled financial statements notes thereto 14b reports form 8k form 8k filed november 30 2000 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 28th day september 2001 kensey nash corporation wendy f dicicco wendy f dicicco chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 28th day september 2001 item 14 principal accountant fees services information required item incorporated reference information caption “proposal 2ratification appointment auditorsindependent auditor fees” 2009 proxy statement part iv item 15 item 14 principal accountant fees services information required item incorporated reference information caption proposal 2 ratification appointment auditors independent auditor fees 2003 proxy statement part iv item 15 item 14 exhibits financial statement schedules reports form 8k 14a 1 financial statements following financial statements company report deloitte touche llp independent auditors included report independent auditors report consolidated balance sheets june 30 2002 2001 consolidated statements income years ended june 30 2002 2001 2000 consolidated statements stockholders equity years ended june 30 2002 2001 2000 consolidated statements cash flows years ended june 30 2002 2001 2000 notes consolidated financial statements independent auditors report board directors shareholders kensey nash corporation audited accompanying consolidated balance sheets kensey nash corporation subsidiaries company june 30 2002 2001 related consolidated statements income stockholders equity cash flows three years period ended june 30 2002 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position company june 30 2002 2001 results operations cash flows three years period ended june 30 2002 conformity accounting principles generally accepted united states america deloitte touche llp philadelphia pennsylvania august 14 2002 kensey nash corporation consolidated balance sheets see notes consolidated financial statements kensey nash corporation consolidated statements income see notes consolidated financial statements kensey nash corporation consolidated statements stockholders equity kensey nash corporation consolidated statements cash flows supplemental disclosure financing information year ended june 30 2001 company entered acquisition obligation connection acquisition thm biomedical inc see note 4 present value acquisition obligation date acquisition 2309386 see notes consolidated financial statements kensey nash corporation notes consolidated financial statements years ended june 30 2002 2001 2000 1 summary significant accounting policies business kensey nash leader development manufacturing cardiovascular medical technology devices distal protection arterial puncture closure company developing triactivtm balloon protected flush extraction system triactiv device designed provide distal protection saphenous vein graft treatment received european ce mark approval triactiv january 2002 commercialized device fourth quarter fiscal year ended june 30 2002 fiscal 2002 marketing selling device europe direct sales force germany distributors throughout rest europe clinical trials underway united states additionally company original designer developer manufacturer angioseal vascular closure device angioseal leading product arterial puncture closure manufactured marketed sold st jude medical inc device designed seal close femoral artery punctures made diagnostic therapeutic cardiovascular catheterizations company incorporated delaware august 6 1984 developed assisted developing manufacturing absorbable biomaterials products leading companies orthopaedic cardiology drugbiologics delivery periodontal wound care markets incorporation products also independently behalf customers designing developing various new absorbable biomaterials products markets principles consolidation basis presentation consolidated financial statements include accounts kensey nash corporation kensey nash holding company kensey nash europe gmbh intercompany transactions balances eliminated kensey nash holding company incorporated delaware january 8 1992 formed hold title certain company patents operations kensey nash gmbh incorporated germany january 2002 formed purpose sales marketing triactiv launched europe fourth fiscal quarter 2002 preparation consolidated financial statements conformity accounting principles generally accepted united states america necessarily requires management make estimates assumptions estimates assumptions may differ actual results affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements well reported amounts revenue expense period cash equivalents cash equivalents represent cash banks shortterm investments original maturity less three months fair value financial instruments carrying amounts financial instruments including cash equivalents shortterm investments accounts receivable accounts payable debt approximated fair value june 30 2002 2001 fair value shortterm investments based quoted market prices investments june 30 2002 consist certificates deposit government corporate obligations accordance statement financial accounting standards sfas 115 accounting certain investments debt equity securities sfas 115 company classified entire investment portfolio availableforsale securities companys entire investment portfolio reported fair value unrealized gains losses included stockholders equity see comprehensive income following summary availableforsale securities june 30 2001 2002 investments maturities ranging 115 years realized gains losses investments years ended june 30 2002 2001 2000 certain securities pledged collateral presented restricted investments see note 11 comprehensive income company accounts comprehensive income provisions sfas 130 reporting comprehensive income sfas 130 accordingly accumulated comprehensive loss shown consolidated statements shareholders equity june 30 2002 2001 2000 comprised net unrealized gains losses companys availableforsale securities foreign currency translation adjustment tax effect 2002 2001 2000 comprehensive income significant inventory stated lower cost determined average cost method approximates firstin firstout market inventory primarily includes cost material utilized processing companys products follows property plant equipment property plant equipment consists primarily machinery equipment leasehold improvements recorded cost maintenance repairs expensed incurred machinery furniture equipment depreciated using straightline method useful life ranging three seven years leasehold improvements amortized using straightline method lesser term lease useful life asset goodwill represents excess cost fair value identifiable net assets thm biomedical inc thm company acquired september 2000 see footnote 4 thm acquisition footnote 3 goodwill effective july 1 2001 company adopted sfas 141 business combinations sfas 141 sfas 142 goodwill intangible assets sfas 142 sfas 141 requires purchase method accounting used business combinations subsequent june 30 2001 specifies criteria recognizing intangible assets acquired business combination sfas 142 goodwill intangible assets indefinite useful lives longer amortized subject annual impairment tests intangible assets definite useful lives continue amortized respective useful lives company recorded 100036 goodwill amortization expense year ended june 30 2001 goodwill amortization expense year ending june 30 2002 would 205111 company decided early adopt sfas 142 early adoption sfas 142 result reclassification intangible assets changes amortization periods intangible assets definite lives impairment intangible assets impairment longlived assets longlived assets reviewed impairment whenever events circumstances indicate carrying amount asset may recoverable undiscounted expected future cash flows generated related asset less carrying value asset company measures amount impairment comparing carrying amount asset fair value estimation fair value generally measured discounting expected future cash flows rate company borrows accounts receivable allowance company trade receivable allowances 42500 1000 june 30 2002 2001 company established trade receivable allowances 68357 1000 wrote amounts totaling 26857 0 years ended june 30 2002 2001 respectively amounts included selling general administrative expense years ended june 30 2002 2001 patents costs internally developed patents expensed incurred due long development cycle patents companys inability measure recoverability costs incurred entire cost acquired patents amortized remaining period economic benefit ranging 7 12 years june 30 2002 gross carrying amount patents june 30 2002 4096366 accumulated amortization 1159692 amortization expense patents 263026 fiscal year ended june 30 2002 amortization expense acquired patents estimated 263025 years ending june 30 2003 2004 2005 2006 2007 revenue recognition effective fiscal 2001 company adopted staff accounting bulletin sab 101 revenue recognition financial statements sab 101 clarifies certain conditions met order recognize revenue companys adoption sab 101 material impact results operations financial position cash flows sales revenue recognized related product shipped revenue research development contracts recognized related costs incurred advance payments received products services recorded deferred revenue recognized product shipped services performed company receives royalty historically 12 became 9 october 2000 cumulative 1000000 units sold every angioseal unit sold partner st jude medical recognize revenue accordance licensing agreement company st jude medical end month st jude medical advises us total angioseal sales dollars month accrue royalty revenue equal 9 total sales dollars reported us royalty payments received within 45 days end calendar quarter income taxes company accounts income taxes provisions sfas 109 accounting income taxes sfas 109 see note 10 earnings per share earnings per share calculated accordance sfas 128 earnings per share sfas 128 requires company report basic diluted earnings per share eps basic diluted eps computed using weighted average number shares common stock outstanding common equivalent shares options included diluted computation effect dilutive see note 16 stockbased compensation stockbased compensation cost accounted sfas 123 accounting stockbased compensation sfas 123 permits continued application intrinsic value method accounting principles board opinion 25 accounting stock issued employees apb 25 intrinsic value method compensation cost represents excess quoted market price companys common stock grant date amount grantee must pay stock companys policy grant stock options fair market value date grant see note 15 options granted nonemployees defined sfas 123 would recorded compensation expense company granted options nonemployees years ended june 30 2002 2001 2000 secondary offering may 23 2000 company sold 2700000 shares common stock secondary public offering secondary offering june 22 2000 underwriters elected exercise overallotment option additional 259000 shares net proceeds secondary offering approximately 255 million continue used primarily research development triactiv including clinical trials repayment certain indebtedness see note 8 general corporate purposes including capital expenditures potential strategic acquisitions see note 4 derivative instruments hedging activities company adopted sfas 133 accounting derivative instruments hedging activities sfas 133 amended fiscal 2001 sfas 133 established new accounting reporting standards derivative financial instruments hedging activities requires entity recognize derivatives either assets liabilities balance sheet depending companys rights obligations applicable derivative contract measure instruments fair value adoption new method accounting derivatives hedging activities material impact companys financial position results operations new accounting pronouncements june 2001 fasb issued sfas 143 accounting asset retirement obligations sfas 143 sfas 143 establishes accounting reporting standards obligations associated retirement tangible longlived assets associated retirement costs adoption sfas 143 required company fiscal 2003 expect material impact companys financial position operations august 2001 fasb issued sfas 144 accounting impairment disposal longlived assets fasb 144 fasb 144 supercedes sfas 121 accounting impairment longlived assets longlived assets disposed fasb 144 applies longlived assets including discontinued operations consequently amends accounting principles board opinion 30 reporting results operations reporting effects disposal segment business opinion 30 sfas 144 effective company fiscal 2003 adoption company expected material effect companys financial position operations april 2002 fasb issued sfas 145 rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections sfas 145 sfas 145 effective company fiscal 2003 companys adoption sfas 145 expected material effect companys financial position operations june 2002 fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 requires liability cost associated exit disposal activity recognized liability incurred rather date commitment exit disposal plan nullifies eitf 943 sfas 146 applies exit disposal activities initiated december 31 2002 sfas 146 expected material impact companys financial position operations presentation certain items 2001 2000 consolidated financial statements reclassified conform presentation 2002 consolidated financial statements 2 strategic alliance agreements company strategic alliance st jude medical inc st jude medical incorporates united states foreign license agreements together license agreements company also research development agreement collagen supply agreement expired see research development agreement collagen supply agreement license agreements license agreements st jude medical exclusive rights manufacture market current future sizes angioseal worldwide also license agreements company receives royalty payments based upon percentage revenues generated sale angioseal research development agreement company agreement whereby angioseal partner funded certain ongoing research development costs incurred company contributed onethird research development costs partner contributed remaining twothirds agreement expired st jude medical performing remaining development work angioseal product line collagen supply agreement pursuant agreement st jude medical company manufacture collagen used angioseal agreement contained minimum purchase requirement company price fluctuated based size cumulative quantities sold five years ended may 31 2000 although agreement expired company continues supply st jude medical collagen requirements angioseal 3 goodwill company adopted provisions sfas 142 july 1 2001 sfas 142 goodwill longer amortized subject annual impairment tests changes net carrying amount goodwill year ended june 30 2002 june 30 2001 company completed initial required goodwill impairment test sfas 142 first quarter fiscal 2002 indicated goodwill impaired following table reconciles net income basic diluted earnings per share fiscal years ended june 30 2002 2001 2000 statement effective july 1 1999 4 thm acquisition september 1 2000 company acquired thm developer porous biodegradable tissueengineering devices repair replacement musculoskeletal tissues approximately 105 million plus acquisition costs approximately 239000 transaction financed 66 million companys cash note payable shareholders thm amount 45 million acquisition obligation acquisition obligation due equal quarterly installments 281250 beginning december 31 2000 ending september 30 2004 accordingly present value cash payments discounted based upon companys available borrowing rate 75 3833970 recorded liability companys consolidated financial statements remaining balance 2309386 june 30 2002 acquisition accounted purchase method accounting thms results operations included company since date acquisition purchase price allocated assets acquired liabilities assumed based estimated fair values date acquisition allocation resulted goodwill approximately 34 million following summary allocation thousands significant portion purchase price identified acquired inprocess research development iprd valuation iprd performed independent appraisal using proven valuation procedures techniques represents estimated fair market value based riskadjusted cash flows related iprd programs iprd consists four primary research development programs expected reach completion late 2002 2005 date acquisition development programs yet reached technological feasibility iprd alternative future uses accordingly costs immediately expensed consolidated statement operations acquisition date following unaudited proforma financial information assumes acquisition occurred beginning period presented pro forma fiscal year 2001 includes iprd charge 76 million pro forma results based certain assumptions estimates pro forma results necessarily represent results would occurred acquisition taken place beginning specified periods indicative results future combined operations 5 leases june 30 2002 future minimum annual rental commitments noncancelable lease obligations follows rent expense operating leases consists rent companys facilities exton pennsylvania duluth minnesota eschborn germany rent expense fiscal years ended june 30 2002 2001 2000 approximately 511000 402000 366000 respectively 6 officer loans company granted loans current officer company totaling 18 million personal use collateralized officers stock interest loans ranges 575 775 based prime rate interest total interest income earned company loans 92092 66166 39575 years ended june 30 2002 2001 2000 respectively interest principal loans due earlier sale portion officers stock march 2003 sarbanesoxley act 2002 loans may renewed extended due date 7 patent acquisition agreement november 1997 company entered agreement patent acquisition agreement acquire portfolio puncture closure patents patent applications well rights seller preexisting licensing agreement result patent acquisition agreement beginning january 1 1998 company earns royalty fees formerly paid sellers angioseal sold royalties addition royalties already earned company license agreement strategic alliance partner terms patent acquisition agreement company issued 200000 shares common stock made cash payments totaling 12 million transfer ownership patents cash portion payable eight quarterly installments four 125000 payments followed four 175000 payments beginning march 31 1998 final quarterly payment made december 31 1999 acquired patents valued share price per share companys common stock multiplied number shares issued date patent acquisition agreement plus present value cash payments legal related costs incurred acquire patents amortized average remaining useful life acquired portfolio time acquisition approximately 15 years june 30 2002 remaining period amortization approximately 10 years 8 debt financing agreement company 50 million financing agreement bank repaid june 1 2000 proceeds secondary offering term loan company 1075000 outstanding 20 million term loan repaid june 1 2000 proceeds secondary offering acquisition obligation company 2309386 outstanding acquisition obligation see note 4 978902 current june 30 2002 9 retirement plan company 401k salary reduction plan trust 401k plan employees least 21 years age eligible participate contributions 401k plan made employees employee salary reduction election effective october 1 1999 company implemented 25 discretionary matching contribution 6 employees total compensation employee contributions employer contributions 401k plan 2002 2001 2000 87500 70234 41379 respectively 10 income taxes company accounts income taxes sfas 109 generally provides deferred tax assets liabilities recognized temporary differences financial reporting basis tax basis companys assets liabilities expected benefits utilizing net operating loss nol carryforwards impact deferred taxes changes tax rates laws applied years temporary differences expected settled reflected financial statements period enactment 2001 company recognized tax benefit related realization certain deferred assets previously offset valuation allowance differences companys income tax expense benefit income tax expense benefit computed using us federal income tax rate follows significant components companys deferred tax assets follows portion companys deferred tax asset offset valuation allowance relating state nol carryforwards due restrictions imposed state uncertainty surrounding use valuation allowance reduces deferred tax assets amount represents managements best estimate amount deferred tax assets likely realized june 30 2002 company nol carryforwards federal state tax purposes totaling 19 200 million respectively expire though 2020 addition company foreign net operating loss 03 million june 30 2002 expire portion nol may subject various statutory limitations usage 11 commitments contingencies company pledged 2113072 investments collateral secure certain bank loans officers used officers payment taxes incurred result receipt common stock companys initial public offering december 1995 exchange company pledging collateral loans affected officer pledged common stock collateral company loans repayable earlier sales officers stock december 2002 balance outstanding officer loans 2113072 june 30 2002 12 concentration credit risk financial instruments potentially subject company significant concentrations credit risk consist primarily cash equivalents investments accounts receivable company places cash equivalents investments high quality financial institutions established guidelines relative diversification maturities maintain safety high liquidity june 30 2002 company one general electric corporate obligation represented 35 companys total investment balance obligation called face value august 2002 single component companys investment portfolio represented 12 total june 30 2002 respect trade royalty receivables primarily st jude medical 40 100 trade royalty receivables respectively june 30 2002 see note 2 trade receivable one customer 35 trade receivables june 30 2002 either one customers receivable balances deemed uncollectable would material adverse effect companys results operations financial condition company performs ongoing credit evaluations remainder customers financial conditions require collateral support customer receivables 13 certain compensation employment agreements company entered employment agreements certain officers provide aggregate annual base salaries 680000 june 30 2002 14 preferred stock company authorized class undesignated preferred stock consisting 100000 shares 001 par value board directors may authorize issuance preferred stock ranks senior common stock respect payment dividends distribution assets liquidation addition board directors authorized fix limitations restrictions upon payment dividends common stock effective shares preferred stock outstanding board directors without stockholder approval issue preferred stock voting conversion rights could adversely affect voting power holders common stock june 30 2002 2001 shares preferred stock outstanding company present intention issue shares preferred stock 15 stock option plans company employee incentive compensation plan employee plan flexible plan provides employee plan committee broad discretion award eligible participants stockbased performancerelated incentives committee deems appropriate persons eligible participate employee plan officers employees company opinion committee contribute growth success company compensation committee board directors oversees committee may grant nonqualified stock options incentive stock options combination thereof participants employee plan provides total 32 million shares available option grants options granted provide purchase common stock prices determined compensation committee event less closing price stock date grant june 30 2002 awards consist solely stock options summarized table company also nonemployee directors stock option plan directors plan directors plan grants nonqualified stock options purchase common stock directors employees directors plan provides total number 410000 shares available option grants nonemployee director granted option purchase 5000 shares common stock directors plans effective date addition directors plan provides grant option purchase 7500 shares common stock date regular annual stockholder meeting effective date participant upon date participant must either continuing nonemployee director subsequent meeting elected meeting serve nonemployee director options granted directors plan must provide purchase common stock closing price stock date grant plans options exercisable maximum term ten years date grant vest periods zero four years based grant date summary stock option activity plans years ended june 30 2002 2001 2000 follows fair value option grant estimated date grant using blackscholes optionpricing model following weighted average assumptions used grants following table summarizes significant option groups outstanding june 30 2002 related weighted average exercise price remaining contractual life information follows company adopted disclosure provisions sfas 123 accordingly compensation cost recognized companys two stock option plans compensation cost plans determined based fair market value grant date awards consistent provisions sfas 123 companys net income earnings per share would reduced pro forma amounts 16 earnings per share following table shows reconciliation numerators denominators basic diluted eps calculations income numerator weighted average number shares denominator 17 segment reporting operating segments identified components enterprise separate discrete financial information available evaluation chief operating decisionmaking group making decisions allocate resources assess performance based criteria established sfas 131 disclosures segments enterprise related information sfas 131 companys operations products aggregated single reportable segment since similar economic characteristics production processes types customers distribution methods companys primary products medical devices include biomaterials puncture closure angioseal distal protection triactv puncture closure primarily represents angioseal device sales st jude medical biomaterials products company designs andor manufactures markets various absorbable polymer collagen products use numerous applications including orthopaedic cardiology drugbiologics delivery periodontal wound care company also receives royalty revenue sale angioseal units st jude medical research development revenue certain research development contracts grants triactiv commercially launched europe fourth quarter fiscal 2002 net sales product line reconciliation total revenue follows years ended june 30 2002 2001 2000 revenues st jude medical represented following percentages total revenues company companys revenues external customers summarized revenues attributed country based location customer one country us represented 10 companys revenues addition companys longlived assets located us 18 quarterly financial data unaudited summarized quarterly results operations company years ended june 30 2002 june 30 2001 presented quarterly total year earnings per share calculated independently based weighted average number shares outstanding period 19 litigation along st jude medical filed patent infringement suit perclose inc competitor puncture closure market original suit filed 1998 along subsequent amendment filed 1999 filed federal district court eastern district pennsylvania claim perclose infringes us patent numbers 5676689 5861004 patents cover systems methods related sealing percutaneous punctures seek damages order permanently enjoin perclose making using selling products infringe patents november 1999 abbott laboratories acquired perclose filed four counterclaims suit answer complaint first counterclaim seeks declare patents invalid infringed additional counterclaims asserted perclose allege claims frivolous assert various antitrust counterclaims including price discrimination predatory pricing attempted monopolization puncture closure market us district court eastern district pennsylvania entered markman hearing order regarding claims interpretation favor defendant perclose judge denied motion reconsideration august 21 2001 parties stipulated final judgement entered october 19 2001 november 15 2001 filed timely notice appeal thereby initiating appeal court appeals federal circuit briefs filed sides await oral argument anticipated take place late 2002 unable predict final outcome suit whether resolution matter could materially affect companys results operations cash flows financial position company expensed legal costs component selling general administrative expenses services incurred 14a 2 financial statement schedules omitted applicable required 14a 3 exhibits exhibit incorporated reference exhibit number current report form 8k filed sec november 30 2000 exhibit incorporated reference exhibit number registration statement form s1 registration 3398722 exhibit incorporated reference exhibit number quarterly report form 10q quarterly period ended september 30 2001 exhibit incorporated reference exhibit 43 44 registration statement form s8 registration 33371050 exhibit incorporated reference exhibit number annual report form 10k fiscal year ended june 30 2001 exhibit incorporated reference exhibit number registration statement form s3 registration 33335494 management contract compensatory plan arrangement required filed exhibit annual report form 10k schedules omitted required applicable information scheduled financial statements notes thereto 14b reports form 8k file current reports form 8k fourth quarter fiscal 2002 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 30th day september 2002 kensey nash corporation wendy f dicicco wendy f dicicco chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 30th day september 2002 certifications joseph w kaufmann certify 1 reviewed annual report form 10k kensey nash corporation 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report dated september 30 2002 joseph w kaufmann joseph w kaufmann chief executive officer president secretary wendy f dicicco certify 1 reviewed annual report form 10k kensey nash corporation 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report dated september 30 2002 wendy f dicicco cpa wendy f dicicco cpa chief financial officer item 14 exhibits financial statement schedules reports form 8k 14a 1 financial statements following financial statements company report deloitte touche llp independent auditors included report independent auditors report consolidated balance sheets june 30 2000 1999 consolidated statements operations years ended june 30 2000 1999 1998 consolidated statements stockholders equity years ended june 30 2000 1999 1998 consolidated statements cash flows years ended june 30 2000 1999 1998 notes consolidated financial statements independent auditors report board directors shareholders kensey nash corporation audited accompanying consolidated balance sheets kensey nash corporation subsidiary company june 30 2000 1999 related consolidated statements operations stockholders equity cash flows three years period ended june 30 2000 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position company june 30 2000 1999 results operations cash flows three years period ended june 30 2000 conformity accounting principles generally accepted united states america deloitte touche llp philadelphia pennsylvania august 9 2000 kensey nash corporation consolidated balance sheets see notes consolidated financial statements kensey nash corporation consolidated statements operations see notes consolidated financial statements kensey nash corporation consolidated statements stockholders equity see notes consolidated financial statements kensey nash corporation consolidated statements cash flows supplemental schedule noncash financing activities year ended june 30 1998 company issued 200000 shares common stock conjunction patent acquisition agreement incurred related obligation amount 1085270 see note 5 see notes consolidated financial statements kensey nash corporation notes consolidated financial statements years ended june 30 2000 1999 1998 1 summary significant accounting policies business kensey nash corporation company developed assisted developing manufacturing absorbable biomaterials products leading companies orthopedic cardiology drugbiologics delivery wound care markets incorporation products company also independently behalf customers designs develops various new absorbable biomaterials products markets company also leader development manufacturing cardiovascular medical technology devices arterial revascularization arterial puncture closure company developing aegis vortextm device designed remove occlusive material saphenous vein grafts implanted coronary bypass surgeries pilot clinical trial aegis vortex completed company intends commercialize device additionally company original designer developer manufacturer angiosealtm leading product arterial puncture closure manufactured marketed sold st jude medical inc device designed seal close femoral artery punctures made diagnostic therapeutic cardiovascular catheterizations company incorporated delaware august 6 1984 principles consolidation basis presentation consolidated financial statements include accounts kensey nash corporation kensey nash holding company intercompany transactions balances eliminated kensey nash holding company incorporated delaware january 8 1992 formed hold title certain company patents operations preparation consolidated financial statements conformity generally accepted accounting principles necessarily requires management make estimates assumptions estimates assumptions may differ actual results affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements well reported amounts revenue expense period cash equivalents cash equivalents represent cash banks shortterm investments original maturity less three months fair value financial instruments carrying amounts financial instruments including cash equivalents shortterm investments accounts receivable accounts payable debt approximated fair value june 30 2000 1999 fair value shortterm investments based quoted market prices investments june 30 2000 consist shortterm certificates deposit government bonds accordance statement financial accounting standards sfas 115 accounting certain investments debt equity securities company classified entire investment portfolio availableforsale securities except pledged collateral restricted use included restricted investments see note 9 companys entire investment portfolio reported fair value unrealized gains losses included stockholders equity see comprehensive income realized gains losses included interest income comprehensive income effective july 1 1998 company adopted sfas 130 reporting comprehensive income sfas 130 establishes new rules reporting display comprehensive income components accumulated comprehensive loss shown consolidated statements shareholders equity june 30 2000 1999 1998 solely comprised unrealized losses companys availableforsale securities unrealized gain loss year ended june 30 1998 tax effect 2000 1999 comprehensive income significant inventory stated lower cost determined average cost method approximates firstin firstout market inventory primarily includes cost material utilized processing companys products follows property plant equipment property plant equipment consists primarily machinery equipment leasehold improvements recorded cost maintenance repairs expensed incurred machinery furniture equipment depreciated using straightline method useful life ranging five seven years leasehold improvements amortized using straightline method lesser term lease useful life asset impairment longlived assets longlived assets reviewed impairment whenever events circumstances indicate carrying amount asset may recoverable undiscounted expected future cash flows generated related asset less carrying value asset company measures amount impairment comparing carrying amount asset fair value estimation fair value generally measured discounting expected future cash flows rate company borrows accounts receivable allowance company trade receivable allowances 0 19000 june 30 2000 1999 company established trade receivable allowances 0 59376 wrote amounts totaling 239 40376 years ended june 30 2000 1999 respectively amounts included selling general administrative expense years ended june 30 2000 1999 patents costs internally developed patents expensed incurred due long development cycle patents companys inability measure recoverability costs incurred cost acquired patents amortized remaining period economic benefit ranging 13 14 years june 30 2000 revenue recognition sales revenue recognized related product shipped revenue research development contracts recognized related costs incurred income taxes company accounts income taxes provisions sfas 109 accounting income taxes see note 8 earnings per share earnings per share calculated accordance sfas 128 earnings per share requires company report basic diluted earnings per share eps basic diluted eps computed using weighted average number shares common stock outstanding common equivalent shares options included diluted computation effect dilutive see note 14 stockbased compensation stockbased compensation cost accounted sfas 123 accounting stockbased compensation permits continued application intrinsic value method accounting principles board opinion 25 accounting stock issued employees intrinsic value method compensation cost represents excess quoted market price companys common stock grant date amount grantee must pay stock companys policy grant stock options fair market value date grant see note 13 secondary offering may 23 2000 company sold 2700000 shares common stock secondary public offering secondary offering june 22 2000 underwriters elected exercise overallotment option additional 259000 shares net proceeds secondary offering approximately 257 million continue used primarily research development aegis vortex including clinical trials repayment certain indebtedness see note 6 general corporate purposes including capital expenditures potential strategic acquisitions new accounting pronouncements sfas 133 accounting derivative instruments hedging activities amended establishes new accounting reporting standards derivative financial instruments hedging activities requires entity recognize derivatives either assets liabilities balance sheet depending companys rights obligations applicable derivative contract measure instruments fair value adoption new method accounting derivatives hedging activities required july 1 2000 expected material impact companys financial position operations presentation certain items 1999 1998 consolidated financial statements reclassified conform presentation 2000 consolidated financial statements 2 strategic alliance agreements company strategic alliance st jude medical inc st jude incorporates united states foreign license agreements together license agreements company also research development agreement collagen supply agreement collectively three agreements strategic alliance agreements expired see research development collagen supply agreement strategic alliance agreements formerly kendall company kendall subsidiary tyco international ltd tyco november 1998 kendall announced sale angioseal license agreements st jude terms sale companys strategic alliance agreements kendall transferred st jude companys current previous alliance partner referred strategic alliance partner throughout license agreements license agreements st jude exclusive rights manufacture market current future sizes angioseal worldwide also license agreements company receives royalty payments based upon percentage revenues generated sale angioseal license agreements also provide certain minimum royalty payments minimum royalty first five years receiving us food drug administration fda approval company received 30 million advance future royalties stipulated license agreements reduced royalty year period beginning october 1st ending september 30th 50 royalties earned excess minimum royalty year remainder royalties earned received cash proceeds company june 30 1999 company exceeded first second third royalty year periods ended september 30 1997 1998 1999 minimum royalties 5233809 cumulatively deferred revenue balance reduced 50 total excess 388096 amount reduced 0 year ended june 30 2000 1999 company received additional royalty payments supplemental royalty previous owner angioseal license agreements tyco amount 15 million supplemental royalty compensate company lost angioseal sales expenses incurred ongoing transition corporate ownership angioseal license agreements st jude payments made two equal installments march 29 1999 april 5 1999 company recorded 15 million royalty income year ended june 30 1999 research development agreement company strategic alliance partner agreement whereby partner funded certain ongoing research development costs incurred company contributed onethird research development costs strategic alliance partner contributed remaining twothirds agreement expired st jude performing remaining development work angioseal product line although company still performs contract research development st jude upon request collagen supply agreement pursuant agreement st jude company manufactured collagen used angioseal agreement contained minimum purchase requirement company price fluctuated based size cumulative quantities sold five years ended may 31 2000 although agreement expired company continues supply st jude collagen requirements angioseal 3 leases june 30 2000 future minimum annual rental commitments noncancelable lease obligations follows rent expense operating leases consists solely rent companys facility exton pennsylvania rent expense fiscal years ended june 30 2000 1999 1998 approximately 366000 360000 326000 respectively carrying value equipment capital leases 9944 28368 june 30 2000 1999 respectively assets amortized periods ranging three five years represent lesser term lease useful life asset 4 officer loans company loans current officer company totaling 900000 collateralized officers stock interest loans ranges 7 95 based prime rate interest time advances made total interest income earned company loans 39575 9174 4750 years ended june 30 2000 1999 1998 respectively interest principal loans due earlier sale portion officers stock june 26 2001 5 patent acquisition agreement november 10 1997 company entered agreement patent acquisition agreement acquire portfolio puncture closure patents patent applications well rights seller preexisting licensing agreement result patent acquisition agreement beginning january 1 1998 company earns royalty fees formerly paid sellers angioseal device sold royalties addition royalties already earned company license agreement strategic alliance partner terms patent acquisition agreement company issued 200000 shares common stock made cash payments totaling 12 million transfer ownership patents cash portion payable eight quarterly installments four 125000 payments followed four 175000 payments beginning march 31 1998 accordingly present value cash payments discounted based upon companys available borrowing rate time transaction 85 recorded liability companys financial statements final quarterly payment made december 31 1999 reducing balance 0 june 30 2000 see note 6 acquired patents valued share price date patent acquisition agreement plus present value cash payments legal related costs incurred acquire patents 6 debt financing agreement january 1999 company entered 50 million financing agreement bank financing agreement terms financing agreement bank purchased companys 50 million taxexempt bond issue bond issue provided local development authority financing agreement bore interest five year treasury rate plus 1 adjusted quarterly 625 june 30 1999 calls twentyfour interest payments followed sixty monthly installments principal interest financing agreement collaterilized assets company financing agreement repaid june 1 2000 proceeds secondary offering company used 925000 proceeds bond issue pay balance existing revolving credit term loan agreement term loan remaining proceeds bond issue placed certificate deposit cd withdrawals restricted capital expenditure purposes balance cd june 30 1999 2726339 included restricted investments due capital expenditure restriction placed use year ended june 30 2000 company withdrawn remainder proceeds capital expansion reducing balance cd 0 term loan january 1999 company paid existing 20 million revolving credit term loan agreement proceeds financing agreement remaining 1075000 term loan bore interest fixed rate 80 called interest payments february 1 2000 time converted term loan due 60 monthly installments principal interest term loan repaid june 1 2000 proceeds secondary offering amounts outstanding companys term loan financing agreement patent acquisition agreement see note 5 shown following table 7 retirement plan company 401k salary reduction plan trust 401k plan employees least 21 years age eligible participate contributions 401k plan made employees employee salary reduction election company contributions discretionary effective october 1 1999 company implemented 25 matching contribution 6 employees total compensation employee contributions 8 income taxes company accounts income taxes sfas 109 generally provides deferred tax assets liabilities recognized temporary differences financial reporting basis tax basis companys assets liabilities expected benefits utilizing net operating loss nol carryforwards impact deferred taxes changes tax rates laws applied years temporary differences expected settled reflected financial statements period enactment 2000 company provided current income taxes due utilization nols tax purposes differences companys income tax expense benefit income tax expense benefit computed using us federal income tax rate follows significant components companys deferred taxes follows substantially companys deferred tax asset offset valuation allowance due uncertainty surrounding future earnings june 30 2000 company nol carryforwards federal state tax purposes totaling 113and 100 million respectively portion nol may subject various statutory limitations usage 9 commitments contingencies company pledged 2081651 investments collateral secure certain bank loans employees used employees payment taxes incurred result receipt common stock companys initial public offering december 1995 exchange company pledging collateral loans affected employee pledged common stock collateral company balance outstanding employee loans 2010676 june 30 2000 10 concentration credit risk financial instruments potentially subject company significant concentrations credit risk consist primarily cash equivalents shortterm investments accounts receivable company places cash equivalents shortterm investments high quality financial institutions established guidelines relative diversification maturities maintain safety high liquidity respect trade royalty receivables primarily st jude 60 100 trade royalty receivables respectively june 30 2000 see note 2 company performs ongoing credit evaluations remainder customers financial conditions require collateral support customer receivables 11 certain compensation employment agreements company entered employment agreements certain officers provide aggregate annual base salaries 676962 june 30 2001 12 preferred stock company authorized class undesignated preferred stock consisting 100000 shares 001 par value board directors may authorize issuance preferred stock ranks senior common stock respect payment dividends distribution assets liquidation addition board directors authorized fix limitations restrictions upon payment dividends common stock effective shares preferred stock outstanding board directors without stockholder approval issue preferred stock voting conversion rights could adversely affect voting power holders common stock june 30 2000 1999 shares preferred stock outstanding company present intention issue shares preferred stock 13 stock option plans 1995 company adopted employee incentive compensation plan employee plan flexible plan provides employee plan committee broad discretion award eligible participants stockbased performancerelated incentives committee deems appropriate persons eligible participate employee plan officers employees consultants company opinion committee contribute growth success company compensation committee board directors oversees committee may grant nonqualified stock options incentive stock options combination thereof participants employee plan provides total 22 million shares available option grants options granted provide purchase common stock prices determined compensation committee event less fair market value date grant june 30 2000 awards consist solely stock options summarized table 1995 company adopted nonemployee directors stock option plan directors plan directors plan grants nonqualified stock options purchase common stock directors employees directors plan provides total number 210000 shares available option grants nonemployee director granted option purchase 5000 shares common stock directors plans effective date addition directors plan provides grant option purchase 7500 shares common stock date regular annual stockholder meeting effective date participant upon date participant must either continuing nonemployee director subsequent meeting elected meeting serve nonemployee director options granted directors plan must provide purchase common stock fair market value date grant plans options exercisable maximum term ten years date grant vest periods zero four years based grant date summary stock option activity plans years ended june 30 2000 1999 1998 follows fair value option grant estimated date grant using blackscholes optionpricing model following weighted average assumptions used grants following table summarizes significant option groups outstanding june 30 2000 related weighted average exercise price remaining contractual life information follows company adopted disclosure provisions sfas 123 accounting stock based compensation accordingly compensation cost recognized companys two stock option plans compensation cost plans determined based fair market value grant date awards consistent provisions sfas 123 companys net loss earnings per share would reduced proforma amounts 14 earnings per share following table shows reconciliation numerators denominators basic diluted eps calculations income numerator weighted average number shares denominator 15 segment reporting effective july 1 1998 company adopted sfas 131 disclosures segments enterprise related information sfas 131 requires company use management approach identifying operating segments establishes annual interim reporting standards operating segments statement also establishes standards related disclosures products services geographic areas companys operations products aggregated single reportable segment permitted sfas 131 since similar economic characteristics production processes types customers distribution methods companys primary products include biomaterials puncture closure angioseal puncture closure products primarily represents angioseal device sales st jude biomaterials products company designs andor manufactures markets various absorbable polymer collagen products use numerous applications including orthopedic cardiology drugbiologics delivery wound care company also receives royalty revenue sale angioseal units strategic alliance partner research development revenue reimbursed certain research development expenses net sales product line reconciliation total revenue follows years ended june 30 2000 1999 1998 revenues strategic alliance partner represented following percentages total revenues company companys revenues external customers summarized revenues attributed country based location customer one country us represented 10 companys revenues addition companys longlived assets located us 16 quarterly financial data unaudited summarized quarterly results operations company years ended june 30 2000 june 30 1999 presented quarterly total year earnings per share calculated independently based weighted average number shares outstanding period 17 litigation march 1998 company together strategic alliance partner filed patent infringement claim perclose inc menlo park california perclose competitor puncture closure market 1999 company amended claim add second patent infringement suit original amended suits filed eastern district pennsylvania claim perclose infringes companys us patent nos 5676689 5861004 together patents cover system method sealing puncture blood vessel eg femoral artery company seeks damages order permanently enjoin perclose making using selling product infringes patents perclose filed four counterclaims answer complaint first counterclaim seeks declare patent invalid infringed second third counterclaims maintain company committed antitrust violations fourth counterclaim asserts company committed unfair competition management unable predict final outcome suit whether resolution matter could materially affect companys results operations cash flows financial position company expensed legal costs component selling general administrative expenses services incurred 18 subsequent events subsequent year end company acquired assets assumed certain liabilities thm biomedical inc bioabsorbable tissue engineering device development company purchase price 111 million purchase price consists 66 million cash payment closing 1125000 annually subsequent four years annual amounts due quarterly payments 281250 beginning december 31 2000 transaction accounted purchase method purchase price allocated amongst assets acquired liabilities assumed 400224 702351 respectively remainder allocated inprocess research development goodwill 14a 2 financial statement schedules omitted applicable required 14a 3 exhibits exhibit description 11 form underwriting agreement 12 form irrevocable power attorney selling stockholder 13 form letter transmittal custody agreement 21 asset purchase agreement dated september 1 2000 among kensey nash corporation thm acquisition sub inc thm biomedical inc stockholders thm biomedical inc 31 amended restated certificate incorporation kensey nash 32 amended restated bylaws kensey nash 41 specimen stock certificate representing kensey nash common stock 51 opinion katten muchin zavis 101 kensey nash corporation second amended restated employee incentive compensation plan form stock option agreement 102 kensey nash corporation third amended restated nonemployee directors stock option plan form stock option agreement 103 form directors indemnification agreement 104 employment agreement dated july 1 1998 kensey nash joseph w kaufmann 105 employment agreement dated april 1 1999 kensey nash wendy f dicicco 106 employment agreement dated december 1 1998 kensey nash john e nash pe 107 employment agreement dated july 16 1998 kensey nash douglas g evans pe 108 collagen component supply agreement dated may 31 1995 kensey nash quinton instrument company 109 employment agreement dated april 1 1999 kensey nash julie n broderick 1010 license agreement united states dated september 4 1991 kensey nash american home products corporation 1011 license agreement foreign dated september 4 1991 kensey nash american home products corporation 1012 tenant lease dated november 19 1996 kensey nash marsh creek associates one lease amendment dated january 3 2000 231 consent deloitte touche llp 232 consent katten muchin zavis included opinion filed exhibit 51 241 form power attorney 271 financial data schedule exhibit incorporated reference exhibit number registration statement form s3 registration statement 33335494 exhibit incorporated reference exhibit number current report form 8k filed sec september 15 2000 exhibit incorporated reference exhibit number registration statement form s1 registration statement 3398722 exhibit incorporated reference exhibit definitive proxy statement filed sec november 4 1999 schedules omitted required applicable information scheduled financial statements notes thereto 14b reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 28th day september 2000 kensey nash corporation wendy f dicicco wendy f dicicco chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 28th day september 2000 signature titles joseph w kaufmann chief executive officer principal executive joseph w kaufmann officer president secretary director john e nash pe vice president new technologies director john e nash pe douglas g evans pe chief operating officer assistant secretary director douglas g evans pe wendy f dicicco cpa chief financial officer principal accounting financial officer wendy f dicicco cpa kenneth r kensey md director kenneth r kensey md robert j bobb director robert j bobb harold n chefitz director harold n chefitz walter r maupay jr director walter r maupay jr c mccollister evarts md director c mccollister evarts md steven j lee director steven j lee item 14 principal accountant fees services information required item incorporated reference information caption “proposal 2ratification appointment auditorsindependent auditor fees” 2007 proxy statement part iv item 15 item 14 principal accountant fees services information required item incorporated reference information caption “proposal 2ratification appointment independent registered public accounting firmindependent auditor fees” 2010 proxy statement part iv item 15 item 14 principal accountant fees services information required item incorporated reference information caption “proposal 2ratification appointment auditorsindependent auditor fees” 2006 proxy statement part iv item 15 item 14 exhibits financial statement schedules reports form 8k 14a 1 financial statements following financial statements company report deloitte touche llp independent auditors included report independent auditors report consolidated balance sheets june 30 1999 1998 consolidated statements operations years ended june 30 1999 1998 1997 consolidated statements stockholders equity years ended june 30 1999 1998 1997 consolidated statements cash flows years ended june 30 1999 1998 1997 notes consolidated financial statements independent auditors report board directors shareholders kensey nash corporation audited accompanying consolidated balance sheets kensey nash corporation company june 30 1999 1998 related consolidated statements operations stockholders equity cash flows three years period ended june 30 1999 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position kensey nash corporation june 30 1999 1998 results operations cash flows three years period ended june 30 1999 conformity generally accepted accounting principles deloitte touche llp philadelphia pennsylvania august 11 1999 kensey nash corporation consolidated balance sheets see notes consolidated financial statements kensey nash corporation consolidated statements operations see notes consolidated financial statements kensey nash corporation consolidated statements stockholders equity see notes consolidated financial statements kensey nash corporation consolidated statements cash flows supplemental schedule noncash financing activities capital lease obligations 39353 incurred year ended june 30 1997 company entered new equipment leases see note 3 year ended june 30 1998 company issued 200000 shares common stock conjunction patent acquisition agreement incurred related obligation amount 1085270 see note 5 see notes consolidated financial statements kensey nash corporation notes consolidated financial statements years ended june 30 1999 1998 1997 1 summary significant accounting policies business kensey nash corporation company designs develops manufactures individually conjunction third parties medical devices use primarily cardiovascular orthopedic markets company leader cardiac catheterization puncture closure market angioseal device angioseal absorbable medical device sealing arterial punctures created cardiovascular procedures angiography angioplasty atherectomy placement stents companys next product cardiovascular market revascularization device aegis vortex system avs currently clinical trials avs device designed open blocked saphenous vein grafts minimizing risk embolization common problem current treatment alternatives company also leading technology area absorbable biomaterials including applications orthopedics cardiovascular tissue regeneration drug delivery many others company incorporated delaware august 6 1984 principles consolidation basis presentation consolidated financial statements include accounts kensey nash corporation kensey nash holding company intercompany transactions balances eliminated kensey nash holding company incorporated delaware january 8 1992 formed hold title certain company patents operations preparation consolidated financial statements conformity generally accepted accounting principles necessarily requires management make estimates assumptions estimates assumptions may differ actual results affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements well reported amounts revenue expense period cash equivalents cash equivalents represent cash banks shortterm investments original maturity less three months fair value financial instruments carrying amounts financial instruments including cash equivalents shortterm investments accounts receivable accounts payable debt approximated fair value june 30 1999 1998 fair value shortterm investments based quoted market prices investments june 30 1999 consist shortterm certificates deposit government bonds accordance statement financial accounting standards sfas 115 accounting certain investments debt equity securities company classified entire investment portfolio availableforsale securities except pledged collateral restricted use included restricted investments see note 9 availableforsale securities reported fair value unrealized gains losses included stockholders equity see comprehensive income realized gains losses included interest income comprehensive income effective july 1 1998 company adopted sfas 130 reporting comprehensive income sfas 130 establishes new rules reporting display comprehensive income components accumulated comprehensive loss shown consolidated statements shareholders equity june 30 1999 1998 1997 solely comprised unrealized losses companys availableforsale securities unrealized gains losses years ended june 30 1998 1997 tax effect 1999 comprehensive income significant inventory stated lower cost determined average cost method approximates firstin firstout market inventory primarily includes cost material utilized processing companys products follows property plant equipment property plant equipment consists primarily machinery equipment leasehold improvements recorded cost maintenance repairs expensed incurred machinery furniture equipment depreciated using straightline method useful life ranging five seven years leasehold improvements amortized using straightline method lesser term lease useful life asset impairment longlived assets longlived assets reviewed impairment whenever events circumstances indicate carrying amount asset may recoverable undiscounted expected future cash flows generated related asset less carrying value asset company measures amount impairment comparing carrying amount asset fair value estimation fair value generally measured discounting expected future cash flows rate company borrows accounts receivable allowance company trade receivable allowance 19000 june 30 1999 year company established trade receivable allowances 59376 wrote amounts totaling 40376 amount included selling general administrative expense year ended june 30 1999 patents costs internally developed patents expensed incurred due long development cycle patents companys inability measure recoverability costs incurred cost acquired patents amortized remaining period economic benefit ranging 14 15 years june 30 1999 revenue recognition revenue research development contracts recognized related costs incurred licensing fees milestone payments strategic alliance agreements see note 2 recognized earnings process complete sales revenue recognized related product shipped income taxes company accounts income taxes provisions sfas 109 accounting income taxes see note 8 earnings per share earnings per share calculated accordance sfas 128 earnings per share requires company report basic diluted earnings per share eps basic diluted eps computed using weighted average number shares common stock outstanding common equivalent shares options included diluted computation effect dilutive see note 15 stockbased compensation stockbased compensation cost accounted sfas 123 accounting stockbased compensation permits continued application intrinsic value method accounting principles board opinion 25 accounting stock issued employees intrinsic value method compensation cost represents excess quoted market price companys common stock grant date amount grantee must pay stock companys policy grant stock options fair market value date grant see note 14 new accounting pronouncements june 1998 financial accounting standards board fasb issued sfas 133 accounting derivative instruments hedging activities statement establishes accounting reporting standards derivative instruments including certain derivative instruments embedded contracts collectively referred derivatives hedging activities requires entity recognize derivatives either assets liabilities statement financial position measure instruments fair value company required adopt standard fiscal 2001 deferred sfas 137 accounting derivative instruments hedging activities deferral effective date fasb statement 133 time company determined impact standard companys financial statements presentation certain items 1998 1997 consolidated financial statements reclassified conform presentation 1999 consolidated financial statements 2 strategic alliance agreements company strategic alliance st jude medical inc st jude incorporates united states foreign license agreements together license agreements research development agreement collagen supply agreement collectively strategic alliance agreements strategic alliance agreements formerly kendall company kendall subsidiary tyco international ltd tyco november 1998 kendall announced sale angioseal license agreements st jude terms sale companys strategic alliance agreements kendall transferred st jude prior kendall strategic alliance agreements american home products companys current previous alliance partners referred strategic alliance partner throughout license agreements license agreements st jude exclusive rights manufacture market current future sizes angioseal worldwide also license agreements company receives royalty payments based upon percentage revenues generated sale angioseal license agreements also provide certain minimum royalty payments minimum royalty first five years receiving us food drug administration fda approval company received licensing milestone fees totaling 110 million set forth license agreements final milestone payment 105 million received upon receipt premarket approval fda produce market angioseal united states september 30 1996 addition 30 million advance received future royalties stipulated license agreements reduced royalty year period beginning october 1st ending september 30th 50 royalties earned excess minimum royalty year remainder royalties earned received cash proceeds company june 30 1999 company exceeded first second third royalty year periods ended september 30 1997 1998 1999 minimum royalties 352310 3058970 1812529 respectively deferred revenue balance reduced 50 total excess 388096 company anticipates remainder deferred royalty balance repaid fiscal year ended june 30 2000 entire balance classified shortterm june 30 1999 company received additional royalty payments supplemental royalty previous owner angioseal license agreements tyco amount 15 million supplemental royalty compensate company lost angioseal sales expenses incurred ongoing transition corporate ownership angioseal license agreements st jude payments made two equal installments march 29 1999 april 5 1999 company recorded 15 million royalty income year ending june 30 1999 research development agreement company strategic alliance partner agreement whereby partner funded certain ongoing research development costs incurred company contributed onethird research development costs strategic alliance partner contributed remaining twothirds agreement expired companys strategic alliance partner performing remaining development work angioseal product line collagen supply agreement pursuant agreement strategic alliance partner company manufactures collagen used angioseal agreement contains minimum purchase requirement company price fluctuates based size cumulative quantities sold five years beginning may 31 1995 3 leases june 30 1999 future minimum annual rental commitments noncancelable lease obligations follows rent expense operating leases consists solely rent companys facility exton pennsylvania rent expense fiscal years ended june 30 1999 1998 1997 approximately 360341 326000 275000 respectively capital leases various types equipment follows assets amortized periods ranging three five years represent lesser term lease useful life asset 4 officer loans company loans current officer company totaling 250000 collateralized officers stock interest loans ranges 7 875 based prime rate interest time advances made total interest income earned company loans 9174 4750 611 years ended june 30 1999 1998 1997 respectivelyinterest principal loans due sooner sale portion officers common stock june 22 2000 5 patent acquisition agreement november 10 1997 company entered agreement patent acquisition agreement acquire portfolio puncture closure patents patent applications well rights seller preexisting licensing agreement result patent acquisition agreement beginning january 1 1998 company earns royalty fees formerly paid sellers angioseal device sold royalties addition royalties already earned company license agreement strategic alliance partner terms patent acquisition agreement company issued 200000 shares common stock make cash payments totaling 12 million transfer ownership patents cash portion payable eight quarterly installments four 125000 payments followed four 175000 payments beginning march 31 1998 accordingly present value cash payments discounted based upon companys available borrowing rate time transaction 85 recorded liability companys financial statements remaining balance 503453 june 30 1999 see note 6 remaining unamortized discount agreement based imputed interest 21547 70771 june 30 1999 1998 respectively remaining quarterly payments due december 31 1999 classified short term june 30 1999 acquired patents valued share price date patent acquisition agreement plus present value cash payments legal related costs incurred acquire patents 6 debt term loan company 2 million revolving credit term loan agreement term loan term loan bore interest prime rate 85 june 30 1998 called interest payments august 1 1998 term date time converted term loan due 60 monthly installments principal interest june 30 1998 company borrowed 20 million term loan january 1999 company refinanced 925000 outstanding balance term loan 50 million financing agreement bank financing agreement interest rate remaining 1075000 term loan modified fixed 80 term date extended february 1 2000 accordingly 74447 classified short term june 30 1999 financing agreement january 1999 company entered 5 million financing agreement bank financing agreement terms financing agreement bank purchased companys 5 million taxexempt bond issue bond issue provided local development authority financing agreement bears interest five year treasury rate plus 1 adjusted quarterly 625 june 30 1999 calls twentyfour interest payments followed sixty monthly installments principal interest financing agreement collaterilized assets company used 925000 proceeds bond issue pay balance existing term loan remaining proceeds bond issue placed certificate deposit cd withdrawals restricted capital expenditure purposes balance cd june 30 1999 2726339 included restricted investments due capital expenditure restriction placed use amounts outstanding companys term loan financing agreement patent acquisition agreement see note 5 shown following table annual debt maturities approximately 577900 548848 1107293 1182342 1262534 years 2000 2004 respectively 7 retirement plan company 401k salary reduction plan trust 401k plan employees least 21 years age eligible participate contributions 401k plan made employees employee salary reduction election company contributions discretionary company made contributions 401k plan date 8 income taxes company accounts income taxes sfas 109 generally provides deferred tax assets liabilities recognized temporary differences financial reporting basis tax basis companys assets liabilities expected benefits utilizing net operating loss nol carryforwards impact deferred taxes changes tax rates laws applied years temporary differences expected settled reflected financial statements period enactment 1999 company provided current income taxes due utilization nols tax purposes differences companys income tax expense benefit income tax expense benefit computed using us federal income tax rate follows significant components companys deferred taxes follows companys entire deferred tax asset offset valuation allowance due uncertainty surrounding future earnings june 30 1999 company nol carryforwards federal state tax purposes totaling 148 3 million respectively portion nol may subject various statutory limitations usage 9 commitments contingencies company pledged 1949386 investments collateral secure certain bank loans employees used employees payment taxes incurred result receipt common stock companys initial public offering december 1995 exchange company pledging collateral loans affected employee pledged common stock collateral company balance outstanding employee loans 1879286 june 30 1999 10 insurance settlement january 8 1996 companys facility sustained significant damage roof collapse resulting major snowstorm production companys products halted destroyed facilities could reconstructed construction completed late march 1996 production resumed time company maintains property damage business interruption insurance company recovered 1309882 final settlement business interruption result event december 1996 amount 968761 net adjuster fees recorded component income year ended june 30 1997 11 concentration credit risk financial instruments potentially subject company significant concentrations credit risk consist primarily cash equivalents shortterm investments accounts receivable company places cash equivalents shortterm investments high quality financial institutions established guidelines relative diversification maturities maintain safety high liquidity respect trade royalty receivables primarily companys strategic alliance partner 67 100 trade royalty receivables respectively june 30 1999 see note 2 company performs ongoing credit evaluations remainder customers financial conditions require collateral support customer receivables 12 certain compensation employment agreements company entered employment agreements certain officers provide aggregate annual base salaries 748662 june 2000 13 preferred stock company authorized class undesignated preferred stock consisting 100000 shares 001 par value board directors may authorize issuance preferred stock ranks senior common stock respect payment dividends distribution assets liquidation addition board directors authorized fix limitations restrictions upon payment dividends common stock effective shares preferred stock outstanding board directors without stockholder approval issue preferred stock voting conversion rights could adversely affect voting power holders common stock june 30 1999 1998 shares preferred stock outstanding company present intention issue shares preferred stock 14 stock option plans 1995 company adopted employee incentive compensation plan employee plan flexible plan provides employee plan committee broad discretion award eligible participants stockbased performancerelated incentives committee deems appropriate persons eligible participate employee plan officers employees consultants company opinion committee contribute growth success company compensation committee board directors oversees committee may grant nonqualified stock options incentive stock options combination thereof participants employee plan provides total 22 million shares available option grants options granted provide purchase common stock prices determined compensation committee event less fair market value date grant june 30 1999 awards consist solely stock options summarized table 1995 company adopted nonemployee directors stock option plan directors plan directors plan grants nonqualified stock options purchase common stock directors employees directors plan provides total number 60000 shares available option grants nonemployee director granted option purchase 5000 shares common stock directors plans effective date addition directors plan provides grant option purchase 5000 shares common stock date regular annual stockholder meeting effective date participant upon date participant must either continuing nonemployee director subsequent meeting elected meeting serve nonemployee director options granted directors plan must provide purchase common stock fair market value date grant plans options exercisable maximum term ten years date grant vest periods zero four years based grant date summary stock option activity plans years ended june 30 1999 1998 1997 follows fair value option grant estimated date grant using blackscholes optionpricing model following weighted average assumptions used grants following table summarizes significant option groups outstanding june 30 1999 related weighted average exercise price remaining contractual life information follows company adopted disclosure provisions sfas 123 accounting stock based compensation accordingly compensation cost recognized companys two stock option plans compensation cost plans determined based fair market value grant date awards consistent provisions sfas 123 companys net loss earnings per share would reduced proforma amounts 15 earnings per share following table shows reconciliation numerators denominators basic diluted eps calculations income numerator weighted average number shares denominator reconciliation shown year ended june 30 1997 common share equivalents antidilutive 16 segment reporting effective july 1 1998 company adopted sfas 131 disclosures segments enterprise related information sfas 131 requires company use management approach identifying operating segments establishes annual interim reporting standards operating segments statement also establishes standards related disclosures products services geographic areas companys operations products aggregated single reportable segment permitted sfas 131 since similar economic characteristics production processes types customers distribution methods companys primary products include puncture closure angioseal biomaterials puncture closure products primarily represents angioseal device sales companys strategic alliance partner biomaterials products company designs andor manufactures markets various absorbable polymer collagen products use numerous applications including orthopedics cardiovascular tissue regeneration drug delivery many others company also receives royalty revenue sale angioseal units strategic alliance partner research development revenue reimbursed certain research development expenses revenue product line follows years ended june 30 1999 1998 1997 revenues strategic alliance partner represented following percentages total revenues company companys sales external customers summarized net sales attributed country based location customer one country us represented 10 companys revenues addition companys longlived assets located us revenue year ended june 30 1999 1998 1997 united states 15911292 11246697 6269412 foreign countries 334130 72035 1637583 total 16245422 11318732 7906995 17 quarterly financial data unaudited summarized quarterly results operations company years ended june 30 1999 june 30 1998 presented quarterly total year earnings per share calculated independently based weighted average number shares outstanding period 18 litigation march 1998 company together strategic alliance partner filed patent infringement claim perclose inc menlo park california perclose competitor puncture closure market 1999 company amended claim add second patent infringement suit original amended suits filed eastern district pennsylvania claim perclose infringes companys us patent nos 5676689 5861004 together patents cover system method sealing puncture blood vessel eg femoral artery company seeks damages order permanently enjoin perclose making using selling product infringes patents perclose filed four counterclaims answer complaint first counterclaim seeks declare patent invalid infringed second third counterclaims maintain company committed antitrust violations fourth counterclaim asserts company committed unfair competition management unable predict final outcome suit whether resolution matter could materially affect companys results operations cash flows financial position company expensed legal costs component selling general administrative expenses services incurred 14a 2 financial statement schedules omitted applicable required 14a 3 exhibits exhibit description 31 form amended restated certificate incorporation company 32 form amended restated bylaws company 41 specimen stock certificate representing common stock 101 kensey nash corporation employee stock incentive plan form stock option agreement 102 kensey nash corporation nonemployee directors stock option plan form stock option agreement 103 form directors indemnification agreement 104 employment agreement dated march 24 1995 company joseph w kaufmann 105 employment agreement dated july 1 1993 company kenneth r kensey md 106 employment agreement dated july 1 1993 company john e nash pe 107 employment agreement dated march 24 1995 company douglas g evans pe first amendment employment agreement dated october 1 1995 108 collagen component supply agreement dated may 31 1995 company quinton instrument company 109 credit agreement dated may 3 1993 company american home products corporation amended 1010 license agreement united states dated september 4 1991 company american home products corporation 1011 license agreement foreign dated september 4 1991 company american home products corporation 1012 research development agreement dated november 19 1995 company american home products corporation 1013 amendment 1 credit agreement dated november 30 1993 company american home products corporation 1014 amendment 2 credit agreement dated august 1 1995 company american home products corporation 271 financial data schedule exhibit incorporated reference exhibit number companys registration statement form s1 registration statement 3398722 14b reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 28th day september 1999 kensey nash corporation wendy f dicicco wendy f dicicco chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 28th day september 1999 item 14 principal accountant fees services information required item incorporated reference information caption proposal 2 ratification appointment auditors independent auditor fees 2004 proxy statement part iv item 15 item 14 principal accountant fees services information required item incorporated reference information caption “proposal 2ratification appointment independent registered public accounting firmindependent auditor fees” 2011 proxy statement part iv item 15 item 14 exhibits financial statement schedules reports form 8k 14a 1 financial statements following financial statements company report deloitte touche llp independent auditors included report independent auditors report consolidated balance sheets june 30 1998 1997 consolidated statements operations years ended june 30 1998 1997 1996 consolidated statements stockholders equity years ended june 30 1998 1997 1996 consolidated statements cash flows years ended june 30 1998 1997 1996 notes consolidated financial statements independent auditors report board directors shareholders kensey nash corporation audited accompanying consolidated balance sheets kensey nash corporation company june 30 1998 1997 related consolidated statements operations stockholders equity cash flows three years period ended june 30 1998 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position kensey nash corporation june 30 1998 1997 results operations cash flows three years period ended june 30 1998 conformity generally accepted accounting principles deloitte touche llp philadelphia pennsylvania august 3 1998 kensey nash corporation consolidated balance sheets see notes consolidated financial statements kensey nash corporation see notes consolidated financial statements kensey nash corporation see notes consolidated financial statements kensey nash corporation supplemental schedule noncash financing activities capital lease obligations 39353 17420 incurred years ended june 30 1997 1996 respectively company entered new equipment leases see note 4 year ended june 30 1998 company issued 200000 shares common stock conjunction patent acquisition agreement incurred related obligation amount 1085270 see note 5 see notes consolidated financial statements kensey nash corporation notes consolidated financial statements years ended june 30 1998 1997 1996 1 summary significant accounting policies business kensey nash corporation company designs develops manufactures individually conjunction third parties medical devices use primarily cardiovascular orthopedic markets companys primary product angioseal absorbable medical device sealing arterial punctures created cardiovascular procedures angiography angioplasty atherectomy placement stents company incorporated delaware august 6 1984 principles consolidation basis presentation consolidated financial statements include accounts kensey nash corporation kensey nash holding company intercompany transactions balances eliminated kensey nash holding company incorporated delaware january 8 1992 formed hold title certain company patents operations preparation consolidated financial statements conformity generally accepted accounting principles necessarily requires management make estimates assumptions estimates assumptions may differ actual results affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements well reported amounts revenue expense period cash equivalents cash equivalents represent cash banks shortterm investments original maturity less three months fair value financial instruments carrying amounts financial instruments including cash equivalents shortterm investments accounts receivable accounts payable debt approximated fair value june 30 1998 1997 fair value shortterm investments based quoted market prices investments june 30 1998 consist shortterm certificates deposit government bonds us treasury bills accordance statement financial accounting standards sfas 115 accounting certain investments debt equity securities company classified entire investment portfolio availableforsale securities except pledged collateral included restricted investments see note 9 availableforsale securities reported fair value unrealized gains losses included stockholders equity june 30 1998 amortized cost approximates fair value realized gains losses included interest income inventory stated lower cost determined average cost method approximates firstin firstout market inventory primarily includes cost material utilized processing companys products follows property plant equipment property plant equipment consists primarily machinery equipment leasehold improvements recorded cost maintenance repairs expensed incurred machinery furniture equipment depreciated using straightline method useful life ranging five seven years leasehold improvements amortized using straightline method lesser term lease useful life asset impairment longlived assets longlived assets reviewed impairment whenever events circumstances indicate carrying amount asset may recoverable undiscounted expected future cash flows generated related asset less carrying value asset company measures amount impairment comparing carrying amount asset fair value estimation fair value generally measured discounting expected future cash flows rate company borrows patents costs internally developed patents expensed incurred due long development cycle patents companys inability measure recoverability costs incurred cost acquired patents amortized remaining period economic benefit ranging 15 16 years june 30 1998 revenue recognition revenue research development contracts recognized related costs incurred licensing fees milestone payments strategic alliance agreements see note 2 recognized earnings process complete revenue sales recognized related product shipped export sales export sales companys us operations unaffiliated customers europe totaled 72035 1637583 867542 years ended june 30 1998 1997 1996 respectively income taxes company accounts income taxes provisions sfas 109 accounting income taxes see note 8 initial public offering december 13 1995 company sold 27 million shares common stock initial public offering ipo net proceeds ipo approximately 291 million continue used primarily research development including clinical trials expansion companys manufacturing capabilities repayment certain indebtedness working capital general corporate purposes charge approximately 12 million recorded year ended june 30 1996 resulting settlement companys employee stock rights see note 13 conjunction therewith 456493 shares common stock issued settle awards certain notes receivable earnings per share effective 1998 earnings per share calculated accordance sfas 128 earnings per share requires company report basic diluted earnings per share eps basic diluted eps computed using weighted average number shares common stock outstanding common equivalent shares options included diluted computation effect dilutive previously disclosed earnings per share data recalculated reflect provisions sfas 128 see note 16 year ended june 30 1996 weighted average common shares outstanding increased 446437 shares number common stock equivalents issued within one year ipo exercise prices ipo price stockbased compensation stockbased compensation cost accounted sfas 123 accounting stockbased compensation permits continued application intrinsic value method accounting principles board opinion 25 accounting stock issued employees intrinsic value method compensation cost represents excess quoted market price companys common stock grant date amount grantee must pay stock companys policy grant stock options fair market value date grant see note 15 new accounting pronouncements june 1997 financial accounting standards board fasb issued sfas 130 reporting comprehensive income establishes standards reporting classifying components comprehensive income financial statements june 1997 fasb also issued sfas 131 disclosures segments enterprise related information statement establishes standards providing disclosures related products services geographic area major customers company adopt statements fiscal year 1999 financial statements required implementation standards expected material effect companys financial statements may require additional financial statement disclosures presentation certain items 1997 1996 consolidated financial statements reclassified conform presentation 1998 consolidated financial statements 2 strategic alliance agreements company entered strategic alliance american home products ahp strategic alliance partner incorporated united states foreign license agreements together license agreements research development agreement collagen supply agreement credit agreement see note 6 collectively strategic alliance agreements december 1997 ahp announced sale subsidiary sherwood davis geck sdg operating company responsible sales marketing manufacturing angioseal device tyco international ltd tyco terms sale companys strategic alliance agreements ahp transferred tycos subsidiary kendall company kendall accordingly kendall replaced ahp companys strategic alliance partner march 1998 upon finalization sale license agreements september 4 1991 company entered license agreements strategic alliance partner develop angioseal provisions agreements parties responsible development product strategic alliance partner exclusive rights manufacture market current future sizes angioseal worldwide license agreements company receives royalty payments based upon percentage revenues generated sale angioseal license agreements also provide certain minimum royalty payments minimum royalty first five years receiving us food drug administration fda approval company received licensing milestone fees totaling 110 million set forth license agreements final milestone payment 105 million received upon premarket approval fda produce market angioseal united states september 30 1996 addition 30 million advance received future royalties stipulated license agreements reduced royalty year period beginning october 1st ending september 30th 50 royalties earned excess minimum royalty year remainder royalties earned received cash proceeds company june 30 1998 company exceeded first second royalty year periods ended september 30 1997 september 30 1998 minimum royalties 352310 1688530 respectively deferred revenue balance reduced 50 total excess 1979580 company cannot reasonably estimate excess future royalty payments minimum royalty year entire balance classified longterm june 30 1998 ahp also provided company operating advances repaid proceeds ipo year ended june 30 1996 research development agreement company strategic alliance partner agreement whereby partner funds certain ongoing research development costs incurred company contributes onethird research development costs strategic alliance partner contributes remaining twothirds prior ipo strategic alliance partner funded companys portion costs amounts repaid proceeds ipo company taken advances partner collagen supply agreement pursuant agreement strategic alliance partner company manufactures collagen used angioseal agreement contains minimum purchase requirement company five years beginning may 31 1995 3 related party transactions company earned interest income 9322 fiscal year ended june 30 1996 certain notes receivable former officer company repaid date ipo amount classified component stockholders equity collateralized primarily common stock common stock equivalents fiscal year ended june 30 1996 company incurred 785524 496580 offset proceeds ipo legal fees law firm serves companys general counsel corporate legal affairs certain current former partners firm interests investment partnership owned 50000 shares outstanding common stock company shares sold fiscal year ended june 30 1997 see note 13 discussion related party transactions certain former officers transactions related employee stock rights issued current former officers outside director 4 leases june 30 1998 future minimum annual rental commitments noncancelable lease obligations follows capital leases various types equipment follows assets amortized periods ranging three five years represent lesser term lease useful life asset majority rent expense companys facility exton pennsylvania company also various office manufacturing equipment operating leases rent expense fiscal years ended june 30 1998 1997 1996 approximately 326000 275000 279000 respectively 5 patent acquisition agreement november 10 1997 company entered agreement patent acquisition agreement acquire portfolio puncture closure patents patent applications well rights seller preexisting licensing agreement result patent acquisition agreement effective january 1 1998 company entitled earn royalty fees formerly paid sellers angioseal device sold royalties addition royalties already earned company license agreement strategic alliance partner terms patent acquisition agreement company issued 200000 shares common stock make cash payments totaling 12 million transfer ownership patents cash portion payable eight quarterly installments four 125000 payments followed four 175000 payments beginning march 31 1998 accordingly present value cash payments discounted based upon companys available borrowing rate 85 recorded liability companys financial statements remaining balance 879228 june 30 1998 see note 6 acquired patents valued share price date patent acquisition agreement plus present value cash payments legal related costs incurred acquire patents 6 debt line credit august 1997 company increased 500000 revolving credit term loan agreement revolver 20 million revolver bears interest prime rate 85 june 30 1998 calls interest payments august 1 1998 time converts term loan due 60 monthly installments principal interest revolver collateralized first security interest equipment purchased proceeds well certain large equipment company june 30 1998 company borrowed 20 million revolver subsequent year end company refinanced 925000 outstanding balance revolver 50 million financing agreement bank bond agreement see note 18 term date remaining 1075000 revolver extended august 1 1999 interest rate modified 80 accordingly amounts due revolver classified longterm june 30 1998 credit agreement company 5 million credit agreement strategic alliance partner outstanding balance 6517348 including interest 1517348 repaid october 1996 following receipt fda approval september 30 1996 amounts outstanding companys revolver patent acquisition agreement shown following table annual debt maturities approximately 540077 536234 353750 400000 years 1999 2003 respectively 7 retirement plan company 401k salary reduction plan trust 401k plan employees least 21 years age eligible participate contributions 401k plan made employees employee salary reduction election company contributions discretionary company made contributions 401k plan date 8 income taxes company accounts income taxes sfas 109 generally provides deferred tax assets liabilities recognized temporary differences financial reporting basis tax basis companys assets liabilities expected benefits utilizing net operating loss nol carryforwards impact deferred taxes changes tax rates laws applied years temporary differences expected settled reflected financial statements period enactment 1998 company provided current income taxes due utilization nols tax purposes difference companys income tax expense benefit income tax expense benefit computed using us federal income tax rate follows significant component companys deferred taxes follows companys entire deferred tax asset offset valuation allowance due uncertainty surrounding future earnings june 30 1998 company nol carryforwards federal state tax purposes totaling 180 28 million respectively portion nol may subject various statutory limitations usage 9 commitments contingencies company pledged 1914418 investments collateral secure certain bank loans employees used employees payment taxes incurred result receipt common stock settlement employee stock rights see note 13 exchange company pledging collateral loans affected employee pledged common stock collateral company balance outstanding employee loans 1818697 june 30 1998 10 product return january 1996 result internal routine testing company ahp withdrew two production lots sale europe although neither company ahp received complaints concerning product testing withdrawn production lots determined precautionary measure withdraw remaining inventory ahps european facility connection withdrawal company recognized pretax charge 573961 consolidated statements operations year ended june 30 1996 corrective action taken resolve issue production resumed reconstruction damaged facility see note 11 impact withdrawal consolidated financial statements company 11 insurance settlement january 8 1996 companys facility sustained significant damage roof collapse resulting major snowstorm production companys products halted destroyed facilities could reconstructed construction completed late march 1996 production resumed time company maintains property damage business interruption insurance company recovered 1186619 net 1000 deductible final settlement property damage fiscal year 1996 settlement amount 240629 represented reimbursable losses expenses company related facility damage amount remaining 945990 presented net selling general administrative sga expenses separate component income respectively consolidated statement operations year ended june 30 1996 company also recovered 1309882 net 1000 deductible final settlement business interruption december 1996 amount 287742 continuing fixed payroll costs related benefits incurred reconstruction period offset related cost products sold sga expense research development expense consolidated statements operations year ended june 30 1996 199642 29073 59027 respectively remaining 968761 net adjuster fees recorded component income separate line item consolidated statement operations year ended june 30 1997 12 concentration credit risk financial instruments potentially subject company significant concentrations credit risk consist primarily cash equivalents shortterm investments accounts receivable company places cash equivalents shortterm investments high quality financial institutions established guidelines relative diversification maturities maintain safety high liquidity respect trade royalty receivables primarily companys strategic alliance partner 89 100 trade royalty receivables respectively june 30 1998 see note 2 company performs ongoing credit evaluations remainder customers financial conditions require collateral support customer receivables years ended june 30 1998 1997 1996 revenues strategic alliance partner represented following percentages total revenues company 13 certain compensation employment agreements employment agreements certain officers company entered employment agreements certain officers provide aggregate annual base salaries 730000 june 1999 employee stock rights company certain stock appreciation plans phantom stock plans stock award obligations together employee stock rights settled full related plans canceled upon completion ipo stock appreciation plans 100000 units equivalent one share common stock value 800 awarded fiscal year ended june 1995 former officers company without cost upon closing ipo benefit paid participants 33333 shares common stock equivalent excess offering price 12 per share unit value 800 per share related compensation expense 400000 recorded year ended june 30 1996 phantom stock plans 439478 units equivalent one share common stock awarded employees company including 305000 current former officers directors ipo compensation expense 2082518 related shares recorded 1493576 related officers directors expense related issuance previously granted stock awards certain consultants company valued 200000 recorded component sga expense year ended june 30 1996 14 preferred stock company authorized class undesignated preferred stock consisting 100000 shares 001 par value board directors may authorize issuance preferred stock ranks senior common stock respect payment dividends distribution assets liquidation addition board directors authorized fix limitations restrictions upon payment dividends common stock effective shares preferred stock outstanding board directors without stockholder approval issue preferred stock voting conversion rights could adversely affect voting power holders common stock june 30 1998 1997 shares preferred stock outstanding company present intention issue shares preferred stock 15 stock option plans 1995 company adopted employee incentive compensation plan employee plan flexible plan provides employee plan committee broad discretion award eligible participants stockbased performancerelated incentives committee deems appropriate persons eligible participate employee plan officers employees consultants company opinion committee contribute growth success company compensation committee board directors oversees committee may grant nonqualified stock options incentive stock options combination thereof participants employee plan provides total 12 million shares available option grants options granted provide purchase common stock prices determined compensation committee event less fair market value date grant june 30 1998 awards consist solely stock options summarized table 1995 company adopted nonemployee directors stock option plan directors plan directors plan grants nonqualified stock options purchase common stock directors employees directors plan provides total number 60000 shares available option grants directors plan provides grant option purchase 5000 shares common stock participant directors plans effective date ii grant option purchase 5000 shares common stock date regular annual stockholder meeting effective date participant upon date either continuing nonemployee director subsequent meeting elected meeting serve nonemployee director options granted directors plan must provide purchase common stock fair market value date grant plans options exercisable maximum term ten years date grant vest periods zero four years based grant date summary stock option activity plans years ended june 30 1998 1997 1996 follows fair value option grant estimated date grant using blackscholes optionpricing model following weighted average assumptions used grants following table summarizes significant option groups outstanding june 30 1998 related weighted average exercise price remaining contractual life information follows company adopted disclosure provisions sfas 123 accounting stock based compensation accordingly compensation cost recognized companys two stock option plans compensation cost plans determined based fair market value grant date awards consistent provisions sfas 123 companys net loss earnings per share would reduced proforma amounts subsequent year end company granted 128500 stock options employee plan option price equal fair market value companys stock date grant august 28 1998 763 per share 16 earnings per share following table shows reconciliation numerators denominators basic diluted eps calculations income numerator weighted average number shares denominator reconcilation shown years ended june 30 1997 1996 common share equivalents antidilutive 17 quarterly financial data unaudited summarized quarterly results operations company years ended june 30 1998 june 30 1997 presented quarterly total year earnings per share calculated independently based weighted average number shares outstanding period 18 litigation march 1998 company together strategic alliance partner filed patent infringement claim perclose inc menlo park california perclose competitor puncture closure market suit filed eastern district pennsylvania claims perclose infringes companys us patent 5676689 patent covers system method sealing puncture blood vessel eg femoral artery company seeks damages order permanently enjoin perclose making using selling product infringes patent perclose filed four counterclaims answer complaint first counterclaim seeks declare patent invalid infringed second third counterclaims maintain company committed antitrust violations fourth counterclaim asserts company committed unfair competition management unable predict final outcome suit whether resolution matter could materially affect companys results operations cash flows financial position accordingly amount recorded june 30 1998 related resolution perclose matter 19 subsequent event subsequent year end company entered bond agreement backed taxexempt bonds issued local county development authority bond agreement bears interest one percent five year treasury rate adjusted quarterly company refinanced 925000 outstanding balance revolver portion proceeds see note 6 remaining 4075000 available bond agreement drawn company equipment purchases facility expansion bond agreement calls twentyfour monthly consecutive interest payments followed 60 monthly installments principal interest collateralized first security interest equipment purchased proceeds well second security interest assets company 14a 2 financial statement schedules omitted applicable required 14a 3 exhibits incorporated reference exhibit number companys registration statement form s1 registration statement 3398722 14b reports form 8k company filed form 8k december 8 1997 report acquired certain patents relating puncture closure technology return issued shares common stock reporting items 5 7 9 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 28th day september 1998 kensey nash corporation joseph w kaufmann joseph w kaufmann chief executive officer president pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 28th day september 1998 signature titles joseph w kaufmann chief executive officer principal executive officer president chief financial officer joseph w kaufmann principal financial accounting officer secretary director john e nash pe vice chairman board executive vice president john e nash pe kenneth r kensey md chairman board directors kenneth r kensey md douglas g evans pe chief operating officer assistant secretary director douglas g evans pe wendy f dicicco cpa chief financial officer wendy f dicicco cpa robert j bobb director robert j bobb harold n chefitz director harold n chefitz walter r maupay jr director walter r maupay jr item 14 principal accountant fees services information required item incorporated reference information caption “proposal 2ratification appointment auditorsindependent auditor fees” 2005 proxy statement part iv item 15 item 14 principal accountant fees services information required item incorporated reference information caption “proposal 2ratification appointment auditorsindependent auditor fees” 2008 proxy statement part iv item 15 item 7 managements discussion analysis financial condition results operations overview company designs develops manufactures proprietary line absorbable medical devices sealing arterial punctures created diagnostic therapeutic cardiovascular procedures angiography angioplasty atherectomy placement stents companys proprietary principal product 8f size angioseal device designed provide safe effective rapid method sealing arterial punctures companys goal replace current standard care manual compression angioseal product line company developing sizes angioseal including 6f 10f sizes together angioseal product line address broader market applications addition angioseal product line company manufactures proprietary collagen use third parties developing additional products related puncture closure technology including laparoseal device closing punctures laparoscopic surgery rotary catheter application opening occluded bypass grafts company strategic relationship ahp whereby ahp manufacture market angioseal product line worldwide 8 f angioseal approved sale ce mark europe september 1995 united states september 1996 angioseal also approved sale canada january 8 1996 portion roof companys exton facility collapsed result record snowfall philadelphia area damage manufacturing areas including companys cleanroom extensive production companys facility halted destroyed facilities could reconstructed construction completed late march 1996 shipments resumed april 1996 company recovered approximately 12 million property damage policy final settlement property claim companys claim business interruption filed carrier august 1996 company expects settlement claim second quarter fiscal year 1997 company made significant investments manufacturing regulatory clinical quality assurance research development staffs companys volume products sold increases company expects fixed investment areas spread across larger number units therby improving gross margins company anticipates results operations improve foreseeable future due number factors including ahps performance manufacturing marketing distributing angioseal product line receipt regulatory approvals united states countries outside europe including japan australia results ongoing planned clinical trials angioseal products acceptance companys products marketplace results operations fiscal year ended june 30 1996 compared fiscal year ended june 30 1995 revenues periods consisted net sales research development revenue milestone fees royalty income revenues decreased 35 2967000 fiscal year ended june 30 1996 fiscal 1996 4567000 fiscal year ended june 30 1995 fiscal 1995 net sales products decreased 3 research development revenues increased 237 decrease net sales mainly attributable angioseal unavailable sale europe third portion fourth quarter fiscal 1996 increase research development revenues related contract research development ahp additional sizes product enhancements angioseal 27 million 1995 represented milestone fee received ahp approval angioseal france final milestone 1050000 license agreement ahp earned company upon receipt fda approval first quarter fiscal 1997 royalty income represented angioseal royalties european sales angioseal available sale europe one quarter fiscal 1995 versus three quarters fiscal 1996 royalty income increased 76000 fiscal 1996 41300 fiscal 1995 cost products sold increased 12 1637000 fiscal year 1996 1468000 fiscal 1995 negative gross profit margin due unabsorbed fixed manufacturing costs associated production angio seal subassemblies collagen unabsorbed fixed costs slightly offset third quarter 200000 insurance recovery charge related companys insurance claim research development expenses increased 18 3581000 fiscal 1996 3034000 fiscal 1995 company expanded development additional angioseal sizes laparoseal biomaterials products started development rotary technology seven additional research development employees hired fiscal year 1996 response expansion accordingly direct research development expenses well personnel costs increased fiscal 1996 selling general administrative expenses increased 15 2132000 fiscal 1996 1850000 fiscal 1995 increase primarily due final recording deferred compensation expense nonofficers directors december 1995 reflect settlement certain employee stock rights initial public offering deferred compensation expense officers directors increased 26 1494000 fiscal 1996 1182000 fiscal 1995 increase due final recording deferred compensation december 1995 reflect settlement certain employee stock rights initial public offering company recognized pretax charge 574000 fiscal 1996 consolidated financial statements charge due withdrawal two production lots subsequent inventory result internal routine testing issue resolved management believe impact withdrawal financial statements company net interest expense decreased 473000 fiscal 1996 1081000 fiscal 1995 decrease result repayment certain notes held former investors upon completion companys initial public offering payment resulted decrease interest expense 956000 1115000 fiscal 1996 1995 respectively addition interest earned cash equivalent investment balances resulting proceeds companys initial public offering increased interest income 483000 34000 fiscal 1996 1995 respectively fiscal 1996 company received 1187000 final settlement property damage portion insurance claim 946000 recorded income business interruption portion claim still pending fiscal 1996 company nonoperating income 62000 compared non operating expense 163000 fiscal 1995 shift non operating expense non operating income results nonrecurring items recorded fiscal 1995 fiscal 1995 company wroteoff investment 128000 well forgave interest 87000 notes due former officer company canceled exchange return common stock fiscal ended june 30 1995 compared fiscal ended june 30 1994 revenues periods consisted net sales products research development revenue milestone fees royalty income revenues increased 8 4567000 fiscal 1995 4236000 fiscal year ended june 30 1994 fiscal 1994 net sales products increased 1358000 fiscal 1995 365000 fiscal 1994 increase primarily due sales angioseal subassemblies ahp sales launch europe partially offsetting increase 18000 decrease sales collagenbased products nonmedical applications mostly cosmetics reflecting companys reduced marketing emphasis area research development revenue decreased 58 468000 fiscal 1995 1121000 fiscal 1994 decrease due timing angioseal clinical trial development program substantially completed fiscal 1994 milestone fees decreased 27 million fiscal 1994 fiscal 1995 payment represented milestone amounts received ahp approval angioseal france fiscal 1994 payment 275 million represented milestone payment submission angioseal pma fda company first earned royalties sales angioseal france germany fiscal 1995 products sold pursuant ahp license agreements fiscal 1994 royalty income year cost products sold increased 1468000 fiscal 1995 369000 fiscal 1994 negative gross profit 110000 fiscal 1995 due expense incurred initiation manufacturing assembly operations manufacturingengineering support functions necessary provide commercial requirements angioseal ahp research development expense including regulatory clinical expense decreased 28 3034000 fiscal 1995 4230000 fiscal 1994 decrease primarily due reduction expenses associated angioseal clinical trials substantially completed fiscal 1994 outside expenses associated clinical trails approximately 500000 lower fiscal 1995 addition legal fees maintenance fees associated patents reduced approximately 200000 1995 costs associated outside laboratory testing fees related companys collagen occurred 1994 reduced approximately 300000 outside professional fees associated angioseal research development programs reduced 1995 approximately 250000 selling general administrative expense decreased 13 1850000 fiscal 1995 2115000 fiscal 1994 decrease primarily due decrease bonus expense 434000 includes reversal bonuses declared fiscal 1994 300000 partially offset increase consulting fees approximately 131000 deferred compensation officers directors increased 1182000 fiscal 1995 45000 fiscal 1994 due increased vesting units june 30 1995 difference fair market value unit june 30 1994 800 june 30 1995 0f 875 respect employee stock rights officers directors interest expense increased 36 1115000 fiscal 1995 822000 fiscal 1994 increase primarily due additional interest due ahp 204000 result increase prime rate fiscal 1995 accrual unpaid interest due investor notes incresed 79000 reflecting increase interest rate 14 18 january 1995 notes default interest income increased 34000 fiscal 1995 15000 fiscal 1994 increase primarily due increased interest earned notes due certain officers company expense income increased net expense 164000 fiscal 1995 net expense 15000 fiscal 1994 increase expense due primarily due writeoff investment 128000 forgiveness interest 87000 due notes companys former officers canceled fiscal 1995 exchange return common stock partially offsetting increase grant income 43000 national science foundation collagenbased project completed august 1995 liquidity capital resources company financed operations since inception sale equity securities licensing technology research development arrangements debt product sales december 13 1995 company completed initial public offering issuing 27 million shares common stock 1200 per share resulting approximately 291 million net proceeds company proceeds used primarily research development including clinical trials expansion companys manufacturing capabilities repayment certain indebtedness working capital general corporate purposes net cash used companys operating activities fiscal years 1996 1995 51 12 million respectively increase net cash used operating activities partially due 17 million increase companys net loss fiscal year 1996 fiscal year 1995 fiscal year 1995 included 27 million milestone payment ahp resulted substantially reduced loss period addition changes asset liability balances fiscal 1996 fiscal 1995 resulted 2044000 increase cash flow used operating activities primarily due accounts receivable increased 1769000 1995 result increased trade receivables insurance proceeds receivable capital expenditures 1728000 fiscal year 1996 1279000 related reconstruction damaged facility replacement destroyed equipment remaining capital expenditures related expansion companys manufacturing capabilities companys cash equivalents shortterm investments 11734000 june 30 1996 addition company pledged 2918000 investments included 11734000 collateral secure bank loans made employees payment taxes incurred employees result receipt common stock settlement employee stock rights time companys initial public offering exchange companys pledging collateral employees pledged common stock collateral company fiscal year 1996 company received 1482000 credit agreement advances ahp notes payable december 1995 company paid 6743000 full settlement 18 notes held former investors addition company repaid ahp outstanding advance balance credit agreement 1945000 february 1996 company 6357000 debt accrued interest outstanding ahp credit agreement june 30 1996 interest accrues prime rate interest plus 2 1025 june 30 1996 debt matures earlier premarket approval angioseal fda december 31 1996 fda approval requires ahp pay company total 4050000 1050000 milestone fee 3000000 royalty advance managements intention use milestone fee royalty advance repay portion credit agreement balance remainder repaid cash hand company anticipates results operations fluctuate foreseeable future due number factors include timing future regulatory approvals ahps performance manufacturing marketing distribution angioseal product line pursuit regulatory approvals united states countries outside europe including japan australia results ongoing planned clinical trials angioseal products acceptance companys products marketplace competitive products generally particular designed sealing arterial site punctures company plans continue expend substantial resources funding clinical trials gain regulatory approvals make additional marketing claims continue expand research development activities angio seal laparoseal rotary technology biomaterials products company believes initial public offering proceeds combined cash generated operations sufficient meet companys operating capital requirements least end fiscal year 1997 statements contained form 10k historical facts forwardlooking statements made pursuant safe harbor provisions private securities litigation reform act 1995 company cautions number important factors could cause companys actual results 1997 beyond differ materially expressed forwardlooking statements made behalf company important factors include without limitation timing future fda approvals announcements technological innovations introduction new products company competitors time effort priority level ahp attaches angioseal ahps ability successfully manufacture market angioseal companys ability manufacture angioseal components competition rival developers puncture closure devices general business conditions healthcare industry general economic conditions important factors could affect companys results fully discussed companys prospectus dated december 13 1995 risk factors detailed companys filing securities exchange commission company cannot assure able anticipate respond timely changes factors listed could adversely affect operating results one fiscal quarters results operations past period considered indicative results expected future periods fluctuations operating results may also result fluctuations price common stock item 8 item 7 managements discussion analysis financial condition results operations overview company medical device company focused commercialization continuing development line absorbable medical devices sealing arterial punctures created diagnostic therapeutic cardiovascular procedures angiography angioplasty atherectomy placement stents companys proprietary principal product 8f angioseal device designed provide safe effective rapid method sealing arterial punctures company developing sizes angioseal including 6f 10f sizes together angioseal product line address broader market applications addition involvement angioseal product line company manufactures proprietary collagen use third parties expanded design manufacturing capabilities resorbable polymers company also developing rotary catheter application opening occluded bypass grafts company strategic relationship ahp whereby ahp worldwide marketing manufacturing rights angioseal product line company participates manufacturing process ahps sole supplier bioresorbable components device addition historically company supplied ahp partially completed devices subassemblies completed ahp european facility distribution european market future company plans supply ahp completed devices distribution europe supplement ahps manufacturing capabilities sherwood davis geck sdg subsidiary ahp responsible worldwide marketing distribution angioseal product line also continues fund development enhancements angioseal product line research development agreement company receives royalty sdg every angioseal device sold worldwide 8f angioseal approved sale ce mark europe september 1995 us september 1996 angioseal also sold canada australia saudi arabia israel following fda approval 8f angioseal september 30 1996 initial sales product began us second quarter fiscal 1997 however january 27 1997 product voluntarily recalled us market sdg related problem identified within assembly process quinton instrument company manufacturing facility ahp upon modification manufacturing process approval pma supplement filed fda product reintroduced us market april 28 1997 product market europe similar period time fiscal 1996 production halted january portion roof companys exton facility collapsed result record snowfall upon completion facility repairs subassembly sales ahp resumed april 1996 reintroduction european market may 1996 company expects royalty income become significant source revenue demand angioseal worldwide market increases also conjunction increase demand company expects increase ahps component requirements company cautions however results operations could fluctuate foreseeable future due number factors including ahps ability successfully manufacture market angioseal results ongoing clinical trials related regulatory approvals companys ability manufacture bioresorbable components angioseal competition puncture closure devices timing acceptance introductions new products market results operations fiscal year ended june 30 1997 compared fiscal year ended june 30 1996 revenues periods consisted net sales research development revenue milestone fees royalty income revenues increased 167 79 million fiscal 1997 30 million fiscal 1996 net sales products increased 178 research development revenue increased 80 royalty income increased 363 increase net sales mainly attributable increases resorbable component subassembly sales ahp support increased demand european market launch 8f angioseal product us following fda approval september 1996 increase research development revenue related contract research development including clinical trials ahp additional sizes product enhancements angioseal 11 million milestone fee represented final milestone license agreement ahp earned company upon receipt fda approval first quarter fiscal 1997 increase royalty income represented angioseal royalties full year european sales commencement us sales compared nine months european sales fiscal 1996 cost products sold increased 87 31 million fiscal 1997 16 million fiscal 1996 fiscal 1997 cost products sold represented 16 gross profit margin change trend 24 negative gross profit margin fiscal 1996 favorable trend resulted manufacturing efficiencies realized production levels increased research development expense increased 31 47 million fiscal 1997 36 million fiscal 1996 company expanded development additional angioseal sizes biomaterials products including resorbable polymers collagen increased clinical trial activity continued development rotary technology six additional research development employees hired fiscal 1997 part increased activity accordingly research development expenses well related personnel costs increased fiscal 1997 selling general administrative expense decreased 15 18 million fiscal 1997 21 million fiscal 1996 decrease primarily due final recording deferred compensation expense nonofficers directors fiscal 1996 reflect settlement certain employee stock rights ipo deferred compensation expense officers directors fiscal 1996 represented final recording deferred compensation december 1995 reflect settlement certain employee stock rights ipo product return charge 574000 fiscal 1996 due withdrawal two production lots subsequent inventory result internal routine testing issue resolved impact withdrawal results operations company interest income increased 30 627000 fiscal 1997 483000 fiscal 1996 increase represented interest earned cash equivalent investment balances remaining ipo held entire year fiscal 1997 compared six months fiscal 1996 interest expense decreased 80 193000 fiscal 1997 956000 fiscal 1996 decrease result repayment credit agreement ahp upon receipt fda approval angioseal september 1996 remaining interest expense represented interest 100000 bank line credit entered october 1996 increased 500000 february 1997 fiscal 1997 company received 13 million final settlement business interruption portion insurance claim related roof collapse amount 288000 recorded receivable fiscal 1996 remainder net adjuster fees recorded component income fiscal 1997 company received 12 million final settlement property damage portion insurance claim fiscal 1996 946000 recorded component income fiscal 1997 majority total nonoperating income 8000 represented net gain sale fixed assets fiscal 1996 company nonoperating income 62000 resulting nonrecurring items fiscal year ended june 30 1996 compared fiscal year ended june 30 1995 revenues periods consisted net sales research development revenue milestone fees royalty income revenues decreased 35 30 million fiscal 1996 46 million fiscal year ended june 30 1995 fiscal 1995 net sales products decreased 3 research development revenue increased 237 decrease net sales mainly attributable angioseal unavailable sale europe third portion fourth quarter fiscal 1996 increase research development revenue related contract research development ahp additional sizes product enhancements angioseal 27 million fiscal 1995 represented milestone fee received ahp approval angioseal france royalty income represented angioseal royalties european sales angioseal available sale europe one quarter fiscal 1995 versus three quarters fiscal 1996 royalty income increased 76000 fiscal 1996 41000 fiscal 1995 cost products sold increased 12 16 million fiscal year 1996 15 million fiscal 1995 negative gross profit margin due unabsorbed fixed manufacturing costs associated production angioseal subassemblies collagen unabsorbed fixed costs slightly offset third quarter 200000 insurance recovery charge related companys insurance claim research development expense increased 18 36 million fiscal 1996 30 million fiscal 1995 company expanded development additional angioseal sizes continued research additional puncture closure technology biomaterials products started development rotary technology seven additional research development employees hired fiscal year 1996 part increased activity accordingly research development expenses well personnel costs increased fiscal 1996 selling general administrative expense increased 15 21 million fiscal 1996 18 million fiscal 1995 increase primarily due final recording deferred compensation expense nonofficers directors december 1995 reflect settlement certain employee stock rights ipo deferred compensation expense officers directors increased 26 15 million fiscal 1996 12 million fiscal 1995 increase due final recording deferred compensation december 1995 reflect settlement certain employee stock rights ipo company recognized pretax charge 574000 fiscal 1996 consolidated financial statements charge due withdrawal two production lots subsequent inventory result internal routine testing issue resolved impact withdrawal results operations company interest expense decreased 956000 11 million fiscal 1996 1995 respectively result repayment certain notes held former investors upon completion ipo interest income increased 483000 34000 fiscal 1996 1995 respectively result interest earned cash equivalent investment balances resulting proceeds ipo fiscal 1996 company received 12 million final settlement property damage portion insurance claim 946000 recorded income fiscal 1996 company nonoperating income 62000 compared nonoperating expense 163000 fiscal 1995 shift nonoperating expense nonoperating income results nonrecurring items recorded fiscal 1995 fiscal 1995 company wroteoff investment 128000 well forgave interest 87000 notes due former officer company canceled exchange return common stock liquidity capital resources company financed operations since inception sale equity securities licensing technology research development arrangements debt credit arrangements product sales december 1995 company completed ipo issuing 27 million shares common stock 1200 per share resulting approximately 291 million net proceeds company proceeds continue used primarily research development including clinical trials expansion companys manufacturing capabilities repayment certain indebtedness working capital general corporate purposes companys operating activities fiscal 1997 provided net cash 29 million fiscal 1996 used net cash 51 million change cash used cash provided operating activities primarily resulted 57 million 96 decrease companys net loss fiscal 1997 fiscal 1996 addition changes asset liability balances fiscal 1997 fiscal 1996 resulted 25 million increase cash flow provided operating activities primarily due 30 million royalty advance received license agreement ahp upon receipt fda approval angioseal september 1996 amount recorded deferred revenue companys balance sheet june 30 1997 capital expenditures 23 million fiscal 1997 represented primarily leasehold improvements machinery equipment related continued expansion companys manufacturing capabilities companys cash equivalents shortterm investments 74 million june 30 1997 company additional 24 million investments classified restricted pledged collateral secure bank loans made certain employees loans incurred payment taxes incurred employees result receipt common stock settlement employee stock rights time ipo exchange companys pledge collateral employees pledged common stock collateral company october 1996 company paid 65 million june 30 1996 balance 64 million plus interest accrued first quarter fiscal 1997 160000 full settlement credit agreement ahp also fiscal 1997 company received 500000 bank line credit june 30 1997 500000 remained outstanding accruing interest payable monthly prime rate 85 june 30 1997 line credit increased 500000 facility 20 million facility september 1997 converts term loan payable 60 equal installments beginning august 1 1998 company anticipates results operations fluctuate foreseeable future due number factors include ahps performance manufacturing marketing distribution angioseal product line pursuit additional regulatory approvals united states countries outside europe including japan results ongoing planned clinical trials angioseal products acceptance companys products marketplace competitive products generally particular designed sealing arterial site punctures company plans continue expend substantial resources fund clinical trials gain regulatory approvals make additional marketing claims continue expand research development activities angioseal rotary technology biomaterials products company believes cash equivalents hand combined cash generated operations sufficient meet companys operating capital requirements least end fiscal year 1998 however company significantly expand efforts one current product lines enter agreements development new products find suitable merger acquisition candidate company may consider additional sources capital based requirements market conditions time statements contained form 10k historical facts forwardlooking statements made pursuant safe harbor provisions private securities litigation reform act 1995 company cautions number important factors could cause companys actual results 1998 beyond differ materially expressed forwardlooking statements made behalf company important factors include without limitation timing future regulatory approvals announcements technological innovations introduction new products company competitors time effort priority level ahp attaches angioseal ahps ability successfully manufacture market angioseal companys ability manufacture angioseal components competition developers puncture closure devices general business conditions healthcare industry general economic conditions important factors could affect companys results fully discussed companys prospectus dated december 13 1995 risk factors detailed companys filing securities exchange commission company cannot assure able anticipate respond timely changes factors listed could adversely affect operating results one fiscal quarters results operations past period considered indicative results expected future periods fluctuations operating results may also result fluctuations price common stock item 8 item 7 managements discussion analysis financial condition results operations following discussion analysis read conjunction selected consolidated financial data financial statements related notes included report overview founded 1984 common stock became publicly traded december 1995 profitable last fourteen fiscal quarters excluding one time iprd charge taken second quarter fiscal year 2001 revenues consist three components net sales research development revenue royalty income net sales net sales comprised absorbable biomaterials products angioseal devices manufactured us biomaterials component net sales represents sale biomaterials products customers use following markets orthopedics cardiology drugbiologics delivery dental wound care 1997 biomaterials sales comprised almost 100 absorbable collagen polymer components angioseal supplied strategic alliance partner since time experienced significant sales growth biomaterials products brought new customers increased sales customers past four years assisted development new product offerings expanded marketing activities fiscal year 2001 angioseal components represent 47 total biomaterial sales believe growth continue greater acceptance medical community biomaterials technological advances expanded applications biomaterials products angioseal fiscal years 2001 2000 1999 manufactured sold 6f angioseal devices st jude medical supplement production requirements august 2001 st jude medical transitioned manufacturing devices facility expect revenue manufacture completed angioseals future manufacture 6f angioseal represented 55 million 42 total net sales fiscal year 2000 significant portion total net sales fiscal year 2000 substantial growth biomaterials business fiscal year 2000 fiscal year 2001 able achieve 11 increase net sales despite loss 6f angioseal device manufacturing business research development revenue historically research development revenue derived solely development work performed angioseal anticipated research development activities transitioned st jude medical significant angioseal research development revenue expected future fiscal year 2001 research development revenue derived national institute standards technology nist grant researching cartilage regeneration utilizing ptm technology project continue early fiscal year 2003 grant acquired conjunction acquisition thm september 2000 royalty income receive royalty every angioseal unit sold worldwide anticipate sales angioseal continue grow st jude medical continues expand sales marketing efforts releases future generations angioseal result royalty income continue significant source revenue fiscal year 2001 unit growth partially offset anticipated reduction royalty rate 12 9 accordance licensing agreements rate reduction occurred second quarter fiscal year 2001 cumulative one million angioseal units sold one decrease royalty rate 6 upon reaching four million cumulative units sold anticipate next reduction occur fiscal year 2005 cost products sold experienced overall increase gross margin fiscal year 2001 reflecting shift higher margin sales biomaterials products elimination lower margin angioseal device sales addition net sales increased able spread fixed costs manufacturing greater number units anticipate gross margin continue improve biomaterials sales levels increase product mix becomes favorable research development expense research development expense consists expenses incurred development proprietary technologies triactiv system absorbable biomaterials products technologies development programs including expenses nist program research development angioseal become insignificant portion overall development costs progression triactiv system clinical trial phase continued development proprietary biomaterials products technologies offset decrease anticipate research development expense continue increase pursue commercialization triactiv system well explore opportunities technologies selling general administrative selling general administrative expenses include general administrative costs well costs related marketing products fiscal years 2001 2000 1999 costs patent litigation also included within selling general administrative expenses marketing component selling general administrative expenses increased move toward commercialization anticipate sales marketing expenses continue increase continue evaluate opportunities commercialization triactiv system expand marketing efforts biomaterials business results operations comparison fiscal years 2001 2000 revenues increased 17 232 million year ended june 30 2001 fiscal 2001 198 million year ended june 30 2000 fiscal 2000 net sales products increased 11 146 million 131 million fiscal 2001 2000 respectively increase 66 million attributable increased sales biomaterials products increase offset 51 million decrease 6f angioseal device sales st jude medical providing st jude medical 6f angioseal devices international us markets however st jude medical transitioned manufacturing devices facility august 2000 research development revenue research development revenues increased 451 330000 60000 fiscal 2001 2000 respectively current year revenues generated nist articular cartilage development grant acquired conjunction thm acquisition research development revenues period year earlier generated work performed angioseal product st jude medical st jude medical transitioned angioseal product research development facilities expect angioseal product research development revenues future royalty income royalty income increased 25 82 million 66 million fiscal 2001 2000 respectively increase achieved despite anticipated 25 reduction angioseal royalty rate 12 9 second fiscal quarter fiscal year 2001 reflects greater number units sold well increase average selling price angioseal royalty units increased 36 approximately 483000 angioseal units sold endusers fiscal 2001 compared approximately 354000 units sold fiscal 2000 unit increase due st jude medicals increased sales marketing efforts continued strong sales 6f angioseal sales new 8f angioseal us market new version 8f angioseal introduced us september 2000 cost products sold cost products sold decreased 2 74 million fiscal 2001 76 million fiscal 2000 addition gross margin increased 49 42 increase reflects higher margins biomaterials products well continued allocation overhead across greater sales volumes results decrease per unit costs research development expense research development expense increased 37 73 million fiscal 2001 compared 53 million fiscal 2000 increase mainly attributable continued development efforts triactiv system including clinical trial expenses also continued expand development efforts biomaterials products including work nist articular cartilage development grant expect research development expense increase investigate develop new products conduct clinical trials seek regulatory approvals proprietary products selling general administrative selling general administrative expense increased 13 30 million 26 million fiscal 2001 fiscal 2000 respectively increase primarily result increased sales marketing expenses increased 703000 fiscal 2001 398000 fiscal 2000 related marketing efforts triactiv system biomaterials products addition general administrative expenses increased 362000 21 million fiscal 2001 18 million fiscal 2000 attributable 100000 goodwill amortization expense related thm acquisition well increased personnel costs support current sales research development growth partially offset 315000 decrease litigation expenses net interest income interest expense decreased 44 239000 fiscal 2001 430000 fiscal 2000 due repayment financing agreement may 2000 proceeds secondary offering offset addition obligation incurred september 2000 conjunction thm acquisition interest income increased 100 19 million fiscal 2001 953000 fiscal 2000 result increase average total cash investment balances primarily related investment secondary offering proceeds nonoperating income expense nonoperating income 24000 fiscal 2001 compared nonoperating expense 1000 fiscal 2000 nonoperating income expense periods represented primarily net gain loss sale fixed assets net income net income decreased 24 36 million fiscal 2001 47 million fiscal 2000 result changes noted iprd charge 76 million described 41 million income tax benefit income tax benefit recognized valuation allowance related certain deferred tax assets reversed based current projections taxable income believe likely able utilize federal net operating loss nol carryforwards result valuation allowance related carryforwards longer considered necessary comparison fiscal years 2000 1999 revenues increased 22 198 million year ended june 30 2000 fiscal 2000 162 million year ended june 30 1999 fiscal 1999 net sales products increased 83 131 million 72 million fiscal 2000 1999 respectively increase 45 million attributable increase sales 6f angioseals st jude medical remaining 14 million attributable increased sales biomaterials products providing st jude medical 6f angioseals international us markets however august 2000 st jude medical transitioned manufacturing devices facility research development revenue research development revenues decreased 97 60000 19 million fiscal 2000 1999 respectively st jude medical transitioned substantially angioseal product research development inhouse royalty income royalty income increased 16 net 15 million supplemental payment previous strategic partner fiscal 1999 66 million 57 million fiscal 2000 1999 respectively royalty units increased 14 approximately 354000 angioseal units sold endusers fiscal 2000 compared approximately 310000 units sold fiscal 1999 unit increase due st jude medicals increased sales marketing efforts primarily us sales new 6f angioseal international markets 6f device introduced international markets april 1999 us late march 2000 cost products sold cost products sold increased 48 76 million fiscal 2000 51 million fiscal 1999 however gross margin increased 42 28 fiscal 2001 fiscal 2000 respectively increase reflected allocation overhead across greater sales volume resulted decrease per unit costs research development expense research development expense decreased 6 53 million fiscal 2000 compared 57 million fiscal 1999 decrease mainly attributable transition substantially development angioseal product line st jude medical decrease offset continued development efforts triactiv system including clinical trial expenses also continued expand development efforts biomaterials products expect research development expense increase investigate develop new products conduct clinical trials seek regulatory approvals proprietary products selling general administrative selling general administrative expense increased 2 50000 fiscal 2000 fiscal 1999 increase primarily result increased sales marketing efforts triactiv system biomaterials products offset decrease litigation expenses net interest income interest expense increased 30 430000 fiscal 2000 332000 fiscal 1999 due addition 50 million financing agreement january 1999 925000 used repay portion 20 million term loan remainder proceeds 50 million financing agreement used fund leasehold improvements capital expansion financing agreement repaid june 1 2000 proceeds secondary offering interest income increased 47 953000 fiscal 2000 649000 fiscal 1999 result increase average total cash investment balances nonoperating income expense nonoperating expense 1000 fiscal 2000 compared nonoperating income 4000 fiscal 1999 nonoperating income expense periods represented primarily net gain loss sale fixed assets liquidity capital resources net cash provided operating activities 54 million 24 million fiscal 2001 2000 respectively fiscal 2001 changes asset liability balances resulted net 75 million use cash offset net income 36 million noncash depreciation amortization 18 million noncash writeoff process research development 76 million fiscal 2000 changes asset liability balances resulted net 32 million use cash offset net income 47 million noncash depreciation amortization 862000 cash equivalents shortterm investments 270 million june 30 2001 addition 22 million restricted investment accounts pledged 22 million investments collateral secure bank loans made employees pay taxes incurred employees received common stock time initial public offering exchange pledging collateral employees pledged common stock us collateral capital spending plan fiscal 2001 31 million expended primarily machinery equipment leasehold improvements expenditures related continued expansion manufacturing capabilities principally biomaterials product lines plan continue spend substantial amounts fund clinical trials gain regulatory approvals continue expand research development activities particularly triactiv system biomaterials products believe current cash investment balances addition cash generated operations sufficient meet operating capital requirements least fiscal 2003 future capital requirements adequacy available funds depend however numerous factors including market acceptance existing future products successful commercialization products development progress product development efforts magnitude scope efforts progress preclinical studies clinical trials product clearance fda agencies cost timing efforts expand manufacturing capabilities cost filing prosecuting defending enforcing patent claims intellectual property rights competing technological market developments development strategic alliances marketing certain products assurance record profits future periods see risk factors terms future equity financing may dilutive stockholders terms debt financing may contain restrictive covenants limit ability pursue certain courses action ability obtain financing dependent status future business prospects well conditions prevailing relevant capital markets assurance given additional financing made available us available acceptable terms need arise estimate time periods cash equivalents adequate fund operations forward looking statement within meaning private securities litigation reform act 1995 subject risks uncertainties actual results may differ materially contemplated forwardlooking statements addition described factors may cause difference set forth caption risk factors well annual report form 10k generally acquisition thm biomedical inc inprocess research development charge september 1 2000 acquired thm biomedical inc thm developer porous biodegradable tissueengineering devices repair replacement muskuloskeletal tissues approximately 105 million plus acquisition costs approximately 228000 transaction financed 66 million cash note payable shareholders thm amount 45 million acquisition obligation acquisition obligation due equal quarterly installments 281250 beginning december 31 2000 ending september 30 2004 accordingly present value cash payments discounted based upon available borrowing rate 75 39 million recorded liability financial statements remaining balance 32 million june 30 2001 76 million iprd charge represents estimated fair value purchased inprocess technology yet reached technological feasibility alternative future use comprised following projects articular cartilage 54 million bone fusion 389000 bone applications 261000 drug delivery 15 million four projects utilizes core opencell poly lactic acid ptm technology porous tissue matrix ptm technology developed thm ptm technology facilitates wound healing bone soft tissue bioabsorbable controlled rates specific functions tissues iprd projects utilizes properties ptm technology address respective market example articular cartilage project uses ptm technology foundation articular cartilage repair regrowth product total iprd value determined estimating stage completion iprd project date acquisition estimating costs develop iprd project commercially viable products estimating resulting net cash flows projects discounting net cash flows back present values discount rate project takes account uncertainty surrounding successful development commercialization purchased inprocess technology stage completion projects ranged 48 72 acquisition date weighted average completion rate approximately 56 date estimated costs bring projects development technological feasibility clinical trials approximately 73 million since date acquisition planned primarily devoted development efforts ptm technology articular cartilage application expended 328000 efforts june 30 2001 addition currently seeking regulatory approval two proprietary ptm based products applications orthopedics market net cash flows iprd projects based managements best estimates revenue cost sales research development costs general administrative costs income taxes projects estimates determined considering historical experience industry trends averages cash flow estimates sales products incorporating technologies expected commence fiscal years 2003 2005 depending project revenue growth rates 50 range immediate years following worldwide market launch declining 5 range market nears maturity projections based best estimates market size growth expected trends technology nature expected timing new product introductions us competitors cash flows revenues period reduced related expenses capital expenditures cost working capital assigned contribution core technology serving foundation research development discount rates used discounting net cash flows purchased inprocess technology 80 articular cartilage 85 bone fusion 78 bone applications 83 drug delivery discount rates project determined upon consideration stage completion project assumptions nature timing remaining efforts completion risks uncertainties project substantial research development preclinical testing clinical trials required determine technical feasibility commercial viability products development assurance efforts successful projects successfully developed revenue profitability may adversely affected future periods continuously monitoring development projects believe assumptions used valuation purchased inprocess technology reasonably estimate future benefits attributable purchased inprocess technology assurance given actual results deviate assumptions future periods quantitative qualitative disclosures market risk interest income expense sensitive changes general level interest rates regard changes interest rates affect interest earned cash equivalents investments well interest paid debt investment portfolio consists primarily high quality us government securities certificates deposit average maturity eight years mitigate default risk investing believe safest highest credit quality securities monitoring credit rating investment issuers portfolio includes marketable securities active secondary resale markets ensure portfolio liquidity limitations regarding duration investments availableforsale securities subject interest rate risk decrease market value interest rates increase june 30 2001 total portfolio consisted approximately 242 million investments maturities ranging one fifteen years additionally generally hold securities earlier call date maturity therefore expect results operations cash flows materially impacted due sudden change interest rates 32 million outstanding debt june 30 2001 related acquisition thm risk factors carefully consider following risk factors addition information set forth report purchasing shares common stock kensey nash risk factors could adversely affect business operating results financial condition well adversely affect value investment common stock investment involves high degree risk risks related business biomaterials products successful operating results business may substantially impaired success existing biomaterials products well develop future depends variety factors including ability continue manufacture sell competitively price products acceptance products medical profession addition may required obtain regulatory approval future biomaterials products require substantial additional funds develop market biomaterials products expect fund growth biomaterials business operating income cannot guarantee operating income sufficient develop new biomaterials products date relied strategic partners customers market sell biomaterials products cannot assure commercialize products successfully either indirectly strategic partners directly development sales force cannot assure able obtain necessary regulatory approvals triactiv system need conduct additional human clinical trials triactiv system triactiv system approved marketing fda governmental entity outside united states require substantial additional funds develop product conduct clinical trials gain necessary regulatory approvals triactiv system prior granting approval fda may require clarification information provided regulatory submissions information clinical studies granted fda approval may impose limitations uses product may marketed product may marketed experience delays unable receive approval fda operating results business may substantially impaired substantial portion revenues continue come angioseal manufactured marketed distributed st jude medical date significant portion revenues derived angioseal sales license agreements st jude medical angioseal manufactured marketed sold worldwide basis st jude medical two significant sources revenue future expected sales collagen st jude medical use angioseal royalty income sale angioseal product line june 1 2000 st jude medical longer obligated buy collagen us success angioseal depends part time effort attention st jude medical devotes angioseal product line success manufacturing marketing selling angioseal product line terms agreements st jude medical control pricing marketing strategy angioseal product line addition depend st jude medical successfully maintain levels manufacturing sufficient meet anticipated demand abide applicable manufacturing regulations seek reimbursement approvals st jude medical terminate arrangement time september 30 2001 reason upon 12 months notice time would receive sales marketing manufacturing distribution rights angioseal product line back assurance st jude medical successfully pass future inspections manufacturing facility adequately perform manufacturing marketing selling duties failure st jude medical may negatively impact angioseal unit sales therefore reduce royalties impair operating results business depend customers market obtain regulatory approvals biomaterials products depend efforts biomaterials customers marketing products include biomaterials components assurance customers end use products include biomaterials components commercialized successfully customers otherwise able compete effectively markets customers fail commercialize products operating results business may substantially impaired receive us andor international regulatory approval may successful commercializing triactiv system triactiv system clinical trials completed successfully obtain necessary governmental approvals need commercialize product cannot assure able find suitable partner andor develop train sales force sell market triactiv system sales marketing force experience hiring training sales marketing force may able establish maintain internal sales marketing force technical expertise supporting distribution capabilities unable successfully commercialize triactiv system growth prospects diminished may required delay reduce eliminate efforts develop market triactiv system fail obtain additional funding may required satisfy future capital needs plan continue spend substantial funds develop market triactiv system future liquidity capital requirements depend upon numerous factors including progress success clinical trials timing cost involved obtaining regulatory approvals timing cost developing sales marketing strategies ability enter strategic alliances manufacturing research development activities extent triactiv system gains market acceptance competitive developments additional required financing may available satisfactory terms unable obtain financing may required delay reduce eliminate research development activities sales marketing efforts case operating results business may substantially impaired markets products highly competitive likely become competitive competitors may able respond quickly new emerging technologies changes customer requirements existing markets current proposed products intensely competitive expect competition increase additional companies begin enter markets andor modify existing products compete directly compete largest players biomaterials markets successful commercializing triactiv system competitors include boston scientific corporation johnson inc possis medical inc medtronic inc owns percusurge inc guidant corporation well companies current future therapies primary competitors vascular sealing device market abbott laboratories owns perclose inc datascope corp vascular solutions inc competitors may broad product lines allow negotiate exclusive longterm supply contracts offer comprehensive pricing products broader product lines may also provide competitors significant advantage marketing competing products group purchasing organizations managed care organizations increasingly seeking reduce costs centralized purchasing greater financial resources product development capabilities may allow competitors respond quickly new emerging technologies changes customer requirements may render products obsolete significant portion revenue depends sales medical devices customers end user market also affected competition within markets devices competition within medical device market could also adverse effect business variety reasons including customers may compete directly larger dominant manufacturers extensive product lines greater sales marketing distribution capabilities also unable control factors may impact commercialization components end use products marketing sales efforts competitive pricing pressures within particular markets products accepted medical community business may suffer success existing products depends continued acceptance products medical community success products develop future depend adoption products targeted markets cannot predict quickly medical community accept future products extent future products used encounter difficulties introducing future products targeted markets operating results business may substantially impaired loss interruption supply key vendors could limit ability manufacture products purchase certain materials components products various suppliers components custom made us including many absorbable polymer suture raw materials used custom polymer products across markets loss interruption supply key vendors may require us find new vendors could experience production development delays seek new vendors could substantially impair operating results business may problems manufacturing delivering biomaterials products future biomaterials industry emerging area using many materials untested whose properties still known consequently time may experience unanticipated difficulties manufacturing delivering biomaterials products customers difficulties may include inability meet customer demand delays delivering products quality control problems certain biomaterials products difficulty fulfill orders timely basis could materially adversely affect operating results business use hazardous materials exposes us risk material environmental liabilities use hazardous substances research development manufacturing operations potentially subject material liabilities related personal injuries property damages may caused hazardous substance releases exposures facility decontamination costs cleanup costs related damages liabilities could substantially impair business operating results required comply increasingly stringent laws regulations governing environmental protection workplace safety including requirements governing handling storage disposal hazardous substances st jude medicals international sales subject number risks could harm future international sales angioseal ability successfully commercialize new products international markets st jude medical sells angioseal product line internationally pays us royalty unit sold royalties subject several risks including impact recessions economies outside united states unexpected changes regulatory requirements tariffs trade barriers weaker intellectual property rights protection countries fluctuations exchange rates potentially adverse tax consequences political economic instability occurrence events could seriously harm st jude medicals future international sales ability receive royalties sales angioseal international markets success depends key personnel loss could impair operating results business success depends significant extent upon efforts abilities joseph w kaufmann douglas g evans members senior management loss services one key employees could harm operating results business addition successful unless attract retain skilled personnel particularly areas research product development failure expand management systems controls support anticipated growth integrate future acquisitions could seriously harm operating results business operations continue grow expect expansion continue execute business strategy sustaining growth placed significant demands management administrative operational information technology manufacturing financial personnel resources accordingly future operating results depend ability officers key employees continue implement improve operational client support financial control systems effectively expand train manage employee base cannot assure future acquisitions successfully integrated operations operated profitably may able manage growth successfully inability sustain manage growth could seriously harm operating results business ownership interest stockholders may diluted future acquisitions strategic alliances stockholders depend upon judgment management respect future acquisitions make strategic alliances enter management may decide acquire companies finance strategic alliances issuing equity securities result may experience dilution ownership interest risks related intellectual property unable protect patents proprietary rights reputation competitiveness marketplace may materially damaged regard patents biomaterials trade secrets intellectual property important success rely upon patent law trade secret protection confidentiality agreements license agreements st jude medical protect proprietary rights registered certain patents applicable governmental authorities effective patent protection may available every country products made available sought protection intellectual property every country products may sold assurance steps take protect proprietary rights adequate third parties infringe otherwise violate patents similar proprietary rights st jude medical plaintiffs patent infringement lawsuit perclose acquired abbott laboratories codefendants counterclaims filed perclose response complaint spent substantial resources litigation intellectual property litigation recent years proven costly complex outcome litigation difficult predict may accused infringing upon proprietary rights others related litigation could materially damage operating results business adverse determination intellectual property litigation interference proceedings brought us could prohibit us selling products subject us significant liabilities third parties require us seek licenses third parties costs associated license arrangements may substantial could include ongoing royalties furthermore necessary licenses may available us satisfactory terms adverse determinations judicial administrative proceeding failure obtain necessary licenses could prevent us manufacturing selling products control use angioseal device trademark term angioseal trademark st jude medical goodwill generated marketing sales devices bearing angioseal trademark belongs st jude medical us st jude medical license agreements terminate would right call products angioseal unless purchase license trademark st jude medical without rights angioseal trademark would market products different trademark moreover upon termination st jude medical license agreements st jude medical would right compete us selling collagen puncture closure devices angioseal trademark thus purchasers puncture closure devices may likely recognize purchase products labeled angioseal regardless whether devices originate us risks related industry may face product liability claims could result costly litigation significant liabilities manufacture sale medical products entail significant risk product liability claims medical device industry general subject significant product liability litigation product liability claims without merit could result costly litigation reduced sales significant liabilities diversion managements time attention resources cannot sure product liability insurance coverage adequate continue available us acceptable terms face uncertainty relating third party reimbursement products could seriously harmed changes reimbursement policies governmental private healthcare payors particularly extent changes affect reimbursement catheterization procedures products used physicians hospitals users products fail obtain sufficient reimbursement healthcare payors procedures products used adverse changes occur governmental private thirdparty payors policies toward reimbursement procedures operating results business may substantially impaired products manufacturing activities subject extensive governmental regulation could make expensive time consuming us introduce new improved products manufacturing activities subject extensive regulation number governmental agencies including fda comparable international agencies required obtain approval fda international agencies market sell new products satisfy agencies requirements labeling sales promotional materials connection existing products comply applicable manufacturing regulations undergo rigorous inspections agencies compliance regulations agencies may delay prevent us introducing new improved products including triactiv system furthermore may subject sanctions including temporary permanent suspension operations product recalls marketing restrictions fail comply laws regulations pertaining business also required demonstrate compliance fdas quality system regulations fda enforces quality system regulations preapproval periodic postapproval inspections regulations relate product testing vendor qualification design control quality assurance well maintenance records documentation unable conform regulations required locate alternative manufacturers conform identifying qualifying alternative manufacturers may long costly difficult process could seriously harm business fda international regulatory agencies may also limit indications products approved regulatory agencies may restrict withdraw approvals received additional information becomes available support action forwardlooking statements report includes forwardlooking statements within meaning section 27a securities act section 21e exchange act based forwardlooking statements largely current expectations projections future events financial trends affecting financial condition business forwardlooking statements subject number risks uncertainties assumptions kensey nash including among things general economic business conditions nationally markets expectations estimates concerning future financial performance financing plans impact competition anticipated trends business existing future regulations affecting business strategic alliances acquisition opportunities risk factors set forth risk factors report addition report words believe may estimate continue anticipate intend expect similar expressions relate kensey nash business management intended identify forwardlooking statements undertake obligation publicly update revise forwardlooking statements whether result new information future events otherwise date report light risks uncertainties forwardlooking events circumstances discussed report may occur actual results could differ materially anticipated implied forwardlooking statements contained form 10k historical facts forwardlooking statements made pursuant safe harbor provisions private securities litigation reform act 1995 caution number important factors could cause actual results fiscal year 2002 beyond differ materially forwardlooking statements made us behalf important factors include without limitation success biomaterials products ability obtain necessary regulatory approvals fund commercialize triactiv system success st jude medical manufacturing marketing distributing angioseal product line ability customers market obtain regulatory approvals biomaterials products acceptance products medical community ability maintain key vendors personnel competition markets general business conditions healthcare industry general economic conditions results operations past period considered indicative results expected future periods fluctuations operating results may also result fluctuations price common stock item 8 item 7 management’s discussion analysis financial condition results operations following discussion analysis read conjunction “selected consolidated financial data” financial statements related notes included report discussion analysis contains forwardlooking statements relating future events future financial performance statements predictions actual events results may differ materially evaluating statements carefully consider various factors identified report could cause actual results differ materially expressed implied forwardlooking statements including set forth “risk factors” annual report form 10k see “cautionary note regarding forwardlooking statements” overview kensey nash corporation medical device company known innovative product development unique technology fields resorbable biomaterials endovascular devices used wide variety medical procedures provide extensive range products multiple medical markets primarily cardiology orthopaedic sports medicine spine endovascular general surgery markets products based significant expertise design development manufacturing processing resorbable biomaterials sell products strategic partners sell direct enduser also developed commercialized series innovative endovascular products completed sale product lines spectranetics may 2008 although sold portfolio products spectranetics still participate market manufacturing licensing agreement development regulatory services agreement entered connection sale transaction see additional discussion revenues consist two components net sales include biomaterials sales endovascular sales royalty income net sales biomaterials sales biomaterial orthopaedic products including products applications primarily sports medicine spine markets sale angioseal components st jude medical continue primary source sales table shows fiveyear trend orthopaedic product sales angioseal component sales orthopaedic product sales increased 1 fiscal 2009 fiscal 2008 due increase sales current product lines specifically spine product portfolio part due increase customer base new product lines current customers expect sales orthopaedic products increase modest growth rate fiscal 2010 compared fiscal 2009 due application resources focus new business development new technologies innovation current customers specific continued success new product launches net sales orthopaedic portion business dependent several factors including 1 success current partners orthopaedic markets sports medicine spine extremities 2 continued acceptance biomaterialsbased products markets well expanded future acceptance products 3 ability offer new products technologies attract new partners markets due dependencies andor factors sales orthopaedic customers vary significantly quarter manufacture two key resorbable components angioseal device st jude medical 100 supply requirements collagen plug least 30 requirements polymer anchors supply contract expires december 2010 sales st jude medical highly dependent ordering patterns components used manufacturing angioseal device st jude medical vary significantly quarter variation ordering patterns evidenced component sales growth 18 fiscal year ended june 30 2009 comparable prior fiscal year compared decline st jude medical’s enduser sales including impact foreign currency exchange 1 period endovascular sales last several years devoted significant resources developing bringing proprietary endovascular products market us europe products focused emerging market segments thrombus blood clot management chronic total occlusions ctos complete vessel blockage occurring coronary peripheral vessels sold primarily interventional cardiologists may also used interventional radiologists vascular surgeons net sales endovascular products decreased 7 total net sales fiscal 2009 compared 12 total net sales fiscal 2008 fiscal 2009 represented first fiscal year endovascular product sales spectranetics following completion sale endovascular business may 2008 spectranetics exclusively responsible worldwide sales marketing entire endovascular product line sales spectranetics reduced transfer price compared direct market price reflected historical sales figures decrease net endovascular sales fiscal 2009 compared fiscal 2008 direct result reduced transfer price spectranetics compared directtomarket price reflected fiscal 2008 figures overall net unit sales spectranetics increased compared enduser unit sales period prior fiscal year expect related net endovascular sales declining next two years see “item 1 businessoverviewour endovascular business” royalty income also derive significant portion revenue profitability royalty income proprietary products developed codeveloped angioseal™ royalty income company inventor original developer angioseal™ device vascular closure device reduces recovery time enhances patient comfort following diagnostic therapeutic cardiovascular catheterizations st jude medical exclusive worldwide rights development manufacturing sales marketing angioseal device pursuant agreement provides us approximate 6 royalty enduser product sales anticipate sales angioseal device st jude medical continue grow modest growth rate based forecasted continued procedure growth st jude medical’s continued expansion international markets marketing new generations product including recently introduction evolution™ device royalty income earned st jude medical fiscal 2009 adversely impacted foreign currency exchange compared foreign currency exchange comparable prior year period vitoss™ foam vitoss™ vitoss™ bioactive foam royalty income since 2003 partnered orthovita codevelop commercialize series unique proprietary bone void filler products branded vitoss foam first launched march 2004 recent vitoss™ bioactive foam technology launched fourth quarter fiscal 2008 receive fixed royalty orthovita’s enduser sales vitoss foam vitoss bioactive foam products targeted use orthopaedic market addition august 2004 entered agreement acquire proprietary rights third party inventor vitoss technology 26 million assignment agreement assignment agreement receive additional royalty orthovita enduser sales orthovita products containing vitoss technology total royalty received 40 million approximately 640000 received fiscal 2009 12 million remaining received june 30 2009 believe unique technology associated vitoss foam vitoss bioactive foam products growing orthopaedic market result orthovita component royalty income becoming significant next fiscal year royalty generating relationships none materially contributes revenue time expect provide increased revenue related products gain market acceptance additional products commercialized stockbased compensation following table summarizes total stockbased compensation expense determined pursuant sfas 123r sharebased payment sfas 123r within operating expense category consolidated statements income fiscal years presented 1 see “acceleration stock awards” stockbased compensation expense consists stock options granted employees nonemployee members board directors executive officers nonemployee outside consultants b nonvested stock awards ie restricted stock granted nonemployee members board directors executive officer nonemployee outside consultant c cashsettled stock appreciation rights sars granted executive officers nonexecutive employees company cannot predict market value common stock time exercise grants magnitude exercises particular time terms grants cashsettled sars continue remeasured reporting period awards settled fluctuations fair value liability award recorded increases decreases compensation cost either immediately remaining service period depending vested status award total stockbased compensation expense fiscal 2009 impacted primarily amortized expense related two years equity grants well expense resulting unfavorable adjustments fair value cashsettled sars remeasured based among factors closing stock price june 30 2009 see note 17 consolidated financial statements included form 10k additional information concerning stockbased compensation following table summarizes stockbased compensation expense fiscal year grant fiscal years ended june 30 2009 2008 see “acceleration stock awards” acceleration stock awards publicly announced september 26 2007 “change control” defined fifth amended restated kensey nash corporation employee incentive compensation plan kensey nash corporation employee incentive compensation plan amended relevant date “employee plan” due purchase open market institutional investor 20 shares outstanding stock result outstanding unvested stock options stock appreciation rights nonvested stock held officers employees directors others plan automatically became vested case options stock appreciation rights exercisable full accelerated vesting resulted noncash charge approximately 30 million primarily quarter ended september 30 2007 fiscal 2008 charge represented significant portion operating expenses fiscal 2008 therefore disclosed table “stock based compensation” amount related acceleration stockbased compensation charges included within operating expense category income statement fiscal year ended june 30 2008 acceleration removed future equity compensation expense related outstanding stock options nonvested shares plan date acceleration however cashsettled sars including rights vesting accelerated continue marked market quarterly basis equity compensation expense incurred respect new stock compensation awards granted event discontinuance embolic protection platform announced july 10 2007 made strategic decision cease activities related embolic protection platform recorded certain charges fiscal 2007 2008 related discontinuance critical accounting policies “critical accounting policies” require application management’s difficult subjective complex judgments often result need make estimates matters inherently uncertain may change future periods identified following critical accounting policies revenue recognition accounting stockbased compensation accounting investments debt equity securities valuation financial instruments inventory valuation income taxes revenue recognition recognize revenue provisions staff accounting bulletin sab 104 revenue recognition sab 104 superseded sab 101 revenue recognition financial statements sab 101 also follow provisions emerging issues task force issue 0021 revenue arrangements multiple deliverables eitf 0021 collaborative arrangements containing multiple revenue elements entered materially amended june 30 2003 sales revenue sales revenue generally recognized related product shipped service completed advance payments received products services generally recorded deferred revenue recognized product shipped services performed timing performance services could subjective reduce sales estimated customer returns discounts allowances applicable products primarily manufactured according customers’ specifications subject return failure meet specifications royalty revenue royalty revenue recognized related product sold customers endusers recognize substantially royalty revenue end month accordance customer agreements see note 1 consolidated financial statements included form 10k additional information concerning royalty revenue recognition accounting stockbased compensation use various forms equity compensation including stock options nonvested stock grants cashsettled sars major part compensation programs retain provide incentives top management team members employees • fair value option grants estimated date grant using blackscholes optionpricing model uses weighted average assumptions expected volatilities based historical volatility common stock factors use historical data estimate option exercise employee termination behavior within valuation model separate groups employees similar historical exercise behavior considered separately valuation purposes expected term options derived historical exercise behavior represents period time options granted expected outstanding riskfree rate periods within contractual life option based us treasuries constant maturities effect time grant • nonvested stock awards ie restricted stock granted nonemployee members board directors executive officers nonemployee consultant accounted using fair value method sfas 123r fair value nonvested stock grants based upon closing price common stock date grant • cashsettled sars awarded stockbased payment transactions accounted sfas 123r classifies awards liabilities accordingly record awards component current liabilities consolidated balance sheets fair value sar estimated date grant using blackscholes optionpricing model uses weighted average assumptions expected volatilities based historical volatility common stock well factors liability awards fair value award determines measurement liability consolidated balance sheet remeasured reporting period award settled fluctuations fair value liability award recorded increases decreases compensation cost either immediately remaining service period depending vested status award use historical data estimate employee termination within valuation model employees similar historical exercise behavior considered separately valuation purposes expected term cashsettled sars determined using simplified method accordance question 6 sec staff accounting bulletin topic 1402 “expected term” sab 107 time historical exercise behavior established december 12 2007 sab 110 issued extend simplified method beyond 2007 companies concluded historical exercise experience sufficient provide reasonable basis reached conclusion believe simplified method provides reasonable estimate expected term revisions estimates methodologies could cause material impact financial statements accounting investments debt equity securities account investment portfolio accordance statement financial accounting standards sfas 115 accounting certain investments debt equity securities sfas 115 related interpretations staff positions fasb staff position fas 1152 fas 1242 recognition presentation otherthantemporary impairments fsp 1152 classified entire investment portfolio availableforsale marketable securities secondary resale markets report portfolio fair value unrealized gains losses included stockholders’ equity realized gains losses income currently investment securities fair values less amortized cost therefore contain unrealized losses evaluated securities determined decline value related company industry specific event intent ability hold investments recovery fair value current requirement sell investments anticipate full recovery amortized costs respect securities maturity sooner event favorable market interest rate environment revisions classification investments andor determination anticipation full recovery amortized costs maturity sooner could result realizing gains losses investments therefore material impact financial statements june 30 2009 compliance affirmative restrictive financial maintenance covenants valuation financial instruments effective july 1 2008 adopted provisions sfas 157 fair value measurements sfas 157 related interpretations staff positions fasb staff position 1574 determining fair value volume level activity asset liability significantly decreased identifying transactions orderly fsp 1574 fsp 1573 determining fair value financial asset market asset active fsp 1573 financial assets liabilities provides guidance using fair value measure financial assets liabilities defining fair value exit price amount would received selling asset paid transfer liability orderly transaction market participants measurement date sfas 157 establishes hierarchy prioritizes fair value measurements based types inputs used various valuation techniques categorization within valuation hierarchy based upon lowest level input significant fair value measurement assessment significance particular input fair value measurement requires judgment may affect valuation financial assets financial liabilities placement within fair value hierarchy see note 14 consolidated financial statements included form 10k discussion regarding fair value financial assets liabilities inventory valuation inventory stated lower cost market adjustments inventory made individual part level estimated excess obsolescence impaired balances reflect inventory lower cost market factors influencing adjustments include changes demand technological changes product life cycle development plans component cost trends product pricing physical deterioration quality concerns revisions adjustments would required factors differ estimates income taxes course estimating estimated annual effective tax rate recording quarterly income tax provisions consider many factors including expected earnings state income tax apportionment estimated research development tax credits nontaxable interest income estimates material changes differences estimates could significant impact effective tax rate results operations comparison fiscal years 2009 2008 total revenues total revenues increased 3 821 million fiscal 2009 798 million fiscal 2008 total net sales net sales products increased 2 549 million fiscal 2009 compared net sales 538 million fiscal 2008 35 million 7 increase biomaterials sales offset 24 million 38 decrease endovascular sales biomaterials sales biomaterials sales 510 million fiscal 2009 7 increase compared 475 million fiscal 2008 biomaterials sales includes revenue recognized products shipped well revenue generated product development programs biomaterials customers increase biomaterials sales primarily result strong sales cardiovascular orthopaedic product lines sales angioseal components st jude medical 183 million increased 28 million 18 compared 155 million fiscal 2008 orthopaedic sales 298 million fiscal 2009 1 increase compared 294 million fiscal 2008 orthopaedic product sales increase primarily result spine products sales increased 6 137 million fiscal 2009 129 million fiscal 2008 increase sales spine products primarily attributable strong sales current new product lines orthovita cancellation fees charged customer research development work performed offset part weaker sales bone void filler products based customer inventory levels believe increased competition market sports medicine product sales 155 million decreased 1 156 million fiscal 2008 sports medicine product sales fiscal 2009 positively impacted due new product launches stronger sales existing products however offset exceptionally high orders fourth quarter fiscal 2008 two major customers current economic conditions negatively impacted customer inventory levels endovascular sales endovascular sales 39 million fiscal 2009 38 decrease compared sales 62 million fiscal 2008 endovascular sales include revenue recognized products shipped well milestone revenue recognized product development programs spectranetics fiscal 2009 endovascular product sales spectranetics reduced transfer price compared direct market price reflected historical sales figures decrease endovascular sales fiscal 2009 fiscal 2008 direct result reduced transfer price overall net unit sales spectranetics increased compared fiscal 2008 enduser unit sales fiscal 2009 announced accomplishment two milestones development regulatory service agreement spectranetics resulted 25 million cash payments recognition 625000 revenue royalty income royalty income increased 4 272 million fiscal 2009 260 million fiscal 2008 angioseal royalty income st jude medical enduser sales 212 million decreased 1 compared 214 million fiscal 2008 estimate angioseal royalties fiscal 2009 negatively impacted due foreign currency exchange approximately 600000 compared foreign currency exchange fiscal 2008 despite negative impact foreign currency exchange st jude medical’s enduser sales angioseal device included negative impact foreign currency exchange declined 1 fiscal 2009 prior fiscal year royalty income net enduser sales orthovita’s vitoss foam vitoss bioactive foam products fiscal 2009 58 million increased 31 compared 44 million fiscal 2008 enduser sales codeveloped vitoss foam vitoss bioactive foam products increased 38 fiscal 2009 compared fiscal 2008 recent successful introduction new vitoss bioactive foam products well continued sales existing vitoss foam products orthovita enduser marketplace contributed increase royalty income cost products sold cost products sold 242 million fiscal 2009 30 million 11 decrease 272 million fiscal 2008 decrease cost products sold period primarily related prior year charges 20 million sale endovascular business spectranetics ii prior year charges 25200 acceleration stockbased awards iii prior year charges 155000 discontinuance embolic protection platform included within cost products sold prior fiscal year applicable fiscal 2009 iv startup costs associated new safecross product line fiscal 2008 recur fiscal 2009 offset 11 million increase total net sales gross margin net sales fiscal 2009 56 compared gross margin net sales 49 fiscal 2008 increase gross margin fiscal 2009 compared prior fiscal year due part product mix well higher volumes process improvements revenue generated product development programs biomaterials customers gross margin period prior fiscal year negatively affected startup costs associated safecross product line initiated continued refine manufacturing process new product line also negatively impacting gross margin prior fiscal year approximately 5 charges related sale endovascular division acceleration stockbased awards discontinuance embolic protection platform research development expense research development expense 181 million fiscal 2009 934000 5 increase 172 million fiscal 2008 increase research development expense period prior fiscal year due 13 million increase biomaterials research development expenses primarily due design development expenses related commencement increased focus articular cartilage regeneration matrix ecm projects expenses incurred connection customer cancellation research development projects ii 471000 increase personnel costs primarily related increase stockbased equity compensation costs increases offset 835000 charge incurred acceleration stockbased awards prior fiscal year applicable fiscal 2009 fiscal 2009 furthered cartilage preclinical studies preparation us clinical trial february 2009 filed ide submission cartilage us clinical trial research development expenses 22 total revenues fiscal years ended 2009 2008 believe research development expenditures total percentage revenue increase slightly fiscal 2010 compared fiscal 2009 believe expected increase primarily result increased focus cartilage repair product efforts dedicated clinical programs product toward achieving regulatory approvals additional stockbased compensation expense primarily due fiscal 2008 acceleration stock awards selling general administrative expense selling general administrative expense 92 million fiscal 2009 184 million 67 decrease 276 million fiscal 2008 decrease selling general administrative expense prior fiscal year due 141 million decrease sales marketing efforts primarily due elimination direct sales marketing efforts endovascular products sale product lines spectranetics may 2008 ii 23 million decrease stockbased equity compensation costs primarily due charge 19 million incurred acceleration stockbased awards prior year applicable fiscal 2009 iii approximate 76000 decrease due charge incurred prior year related discontinuance embolic protection platform applicable fiscal 2009 iv charge 25 million incurred sale endovascular business spectranetics may 2008 applicable fiscal 2009 decreases partially offset 478000 aggregate increase professional fees including legal audit tax fees board director fees selling general administrative expenses 11 35 total revenues fiscal years ended 2009 2008 respectively believe selling general administrative expenditures total percentage revenue remain consistent fiscal 2010 fiscal 2009 primarily result additional stockbased compensation expense due large part fiscal 2008 acceleration stock awards interest income interest expense interest income decreased 34 12 million fiscal 2009 18 million fiscal 2008 decrease due primarily lower interest rates partially offset increase 46 average cash investment balance fiscal year ended june 30 2009 prior fiscal year interest expense fiscal 2009 21 million compared 15 million prior year november 2007 borrowed remaining 270 million available mortgage citibank fsb increasing outstanding balance 350 million mortgage hedged fixed interest rate swap bearing interest 644 expect interest expense decrease continue pay mortgage principal mortgage balance 328 million june 30 2009 see note 13 note 14 consolidated financial statements included form 10k additional information concerning mortgage swap incomeloss nonoperating income 151000 fiscal 2009 fluctuation 371000 nonoperating loss 220000 fiscal 2008 nonoperating income fiscal 2009 due final settlement outstanding items related opportunity grant program department community economic development commonwealth pennsylvania governor’s action team see note 21 consolidated financial statements included form 10k additional information concerning opportunity grant nonoperating loss fiscal 2008 represented nonoperating items including gainloss foreign currency exchange gainloss sales assets loss sale mutual fund investment offset gains sale selected municipal obligations income tax expense tax expense fiscal 2009 97 million resulting effective tax rate approximately 33 fiscal 2008 effective tax rate 27 result october 2008 congressional approval extension research experimentation tax credit recorded retroactive adjustment tax provision second fiscal quarter ended december 31 2008 reduced effective tax rate fiscal 2009 33 effective tax rate impacted income tax benefit fiscal years 2009 2008 see note 22 consolidated financial statements included form 10k additional information concerning effective tax rate results operations comparison fiscal years 2008 2007 total revenues total revenues increased 15 798 million fiscal 2008 695 million fiscal 2007 total net sales net sales products increased 20 538 million fiscal 2008 compared net sales 449 million fiscal 2007 64 million 16 increase biomaterials sales 24 million 64 increase endovascular sales biomaterials sales biomaterials sales 475 million fiscal 2008 16 increase compared 411 million fiscal 2007 biomaterials sales includes revenue recognized products shipped well revenue generated product development programs biomaterials customers increase primarily due increase orthopaedic sales 76 million 35 294 million fiscal 2008 compared 218 million fiscal 2007 orthopaedic sales growth primarily result sales arthrex 140 million represented increase 30 million 27 prior fiscal year additionally sales orthovita increased 19 million 35 73 million fiscal 2008 compared 54 million fiscal 2007 due strong end user sales existing products initial shipments new vitoss bioactive foam product line fully launched orthovita fourth quarter fiscal 2008 fiscal 2008 orthopaedic sales growth also impacted 20 million new product sales resulting macropore biosurgery assets acquisition completed may 2007 biomaterials sales increased 716000 37 26 million fiscal 2008 compared 19 million fiscal 2007 offsetting increases 19 million 11 decrease sales angioseal components st jude medical 155 million fiscal 2008 compared 174 million fiscal 2007 collagen plug component sales 136 million decrease 5 sales anchor component 19 million decrease 39 asked supplement st jude medical’s production rates greater 30 fiscal 2007 see volume anchor sales fiscal 2008 endovascular sales endovascular sales 62 million fiscal 2008 64 increase compared sales 38 million fiscal 2007 sales us increased 39 million 28 million due continuation launch safecross device continued market acceptance thromcat system quickcat catheter fiscal 2008 us sales included sales spectranetics inc late fiscal 2008 fourth quarter international endovascular sales increased 135 year 23 million 993000 due increased market acceptance thromcat quickcat devices fiscal 2008 issued 466000 us international sales credits customers fiscal 2007 related recall discontinuance embolic protection product line royalty income royalty income increased 6 260 million fiscal 2008 246 million fiscal 2007 angioseal royalty income st jude medical enduser sales increased 3 214 million fiscal 2008 compared 208 million fiscal 2007 based st jude medical revenue approximately 360 million fiscal 2008 compared 350 million fiscal 2007 orthovita royalty income increased 19 fiscal 2008 fiscal 2007 total royalty income orthovita approximately 44 million fiscal 2008 compared 37 million fiscal 2007 enduser sales codeveloped vitoss™ foam products increased 23 fiscal 2008 compared fiscal 2007 cost products sold cost products sold 272 million fiscal 2008 26 million 11 increase 246 million fiscal 2007 increase costs products sold fiscal 2008 primarily related 36 million increase net sales fiscal 2008 startup costs associated safecross product line initiated continued refine manufacturing process new product line ii 20 million charges related sale endovascular division iii charge 252000 acceleration stock awards iv 155000 charges related discontinuance embolic protection platform applicable fiscal 2007 year charges fiscal 2008 offset 34 million charges related fiscal 2007 discontinuance embolic protection platform applicable fiscal 2008 gross margin net sales fiscal 2008 49 compared gross margin net sales 45 fiscal 2007 increase gross margin fiscal 2008 compared prior fiscal year primarily related net effect discontinuance embolic protection platform fiscal 2007 fiscal 2008 sale endovascular division acceleration stock awards remaining charges related discontinuance embolic protection platform addition contributing improvement gross margin increase sales offset startup costs associated safecross product line described negatively impacting gross margin net sales fiscal 2008 approximately 5 percentage points sale endovascular division acceleration stock awards discontinuance embolic protection platform fiscal 2007 gross margin net sales negatively impacted approximately 8 percentage points discontinuance embolic protection platform research development expense research development expense 172 million fiscal 2008 31 million 15 decrease 203 million fiscal 2007 decrease research development expense fiscal 2008 primarily related endovascular research development expenses decreased 44 million due decrease personnel costs clinical trial expenses development services supplies expenses related embolic protection platform recur fiscal 2008 due discontinuance embolic protection platform fiscal 2007 offset part increase biomaterials research development expense 12 million comparable prior year due additional costs related design development expenses annulus repair cartilage resorbable interbody fusion projects decrease research development expense also related 729000 charge related fiscal 2007 discontinuance embolic protection platform applicable fiscal 2008 decreases offset fiscal 2008 10000 charges related sale endovascular division charge 835000 acceleration stockbased awards 93000 charges related discontinuance embolic protection platform selling general administrative expense total selling general administrative expense 276 million fiscal 2008 68 million 32 increase fiscal 2007 sales marketing sales marketing expense 147 million fiscal 2008 22 million 18 increase 125 million fiscal 2007 increase sales marketing expense fiscal 2008 primarily due 24 million charges related sale endovascular division ii 260000 charge acceleration stockbased awards iii 71000 charges related discontinuance embolic protection platform fiscal 2007 included 87000 charges related discontinuance embolic protection platform iv 682000 increase european sales marketing expenses primarily caused 445000 increase personnel travel expenses 129000 increase office costs professional fees 95000 increase marketing convention expenses part relates increase average eurotodollar exchange rate fiscal 2008 compared fiscal 2007 average eurotodollar exchange rate fiscal 2008 147 versus average exchange rate fiscal 2007 131 increase approximately 12 offsetting charges sales marketing expense fiscal 2008 11 million decrease us sales marketing expenses primarily due 445000 decrease personnel travel expenses 665000 decrease conventions advertising expense product launches based timing sale endovascular business 11 months direct sales force fiscal 2008 compared 12 months fiscal 2007 despite fact growing sales force start fiscal 2008 change management’s direction sought strategic alternatives endovascular business drastically reduced marketing initiatives ability continue recruit retain sales people fiscal 2008 offsetting increase expenses beginning fiscal 2008 general administrative general administrative expense 128 million fiscal 2008 45 million 55 increase 83 million fiscal 2007 general administrative expense fiscal 2008 includes costs finance information technologies human resource business development departments increase general administrative expense fiscal 2008 primarily due 25 million charges related sale endovascular division ii 16 million charge acceleration stockbased awards iii 5000 charges related discontinuance embolic protection platform fiscal 2007 included 120000 charges related discontinuance embolic protection platform iv increase personnel costs 222000 including stockbased compensation expense increase 303000 amortization expense related amortization intangible asset acquired macropore biosurgery inc late fourth quarter fiscal 2007 loss sale endovascular assets may 2008 recorded loss sale certain assets 12 million sold endovascular business spectranetics assets’ carrying value date transaction excess 100 million cash payment received closing transaction interest income interest expense interest income increased 63 18 million fiscal 2008 11 million fiscal 2007 increase due primarily 60 increase average cash investment balance fiscal year ended june 30 2008 comparable prior year period well effect higher interest rates interest expense fiscal 2008 15 million compared 427000 prior year november 2007 borrowed remaining 270 million available mortgage see note 13 consolidated financial statements included 10k increasing outstanding balance 350 million compared 80 million prior year period thereby increasing interest paid mortgage nine month period mortgage hedged fixed interest rate swap 644 mortgage balance 342 million june 30 2008 incomeloss nonoperating loss 220000 fiscal 2008 decrease nonoperating loss 23000 fiscal 2007 nonoperating loss fiscal 2008 represents loss sale mutual fund investment offset gains sale selected municipal obligations nonoperating income loss also includes items gainloss exchange gainloss disposal fixed assets nonoperating income fiscal 2007 related primarily loss disposal fixed assets offset revenue recognized 500000 opportunity grant received commonwealth pennsylvania governor’s action team see note 21 consolidated financial statements included form 10k income tax expense tax expense fiscal 2008 18 million resulting effective tax rate 27 fiscal 2007 effective tax rate 18 effective tax rate impacted income tax benefit fiscal years 2007 2008 fiscal 2007 recorded retroactive adjustment tax provision result congressional approval extension research experimentation tax credit reduced effective tax rate see note 22 consolidated financial statements included form 10k liquidity capital resources cash equivalents investments 797 million june 30 2009 increase 162 million balance 635 million june 30 2008 end prior fiscal year working capital 950 million june 30 2009 increase 121 million working capital 829 million june 30 2008 increase working capital primarily result increase cash investment balances result overall reduction fiscal 2009 selling general administrative expenses due elimination direct sales marketing efforts endovascular products sale product lines spectranetics may 2008 operating activities net cash provided operating activities 332 million fiscal year ended june 30 2009 fiscal year ended june 30 2009 net income 201 million noncash depreciation amortization 67 million net effect noncash employee stockbased compensation related tax events 28 million net change deferred income taxes 12 million primarily result utilization available prior years’ tax credits offset deferred tax asset established fiscal 2009 due tax treatment related milestones payments spectranetics cash provided operations result changes asset liability balances 24 million increase cash primarily result decrease receivable balances 28 million ii increase deferred revenue approximately 17 million related receipt milestones payments pursuant development regulatory agreement spectranetics iii decrease prepaid expenses 860000 primarily due current federal tax liability position increases offset part decrease accounts payable accrued expenses 15 million primarily due decrease accrued payroll related compensation decrease accrued endovascular transaction exit costs increase inventory 13 million investing activities cash used investing activities 191 million fiscal year ended june 30 2009 amount result 229 million bond purchases offset 74 million bond maturities within investment portfolio also invested 36 million capital expenditures fiscal year ended june 30 2009 continue expand research development manufacturing capabilities improve information technology systems financing activities cash used financing activities 133 million fiscal year ended june 30 2009 amount primarily result 194 million repurchases common stock 14 million repayments longterm debt offset 75 million cash proceeds net effect exercise stockbased awards stock repurchase program time made repurchases common stock pursuant various programs established board directors march 18 2009 announced board directors approved new stock repurchase program allows us repurchase total 600000 issued outstanding shares common stock new program scheduled expiration date fiscal 2009 repurchased retired 806666 shares common stock total cost 193 million average market price per share 2392 current 600000 share repurchase program previously announced stock repurchase programs using available cash june 30 2009 194705 shares remaining repurchase current 600000 stock repurchase program company 11145562 shares common stock outstanding plan finance remaining repurchases using available cash liquid investments cash operations see note 16 consolidated financial statements included 10k additional information concerning stock repurchase programs stock appreciation rights sars buyback program granted cashsettled sar awards eligible employees quarter ended september 30 2006 award granted provided participant right receive payment cash upon exercise appreciation market value share common stock award’s exercise price exercise price sar equal closing market price common stock date grant sars exercisable maximum term five years date grant vest period three years grant date first onethird grants scheduled vest quarter ended september 30 2007 quarter ended september 30 2007 vesting equity compensation awards automatically accelerated due “change control” defined employee plan see note 17 consolidated financial statements included 10k additional information concerning accelerated vesting equity awards therefore granted cashsettled sar awards available exercise subject quarterly marktomarket adjustments november 14 2007 effort reduce exposure liability offered buy back sars current eligible employees excluding executive officers fair market value buyout price based closing price common stock december 14 2007 settlement date offer resulted purchase 173940 sars buyout price 647 per sar total 11 million net portion payroll taxes paid participating eligible employees remaining sars continue remeasured reporting period awards settled cannot predict market value common stock time exercise grants magnitude exercises particular time term grants general plan continue increase research development activities biomaterials products continue research development activities endovascular products based research development agreement spectranetics sold endovascular product lines spectranetics may 2008 portion operating expense specifically related endovascular sales marketing efforts eliminated fiscal 2009 believe current cash investment balances expected future cash generated operations sufficient meet operating financing capital requirements next 12 months although believe cash investment balances also sufficient much longer term basis depend numerous factors including market acceptance existing future products successful commercialization products development costs associated commercialization progress product development efforts magnitude scope efforts progress preclinical studies future clinical trials product clearance fda agencies cost timing efforts expand manufacturing sales marketing capabilities cost filing prosecuting defending enforcing patent claims intellectual property rights competing technological market developments development strategic alliances marketing certain products terms future equity financing undertake may dilutive stockholders terms debt financing may contain restrictive covenants limit ability pursue certain courses action ability obtain financing dependent status future business prospects well conditions prevailing relevant capital markets assurance given additional financing available us available us acceptable terms need arise contractual obligations contingent commitments presented summary approximate aggregate contractual obligations contingent commitments june 30 2009 future payments contracts contingent commitments year 2010 beyond obligations related mortgage agreements purchase goods services legally binding enforceable us 1 longterm debt obligations consist principal interest mortgage outstanding principal balance 328 million june 30 2009 accordance accounting principles generally accepted united states america us gaap future interest obligations recorded consolidated balance sheet see note 13 consolidated financial statements included form 10k 2 obligations consist cancelable noncancelable purchase commitments related inventory capital expenditures goods services accordance us gaap obligations recorded consolidated balance sheets see note 19 consolidated financial statements included form 10k 3 development regulatory services agreement spectranetics amended company’s contributions limited maximum amount 2750000 toward expenses associated clinical studies obtain approval fda certain nextgeneration endovascular products unable reliably estimate amount timing contributions dependent type complexity clinical studies intended use product established accordance us gaap obligations recorded consolidated balance sheets see note 19 note 26 consolidated financial statements included form 10k 4 company entered employment agreements certain named executive officers employment agreements provide among things aggregate annual base salaries 1881000 though fiscal 2012 accordance us gaap obligations recorded consolidated balance sheets see note 19 consolidated financial statements included form 10k 5 liabilities uncertain tax positions aggregate amount 141194 omitted table due inability reliably estimate period cash settlement liabilities see note 22 consolidated financial statements included form 10k 6 noncurrent deferred revenue includes milestone payments received company pursuant customer agreements well advanced payments customers future services accordance us gaap liabilities recorded consolidated balance sheets see note 5 note 26 consolidated financial statements included form 10k 7 value represents estimated amount company would pay terminate swap company prepay mortgage currently intend prepay mortgage therefore unable reliably estimate period cash settlement swap accordance us gaap liability recorded consolidated balance sheets see note 13 consolidated financial statements included form 10k estimate time periods cash equivalents adequate fund operations forward looking statement within meaning private securities litigation reform act 1995 subject risks uncertainties actual results may differ materially contemplated forwardlooking statements addition described factors may cause difference set forth item 1a risk factors annual report form 10k item 7a item 7 managements discussion analysis financial condition results operations following discussion analysis read conjunction selected consolidated financial data financial statements related notes included report discussion analysis contains forwardlooking statements relating future events future financial performance statements predictions actual events results may differ materially evaluating statements carefully consider various factors identified report could cause actual results differ materially expressed implied forwardlooking statements including set forth risk factors annual report form 10k see forwardlooking statements overview revenues consist three components net sales research development revenue royalty income net sales net sales comprised sales biomaterials products triactiv device biomaterials component net sales represents sale biomaterials products customers use following markets orthopaedics cardiology drugbiologics delivery periodontal general surgery wound care 1997 biomaterials sales comprised almost 100 absorbable nonabsorbable collagen polymer components angioseal supplied strategic alliance partner since time experienced significant sales growth biomaterials products expanded customer base marketing activities increased sales existing customers assisted development new product offerings fiscal 2003 angioseal components represented 54 total biomaterial sales believe growth overall biomaterials sales 54 fiscal 2003 fiscal 2002 continue greater acceptance medical community biomaterials technological advances expanded applications biomaterials products triactiv commercially launched europe fourth quarter fiscal 2002 selling direct market germany distributors throughout rest europe entered distribution agreements sales united kingdom ireland switzerland austria italy june 30 2003 process identifying distributors rest europe triactiv sales less 1 total sales fiscal 2003 anticipate triactiv become significant component net sales fiscal 2004 beyond gain new customers european markets launch new versions applications product launch product us market anticipate commercial launch triactiv us second half fiscal 2004 research development revenue fiscal 2001 research development revenue derived entirely single nist grant researching cartilage regeneration utilizing ptm technology grant continued fiscal 2002 received remaining funds grant second quarter fiscal 2003 addition october 2001 received second nist grant researching synthetic vascular graft also utilizing ptm technology project expected continue early fiscal 2005 january 2003 received nih grant researching sustained controlled release chemotherapeutic drugs treatment breast cancer utilizing ptm technology grant continue early fiscal year 2004 royalty income receive royalty every angioseal unit sold worldwide anticipate sales angioseal continue grow st jude medical continues expand sales marketing efforts including launch angioseal product line japanese market releases future generations angioseal system including recent launch sts plus version device us result expect royalty income continue significant source revenue current royalty rate 9 original rate 12 contractually reduced 12 9 accordance licensing agreements fiscal quarter ended december 31 2000 cumulative one million angioseal units sold one decrease royalty rate 6 upon reaching four million cumulative units sold anticipate final rate reduction occur fourth quarter fiscal 2004 june 30 2003 approximately three million angioseal units sold cost products sold experienced overall increase gross margin fiscal 2003 reflecting continued increase volume biomaterials product sales increased volume existing customers new customers resulted manufacturing efficiencies volume increase also results fixed costs spread greater number units anticipate gross margin biomaterials products continue improve continued increased sales volume increase gross margin partially offset lower gross margins associated triactiv expect margins early sales lower biomaterials margins due startup nature manufacturing process low volume result product mix fiscal 2004 believe total gross margin across product lines slightly improved fiscal 2003 volumes increase manufacturing process matures triactiv expect gross margin product increase research development expense research development expense consists expenses incurred development proprietary technologies triactiv absorbable nonabsorbable biomaterials products technologies development programs including expenses nist nih programs december 2001 began triactiv us pivotal clinical study planned 500 800 patient randomized trial 80 sites around us europe anticipate completion trial enrollment submission food drug administration fda 510k approval end second quarter early third quarter fiscal 2004 clinical efforts pursuit fda approval continuing development triactiv well continued development proprietary biomaterials products technologies requires significant research development spending anticipate research development expense continue increase pursue commercialization triactiv device us explore opportunities indications related triactiv well technologies including continued development proprietary biomaterials technologies selling general administrative selling general administrative expenses include general administrative costs well costs related sales marketing products costs patent litigation also included within selling general administrative expenses sales marketing component selling general administrative expenses increased commercialized triactiv europe may 2002 move toward commercialization triactiv us january 2002 received ce mark approval european regulatory authority triactiv allows commercial sale product european union effective january 2002 established subsidiary germany kensey nash europe gmbh hired vice president european sales established european sales marketing team continue add personnel team required meet clinical sales goals team selling product direct german market supports distributor relationships rest europe entered distribution agreements sales united kingdom ireland switzerland austria italy june 30 2003 process identifying distributors rest europe anticipate sales marketing expenses continue increase prepare us commercial launch also continue evaluate opportunities commercialization triactiv us expand marketing efforts biomaterials business critical accounting policies critical accounting policies require application managements difficult subjective complex judgments often result need make estimates matters inherently uncertain may change future periods intended comprehensive list significant accounting policies many cases accounting treatment particular transaction specifically dictated generally accepted accounting principles need managements judgment application also areas selection available alternative policy would produce materially different result identified following critical accounting policies revenue recognition accounting stockbased compensation revenue recognition recognize revenue provisions staff accounting bulletin sab 101 revenue recognition financial statements sab 101 accordingly sales revenue recognized related product shipped shipments free board fob shipping point revenue research development contracts recognized related costs incurred royalty revenue recognized related product sold advance payments received products services recorded deferred revenue recognized product shipped services performed stockbased compensation account stockbased compensation costs sfas 123 accounting stockbased compensation sfas 123 amended sfas 148 permits continued application intrinsic value method accounting principles board opinion 25 accounting stock issued employees apb 25 intrinsic value method compensation cost represents excess quoted market price companys common stock grant date amount grantee must pay stock policy grant stock options fair market value date grant therefore recognized compensation expense options granted employees account stockbased awards nonemployees using fair value method accordance sfas 123 requires using blackscholes optionpricing model determine fair value option original grant date options granted nonemployees defined sfas 123 amended sfas 148 emerging issues task force eitf 9618 accounting equity instruments employees acquiring conjunction selling goods services recorded expense service period company grant options nonemployees fiscal 2002 see note 12 financial statements information regarding options granted nonemployee outside consultant october 2002 results operations comparison fiscal years 2003 2002 total revenue net sales total revenues increased 53 444 million year ended june 30 2003 290 million year ended june 30 2002 net sales products increased 55 271 million fiscal 2003 175 million fiscal 2002 triactiv sales increased 388 fiscal 2003 fiscal 2002 represented less 1 total sales fiscal 2003 increase total sales primarily attributable increased sales angioseal components orthopaedic products research development revenue research development revenues increased 26 963000 fiscal 2003 765000 fiscal 2002 fiscal 2003 revenues generated nist articular cartilage synthetic vascular graft development grants nih breast cancer drug delivery grant prior fiscal year revenues generated nist articular cartilage synthetic vascular graft development grants nist articular cartilage grant provided revenue four twelve months fiscal 2003 project concluded october 2002 nist vascular graft grant provided revenue entire year nih breast cancer drug delivery grant initiated september 2002 increase prior fiscal year reflects addition nih breast cancer grant provided 46000 revenue fiscal 2003 increase activities expenses related nist synthetic vascular graft grant vascular graft grant revenue increased 454000 fiscal 2003 fiscal 2002 increases offset decrease 302000 nist articular cartilage grant due conclusion grant early fiscal 2003 royalty income royalty income increased 52 163 million fiscal 2003 108 million fiscal 2002 increase reflects greater number units sold well increase average selling price angioseal royalty units increased 44 approximately 967000 angioseal units sold endusers fiscal 2003 compared approximately 670000 units sold fiscal 2002 believe unit increase primarily due st jude medicals increased sales marketing efforts resulting market share gains angioseal product line us european markets full year impact selftightening suture sts version angioseal introduced us march 2002 cost products sold cost products sold increased 48 122 million fiscal 2003 82 million fiscal 2002 gross margin increased 55 53 increase gross margin reflected higher margins biomaterials products attributable part higher volumes result manufacturing efficiencies well continued allocation overhead across greater sales volumes results decrease per unit costs higher margins biomaterials products slightly offset lower margins triactiv margins continue lower biomaterials product margins manufacturing process matures volumes increase research development expense research development expense increased 34 145 million fiscal 2003 compared 108 million fiscal 2002 increase mainly attributable continued development efforts triactiv including clinical trial expenses research development expenses related triactiv increased 19 million 31 81 million fiscal 2003 62 million fiscal 2002 also continued expand development efforts biomaterials products including work nist grants biomaterials proprietary technologies spending increased 18 million 39 64 million fiscal 2003 46 million fiscal 2002 selling general administrative expense selling general administrative expense increased 59 74 million fiscal 2003 47 million fiscal 2002 increase partially result increased sales marketing expenses increased 15 million 33 million fiscal 2003 18 million fiscal 2002 increase related primarily european sales marketing efforts triactiv addition general administrative expenses increased 13 million 41 million fiscal 2003 28 million fiscal 2002 attributable 696000 increased personnel costs 261000 increased professional services public company expenses including investor relations filing fees increases related continued sales research development growth primarily increased costs related complying sarbanesoxley act 2002 soa addition selling general administrative include 325000 professional service fee relates directly research development tax credit project performed fiscal fourth quarter see net interest income interest expense decreased 78000 35 145000 fiscal 2003 223000 fiscal 2002 due lower principal balance thm acquisition obligation continue make required quarterly payments result early repayment certain debt holders interest income decreased 37 12 million fiscal 2003 19 million fiscal 2002 although cash investment balances increased offset lower interest rates nonoperating income expense nonoperating income 700 fiscal 2003 compared nonoperating expense 15000 fiscal 2002 nonoperating expense income periods represented primarily net loss gain sale fixed assets net income net income increased 91 88 million fiscal 2003 46 million fiscal 2002 primarily result increased sales royalty income described offset part increased expenses associated research development sales marketing efforts related triactiv also described addition company recognized 25 million income tax expense fiscal 2003 compared 24 million income tax expense fiscal 2002 tax expense fiscal 2003 net 15 million research development tax credit described comparison fiscal years 2002 2001 total revenue net sales total revenues increased 25 290 million year ended june 30 2002 232 million year ended june 30 2001 net sales products increased 20 175 million fiscal 2002 146 million fiscal 2001 increase entirely attributable increased sales angioseal components orthopaedic products research development revenue research development revenues increased 132 765000 fiscal 2002 330000 fiscal 2001 fiscal 2002 revenues generated nist articular cartilage synthetic vascular graft development grants synthetic vascular graft grant received fiscal 2002 research development revenues period year earlier generated work performed nist articular cartilage development grant royalty income royalty income increased 31 108 million fiscal 2002 82 million fiscal 2001 increase reflects greater number units sold well increase average selling price angioseal offset decrease average royalty rate approximately 98 fiscal 2001 90 fiscal 2002 decrease average rate came result drop royalty rate 12 9 october 2000 discussed royalty units increased 39 approximately 670000 angioseal units sold endusers fiscal 2002 compared approximately 483000 units sold fiscal 2001 believe unit increase primarily due st jude medicals increased sales marketing efforts launch new selftightening suture sts version angioseal introduced us march 2002 cost products sold cost products sold increased 11 82 million fiscal 2002 74 million fiscal 2001 gross margin increased 53 49 increase gross margin reflected higher margins biomaterials products attributable part higher volumes result manufacturing efficiencies well continued allocation overhead across greater sales volumes results decrease per unit costs cost initial quantities triactiv insignificant portion cost products sold fiscal 2002 research development expense research development expense increased 48 108 million fiscal 2002 compared 73 million fiscal 2001 increase mainly attributable continued development efforts triactiv including clinical trial expenses research development expenses related triactiv increased 31 million 100 62 million fiscal 2002 31 million fiscal 2001 also continued expand development efforts biomaterials products including work nist grants biomaterials proprietary technologies spending increased 12 million 35 46 million fiscal 2002 34 million fiscal 2001 selling general administrative expense selling general administrative expense increased 56 47 million fiscal 2002 30 million fiscal 2001 increase primarily result increased sales marketing expenses increased 11 million 18 million fiscal 2002 703000 fiscal 2001 increase related primarily european sales marketing efforts triactiv addition general administrative expenses increased 559000 28 million fiscal 2002 23 million fiscal 2001 attributable 350000 increased personnel costs 209000 increased professional services public company expenses including investor relations filing fees increases related continued sales research development growth net interest income interest expense decreased 16000 7 223000 fiscal 2002 239000 fiscal 2001 due lower principal balance thm acquisition obligation result scheduled repayments interest income consistent 19 million fiscal 2002 2001 although cash investment balances increased offset lower interest rates nonoperating income expense nonoperating expense 15000 fiscal 2002 compared nonoperating income 24000 fiscal 2001 nonoperating expense income periods represented primarily net gain loss sale fixed assets net income net income increased 27 46 million fiscal 2002 36 million fiscal 2001 primarily result increased sales royalty income described offset part increased expenses associated research development sales marketing efforts related triactiv also described addition company recognized 24 million income tax expense fiscal 2002 compared 41 income tax benefit fiscal 2001 prior year income tax benefit recognized valuation allowance related certain deferred tax assets reversed based projections taxable income believed likely would able utilize federal net operating loss nol carryforwards result valuation allowance related carryforwards longer considered necessary lastly fiscal 2001 recognized inprocess research development charge iprd 76 million liquidity capital resources net cash provided operating activities 144 million 73 million fiscal 2003 2002 respectively fiscal 2003 changes asset liability balances resulted net 160000 use cash offset net income 88 million noncash depreciation amortization 32 million fiscal 2002 changes asset liability balances resulted net 330000 use cash net income 46 million noncash depreciation amortization 21 million cash equivalents investments 484 million june 30 2003 june 30 2002 21 million restricted investment accounts pledged 21 million investments collateral secure bank loan officer used officer payment taxes incurred result receipt common stock time initial public offering december 1995 companys security pledge related loans released bank february 2003 officers loans bank repaid full restriction companys investments removed spent approximately 49 million primarily machinery equipment leasehold improvements expenditures related continued expansion manufacturing capabilities biomaterials new triactiv product lines 80 million capital spending plan fiscal 2004 continue expended primarily expansion manufacturing capabilities space product lines conjunction acquisition thm september 2000 incurred note payable shareholders thm amount 45 million acquisition obligation amount 11 million paid june 30 2003 obligation due equal quarterly installments 281250 began december 31 2000 scheduled end september 30 2004 february 28 2003 due repayments certain former shareholders thm reduced remaining quarterly installments 223256 september 30 2004 cash outflow related acquisition obligation 893023 fiscal year 2004 223256 fiscal 2005 obligation fully repaid received 61 million proceeds tax benefit 26 million employee stock option exercises fiscal 2003 operating leases primarily facility exton pennsylvania also represent significant cash outflow lease expense noncancelable operating leases next three years follows 742212 fiscal 2004 711696 fiscal 2005 302157 fiscal 2006 plan continue spend substantial amounts fund clinical trials gain regulatory approvals continue expand research development activities particularly triactiv biomaterials products believe current cash investment balances addition cash generated operations sufficient meet operating capital requirements least fiscal 2004 future capital requirements adequacy available funds depend however numerous factors including market acceptance existing future products successful commercialization products development progress product development efforts magnitude scope efforts progress preclinical studies clinical trials product clearance fda agencies cost timing efforts expand manufacturing capabilities cost filing prosecuting defending enforcing patent claims intellectual property rights competing technological market developments development strategic alliances marketing certain products assurance record profits future periods see risk factors may need otherwise decide seek additional capital private andor public equity debt markets support higher level growth respond competition develop products reasons terms future equity financing may dilutive stockholders terms debt financing may contain restrictive covenants limit ability pursue certain courses action ability obtain financing dependent status future business prospects well conditions prevailing relevant capital markets assurance given additional financing made available us available acceptable terms need arise estimate time periods cash equivalents adequate fund operations forward looking statement within meaning private securities litigation reform act 1995 subject risks uncertainties actual results may differ materially contemplated forwardlooking statements addition described factors may cause difference set forth caption risk factors annual report form 10k acquisition thm biomedical inc inprocess research development charge fiscal 2001 76 million iprd charge represented estimated fair value purchased inprocess technology yet reached technological feasibility alternative future use comprised following projects articular cartilage 54 million bone fusion 389000 bone applications 261000 drug delivery 15 million four projects utilizes core opencell poly lactic acid opla technology porous tissue matrix ptm technology developed thm ptm technology facilitates wound healing bone soft tissue bioabsorbable controlled rates specific functions tissues iprd projects utilizes properties ptm technology address respective market example articular cartilage project uses ptm technology foundation articular cartilage repair regrowth product total iprd value determined estimating stage completion iprd project date acquisition estimating costs develop iprd project commercially viable products estimating resulting net cash flows projects discounting net cash flows back present values discount rate project takes account uncertainty surrounding successful development commercialization purchased inprocess technology stage completion projects ranged 48 72 acquisition date weighted average completion rate approximately 56 date estimated costs bring projects development technological feasibility clinical trials approximately 73 million since date acquisition thm planned primarily devoted development efforts acquired ptm technology articular cartilage application synthetic vascular graft sustained release chemotherapeutic drug treatment expended approximately 1073000 1110000 49000 efforts fiscal 2003 2002 2001 respectively addition received 510k approval proprietary ptm based product improvisetm absorbable cement flow restrictor use certain orthopaedic surgical procedures net cash flows iprd projects based managements best estimates revenue cost sales research development costs general administrative costs income taxes projects estimates determined considering historical experience industry trends averages sales products incorporating technologies forecasted commence fiscal 2003 fiscal 2005 depending project projected revenue growth rates 50 range immediate years following worldwide market launch declining 5 range market nears maturity projections based best estimates market size growth expected trends technology nature expected timing new product introductions us competitors cash flows revenues period reduced related expenses capital expenditures cost working capital assigned contribution core technology serving foundation research development discount rates used discounting net cash flows purchased inprocess technology 80 articular cartilage 85 bone fusion 78 bone applications 83 drug delivery discount rates project determined upon consideration stage completion project assumptions nature timing remaining efforts completion risks uncertainties project substantial research development preclinical testing clinical trials required determine technical feasibility commercial viability products development assurance efforts successful projects successfully developed revenue profitability may adversely affected future periods continuously monitoring development projects believe assumptions used valuation purchased inprocess technology reasonably estimate future benefits attributable purchased inprocess technology assurance given actual results deviate assumptions future periods research development tax credit fourth quarter fiscal 2003 company recorded research development tax credit 15 million tax credit relates qualified research development activities company risk factors carefully consider risks uncertainties factors described addition information set forth report could materially adversely affect business operating results financial condition cash flows prospects well adversely affect value investment common stock risks related business cannot assure clinical trials triactiv successful able obtain necessary regulatory approvals triactiv united states need conduct additional human clinical trials triactiv possible trials triactiv may found ineffective unsafe may encounter problems cause us delay suspend development product triactiv approved marketing fda require substantial additional expenditures develop product conduct clinical trials gain necessary regulatory approval triactiv us prior granting approval fda may require clarification information provided regulatory submissions information clinical studies granted fda approval may impose limitations uses product may marketed product may marketed experience delays unable receive approval fda growth prospects diminished although received ce mark approval even receive fda approval may successful commercializing triactiv clinical trials completed successfully obtain necessary governmental approvals need commercialize product cannot assure able find suitable partner andor develop train sales force sell market triactiv recently began build sales marketing force prior experience hiring training sales marketing force may able expand maintain internal sales marketing force technical expertise supporting distribution capabilities unable successfully commercialize triactiv growth prospects diminished derive substantial majority revenues two customers substantial majority total revenues derived two customers royalty income sales biomaterials st jude medical associated angioseal represented approximately 69 total revenue fiscal 2003 sales biomaterials products one customer distributor orthopaedic products represented approximately 22 total revenues possible us predict future level demand products generated customers future demand angioseal customers st jude medical customer concentration exposes us risk changes business condition either major customers risk loss major customer would adversely affect results operations relationship customers subject change time anticipate substantial portion revenues continue come angioseal manufactured marketed distributed st jude medical license agreements st jude medical angioseal manufactured marketed sold worldwide basis st jude medical two significant sources revenue future expected sales collagen st jude medical use angioseal royalty income sale angioseal product line success angioseal depends part time effort attention st jude medical devotes angioseal product line success manufacturing marketing selling angioseal product line terms agreements st jude medical control pricing marketing strategy angioseal product line addition depend st jude medical successfully maintain levels manufacturing sufficient meet anticipated demand abide applicable manufacturing regulations seek reimbursement approvals st jude medical terminate arrangement time reason upon 12 months notice time would receive sales marketing manufacturing distribution rights angioseal product line back st jude medical may successfully pass future inspections manufacturing facility adequately perform manufacturing marketing selling duties failure st jude medical may negatively impact angioseal unit sales therefore reduce royalties biomaterials products successful operating results business may substantially impaired success existing biomaterials products well develop future depends variety factors including ability continue manufacture sell competitively price products acceptance products medical profession addition may required obtain regulatory approval future biomaterials products require substantial additional funds develop market biomaterials products expect fund growth biomaterials business operating income operating income may sufficient develop new biomaterials products date relied strategic partners customers market sell biomaterials products cannot assure commercialize products successfully either indirectly strategic partners directly development sales force depend customers market obtain regulatory approvals biomaterials products depend efforts biomaterials customers marketing products include biomaterials components assurance customers enduse products include biomaterials components commercialized successfully customers otherwise able compete effectively markets may required delay reduce eliminate efforts develop market triactiv fail obtain additional funding may required satisfy future capital needs plan continue spend substantial funds develop market triactiv future liquidity capital requirements depend upon numerous factors including progress success clinical trials timing cost involved obtaining regulatory approvals timing cost developing sales marketing strategies ability enter strategic alliances manufacturing research development activities extent triactiv gains market acceptance competitive developments additional required financing may available satisfactory terms unable obtain financing may required delay reduce eliminate research development activities sales marketing efforts case operating results business may substantially impaired markets products highly competitive likely become competitive competitors may able respond quickly new emerging technologies changes customer requirements markets current proposed products fragmented intensely competitive subject rapid change sensitive new product introductions enhancements expect competitive environment products become intense additional companies enter markets new techniques technologies adopted biomaterials medical devices compete directly indirectly customers range products technologies produced wide variety companies well processes procedures require use products competitors many existing competitors well number potential new competitors longer operating histories markets greater name recognition larger customer bases greater financial technical marketing resources biomaterials products compete products many larger companies industry vascular sealing device market products compete products sold datascope corporation perclose inc subsidiary abbott laboratories vascular solutions inc majority vascular sealing performed manual compression represents primary competition triactiv currently commercially available europe competitors include boston scientific corporation johnson inc medtronic inc owns percusurge inc guidant corporation among others successful commercializing triactiv us anticipate competitors companies competing europe well others competitors may broad product lines allow negotiate exclusive longterm supply contracts offer comprehensive pricing products broader product lines may also provide competitors significant advantage marketing competing products group purchasing organizations managed care organizations increasingly seeking reduce costs centralized purchasing greater financial resources product development capabilities may allow competitors respond quickly new emerging technologies changes customer requirements may render products obsolete significant portion revenue depends sales medical devices customers enduser market also affected competition within markets devices competition within medical device market could also adverse effect business variety reasons including customers may compete directly larger dominant manufacturers extensive product lines greater sales marketing distribution capabilities also unable control factors may impact commercialization components end use products marketing sales efforts competitive pricing pressures within particular markets products accepted medical community products replaced new technologies business may suffer success existing products depends continued acceptance products medical community cannot predict whether products continue accepted acceptance sustained long term success products develop future depend adoption products targeted markets cannot predict quickly medical community accept future products extent future products used encounter difficulties introducing future products targeted markets operating results business may substantially impaired addition new technologies techniques may developed may render current products along development obsolete loss interruption supply key vendors could limit ability manufacture products purchase certain materials components products various suppliers components custom made us including many absorbable polymer suture raw materials used custom polymer products across markets loss interruption supply key vendors may require us find new vendors could experience production development delays seek new vendors may problems manufacturing delivering biomaterials products future biomaterials industry emerging area using many materials untested whose properties still known consequently time may experience unanticipated difficulties manufacturing delivering biomaterials products customers difficulties may include inability meet customer demand delays delivering products quality control problems certain biomaterials products use hazardous materials exposes us risk material environmental liabilities use hazardous substances research development manufacturing operations potentially subject material liabilities related personal injuries property damages may caused hazardous substance releases exposures facility decontamination costs cleanup costs related damages liabilities could substantially impair business operating results required comply increasingly stringent laws regulations governing environmental protection workplace safety including requirements governing handling storage disposal hazardous substances st jude medicals international sales subject number risks could harm future international sales angioseal ability successfully commercialize new products international markets st jude medical sells angioseal product line internationally pays us royalty unit sold also sell triactiv well products international markets royalties international sales angioseal product line st jude medical revenues international sales subject several risks including impact recessions economies within outside united states unexpected changes regulatory requirements tariffs trade barriers weaker intellectual property rights protection countries fluctuations exchange rates potentially adverse tax consequences political economic instability occurrence events could seriously harm st jude medicals future international sales success depends key personnel loss could impair operating results business success depends significant extent upon efforts abilities joseph w kaufmann douglas g evans wendy f dicicco members senior management loss services one key employees could harm operating results business addition successful unless attract retain skilled personnel particularly areas research product development failure expand management systems controls support anticipated growth integrate future acquisitions could seriously harm operating results business operations continue grow expect expansion continue execute business strategy sustaining growth placed significant demands management administrative operational information technology manufacturing financial personnel resources accordingly future operating results depend ability officers key employees continue implement improve operational client support financial control systems effectively expand train manage employee base may able manage growth successfully acquisitions undertake could difficult integrate disrupt business dilute stockholder value harm operating results may acquire make investments complementary businesses technologies services products appropriate opportunities arise process integrating acquired business technology service product business operations may result unforeseen operating difficulties expenditures integration acquired company also may consume much managements time attention could otherwise available ongoing development business moreover anticipated benefits acquisition may realized furthermore may unable identify negotiate finance future acquisitions successfully future acquisitions could result potentially dilutive issuances equity securities incurrence debt contingent liabilities amortization expenses related goodwill intangible assets future operating results difficult predict may vary significantly quarter operating results varied significantly quarter past likely vary substantially future result number factors control including market perception customer acceptance products market perception acceptance customers products efforts increase sales biomaterials products efforts gain fda approval commercialize triactiv efforts gain ce mark fda approval future generations triactiv device loss significant orders changes relationship st jude medical establishment strategic alliances acquisitions timely implementation new improved products delays obtaining regulatory approvals increased competition litigation concerning intellectual property rights medical device industry rely upon results operations particular quarter indication results full year quarter risks related intellectual property unable protect patents proprietary rights reputation competitiveness marketplace may materially damaged regard patents biomaterials trade secrets intellectual property important success rely upon patent law trade secret protection confidentiality agreements license agreements st jude medical protect proprietary rights although registered certain patents applicable governmental authorities effective patent protection may available every country products made available sought protection intellectual property every country products may sold steps take protect proprietary rights may adequate ensure third parties infringe otherwise violate patents similar proprietary rights st jude medical plaintiffs patent infringement lawsuit perclose acquired abbott laboratories codefendants counterclaims filed perclose response complaint spent substantial resources litigation markman hearing order entered us upheld appeal claims perclose denied see item 3 legal proceedings may accused infringing upon proprietary rights others related litigation could materially damage operating results business third parties may claim violated intellectual property rights adverse determination intellectual property litigation interference proceedings brought us could prohibit us selling products subject us significant liabilities third parties require us seek licenses third parties costs associated license arrangements may substantial could include ongoing royalties furthermore necessary licenses may available us satisfactory terms adverse determinations judicial administrative proceeding failure obtain necessary licenses could prevent us manufacturing selling products claims without merit could subject us costly litigation divert attention key personnel control use angioseal device trademark term angioseal trademark st jude medical goodwill generated marketing sales devices bearing angioseal trademark belongs st jude medical us st jude medical license agreements terminate would right call products angioseal unless purchase license trademark st jude medical without rights angioseal trademark would market products different trademark moreover upon termination st jude medical license agreements st jude medical would right compete us selling collagen puncture closure devices angioseal trademark thus purchasers puncture closure devices may likely recognize purchase products labeled angioseal regardless whether devices originate us risks related industry may face product liability claims could result costly litigation significant liabilities clinical testing manufacture sale medical products involve inherent risk human subjects clinical testing consumers products may suffer serious bodily injury death due side effects unintended negative reactions products accordingly clinical testing manufacture sale products entail significant risk product liability claims medical device industry general subject significant product liability litigation product liability claims without merit could result costly litigation reduced sales significant liabilities diversion managements time attention resources cannot sure product liability insurance coverage adequate continue available us acceptable terms face uncertainty relating third party reimbursement products could seriously harmed changes reimbursement policies governmental private healthcare payers particularly extent changes affect reimbursement catheterization procedures angioseal products used physicians hospitals users products may fail obtain sufficient reimbursement healthcare payers procedures products used adverse changes may occur governmental private thirdparty payers policies toward reimbursement procedures products manufacturing activities subject extensive governmental regulation could make expensive time consuming us introduce new improved products manufacturing activities subject extensive regulation number governmental agencies including fda comparable international agencies required obtain approval fda international agencies market sell new products satisfy agencies requirements labeling sales promotional materials connection existing products comply applicable manufacturing regulations undergo rigorous inspections agencies compliance regulations agencies may delay prevent us introducing new improved products including triactiv furthermore may subject sanctions including temporary permanent suspension operations product recalls marketing restrictions fail comply laws regulations pertaining business also required demonstrate compliance fdas quality system regulations fda enforces quality system regulations preapproval periodic postapproval inspections regulations relate product testing vendor qualification design control quality assurance well maintenance records documentation unable conform regulations required locate alternative manufacturers conform identifying qualifying alternative manufacturers may long costly difficult process could seriously harm business fda international regulatory agencies may also limit indications products approved regulatory agencies may restrict withdraw approvals received additional information becomes available support action risks related securities trading price common stock likely fluctuate substantially future trading price common stock may fluctuate widely result number factors control including ability meet exceed forecasts expectations analysts investors quarter variations operating results announcements regarding clinical activities new products us competitors general conditions medical device industry changes forecasts earnings estimates analysts price volume fluctuations overall stock market particularly affected market prices many medical device companies general economic conditions addition market stock experienced may continue experience price volume fluctuations unrelated disproportionate operating performance result may able sell shares common stock price purchase past following periods volatility market price companys securities class action litigation often instituted company securities litigation initiated us without merit could incur substantial cost managements attention resources could diverted business future sales common stock public market management stockholders significant holdings could cause stock price fall sales substantial number shares common stock public market management significant stockholders perception sales could occur could cause market price common stock decline adversely affect future ability raise capital offering equity securities second amended restated certificate incorporation delaware law may discourage acquisition company provisions second amended restated certificate incorporation delaware law could make difficult third party acquire us even would beneficial stockholders forwardlooking statements report includes forwardlooking statements within meaning section 21e securities exchange act 1934 based forwardlooking statements largely current expectations projections future events trends affecting business report words believe may estimate continue anticipate intend expect plan similar expressions relate kensey nash business management intended identify forwardlooking statements exclusive means identifying number risks uncertainties factors could cause actual results performance financial condition cash flows prospects opportunities differ materially expressed implied forwardlooking statements risks uncertainties factors include among things general economic business conditions nationally markets impact competition anticipated trends business existing future regulations affecting business strategic alliances acquisition opportunities risk factors set forth risk factors except expressly required federal securities laws undertake obligation publicly update revise forwardlooking statements whether result new information future events otherwise date report results operations past period considered indicative results expected future periods fluctuations operating results may also result fluctuations price common stock item 7a item 7 managements discussion analysis financial condition results operations following discussion analysis read conjunction selected consolidated financial data financial statements related notes included report discussion analysis contains forwardlooking statements relating future events future financial performance statements predictions actual events results may differ materially evaluating statements carefully consider various factors identified report could cause actual results differ materially expressed implied forwardlooking statements including set forth risk factors annual report form 10k see forwardlooking statements overview revenues consist three components net sales research development revenue royalty income net sales net sales comprised sales absorbable biomaterials products triactiv historically also included sales angioseal devices manufactured us biomaterials component net sales represents sale biomaterials products customers use following markets orthopaedics cardiology drugbiologics delivery periodontal general surgery wound care 1997 biomaterials sales comprised almost 100 absorbable collagen polymer components angioseal supplied strategic alliance partner since time experienced significant sales growth biomaterials products brought new customers increased sales customers past five years assisted development new product offerings expanded marketing activities fiscal 2002 angioseal components represent 42 total biomaterial sales believe growth overall biomaterials sales 23 fiscal 2002 fiscal 2001 continue greater acceptance medical community biomaterials technological advances expanded applications biomaterials products triactiv commercially launched europe fourth quarter fiscal 2002 triactiv sales less 1 total sales fiscal 2002 anticipate triactiv become significant component net sales fiscal 2003 product market europe entire fiscal year anticipate commercial launch triactiv us second half fiscal 2004 angioseal fiscal 2001 2000 manufactured sold angioseal devices st jude medical supplement production requirements august 2001 st jude medical transitioned manufacturing devices facility expect revenue manufacture completed angioseals future manufacture angioseal represented 55 million 42 total net sales fiscal 2000 significant portion total net sales fiscal 2000 substantial growth biomaterials business fiscal 2000 fiscal 2001 able achieve 11 increase net sales despite loss angioseal device manufacturing business research development revenue fiscal 2000 research development revenue derived solely development work performed angioseal anticipated research development activities fully transitioned st jude medical fiscal 2000 angioseal research development revenue expected future fiscal 2001 research development revenue derived entirely single national institute standards technology nist grant researching cartilage regeneration utilizing porous tissue matrix ptm technology project expected continue early fiscal 2003 addition october 2001 received second nist grant researching synthetic vascular graft also utilizing ptm technology project expected continue early fiscal 2005 royalty income receive royalty every angioseal unit sold worldwide anticipate sales angioseal continue grow st jude medical continues expand sales marketing efforts releases future generations angioseal result expect royalty income continue significant source revenue fiscal 2001 royalty rate decreased 12 9 accordance licensing agreements rate reduction occurred second quarter fiscal 2001 cumulative one million angioseal units sold one decrease royalty rate 6 upon reaching four million cumulative units sold anticipate next reduction occur fiscal 2005 cost products sold experienced overall increase gross margin fiscal 2002 reflecting continued increase volume biomaterials product sales increased volume existing customers new customers resulted manufacturing efficiencies volume increase also results fixed costs spread greater number units anticipate gross margin biomaterials products continue improve continued increased sales volume increase partially offset lower gross margin associated initial sales triactiv expect margins initial triactiv sales minimal due startup nature manufacturing process result product mix fiscal 2003 believe total gross margin across product lines slightly improved fiscal 2002 volumes increase manufacturing process matures triactiv expect gross margin triactiv increase research development expense research development expense consists expenses incurred development absorbable biomaterials products technologies proprietary technologies triactiv development programs including expenses nist programs longer perform research development angioseal clinical expenses pursuit ce mark fda approvals continuing development costs triactiv well continued development proprietary biomaterials products technologies offset absence angioseal anticipate research development expense continue increase pursue us commercialization triactiv well explore opportunities technologies selling general administrative selling general administrative expenses include general administrative costs well costs related sales marketing products costs patent litigation also included within selling general administrative expenses sales marketing component selling general administrative expenses increased commercialized triactiv europe move toward commercialization triactiv us january 2002 received ce mark approval european regulatory authority triactiv allows commercial sale product european union effective january 2002 established subsidiary germany kensey nash europe gmbh hired vice president european sales begun establish european sales marketing team continue add personnel team selling triactiv directly market germany using distributors market product throughout rest europe entered distribution agreements sales united kingdom ireland switzerland austria june 30 2002 process identifying distributors rest europe anticipate sales marketing expenses continue increase expand european sales team prepare us commercial launch also continue evaluate opportunities commercialization triactiv united states expand marketing efforts biomaterials business critical accounting policies revenue recognition recognize revenue provisions staff accounting bulletin sab 101 revenue recognition financial statements sab 101 accordingly sales revenue recognized related product shipped revenue research development contracts recognized related costs incurred royalty revenue recognized related product sold advance payments received products services recorded deferred revenue recognized product shipped services performed stockbased compensation account stockbased compensation costs sfas 123 accounting stockbased compensation sfas 123 permits continued application intrinsic value method accounting principles board opinion 25 accounting stock issued employees apb 25 intrinsic value method compensation cost represents excess quoted market price companys common stock grant date amount grantee must pay stock policy grant stock options closing price stock date grant therefore compensation costs options granted employees options granted nonemployees defined sfas 123 would recorded compensation expense company granted options nonemployees fiscal 2002 research development expenses research development charges including clinical trials expense expensed incurred results operations comparison fiscal years 2002 2001 total revenue net sales total revenues increased 25 290 million year ended june 30 2002 232 million year ended june 30 2001 net sales products increased 20 175 million fiscal 2002 146 million fiscal 2001 increase entirely attributable increased sales biomaterials products research development revenue research development revenues increased 132 765000 fiscal 2002 330000 fiscal 2001 fiscal 2002 revenues generated nist articular cartilage synthetic vascular graft development grants synthetic vascular graft grant received fiscal 2002 research development revenues period year earlier generated work performed nist articular cartilage development grant royalty income royalty income increased 31 108 million fiscal 2002 82 million fiscal 2001 increase reflects greater number units sold well increase average selling price angioseal offset decrease average royalty rate approximately 98 fiscal 2001 90 fiscal 2002 decrease average rate came result drop royalty rate 12 9 october 2000 discussed royalty units increased 39 approximately 670000 angioseal units sold endusers fiscal 2002 compared approximately 483000 units sold fiscal 2001 believe unit increase primarily due st jude medicals increased sales marketing efforts launch new selftightening suture sts version angioseal introduced us march 2002 cost products sold cost products sold increased 11 82 million fiscal 2002 74 million fiscal 2001 gross margin increased 53 49 increase gross margin reflected higher margins biomaterials products attributable part higher volumes result manufacturing efficiencies well continued allocation overhead across greater sales volumes results decrease per unit costs cost initial quantities triactiv insignificant portion cost products sold fiscal 2002 research development expense research development expense increased 48 108 million fiscal 2002 compared 73 million fiscal 2001 increase mainly attributable continued development efforts triactiv including clinical trial expenses research development expenses related triactiv increased 22 million 71 53 million fiscal 2002 31 million fiscal 2001 also continued expand development efforts biomaterials products including work nist grants biomaterials proprietary technologies spending increased 13 million 38 47 million fiscal 2002 34 million fiscal 2001 selling general administrative expense selling general administrative expense increased 56 47 million fiscal 2002 30 million fiscal 2001 increase primarily result increased sales marketing expenses increased 11 million 18 million fiscal 2002 703000 fiscal 2001 increase related primarily european sales marketing efforts triactiv addition general administrative expenses increased 559000 28 million fiscal 2002 23 million fiscal 2001 attributable 350000 increased personnel costs 209000 increased professional services public company expenses including investor relations filing fees increases related continued sales research development growth net interest income interest expense decreased 16000 7 223000 fiscal 2002 239000 fiscal 2001 due lower principal balance thm acquisition obligation result scheduled repayments interest income consistent 19 million fiscal 2002 2001 although cash investment balances increased offset lower interest rates nonoperating income expense nonoperating expense 15000 fiscal 2002 compared nonoperating income 24000 fiscal 2001 nonoperating expense income periods represented primarily net gain loss sale fixed assets net income net income increased 27 46 million fiscal 2002 36 million fiscal 2001 primarily result increased sales royalty income described offset part increased expenses associated research development sales marketing efforts related triactiv also described addition company recognized 24 million income tax expense fiscal 2002 compared 41 income tax benefit fiscal 2001 prior year income tax benefit recognized valuation allowance related certain deferred tax assets reversed based projections taxable income believed likely would able utilize federal net operating loss nol carryforwards result valuation allowance related carryforwards longer considered necessary lastly fiscal 2001 recognized iprd charge 76 million described comparison fiscal years 2001 2000 revenues increased 17 232 million year ended june 30 2001 fiscal 2001 198 million year ended june 30 2000 fiscal 2000 net sales products increased 11 146 million 131 million fiscal 2001 2000 respectively increase 66 million attributable increased sales biomaterials products increase offset 51 million decrease 6f angioseal device sales st jude medical providing st jude medical angioseal devices international us markets however st jude medical transitioned manufacturing devices facility august 2000 research development revenue research development revenues increased 451 330000 60000 fiscal 2001 2000 respectively current year revenues generated nist articular cartilage development grant acquired conjunction thm acquisition research development revenues period year earlier generated work performed angioseal product st jude medical st jude medical transitioned angioseal product research development facilities expect angioseal product research development revenues future royalty income royalty income increased 25 82 million 66 million fiscal 2001 2000 respectively increase achieved despite anticipated 25 reduction angioseal royalty rate 12 9 second fiscal quarter fiscal 2001 reflects greater number units sold well increase average selling price angioseal royalty units increased 36 approximately 483000 angioseal units sold endusers fiscal 2001 compared approximately 354000 units sold fiscal 2000 unit increase due st jude medicals increased sales marketing efforts continued strong sales 6f angioseal sales new 8f angioseal us market new version 8f angioseal introduced us september 2000 cost products sold cost products sold decreased 2 74 million fiscal 2001 76 million fiscal 2000in addition gross margin increased 49 42 increase reflects higher margins biomaterials products well continued allocation overhead across greater sales volumes results decrease per unit costs research development expense research development expense increased 37 73 million fiscal 2001 compared 53 million fiscal 2000 increase mainly attributable continued development efforts triactiv including clinical trial expenses also continued expand development efforts biomaterials products including work nist articular cartilage development grant selling general administrative expense selling general administrative expense increased 13 30 million 26 million fiscal 2001 fiscal 2000 respectively increase primarily result increased sales marketing expenses increased 703000 fiscal 2001 398000 fiscal 2000 related marketing efforts triactiv biomaterials products addition general administrative expenses increased 362000 21 million fiscal 2001 18 million fiscal 2000 attributable 100000 goodwill amortization expense related thm acquisition well increased personnel costs support current sales research development growth partially offset 315000 decrease litigation expenses net interest income interest expense decreased 44 239000 fiscal 2001 430000 fiscal 2000 due repayment financing agreement may 2000 proceeds secondary offering offset addition obligation incurred september 2000 conjunction thm acquisition interest income increased 100 19 million fiscal 2001 953000 fiscal 2000 result increase average total cash investment balances primarily related investment secondary offering proceeds nonoperating income expense nonoperating income 24000 fiscal 2001 compared nonoperating expense 1000 fiscal 2000 nonoperating income expense periods represented primarily net gain loss sale fixed assets net income net income decreased 24 36 million fiscal 2001 47 million fiscal 2000 result changes noted iprd charge 76 million described 41 million income tax benefit income tax benefit recognized valuation allowance related certain deferred tax assets reversed based current projections taxable income believe likely able utilize federal net operating loss nol carry forwards result valuation allowance related carry forwards longer considered necessary liquidity capital resources net cash provided operating activities 64 million 54 million fiscal 2002 2001 respectively fiscal 2002 changes asset liability balances resulted net 300000 use cash offset net income 46 million noncash depreciation amortization 21 million fiscal 2001 changes asset liability balances resulted net 76 million use cash offset net income 36 million noncash depreciation amortization 18 million noncash writeoff inprocess research development 76 million conjunction acquisition thm september 2000 incurred note payable shareholders thm amount 45 million acquisition obligation acquisition obligation due equal quarterly installments 281250 began december 31 2000 end september 30 2004 cash outflow related acquisition obligation next five years 1125000 fiscal years 2003 2004 281250 fiscal 2005 obligation fully repaid operating leases also represent significant cash outflow lease expense noncancelable operating leases next five years follows 512000 fiscal 2002 578000 fiscal 2003 574000 fiscal 2004 543000 fiscal 2005 231000 fiscal 2006 cash equivalents shortterm investments 319 million june 30 2002 addition 21 million restricted investment accounts pledged 21 million investments collateral secure bank loans made employees pay taxes incurred employees received common stock time initial public offering exchange pledging collateral employees pledged common stock us collateral 42 million capital spending plan fiscal 2002 expended primarily machinery equipment leasehold improvements expenditures related continued expansion manufacturing capabilities biomaterials new triactiv product lines 51 million capital spending plan fiscal 2003 continue expended primarily expansion manufacturing capabilities space product lines plan continue spend substantial amounts fund clinical trials gain regulatory approvals continue expand research development activities particularly triactiv biomaterials products believe current cash investment balances addition cash generated operations sufficient meet operating capital requirements least fiscal 2003 future capital requirements adequacy available funds depend however numerous factors including market acceptance existing future products successful commercialization products development progress product development efforts magnitude scope efforts progress preclinical studies clinical trials product clearance fda agencies cost timing efforts expand manufacturing capabilities cost filing prosecuting defending enforcing patent claims intellectual property rights competing technological market developments development strategic alliances marketing certain products assurance record profits future periods see risk factors terms future equity financing may dilutive stockholders terms debt financing may contain restrictive covenants limit ability pursue certain courses action ability obtain financing dependent status future business prospects well conditions prevailing relevant capital markets assurance given additional financing made available us available acceptable terms need arise estimate time periods cash equivalents adequate fund operations forward looking statement within meaning private securities litigation reform act 1995 subject risks uncertainties actual results may differ materially contemplated forwardlooking statements addition described factors may cause difference set forth caption risk factors annual report form 10k acquisition thm biomedical inc inprocess research development charge september 1 2000 acquired thm biomedical inc thm developer porous biodegradable tissueengineering devices repair replacement musculoskeletal tissues approximately 105 million plus acquisition costs approximately 228000 transaction financed 66 million cash note payable shareholders thm amount 45 million acquisition obligation acquisition obligation due equal quarterly installments 281250 began december 31 2000 end september 30 2004 accordingly present value cash payments discounted based upon available borrowing rate 75 39 million recorded liability companys financial statements remaining balance 23 million june 30 2002 fiscal 2001 76 million iprd charge represented estimated fair value purchased inprocess technology yet reached technological feasibility alternative future use comprised following projects articular cartilage 54 million bone fusion 389000 bone applications 261000 drug delivery 15 million four projects utilizes core opencell poly lactic acid opla technology porous tissue matrix ptm technology developed thm ptm technology facilitates wound healing bone soft tissue bioabsorbable controlled rates specific functions tissues iprd projects utilizes properties ptm technology address respective market example articular cartilage project uses ptm technology foundation articular cartilage repair regrowth product total iprd value determined estimating stage completion iprd project date acquisition estimating costs develop iprd project commercially viable products estimating resulting net cash flows projects discounting net cash flows back present values discount rate project takes account uncertainty surrounding successful development commercialization purchased inprocess technology stage completion projects ranged 48 72 acquisition date weighted average completion rate approximately 56 date estimated costs bring projects development technological feasibility clinical trials approximately 73 million since date acquisition planned primarily devoted development efforts ptm technology articular cartilage bone applications expended approximately 880000 efforts june 30 2002 addition received 510k approval proprietary ptm based product improvisetm absorbable cement flow restrictor use certain orthopaedic surgical procedures addition seeking regulatory approval second proprietary ptm based product application orthopaedics market net cash flows iprd projects based managements best estimates revenue cost sales research development costs general administrative costs income taxes projects estimates determined considering historical experience industry trends averages sales products incorporating technologies expected commence fiscal 2003 fiscal 2005 depending project projected revenue growth rates 50 range immediate years following worldwide market launch declining 5 range market nears maturity projections based best estimates market size growth expected trends technology nature expected timing new product introductions us competitors cash flows revenues period reduced related expenses capital expenditures cost working capital assigned contribution core technology serving foundation research development discount rates used discounting net cash flows purchased inprocess technology 80 articular cartilage 85 bone fusion 78 bone applications 83 drug delivery discount rates project determined upon consideration stage completion project assumptions nature timing remaining efforts completion risks uncertainties project substantial research development preclinical testing clinical trials required determine technical feasibility commercial viability products development assurance efforts successful projects successfully developed revenue profitability may adversely affected future periods continuously monitoring development projects believe assumptions used valuation purchased inprocess technology reasonably estimate future benefits attributable purchased inprocess technology assurance given actual results deviate assumptions future periods risk factors carefully consider risks uncertainties described addition information set forth report could materially adversely affect business operating results financial condition cash flows prospects well adversely affect value investment common stock risks related business cannot assure clinical trials triactiv successful able obtain necessary regulatory approvals triactiv united states need conduct additional human clinical trials triactiv possible trials triactiv may found ineffective unsafe encounter problems cause us delay suspend development product triactiv approved marketing fda require substantial additional expenditures develop product conduct clinical trials gain necessary regulatory approval triactiv us prior granting approval fda may require clarification information provided regulatory submissions information clinical studies granted fda approval may impose limitations uses product may marketed product may marketed experience delays unable receive approval fda operating results business may substantially impaired although received ce mark approval even receive fda approval may successful commercializing triactiv clinical trials completed successfully obtain necessary governmental approvals need commercialize product cannot assure able find suitable partner andor develop train sales force sell market triactiv recently began build sales marketing force prior experience hiring training sales marketing force may able expand maintain internal sales marketing force technical expertise supporting distribution capabilities unable successfully commercialize triactiv growth prospects diminished derive substantial majority revenues two customers substantial majority total revenues derived two customers royalty income sales biomaterials st jude medical associated angioseal represented approximately 62 total revenue sales biomaterials products one customer distributor orthopedic products represented approximately 23 total revenues possible us predict future level demand products generated customers future demand angioseal customers st jude medical customer concentration exposes us risk changes business condition major customers risk loss major customer would adversely affect results operations relationship customers subject change time anticipate substantial portion revenues continue come angioseal manufactured marketed distributed st jude medical license agreements st jude medical angioseal manufactured marketed sold worldwide basis st jude medical two significant sources revenue future expected sales collagen st jude medical use angioseal royalty income sale angioseal product line june 1 2000 st jude medical longer obligated buy collagen us success angioseal depends part time effort attention st jude medical devotes angioseal product line success manufacturing marketing selling angioseal product line terms agreements st jude medical control pricing marketing strategy angioseal product line addition depend st jude medical successfully maintain levels manufacturing sufficient meet anticipated demand abide applicable manufacturing regulations seek reimbursement approvals st jude medical terminate arrangement time reason upon 12 months notice time would receive sales marketing manufacturing distribution rights angioseal product line back assurance st jude medical successfully pass future inspections manufacturing facility adequately perform manufacturing marketing selling duties failure st jude medical may negatively impact angioseal unit sales therefore reduce royalties impair operating results business biomaterials products successful operating results business may substantially impaired success existing biomaterials products well develop future depends variety factors including ability continue manufacture sell competitively price products acceptance products medical profession addition may required obtain regulatory approval future biomaterials products require substantial additional funds develop market biomaterials products expect fund growth biomaterials business operating income cannot guarantee operating income sufficient develop new biomaterials products date relied strategic partners customers market sell biomaterials products cannot assure commercialize products successfully either indirectly strategic partners directly development sales force depend customers market obtain regulatory approvals biomaterials products depend efforts biomaterials customers marketing products include biomaterials components assurance customers end use products include biomaterials components commercialized successfully customers otherwise able compete effectively markets customers fail commercialize products operating results business may substantially impaired may required delay reduce eliminate efforts develop market triactiv fail obtain additional funding may required satisfy future capital needs plan continue spend substantial funds develop market triactiv future liquidity capital requirements depend upon numerous factors including progress success clinical trials timing cost involved obtaining regulatory approvals timing cost developing sales marketing strategies ability enter strategic alliances manufacturing research development activities extent triactiv gains market acceptance competitive developments additional required financing may available satisfactory terms unable obtain financing may required delay reduce eliminate research development activities sales marketing efforts case operating results business may substantially impaired markets products highly competitive likely become competitive competitors may able respond quickly new emerging technologies changes customer requirements markets current proposed products fragmented intensely competitive subject rapid change sensitive new product introductions enhancements expect competitive environment products become intense additional companies enter markets new techniques technologies adopted biomaterials medical devices compete directly indirectly customers range products technologies produced wide variety companies well processes procedures require use products competitors many existing competitors well number potential new competitors longer operating histories markets greater name recognition larger customer bases greater financial technical marketing resources biomaterials products compete products many larger companies industry vascular sealing device market products compete products sold datascope corp perclose inc subsidiary abbott laboratories vascular solutions inc substantial majority vascular sealing performed manual compression represents primary competition successful commercializing triactiv competitors market include boston scientific corporation johnson inc medtronic inc owns percusurge inc guidant corporation among others competitors may broad product lines allow negotiate exclusive longterm supply contracts offer comprehensive pricing products broader product lines may also provide competitors significant advantage marketing competing products group purchasing organizations managed care organizations increasingly seeking reduce costs centralized purchasing greater financial resources product development capabilities may allow competitors respond quickly new emerging technologies changes customer requirements may render products obsolete significant portion revenue depends sales medical devices customers end user market also affected competition within markets devices competition within medical device market could also adverse effect business variety reasons including customers may compete directly larger dominant manufacturers extensive product lines greater sales marketing distribution capabilities also unable control factors may impact commercialization components end use products marketing sales efforts competitive pricing pressures within particular markets products accepted medical community products replaced new technologies business may suffer success existing products depends continued acceptance products medical community cannot predict whether products continue accepted acceptance sustained long term success products develop future depend adoption products targeted markets predict quickly medical community accept future products extent future products used encounter difficulties introducing future products targeted markets operating results business may substantially impaired addition new technologies techniques may developed may render current products along development obsolete loss interruption supply key vendors could limit ability manufacture products purchase certain materials components products various suppliers components custom made us including many absorbable polymer suture raw materials used custom polymer products across markets loss interruption supply key vendors may require us find new vendors could experience production development delays seek new vendors could substantially impair operating results business may problems manufacturing delivering biomaterials products future biomaterials industry emerging area using many materials untested whose properties still known consequently time may experience unanticipated difficulties manufacturing delivering biomaterials products customers difficulties may include inability meet customer demand delays delivering products quality control problems certain biomaterials products difficulty fulfill orders timely basis could materially adversely affect operating results business use hazardous materials exposes us risk material environmental liabilities use hazardous substances research development manufacturing operations potentially subject material liabilities related personal injuries property damages may caused hazardous substance releases exposures facility decontamination costs cleanup costs related damages liabilities could substantially impair business operating results required comply increasingly stringent laws regulations governing environmental protection workplace safety including requirements governing handling storage disposal hazardous substances st jude medicals international sales subject number risks could harm future international sales angioseal ability successfully commercialize new products international markets st jude medical sells angioseal product line internationally pays us royalty unit sold royalties international sales subject several risks including impact recessions economies within outside united states unexpected changes regulatory requirements tariffs trade barriers weaker intellectual property rights protection countries fluctuations exchange rates potentially adverse tax consequences political economic instability occurrence events could seriously harm st jude medicals future international sales ability receive royalties sales angioseal international markets success depends key personnel loss could impair operating results business success depends significant extent upon efforts abilities joseph w kaufmann douglas g evans members senior management loss services one key employees could harm operating results business addition successful unless attract retain skilled personnel particularly areas research product development failure expand management systems controls support anticipated growth integrate future acquisitions could seriously harm operating results business operations continue grow expect expansion continue execute business strategy sustaining growth placed significant demands management administrative operational information technology manufacturing financial personnel resources accordingly future operating results depend ability officers key employees continue implement improve operational client support financial control systems effectively expand train manage employee base may able manage growth successfully inability sustain manage growth could seriously harm operating results business acquisitions undertake could difficult integrate disrupt business dilute stockholder value harm operating results may acquire make investments complementary businesses technologies services products appropriate opportunities arise process integrating acquired business technology service product business operations may result unforeseen operating difficulties expenditures integration acquired company also may consume much managements time attention could otherwise available ongoing development business moreover anticipated benefits acquisition may realized furthermore may unable identify negotiate finance future acquisitions successfully future acquisitions could result potentially dilutive issuances equity securities incurrence debt contingent liabilities amortization expenses related goodwill intangible assets future operating results difficult predict may vary significantly quarter operating results varied significantly quarter past likely vary substantially future result number factors control including market perception customer acceptance products market perception acceptance customers products efforts increase sales biomaterials products efforts gain fda approval commercialize triactiv loss significant orders changes relationship st jude medical establishment strategic alliances acquisitions timely implementation new improved products delays obtaining regulatory approvals increased competition litigation concerning intellectual property rights medical device industry rely upon results operations particular quarter indication results full year quarter risks related intellectual property unable protect patents proprietary rights reputation competitiveness marketplace may materially damaged regard patents biomaterials trade secrets intellectual property important success rely upon patent law trade secret protection confidentiality agreements license agreements st jude medical protect proprietary rights although registered certain patents applicable governmental authorities effective patent protection may available every country products made available sought protection intellectual property every country products may sold steps take protect proprietary rights may adequate ensure third parties infringe otherwise violate patents similar proprietary rights st jude medical plaintiffs patent infringement lawsuit perclose acquired abbott laboratories codefendants counterclaims filed perclose response complaint spent substantial resources litigation markman hearing order entered us upheld appeal would mean claims perclose denied see item 3 legal proceedings intellectual property litigation recent years proven costly complex outcome litigation difficult predict may accused infringing upon proprietary rights others related litigation could materially damage operating results business third parties may claim violated intellectual property rights adverse determination intellectual property litigation interference proceedings brought us could prohibit us selling products subject us significant liabilities third parties require us seek licenses third parties costs associated license arrangements may substantial could include ongoing royalties furthermore necessary licenses may available us satisfactory terms adverse determinations judicial administrative proceeding failure obtain necessary licenses could prevent us manufacturing selling products claims without merit could subject us costly litigation divert attention key personnel control use angioseal device trademark term angioseal trademark st jude medical goodwill generated marketing sales devices bearing angioseal trademark belongs st jude medical us st jude medical license agreements terminate would right call products angioseal unless purchase license trademark st jude medical without rights angioseal trademark would market products different trademark moreover upon termination st jude medical license agreements st jude medical would right compete us selling collagen puncture closure devices angioseal trademark thus purchasers puncture closure devices may likely recognize purchase products labeled angioseal regardless whether devices originate us risks related industry may face product liability claims could result costly litigation significant liabilities clinical testing manufacture sale medical products involve inherent risk human subjects clinical testing consumers products may suffer serious bodily injury death due side effects unintended negative reactions products accordingly clinical testing manufacture sale products entail significant risk product liability claims medical device industry general subject significant product liability litigation product liability claims without merit could result costly litigation reduced sales significant liabilities diversion managements time attention resources cannot sure product liability insurance coverage adequate continue available us acceptable terms face uncertainty relating third party reimbursement products could seriously harmed changes reimbursement policies governmental private healthcare payers particularly extent changes affect reimbursement catheterization procedures angioseal products used physicians hospitals users products fail obtain sufficient reimbursement healthcare payers procedures products used adverse changes occur governmental private thirdparty payers policies toward reimbursement procedures operating results business may substantially impaired products manufacturing activities subject extensive governmental regulation could make expensive time consuming us introduce new improved products manufacturing activities subject extensive regulation number governmental agencies including fda comparable international agencies required obtain approval fda international agencies market sell new products satisfy agencies requirements labeling sales promotional materials connection existing products comply applicable manufacturing regulations undergo rigorous inspections agencies compliance regulations agencies may delay prevent us introducing new improved products including triactiv furthermore may subject sanctions including temporary permanent suspension operations product recalls marketing restrictions fail comply laws regulations pertaining business also required demonstrate compliance fdas quality system regulations fda enforces quality system regulations preapproval periodic postapproval inspections regulations relate product testing vendor qualification design control quality assurance well maintenance records documentation unable conform regulations required locate alternative manufacturers conform identifying qualifying alternative manufacturers may long costly difficult process could seriously harm business fda international regulatory agencies may also limit indications products approved regulatory agencies may restrict withdraw approvals received additional information becomes available support action risks related securities trading price common stock likely fluctuate substantially future trading price common stock may fluctuate widely result number factors control including ability meet exceed expectations analysts investors quarter variations operating results announcements regarding clinical activities new products us competitors general conditions medical device industry changes earnings estimates analysts price volume fluctuations overall stock market particularly affected market prices many medical device companies general economic conditions addition market stock experienced may continue experience price volume fluctuations unrelated disproportionate operating performance result may able sell shares common stock price purchase past following periods volatility market price companys securities class action litigation often instituted company securities litigation initiated us could incur substantial cost managements attention resources could diverted business future sales common stock public market management stockholders significant holdings could cause stock price fall sales substantial number shares common stock public market management significant stockholders including sales made raise capital repay outstanding indebtedness perception sales could occur could cause market price common stock decline adversely affect future ability raise capital offering equity securities second amended restated certificate incorporation delaware law may discourage acquisition company provisions second amended restated certificate incorporation delaware law could make difficult third party acquire us even would beneficial stockholders forwardlooking statements report includes forwardlooking statements within meaning section 21e securities exchange act 1934 based forwardlooking statements largely current expectations projections future events trends affecting business report words believe may estimate continue anticipate intend expect plan similar expressions relate kensey nash business management intended identify forwardlooking statements exclusive means identifying number risks uncertainties factors could cause actual results performance financial condition cash flows prospects opportunities differ materially expressed implied forwardlooking statements risks uncertainties factors include among things general economic business conditions nationally markets expectations estimates concerning future financial performance financing plans impact competition anticipated trends business existing future regulations affecting business strategic alliances acquisition opportunities risk factors set forth risk factors undertake obligation publicly update revise forwardlooking statements whether result new information future events otherwise date report results operations past period considered indicative results expected future periods fluctuations operating results may also result fluctuations price common stock item 7a item 7 managements discussion analysis financial condition results operations following discussion analysis read conjunction selected consolidated financial data financial statements related notes included report overview founded 1984 common stock became publicly traded december 1995 profitable last ten fiscal quarters revenues consist three components net sales research development revenue royalty income net sales net sales comprised absorbable biomaterials products angioseal devices manufactured us biomaterials component net sales represents sale biomaterials products customers use following markets orthopedics cardiology drugbiologics delivery wound care historically biomaterials sales represented primarily absorbable collagen polymer components angioseal device supplied st jude medical experienced significant sales growth biomaterials products fiscal years 2000 1999 1998 due sales new customers increased sales existing customers new product offerings expansion marketing activities believe growth continue greater acceptance medical community biomaterials technological advances expanded applications biomaterials products angioseal devices historically supplied strategic partner partially completed 8f angioseal devices fiscal years 2000 1999 supplied partner 6f angioseal devices supplement production requirements subsequent year end st jude medical transitioned manufacturing devices facility expect revenue manufacture completed angioseal devices future research development revenue historically research development revenue derived solely development work performed angioseal anticipated research development activities transitioned st jude medical significant research development revenue expected future royalty income receive royalty every angioseal unit sold worldwide anticipate sales angioseal device continue grow particularly due recent launches 6f angioseal us europe result royalty income continue significant source revenue anticipated increase unit sales partially offset fiscal year 2001 anticipated reduction royalty rate 12 9 accordance licensing agreements expect rate reduction occur second quarter fiscal year 2001 cost products sold experienced overall increase gross margin fiscal year 2000 net sales increased able spread fixed costs manufacturing greater number units anticipate gross margin continue improve sales levels increase product mix becomes favorable reflecting shift higher margin sales biomaterials products reduction sales lower margin angioseal devices research development expense research development expense consists expenses incurred development proprietary technology aegis vortex absorbable biomaterials products technologies development programs research development angioseal become insignificant portion overall development costs progression aegis vortex clinical trial phase continued development proprietary biomaterials products technologies offset decrease anticipate research development expense continue increase pursue commercialization aegis vortex well explore opportunities technologies selling general administrative selling general administrative expenses include general administrative costs well costs related marketing products fiscal years 2000 1999 costs patent litigation also included within selling general administrative expenses anticipate marketing component selling general administrative expenses insignificant past fiscal years increase evaluate opportunities commercialization aegis vortex expand marketing efforts biomaterials business results operations comparison fiscal 2000 1999 revenues increased 22 198 million year ended june 30 2000 fiscal 2000 162 million year ended june 30 1999 fiscal 1999 net sales products increased 83 131 million 72 million fiscal 2000 1999 respectively increase 45 million attributable increase sales 6f angioseal devices st jude medical remaining 14 million attributable increased sales biomaterials products providing st jude medical 6f angioseal devices international us markets however st jude medical transitioned manufacturing devices facility research development revenues research development revenues decreased 97 60000 19 million fiscal 2000 1999 respectively st jude medical transitioned substantially angioseal research development inhouse expect research development revenues significant future royalty income royalty income increased 16 net 15 million supplemental payment previous strategic partner fiscal 1999 66 million 57 million fiscal 2000 1999 respectively royalty units increased 14 approximately 354000 angioseal units sold endusers fiscal 2000 compared approximately 310000 units sold fiscal 1999 unit increase due st jude medicals increased sales marketing efforts primarily us sales new 6f device international markets 6f device introduced international markets april 1999 us late march 2000 cost products sold cost products sold increased 48 76 million fiscal 2000 51 million fiscal 1999 however gross margin increased 42 28 increase reflected allocation overhead across greater sales volume resulted decrease per unit costs research development expense research development expense decreased 6 53 million fiscal 2000 compared 57 million fiscal 1999 decrease mainly attributable transition substantially development angioseal product line st jude medical decrease offset continued development efforts aegis vortex including clinical trial expenses also continued expand development efforts biomaterials products expect research development expense increase investigate develop new products conduct clinical trials seek regulatory approvals proprietary products selling general administrative selling general administrative expense increased 2 50000 fiscal 2000 fiscal 1999 increase primarily result increased sales marketing efforts aegis vortex biomaterials products offset decrease litigation expenses net interest income interest expense increased 30 430000 fiscal 2000 332000 fiscal 1999 due addition 50 million financing agreement january 1999 925000 used repay portion 20 million term loan remainder proceeds 50 million financing agreement used fund leasehold improvements capital expansion financing agreement repaid june 1 2000 proceeds secondary offering interest income increased 47 953000 fiscal 2000 649000 fiscal 1999 result increase average total cash investment balances nonoperating income expense nonoperating expense 1000 fiscal 2000 compared nonoperating income 4000 fiscal 1999 nonoperating income expense periods represented primarily net gain loss sale fixed assets comparison fiscal 1999 1998 revenues increased 44 162 million fiscal 1999 113 million year ended june 30 1998 fiscal 1998 net sales products increased 54 72 million 47 million 25 million attributable increased sales biomaterials products comprised 18 million biomaterials products sold multiple customers 700000 increased sales angioseal components st jude medical remaining increase attributable sale 6f angioseal devices st jude medical international market research development revenue research development revenue decreased 48 19 million 36 million decrease due reduction angioseal research development activity 6f angioseal transitioned development commercialization royalty income royalty income increased 139 72 million 30 million fiscal 1999 fiscal 1998 respectively increase 27 million due increased unit sales angioseal approximately 310000 angioseal units sold end users fiscal 1999 compared approximately 178000 units sold fiscal 1998 increase angioseal unit volume reflected launch 6f angioseal europe fiscal 1999 well increased demand 8f angioseal us european markets fiscal 1999 versus fiscal 1998 addition received 15 million supplemental royalty payment fiscal 1999 cost products sold cost products sold increased 26 51 million fiscal 1999 41 million fiscal 1998 however gross margin increased 28 13 increase gross margin reflects allocation overhead across greater sales volume results decrease per unit costs well increased sales higher margin biomaterials products research development expense research development expense increased 3 57 million fiscal 1999 55 million fiscal 1998 increase mainly attributable increased development efforts aegis vortex applied received investigational device exemption ide fda prepared initiation clinical trials device also expanded development efforts area absorbable biomaterials increases expense offset ongoing transition development angioseal product line st jude medical along 6f product moving commercialization selling general administrative selling general administrative expense increased 47 26 million fiscal 1999 18 million fiscal 1998 increase primarily result legal expenses amount 640000 related ongoing patent infringement suit incurred legal expenses related lawsuit fiscal 1998 net interest income interest expense increased 121 332000 fiscal 1999 150000 fiscal 1998 increase due addition 50 million financing agreement fiscal 1999 925000 used repay portion existing 20 million term loan remainder proceeds 50 million financing agreement used fund leasehold improvements capital expansion interest income increased 20 649000 fiscal 1999 540000 fiscal 1998 result increase average total cash investment balances nonoperating income nonoperating income remained constant 4000 fiscal 1999 fiscal 1998 fiscal 1999 nonoperating income represented primarily net gain sale fixed assets fiscal 1998 represented miscellaneous nonrecurring items liquidity capital resources net cash provided operating activities 24 million 29 million fiscal 2000 1999 respectively fiscal 2000 changes asset liability balances resulted net 32 million use cash offset net income 47 million noncash depreciation amortization 862000 fiscal 1999 changes asset liability balances resulted net 15 million use cash offset net income 32 million noncash depreciation amortization 12 million cash equivalents shortterm investments 317 million june 30 2000 addition 21 million restricted investment accounts pledged 21 million investments collateral secure bank loans made employees pay taxes incurred employees received common stock time initial public offering exchange pledging collateral employees pledged common stock us collateral may 2000 completed secondary offering 2700000 shares common stock addition underwriters exercised portion allotment option june 2000 additional 259000 shares common stock net proceeds secondary offering 257 million proceeds 61 million used repay outstanding indebtedness capital spending plan fiscal 2000 21 million expended primarily machinery equipment leasehold improvements expenditures related continued expansion manufacturing capabilities principally biomaterials product lines received 30 million royalty advance licensing agreement upon receipt fda approval angioseal fiscal year 1997 royalty advance reduced period 50 excess royalty income minimum royalties stipulated within licensing agreement fiscal 2000 liability retired november 1997 acquired patents exchange 200000 shares common stock series eight quarterly cash payments began march 31 1998 totaling 12 million patents recorded balance sheet value shares date agreement plus present value 12 million cash legal related costs incurred acquire patents present value cash payments 11 million recorded balance sheet obligation fully repaid fiscal 2000 plan continue spend substantial amounts fund clinical trials gain regulatory approvals continue expand research development activities particularly aegis vortex biomaterials products believe cash generated operations sufficient meet operating capital requirements next twelve months quantitative qualitative disclosures market risk interest income expense sensitive changes general level interest rates regard changes interest rates affect interest earned cash equivalents investments well interest paid debt investment portfolio consists primarily high quality us government securities certificates deposit average maturity one year less mitigate default risk investing believe safest highest credit quality securities monitoring credit rating investment issuers portfolio includes marketable securities active secondary resale markets ensure portfolio liquidity limitations regarding duration investments availableforsale securities subject interest rate risk decrease market value interest rates increase june 30 2000 total portfolio consisted approximately 290 million investments maturities within one year additionally generally hold securities maturity therefore expect results operations cash flows materially impacted due sudden change interest rates outstanding debt june 30 2000 risk factors carefully consider following risk factors addition information set forth report purchasing shares common stock kensey nash risk factors could adversely affect business operating results financial condition well adversely affect value investment common stock investment involves high degree risk risks related business biomaterials products successful operating results business may substantially impaired success existing biomaterials products well develop future depends variety factors including ability continue manufacture sell competitively price products acceptance products medical profession addition may required obtain regulatory approval future biomaterials products require substantial additional funds develop market biomaterials products expect fund growth biomaterials business operating income cannot guarantee operating income sufficient develop new biomaterials products date relied strategic partners customers market sell biomaterials products cannot assure commercialize products successfully either indirectly strategic partners directly development sales force cannot assure able obtain necessary regulatory approvals aegis vortex need conduct additional human clinical trials aegis vortex aegis vortex approved marketing fda governmental entity outside united states require substantial additional funds develop product conduct clinical trials gain necessary regulatory approvals aegis vortex prior granting approval fda may require clarification information provided regulatory submissions information clinical studies granted fda approval may impose limitations uses product may marketed product may marketed experience delays unable receive approval fda operating results business may substantially impaired substantial portion revenues continue come angioseal manufactured marketed distributed st jude medical date significant portion revenues derived angioseal sales license agreements st jude medical angioseal manufactured marketed sold worldwide basis st jude medical two significant sources revenue future expected sales collagen st jude medical use angioseal devices royalty income sale angioseal product line beginning june 1 2000 st jude medical longer obligated buy collagen us furthermore expect reduction royalty rate 12 9 second quarter fiscal year 2001 accordance license agreements success angioseal depends part time effort attention st jude medical devotes angioseal product line success manufacturing marketing selling angioseal product line terms agreements st jude medical control pricing marketing strategy angioseal product line addition depend st jude medical successfully maintain levels manufacturing sufficient meet anticipated demand abide applicable manufacturing regulations seek reimbursement approvals st jude medical terminate arrangement time september 30 2001 reason upon 12 months notice assurance st jude medical successfully pass future inspections manufacturing facility adequately perform manufacturing marketing selling duties failure st jude medical may negatively impact angioseal sales therefore reduce royalties impair operating results business depend customers market obtain regulatory approvals biomaterials products depend efforts biomaterials customers marketing products include biomaterials components assurance customers end use products include biomaterials components commercialized successfully customers otherwise able compete effectively markets customers fail commercialize products operating results business may substantially impaired receive fda approval may successful commercializing aegis vortex aegis vortex clinical trials completed successfully obtain necessary governmental approvals need commercialize product cannot assure able find suitable partner andor develop train sales force sell market aegis vortex sales marketing force experience hiring training sales marketing force may able establish maintain internal sales marketing force technical expertise supporting distribution capabilities unable successfully commercialize aegis vortex growth prospects diminished may required delay reduce eliminate efforts develop market aegis vortex fail obtain additional funding may required satisfy future capital needs plan continue spend substantial funds develop market aegis vortex future liquidity capital requirements depend upon numerous factors including progress success clinical trials timing cost involved obtaining regulatory approvals timing cost developing sales marketing strategies ability enter strategic alliances manufacturing research development activities extent aegis vortex gains market acceptance competitive developments additional required financing may available satisfactory terms unable obtain financing may required delay reduce eliminate research development activities sales marketing efforts case operating results business may substantially impaired markets products highly competitive likely become competitive competitors may able respond quickly new emerging technologies changes customer requirements existing markets current proposed products intensely competitive expect competition increase additional companies begin enter markets andor modify existing products compete directly compete largest players biomaterials markets successful commercializing aegis vortex competitors include boston scientific corporation johnson inc possis medical inc percusurge inc interventional technologies inc well companies current future therapies primary competitors vascular sealing device market abbott laboratories owns perclose inc datascope corp vascular solutions inc competitors may broad product lines allow negotiate exclusive longterm supply contracts offer comprehensive pricing products broader product lines may also provide competitors significant advantage marketing competing products group purchasing organizations managed care organizations increasingly seeking reduce costs centralized purchasing greater financial resources product development capabilities may allow competitors respond quickly new emerging technologies changes customer requirements may render products obsolete significant portion revenue depends sales medical devices customers end user market also affected competition within markets devices competition within medical device market could also adverse effect business variety reasons including customers may compete directly larger dominant manufacturers extensive product lines greater sales marketing distribution capabilities also unable control factors may impact commercialization components end use products marketing sales efforts competitive pricing pressures within particular markets products accepted medical community business may suffer success existing products depends continued acceptance products medical community success products develop future depend adoption products targeted markets cannot predict quickly medical community accept future products extent future products used encounter difficulties introducing future products targeted markets operating results business may substantially impaired loss interruption supply key vendors could limit ability manufacture products purchase certain materials components products various suppliers components custom made us loss interruption supply key vendors may require us find new vendors could experience production development delays seek new vendors could substantially impair operating results business may problems manufacturing delivering biomaterials products future biomaterials industry emerging area using many materials untested whose properties still known consequently time may experience unanticipated difficulties manufacturing delivering biomaterials products customers difficulties may include inability meet customer demand delays delivering products quality control problems certain biomaterials products difficulty fulfill orders timely basis could materially adversely affect operating results business use hazardous materials exposes us risk material environmental liabilities use hazardous substances research development manufacturing operations potentially subject material liabilities related personal injuries property damages may caused hazardous substance releases exposures facility decontamination costs cleanup costs related damages liabilities could substantially impair business operating results required comply increasingly stringent laws regulations governing environmental protection workplace safety including requirements governing handling storage disposal hazardous substances st jude medicals international sales subject number risks could harm future international sales angioseal ability successfully commercialize new products international markets st jude medical sells angioseal product line internationally pays us royalty unit sold royalties subject several risks including impact recessions economies outside united states unexpected changes regulatory requirements tariffs trade barriers weaker intellectual property rights protection countries fluctuations exchange rates potentially adverse tax consequences political economic instability occurrence events could seriously harm st jude medicals future international sales ability receive royalties sales angioseal international markets success depends key personnel loss could impair operating results business success depends significant extent upon efforts abilities joseph w kaufmann douglas g evans members senior management loss services one key employees could harm operating results business addition successful unless attract retain skilled personnel particularly areas research product development failure expand management systems controls support anticipated growth integrate future acquisitions could seriously harm operating results business operations continue grow expect expansion continue execute business strategy sustaining growth placed significant demands management administrative operational information technology manufacturing financial personnel resources accordingly future operating results depend ability officers key employees continue implement improve operational client support financial control systems effectively expand train manage employee base cannot assure future acquisitions recent acquisition thm biomedical inc successfully integrated operations operated profitably may able manage growth successfully inability sustain manage growth could seriously harm operating results business ownership interest stockholders may diluted future acquisitions strategic alliances stockholders depend upon judgment management respect future acquisitions make strategic alliances enter management may decide acquire companies finance strategic alliances issuing equity securities result may experience dilution ownership interest risks related intellectual property unable protect patents proprietary rights reputation competitiveness marketplace may materially damaged regard patents biomaterials trade secrets intellectual property important success rely upon patent law trade secret protection confidentiality agreements license agreements st jude medical protect proprietary rights registered certain patents applicable governmental authorities effective patent protection may available every country products made available sought protection intellectual property every country products may sold assurance steps take protect proprietary rights adequate third parties infringe otherwise violate patents similar proprietary rights st jude medical plaintiffs patent infringement lawsuit perclose acquired abbott laboratories codefendants counterclaims filed perclose response complaint spent substantial resources litigation intellectual property litigation recent years proven costly complex outcome litigation difficult predict may accused infringing upon proprietary rights others related litigation could materially damage operating results business adverse determination intellectual property litigation interference proceedings brought us could prohibit us selling products subject us significant liabilities third parties require us seek licenses third parties costs associated license arrangements may substantial could include ongoing royalties furthermore necessary licenses may available us satisfactory terms adverse determinations judicial administrative proceeding failure obtain necessary licenses could prevent us manufacturing selling products control use angioseal trademark term angioseal trademark st jude medical goodwill generated marketing sales devices bearing angioseal trademark belongs st jude medical us st jude medical license agreements terminate would right call products angioseal unless purchase license trademark st jude medical without rights angioseal trademark would market products different trademark moreover upon termination st jude medical license agreements st jude medical would right compete us selling collagen puncture closure devices angioseal trademark thus purchasers puncture closure devices may likely recognize purchase products labeled angioseal regardless whether devices originate us risks related industry may face product liability claims could result costly litigation significant liabilities manufacture sale medical products entail significant risk product liability claims medical device industry general subject significant product liability litigation product liability claims without merit could result costly litigation reduced sales significant liabilities diversion managements time attention resources cannot sure product liability insurance coverage adequate continue available us acceptable terms face uncertainty relating third party reimbursement products could seriously harmed changes reimbursement policies governmental private healthcare payors particularly extent changes affect reimbursement catheterization procedures products used physicians hospitals users products fail obtain sufficient reimbursement healthcare payors procedures products used adverse changes occur governmental private thirdparty payors policies toward reimbursement procedures operating results business may substantially impaired products manufacturing activities subject extensive governmental regulation could make expensive time consuming us introduce new improved products manufacturing activities subject extensive regulation number governmental agencies including fda comparable international agencies required obtain approval fda international agencies market sell new products satisfy agencies requirements labeling sales promotional materials connection existing products comply applicable manufacturing regulations undergo rigorous inspections agencies compliance regulations agencies may delay prevent us introducing new improved products including aegis vortex furthermore may subject sanctions including temporary permanent suspension operations product recalls marketing restrictions fail comply laws regulations pertaining business also required demonstrate compliance fdas quality system regulations fda enforces quality system regulations preapproval periodic postapproval inspections regulations relate product testing vendor qualification design control quality assurance well maintenance records documentation unable conform regulations required locate alternative manufacturers conform identifying qualifying alternative manufacturers may long costly difficult process could seriously harm business fda international regulatory agencies may also limit indications products approved regulatory agencies may restrict withdraw approvals received additional information becomes available support action forwardlooking statements report includes forwardlooking statements within meaning section 27a securities act section 21e exchange act based forwardlooking statements largely current expectations projections future events financial trends affecting financial condition business forwardlooking statements subject number risks uncertainties assumptions kensey nash including among things general economic business conditions nationally markets expectations estimates concerning future financial performance financing plans impact competition anticipated trends business existing future regulations affecting business strategic alliances acquisition opportunities risk factors set forth risk factors report addition report words believe may estimate continue anticipate intend expect similar expressions relate kensey nash business management intended identify forwardlooking statements undertake obligation publicly update revise forwardlooking statements whether result new information future events otherwise date report light risks uncertainties forwardlooking events circumstances discussed report may occur actual results could differ materially anticipated implied forwardlooking statements contained form 10k historical facts forwardlooking statements made pursuant safe harbor provisions private securities litigation reform act 1995 caution number important factors could cause actual results fiscal year 2001 beyond differ materially forwardlooking statements made us behalf important factors include without limitation success biomaterials products ability obtain necessary regulatory approvals fund commercialize aegis vortex success st jude medical manufacturing marketing distributing angioseal ability customers market obtain regulatory approvals biomaterials products acceptance products medical community ability maintain key vendors personnel competition markets general business conditions healthcare industry general economic conditions results operations past period considered indicative results expected future periods fluctuations operating results may also result fluctuations price common stock item 8 item 7 management’s discussion analysis financial condition results operations following discussion analysis read conjunction “selected consolidated financial data” financial statements related notes included report discussion analysis contains forwardlooking statements relating future events future financial performance statements predictions actual events results may differ materially evaluating statements carefully consider various factors identified report could cause actual results differ materially expressed implied forwardlooking statements including set forth “risk factors” annual report form 10k see “cautionary note regarding forwardlooking statements” overview provide extensive range products multiple medical markets primarily endovascular orthopaedic markets products place markets include range resorbable biomaterials products primarily cardiology orthopaedic markets well line products endovascular markets including devices applications thrombectomy chronic total occlusion markets revenues consist three components net sales includes biomaterials endovascular products research development royalty income net sales biomaterials sales sale angioseal components st jude medical sales biomaterial orthopaedic products including products applications orthopaedic markets especially within sports medicine spine product lines continue primary source revenue table shows fiveyear trend angioseal component orthopaedic product sales manufacture two key absorbable components angioseal st jude medical 100 supply requirements collagen plug least 30 requirements polymer anchors supply contract expires 2010 sales st jude medical however highly dependent ordering patterns vary significantly quarter experienced variation ordering patterns throughout fiscal 2007 exceptionally strong sales past four quarters due part anchor orders exceeded contractual minimums expect sales angioseal components decline fiscal 2008 compared fiscal 2007 sales due large volume orders sold st jude fiscal 2007 contract comparison st jude’s end user sales comparable periods net sales orthopaedic portion business dependent several factors including success current partners sports medicine spine markets continued acceptance biomaterialsbased products two markets well expanded future acceptance products ability offer new products technologies attract new partners markets due dependencies factors sales orthopaedic customers vary significantly quarter endovascular sales last several years kensey nash devoted significant resources bringing family proprietary endovascular products market us europe products focused emerging markets thrombectomy chronic total occlusions “ctos” sales endovascular products increased 8 total net sales fiscal 2007 compared 3 total net sales fiscal 2006 see also “discontinuance embolic protection platform” discussion changes endovascular product line platform impacted results operations royalty income company also derives significant portion revenue profitability royalty income proprietary products developed codeveloped angioseal royalty income company inventor original developer angioseal™ vascular closure device “angioseal” device reduces recovery time enhances patient comfort following diagnostic therapeutic cardiovascular catheterizations st jude medical inc exclusive worldwide rights development manufacturing sales marketing angioseal pursuant agreement provides 6 royalty kensey nash enduser product sales anticipate sales angioseal device continue modest growth pattern based forecasted continued procedure growth st jude medical’s continued expansion international markets potential success marketing new generations product vip angioseal launched march 2006 vitoss® foam vitoss® royalty income since 2003 partnered orthovita inc codevelop commercialize series unique proprietary bone void filler products branded vitoss foam first launched march 2004 receive fixed royalty orthovita’s enduser sales vitoss foam products targeted use orthopaedic market addition august 2004 entered agreement acquire proprietary rights third party inventor vitoss technology 26 million “the assignment agreement” assignment agreement receive additional royalty orthovita enduser sales orthovita products containing vitoss technology total royalty received 40 million 600000 received fiscal 2007 24 million remaining received june 30 2007 believe unique technology associated vitoss foam products growing orthopaedic market result orthovita component royalty income becoming significant next fiscal year beyond royalty generating relationships none materially contributes revenue time expect provide increased revenue related products gain market acceptance additional products commercialized discontinuance embolic protection platform july 10 2007 announced strategic decision cease activities related embolic protection platform result action recorded certain charges fourth quarter fiscal 2007 including 43 million writeoffs inventory certain dedicated embolic protection equipment assets additionally knc offered customers credits unused embolic protection product totaled 356000 fourth quarter fiscal 2007 total charges credits approximately 47 million 025 per share taxeffected presented within results continuing operations fiscal year ended june 30 2007 additional charges related severance clinical trial closeout costs recorded first fiscal quarter 2008 expected total approximately 600000 charges represented significant portion operating expenses fiscal 2007 therefore included following table show amounts discontinuance embolic protection charges included within operating expense category financial statements fiscal year ended june 30 2007 new facility fiscal 2006 successfully completed construction moved operations new facility resulted significant facility transition expenses including acceleration depreciation certain abandoned leasehold improvement assets previous locations moving charges impact acceleration depreciation charges 42 million fiscal 2006 addition incurred moving costs totaling 543000 fiscal 2006 transition new facility completed fiscal 2006 accordingly facility transition charges recorded fiscal 2007 facility transition charges represented significant portion operating expenses fiscal 2006 lesser extent fiscal 2005 therefore included following table show amounts facility transition charges included within operating expense category financial statements fiscal years ended june 30 2006 2005 stockbased compensation following table summarizes total stockbased compensation expense result required adoption sfas 123r fiscal year 2006 within operating expense category financial statements periods presented critical accounting policies “critical accounting policies” require application management’s difficult subjective complex judgments often result need make estimates matters inherently uncertain may change future periods identified following critical accounting policies revenue recognition accounting stockbased compensation accounting investments debt equity securities inventory valuation income taxes revenue recognition recognize revenue provisions staff accounting bulletin sab 104 revenue recognition sab 104 superseded sab 101 revenue recognition financial statements sab 101 sales revenue sales revenue recognized related product shipped service completed advance payments received products services recorded deferred revenue recognized product shipped services performed timing could subjective reduce sales estimated customer returns discounts allowances applicable products primarily manufactured according customers’ specifications subject return failure meet specifications royalty revenue royalty revenue recognized related product sold recognize substantially royalty revenue end month accordance customer agreements see note 1 revenue recognition condensed consolidated financial statements included herein accounting stockbased compensation use various forms equity compensation including stock options nonvested stock grants cashsettled stock appreciation rights major part compensation programs retain provide incentives top management team members employees • fair value option grants estimated date grant using blackscholes optionpricing model uses weighted average assumptions expected volatilities based historical volatility common stock factors use historical data estimate option exercise employee termination behavior within valuation model separate groups employees similar historical exercise behavior considered separately valuation purposes expected term options derived historical exercise behavior represents period time options granted expected outstanding riskfree rate periods within contractual life option based us treasuries constant maturities effect time grant • nonvested stock granted nonemployee members board directors executive officers management accounted using fair value method sfas 123r fair value nonvested stock grants based upon closing price common stock date grant • cashsettled sars awarded stockbased payment transactions accounted sfas 123r classifies awards liabilities accordingly record awards component noncurrent liabilities balance sheet liability awards fair value award determines measurement liability balance sheet remeasured reporting period award settled fluctuations fair value liability award recorded increases decreases compensation cost either immediately remaining service period depending vested status award expected term cashsettled stock appreciation rights determined accordance question 6 sec staff accounting bulletin topic 1402 “expected term” sab 107 time historical exercise behavior established revisions estimates methodologies could cause material impact financial statements accounting investments debt equity securities accordance statement financial accounting standards sfas 115 accounting certain investments debt equity securities sfas 115 classified entire investment portfolio availableforsale marketable securities secondary resale markets report portfolio fair value unrealized gains losses included stockholders’ equity realized gains losses income currently investment securities fair values less amortized cost therefore contain unrealized losses evaluated securities determined decline value related company industry specific event anticipate full recovery amortized costs respect securities maturity sooner event favorable market interest rate environment revisions classification investments andor determination anticipation full recovery amortized costs maturity sooner could result realizing gains losses investments therefore cause material impact financial statements inventory valuation inventory stated lower cost market adjustments inventory made individual part level estimated excess obsolescence impaired balances reflect inventory lower cost market factors influencing adjustments include changes demand rapid technological changes product life cycle development plans component cost trends product pricing physical deterioration quality concerns revisions adjustments would required factors differ estimates income taxes estimated effective tax rate includes impact certain estimated research development tax credits nontaxable interest income material changes differences estimates could impact estimate effective tax rate results operations comparison fiscal years 2007 2006 total revenues total revenues increased 15 695 million fiscal 2007 604 million fiscal 2006 total net sales net sales products increased 19 449 million fiscal 2007 compared net sales 379 million fiscal 2006 12 increase biomaterials sales 221 increase endovascular sales biomaterials sales biomaterials sales 411 million fiscal 2007 12 increase compared 367 million fiscal 2006 biomaterials sales includes revenue recognized products shipped well revenue generated product development programs biomaterials customers increase primarily due increase sales angioseal components st jude medical 174 million fiscal 2007 compared 148 million fiscal 2006 17 increase despite 611000 volume discount sales fiscal 2007 collagen plug component sales 143 million increase 11 sales anchor component 31 million increase 55 asked supplement st jude medical’s production rates greater 30 additionally orthopaedic sales increased 12 million 6 218 million fiscal 2007 compared 206 million fiscal 2006 orthopaedic sales growth primarily result sales orthovita 54 million represented increase 22 million 70 prior fiscal year well 22 million increase sales zimmer new customers offsetting increases 23 million decrease sales arthrex inc well 11 million decrease sales medtronic due large launch quantities supplied medtronic fiscal 2006 biomaterials sales increased 649000 51 19 million fiscal 2007 compared 13 million fiscal 2006 endovascular sales endovascular sales 38 million fiscal 2007 221 increase compared sales 12 million fiscal 2006 sales us increased 212 28 million 895000 due introduction thromcat system continuation launch quickcat catheter fiscal year 2007 international endovascular sales increased 249 year 993000 284000 due introduction thromcat quickcat devices fiscal 2007 prior year international endovascular sales consisted entirely embolic protection product line since discontinued 466000 us international sales credits given customers fiscal 2007 related recall discontinuance embolic protection product line credits negatively impacted reported sales growth fiscal year ended june 30 2007 royalty income royalty income increased 9 246 million fiscal 2007 225 million fiscal 2006 st jude medical angioseal royalty income increased 6 208 million fiscal 2007 compared 196 million fiscal 2006 based st jude medical revenue approximately 350 million period orthovita royalty income increased 26 fiscal 2007 fiscal 2006 total royalty income orthovita approximately 37 million fiscal 2007 compared 29 million fiscal 2006 enduser sales codeveloped vitoss® foam products increased 29 fiscal 2007 compared fiscal 2006 cost products sold cost products sold 246 million fiscal 2007 40 million increase 206 million fiscal 2006 gross margin net sales fiscal 2007 45 compared gross margin net sales 45 fiscal 2006 costs products sold fiscal 2007 included 34 million charges related discontinuance embolic protection platform costs products sold fiscal 2006 included 25 million facility transition charges remaining change cost products sold increase 31 million fiscal 2007 compared fiscal 2006 increase primarily due increase units sold also affected production scrap shop order variances embolic protection devices attempts made rectify issues relating recall conducted third fourth quarters fiscal year costs incurred announcement recall embolic protection devices prior decision discontinuance look ahead fiscal 2008 believe continuing higher volumes process improvements process automation lead improvement gross margin sales research development expense research development expense 203 million fiscal 2007 compared 190 million fiscal 2006 research development expense fiscal 2007 included 729000 charges related discontinuance embolic protection platform fiscal 2006 included 15 million facility transition charges remaining change research development expense increase 21 million fiscal 2007 compared fiscal 2006 increase research development expense primarily related increase personnel expense 11 million increase clinical trial expense 648000 increase patent regulatory fees 272000 personnel expenses equity compensation increased 196000 increases salaries benefits increased 634000 increase clinical trial expenses due extent well timing trials took place period fiscal 2006 enrolling aspire study led fda clearance triactiv fx system fiscal 2007 commenced completed european study thromcat device native coronary anatomy initiated enrollment us european proguard trial carotid pivotal trial triactiv proguard device carotid anatomy due discontinuation embolic protection platform proguard trial since cancelled expect incur closeout costs associated proguard trial first quarter fiscal 2008 research development expenses 29 31 total revenues fiscal year ended 2007 2006 respectively believe research development expenditures total percentage revenue decrease fiscal 2008 compared fiscal 2007 likely decrease direct result discontinuance embolic protection line well planned clinical trials relating endovascular biomaterials product lines fiscal 2008 sales marketing expense sales marketing expense 125 million fiscal 2007 compared 94 million fiscal 2006 sales marketing expense fiscal 2007 included 87000 charges related discontinuance embolic protection platform fiscal 2006 included 170000 facility transition charges remaining change sales marketing expense increase 32 million fiscal 2007 compared fiscal 2006 increase due 24 million increase us sales marketing expenses 724000 increase european sales marketing expenses us personnel travel expenses sales marketing departments increased 18 million fiscal 2007 compared fiscal 2006 increase related building endovascular direct sales force average 38 sales marketing employees us fiscal 2007 compared average 30 sales marketing employees fiscal 2006 addition increase 549000 marketing expenses related conventions advertising expense product launches increase european sales marketing expenses primarily caused 378000 increase personnel travel expenses 158000 increase office costs professional fees 146000 increase marketing convention expenses part relates increase average exchange rate fiscal 2007 compared fiscal 2006 average euro dollar exchange rate fiscal 2007 131 versus average exchange rate fiscal 2006 122 increase approximately 7 anticipate sales marketing expenses us europe continue increase fiscal 2008 due expected growth endovascular sales plans continued expansion us sales team general administrative expense general administrative expenses include costs finance information technologies human resource business development departments general administrative expense 83 million fiscal 2007 compared 79 million fiscal 2006 general administrative expense fiscal 2007 included 120000 charges related discontinuance embolic protection platform fiscal 2006 included 503000 facility transition charges remaining change general administrative expense increase 832000 fiscal 2007 compared fiscal 2006 increase primarily result increase personnel costs 595000 including stockbased compensation expense 239000 writeoff previously deferred costs related prospective acquisition longer pursued net interest income interest income increased 4 11 million fiscal 2007 10 million fiscal 2006 although 3 decrease average cash investment balance fiscal 2007 fiscal 2006 decrease offset higher interest rates decrease cash balances due primarily funding construction new facility throughout fiscal 2006 final payments beginning fiscal 2007 well 33 million acquisition intellectual property certain assets macropore biosurgery spinal orthopaedic business unit cytori therapeutics inc see note 10 acquisition certain assets macropore condensed consolidated financial statements included herein interest expense fiscal 2007 427000 compared 71000 prior year borrowed cash variable rate secured commercial mortgage agreement hedged swap fixed interest rate 644 balance agreement 80 million june 30 2007 incomeexpense nonoperating expense 23000 fiscal 2007 compared nonoperating income 82000 fiscal 2006 nonoperating expense fiscal 2007 primarily related loss disposal fixed assets offset revenue recognized 500000 opportunity grant received commonwealth pennsylvania governor’s action team see note 21 opportunity grant fiscal 2006 income primarily related revenue recognized opportunity grant offset loss foreign currency exchange loss disposal fixed assets income tax expense tax expense fiscal 2007 787000 resulting effective tax rate 18 consistent fiscal year 2006’s effective tax rate 18 effective tax rate impacted income tax benefit fiscal years 2006 2007 see note 22 income taxes comparison fiscal years 2006 2005 total revenues total revenues decreased 2 604 million fiscal 2006 614 million fiscal 2005 total net sales net sales products decreased 6 379 million fiscal 2006 compared net sales 404 million fiscal 2005 8 decrease biomaterials sales 128 increase endovascular sales biomaterials sales biomaterials sales 367 million fiscal 2006 8 decrease compared 399 million fiscal 2005 angioseal sales st jude medical 147 million fiscal 2006 compared 163 million prior fiscal year due 895000 decrease polymer anchor sales 171000 decrease collagen plug sales 460000 decrease development revenue related research development performed two new collagen plug product enhancements prior year orthopaedic sales decreased 13 million 6 206 million fiscal 2006 compared 219 million fiscal 2005 decrease orthopaedic sales primarily attributable 55 decrease product sales orthovita 32 million fiscal 2006 compared 72 million fiscal 2005 decrease sales orthovita related orthovita vitoss foam™ product launches fiscal years 2005 2004 continued flow distribution channels throughout fiscal 2006 although sales orthovita decreased year orthovita’s end user sales vitoss foam™ products strong increased 45 fiscal 2006 fiscal 2005 return growth shipments orthovita third fourth quarters fiscal 2006 sales othovita 22 million compared combined first second quarter sales year 11 million offsetting decrease 7 increase 889000 sports medicine sales fiscal 2005 fiscal 2006 mainly related sales sports medicine products arthrex increased 5 632000 additionally 23 million spine product sales new orthopaedic customers launching new product lines fiscal 2006 biomaterials sales decreased 332000 21 13 million fiscal 2006 compared 16 million fiscal 2005 endovascular sales endovascular sales 12 million fiscal 2006 128 increase compared sales 517000 fiscal 2005 sales us increased 317 895000 215000 international endovascular sales decreased 6 year 284000 302000 sales fiscal years 2005 2006 primarily products within embolic protection product line discontinued july 2007 research development revenue research development revenues fiscal 2006 compared 253000 revenues fiscal 2005 research development revenues fiscal 2005 consisted amounts generated nist synthetic vascular graft development grant concluded september 2004 royalty income royalty income increased 9 225 million fiscal 2006 208 million fiscal 2005 st jude medical angioseal royalty income increased 6 196 million fiscal 2006 compared 185 million fiscal 2005 based st jude medical revenue approximately 333 million period orthovita royalty income increased 29 fiscal 2006 fiscal 2005 total royalty income orthovita 29 million fiscal 2006 compared 23 million fiscal 2007 enduser sales codeveloped vitoss® foam products increased 45 fiscal 2006 compared fiscal 2005 cost products sold cost products sold 206 million fiscal 2006 30 million increase 177 million fiscal 2005 gross margin net sales fiscal 2006 45 compared gross margin net sales 56 fiscal 2005 costs products sold fiscal 2006 included 25 million facility transition charges compared 440000 prior fiscal year cost good sold fiscal 2006 also increased due equity compensation expense 179000 related adoption sfas 123r see note 1 consolidated financial statements company applicable fiscal year 2005 gross margin net sales excluding transition equity compensation expenses 53 fiscal 2006 compared 57 fiscal 2005 unfavorable decline 7 year trend partially attributable decreased volume also related late year obsolescence charges process raw material changes one specific collagen product unfavorable manufacturing variances related production startup three new products within endovascular product line well two new orthopaedic product line launches midyear increase personnel expenses anticipation endovascular product launches research development expense research development expense 190 million fiscal 2006 compared 151 million fiscal 2005 research development expense fiscal 2006 included 15 million facility transition costs well 853000 equity compensation expense due adoption sfas 123r fiscal 2005 included 302000 facility transition costs remaining change research development expenses increase 18 million fiscal 2006 compared fiscal 2005 increase research development expense primarily related increase personnel expense 12 million increase clinical trial expense 922000 due increased clinical activity related aspire european carotid pilot studies embolic protection platform sales marketing expense sales marketing expense increased 39 million 94 million fiscal 2006 compared 55 million fiscal 2005 sales marketing expense fiscal 2006 included 170000 facility transition charges 113000 related adoption sfas 123r fiscal 2005 included 7000 facility transition charges remaining change sales marketing expense increase 36 million fiscal 2006 compared fiscal 2005 increase due 43 million increase us sales marketing expenses offset 717000 decrease european sales marketing expenses us personnel travel expenses sales marketing departments increased 32 million fiscal 2006 compared fiscal 2005 41 sales marketing employees us june 30 2006 compared 24 sales marketing employees june 30 2005 addition increase 947000 marketing expenses related conventions advertising expense product launches decrease european sales marketing expenses due decrease personnel related decrease travel expenses 350000 decrease marketing study expenses 380000 due conclusion first study december 2004 offset increase marketing efforts 72000 first study examine cost effectiveness triactiv system saphenous vein graft patients support reimbursement product europe also affecting expenses 4 decrease foreign currency exchange rate average euro dollar exchange rate fiscal 2006 122 versus average exchange rate fiscal 2005 127 general administrative expense general administrative expenses increased 16 million 79 million fiscal 2006 63 million fiscal 2005 general administrative expense fiscal 2006 included 503000 facility transition charges 425000 equity compensation expense related adoption sfas 123r fiscal 2005 included 64000 facility transition charges remaining change general administrative expenses increase 701000 fiscal 2006 fiscal 2005 attributable increases 874000 personnel costs including 725000 equity compensation 650000 facility costs including rent electric depreciation 45000 professional services 13000 public company expenses including board compensation sec filing fees excluding transition costs equity compensation costs general administrative expenses increased 11 701000 fiscal 2006 fiscal 2005 net interest income interest expense increased 67000 71000 fiscal 2006 5000 fiscal 2005 due secured commercial mortgage entered fiscal 2006 see note 14 debt interest income decreased 17 10 million fiscal 2006 13 million fiscal 2005 due lower cash investment balances fiscal 2006 fiscal 2005 offset part rising interest rates average cash investment balance fiscal 2006 313 million compared 503 million fiscal 2005 approximate weighted average interest rate portfolio 334 compared 249 fiscal years 2006 2005 respectively incomeexpense nonoperating income 82000 fiscal 2006 compared nonoperating expense 45000 fiscal 2005 increase related primarily 81000 revenue recognized fiscal 2006 related 500000 opportunity grant received commonwealth pennsylvania governor’s action team see note 21 opportunity grant compared 54000 recognized fiscal 2005 remainder due net loss gain sale fixed assets income tax expense tax expense fiscal 2006 838000 resulting effective tax rate 18 significantly lower fiscal year 2005’s effective tax rate 29 effective tax rate affected income tax benefit fiscal year 2006 see note 22 income taxes liquidity capital resources cash equivalents investments 343 million june 30 2007 increase 72 million balance 271 million june 30 2006 end prior fiscal year addition working capital 532 million june 30 2007 increase 88 million working capital 443 million june 30 2006 operating activities net cash provided operating activities 145 million 169 million fiscal years ended june 30 2007 2006 respectively fiscal year ended june 30 2007 net income 36 million net effect noncash employee stockbased compensation related tax events 29 million noncash depreciation amortization 81 million cash used result changes asset liability balances 107000 decrease cash related change assets liabilities primarily due decrease 10 million related contingent liability restricted cash held escrow date ilt acquisition see note 9 acquisition certain assets intraluminal therapeutics inc occurred may prior fiscal year released may current fiscal year addition decrease deferred taxes 829000 increase prepaid expenses 621000 decreases cash offset 20 million increase accounts payable accrued expenses 331000 decrease accounts receivable investing activities cash used investing activities 168 million fiscal year ended june 30 2007 result net purchase redemption activity within investment portfolio capital spending related ongoing expansion manufacturing capabilities period investments 109 million matured called subsequently purchased new investments 160 million proceeds cash operations resulting net use cash investing transactions 51 million also spent 33 million acquisition intellectual property certain assets macropore biosurgery spinal orthopaedic business unit cytori therapeutics inc see note 10 additionally 10 million escrowed cash related acquisition ilt paid also invested 93 million capital expenditures fiscal year ended june 30 2007 expand research manufacturing capabilities facility enhancements equipment machinery purchases financing activities cash provided financing activities 44 million fiscal year ended june 30 2007 primarily result proceeds exercise stock options excess tax benefits sharebased payment arrangements exercise stock options provided cash 36 million gross effect awards generated tax savings excess tax benefits provided 11 million fiscal year june 30 2007 financing activities partially offset stock repurchases 238000 plan draw 270 million remaining funds available 35 million secured commercial mortgage agreement “mortgage” entered fiscal 2006 date draw period concludes november 25 2007 interest rate 644 set interest rate swap agreement hedges mortgage see note 14 debt general plan invest sales team well increase spending marketing efforts endovascular product platform due investment endovascular product lines expect sales marketing expenses continue increase next twelve months addition expect continue spend research development dollars continue expand research development activities endovascular biomaterials products addition increased cash requirements operations granted cashsettled sar awards eligible employees quarter ended september 30 2006 award granted provides participant right receive payment cash upon exercise appreciation market value share common stock award’s exercise price exercise price sar equal closing market price common stock date grant sars exercisable maximum term five years date grant vest period three years grant date first grants vest quarter ended september 30 2007 cannot predict market value common stock time exercise grants magnitude exercises particular time term grants believe current cash investment balances future cash generated operations sufficient meet operating financing capital requirements least next 12 months also ability draw secured commercial mortgage remaining 270 million aggregate maximum amount 350 million see note 14 debt plan draw remaining balance expiration draw period november 25 2007 although believe cash investment balances also sufficient longer term basis sufficiency depend numerous factors including market acceptance existing future products successful commercialization products development costs associated commercialization progress product development efforts magnitude scope efforts cost timing efforts expand manufacturing sales marketing capabilities cost filing prosecuting defending enforcing patent claims intellectual property rights competing technological market developments development strategic alliances marketing certain products terms future equity financing undertake may dilutive stockholders terms debt financing may contain restrictive covenants limit ability pursue certain courses action ability obtain financing dependent status future business prospects well conditions prevailing relevant capital markets assurance given additional financing available us available us acceptable terms need arise contractual obligations presented summary contractual obligations june 30 2007 obligations related secured commercial mortgage agreements purchase goods services enforceable legally binding 1 longterm debt obligations consist principal interest secured commercial mortgage currently 80 million plus remaining 270 million available mortgage intend draw november 25 2007 see note 14 debt 2 obligations consist open purchase orders capital items primarily continued expansion research development manufacturing capabilities 3 accordance generally accepted accounting principles united states gaap obligations recorded consolidated balance sheet estimate time periods cash equivalents adequate fund operations forward looking statement within meaning private securities litigation reform act 1995 subject risks uncertainties actual results may differ materially contemplated forwardlooking statements addition described factors may cause difference set forth item 1a risk factors annual report form 10k item 7a item 7 management’s discussion analysis financial condition results operations following discussion analysis read conjunction “selected consolidated financial data” financial statements related notes included report discussion analysis contains forwardlooking statements relating future events future financial performance statements predictions actual events results may differ materially evaluating statements carefully consider various factors identified report could cause actual results differ materially expressed implied forwardlooking statements including set forth “risk factors” annual report form 10k see “cautionary note regarding forwardlooking statements” overview kensey nash corporation medical device company primarily focused field regenerative medicine application devices materials therapies help repair damaged diseased tissues recognized leader innovative product development well broad portfolio resorbable biomaterials products extensive range products sold strategic partners multiple large medical markets including cardiology orthopaedic sports medicine spinal general surgery also ongoing development manufacturing program products endovascular market sell products strategic partners sell direct enduser revenues consist two components net sales include biomaterials sales endovascular sales royalty income net sales biomaterials sales biomaterial orthopaedic products including products applications primarily sports medicine spinal markets cardiovascular products consisting primarily angioseal components sold st jude medical continue primary source revenue table shows fiveyear trend biomaterials sales including orthopaedic product sales cardiovascular product sales general surgery product sales net sales biomaterials products increased 2 521 million fiscal 2010 compared 510 million prior fiscal year primarily due increase general surgery sports medicine cardiovascular product sales general surgery product sales increased due initial shipment products launch xcm biologic™ tissue matrix products variations ordering patterns another customer fiscal 2009 cardiovascular product sales included onetime cancellation fee 781000 research development project partially offsetting increase sports medicine general surgery cardiovascular product sales decrease spine product sales decline sales spine products due overall weakness spinal market well orthovita’s shift sales’ focus past year away codeveloped products additionally fiscal 2009 spine product sales included onetime cancellation fee 825000 research development project fiscal 2011 expect achieve double digit percentage growth sales biomaterials products excluding cardiology products result combination new product launches ecm products us european markets along launch cartilage repair device europe overall growth core biomaterials business net sales orthopaedic portion business dependent several factors including 1 success current partners orthopaedic markets sports medicine spine extremities 2 continued acceptance biomaterialsbased products markets well expanded future acceptance products 3 competitive pricing 4 ability offer new products technologies attract new partners markets due dependencies factors sales orthopaedic customers vary significantly quarter primary part cardiovascular sales manufacture two key resorbable components angioseal device st jude medical specifically currently supply 100 requirements collagen plug least 30 requirements polymer anchors supply agreement expires december 2010 sales st jude medical highly dependent ordering patterns components used manufacturing angioseal device st jude medical vary significantly quarter june 2010 entered new twoyear supply agreement st jude medical effective period january 1 2011 december 31 2012 new supply agreement exclusive outside supplier st jude medical collagen plugs supply polymer anchors new supply agreement provides calendar year 2011 minimum order levels equivalent approximately 25 fiscal year 2010 collagen plug sales result st jude medical’s purchase levels minimum levels new supply agreement related product sales fiscal 2011 substantially lower fiscal 2010 also developed manufacture products used general surgery markets products primarily include products ecm program well resorbable collagen product use breast biopsies may 2010 launched new ecm product xcm biologic™ tissue matrix us strategic partner synthes represents opportunity expansion growth general surgery market june 2010 announced strategic distribution agreement ecm products arthrex rotator cuff tendon repair procedures additionally received ce mark approval ecm technology april 2010 anticipate synthes’ european launch product second quarter fiscal 2011 royalty income also derive significant portion revenue profitability royalty income proprietary products developed codeveloped angiosealtm royalty income inventor original developer angioseal device vascular closure device reduces recovery time enhances patient comfort following diagnostic therapeutic cardiovascular catheterizations st jude medical exclusive worldwide rights development manufacturing sales marketing angioseal device pursuant agreement provides us approximate 6 royalty enduser product sales royalty income angioseal device license agreement affected new supply agreement st jude medical believe mature market anticipate sales angioseal device st jude medical expected relatively flat upcoming years vitoss™ foam vitoss™ vitoss™ bioactive foam royalty income since 2003 partnered orthovita codevelop commercialize series unique proprietary bone void filler products branded vitosstm foam first launched march 2004 recent vitosstm bioactive foam technology launched fourth quarter fiscal 2008 receive royalty orthovita’s enduser sales vitosstm foam vitosstm bioactive foam products addition august 2004 entered agreement acquire proprietary rights third party inventor vitosstm technology 26 million assignment agreement assignment agreement receive additional royalty orthovita enduser sales orthovita products containing vitosstm technology total royalty received 40 million approximately 625000 received fiscal 2010 580000 remaining received june 30 2010 expect royalty income assignment agreement come end fiscal 2011 believe unique technology associated vitosstm foam vitosstm bioactive foam products including product extensions result orthovita component royalty income continuing grow next fiscal year royalty generating relationships none materially contributes revenue time expect provide increased revenue related products gain market acceptance additional products commercialized sharebased compensation following table summarizes total sharebased compensation expense within operating expense category consolidated statements income fiscal years presented 1 see “acceleration stock awards” sharebased compensation expense consists stock options granted employees nonemployee members board directors executive officers nonemployee outside consultants b nonvested stock awards ie restricted stock granted nonemployee members board directors executive officer nonemployee outside consultant c cashsettled stock appreciation rights sars granted executive officers nonexecutive employees company cannot predict market value common stock time exercise grants magnitude exercises particular time terms grants cashsettled sars classified liability awards continue remeasured reporting period awards settled fluctuations fair value liability award recorded increases decreases compensation cost either immediately remaining service period depending vesting status award total sharebased compensation expense fiscal 2010 increased relation corresponding period prior year primarily due amortized expense related three years equity grants versus two years equity grants additionally fiscal 2009 higher favorable adjustments fair value cashsettled sars fiscal 2010 remeasured based among factors closing stock price june 30 2010 2009 see note 12 consolidated financial statements included form 10k additional information concerning sharebased compensation acceleration stock awards publicly announced september 26 2007 “change control” defined fifth amended restated kensey nash corporation employee incentive compensation plan kensey nash corporation employee incentive compensation plan amended relevant date “employee plan” due purchase open market institutional investor 20 shares outstanding stock result outstanding unvested stock options stock appreciation rights nonvested stock held officers employees directors others employee plan automatically became vested case options stock appreciation rights exercisable full accelerated vesting resulted noncash charge approximately 30 million primarily quarter ended september 30 2007 fiscal 2008 charge represented significant portion operating expenses fiscal 2008 therefore disclosed table “sharebased compensation” amount related acceleration sharebased compensation charges included within operating expense category income statement fiscal year ended june 30 2008 acceleration removed future equity compensation expense related outstanding stock options nonvested shares plan date acceleration however remaining cashsettled sars including rights vesting accelerated continue markedtomarket quarterly basis equity compensation expense incurred respect new stock compensation awards granted event see note 12 consolidated financial statements included form 10k discussion purchase substantial majority sars following table summarizes sharebased compensation expense fiscal year grant fiscal years ended june 30 2010 2009 2008 see “acceleration stock awards” fiscal 2011 expect increase approximately 800000 sharebased compensation expense 34 million recorded fiscal 2010 increase primarily result fiscal 2011 stock option expense reflecting amortized expense related 36 months equity grants whereas fiscal 2010 amortized expense related 33 months equity grants well additional expense relating unfavorable marktomarket adjustments cashsettled sars sharebased compensation expense derived using blackscholes optionpricing valuation model dependent several factors weighted average assumptions stock volatilities employee termination behavior factors differ fiscal year expense may vary significantly change one valuation assumptions cost reduction plan second quarter fiscal 2010 implemented cost reduction plan primarily associated reduced endovascular activities lower production volume cost reduction plan comprised headcount reductions primarily voluntary retirement program well reduced work schedules connection plan incurred 19 million pretax charges second quarter fiscal 2010 consisting 10 million pretax severance charge 944000 pretax unabsorbed overhead expense charge following table summarizes cost reduction plan pretax charges within operating expense category consolidated statements income fiscal 2010 property insurance claim fiscal 2010 fire occurred contained small manufacturing area within company’s corporate headquarters building company’s property insurance policy covered remediation efforts fixed asset replacements subject 25000 deductible recognized gain 775000 within cost products sold upon final settlement insurance carrier remediation recovery efforts completed received 13 million total insurance proceeds remediation efforts replacement value fixed assets expenses replaced damaged fixed assets total value approximately 480000 remaining insurance proceeds used company pay related expenses added general company funds total insurance proceeds including amounts relating outside remediation services fixed assets classified within investing activities section consolidated statement cash flows balance insurance proceeds used company pay related expenses classified within operating activities section consolidated statement cash flows critical accounting policies critical accounting policies require application management’s difficult subjective complex judgments often result need make estimates matters inherently uncertain may change future periods identified following critical accounting policies revenue recognition accounting sharebased compensation accounting investments debt equity securities valuation financial instruments inventory valuation income taxes revenue recognition recognize revenue accordance fasb asc topic 605 “revenue recognition” asc 60510s99 also follow fasb asc subtopic 60525 “multiple element arrangements” asc 60525 customer arrangements containing multiple revenue elements entered materially amended june 30 2003 sales revenue sales revenue generally recognized related product shipped service completed advance payments received products services generally recorded deferred revenue recognized product shipped services performed timing performance services could subjective reduce sales estimated customer returns allowances applicable products primarily manufactured according customers’ specifications subject return failure meet specifications royalty revenue royalty revenue recognized related product sold customers endusers recognize substantially royalty revenue end month accordance customer agreements see note 1 consolidated financial statements included form 10k additional information concerning royalty revenue recognition accounting sharebased compensation use various forms equity compensation including stock options nonvested stock awards cashsettled sars major part compensation programs retain provide incentives top management team members employees account equity compensation accordance fasb asc topic 718 “compensation stock compensation” revisions estimates methodologies could material impact financial statements • fair value option grants estimated date grant using blackscholes optionpricing model uses weighted average assumptions expected volatilities based historical volatility common stock factors use historical data estimate option exercise employee termination behavior within valuation model separate groups employees similar historical exercise behavior consider separately valuation purposes expected term options derived historical exercise behavior represents period time options granted expected outstanding riskfree rate periods within contractual life option based us treasuries constant maturities effect time grant • nonvested stock awards ie restricted stock granted nonemployee members board directors executive officers nonemployee consultant accounted using fair value method fair value nonvested stock awards based upon closing price common stock date grant • cashsettled sars awarded sharebased payment transactions classified liability awards accordingly record awards component current liabilities consolidated balance sheets fair value sar estimated using blackscholes optionpricing model uses weighted average assumptions expected volatilities based historical volatility common stock well factors liability awards fair value award determines measurement liability consolidated balance sheet remeasured reporting period award settled fluctuations fair value liability award recorded increases decreases compensation cost either immediately remaining service period depending vested status award use historical data estimate employee termination within valuation model employees similar historical exercise behavior considered separately valuation purposes expected term cashsettled sars determined using simplified method accordance asc 71810s99 accounting investments debt securities account investment portfolio accordance fasb asc topic 320 “investments debt equity securities” classified entire investment portfolio availableforsale securities secondary resale markets report portfolio fair value unrealized gains losses included stockholders’ equity realized gains losses income currently various investment securities fair values less amortized costs therefore contain unrealized losses unrealized losses related investments due either changes interest rates investments obtained premium evaluated securities determined decline value related company industry specific event intent sell investments recovery fair value current requirement sell investments anticipate full recovery amortized costs respect securities maturity sooner event favorable market interest rate environment revisions classification investments andor determination anticipation full recovery amortized costs maturity sooner could result realizing gains losses investments therefore material impact financial statements valuation financial instruments adopted provisions fasb asc topic 820 “fair value measurements disclosures” asc 820 financial assets liabilities provides guidance using fair value measure financial assets liabilities defining fair value exit price amount would received selling asset paid transfer liability orderly transaction market participants measurement date categorization based threetier valuation hierarchy prioritizes inputs used measuring fair value assessment significance particular input fair value measurement requires judgment may affect valuation financial assets financial liabilities placement within fair value hierarchy see note 9 consolidated financial statements included form 10k discussion regarding fair value financial assets liabilities inventory valuation inventory stated lower cost market adjustments inventory made individual part level estimated excess obsolescence impaired balances reflect inventory lower cost market factors influencing adjustments include changes demand technological changes product life cycle development plans component cost trends product pricing physical deterioration quality concerns revisions adjustments would required factors differ estimates income taxes course estimating estimated annual effective tax rate recording quarterly income tax provisions consider many factors including expected earnings state income tax apportionment estimated manufacturing research development tax credits nontaxable interest income estimates material changes differences estimates including extension research development tax credit could significant impact effective tax rate results operations comparison fiscal years 2010 2009 total revenues total revenues 806 million fiscal 2010 decreased 2 total revenues 821 million fiscal 2009 total net sales net sales products decreased 1 543 million fiscal 2010 compared net sales 549 million fiscal 2009 11 million 2 increase biomaterials sales 17 million 43 decrease endovascular sales biomaterials sales biomaterials sales 521 million fiscal 2010 2 increase compared 510 million fiscal 2009 biomaterials sales include revenue recognized products shipped well revenue generated product development programs milestone revenue earned biomaterials customers biomaterials sales increase primarily due cardiovascular general surgery product lines cardiovascular product sales primarily consisting sales angioseal components st jude medical 193 million fiscal 2010 increased 10 million 5 183 million fiscal 2009 due favorable variations ordering patterns components used manufacture angioseal device st jude medical cardiovascular product sales fiscal 2009 included cancellation fee charged customer approximately 800000 cardiovascular productrelated research development work performed also contributing increase biomaterials sales continued growth general surgery product sales 36 million fiscal 2010 increase 15 million 74 21 million fiscal 2009 increase due initial shipments synthes related us launch new ecm product xcm biologic™ tissue matrix well due timing increased orders collagen product sales customer use breast biopsies increases product sales offset part decrease orthopaedic product sales orthopaedic product sales consisting primarily sports medicine spine products 286 million fiscal 2010 decrease 12 million 4 298 million fiscal 2009 sales spine products decreased 21 million 16 116 million fiscal 2010 137 million fiscal 2009 decline sales spine products due overall weakness spinal market well orthovita’s shift sales focus past year away codeveloped products additionally fiscal 2009 spine product sales included onetime cancellation fee 825000 charged customer research development work performed decrease spine products offset increase sports medicine product sales 980000 6 164 million fiscal 2010 155 million fiscal 2009 due primarily favorable variations ordering patterns endovascular sales endovascular sales 22 million fiscal 2010 43 decrease compared sales 39 million fiscal 2009 endovascular sales include revenue recognized products shipped well milestone revenue recognized product development programs spectranetics endovascular sales decrease primarily due decrease safecross quickcat product sales second quarter fiscal 2010 ended december 31 2009 last quarter reflecting sales quickcat device quickcat manufacturing transferred spectranetics december 2009 spectranetics publicly announced discontinuation sales safecross product line second quarter fiscal 2010 fiscal 2010 recognized revenue 577000 compared 625000 fiscal 2009 two milestones achieved year development regulatory service agreement spectranetics royalty income royalty income decreased 3 264 million fiscal 2010 272 million fiscal 2009 royalty income 203 million st jude medical’s angioseal net enduser sales fiscal 2010 decreased 4 212 million fiscal 2009 primarily due fewer shipping days fiscal 2010 compared fiscal 2009 combination product mix changes effects foreign currency exchange rate fluctuations fiscal 2010 enduser sales angioseal device decreased 4 fiscal 2010 prior fiscal year royalty income 58 million orthovita’s vitoss™ vitoss™ foam vitoss™ bioactive foam products net enduser sales fiscal 2010 consistent fiscal 2009 enduser sales codeveloped vitoss™ foam vitoss™ bioactive foam products increased 4 fiscal 2010 prior fiscal year cost products sold cost products sold 235 million fiscal 2010 687000 3 decrease 242 million fiscal 2009 gross margin net sales 57 56 fiscal 2010 fiscal 2009 respectively decrease cost products sold result recognition 775000 net gain property insurance proceeds claim property insurance policy well 600000 reduction expense provision upgrade safecross product longer necessary due cancellation safecross product line spectranetics contributing reduction cost products sold 10 million decrease net sales excluding net milestone revenue recognized 10 million fiscal 2010 625000 fiscal 2009 offsetting decreases within cost products sold fiscal 2010 result fiscal 2010 second quarter cost reduction plan 944000 unabsorbed overhead charges due reduced work schedules quarter 404000 severance charges believe gross margin net sales fiscal 2011 decrease slightly compared fiscal 2010 due product mix changes primarily relating introduction new product lines expected reduction sales angioseal components research development expense research development expense 179 million fiscal 2010 258000 1 decrease 181 million fiscal 2009 decrease research development expense due 352000 decrease animal studies outside services costs 275000 decrease design development supply expenses 233000 decrease engineering consulting costs 197000 decrease expenses due charge incurred prior fiscal year connection customer cancellation research development projects offsetting decreases within research development expense fiscal 2010 result previously disclosed fiscal 2010 second quarter cost reduction plan 536000 severance charges increased research development expense additionally increase personnel costs including salaries equity compensation expense 239000 research development expense 22 revenue fiscal 2010 fiscal 2009 believe research development expense fiscal 2011 increase compared fiscal 2010 primarily result plans increase clinical activities cartilage ecm technologies us europe recently received fda approval initiate us pilot trial cartilage repair device expect begin trial first half fiscal 2011 clinical efforts pursuit fda approval continuing development cartilage repair device application well continued development proprietary biomaterials products technologies require significant research development expenditures cannot make assurances successful completion studies subsequent regulatory approval cartilage repair product application future applications us internationally selling general administrative expense selling general administrative expense 90 million fiscal 2010 210000 2 decrease 92 million fiscal 2009 selling general administrative expense decreased prior fiscal year primarily result reduced professional fees 360000 partially offset 71000 severance charges result previously disclosed fiscal 2010 second quarter cost reduction plan selling general administrative expenses 11 revenue fiscal years ended 2010 2009 respectively believe selling general administrative expenditures total percentage revenue remain consistent fiscal 2011 fiscal 2010 interest income interest expense interest income decreased 40 704000 fiscal 2010 12 million fiscal 2009 decrease due significant decreases interest rates earned average cash investment balances fiscal year ended june 30 2010 prior fiscal year interest expense mortgage fiscal 2010 essentially flat 21 million compared prior year borrowed 35 million mortgage citibank fsb outstanding principal balance 314 million june 30 2010 mortgage hedged fixed interest rate swap bearing interest 644 see note 8 consolidated financial statements included form 10k additional information concerning mortgage swap incomeloss nonoperating loss 19000 fiscal 2010 decrease 170000 nonoperating income 151000 fiscal 2009 nonoperating loss fiscal 2010 primarily represents nonoperating items including loss foreign currency exchange nonoperating income fiscal 2009 primarily represents nonoperating items including 134000 deferred revenue recognized component income result august 2008 final settlement outstanding items related opportunity grant program department community economic development commonwealth pennsylvania governor’s action team net gainloss foreign currency exchange remaining deferred revenue opportunity grant program june 30 2009 income tax expense tax expense fiscal 2010 94 million resulting effective tax rate approximately 33 could claim research development tax credits december 31 2009 component 2010 tax provision related ongoing performance qualified research development previously approved october 2008 congressional extension research experimentation tax credit fiscal 2009 effective tax rate 33 included retroactive adjustment tax provision second fiscal quarter ended december 31 2008 result october 2008 extension tax credit see note 16 consolidated financial statements included form 10k additional information concerning effective tax rate results operations comparison fiscal years 2009 2008 total revenues total revenues increased 3 821 million fiscal 2009 798 million fiscal 2008 total net sales net sales products increased 2 549 million fiscal 2009 compared net sales 538 million fiscal 2008 35 million 7 increase biomaterials sales offset 24 million 38 decrease endovascular sales biomaterials sales biomaterials sales 510 million fiscal 2009 7 increase compared 475 million fiscal 2008 biomaterials sales includes revenue recognized products shipped well revenue generated product development programs biomaterials customers increase biomaterials sales primarily result strong sales cardiovascular orthopaedic product lines cardiovascular product sales primarily consisting sales angioseal components st jude medical 183 million fiscal 2009 16 increase compared 159 million fiscal 2008 fiscal 2009 cardiovascular revenue included cancellation fee charged customer approximately 800000 cardiovascular productrelated research development work performed orthopaedic sales 298 million fiscal 2009 1 increase compared 294 million fiscal 2008 orthopaedic product sales increase primarily result increase spine products sales 6 137 million fiscal 2009 129 million fiscal 2008 increase sales spine products primarily attributable strong sales current new product lines orthovita cancellation fees charged customer research development work performed offset part weaker sales bone void filler products based customer inventory levels believe increased competition market sports medicine product sales 155 million decreased 1 156 million fiscal 2008 sports medicine product sales fiscal 2009 positively impacted due new product launches stronger sales existing products offset exceptionally high orders fourth quarter fiscal 2008 two major customers current economic conditions negatively impacted customer inventory levels endovascular sales endovascular sales 39 million fiscal 2009 38 decrease compared sales 62 million fiscal 2008 endovascular sales include revenue recognized products shipped well milestone revenue recognized product development programs spectranetics fiscal 2009 endovascular product sales spectranetics reduced transfer price compared direct market price reflected prior sales figures decrease endovascular sales fiscal 2009 fiscal 2008 direct result reduced transfer price overall net unit sales spectranetics increased compared fiscal 2008 enduser unit sales fiscal 2009 announced accomplishment two milestones development regulatory service agreement spectranetics resulted 25 million cash payments recognition 625000 revenue royalty income royalty income increased 4 272 million fiscal 2009 260 million fiscal 2008 angioseal royalty income st jude medical enduser sales 212 million decreased 1 compared 214 million fiscal 2008 estimate angioseal royalties fiscal 2009 negatively impacted due foreign currency exchange approximately 600000 compared fiscal 2008 despite negative impact foreign currency exchange st jude medical’s enduser sales angioseal device included negative impact foreign currency exchange declined 1 fiscal 2009 prior fiscal year royalty income net enduser sales orthovita’s vitoss foam vitoss bioactive foam products fiscal 2009 58 million increased 31 compared 44 million fiscal 2008 end user sales codeveloped vitoss foam vitoss bioactive foam products increased 38 fiscal 2009 compared fiscal 2008 successful introduction new vitoss bioactive foam products well continued sales existing vitoss foam products orthovita enduser marketplace contributed increase royalty income cost products sold cost products sold 242 million fiscal 2009 30 million 11 decrease 272 million fiscal 2008 decrease cost products sold period primarily related prior year charges 20 million sale endovascular business spectranetics ii prior year charges 252000 acceleration sharebased awards iii prior year charges 155000 discontinuance embolic protection platform included within cost products sold prior fiscal year applicable fiscal 2009 iv startup costs associated new safecross product line fiscal 2008 recur fiscal 2009 offset 11 million increase total net sales gross margin net sales fiscal 2009 56 compared gross margin net sales 49 fiscal 2008 increase gross margin fiscal 2009 compared prior fiscal year due part product mix well higher volumes process improvements revenue generated product development programs biomaterials customers decrease costs products sold discussed gross margin period prior fiscal year negatively affected startup costs associated safecross product line initiated continued refine manufacturing process new product line also negatively impacting gross margin prior fiscal year approximately 5 charges related sale endovascular division acceleration sharebased awards discontinuance embolic protection platform research development expense research development expense 181 million fiscal 2009 934000 5 increase 172 million fiscal 2008 increase research development expense period prior fiscal year due 13 million increase biomaterials research development expenses primarily due design development expenses related commencement increased focus articular cartilage regeneration matrix ecm projects expenses incurred connection customer cancellation research development projects ii 471000 increase personnel costs primarily related increase sharebased equity compensation costs increases offset 835000 charge incurred acceleration sharebased awards prior fiscal year applicable fiscal 2009 fiscal 2009 furthered cartilage preclinical studies preparation us clinical trial february 2009 filed ide submission cartilage us clinical trial research development expenses 22 total revenues fiscal years ended 2009 2008 selling general administrative expense selling general administrative expense 92 million fiscal 2009 184 million 67 decrease 276 million fiscal 2008 decrease selling general administrative expense prior fiscal year due 141 million decrease sales marketing efforts primarily due elimination direct sales marketing efforts endovascular products sale product lines spectranetics may 2008 ii 23 million decrease sharebased equity compensation costs primarily due charge 19 million incurred acceleration sharebased awards prior year applicable fiscal 2009 iii approximate 76000 decrease due charge incurred prior year related discontinuance embolic protection platform applicable fiscal 2009 iv charge 25 million incurred sale endovascular business spectranetics may 2008 applicable fiscal 2009 decreases partially offset 478000 aggregate increase professional fees including legal audit tax fees board director fees selling general administrative expenses 11 35 total revenues fiscal years ended 2009 2008 respectively interest income interest expense interest income decreased 34 12 million fiscal 2009 18 million fiscal 2008 decrease due primarily lower interest rates partially offset increase 46 average cash investment balance fiscal year ended june 30 2009 prior fiscal year interest expense mortgage fiscal 2009 21 million compared 15 million prior year november 2007 borrowed remaining 270 million available mortgage citibank fsb increasing outstanding balance 35 million mortgage hedged fixed interest rate swap bearing interest 644 mortgage balance 328 million june 30 2009 incomeloss nonoperating income 151000 fiscal 2009 fluctuation 371000 nonoperating loss 220000 fiscal 2008 nonoperating income fiscal 2009 due final settlement outstanding items related opportunity grant program department community economic development commonwealth pennsylvania governor’s action team nonoperating loss fiscal 2008 represented nonoperating items including gainloss foreign currency exchange gainloss sales assets loss sale mutual fund investment offset gains sale selected municipal obligations income tax expense tax expense fiscal 2009 97 million resulting effective tax rate approximately 33 fiscal 2008 effective tax rate 27 result october 2008 congressional approval extension tax credit recorded retroactive adjustment tax provision second fiscal quarter ended december 31 2008 reduced effective tax rate fiscal 2009 33 liquidity capital resources cash equivalents investments 657 million june 30 2010 decrease 140 million balance 797 million june 30 2009 end prior fiscal year working capital 803 million june 30 2010 decrease 147 million working capital 950 million june 30 2009 cash flows operating activities net cash provided operating activities 301 million fiscal year ended june 30 2010 fiscal year ended june 30 2010 net income 195 million noncash depreciation amortization 73 million net effect noncash employee sharebased compensation related tax events 34 million increases cash offset part net change deferred income taxes 12 million primarily result change noncurrent deferred tax assets increases cash provided operating activities offset 10 million related gain property insurance claim related expenses cash provided operations result changes asset liability balances 21 million increase cash primarily result decrease inventory balances 17 million primarily associated lower production volume anticipated second quarter cost reduction plan increase deferred revenue approximately 11 million related receipt milestone payments research development manufacturing agreements customers offsetting increases decrease accounts payable accrued expenses 303000 related endovascular transaction exit costs also reducing cash provided operations increase receivable balances 174000 increase prepaid expenses assets 191000 investing activities cash used investing activities 147 million fiscal year ended june 30 2010 use cash primarily result net investment activity 130 million related 401 million purchased investments offset 271 million increase cash maturities investments within investment portfolio addition used cash 27 million capital expenditures continue expand research development manufacturing capabilities improve information technology systems 331000 purchase certain intangible assets uses cash offset part 13 million related proceeds property insurance claim financing activities cash used financing activities 418 million fiscal year ended june 30 2010 amount primarily result 414 million common stock repurchases 14 million repayments longterm debt offset part 10 million net cash proceeds exercise sharebased awards stock repurchase program time made repurchases common stock executed various stock repurchase programs established board directors miscellaneous transactions december 10 2009 announced board directors approved stock repurchase program allowed us repurchase total 400000 issued outstanding shares common stock february 9 2010 announced board directors approved new stock repurchase program allowing us repurchase total 30 million issued outstanding shares common stock june 16 2010 announced board directors approved additional stock repurchase program allowing us repurchase additional 30 million issued outstanding shares common stock fiscal 2010 repurchased retired 1794705 shares common stock total cost approximately 413 million average price 2302 per share using available cash commissions related costs associated stock repurchases totaled 55788 additional 34400 shares repurchased june 2010 trades settled july 2010 cost 811054 average market price per share 2358 see note 11 consolidated financial statements included form 10k part ii item 5 market registrant’s common equity related stockholder matters issuer purchases equity securities form 10k general plan continue increase research development activities biomaterials products continue endovascular product research development activities based development contract spectranetics believe current cash investment balances expected future cash generated operations sufficient meet operating financing capital requirements next 12 months although believe cash investment balances also sufficient longer term basis depend numerous factors including following continuation existing customer relationships royalty streams market acceptance existing future products successful commercialization products development costs associated commercialization progress product development efforts magnitude scope efforts progress preclinical studies future clinical trials product clearance fda agencies cost timing efforts expand manufacturing sales marketing capabilities cost filing prosecuting defending enforcing patent claims intellectual property rights competing technological market developments development strategic alliances marketing certain products timing extent stock repurchase programs terms future equity financing undertake may dilutive stockholders terms debt financing may contain restrictive covenants limit ability pursue certain courses action ability obtain financing dependent status future business prospects well conditions prevailing relevant capital markets assurance given additional financing available us available us acceptable terms need arise june 30 2010 compliance affirmative restrictive financial maintenance covenants relating mortgage contractual obligations contingent commitments presented summary approximate aggregate contractual obligations contingent commitments june 30 2010 future payments contracts contingent commitments fiscal 2011 beyond obligations related mortgage agreements purchase goods services legally binding enforceable us 1 longterm debt obligations consist principal interest mortgage outstanding principal balance 314 million june 30 2010 accordance accounting principles generally accepted united states america us gaap future interest obligations recorded consolidated balance sheet see note 8 consolidated financial statements included form 10k 2 obligations consist cancelable noncancelable purchase commitments related inventory capital expenditures goods services accordance us gaap obligations recorded consolidated balance sheets see note 14 consolidated financial statements included form 10k 3 development regulatory services agreement spectranetics amended contributions limited maximum amount 2750000 toward expenses associated clinical studies obtain approval fda certain nextgeneration endovascular products reduced total cumulative expenses incurred june 30 2010 unable reliably estimate amount timing contributions dependent type complexity clinical studies intended uses products established accordance us gaap obligations recorded consolidated balance sheets 4 entered employment agreements certain named executive officers employment agreements provided among things annual base salaries aggregate amount less 1615663 june 30 2010 fiscal 2012 accordance us gaap obligations recorded consolidated balance sheets see note 14 consolidated financial statements included form 10k 5 liabilities uncertain tax positions aggregate amount 118981 omitted table due inability reliably estimate period cash settlement liabilities see note 16 consolidated financial statements included form 10k 6 noncurrent deferred revenue includes milestone payments received us pursuant customer agreements well advance payments customers future services several deferred milestone revenues nonrefundable may require future performance company liabilities recorded accordance us gaap reported consolidated balance sheets 7 amount represents estimated amount would pay terminate swap june 30 2010 prepay mortgage june 30 2010 prior swap agreement term end date may 2016 currently intend prepay mortgage therefore unable reliably estimate period cash settlement swap accordance us gaap liability recorded consolidated balance sheets see note 8 consolidated financial statements included form 10k estimate time periods cash equivalents adequate fund operations forward looking statement within meaning private securities litigation reform act 1995 subject risks uncertainties actual results may differ materially contemplated forwardlooking statements addition described factors may cause difference set forth item 1a risk factors annual report form 10k see “cautionary note regarding forwardlooking statements” item 7a item 7 management’s discussion analysis financial condition results operations following discussion analysis read conjunction “selected consolidated financial data” financial statements related notes included report discussion analysis contains forwardlooking statements relating future events future financial performance statements predictions actual events results may differ materially evaluating statements carefully consider various factors identified report could cause actual results differ materially expressed implied forwardlooking statements including set forth “risk factors” annual report form 10k see “forwardlooking statements” overview revenues consist three components net sales research development revenue royalty income net sales net sales comprised sales biomaterials endovascular products biomaterials year ipo fiscal 1996 biomaterials sales comprised entirely absorbable collagen polymer components angioseal supplied strategic alliance partner since time experienced significant sales growth biomaterials products expanded customer base marketing activities increased sales existing customers assisted customers development new product offerings biomaterials component net sales comprises 97 total net sales represents sale biomaterials products customers use following markets orthopaedics sports medicine spine cardiology drugbiologics delivery periodontal general surgery two significant components biomaterials sales orthopaedic product sales absorbable components angioseal supplied st jude medical orthopaedic product sales consist primarily sales arthrex privately held orthopaedics company manufacture wide array sports medicine products orthovita publicly held orthopaedic biomaterials company began working arthrex fiscal 1998 since provided arthrex many varied sports medicine products commercial distribution fiscal 2004 sold first bone grafting spine products orthovita vitoss foam strips cylinders fiscal 2005 provided additional product lines orthovita vitoss scaffold foam shapes pack table showing trends angioseal component orthopaedic sales fiscal 2005 fiscal 2006 percentage total biomaterials sales orthopaedic products sales increased percentage total biomaterials sales 56 fiscal 2006 53 fiscal 2005 arthrex sales increased 5 fiscal 2005 fiscal 2006 fiscal 2006 additional product lines developed made commercially available increased sales volume arthrex fiscal year continue work arthrex developing new products well adding current product lines expect growth sales arthrex continue fiscal 2007 fiscal 2006 initiated business two major orthopaedic customers resulted product launches fiscal year sales new orthopaedic customers generated 23 million sales third fourth quarters fiscal 2006 anticipate continued sales new customers fiscal 2007 increase sales arthrex product launches two new orthopaedic customers offset 40 million 55 decrease orthovita sales fiscal 2006 fiscal 2005 anticipated previously reported decrease sales orthovita related orthovita vitoss foam™ product launches fiscal 2004 fiscal 2005 large volume products shipped orthovita prior years continued flow distribution channels throughout fiscal 2006 although sales orthovita decreased year orthovita’s end user sales vitoss foam™ products strong increased 45 fiscal 2006 fiscal 2005 starting see growth shipments orthovita evidenced combined third fourth quarter fiscal 2006 sales orthovita 22 million compared combined first second quarter sales 11 million anticipate return growth vitoss foam™ product sales fiscal 2007 angioseal component sales percentage total biomaterials sales consistent fiscal 2005 percentages sales collagen plug component decreased 1 127 million dollars fiscal year ended june 30 2006 compared 129 million fiscal year ended june 30 2005 absorbable polymer anchor component decreased 31 20 million fiscal year ended june 30 2006 compared 29 million fiscal year ended june 30 2005 decline result supply prior year increased requirements st jude medical related capacity certain new version angioseal anchor going forward anticipate consistency volume anchor component supply level formalized supply agreement st jude medical effective june 30 2005 supply agreement st jude medical required purchase least 30 polymer anchor requirements us future portion biomaterials sales dependent upon continued success angioseal device vascular closure market today estimate angioseal device approximately 65 market based enduser sales approximately 322 million fiscal year ended june 30 2006 angioseal market share may impacted future competition market new technologies introduced address diagnostic therapeutic treatment diseased coronary arteries overall combination supply agreement st jude medical anticipated continued growth angioseal end user sales expected growth arthrex sports medicine product business products launched new customers expected growth orthovita vitoss foam™ sales new business opportunities expect growth overall biomaterials sales fiscal 2007 due greater market acceptance biomaterials based products able expand customer product base initiating new partnerships within medical device industry well expanding product lines current customers endovascular product line sales began triactiv embolic protection system europe fiscal 2002 evolved include current product offering triactiv fx system quickcat catheter thromcat device us europe selling products us new endovascular division responsible direct sales marketing believe direct strategy endovascular markets allow us maximize return triactiv technology us launched triactiv system receiving fda clearance march 2005 late third quarter fiscal 2006 launched another product within endovascular product line quickcat™ catheter aspiration catheter indicated removal fresh soft emboli thrombi blood clots vessels arterial system sales two endovascular products us 895000 year ended june 30 2006 included 305000 quickcat™ catheter sales alone subsequent year end july 2006 received 510k clearance triactiv® fx™ system enhanced design easeofuse features previous generation launched product july 2006 received 510k approval thromcat™ device fourth quarter fiscal 2006 product launch anticipated october 2006 thromcat™ device fully disposable mechanical catheter system incorporates technology flush macerate extract thrombus forecasting significant sales growth us endovascular products fiscal 2007 based availability greater acceptance medical community new fx system svg embolic protection product continuation notable reception quickcat™ device fourth quarter fiscal 2006 well launch thromcat™ device first half fiscal 2007 europe sell direct germany via distributors throughout rest europe triactiv system commercially launched may 2002 launched secondgeneration triactiv system triactiv® fx europe april 2005 received ce mark approval quickcat catheter july 2006 await thromcat approval anticipated second quarter fiscal 2007 addition proguard system carotid artery embolic protection expected gain ce mark approval end second quarter fiscal 2007 triactiv sales europe 284000 fiscal year 2006 7 decrease prior fiscal year european interventional procedures svgs substantially lower analysts’ company’s estimates previously indicated resulted lower anticipated product sales triactiv svg application europe however believe addition three additional products fiscal 2007 adding thrombus removal well carotid application offering improve total sales endovascular products european community total worldwide endovascular sales approximately 3 total sales fiscal year ended june 30 2006 compared 1 fiscal year ended june 30 2005 anticipate endovascular sales become significant component net sales fiscal 2007 beyond increase sales product us market gain new customers european asian markets introduce new versions applications product us europe research development revenue fiscal 2005 research development revenue derived three year 19 million national institute standards technology nist grant received october 2001 grant researching synthetic vascular graft also utilizing ptm technology project concluded october 2004 prior years research development revenue included additional revenue additional grant programs november 1999 received first nist grant since time also awarded second nist grant nih grant first nist grant 12 million grant threeyear period researching cartilage regeneration utilizing porous tissue matrix ptm technology although continue independently develop technology received remaining funds grant second quarter fiscal 2003 january 2003 received nih 100000 oneyear period researching sustained controlled release chemotherapeutic drugs treatment breast cancer utilizing ptm technology research grant completed early fiscal 2004 continuing independently develop drug delivery technology commercial use expectations future grant applications grant revenue fiscal 2006 project grant revenue fiscal 2007 royalty income royalty income primarily consists royalties received st jude medical orthovita royalties st jude medical earned angioseal worldwide net sales anticipate sales angioseal device grow fiscal 2007 forecasted continued procedure growth st jude medical continues expand sales marketing efforts launch new generations product license agreement st jude medical final contractual decrease royalty rate 6 9 upon reaching four million cumulative units sold final rate reduction occurred april 2004 royalty income st jude increased 11 million 6 fiscal 2006 compared fiscal 2005 expect royalty income angioseal device continue significant source revenue foreseeable future june 30 2006 approximately 76 million angioseal units sold march 2003 agreement orthovita codevelop commercialize vitoss foam products receive royalty orthovita’s enduser sales vitoss foam products addition august 2004 acquired proprietary rights third party inventor vitoss technology 26 million assignment agreement assignment agreement company receives additional royalty orthovita enduser sales orthovita products containing vitoss technology total royalty received 40 million 30 million remaining june 30 2006 received first royalty agreements third quarter fiscal 2004 orthovita launched initial bone grafting spinal product lines vitoss scaffold foam stirps cylinders royalty income orthovita increased since time orthovita launched three additional product lines vitoss scaffold foam flow shapes pack june october 2004 may 2005 respectively believe unique technology associated vitoss foam products growing spine market result orthovita component royalty income becoming significant next fiscal year beyond total royalty income received orthovita fiscal 2006 29 million cost products sold gross margin percentage fiscal 2006 45 compared 56 fiscal 2005 cost goods sold fiscal 2006 2005 included accelerated depreciation charge 22 million 440000 respectively related transition new facility fiscal 2006 also includes moving costs 305000 accelerated depreciation change moving expenses related transition new facility see item 2 liquidity capital resources addition incurred 179000 equity compensation expense recorded costs products sold fiscal 2006 see consolidated financial statements note 1 “liquidity capital resources” effect transition equity compensation expenses fiscal year 2006 2005 decrease gross margin percentage approximately 8 1 respectively excluding effect charges would experienced decrease gross margin fiscal 2006 approximately 4 decline gross margin directly related several factors specifically obsolescence charges process raw material changes one specific collagen product unfavorable manufacturing variances related production startup three new products within endovascular product line well two new orthopaedic product line launches addition increase personnel expenses anticipation endovascular product launches anticipate gross margin biomaterials products continue improve process improvements continued increased sales volume occasionally offsetting efficiencies gained products mature margins achieved new product launches often minimal related startup process inefficiencies learning curves initiated two new product lines fiscal 2006 orthopaedic product line initial phases production product lines incurred higher costs due learning curve associated initiating new products anticipate continued improvement gross margin mature biomaterials product lines improvements offset initial low margins approximately 35 40 endovascular product line associated low volumes startup inefficiencies experienced fourth quarter fiscal 2006 engineering teams also working process improvements automation production current endovascular products anticipate margins come line overall product mix late fiscal 2007 fiscal 2008 result expanding product mix fiscal 2007 believe total gross margin across product lines improved fiscal 2006 although enhancements made endovascular products may obsolescence charges incurred fiscal 2007 research development expense research development expense consists expenses incurred development proprietary technologies endovascular products absorbable nonabsorbable biomaterials products technologies development programs included fiscal 2006 research development expenses acceleration depreciation charge 14 million moving costs 169000 associated transition new facility see item 2 liquidity capital resources addition incurred 853000 equity compensation expense recorded research development expense fiscal 2006 see consolidated financial statements note 1 “liquidity capital resources” included research development expense fiscal 2006 costs completed us clinical trial registry aspire angioplasty svgs post intervention removal embolic debris clinical study next generation triactiv system triactiv fx® system study commenced march 2005 completed enrollment november 2005 addition november 2005 commenced european pilot study support ce mark application new version triactiv® embolic protection system carotid stenting procedures trial utilized new version triactiv® system product line incorporates local flush extraction lfx™ technology designed use branched arteries carotid blood vessels triactiv® proguard™ system device incorporates three features designed reduce incidence embolic stroke carotid stenting procedures balloon protection guidewire flush catheter automated extraction system remove debris clinical efforts pursuit fda approval continuing development future generations endovascular products well continued development proprietary biomaterials products technologies require significant research development expenditures anticipate research development expense including additional clinical trials increase pursue commercialization future generations triactiv system us explore opportunities indications related triactiv system well technologies including continued development proprietary biomaterials technologies believe research development expenditures increase dollars believe decrease percentage total revenue research development expense 31 total revenues fiscal year ended june 30 2006 29 excluding effect accelerated depreciation moving costs incurred fiscal 2007 selling general administrative selling general administrative expenses include costs finance information technologies human resource business development departments well costs related sales marketing products also recorded acceleration depreciation charge moving expenses related transition new facility see item 2 liquidity capital resources 603000 70000 respectively fiscal year ended june 30 2006 addition incurred 13 million equity compensation expense recorded selling general administrative expenses fiscal 2006 see consolidated financial statements note 1 “liquidity capital resources” general administrative component increased period fiscal 2005 increase result overall growth business administrative requirements support growth personnel expenses including increase 725000 equity compensation expense due adopton sfas 123r sharebased payment expenses incurred related compliance new sec corporate governance regulations growth business increased requirements planning tracking administrating sales endovascular products direct market sales marketing component selling general administrative consists expenses us europe related direct commercialization efforts endovascular products locations fortytwo person endovascular sales marketing team us five person sales marketing team headquartered european subsidiary kensey nash europe gmbh teams selling marketing product direct us german markets europe team supports distributor relationships rest europe asia sales marketing expenses increased fiscal 2006 period fiscal 2005 increase related primarily costs associated building new us endovascular direct sales force well marketing campaigns launching new endovascular products including triactiv fx® quickcat™ devices anticipate sales marketing expenses continue increase fiscal 2007 fiscal 2006 expand sales marketing efforts endovascular product lines us europe also continuing expand marketing efforts biomaterials business income tax expense effective income tax rate approximately 184 fiscal year 2006 285 fiscal year 2005 284 fiscal year 2004 fiscal 2006 effective income tax rate includes tax benefits research development tax credits nontaxable interest income see note 9 consolidated financial statements included form 10k forecasting effective tax rate fiscal 2007 approximately 30 income taxes income taxes decreased 135 million 181 million fiscal 2005 46 million fiscal 2006 large decrease income related primarily increase expenses rather decrease revenue total revenue decreased 979000 fiscal 2006 fiscal 2005 significant portion decrease income related 39 million increase facility transition charges move new facility see item 2 liquidity capital resources well 16 million dollar increase equity compensation due adoption sfas 123r see note 1 consolidated financial statements company addition excluding increase transition costs equity compensation expense 36 million 20 million increase sales marketing research development expenses respectively increases directly related endovascular product line stated increase sales marketing expense related directly building new us endovascular direct sales force well marketing campaigns launching new endovascular products research development expense increased primarily due clinical efforts development products within endovascular product line see results operations comparison fiscal years 2006 2005 details critical accounting policies “critical accounting policies” require application management’s difficult subjective complex judgments often result need make estimates matters inherently uncertain may change future periods intended comprehensive list significant accounting policies many cases accounting treatment particular transaction specifically dictated generally accepted accounting principles need management’s judgment application also areas selection available alternative policy would produce materially different result identified following critical accounting policies revenue recognition accounting stockbased compensation allowance doubtful accounts inventory valuation income taxes revenue recognition recognize revenue provisions staff accounting bulletin sab 104 revenue recognition sab 104 superseded sab 101 sab 104’s primary purpose rescind accounting guidance contained sab 101 related multiple element revenue arrangements modified result issuance emerging issues task force eitf issue 0021 accounting revenue arrangements multiple deliverables eitf 0021 adoption sab 104 material impact company’s financial position results operations sales revenue sales revenue recognized related product shipped advance payments received products services recorded deferred revenue recognized product shipped services performed shipments free board fob shipping point reduce sales estimated customer returns discounts allowances applicable majority products manufactured according customers’ specifications subject return failure meet specifications research development revenue research development contracts recognized related expenses incurred revenues recorded line item related government programs us government funds research high risk enabling technologies royalty revenue royalty revenue recognized related product sold recognize substantially royalty revenue end month accordance customer agreements see note 1 consolidated financial statements company revenue recognition accounting stockbased compensation end fiscal 2005 accounted stockbased compensation costs statement financial accounting standards sfas 123 accounting stockbased compensation sfas 123 amended sfas 148 accounting stockbased compensation transition disclosure amendment fasb statement 123 accounting stockbased compensation sfas 148 permitted recognition fair value stockbased awards expense ii continued application intrinsic value method accounting principles board apb opinion 25 accounting stock issued employees apb 25 accounted stockbased employee director compensation plans recognition measurement principles apb 25 intrinsic value method compensation cost represented excess quoted market price common stock grant date amount grantee must pay stock policy grant stock options fair market value date grant therefore recognized compensation expense options granted employees june 30 2005 options granted nonemployees defined sfas 123 amended sfas 148 eitf 9618 accounting equity instruments issued employees acquiring conjunction selling goods services continue recorded compensation expense contractual service period using fair market value method accordance sfas 123 requires using blackscholes option pricing model determine fair market value option original grant date granted options nonemployee outside consultants fiscal 2003 2004 see note 10 consolidated financial statements company account nonvested shares nonemployee members board directors executive officers using intrinsic value method accordance apb 25 granted nonvested shares members board directors executive officers fiscal 2004 2005 2006 see note 16 consolidated financial statements company december 2004 fasb issued sfas 123r sharebased payment sfas 123r amended sfas 123 apb 25 requires cost sharebased payment transactions including employees nonemployees recognized financial statements sfas 123r applies sharebased payment transactions entity acquires goods services issuing offering issue shares share options equity instruments incurring liabilities 1 amounts based even part price entity’s shares equity instruments 2 require may require settlement issuance entity’s shares equity instruments statement effective company first interim period beginning june 15 2005 quarter ended september 30 2005 effective july 1 2005 company adopted provisions sfas 123r using modified prospective approach accounts sharebased compensation applying fair value method expensing stock options nonvested stock awards stock options stock options granted employee nonemployee members board directors recorded compensation expense using fair value method sfas 123r fair value calculated blackscholes optionpricing model see note 15 financial statements included form 10k additional information nonvested shares nonvested shares granted executive officers management nonemployee members board directors recorded compensation expense using fair value method sfas 123r fair value based upon closing price common stock date grant see note 16 financial statements included form 10k discussion nonvested stock awards granted nonemployee members board directors executive officers certain management implemented practice granting nonvested shares members board directors well executive officers permitted stock option plans component board executive officer compensation arrangements response growing industry concerns related effect expensing stock options diversified compensation arrangements reduce number total equity shares granted board members executive officers management team compensation arrangements include granting nonvested shares well executive officers management team members greater component incentive cash compensation lesser emphasis options first nonvested shares granted board directors december 2003 first nonvested shares executive officers granted july 2004 first nonvested shares management granted september 2005 nonemployee stock options granted nonemployee outside consultants defined sfas 123 r recorded compensation expense using fair value method sfas 123r fair value calculated blackscholes optionpricing model see note 10 financial statements included form 10k discussion options granted nonemployee outside consultants july 2003 october 2002 derivative instruments hedging activities may 25 2006 entered 35 million aggregate tenyear fixed interest rate swap agreement swap citibank na manage market risk changes interest rates secured commercial mortgage see note 7 swap derivative instrument classified cash flow hedge accordance sfas 133 accounting derivative instruments hedging activities amended sfas 137 138 149 recorded consolidated balance sheet fair value recognize derivatives either assets liabilities balance sheet depending rights obligations applicable derivative contract measure instruments fair value change derivative’s fair value recorded period current earnings accumulated comprehensive income oci depending derivative designated part hedge transaction type hedge transaction effective portion interest rate swap gains losses due changes fair value recorded component oci reclassified earnings period periods hedged forecasted transaction affects earnings utilize hypothetical derivative method determining hedge effectiveness period transactions would cause ineffectiveness result reclassifying ineffective portion current earnings would include prepayment secured commercial mortgage andor election prime interest rate option interest expense recorded earnings fixed rate set forth swap agreement allowance doubtful accounts allowance doubtful accounts determined using combination factors ensure trade receivables balances overstated due uncollectibility maintain bad debt reserve customers based variety factors including length time receivables past due trends overall weighted average risk rating total portfolio significant onetime events historical experience customer also record additional reserves individual accounts become aware customer’s inability meet financial obligations us case bankruptcy filings deterioration customer’s operating results financial position circumstances related specific customers change estimates recoverability receivables would adjusted believe allowance june 30 2006 sufficient cover existing accounts receivable inventory valuation inventory stated lower cost market adjustments inventory made individual part level estimated excess obsolescence impaired balances reflect inventory lower cost market factors influencing adjustments include changes demand rapid technological changes product life cycle development plans component cost trends product pricing physical deterioration quality concerns revisions adjustments would required factors differ estimates income taxes estimated effective tax rate includes impact certain estimated research development tax credits nontaxable interest income material changes differences estimates could impact estimate effective tax rate results operations comparison fiscal years 2006 2005 following table summarizes operating results fiscal year ended june 30 2006 compared fiscal year ended june 30 2005 total revenue net sales total revenues decreased 2 604 million fiscal 2006 614 million fiscal 2005 net sales products decreased 6 379 million fiscal 2006 404 million fiscal 2005 sales biomaterials products decreased 8 fiscal 2006 fiscal 2005 decrease biomaterials sales primarily attributable 55 decrease product sales orthovita 32 million fiscal 2006 compared 72 million fiscal 2005 anticipated previously reported decrease sales orthovita related orthovita vitoss foam™ product launches prior year fiscal 2004which continued flow distribution channels throughout fiscal 2006 although sales orthovita decreased year orthovita’s end user sales vitoss foam™ products strong increased 45 fiscal 2006 fiscal 2005 also starting see return growth shipments orthovita evidenced combined third fourth quarter fiscal 2006 sales othovita 22 million compared combined first second quarter sales year 11 million cardiology product sales st jude medical largest cardiology customer 147 million compared 163 million prior year due 895000 decrease polymer anchor sales 171000 decrease collagen plug sales 460000 decrease development revenue related research development performed two new collagen plug product enhancements prior year offsetting decreases 7 increase 889000 orthopaedic sports medicine sales fiscal 2005 fiscal 2006 mainly related sales sports medicine products arthrex increased 5 632000 additionally 23 million spine product sales new orthopaedic customers launching new product lines fiscal 2006 addition endovascular sales approximately 12 million increased 128 prior year increase due sales us 895000 sales europe 284000 endovascular sales represented 3 total sales fiscal 2006 research development revenue research development revenues fiscal 2006 compared 253000 revenues fiscal 2005 research development revenues fiscal 2005 consisted amounts generated nist synthetic vascular graft development grant concluded september 2004 royalty income royalty income increased 9 225 million fiscal 2006 208 million fiscal 2005 angioseal royalty income increased 6 196 million 185 million fiscal year 2006 2005 respectively royalty units increased 8 approximately 17 million angioseal units sold endusers fiscal 2006 compared approximately 16 million units sold fiscal 2005 believe increase units due st jude medical’s continued sales marketing efforts including launch new version angioseal march 2006 resulting greater market share overall increased adoption vascular closure devices market st jude medical’s market share estimated 65 fiscal 2006 worldwide market penetration vascular closure devices estimated approximately 49 fiscal 2006 additionally total royalty income orthovita increased 29 million fiscal 2006 compared 23 million fiscal year 2005 royalties received march 2003 manufacturing development supply agreement two companies acquisition separate vitoss™ proprietary rights third party inventor vitoss™ technology discussed also see note 1 consolidated financial statements company patents proprietary rights cost products sold cost products sold increased 17 206 million fiscal 2006 177 million fiscal 2005 gross margin decreased 56 fiscal 2005 45 fiscal 2006 related transition new facility transition costs component cost goods sold 25 million compared 440000 prior fiscal year also increasing costs good sold equity compensation expense 179000 recorded fiscal 2006 related adoption sfas 123r mentioned gross margin excluding transition equity compensation expenses 53 fiscal 2006 compared 57 fiscal 2005 unfavorable decline 7 year trend partially attributable decreased volume also related late year obsolescence charges process raw material changes one specific collagen product unfavorable manufacturing variances related production startup three new products within endovascular product line well two new orthopaedic product line launches midyear increase personnel expenses anticipation endovascular product launches believe endovascular product margins partially offsetting higher biomaterials product margins continue manufacturing process endovascular product line matures start inefficiencies learning curve level research development expenses research development expense increased 26 190 million fiscal 2006 compared 151 million fiscal 2005 research development expense also increased percentage total revenue 31 25 fiscal years ended june 30 2006 june 30 2005 respectively included research development expenses increase 12 million related transition costs move new facility see item 2 liquidity capital resources well 611000 increase equity compensation expense due adoption sfas 123r see note 1 consolidated financial statements company excluding effect transition equity compensation expense increases research development increased 14 fiscal 2005 27 total revenue increase expenses primarily due endovascular spending increased 23 million 25 113 million fiscal year 2006 compared 90 million fiscal 2005 clinical trial expenses increased 165 15 million fiscal 2006 559000 fiscal 2005 due increased clinical activity related aspire european carotid pilot studies also increasing personnel expenses 837000 including 409000 increase equity compensation related adoption sfas 123r 175000 increase operational design costs support product line expansion endovascular platform 12 million transition costs relating research development 553000 allocated endovascular research development biomaterials proprietary technologies spending increased 16 million 76 million fiscal 2006 61 million fiscal 2005 biomaterials spending increased due increased personnel costs 927000 including 202000 increase equity compensation related adoption sfas 123r office facility costs 775000 including 693000 increase transition costs outside services 36000 offsetting increases decrease consulting services 174000 expect research development expenses increase investigate develop new products conduct clinical trials seek regulatory approvals proprietary products selling general administrative expense selling general administrative expense selling general administrative expense increased 46 173 million fiscal 2006 118 million fiscal 2005 increase includes 804000 equity compensation expense related adoption sfas 123r see note 1 consolidated financial statements company well 603000 transition costs see item 2 “liquidity capital resource” sales marketing expenses increased 39 million 94 million fiscal 2006 55 million fiscal 2005 increase result us commercial launch efforts endovascular product line increased 46 million fiscal 2006 fiscal 2005 personnel expenses us sales marketing department increased 27 million relating building endovascular direct sales force including equity compensation expense 107000 related adoption sfas 123r june 30 2006 total 41 us sales marketing personnel including 26 sales representatives clinical support staff compared total 24 sales marketing employees june 30 2005 including 12 sales representatives clinical support staff travel costs increased 502000 due recruiting training conducted new sales team well travel current prospective customers hospitals addition increase 947000 marketing expenses professional fees related conventions advertising expense scientific advisory board meeting related strategic marketing campaigns endovascular devices us finally increase office facility costs due increase sales marketing personnel inhouse 432000 included 163000 facility transition costs offsetting increased us sales marketing expenses endovascular european sales marketing costs decreased 29 711000 decrease due decrease personnel related decrease travel expenses 350000 decrease clinical trial expenses 380000 due conclusion first study december 2004 offset increase marketing efforts 72000 first study examine cost effectiveness triactiv system saphenous vein graft patients support reimbursement product europe also affecting expenses 4 decrease foreign currency exchange rate general administrative expenses increased 16 million 79 million fiscal 2006 63 million fiscal 2005 attributable increases 874000 personnel costs including 725000 equity compensation expense related adoption sfas 123r 650000 facility costs including rent electric depreciation 440000 transition costs 45000 professional services 13000 public company expenses including board compensation sec filing fees excluding transition costs equity compensation costs general administrative expenses increased 8 435000 fiscal 2006 fiscal 2005 net interest income interest expense increased 67000 71000 fiscal 2006 5000 fiscal 2005 due secured commercial mortgage entered fiscal 2006 see note 7 consolidated financial statements company interest income decreased 17 10 million fiscal 2006 13 million fiscal 2005 due lower cash investment balances fiscal 2006 fiscal 2005 offset rising interest rates average cash investment balance fiscal 2006 313 million compared 503 million fiscal 2005 approximate weighted average interest rate portfolio 334 compared 249 fiscal years 2006 2005 respectively nonoperating income expense nonoperating income 82000 fiscal 2006 compared nonoperating expense 45000 fiscal 2005 increase related primarily 81000 revenue recognized fiscal 2006 related 500000 opportunity grant received commonwealth pennsylvania governor’s action team see “liquidity capital resources” note 20 consolidated financial statements company compared 54000 recognized fiscal 2005 remainder due net loss gain sale fixed assets comparison fiscal years 2005 2004 following table summarizes operating results fiscal year ended june 30 2005 compared fiscal year ended june 30 2004 total revenue net sales total revenues increased 5 614 million fiscal 2005 582 million fiscal 2004 net sales products increased 11 404 million fiscal 2005 364 million fiscal 2004 increase net sales primarily attributable sales biomaterials products specifically cardiology products grew 30 fiscal 2005 fiscal 2004 cardiology product sales st jude medical largest cardiology customer 163 million compared 128 million prior year due increased collagen plug revenues including 540000 related development two new collagen plug product enhancements sales anchors st jude medical decreased 282000 prior year previously discussed orthopaedic sales decreased 4 974000 fiscal 2004 mainly related sales sports medicine products arthrex decreased 27 47 million almost entirely offset product sales orthovita increased 42 million 142 72 million 30 million fiscal 2004 addition triactiv sales approximately 515000 increased 137 prior year increase due sales us 213000 following company’s april launch triactiv system first quarter direct commercial sales us sales europe 303000 included sales new triactiv fx launched late march 2005 triactiv sales represented 1 total sales fiscal 2005 research development revenue research development revenues decreased 63 253000 fiscal 2005 688000 fiscal 2004 fiscal 2005 revenues generated nist synthetic vascular graft development grant concluded september 2004 prior fiscal year revenues generated nist synthetic vascular graft development grant nih breast cancer drug delivery grant concluded september 2003 october 2003 respectively decrease prior fiscal year reflects conclusion nist vascular graft development grant october 2004 provided 634000 revenue fiscal 2004 253000 fiscal 2005 royalty income royalty income decreased 2 208 million fiscal 2005 212 million fiscal 2004 angioseal royalty income decreased 12 185 million 209 million fiscal year 2005 2004 respectively decrease angioseal royalty income primarily due 33 decline 9 6 contracted royalty rate occurred april 2004 original rate 12 contractually reduced 12 9 accordance license agreements fiscal quarter ended december 31 2000 cumulative one million angioseal units sold one final contracted decrease royalty rate 6 occurred upon reaching four million cumulative units sold april 2004 effective royalty rate june 30 2005 decrease royalty rate partially offset greater number units sold royalty units increased 19 approximately 16 million angioseal units sold endusers fiscal 2005 compared approximately 13 million units sold fiscal 2004 believe increase units due st jude medical’s continued sales marketing efforts resulting greater market share overall increased adoption vascular closure devices market st jude medical’s market share estimated 65 fiscal 2005 60 fiscal 2004 worldwide market penetration vascular closure devices estimated approximately 47 fiscal 2005 approximately 40 fiscal 2005 2004 respectively partially offsetting angioseal royalty income decrease royalties orthovita vitoss foam product lines total royalty income orthovita approximately 23 million fiscal 2005 compared 288000 fiscal year 2004 royalties received march 2003 manufacturing development supply agreement two companies acquisition separate vitoss proprietary rights third party inventor vitoss technology discussed also see note 1 condensed consolidated financial statements patents proprietary rights cost products sold cost products sold increased 10 177 million fiscal 2005 161 million fiscal 2004 gross margin 56 periods due plans transition new facility acceleration depreciation charge described recorded 440000 component cost goods sold offsetting charge cost goods sold higher margins biomaterials products attributable higher volumes cardiology product sales resulted manufacturing efficiencies increased volume additional experience spine product manufacturing processes continued allocation overhead across greater sales volumes resulting decrease per unit costs higher margins biomaterials products slightly offset lower margins triactiv device related low volume early stage manufacturing process expect triactiv system margins continue lower biomaterials product margins manufacturing process matures volumes increase research development expense research development expense decreased 8 151 million fiscal 2005 compared 164 million fiscal 2004 research development expense also decreased percentage total revenue 25 28 fiscal years ended june 30 2005 june 30 2004 respectively expense reductions primarily due triactiv system spending decreased 12 million 12 89 million fiscal year 2005 compared 101 million fiscal 2004 clinical trial expenses 557000 24 million less fiscal 2005 fiscal 2004 due conclusion pride clinical trial march 2004 clinical trial expenses fiscal 2005 related triactiv fx aspire study decrease offset increases personnel costs including travel expenses restricted share incentive compensation expense 894000 facility office costs including acceleration depreciation charge 350000 legal consulting expenses 156000 operational design costs 725000 associated new products specifically triactiv proguard system thromcat device biomaterials proprietary technologies spending decreased 72000 62 million fiscal 2005 63 million fiscal 2004 primary reason decrease efforts several research development personnel throughout fiscal 2005 work performed reimbursed st jude medical resulting salaries personnel costs employees recorded component cost products sold related revenue recorded component sales work included development three new product enhancements angioseal collagen plug total applicable personnel costs related effort 346000 recorded cost products sold addition depreciation expense excluding acceleration depreciation related facility transition decreased 99000 related conclusion nist grant depreciation assets purchased nist grant fully depreciated conclusion grant october 2004 thereby reducing biomaterials depreciation expense fiscal 2005 compared fiscal 2004 offsetting decreases legal fees higher related greater number patent filings increased patent maintenance fees 112000 additional operational design development costs 278000 related development new products processes current prospective customers expect research development expenses increase investigate develop new products conduct clinical trials seek regulatory approvals proprietary products selling general administrative expense selling general administrative expense increased 36 118 million fiscal 2005 87 million fiscal 2004 general administrative expenses increased 18 million 63 million fiscal 2005 45 million fiscal 2004 attributable increases 372000 personnel costs including restricted stock expense 216000 facility costs including rent electric primarily depreciation increased 170000 including 64000 acceleration depreciation charge described 415000 professional services 132000 public company expenses including board compensation sec filing fees 170000 bad debt expense addition general administrative expense fiscal 2005 includes 477000 related amortization intellectual proprietary rights acquired august 2004 see note 1patents proprietary rights personnel expense increased primarily due issuance restricted shares related expense 581000 fiscal 2005 compared 258000 fiscal 2004 professional service fees include audit tax fees sarbanesoxley consulting fees increased primarily result sarbanesoxley act 2002 company expensed 412000 fees related compliance fiscal year ended 2005 bad debt expense increased due prior year collection previously reserved amount 116000 current period bad debt expense 54000 resulting 170000 cumulative increase prior year comparable period sales marketing expenses increased 13 million 55 million fiscal 2005 42 million fiscal 2004 increase primarily result us commercial launch efforts triactiv system increased 14 million fiscal 2005 fiscal 2004 personnel expenses us sales marketing department increased 957000 relating expenses endovascular direct sales force june 30 2005 total 24 sales marketing personnel including 12 sales representatives compared total three sales marketing employees june 30 2004 travel costs increased 241000 due recruiting training conducted new sales team well postlaunch travel prospective customershospitals addition increase 91000 marketing expenses related prelaunch postlaunch activities product training new sales team creation marketing materials triactiv system european sales marketing costs decreased 4 91000 due conclusion first study examine cost effectiveness triactiv system saphenous vein graft patients support reimbursement product europe study concluded december 2004 first study results showed triactiv system substantially reduced 30day mace compared historical control patients treated embolic protection reductions complication rates used generate cost effectiveness analysis triactiv system important reimbursement european countries expected applied fiscal 2006 first study expenses 657000 fiscal 2004 compared 359000 fiscal 2005 decrease 298000 offset increases personnel marketing convention expenses 62000 67000 79000 respectively part due 7 increase foreign currency exchange rate well increased marketing efforts related launch new triactiv fx system net interest income interest expense decreased 61000 93 5000 fiscal 2005 66000 fiscal 2004 due lower principal balance debt balance continued make required quarterly payments interest income increased 11 13 million fiscal 2005 11 million fiscal 2004 although cash investment balances decreased offset higher interest rates nonoperating income expense nonoperating income 45000 fiscal 2005 compared nonoperating expense 16000 fiscal 2004 increase related primarily 54000 revenue recognized 500000 opportunity grant received commonwealth pennsylvania governor’s action team see liquidity capital resources section note 20 remainder due net loss gain sale fixed assets liquidity capital resources cash equivalents investments 271 million june 30 2006 decrease 178 million balance 449 million end prior fiscal year june 30 2005 addition working capital 443 million june 30 2006 decrease 138 million working capital 581 million june 30 2005 operating activities net cash provided operating activities 169 million 123 million fiscal years ended june 30 2006 2005 respectively fiscal year ended june 30 2006 net income 37 million tax benefit exercise stock options 10 million noncash employee stockbased compensation 24 million noncash depreciation amortization 96 million use cash 182000 excess tax benefit sharebased payment arrangements 207000 use cash pay executive officers tax liability related nonvested shares issued cash provided result changes asset liability balances 572000 increase cash related change assets liabilities primarily due decrease prepaid expenses 21 million decrease accounts receivable 11 million partially offset increase inventory 14 million increase deferred tax asset 633000 decrease accounts payable accrued expenses 630000 decrease prepaids assets primarily related decrease deposits made equipment ordered new facility see prior year equipment placed service fiscal 2006 decrease accounts receivable due timely payments key customers throughout fiscal 2006 increase inventory related increase build endovascular product component parts inventory preparation anticipated market launches well stocking components one primary biomaterial products decrease accounts payable accrued expenses primarily related fiscal 2006 payments services related fiscal 2005 sarbanesoxley requirements payments clinical trial fees europe first study completed fiscal 2005 opportunity grant november 2004 company awarded 500000 opportunity grant department community economic development commonwealth pennsylvania dced grant awarded company recognition potential jobcreating economic development opportunities created company’s construction new facility within state pennsylvania grant conditioned upon meeting following three criteria 1 company create 238 fulltime jobs within 5 years beginning april 1 2003 date company’s request grant 2 company invest least 54250000 total project costs including limited personnel land building construction machinery equipment within three years beginning july 19 2004 date company’s facility groundbreaking 3 company operate new facility minimum 5 years company received cash payment 500000 third fiscal quarter 2005 revenue recognized earned longest period contained within grant commitment terms five years date occupancy company’s new facility date satisfaction last grant commitment expected december 2010 june 30 2006 approximately 135135 revenue recognized date related grant component income fiscal 2006 81081 revenue recognized investing activities cash used investing activities 269 million year ended june 30 2006 result purchase redemption activity within investment portfolio capital spending related construction new facility see ongoing expansion manufacturing capabilities addition spent 81 million acquisition intellectual property certain assets intraluminal therapeutics inc 10 million escrowed see note 3 consolidated financial statements company 25000 acquisition patents proprietary rights complementary biomaterials platform period investments 245 million matured sold called subsequently purchased new investments proceeds total investment purchases 65 million providing net cash investment activity 180 million see note 1 consolidated financial statements company description availablefor sale securities 300 million capital spending plan fiscal 2006 20 million intended new facility see discussion end fiscal 2006 remainder authorized continue expand research development manufacturing capabilities upgrade management information systems mis technology infrastructure total plan spent 367 million year ended june 30 2006 58 million related ongoing operations company remaining 309 million used purchase land construction new facility 157 million capital spending plan fiscal 2007 approximately 70 million expended new facility including final invoices completion construction see discussion remainder used continue expand research development manufacturing capabilities upgrade mis technology new facility new facility located approximately two miles previous leased facilities exton pennsylvania new building site consolidates us operations research development administrative areas 202500 square foot facility thus provide future growth continued expansion construction plan three phases phase one consisted land building shell 162000 square feet fit 105000 square feet manufacturing quality assurance operations phase completed december 2005 approximate cost 273 million remaining building shell phases two three complete consists 40000 square feet additional fit approximately 70000 square feet additional cost phases two three approximately 22 million aggregate including purchase additional land required complete expansion january 2006 purchased additional parcel land existing site 13 million total cost project estimated approximately 49 million associated management’s april 30 2005 finalization plan transition operations new facility recorded acceleration depreciation charges related assets abandoned time transition total net book value assets abandoned 49 million april 30 2005 acceleration depreciation charge 813000 recorded quarter ended june 30 2005 remainder 42 million fiscal 2006 addition incurred 543000 moving costs fiscal 2006 financing activities cash provided financing activities 107 million year ended june 30 2006 result proceeds longterm debt related mortgage new facility 80 million exercise stock options 31 million excess tax benefits sharebased payment arrangements 182000 partially offset stock repurchases 442000 deferred financing costs paid 122000 debt secured commercial mortgage may 25 2006 entered agreement secured commercial mortgage “mortgage” citibank fsb “bank” mortgage provides us ability take aggregate advances 35 million november 25 2007 “draw period” secured facility located 735 pennsylvania drive exton pennsylvania 19341 june 30 2006 taken 8 million advance mortgage see note 7 consolidated financial statements company thm acquisition obligation september 1 2000 incurred obligation amount 45 million conjunction acquisition thm biomedical inc obligation due equal quarterly installments september 2004 entire obligation paid full stock repurchase program august 17 2004 announced board directors reinstated program repurchase issued outstanding shares common stock six months date board reinstatement reinstated plan called repurchase 259500 shares balance original plan approved october 2003 repurchased retired 199867 shares common stock reinstated program cost approximately 51 million average market price 2568 per share financed repurchases using available cash program expired february 2005 march 16 2005 announced new program additional 400000 issued outstanding shares common stock approved repurchase board directors june 30 2005 repurchased retired 103133 shares common stock new program cost approximately 27 million average market price 2658 per share using available cash june 30 2005 296867 shares remaining repurchase program plan scheduled expire september 30 2005 extended indefinitely terminated board directors quarter ended december 31 2005 repurchased retired 20000 shares common stock cost 441000 average market price 2205 per share using available cash repurchases remaining six months ended june 30 2006 leaving 276867 shares remaining repurchase program research development tax credit recorded research development tax credits 528017 493536 984817 fiscal years ended june 30 2006 2005 2004 respectively continue record research development tax credits component current tax provision related ongoing performance qualified research development general plan continue spend substantial amounts fund clinical trials gain regulatory approvals continue expand research development activities particularly endovascular products biomaterials products marketing selling endovascular products us direct sales force anticipate sales marketing expenses increase substantially continue invest build us sales team increased marketing efforts toward success endovascular product platform believe current cash investment balances addition cash generated operations sufficient meet operating financing capital requirements least next 12 months also believe cash investment balances sufficient longer term basis however depend numerous factors including market acceptance existing future products successful commercialization products development costs associated commercialization progress product development efforts magnitude scope efforts progress preclinical studies clinical trials product clearance fda agencies cost timing efforts expand manufacturing sales marketing capabilities cost filing prosecuting defending enforcing patent claims intellectual property rights competing technological market developments development strategic alliances marketing certain products terms future equity financing may dilutive stockholders terms debt financing may contain restrictive covenants limit ability pursue certain courses action ability obtain financing dependent status future business prospects well conditions prevailing relevant capital markets assurance given current additional financing available us available us acceptable terms’ need arise offbalance sheet arrangements presented summary contractual obligations june 30 2006 obligations primarily related longterm debt facility construction agreement purchase goods services enforceable legally binding 1 principal interest secured commercial mortgage 2 obligations consist open purchase orders capital items primarily construction new facility 3 accordance generally accepted accounting principles united states gaap obligations recorded consolidated balance sheet estimate time periods cash equivalents adequate fund operations forward looking statement within meaning private securities litigation reform act 1995 subject risks uncertainties actual results may differ materially contemplated forwardlooking statements addition described factors may cause difference set forth item 1a risk factors annual report form 10k forwardlooking statements report includes forwardlooking statements within meaning section 21e securities exchange act 1934 based forwardlooking statements largely current expectations projections future events trends affecting business report words “believe” “may” “will” “estimate” “continue” “anticipate” “intend” “expect” “plan” similar expressions relate kensey nash business management intended identify forwardlooking statements exclusive means identifying number risks uncertainties factors could cause actual results performance financial condition cash flows prospects opportunities differ materially expressed implied forwardlooking statements risks uncertainties factors include among things • general economic business conditions nationally markets • impact competition • anticipated trends business • existing future regulations affecting business • strategic alliances acquisition opportunities • risk factors set forth “risk factors” except expressly required federal securities laws undertake obligation publicly update revise forwardlooking statements whether result new information future events otherwise date report results operations past period considered indicative results expected future periods fluctuations operating results may also result fluctuations price common stock item 7a item 7 managements discussion analysis financial condition results operations overview kensey nash corporation company designs develops manufactures individually conjunction third parties medical devices use primarily cardiovascular orthopedic markets company leader cardiac catheterization puncture closure market angioseal device angioseal absorbable medical device sealing arterial punctures created cardiovascular procedures angiography angioplasty atherectomy placement stents company participates puncture closure market primarily relationship strategic alliance partner generates royalty income research development funding sales revenue manufacture angioseal devices components angioseal february company announced european community ce mark approval granted new 6f angioseal puncture closure device ce mark approval allows sale device throughout european union smaller version companys 8f angioseal currently marketed us europe designed seal arterial punctures 6f smaller addresses largest segment puncture closure market march 16 1999 st jude medical inc st jude announced completion acquisition marketing manufacturing rights angioseal product line tyco international ltd tyco companys previous strategic alliance partner purchase agreement companys agreements tyco transferred st jude accordingly st jude replaced tyco companys strategic alliance partner upon finalization acquisition companys next product cardiovascular market revascularization device aegis vortex system avs device designed open occluded saphenous vein bypass grafts svg minimizing risk embolization common problem current treatment alternatives company developing avs utilizing strong intellectual property inhouse expertise company announced initiation clinical trials avs july 1999 company also leading technology area absorbable biomaterials continues expand capabilities company currently manufacturing absorbable collagen polymer products third parties use orthopedic cardiovascular tissue regeneration bone growth protein drug delivery applications among others following discussion analysis read conjunction consolidated financial statements notes thereto contained elsewhere report results operations fiscal year ended june 30 1999 compared fiscal year ended june 30 1998 revenues periods consisted net sales research development revenue royalty income revenues increased 44 162 million year ended june 30 1999 fiscal 1999 113 million year ended june 30 1998 fiscal 1998 net sales products increased 54 research development revenue decreased 48 prior year royalty income increased 139 prior year increase net sales primarily attributable sale complete 6f angioseal commercial devices well increased sales commercial bioabsorbable polymer collagen products third parties including sale components 8f angioseal device strategic alliance partner sale 6f angioseal devices related product launch europe april 1999 increases sales angioseal components came result increased demand 8f product us european markets decrease research development revenues due reduction angioseal research development activity 6f angioseal transitioned development phase commercial product going forward company expects research development revenue nominal new strategic alliance partner st jude plans perform majority ongoing angioseal research development inhouse royalty income increased 139 72 million 30 million fiscal 1999 fiscal 1998 respectively approximately 310000 angioseal units sold endusers fiscal 1999 compared 178000 units sold fiscal 1998 increase royalty income reflected launch 6f angioseal europe fiscal 1999 well increased demand 8f angioseal us european markets fiscal 1999 versus fiscal 1998 addition company received 15 million supplemental royalty payment fiscal 1999 tyco previous owner angioseal licensing agreements companys strategic alliance partner continues increase production enhance marketing efforts angioseal product line united states europe company expects royalty income continue significant source revenue royalty rates based volume units sold rates decline certain cumulative unit sales levels reached equivalent domestic foreign licensing agreements cost products sold increased 26 51 million fiscal 1999 41 million fiscal 1998 increase reflects greater net sales products created favorable product mix resulting favorable gross margin trend research development expense including regulatory clinical expenses increased 3 57 million fiscal 1999 55 million fiscal 1998 increase mainly attributable increased development efforts revascularization technology company applied received investigational device exemption ide fda avs prepared initiation clinical trials device company also expanding development efforts area absorbable biomaterials continues work new customers well proprietary products polymer collagen markets increases expense offset ongoing shift development angioseal companys strategic alliance partner tandem commercialization 6f product company expects research development expense continue increase investigates develops new products conducts clinical trials seeks regulatory approval proprietary products selling general administrative expense increased 47 26 million fiscal 1999 18 million fiscal 1998 increase primarily result legal expenses incurred related companys ongoing patent infringement suit interest expense increased 121 332000 fiscal 1999 150000 fiscal 1998 increase due increase companys outstanding debt 20 million june 30 1998 61 million june 30 1999 interest income increased 20 649000 fiscal 1999 540000 fiscal 1998 result increase average total cash investment balances nonoperating income remained constant 4000 fiscal 1999 fiscal 1998 fiscal 1999 nonoperating income represented primarily net gain sale fixed assets fiscal 1998 represented miscellaneous nonrecurring items fiscal year ended june 30 1998 compared fiscal year ended june 30 1997 revenues periods consisted net sales research development revenue milestone fees royalty income revenues increased 43 113 million year ended june 30 1998 fiscal 1998 79 million year ended june 30 1997 fiscal 1997 net sales products research development revenue increased 28 prior year royalty income increased 752 increase net sales mainly attributable increase angioseal components sold companys strategic alliance partner result increased demand us european markets well expansion companys thirdparty business collagen polymer customers approximately 178000 angioseal units sold endusers fiscal year 1998 compared 26000 fiscal 1997 increase royalty income represented full year angioseal us sales royalties compared nine months us sales royalties fiscal 1997 significant increase demand us european markets increase total royalty per unit resulting patent acquisition agreement see note 5 financial statements increase research development revenue related contract research development including clinical trials strategic alliance partner additional sizes product enhancements angioseal product line 11 million milestone fee represented final milestone license agreement earned company upon receipt fda approval first quarter fiscal 1997 cost products sold increased 33 41 million fiscal 1998 31 million fiscal 1997 increase reflected greater net sales products offset manufacturing inefficiencies realized startup phase production new sizes angioseal 6f 10f new biomaterials products fiscal year research development expense including regulatory clinical expenses increased 18 55 million fiscal 1998 47 million fiscal 1997 company expanded development additional angioseal sizes biomaterials products including resorbable polymers collagen increased clinical trial activity addition company significantly expanded development revascularization technology targeted commencement clinical trials avs fiscal year 1999 selling general administrative expense decreased 3 61000 fiscal 1998 fiscal 1997 decrease primarily due reduction certain outside professional fees interest income decreased 14 540000 fiscal 1998 627000 fiscal 1997 decrease primarily attributable cash equivalent investment balances first quarter fiscal 1997 included funds used repayment credit agreement total cash investment balances remained relatively constant since time interest expense decreased 22 150000 fiscal 1998 193000 fiscal 1997 decrease also result repayment credit agreement companys strategic alliance partner october 1996 offset amounts drawn companys line credit current fiscal year interest charges recorded relation obligation companys patent acquisition agreement fiscal 1997 company received 13 million final settlement business interruption portion insurance claim related roof collapse amount 969000 recorded income nonoperating income decreased 47 8000 fiscal 1997 4000 fiscal 1998 fiscal 1998 represented miscellaneous nonrecurring items fiscal 1997 represented primarily net gain sale fixed assets liquidity capital resources net cash provided companys operating activities fiscal 1999 29 million net cash provided companys operating activities fiscal 1998 6000 fiscal 1999 changes asset liability balances resulted 15 million use cash offset net income 32 million noncash depreciation amortization 13 million fiscal 1998 changes asset liability balances resulted 14 million use cash offset net income 343000 depreciation 1 million capital expenditures 17 million fiscal 1999 primarily representing machinery equipment leasehold improvements related continued expansion companys manufacturing capabilities principally collagen polymer product lines companys cash equivalents shortterm investments 97 million june 30 1999 addition company 47 million restricted investment accounts included 97 million company pledged 19 million investments collateral secure bank loans made employees payment taxes incurred employees result receipt common stock time ipo exchange companys pledging collateral employees pledged common stock collateral company also 28 million investments restricted capital spending june 30 2000 terms financing arrangement described company 28 million captital spending plan fiscal year 2000 continued expansion improvement exton manufacturing facility january 1999 company entered 5 million financing agreement bank financing agreement terms financing agreement bank purchased companys 5 million taxexempt bond issue bond issue issued local development authority company used 925000 proceeds bond issue pay balance existing 2 million term loan remaining proceeds bond issue placed certificate deposit cd withdrawals restricted capital expenditure purposes company received 30 million royalty advance license agreement upon receipt fda approval angioseal fiscal year 1997 royalty advance continues reduced company exceeded minimum royalty stipulations licensing agreement november 1997 company acquired patents patent acquisition agreement exchange 200000 shares common stock series eight quarterly cash payments began march 31 1998 totaling 12 million patents recorded balance sheet value shares date agreement plus present value 12 million cash legal related costs incurred acquire patents present value cash payments 11 million recorded balance sheet remaining balance june 30 1999 503000 company plans continue expend substantial resources fund clinical trials gain regulatory approvals continue expand research development activities particularly revascularization technology biomaterials products company believes cash generated operations well funds available financing arrangements bank sufficient meet companys operating capital requirements next twelve months quantitative qualitative disclosures market risk companys interest income expense sensitive changes general level interest rates regard changes interest rates affect interest earned companys cash equivalents investments well interest paid debt companys investment portfolio consists primarily high quality us government securities certificates deposit average maturity one year less company mitigates default risk investing believes safest highest credit quality securities monitoring credit rating investment issuers portfolio includes marketable securities active secondary resale markets ensure portfolio liquidity limitations regarding duration investments availableforsale securities subject interest rate risk decrease market value interest rates increase june 30 1999 companys total portfolio consisted approximately 132 million investments maturities within one year additionally company generally holds securities maturity therefore company expect results operations cash flows materially impacted due sudden change interest rates company 1075000 fixed rate debt risk would inability refinance rates decreased remaining 5 million companys debt fluctuates us treasury rate therefore subject increases us interest rates estimated potential reduction earnings onepoint increase five year us treasury rate year ended june 30 1999 would approximately 22000 year 2000 compliance company aware computer program issues associated existing computer systems year 2000 approaches year 2000 problem pervasive complex virtually every computer operation affected way rollover twodigit year value 99 00 issue whether computer systems embedded controls properly recognize date sensitive information year changes 2000 year 2000 compliance issue systems properly recognize information could result system failures miscalculations causing disruptions operations normal business activities company completed assessment potential year 2000 issues associated potential risks company assessed impact year 2000 issues believes business products services significantly impacted company identified financial informational operational systems found critical processes incorporating systems 2000 compliant company verifying readiness significant customers suppliers including strategic alliance partner distribution questionnaire process substantially completed june 30 1999 company warrant however companies year 2000 compliance activities completely successful company continues monitor situation refine contingency plans appropriate company began work computer year 2000 compliance issue fiscal year 1998 software applications hardware related information noninformation technologies upgraded replaced ensure systems year 2000 compliant replacing hardware software fashion considered normal cost business expensed capitalized appropriate management anticipate costs year 2000 compliance material effect companys results operations cash flows financial position company presently expect operations materially affected problems computer systems third parties deals statements contained form 10k historical facts forwardlooking statements made pursuant safe harbor provisions private securities litigation reform act 1995 company cautions number important factors could cause companys actual results fiscal year 2000 beyond differ materially forwardlooking statements made behalf company important factors include without limitation time effort priority level companys strategic alliance partner attaches angioseal strategic alliance partners ability successfully manufacture market distribute angioseal companys ability manufacture angioseal components results ongoing clinical trials avs products timing additional regulatory approvals united states countries outside europe including japan announcements technological innovations introduction new products company customers competitors competition puncture closure occluded svg devices general business conditions healthcare industry general economic conditions results operations past period considered indicative results expected future periods fluctuations operating results may also result fluctuations price common stock item 8 item 7 managements discussion analysis financial condition results operations following discussion analysis read conjunction selected consolidated financial data financial statements related notes included report discussion analysis contains forwardlooking statements relating future events future financial performance statements predictions actual events results may differ materially evaluating statements carefully consider various factors identified report could cause actual results differ materially expressed implied forwardlooking statements including set forth risk factors annual report form 10k see forwardlooking statements overview revenues consist three components net sales research development revenue royalty income net sales net sales comprised sales biomaterials products triactiv device biomaterials year ipo fiscal 1996 biomaterials sales comprised entirely absorbable collagen polymer components angioseal supplied strategic alliance partner since time experienced significant sales growth biomaterials products expanded customer base marketing activities increased sales existing customers assisted development new product offerings biomaterials component net sales comprises 99 total net sales represents sale biomaterials products customers use following markets orthopaedics sports medicine spine cardiology drugbiologics delivery periodontal general surgery wound care two significant components biomaterials sales orthopaedic product sales absorbable components angioseal supplied st jude medical orthopaedic product sales date consisted primarily sales arthrex privately held orthopaedics company manufacture wide array sports medicine products fiscal 2004 sold first bone grafting spine products orthovita publicly held orthopaedic biomaterials company next fiscal year beyond anticipate sales products new products orthovita become significant portion total biomaterials sales table showing trends angioseal orthopaedic sales fiscal 2003 fiscal 2004 percentage total biomaterials sales decline angioseal components percentage total biomaterials sales related ongoing transition manufacture absorbable polymer anchor us st jude medical offset part increases sales collagen component related increased sales volume angioseal device based discussions st jude medical believe current plans remain supplier approximately 15 future anchor requirements angioseal continue supply minimum 50 collagen component device three year contract st jude medical currently expires december 2005 increase orthopaedic products sales percentage total biomaterials sales primarily related growth sales arthrex represented 48 total biomaterials sales fiscal 2004 addition third fiscal quarter 2004 shipped first commercial products orthovita sales represented approximately 8 total biomaterials sales fiscal 2004 expect growth overall biomaterials sales continue greater acceptance medical community biomaterials technological advances expanded applications biomaterials products biomaterials sales growth 35 fiscal 2004 fiscal 2003 due greater acceptance able expand biomaterials customer product base initiating new partnerships within medical device industry well expanding product lines current customers triactiv system triactiv device commercially launched europe fourth quarter fiscal 2002 selling directly market germany distributors throughout rest europe currently distribution agreements sales ireland switzerland austria italy netherlands united kingdom entered two distribution agreements fiscal 2004 process identifying additional distributors markets europe asia triactiv sales less 1 total sales fiscal 2004 anticipate triactiv system become significant component net sales fiscal year ending june 30 2005 beyond gain new customers european markets introduce new versions applications product launch product us market currently anticipate commercial launch triactiv system us third quarter fiscal 2005 subject us regulatory approval via direct sales force received european community approval ce mark market secondgeneration triactiv device triactivr fx embolic protection system triactiv fx november 2003 second generation device incorporates several important easeofuse design enhancements including integrated fully disposable flush extraction system new balloon inflator simplifies catheter exchanges procedure monorail flush catheter enhance device usage reduce procedure time expect initiate european marketing triactiv fx second half fiscal 2005 research development revenue fiscal 2004 research development revenue derived national institute standards technology nist grant national institute health nih grant november 1999 received first nist grant since time awarded second nist grant nih grant first nist grant 12 million grant threeyear period researching cartilage regeneration utilizing porous tissue matrix ptm technology although continue independently develop technology received remaining funds grant second quarter fiscal 2003 october 2001 received second nist grant 19 million grant three year period researching synthetic vascular graft also utilizing ptm technology project expected continue october 2004 january 2003 received nih 100000 oneyear period researching sustained controlled release chemotherapeutic drugs treatment breast cancer utilizing ptm technology research grant completed early fiscal 2004 continuing independently develop drug delivery technology commercial use expectations future grant applications royalty income royalty income consists royalties received st jude medical orthovita royalties st jude medical received every angioseal unit sold worldwide anticipate sales angioseal continue grow st jude medical continues expand sales marketing efforts including recent launch angioseal product line japanese market releases future generations angioseal system including launch self tightening suture sts plus version device us europe royalty rate june 30 2004 6 original rate 12 contractually reduced 12 9 accordance license agreements fiscal quarter ended december 31 2000 cumulative one million angioseal units sold one contracted decrease royalty rate 6 upon reaching four million cumulative units sold final rate reduction occurred april 2004 believe continued angioseal unit growth partially offset 33 decline royalty rate net reduction royalty income fiscal 2005 fiscal 2004 approximately 1015 therefore expect royalty income angioseal continue significant source revenue june 30 2004 approximately 43 million angioseal units sold march 2003 entered agreement orthovita develop commercialize products based orthovitas proprietary ultra porous vitosstm bone void filler material combination proprietary biomaterials products applications bone grafting spinal surgery markets agreement products codeveloped manufacture products orthovita market sell products worldwide orthovita launched initial bone grafting spinal product line vitoss scaffold foam strips cylinders third quarter fiscal 2004 second family products vitoss scaffold foam flow june 2004 agreement receive royalty orthovitas enduser sales codeveloped products believe unique technology associated vitoss foam products size strength spine market result orthovita component royalty income becoming significant next several quarters beyond cost products sold experienced overall increase gross margin fiscal 2004 reflecting continued increase volume biomaterials product sales increased volume existing customers new customers resulted manufacturing efficiencies volume increase also results fixed costs spread greater number units anticipate gross margin biomaterials products continue improve continued increased sales volume experienced higher volume sales biomaterials products greater manufacturing efficiencies lowered unit costs many product lines however also initiated three new product lines fiscal 2004 orthovita vitoss foam strips cylinder flow products initial phases production product lines incurred higher costs due learning curve associated initiating new products expectations gross margin maturity product line expected line overall gross margins company whole anticipate gross margin biomaterials products continue improve expected increases sales volume efficiencies gained new product lines improvements could potentially offset low initial margins triactiv product line first year us sales result expanding product mix fiscal 2005 believe total gross margin across product lines slightly improved fiscal 2004 research development expense research development expense consists expenses incurred development proprietary technologies triactiv system absorbable nonabsorbable biomaterials products technologies development programs including expenses nist nih programs december 2001 began triactiv us pivotal clinical study pride study randomized trial 80 sites us europe completed enrollment pride study march 2004 enrolled total 894 patients pride study including rollin patients 68 sites us 10 sites europe submission data trial fda 510k approval occurred july 2004 granted approval fda market sell device us using small direct sales team anticipated market launch january 2005 also completed six patient pilot study tracer study carotid artery application triactiv system september 2003 study completed one clinical site costa rica triactiv carotid application device successfully used provide protection potential strokecausing emboli actively removing debris carotid stenting procedures plan begin enrollment ce mark study triactiv carotid application fiscal 2005 also plan initiate us registry next generation triactiv device triactiv lfx third quarter fiscal 2005 study planned 100 120 patient study 20 sites us cannot make assurances successful completion trials subsequent regulatory approval triactiv system future applications us europe clinical efforts pursuit fda approval continuing development triactiv system well continued development proprietary biomaterials products technologies require significant research development expenditures anticipate research development expense continue increase pursue commercialization triactiv system us explore opportunities indications related triactiv system well technologies including continued development proprietary biomaterials technologies believe research development expense increase dollars believe decrease percentage total revenue continues grow research development expense 28 total revenue fiscal 2004 compared 33 total revenue fiscal 2003 anticipate research development continue decline percentage total revenue fiscal 2005 beyond selling general administrative selling general administrative expense includes general administrative costs including activities finance human resource business development departments well costs related sales marketing products general administrative component selling general administrative expense increased fiscal 2003 increase result overall growth business well expenses incurred related compliance new sec corporate governance regulations sales marketing component selling general administrative expenses also increased fiscal 2003 increase relates increased sales efforts triactiv system europe commercially launched may 2002 move toward commercialization triactiv system us january 2002 received ce mark approval european regulatory authority triactiv system allows commercial sale product european union established subsidiary germany kensey nash europe gmbh maintain european sales marketing team consisted vice president european sales marketing three clinical specialists four sales people june 30 2004 plan continue add personnel team believe required meet clinical sales goals team selling product direct german market supports distributor relationships rest europe anticipate sales marketing expenses continue increase await us regulatory approval triactiv system approved fda market sell triactiv system us small dedicated direct sales force initially comprised approximately ten salespeople initial estimates cost direct sales plan would increase selling expense fiscal 2005 25 million 30 million including personnel marketing expenses fiscal 2004 also continue expand marketing efforts biomaterials business income tax expense effective income tax rate approximately 284 fiscal year 2004 compared 225 year ended june 30 2003 prior year effective tax rate reduced 15 million tax credit related historic qualified research development activities company fiscal 2004 effective income tax rate includes current year research development tax credit forecasting effective tax rate fiscal 2005 approximately 30 critical accounting policies critical accounting policies require application managements difficult subjective complex judgments often result need make estimates matters inherently uncertain may change future periods intended comprehensive list significant accounting policies many cases accounting treatment particular transaction specifically dictated generally accepted accounting principles need managements judgment application also areas selection available alternative policy would produce materially different result identified following critical accounting policies revenue recognition accounting stockbased compensation allowance doubtful accounts inventory valuation income taxes revenue recognition recognize revenue provisions staff accounting bulletin sab 101 revenue recognition financial statementssab 101 accordingly sales revenue recognized related product shipped shipments free board fob shipping point revenue research development contracts recognized related costs incurred royalty revenue recognized related product sold advance payments received products services recorded deferred revenue recognized product shipped services performed accounting stockbased compensation account stockbased compensation costs accounting stockbased compensation sfas 123 amended sfas 148 permits recognition fair value stockbased awards expense ii continued application intrinsic value method accounting principles board opinion 25 accounting stock issued employees apb 25 account stockbased employee director compensation plans recognition measurement principles apb 25 intrinsic value method compensation cost represents excess quoted market price common stock grant date amount grantee must pay stock policy grant stock options fair market value date grant therefore recognized compensation expense options granted employees account stockbased awards nonemployees using fair value method accordance sfas 123 requires using blackscholes optionpricing model determine fair value option original grant date options granted nonemployees defined sfas 123 amended sfas 148 emerging issues task force eitf 9618 accounting equity instruments issued employees acquiring conjunction selling goods services recorded expense service period granted options nonemployees outside consultants fiscal 2003 fiscal 2004 see note 9 financial statements information regarding options granted nonemployees july 2003 october 2002 allowance doubtful accounts allowance doubtful accounts determined using combination factors ensure trade receivables balances overstated due uncollectibility maintain bad debt reserve customers based variety factors including length time receivables past due trends overall weighted average risk rating total portfolio significant onetime events historical experience customer also record additional reserves individual accounts become aware customers inability meet financial obligations us case bankruptcy filings deterioration customers operating results financial position circumstances related specific customers change estimates recoverability receivables would adjusted believe allowance june 30 2004 sufficient cover existing accounts receivable inventory valuation inventory stated lower cost market adjustments inventory made individual part level estimated excess obsolescence impaired balances reflect inventory lower cost market factors influencing adjustments include changes demand rapid technological changes product life cycle development plans component cost trends product pricing physical deterioration quality concerns revisions adjustments would required factors differ estimates income taxes estimated effective tax rate includes impact certain research development tax credits material changes differences estimates three factors could impact estimate effective tax rate results operations comparison fiscal years 2004 2003 following table summarizes operating results fiscal year ended june 30 2004 compared fiscal year ended june 30 2003 total revenue net sales total revenues increased 31 582 million fiscal 2004 444 million fiscal 2003 net sales products increased 34 364 million fiscal 2004 271 million fiscal 2003 increase net sales primarily attributable increased sales biomaterials products specifically orthopaedic products increased 97 fiscal 2004 fiscal 2003 orthopaedic product sales increased result increased sports medicine product sales arthrex largest orthopaedic customer initial sales new spine product line orthovita agreement entered march 2003 sales two customers increased 78 million 80 30 million entirely new business respectively fiscal 2003 increase partially offset 17 million 12 decrease angioseal component sales decrease angioseal component sales related ongoing transition manufacture absorbable polymer anchor us st jude medical offset part increases sales collagen component related increased sales volume angioseal device based discussions st jude medical believe current plans us remain supplier approximately 15 future anchor requirements angioseal continue supply minimum 50 collagen component device threeyear contract st jude medical currently expires december 2005 triactiv sales represented less 1 total sales fiscal 2004 fiscal 2003 research development revenue research development revenues decreased 28 688000 fiscal 2004 963000 fiscal 2003 fiscal 2004 revenues generated nist synthetic vascular graft development grant nih breast cancer drug delivery grant prior fiscal year revenues generated two grants addition nist articular cartilage grant nih breast cancer drug delivery grant provided revenue four twelve months fiscal 2004 project concluded october 2003 nist vascular graft grant provided revenue entire year decrease prior fiscal year reflects conclusion nist articular cartilage grant october 2002 provided 193000 revenue fiscal 2003 provide revenue fiscal 2004 addition decrease prior year reflected decrease reimbursements synthetic vascular graft grant generated 634000 revenue fiscal 2004 compared 724000 fiscal 2003 decrease attributable timing animal studies significant component total reimbursement grant specifically animal study concluded prior second quarter fiscal 2004 another animal study started late third fiscal quarter 2004 contrast fiscal 2003 animal study conducted throughout year following table summarizes research development revenue fiscal year ended june 30 2004 compared fiscal year ended june 30 2003 royalty income royalty income increased 30 212 million fiscal 2004 163 million fiscal 2003 increase royalty income primarily due increase angioseal royalties st jude medical increase occurred despite 33 decline 9 6 contracted angioseal royalty rate april 2004 royalty rate june 30 2004 6 original rate 12 contractually reduced 12 9 accordance license agreements fiscal quarter ended december 31 2000 cumulative one million angioseal units sold one final contracted decrease royalty rate 6 occurred upon reaching four million cumulative units sold april 2004 increase royalty income despite fourth quarter reduction royalty rate reflected greater number units sold well increase average selling price angioseal royalty units increased 38 approximately 13 million angioseal units sold endusers fiscal 2004 compared approximately 967000 units sold fiscal 2003 average worldwide selling price increased 188 186 fiscal 2004 2003 respectively believe increase units due st jude medicals continued sales marketing efforts resulting greater market share overall increased adoption vascular closure devices market st jude medicals market share estimated 60 fiscal 2004 55 fiscal 2003 worldwide market penetration estimated 40 approximately 35 fiscal 2004 2003 respectively st jude medical launched recent generation angioseal product line sts plus platform september 2003 commanding premium price previous version device fiscal 2004 royalty income also included new royalty orthovita march 2003 manufacturing development supply agreement two companies royalty received codeveloped vitoss products enduser sales products orthovita first royalty earned third quarter fiscal 2004 orthovita commercially launched first codeveloped products royalty income orthovita approximately 300000 fiscal year 2004 cost products sold cost products sold increased 32 161 million fiscal 2004 122 million fiscal 2003 gross margin increased 56 55 periods increase gross margin reflected higher margins biomaterials products attributable part higher volumes resulted manufacturing efficiencies well continued allocation overhead across greater sales volumes resulting decrease per unit costs higher margins slightly offset lower margins triactiv device new biomaterials products specifically orthovita triactiv margins continue lower biomaterials product margins manufacturing process matures volumes increase also initiated new product line third fiscal quarter 2004 orthovitas vitoss foam products initial phases production product line incurred higher costs due learning curve associated new products research development expense research development expense increased 13 164 million fiscal 2004 compared 145 million fiscal 2003 research development expenses continued increase dollars decreased percentage total revenue 28 33 fiscal periods ended june 30 2004 june 30 2003 respectively expense increases primarily due development efforts biomaterials products including work nist grant biomaterials proprietary technologies spending increased 14 million 30 63 million fiscal 2004 49 million fiscal 2003 related primarily increases personnel costs totaling 763000 facility costs including rent electric depreciation 573000 support continued development new products processes current prospective customers expect research development expenses increase investigate develop new products conduct clinical trials seek regulatory approvals proprietary products expense increases also attributable continued development efforts triactiv including clinical trial expenses research development expenses related triactiv increased 493000 5 101 million fiscal 2004 96 million fiscal 2003 expense increases occurred personnel costs 372000 facility costs including rent electric depreciation 164000 patent counsel fees consulting costs 208000 support final efforts pride clinical study growth development efforts next generation triactiv lfx cost increases partially offset 225000 decrease fiscal 2004 fiscal 2003 various product design costs related triactiv svg application past year many new design featuresease use improvements triactiv product third fiscal quarter 2004 many design enhancements implemented expenses related improvements level prior year addition decrease clinical trial costs 61000 due conclusion enrollment pride clinical study march 2004 selling general administrative expense selling general administrative expense increased 17 87 million fiscal 2004 74 million fiscal 2003 sales marketing expenses increased 900000 42 million fiscal 2004 33 million fiscal 2003 increase related primarily triactiv european sales marketing efforts increased 695000 mainly due marketing clinical study support third party reimbursement triactiv europe clinical study expenses increased 356000 657000 fiscal 2004 302000 fiscal 2003 study expected conclude second quarter fiscal 2005 addition increases occurred overall operations europe support clinical commercial efforts including personnel costs 195000 convention travel expenses 65000 well office facility costs including rent phone electric 56000 increases european sales marketing expenses include exchange rate premium fiscal 2003 2004 average exchange rate fiscal 2003 105 whereas average exchange rate fiscal 2004 119 increases approximately 60000 695000 related increase exchange rate 14 increases stated directly related difference exchange rate us marketing expenses increased 205000 17 million fiscal 2004 15 million fiscal 2003 increase primarily personnel expenses 148000 prelaunch activities marketing materials publications 52000 prepare commercial launch general administrative expenses increased 359000 45 million fiscal 2004 41 million fiscal 2003 attributable increases 392000 personnel costs 63000 facility costs including rent electric depreciation 321000 increased professional services public company expenses including investor relations sec filing fees personnel facility cost increases primarily related support continued sales research development growth increased professional fees well personnel costs related complying sarbanesoxley act 2002 soa offsetting increases decrease 218000 audit tax fees 210000 decrease allowance doubtful accounts although audit portion fees increased fiscal 2004 compared fiscal 2003 tax services fees fiscal 2004 decreased 275000 related 325000 professional service fee fiscal 2003 research development tax credit project performed 50500 professional service fee fiscal 2004 final portion research development tax credit project performed related accounts receivable allowance carrying receivables reserve amount due company filed bankruptcy outstanding balance since paid reserve longer required net interest income interest expense decreased 80000 55 66000 fiscal 2004 145000 fiscal 2003 due lower principal balance debt balance continue make required quarterly payments interest income decreased 7 11 million fiscal 2004 12 million fiscal 2003 although cash investment balances increased offset lower interest rates nonoperating income expense nonoperating income 16000 fiscal 2004 compared nonoperating expense 700 fiscal 2003 nonoperating expense income periods represented primarily net loss gain sale fixed assets comparison fiscal years 2003 2002 following table summarizes operating results fiscal year ended june 30 2003 compared fiscal year ended june 30 2002 total revenue net sales total revenues increased 53 444 million year ended june 30 2003 290 million year ended june 30 2002 net sales products increased 55 271 million fiscal 2003 175 million fiscal 2002 triactiv sales increased 388 fiscal 2003 fiscal 2002 represented less 1 total sales fiscal 2003 increase total sales primarily attributable increased sales angioseal components orthopaedic products orthopaedic products increased 31 fiscal 2003 fiscal 2002 research development revenue research development revenues increased 26 963000 fiscal 2003 765000 fiscal 2002 fiscal 2003 revenues generated nist articular cartilage synthetic vascular graft development grants nih breast cancer drug delivery grant prior fiscal year revenues generated nist articular cartilage synthetic vascular graft development grants nist articular cartilage grant provided revenue four twelve months fiscal 2003 project concluded october 2002 nist vascular graft grant provided revenue entire year nih breast cancer drug delivery grant initiated september 2002 increase prior fiscal year reflects addition nih breast cancer grant provided 46000 revenue fiscal 2003 increase activities expenses related nist synthetic vascular graft grant vascular graft grant revenue increased 454000 fiscal 2003 fiscal 2002 increases offset decrease 302000 nist articular cartilage grant due conclusion grant early fiscal 2003 following table summarizes research development revenue fiscal year ended june 30 2003 compared fiscal year ended june 30 2002 royalty income royalty income increased 52 163 million fiscal 2003 108 million fiscal 2002 increase reflects greater number units sold well increase average selling price angioseal average worldwide selling price increased 186 178 fiscal 2003 2002 respectively royalty units increased 44 approximately 967000 angioseal units sold endusers fiscal 2003 compared approximately 670000 units sold fiscal 2002 believe unit increase primarily due st jude medicals increased sales marketing efforts resulting market share gains angioseal product line us european markets full year impact selftightening suture sts version angioseal introduced us march 2002 cost products sold cost products sold increased 48 122 million fiscal 2003 82 million fiscal 2002 gross margin increased 55 53 increase gross margin reflected higher margins biomaterials products attributable part higher volumes result manufacturing efficiencies well continued allocation overhead across greater sales volumes results decrease per unit costs higher margins biomaterials products slightly offset lower margins triactiv margins continue lower biomaterials product margins manufacturing process matures volumes increase research development expense research development expense increased 34 145 million fiscal 2003 compared 108 million fiscal 2002 research development expenses related triactiv increased 25 million 36 96 million fiscal 2003 71 million fiscal 2002 increase mainly attributable continued development efforts triactiv including clinical trial expenses increased 18 million fiscal 2003 fiscal 2002 increases occurred personnel expenses 643000 operational expenses related new design featuresease use improvements triactiv product line 142000 also continued expand development efforts biomaterials products including work nist grants biomaterials proprietary technologies spending increased 12 million 31 49 million fiscal 2003 37 million fiscal 2002 increases related primarily personnel costs 503000 operational expenses related product development costs 288000 facility costs including rent electric depreciation 289000 patent counsel fees consulting costs 75000 selling general administrative expense selling general administrative expense increased 59 74 million fiscal 2003 47 million fiscal 2002 increase partially result increased sales marketing expenses increased 15 million 33 million fiscal 2003 18 million fiscal 2002 increase related primarily european sales marketing efforts triactiv increased 14 million fiscal 2003 fiscal 2002 subsidiary germany established january 2002 since time established european sales marketing team meet clinical sales goals fiscal year 2003 first full year european sales marketing expenses general administrative expenses increased 13 million 41 million fiscal 2003 28 million fiscal 2002 increase attributable 696000 increased personnel costs 261000 increased professional services public company expenses including investor relations filing fees increases related continued sales research development growth primarily increased costs related complying sarbanesoxley act 2002 soa addition selling general administrative include 325000 professional service fee relates directly research development tax credit project performed fiscal fourth quarter see net interest income interest expense decreased 78000 35 145000 fiscal 2003 223000 fiscal 2002 due lower principal balance thm acquisition obligation continue make required quarterly payments result early repayment certain debt holders interest income decreased 37 12 million fiscal 2003 19 million fiscal 2002 although cash investment balances increased offset lower interest rates nonoperating income expense nonoperating income 700 fiscal 2003 compared nonoperating expense 15000 fiscal 2002 nonoperating expense income periods represented primarily net loss gain sale fixed assets net income net income increased 91 88 million fiscal 2003 46 million fiscal 2002 primarily result increased sales royalty income described offset part increased expenses associated research development sales marketing efforts related triactiv also described addition company recognized 25 million income tax expense fiscal 2003 compared 24 million income tax expense fiscal 2002 tax expense fiscal 2003 net 15 million research development tax credit described liquidity capital resources cash equivalents investments 611 million june 30 2004 increase 127 million balance 484 end prior fiscal year june 30 2003 addition working capital 727 million june 30 2004 increase 133 million working capital 594 million june 30 2003 net cash provided operating activities 199 million 144 million fiscal years ended june 30 2004 2003 respectively fiscal year ended june 30 2004 net income 130 million tax benefit exercise stock options 17 million noncash depreciation amortization 43 million addition changes asset liability balances provided 900000 cash increase cash provided change assets liabilities primarily due utilization deferred tax asset coupled reduction prepaid assets increase accounts payable accrued expenses partially offset increase accounts receivable deferred revenue decrease prepaid assets directly attributable prepayments related clinical trial contracts prepaid balances expensed service performed completed enrollment pride study many related services performed prepayments expensed increase accounts payable accrued expenses directly related accrued tax liability fourth quarter fiscal 2004 recorded 19 million federal tax liability paid first quarter fiscal 2005 prior fourth quarter including entire fiscal year 2003 deferred tax asset utilized net operating loss nol position therefore federal tax liability recorded time periods increases accounts receivable related increased sales levels fourth quarter fiscal 2004 period fiscal 2003 fiscal year ended june 30 2003 changes asset liability balances resulted net 160000 use cash net income 88 million tax benefit exercise stock options 26 million noncash depreciation amortization 32 million cash used investing activities 200 million fiscal year ended june 30 2004 net result purchase redemption activity within investment portfolio 133 million investments mature called fiscal year 2004 subsequently purchased new investments proceeds well invested additional 139 million cash equivalents total investment purchases 271 million see note 1 condensed consolidated financial statements included annual report description availablefor sale securities see discussion cash used purchase property plant equipment 80 million capital spending plan fiscal 2004 spent 61 million june 30 2004 machinery equipment furniture fixtures well leasehold improvements fitout additional leased space reconfigure existing space expenditures primarily related expansion research development capabilities 788000 expansion upgrade mis technology 266000 continued expansion manufacturing capabilities biomaterials triactiv product lines 50 million 250 million capital spending plan fiscal 2005 expended primarily 15 20 million new facility see discussion used continue expand research development manufacturing capabilities upgrade mis technology operating leases various facilities exton pennsylvania also represent significant cash outflow lease expense noncancelable operating leases next three years follows 899004 fiscal 2005 420378 fiscal 2006 0 fiscal 2007 address current future facilities requirements august 2004 entered agreement purchase land construction new facility new facility located chester county pennsylvania approximately two miles existing location long term proposed building site accommodate 220000 square foot facility thus provide future growth continued expansion construction plan three phases phase one include construction 162000 square foot building shell fitout 90000 square feet space manufacturing quality assurance operations personnel phase one began august 2004 continue period approximately 18 months total estimated cost 26 million including land purchase phase two would increase total building shell size 175000 square feet add another 85000 square feet fitout anticipated complete end five years second phase would allow complete transition personnel operations new facility within five years phase three would complete building maximum 220000 square feet necessary intend finance construction building current available cash hand cash operations andor liquid investments conjunction acquisition thm september 2000 incurred note payable shareholders thm amount 45 million acquisition obligation amount 219147 remained outstanding june 30 2004 obligation due equal quarterly installments 281250 began december 31 2000 scheduled end september 30 2004 february 28 2003 due repayments certain former shareholders thm reduced remaining quarterly installments 223256 september 30 2004 cash outflow related acquisition obligation 223256 fiscal 2005 adequate cash balances june 30 2004 repay remaining amount obligation exercise stock options provided cash 34 million fiscal year ended june 30 2004 believe option exercises continue fiscal 2005 due strength share price compared average exercise price outstanding options second quarter fiscal year 2004 company repurchased retired 140500 shares common stock board approved repurchase program cost approximately 30 million average market price 2134 per share financed repurchases using available cash august 17 2004 reinstated stock repurchase plan see reinstatement stock repurchase program plan continue spend substantial amounts fund clinical trials gain regulatory approvals continue expand research development activities particularly triactiv system biomaterials products addition potential cash requirements associated announced reinstatement stock repurchase plan see continue add additional manufacturing facilities support continued growth biomaterials business expected commercial launch triactiv system discussed approved fda market sell triactiv system us small dedicated direct sales force initially comprised approximately ten salespeople initial estimates cost direct sales plan would increase selling expense fiscal 2005 25 million 30 million including personnel marketing expenses believe current cash investment balances addition cash generated operations sufficient meet operating financing capital requirements least next 12 months also believe cash investment balances sufficient longer term basis however depend numerous factors including market acceptance existing future products successful commercialization products development costs associated commercialization progress product development efforts magnitude scope efforts progress preclinical studies clinical trials product clearance fda agencies cost timing efforts expand manufacturing sales marketing capabilities cost filing prosecuting defending enforcing patent claims intellectual property rights competing technological market developments development strategic alliances marketing certain products terms future equity financing may dilutive stockholders terms debt financing may contain restrictive covenants limit ability pursue certain courses action ability obtain financing dependent status future business prospects well conditions prevailing relevant capital markets assurance given additional financing available us available us acceptable terms need arise presented summary contractual obligations june 30 2004 1 see note 6 consolidated financial statements additional information shortterm debt 2 accordance accounting principles generally accepted united states obligations recorded consolidated balance sheet 3 see note 4 consolidated financial statements additional information operating leases estimate time periods cash equivalents adequate fund operations forward looking statement within meaning private securities litigation reform act 1995 subject risks uncertainties actual results may differ materially contemplated forwardlooking statements addition described factors may cause difference set forth caption risk factors annual report form 10k research development tax credit recorded tax credits 984817 1500000 fiscal years ended june 30 2004 june 30 2003 respectively entire tax credit recorded 2003 310000 2004 credit related qualified research development activities company period 1991 2003 stock repurchase program october 23 2003 announced board directors approved program repurchase 400000 issued outstanding shares common stock six months date board approval second quarter fiscal year 2004 company repurchased retired 140500 shares common stock program cost approximately 30 million average market price 2134 per share financed repurchases using available cash august 17 2004 announced board directors reinstated program repurchase issued outstanding shares common stock six months date board approval current plan calls repurchase 259500 shares balance original plan mentioned september 3 2004 repurchased retired 25000 shares common stock program cost approximately 600000 average market price 2414 per share financed repurchases using available cash plan continue repurchase shares cash time open market block trades otherwise repurchase program require us purchase specific dollar value number shares purchases program depend market conditions may commenced suspended time without prior notice risk factors carefully consider risks uncertainties factors described addition information set forth report could materially adversely affect business operating results financial condition cash flows prospects well adversely affect value investment common stock risks related business may able obtain necessary regulatory approvals triactiv system united states fda approved triactiv system marketing prior granting approval fda may require clarification information provided regulatory submissions information clinical studies granted fda approval may impose limitations uses product may marketed product may marketed experience delays unable receive approval fda growth prospects diminished although received ce mark approval even receive fda approval may successful commercializing triactiv system direct sales force triactiv system obtains necessary governmental approvals need commercialize product may able successfully develop train sales force sell market triactiv system recently began build sales marketing force prior experience hiring training sales marketing force may able expand maintain internal sales marketing force technical expertise supporting distribution capabilities unable successfully commercialize triactiv growth prospects diminished derive substantial majority revenues two customers substantial majority total revenues derived two customers royalty income sales biomaterials st jude medical associated angioseal represented approximately 58 total revenue fiscal 2004 sales biomaterials products arthrex distributor orthopaedic products represented approximately 30 total revenues possible us predict future level demand products generated customers future demand angioseal customers st jude medical customer concentration exposes us risk changes business condition either major customers risk loss major customer would adversely affect results operations relationship customers subject change time anticipate substantial portion revenues continue come angioseal manufactured marketed distributed st jude medical license agreements st jude medical angioseal manufactured marketed sold worldwide basis st jude medical two significant sources revenue future expected sales collagen st jude medical use angioseal royalty income sale angioseal product line success angioseal depends part time effort attention st jude medical devotes angioseal product line success manufacturing marketing selling angioseal product line terms agreements st jude medical control pricing marketing strategy angioseal product line addition depend st jude medical successfully maintain levels manufacturing sufficient meet anticipated demand abide applicable manufacturing regulations seek reimbursement approvals st jude medical terminate arrangement time reason upon 12 months notice time sales marketing manufacturing distribution rights angioseal would returned us st jude medical may successfully pass future inspections manufacturing facility adequately perform manufacturing marketing selling duties failure st jude medical may negatively impact angioseal unit sales therefore reduce royalties biomaterials products successful operating results business may substantially impaired success existing biomaterials products well develop future depends variety factors including ability continue manufacture sell competitively price products acceptance products medical profession addition may required obtain regulatory approval future biomaterials products require substantial additional funds develop market biomaterials products expect fund growth biomaterials business operating income operating income may sufficient develop new biomaterials products date relied strategic partners customers market sell biomaterials products cannot assure commercialize products successfully planned development sales force depend customers market obtain regulatory approvals biomaterials products depend efforts biomaterials customers marketing products include biomaterials components assurance customers enduse products include biomaterials components commercialized successfully customers otherwise able compete effectively markets products highly competitive likely become competitive competitors may able respond quickly new emerging technologies changes customer requirements markets current proposed products fragmented intensely competitive subject rapid change sensitive new product introductions enhancements expect competitive environment products become intense additional companies enter markets new techniques technologies adopted biomaterials medical devices compete directly indirectly customers range products technologies produced wide variety companies well processes procedures require use products competitors many existing competitors well number potential new competitors longer operating histories markets greater name recognition larger customer bases greater financial technical marketing resources biomaterials products compete products many larger companies industry vascular sealing device market products compete products sold datascope corporation perclose inc subsidiary abbott laboratories vascular solutions inc amongst smaller competitors majority vascular sealing performed manual compression represents primary competition triactiv currently commercially available europe competitors include boston scientific corporation johnson inc medtronic inc owns percusurge inc guidant corporation among others successful commercializing triactiv us anticipate competitors companies competing europe well others competitors may broader product lines allow negotiate exclusive longterm supply contracts offer comprehensive pricing products broader product lines may also provide competitors significant advantage marketing competing products group purchasing organizations managed care organizations increasingly seeking reduce costs centralized purchasing greater financial resources product development capabilities may allow competitors respond quickly new emerging technologies changes customer requirements may render products obsolete significant portion revenue depends sales medical devices customers enduser market also affected competition within markets devices competition within medical device market could also adverse effect business variety reasons including customers may compete directly larger dominant manufacturers extensive product lines greater sales marketing distribution capabilities also unable control factors may impact commercialization components end use products marketing sales efforts competitive pricing pressures within particular markets products accepted medical community products replaced new technologies business may suffer success existing products depends continued acceptance products medical community cannot predict whether products continue accepted acceptance sustained long term success products develop future depend adoption products targeted markets cannot predict quickly medical community accept future products extent future products used encounter difficulties introducing future products targeted markets operating results business may substantially impaired addition new technologies techniques may developed may render current products along development obsolete loss interruption supply key vendors could limit ability manufacture products purchase certain materials components products various suppliers components custom made us including many absorbable polymer suture raw materials used custom polymer products across markets loss interruption supply key vendors may require us find new vendors could experience production development delays seek new vendors may problems manufacturing delivering biomaterials products future biomaterials industry emerging area using many materials untested whose properties still known consequently time may experience unanticipated difficulties manufacturing delivering biomaterials products customers difficulties may include inability meet customer demand delays delivering products quality control problems certain biomaterials products use hazardous materials exposes us risk material environmental liabilities use hazardous substances research development manufacturing operations potentially subject material liabilities related personal injuries property damages may caused hazardous substance releases exposures facility decontamination costs cleanup costs related damages liabilities could substantially impair business operating results required comply increasingly stringent laws regulations governing environmental protection workplace safety including requirements governing handling storage disposal hazardous substances st jude medicals international sales subject number risks could harm future international sales angioseal ability successfully commercialize new products international markets st jude medical sells angioseal product line internationally pays us royalty unit sold also sell triactiv well products international markets royalties international sales angioseal product line st jude medical revenues international sales subject several risks including impact recessions economies within outside united states unexpected changes regulatory requirements tariffs trade barriers weaker intellectual property rights protection countries fluctuations exchange rates potentially adverse tax consequences political economic instability occurrence events could seriously harm st jude medicals future international sales success depends key personnel loss could impair operating results business success depends significant extent upon efforts abilities joseph w kaufmann douglas g evans wendy f dicicco members senior management loss services one key employees could harm operating results business addition successful unless attract retain skilled personnel particularly areas research product development failure expand management systems controls support anticipated growth integrate future acquisitions could seriously harm operating results business operations continue grow expect expansion continue execute business strategy sustaining growth placed significant demands management administrative operational information technology manufacturing financial personnel resources accordingly future operating results depend ability officers key employees continue implement improve operational client support financial control systems effectively expand train manage employee base may able manage growth successfully acquisitions undertake could difficult integrate disrupt business dilute stockholder value harm operating results may acquire make investments complementary businesses technologies services products appropriate opportunities arise process integrating acquired business technology service product business operations may result unforeseen operating difficulties expenditures integration acquired company also may consume much managements time attention could otherwise available ongoing development business moreover anticipated benefits acquisition may realized furthermore may unable identify negotiate finance future acquisitions successfully future acquisitions could result potentially dilutive issuances equity securities incurrence debt contingent liabilities amortization expenses related goodwill intangible assets future operating results difficult predict may vary significantly quarter operating results varied significantly quarter past likely vary substantially future result number factors control including market perception customer acceptance products market perception acceptance customers products efforts increase sales biomaterials products efforts gain fda approval commercialize triactiv efforts gain ce mark fda approval future generations triactiv device loss significant orders changes relationship st jude medical establishment strategic alliances acquisitions timely implementation new improved products delays obtaining regulatory approvals increased competition litigation concerning intellectual property rights medical device industry rely upon results operations particular quarter indication results full year quarter risks related intellectual property unable protect patents proprietary rights reputation competitiveness marketplace may materially damaged regard patents biomaterials trade secrets intellectual property important success rely upon patent law trade secret protection confidentiality agreements license agreements st jude medical protect proprietary rights although registered certain patents applicable governmental authorities effective patent protection may available every country products made available sought protection intellectual property every country products may sold steps take protect proprietary rights may adequate ensure third parties infringe otherwise violate patents similar proprietary rights may accused infringing upon proprietary rights others related litigation could materially damage operating results business third parties may claim violated intellectual property rights adverse determination intellectual property litigation interference proceedings brought us could prohibit us selling products subject us significant liabilities third parties require us seek licenses third parties costs associated license arrangements may substantial could include ongoing royalties furthermore necessary licenses may available us satisfactory terms adverse determinations judicial administrative proceeding failure obtain necessary licenses could prevent us manufacturing selling products claims without merit could subject us costly litigation divert attention key personnel control use angioseal device trademark term angioseal trademark st jude medical goodwill generated marketing sales devices bearing angioseal trademark belongs st jude medical us st jude medical license agreements terminate would right call products angioseal unless purchase license trademark st jude medical without rights angioseal trademark would market products different trademark moreover upon termination st jude medical license agreements st jude medical would right compete us selling collagen puncture closure devices angioseal trademark thus purchasers puncture closure devices may likely recognize purchase products labeled angioseal regardless whether devices originate us risks related industry may face product liability claims could result costly litigation significant liabilities clinical testing manufacture sale medical products involve inherent risk human subjects clinical testing consumers products may suffer serious bodily injury death due side effects unintended negative reactions products accordingly clinical testing manufacture sale products entail significant risk product liability claims medical device industry general subject significant product liability litigation product liability claims without merit could result costly litigation reduced sales significant liabilities diversion managements time attention resources cannot sure product liability insurance coverage adequate continue available us acceptable terms face uncertainty relating third party reimbursement products could seriously harmed changes reimbursement policies governmental private healthcare payers particularly extent changes affect reimbursement catheterization procedures angioseal products used physicians hospitals users products may fail obtain sufficient reimbursement healthcare payers procedures products used adverse changes may occur governmental private thirdparty payers policies toward reimbursement procedures products manufacturing activities subject extensive governmental regulation could make expensive time consuming us introduce new improved products manufacturing activities subject extensive regulation number governmental agencies including fda comparable international agencies required obtain approval fda international agencies market sell new products satisfy agencies requirements labeling sales promotional materials connection existing products comply applicable manufacturing regulations undergo rigorous inspections agencies compliance regulations agencies may delay prevent us introducing new improved products including triactiv furthermore may subject sanctions including temporary permanent suspension operations product recalls marketing restrictions fail comply laws regulations pertaining business also required demonstrate compliance fdas quality system regulations fda enforces quality system regulations preapproval periodic postapproval inspections regulations relate product testing vendor qualification design control quality assurance well maintenance records documentation unable conform regulations required locate alternative manufacturers conform identifying qualifying alternative manufacturers may long costly difficult process could seriously harm business fda international regulatory agencies may also limit indications products approved regulatory agencies may restrict withdraw approvals received additional information becomes available support action risks related securities trading price common stock likely fluctuate substantially future trading price common stock may fluctuate widely result number factors control including ability meet exceed forecasts expectations analysts investors quarter variations operating results announcements regarding clinical activities new products us competitors general conditions medical device industry changes forecasts earnings estimates analysts partners ability meet exceed forecasts expectations analysts investors price volume fluctuations overall stock market particularly affected market prices many medical device companies general economic conditions addition market stock experienced may continue experience price volume fluctuations unrelated disproportionate operating performance result may able sell shares common stock price purchase past following periods volatility market price companys securities class action litigation often instituted company securities litigation initiated us without merit could incur substantial costs managements attention resources could diverted business future sales common stock public market management stockholders significant holdings could cause stock price fall sales substantial number shares common stock public market management significant stockholders perception sales could occur could cause market price common stock decline adversely affect future ability raise capital offering equity securities second amended restated certificate incorporation delaware law may discourage acquisition company provisions second amended restated certificate incorporation delaware law could make difficult third party acquire us even would beneficial stockholders forwardlooking statements report includes forwardlooking statements within meaning section 21e securities exchange act 1934 based forwardlooking statements largely current expectations projections future events trends affecting business report words believe may estimate continue anticipate intend expect plan similar expressions relate kensey nash business management intended identify forwardlooking statements exclusive means identifying number risks uncertainties factors could cause actual results performance financial condition cash flows prospects opportunities differ materially expressed implied forwardlooking statements risks uncertainties factors include among things general economic business conditions nationally markets impact competition anticipated trends business existing future regulations affecting business strategic alliances acquisition opportunities risk factors set forth risk factors except expressly required federal securities laws undertake obligation publicly update revise forwardlooking statements whether result new information future events otherwise date report results operations past period considered indicative results expected future periods fluctuations operating results may also result fluctuations price common stock item 7a item 7 management’s discussion analysis financial condition results operations following discussion analysis read conjunction “selected consolidated financial data” financial statements related notes included report discussion analysis contains forwardlooking statements relating future events future financial performance statements predictions actual events results may differ materially evaluating statements carefully consider various factors identified report could cause actual results differ materially expressed implied forwardlooking statements including set forth “risk factors” annual report form 10k see “cautionary note regarding forwardlooking statements” overview kensey nash corporation medical device company primarily focused field regenerative medicine application devices materials therapies help repair damaged diseased tissues recognized leader innovative product development well broad portfolio resorbable biomaterials products extensive range products sold strategic partners multiple large medical markets including cardiology orthopaedic sports medicine spinal craniomaxillofacial cmf trauma general surgery sell products strategic partners sell direct enduser revenues consist two components net sales include biomaterials sales endovascular sales royalty income net sales biomaterials sales biomaterial orthopaedic products including products applications primarily sports medicine spinal markets cardiovascular products consisting primarily angioseal components sold st jude medical continue primary source revenue table shows fiveyear trend biomaterials sales including orthopaedic product sales cardiovascular product sales general surgery product sales net sales biomaterials products decreased 15 444 million fiscal 2011 compared 521 million prior fiscal year primarily due decrease cardiovascular products due reduced requirements new supply agreement st jude medical well decrease orthopaedic product sales negative economic climate particularly first half fiscal year impacted medical device industry high unemployment challenging health insurance environment appear reduced procedures markets first half fiscal 2011 experienced lower orthopaedic sales originally anticipated however orthopaedic sales primarily sales spine sports medicine products second half fiscal 2011 increased customers rebalanced inventory levels introduced new products market believe fiscal 2012 continued stronger product sales orthopaedic products primarily attributable customers continuing rebalancing inventory levels sales norian products synthes result recent acquisition norian product line impact stryker’s overall larger market presence marketing orthovita products reflective stryker’s acquisition orthovita occurred fourth quarter fiscal 2011 addition macroeconomic health insurance environment factors discussed net sales orthopaedic portion business dependent 1 partners’ management inventory levels 2 success current partners orthopaedic markets sports medicine spine extremities 3 continued acceptance biomaterialsbased products markets well expanded future acceptance products 4 competitive pricing 5 ability offer new products technologies attract new partners markets due dependencies factors sales orthopaedic customers vary significantly quarter cardiovascular sales consist primarily angioseal components sold st jude medical sales st jude medical highly dependent ordering patterns components used manufacturing angioseal device st jude medical vary significantly quarter previously supplied 100 requirements collagen plug least 30 requirements polymer anchors supply agreement expired december 31 2010 june 2010 entered new twoyear supply agreement st jude medical effective period january 1 2011 december 31 2012 replace previous supply agreement new supply agreement provides us exclusive outside supplier collagen plugs one key resorbable components angioseal device new supply agreement requires st jude medical purchase contractual minimum order levels collagen plugs calendar years 2011 2012 new supply agreement call us supply polymer anchors fiscal year 2011 collagen plug sales st jude medical approximately 113 million polymer anchor sales approximately 08 million april 2011 st jude medical filled calendar year 2011 minimum order levels 40 million collagen plugs shipped second half fiscal 2011 currently expect st jude medical place additional orders remainder calendar year 2011 june 30 2011 st jude medical placed calendar 2012 order approximately 64 million collagen plugs 40 million shipped second half fiscal 2012 24 million first half fiscal 2013 64 million orders calendar year 2012 29 million higher contractual minimum royalties license agreements st jude medical angioseal device affected new supply agreement also developed manufactured products used general surgery markets products primarily include products extracellular matrix ecm program well resorbable collagen product use breast biopsies fiscal 2010 announced two strategic agreements involving medeor™ matrix porcine dermis ecm material one synthes arthrex synthes launched xcm biologic™ tissue matrix initially focused ventral hernia repair plastic reconstructive procedures us may 2010 outside us ous august 2010 expect achieve increases general surgery product sales fiscal 2012 ecm product sales continue expand us ous launch gains momentum arthrex launched rotator cuff repair product fourth quarter fiscal 2011 currently evaluating additional partnering opportunities well fields use ecm products plan continue expand relationships current customers build relationships new customers targeting new markets biomaterials sales primarily include grant revenue generated research development team acquired nerites acquisition revenue research development contracts recognized period related expenses incurred grant revenues recorded related government programs us government funds research high risk enabling technologies royalty income also derive significant portion revenue profitability royalty income proprietary products developed codeveloped angioseal™ royalty income inventor original developer angioseal device vascular closure device reduces recovery time enhances patient comfort following diagnostic therapeutic cardiovascular catheterizations st jude medical exclusive worldwide rights development manufacturing sales marketing angioseal device receive approximate 6 royalty enduser product sales royalty income angioseal device license agreements affected new supply agreement st jude medical believe mature market anticipate sales angioseal device st jude medical expected relatively flat upcoming years vitoss™ foam vitoss™ vitoss™ bioactive foam royalty income since 2003 partnered orthovita recently acquired stryker codevelop commercialize series unique proprietary bone void filler products branded vitoss™ foam first launched march 2004 recent vitoss™ bioactive foam technology launched fourth quarter fiscal 2008 receive royalty orthovita’s enduser sales vitoss™ foam vitoss™ bioactive foam products addition august 2004 entered agreement acquire proprietary rights third party inventor vitoss™ technology 26 million assignment agreement assignment agreement receive additional royalty orthovita enduser sales orthovita products containing vitoss™ technology total royalty received 40 million approximately 566000 received fiscal 2011 17000 remaining received june 30 2011 believe unique technology associated vitoss™ foam vitoss™ bioactive foam products including product extensions well stryker’s worldwide marketing efforts result orthovita component royalty income continuing grow next fiscal year royalty generating relationships none materially contributes revenue time expect provide increased revenue related products gain market acceptance additional products commercialized sharebased compensation following table summarizes total sharebased compensation expense within operating expense category consolidated statements income fiscal years presented sharebased compensation expense consists stock options granted employees nonemployee members board directors executive officers nonemployee outside consultants b nonvested stock awards ie restricted stock granted nonemployee members board directors executive officer nonemployee outside consultant c cashsettled stock appreciation rights sars granted executive officers nonexecutive employees company cannot predict market value common stock time exercise grants magnitude exercises particular time terms grants cashsettled sars classified liability awards continue remeasured reporting period awards settled fluctuations fair value liability award recorded increases decreases compensation cost either immediately remaining service period depending vesting status award total sharebased compensation expense fiscal 2011 2010 increased relation fiscal year 2009 primarily due amortized expense related number years equity grants additionally fiscal 2009 higher favorable adjustments fair value cashsettled sars fiscal 2011 2010 remeasured based among factors closing stock price june 30 2011 2010 2009 see note 14 consolidated financial statements included form 10k additional information concerning sharebased compensation following table summarizes sharebased compensation expense fiscal year grant fiscal years ended june 30 2011 2010 2009 recent strategic acquisitions investments orteq sports medicine december 21 2010 entered manufacturing supply agreement pursuant investment agreement made noncontrolling minority costmethod investment preferred shares orteq approximately 25 million orteq privatelyheld medical device company headquartered london united kingdom specializing field biodegradable polymer technology meniscus repair pursuant manufacturing supply agreement orteq acquired exclusive worldwide manufacturing rights actifit® actifit product line orteq period 10 years date first us commercial sale approximately 16 million actifit biocompatible synthetic meniscal scaffold received ce mark approval 2008 treatment irreparable partial meniscal tears currently sold throughout europe previously disclosed investment agreement orteq committed making additional minority costmethod investment approximately 637000 british pounds preferred shares orteq payable us dollars orteq receives approval conditional approval fda investigational device exemption clinical trial second anniversary initial investment december 21 2012 otherwise earlier option prior december 21 2012 august 19 2011 event subsequent june 30 2011 option pursuant ancillary agreement made cash advance orteq approximately 637000 british pounds 1055063 structured convertible debt agreement option convert cash advance preferred shares orteq additional costmethod investment agreement convert cash advance shares cash advance accrued interest payable orteq us prior august 2016 see note 8 consolidated financial statements included form 10k additional information regarding relationship orteq accounting treatment transactions expect begin generating revenues manufacturing supply agreement orteq transition manufacturing orteq completed fiscal 2012 revenues expected significant fiscal 2012 nerites corporation january 2011 acquired substantially assets certain operational liabilities privatelyheld nerites corporation nerites development stage company process developing medical adhesives antifouling coatings ie coatings passively inhibit bacterial attachment prevent biofilm formation based madison wisconsin approximately 197 million plus acquisitionrelated costs approximately 300000 approximately 167 million purchase price paid acquisition date financed available cash investments hand remaining 30 million also expected financed cash hand held back us security certain potential nerites indemnification obligations holdback amount 15 million released first second anniversaries acquisition date nerites extent holdback amount applied toward indemnification obligations expect technology platform adhesivebased biomaterials acquired nerites enable us penetration regenerative medicine markets transaction accounted asset acquisition total cost acquisition allocated net assets acquired 22000 intangible assets 18 million acquired inprocess research development iprd 182 million acquisition date planned develop portfolio hybrid adhesivebased products integrate ecm collagen polymer technology platforms applications general neurologic plasticreconstructive orthopaedic urologic cardiovascular thoracic surgical specialties initial product targets 182 million acquired iprd assigned included devices 1 repairing defects abdominal walls 71 million 2 meniscal tears 47 million 3 articular cartilage resurfacing 02 million 4 dural membranes 53 million 5 gastrointestinal tracts 09 million date acquisition five projects expected utilize adhesive technology 100 dependent developing adhesive raw material nerites technology date acquisition expected spend approximately 250 million next seven years bring five projects development technological feasibility believe current cash investment balances expected future cash generated operations sufficient develop projects acquisition date assuming research development program create adhesive raw material successful expected begin receiving estimated revenues five process projects fiscal 2013 2017 depending project substantial additional research development required finalize raw material formulation unique processes specific formulation must developed enable formulation ability manufactured commercially viable medical device risk marketable material formulation may never developed may problems manufacturing materials untested whose properties still known ultimately order determine technical feasibility commercial viability initial product targets medical device would subject preclinical testing would potentially need complete clinical trials receive regulatory approvals prior potential commercialization length time develop commercially viable medical device vary substantially according type complexity intended use product delays associated products expect develop may cause us incur additional expenses affect ability attract customers market sell products result new emerging technologies obsolescing adhesive technology products competitors may introduce gain market acceptance comparable products prior us would impact future revenues assurance efforts successful projects successfully developed revenue profitability may adversely affected future periods continuously monitoring development projects believe assumptions used valuation acquired iprd reasonably estimated future benefits attributable acquired iprd see note 5 consolidated financial statements included form 10k additional information concerning acquisition net assets nerites related iprd assurance given actual results deviate assumptions future periods additionally value acquired intangible assets may become impaired see item 1a “risk factors” herein additional risks uncertainties factors could impact successful development projects similar risks uncertainties research development efforts norian corporation may 24 2011 completed acquisition certain operational assets certain liabilities relating business product lines norian wholly owned subsidiary synthes pursuant asset purchase agreement related property purchase agreement total purchase price approximately 26 million included financial results norian consolidated financial statements date acquisition accounted asset acquisition using purchase method accounting us gaap purchase method accounting total purchase price allocated tangible intangible acquired assets assumed liabilities norian based respective fair values date acquisition allocating total purchase price norian based estimated fair values recorded 14 million identifiable intangible assets 8 million net tangible assets gain bargain purchase deferred taxes 514000 may 24 2011 also entered supply agreement synthes usa sales llc subsidiary synthes provides us exclusive manufacturer supplier norian product lines acquired asset purchase agreement pursuant synthes exclusively purchase us requirements products exclusively terms set forth supply agreement also may 24 2011 entered research development agreement synthes develop certain related future products see item 1a “risk factors” herein additional risks uncertainties factors could impact success products cost reduction plan second quarter fiscal 2010 implemented cost reduction plan primarily associated reduced endovascular activities lower production volume cost reduction plan comprised headcount reductions primarily voluntary retirement program well reduced work schedules connection plan incurred 19 million pretax charges second quarter fiscal 2010 consisting 10 million pretax severance charge 944000 pretax unabsorbed overhead expense charge following table summarizes pretax charges resulting cost reduction plan within operating expense category consolidated statements income fiscal 2010 property insurance claim fiscal 2010 fire occurred contained small manufacturing area within corporate headquarters building exton property insurance policy covered remediation efforts fixed asset replacements subject 25000 deductible recognized gain 775000 within cost products sold upon final settlement insurance carrier remediation recovery efforts completed received 13 million total insurance proceeds remediation efforts replacement value fixed assets expenses replaced damaged fixed assets total value approximately 480000 remaining insurance proceeds used us pay related expenses added general funds total insurance proceeds including amounts relating outside remediation services fixed assets classified within investing activities section fiscal 2010 consolidated statement cash flows balance insurance proceeds used us pay related expenses classified within operating activities section fiscal 2010 consolidated statement cash flows critical accounting policies critical accounting policies require application management’s difficult subjective complex judgments often result need make estimates matters inherently uncertain may change future periods critical accounting policies identified described revenue recognition recognize revenue accordance fasb asc topic 605 “revenue recognition” asc 60510s99 also follow fasb asc subtopic 60525 “multiple element arrangements” asc 60525 customer arrangements containing multiple revenue elements entered materially amended june 30 2003 sales revenue sales revenue recognized accordance financial accounting standards board fasb accounting standards codification asc subtopic 60510s99 “revenue recognition” asc 60510s99 sales revenue recognized products shipped services completed advance payments received products services recorded deferred revenue recognized product shipped services performed reduce sales revenue estimated customer returns allowances addition account customer arrangements containing multiple revenue elements accordance asc 60525 consider variety factors determining appropriate method accounting multiple elements agreements including whether various elements separated accounted individually separate units accounting multiple element arrangements combined single unit accounting revenues deferred recognized expected period performance specific methodology recognition revenue determined casebycase basis based facts circumstances applicable agreement upfront nonrefundable payments standalone value recorded deferred revenue received recognized revenues expected period performance evaluate milestone payments individual basis recognize revenue nonrefundable milestone payments earnings process complete payment reasonably assured nonrefundable milestone payments related arrangements continuing performance obligations recognized using contingencyadjusted performance model period performance revenue recognized milestone proportionately extent performance period date remainder ratably spread remaining performance period arrangement also recognize grant revenue research development related us government programs periods related expenses incurred royalty income royalty revenue recognized end quarter relevant net total enduser product sales dollars reported customers us quarter royalty payments typically received within 45 days end calendar quarter accounting sharebased compensation use various forms equity compensation including stock options nonvested stock awards major part compensation programs retain provide incentives top management team members employees past also issued cashsettled sars employees account equity compensation accordance fasb asc topic 718 “compensationstock compensation” revisions estimates methodologies could material impact financial statements • fair value option grants estimated date grant using blackscholes optionpricing model uses weighted average assumptions expected volatilities based historical volatility common stock factors use historical data estimate option exercise employee termination behavior within valuation model separate groups employees similar historical exercise behavior consider separately valuation purposes expected terms options derived historical exercise behavior represent periods time options granted expected outstanding riskfree rate periods within contractual life option based us treasuries constant maturities effect time grant • nonvested stock awards ie restricted stock granted nonemployee members board directors executive officers accounted using fair value method fair value nonvested stock awards based upon closing price common stock date grant • cashsettled sars awarded sharebased payment transactions classified liability awards accordingly record awards component current liabilities consolidated balance sheets fair value sar estimated using blackscholes optionpricing model uses weighted average assumptions expected volatilities based historical volatility common stock well factors liability awards fair value award determines measurement liability consolidated balance sheet remeasured reporting period award settled fluctuations fair value liability award recorded increases decreases compensation cost either immediately remaining service period depending vested status award use historical data estimate employee termination within valuation model employees similar historical exercise behavior considered separately valuation purposes expected term cashsettled sars determined using simplified method accordance asc 71810s99 accounting investments debt securities account investment portfolio accordance fasb asc topic 320 “investmentsdebt equity securities” classified entire investment portfolio availableforsale securities secondary resale markets report portfolio fair value unrealized gains losses included stockholders’ equity realized gains losses income currently various investment securities fair values less amortized costs therefore contain unrealized losses unrealized losses related investments due either changes interest rates investments obtained premium evaluated securities determined decline value related company industry specific event intent sell investments recovery fair value current requirement sell investments anticipate full recovery amortized costs respect securities maturity sooner event favorable market interest rate environment revisions classification investments andor determination anticipation full recovery amortized costs maturity sooner could result realizing gains losses investments therefore material impact financial statements business combinations fiscal 2010 adopted asc 805 “business combinations” accounting business combinations requires management make significant estimates assumptions especially acquisition date respect fair values certain intangible assets inventory fixed assets valuations performed assist determining fair values assets acquired liabilities assumed requires management make significant estimates assumptions especially respect intangible assets management makes estimates fair value based upon assumptions believed reasonable estimates based part historical experience information obtained management acquired companies expectations future cash flows inprocess research development iprd business combination accounted indefinitelived asset balance sheet associated research development efforts completed abandoned classified indefinitelived asset acquired iprd would subject impairment testing would determine useful life intangible asset completion abandonment associated research development efforts alternatively asset acquisition account iprd accordance fasb asc topic 730 “research development” whereby costs intangible assets purchased others particular research development project alternative future uses research development projects otherwise therefore separate economic values research development costs time costs incurred would expensed capitalized alternative future use cost method investments account noncontrolling minority costmethod investments using cost method ability exercise significant influence operating financial policies investee periodic basis less frequently quarterly assess investments impairment events changes circumstances may significant adverse effect fair value investment event change circumstances may significant adverse effect fair value investment identified estimate fair value investment amount carrying value cost method investment exceeds fair value reduction value determined temporary record impairment loss investment valuation financial instruments adopted provisions fasb asc topic 820 “fair value measurements disclosures” asc 820 financial assets liabilities provides guidance using fair value measure financial assets liabilities defining fair value exit price amount would received selling asset paid transfer liability orderly transaction market participants measurement date categorization based threetier valuation hierarchy prioritizes inputs used measuring fair value assessment significance particular input fair value measurement requires judgment may affect valuation financial assets financial liabilities placement within fair value hierarchy see note 11 consolidated financial statements included form 10k discussion regarding fair value financial assets liabilities inventory valuation inventory stated lower cost market adjustments inventory made individual part level estimated excess obsolescence impaired balances reflect inventory lower cost market factors influencing adjustments include changes demand technological changes product life cycle development plans component cost trends product pricing physical deterioration quality concerns revisions adjustments would required factors differ estimates income taxes course estimating estimated annual effective tax rate recording quarterly income tax provisions consider many factors including expected earnings state income tax apportionment estimated research development tax credits manufacturing deductions nontaxable interest income estimates material changes differences estimates could significant impact effective tax rate follow standards related accounting uncertainty income taxes record uncertainties judgments application complex tax regulations multitude jurisdictions see note 18 consolidated financial statements included form 10k additional information results operations comparison fiscal years 2011 2010 total revenues total revenues 716 million fiscal 2011 decreased 11 total revenues 806 million fiscal 2010 total net sales net sales products decreased 15 460 million fiscal 2011 compared net sales 543 million fiscal 2010 77 million 15 decrease biomaterials sales 06 million 27 decrease endovascular sales biomaterials sales biomaterials sales 444 million fiscal 2011 15 decrease compared 521 million fiscal 2010 biomaterials sales include revenue recognized products shipped grant revenue well revenue generated product development programs milestone revenue earned biomaterials customers sports medicine product sales 121 million fiscal 2011 decreased 27 164 million prior fiscal year although sales sports medicine products improved second half fiscal 2011 compared first half fiscal 2011 14 million inventory reductions one major customers overall weakness sector adversely impacted sales full year spine product sales 118 million fiscal year ended june 30 2011 increased 2 116 million prior fiscal year overall spine market weak throughout year one major customers reduced inventory levels first half fiscal year improve significantly third fourth quarters customer inventory levels rebalanced trauma cmf products consisting primarily one month sales resulting norian acquisition increased 17 million fiscal 2011 06 million prior fiscal year cardiovascular sales 127 million consisting primarily sales vascular closure product components st jude medical decreased 34 193 million prior fiscal year st jude medical purchased minimum amount collagen plugs called new supply agreement general surgery sales consisting primarily new extracellular matrix ecm product xcm biologic breast biopsy products 44 million increased 21 fiscal year ended june 30 2011 36 million prior fiscal year sales ecm products fiscal 2011 33 million compared 11 million prior fiscal year increase ecm product sales reflected market launch new xcm products synthes strategic partner sales breast biopsy products 10 million compared 25 million prior fiscal year comparable period due inventory stocking orders placed first half fiscal 2010 negatively affected sales throughout fiscal 2011 endovascular sales endovascular sales 16 million fiscal 2011 27 decrease compared sales 22 million fiscal 2010 endovascular sales include revenue recognized products shipped well milestone revenue recognized product development programs spectranetics corporation spectranetics endovascular sales decrease primarily due decrease quickcat product sales second quarter ended december 31 2009 fiscal 2010 last quarter reflecting sales quickcat device quickcat manufacturing transferred spectranetics december 2009 fourth quarter ended june 30 2011 spectranetics assumed manufacturing responsibility thromcat products therefore fiscal 2011 final fiscal year product revenues endovascular business fiscal 2011 fiscal 2010 recognized revenue 577000 two milestones achieved fiscal 2009 development regulatory service agreement spectranetics achievement future remaining research development milestone payments pursuant agreements spectranetics could negatively affected performance spectranetics may minimum delayed may received spectranetics disclosed spectranetics publicly announced discontinuation sales safecross product line second quarter fiscal 2010 spectranetics’ decision discontinue safecross product line negatively impacts ability receive future royalties based sales safecross product minimum delay achievement 6 million cumulative sales milestone based upon sales safecross thromcat quickcat products company currently expecting achievement 60 million cumulative sales milestone payment spectranetics company’s second quarter fiscal 2012 portion would deferred recognized expected period performance royalty income royalty income decreased 3 256 million fiscal 2011 264 million fiscal 2010 royalty income 194 million st jude medical’s angioseal net enduser sales fiscal 2011 decreased 5 203 million fiscal 2010 may result increased competition reduction use closure devices enduser sales angioseal device decreased 5 fiscal 2011 prior fiscal year royalty income 58 million orthovita’s vitoss™ vitoss™ foam vitoss™ bioactive foam products net enduser sales fiscal 2011 consistent fiscal 2010 enduser sales codeveloped vitoss™ foam vitoss™ bioactive foam products increased 3 fiscal 2010 prior fiscal year cost products sold cost products sold 234 million fiscal 2011 105000 decrease 235 million fiscal 2010 gross margin net sales 49 57 fiscal 2011 fiscal 2010 respectively negatively affecting gross margin fiscal 2011 product mix higher unabsorbed overhead period costs related reduced production levels due lower sales norian inventory stepup charge described included within cost products sold fiscal 2010 result previously disclosed cost reduction plan 944000 unabsorbed overhead charges due reduced work schedules second quarter fiscal 2010 well 404000 severance charges offset recognition 775000 net gain property insurance proceeds claim property insurance policy connection asset acquisition norian may 2011 recorded purchase accounting adjustment fair value acquired inventory commonly referred “steppedup value” 13 million representing estimated capitalized manufacturing profit acquired inventory nonrecurring noncash charge cost products sold recognized expected inventory turnover period approximates 6 month period capitalized manufacturing profit added inventory purchase accounting expected sold within approximately 6 months acquisition date included within cost products sold fourth quarter fiscal 2011 approximately 257000 inventory stepup charge believe gross margin net sales fiscal 2012 decrease compared fiscal 2011 due lower margins acquired norian products including inventory stepup charge transition costs associated transition manufacturing operations norian products exton facility expected reduction sales angioseal components research development expense research development expense 175 million fiscal 2011 decrease 327000 2 179 million fiscal 2010 fiscal 2011 refocused research development efforts towards ecm adhesives research development efforts increase expense year offset reduction endovascular research development research development expense decreased due 536000 severance costs related cost reduction plan implemented second quarter ended december 31 2009 fiscal 2010 research development expense 24 revenue fiscal 2011 compared 22 revenue fiscal 2010 believe research development expense fiscal 2012 increase 22 million continue ecm adhesive research development efforts selling general administrative expense selling general administrative expense 90 million fiscal 2011 consistent selling general administrative expense fiscal 2010 selling general administrative expense fiscal 2011 included transaction costs 506000 related norian acquisition noncash amortization intangible asset customer relationship related acquisition norian 77000 offset noncash gain bargain purchase 514000 recognized purchase method accounting amount aggregate fair value net assets acquired exceeded norian acquisition purchase price selling general administrative expenses 13 revenue fiscal year ended 2011 11 revenue fiscal year ended 2010 believe selling general administrative expenditures total percentage revenue approximately 12 fiscal 2012 noncash amortization intangible asset customer relationship related acquisition norian expected approximate 900000 fiscal 2012 acquired inprocess research development connection asset acquisition nerites allocated approximately 182 million cost acquisition inprocess research development projects costs charged expense third quarter fiscal 2011 date acquisition development projects yet reached technological feasibility research development progress alternative future uses acquisition date nerites spent approximately 142 million ongoing research initiatives targeted developing three potential platform technologies researching liquid adhesivessealants thin film adhesives antifoulingantibacterial coating capabilities nerites’ research early concept phase still testing feasibility adhesive technology primarily focused identifying mechanical physical properties reaction attributes adhesive raw material see “recent strategic acquisitions investments” note 5 consolidated financial statements included form 10k additional information concerning nerites asset acquisition related acquired iprd interest income interest income decreased 40 422000 fiscal 2011 704000 fiscal 2010 decrease due significant decreases average cash investment balances fiscal year ended june 30 2011 compared prior fiscal year due strategic acquisitions stock repurchases fiscal 2011 interest expense interest expense mortgage fiscal 2011 20 million compared 21 million prior year borrowed 35 million mortgage citibank fsb outstanding principal balance 30 million june 30 2011 mortgage hedged fixed interest rate swap bearing interest 644 see note 10 consolidated financial statements included form 10k additional information concerning mortgage swap incomeloss nonoperating income 101000 fiscal 2011 increase 120000 nonoperating loss 19000 fiscal 2010 nonoperating loss fiscal 2010 primarily represents nonoperating items including loss foreign currency exchange nonoperating income fiscal 2011 primarily represents gain sale securities period income tax benefit tax benefit fiscal 2011 78000 resulting effective tax rate approximately 4 primarily result acquired iprd charge third quarter ended march 31 2011 compared fiscal 2010 effective tax rate approximately 33 see note 18 consolidated financial statements included form 10k additional information concerning effective tax rate results operations comparison fiscal years 2010 2009 total revenues total revenues 806 million fiscal 2010 decreased 2 total revenues 821 million fiscal 2009 total net sales net sales products decreased 1 543 million fiscal 2010 compared net sales 549 million fiscal 2009 11 million 2 increase biomaterials sales 17 million 43 decrease endovascular sales biomaterials sales biomaterials sales 521 million fiscal 2010 2 increase compared 510 million fiscal 2009 biomaterials sales include revenue recognized products shipped well revenue generated product development programs milestone revenue earned biomaterials customers biomaterials sales increase primarily due cardiovascular general surgery product lines cardiovascular product sales primarily consisting sales angioseal components st jude medical 193 million fiscal 2010 increased 10 million 5 183 million fiscal 2009 due favorable variations ordering patterns components used manufacture angioseal device st jude medical cardiovascular product sales fiscal 2009 included cancellation fee charged customer approximately 800000 cardiovascular productrelated research development work performed also contributing increase biomaterials sales continued growth general surgery product sales 36 million fiscal 2010 increase 15 million 74 21 million fiscal 2009 increase due initial shipments synthes related us launch new ecm product xcm biologic™ tissue matrix well due timing orders collagen product sales customer use breast biopsies increases product sales offset part decrease orthopaedic product sales orthopaedic product sales consisting primarily sports medicine spine products 286 million fiscal 2010 decrease 12 million 4 298 million fiscal 2009 sales spine products decreased 21 million 16 116 million fiscal 2010 137 million fiscal 2009 decline sales spine products due overall weakness spinal market well orthovita’s shift sales focus fiscal 2010 away codeveloped products additionally fiscal 2009 spine product sales included onetime cancellation fee 825000 charged customer research development work performed decrease spine products offset increase sports medicine product sales 980000 6 164 million fiscal 2010 155 million fiscal 2009 due primarily favorable variations ordering patterns endovascular sales endovascular sales 22 million fiscal 2010 43 decrease compared sales 39 million fiscal 2009 endovascular sales include revenue recognized products shipped well milestone revenue recognized product development programs spectranetics endovascular sales decrease primarily due decrease safecross quickcat product sales second quarter fiscal 2010 ended december 31 2009 last quarter reflecting sales quickcat device quickcat manufacturing transferred spectranetics december 2009 spectranetics publicly announced discontinuation sales safecross product line second quarter fiscal 2010 fiscal 2010 recognized revenue 577000 compared 625000 fiscal 2009 two milestones achieved fiscal 2009 development regulatory service agreement spectranetics royalty income royalty income decreased 3 264 million fiscal 2010 272 million fiscal 2009 royalty income 203 million st jude medical’s angioseal net enduser sales fiscal 2010 decreased 4 212 million fiscal 2009 primarily due fewer shipping days fiscal 2010 compared fiscal 2009 combination product mix changes effects foreign currency exchange rate fluctuations fiscal 2010 enduser sales angioseal device decreased 4 fiscal 2010 prior fiscal year royalty income 58 million orthovita’s vitoss™ vitoss™ foam vitoss™ bioactive foam products net enduser sales fiscal 2010 consistent fiscal 2009 enduser sales codeveloped vitoss™ foam vitoss™ bioactive foam products increased 4 fiscal 2010 prior fiscal year cost products sold cost products sold 235 million fiscal 2010 687000 3 decrease 242 million fiscal 2009 gross margin net sales 57 56 fiscal 2010 fiscal 2009 respectively decrease cost products sold result recognition fiscal 2010 775000 net gain property insurance proceeds claim property insurance policy well 600000 reduction expense provision upgrade safecross product longer necessary due cancellation safecross product line spectranetics contributing reduction cost products sold 10 million decrease net sales excluding net milestone revenue recognized 10 million fiscal 2010 625000 fiscal 2009 offsetting decreases within cost products sold fiscal 2010 result fiscal 2010 second quarter cost reduction plan 944000 unabsorbed overhead charges due reduced work schedules quarter 404000 severance charges research development expense research development expense 179 million fiscal 2010 258000 1 decrease 181 million fiscal 2009 decrease research development expense due 352000 decrease animal studies outside services costs 275000 decrease design development supply expenses 233000 decrease engineering consulting costs 197000 decrease expenses due charge incurred prior fiscal year connection customer cancellation research development projects offsetting decreases within research development expense fiscal 2010 result previously disclosed fiscal 2010 second quarter cost reduction plan 536000 severance charges increased research development expense additionally fiscal 2010 increase personnel costs including salaries equity compensation expense 239000 research development expense 22 revenue fiscal 2010 fiscal 2009 selling general administrative expense selling general administrative expense 90 million fiscal 2010 210000 2 decrease 92 million fiscal 2009 selling general administrative expense decreased prior fiscal year primarily result reduced professional fees 360000 partially offset 71000 severance charges result previously disclosed fiscal 2010 second quarter cost reduction plan selling general administrative expenses 11 revenue fiscal years ended 2010 2009 respectively interest income interest expense interest income decreased 40 704000 fiscal 2010 12 million fiscal 2009 decrease due significant decreases interest rates earned average cash investment balances fiscal year ended june 30 2010 prior fiscal year interest expense mortgage fiscal 2010 essentially flat 21 million compared prior year borrowed 35 million mortgage citibank fsb outstanding principal balance 314 million june 30 2010 mortgage hedged fixed interest rate swap bearing interest 644 incomeloss nonoperating loss 19000 fiscal 2010 decrease 170000 nonoperating income 151000 fiscal 2009 nonoperating income fiscal 2009 primarily represents nonoperating items including 134000 deferred revenue recognized component income result august 2008 final settlement outstanding items related opportunity grant program department community economic development commonwealth pennsylvania governor’s action team net gainloss foreign currency exchange remaining deferred revenue opportunity grant program june 30 2009 income tax expense tax expense fiscal 2010 94 million resulting effective tax rate approximately 33 could claim research development tax credits december 31 2009 component 2010 tax provision related ongoing performance qualified research development previously approved october 2008 congressional extension research experimentation tax credit fiscal 2009 effective tax rate 33 included retroactive adjustment tax provision second fiscal quarter ended december 31 2008 result october 2008 extension tax credit liquidity capital resources cash equivalents investments 219 million june 30 2011 decrease 437 million balance 657 million june 30 2010 end prior fiscal year working capital 470 million june 30 2011 decrease 333 million working capital 803 million june 30 2010 decrease cash working capital primarily due stock repurchases 300 million principally stock repurchase programs acquisitions net assets nerites norian see “stock repurchase programs” note 13 consolidated financial statements included form 10k additional information stock repurchases note 5 consolidated financial statements included form 10k additional information acquisitions cash flows operating activities net cash provided operating activities 204 million fiscal year ended june 30 2011 fiscal year ended june 30 2011 net income 21 million noncash depreciation amortization 68 million net effect noncash employee sharebased compensation related tax events 53 million noncash acquired iprd charge 182 million associated acquisition net assets nerites increases cash offset part net change deferred income taxes 57 million primarily result increase noncurrent deferred tax assets primarily due federal tax treatment acquired iprd gain bargain purchase deferred taxes related norian acquisition 514000 cash used operations result changes asset liability balances 57 million decrease cash primarily result decrease accounts payable accrued expenses 26 million primarily related federal tax payable balance accrued bonuses prior fiscal year paid fiscal 2011 increase prepaid expenses assets 17 million related company prepaying health insurance fiscal 2011 receive discount decrease deferred revenue approximately 09 million related recognition deferred revenue milestone payments research development manufacturing agreements customers also reducing cash provided operations increase receivable balances 03 million increase inventory balances 02 million investing activities cash used investing activities 52 million fiscal year ended june 30 2011 use cash result 171 million cash paid asset acquisition net assets nerites 119 million cash paid acquisition net assets norian 41 million cash paid cost method investment orteq purchase manufacturing rights actifit® products orteq well capital expenditures 23 million continue expand research development manufacturing capabilities improve information technology systems uses cash offset 301 million maturities within investment portfolio financing activities cash used financing activities 281 million fiscal year ended june 30 2011 amount primarily result 300 million common stock repurchases 14 million repayments longterm debt offset part 4 million net cash proceeds approximately 83 million exercise sharebased awards 44 million exercised shares exchanged noncash net share settlement stock repurchase program time made repurchases common stock executed various stock repurchase programs established board directors miscellaneous transactions december 10 2009 announced board directors approved stock repurchase program allowed us repurchase total 400000 issued outstanding shares common stock february 9 2010 announced board directors approved new stock repurchase program allowing us repurchase total 30 million issued outstanding shares common stock june 16 2010 announced board directors approved additional stock repurchase program allowing us repurchase additional 30 million issued outstanding shares common stock fiscal 2010 repurchased retired 1794705 shares common stock total cost approximately 413 million average price 2302 per share using available cash commissions related costs associated stock repurchases totaled 55788 additional 34400 shares repurchased june 2010 trades settled july 2010 cost 811054 average market price per share 2358 fiscal year ended june 30 2011 repurchased 1175738 shares common stock total cost approximately 300 million average market price 2552 per share using available cash program completed prior second quarter ended december 31 2010 accordingly june 30 2011 amounts remaining repurchase shares common stock repurchase program see note 13 consolidated financial statements included form 10k part ii item 5 market registrant’s common equity related stockholder matters issuer purchases equity securities form 10k general plan continue increase research development spending biomaterials products expand clinical activities relating ecm programs us outside us cartilage repair program outside us new technologies including acquired acquisition net assets nerites furthermore fiscal 2012 plan build additional inventories related norian product line prepare transfer manufacturing norian product line west chester facility exton facility next 18 24 months continue believe current cash investment balances expected future cash generated operations sufficient meet operating financing capital requirements next 12 months although believe cash investment balances also sufficient longer term basis depend numerous factors including following continuation existing customer relationships royalty streams market acceptance existing future products successful commercialization products development costs associated commercialization progress product development efforts magnitude scope efforts progress preclinical studies future clinical trials product clearance fda agencies cost timing efforts expand manufacturing sales marketing capabilities cost filing prosecuting defending enforcing patent claims intellectual property rights competing technological market developments development strategic alliances marketing certain products cost entering future acquisitions strategic transactions may 26 2011 entered 35 million revolving credit facility wells fargo fiscal 2011 borrowings revolving credit facility june 30 2011 outstanding principal mortgage 30 million see note 8 consolidated financial statements included form 10k terms future equity financing undertake may dilutive stockholders terms debt financing may contain restrictive covenants limit ability pursue desired courses action ability obtain financing dependent status future business prospects well conditions prevailing relevant capital markets assurance given additional financing available us available us acceptable terms need arise june 30 2011 compliance affirmative restrictive financial maintenance covenants relating mortgage revolving credit facility contractual obligations contingent commitments presented summary approximate aggregate contractual obligations contingent commitments june 30 2011 future payments contracts contingent commitments fiscal 2012 beyond obligations related mortgage agreements legally binding enforceable us changes business needs cancellation provisions factors may result actual payments differing estimates obligations related mortgage agreements legally binding enforceable us 1 longterm debt obligations consist principal interest mortgage outstanding principal balance 299 million june 30 2011 accordance accounting principles generally accepted united states america us gaap future interest obligations recorded consolidated balance sheet see note 10 consolidated financial statements included form 10k 2 become party certain operating leases nerites previously party leased space madison wisconsin well office equipment minimum lease payments 119797 presented entered agreement synthes sublease manufacturing space company’s west chester pennsylvania facility purchased leased back synthes minimum lease payments 1105000 18month term lease presented 3 obligations consist cancelable noncancelable purchase commitments related inventory capital expenditures goods services accordance us gaap obligations recorded consolidated balance sheets see note 10 consolidated financial statements included form 10k 4 amount reflects payment obligations fixed determinable development regulatory services agreement spectranetics amended contributions capped maximum amount 2750000 toward expenses associated clinical studies obtain approval fda certain nextgeneration endovascular products reduced total cumulative expenses incurred june 30 2011 approximately 30000 unable reliably estimate amount timing contributions dependent type complexity clinical studies intended uses products established entered research development service agreements certain customers provide share certain regulatory clinical costs associated future research development activities amounts timing future payment obligations cannot currently determined therefore included table accordance us gaap obligations recorded consolidated balance sheets 5 amount reflects additional committed investment orteq august 19 2011 subsequent event june 30 2011 option pursuant ancillary agreement made additional investment orteq approximately 637000 british pounds 1055063 form cash advance orteq structured convertible debt previously disclosed investment agreement orteq committed making additional minority costmethod investment approximately 637000 british pounds preferred shares orteq payable us dollars orteq receives approval conditional approval fda conduct investigational device exemption product pivotal trial second anniversary initial investment december 21 2012 otherwise earlier option prior december 21 2012 ancillary agreement option convert cash advance preferred shares additional costmethod investment agreement convert cash advance shares cash advance accrued interest payable orteq us prior august 2016 cash investment increase ownership interest orteq accordance us gaap obligations recorded consolidated balance sheets 6 entered employment agreements certain named executive officers june 30 2011 employment agreements provided among things annual base salaries aggregate amount less amount date fiscal 2012 accordance us gaap obligations recorded consolidated balance sheets see note 16 consolidated financial statements included form 10k 7 noncurrent deferred revenue includes milestone payments received us pursuant customer agreements well advance payments customers future services several deferred milestone revenues nonrefundable may require future performance us liabilities recorded accordance us gaap recorded consolidated balance sheets 8 value represents estimated amount would pay terminate swap prepay mortgage currently intend prepay mortgage therefore unable reliably estimate period cash settlement swap accordance us gaap liability recorded consolidated balance sheets see note 10 consolidated financial statements included form 10k 9 asset purchase agreement nerites entered january 28 2011 acquired substantially assets certain operational liabilities nerites approximately 20 million approximately 167 million paid acquisition date remaining approximately 3 million held back terms acquisition security certain potential nerites indemnification obligations holdback amount 15 million released first second anniversaries acquisition date nerites extent holdback amount applied toward indemnification 10 asset purchase agreement norian entered may 24 2011 acquired certain operational assets certain liabilities norian approximately 26 million approximately 12 million paid acquisition date pay remaining 14 million earlier date transfer manufacturing operations purchased west chester pennsylvania facility company’s facility located exton pennsylvania completed 18month anniversary acquisition date 11 liabilities uncertain tax positions aggregate amount approximately 104000 omitted table due inability reliably estimate period cash settlement liabilities see note 18 consolidated financial statements included form 10k estimate time periods cash equivalents adequate fund operations forward looking statement within meaning private securities litigation reform act 1995 subject risks uncertainties actual results may differ materially contemplated forwardlooking statements addition described factors may cause difference set forth item 1a risk factors annual report form 10k see “cautionary note regarding forwardlooking statements” item 7a item 7 managements discussion analysis financial condition results operations overview company medical device company established three technology platforms puncture closure angioseal biomaterials collagen resorbable polymers revascularization aegis vortex system avs company participates puncture closure market primarily relationship strategic alliance partner generates royalty income research development funding sales revenue manufacture clinical devices components angioseal companys operations focused commercialization continuing development proprietary principal product angioseal product line continued expansion capabilities biomaterials development revascularization catheter system aegis vortex system angioseal device sealing arterial punctures created diagnostic therapeutic cardiovascular procedures angiography angioplasty atherectomy placement stents company currently manufacturing collagen products third parties use delivery systems various applications including bone growth proteins artificial skin burn victims drug delivery products various stages clinical trials result absorbable polymer capabilities company expanded orthopedic marketplace oem supplier specialized products companys revascularization platform established address market opportunity cardiology treatment occluded saphenous vein bypass grafts instent restenosis company developing revascularization catheter system aegis vortex system utilizing patent platform inhouse expertise address life threatening medical conditions december 1997 american home products corporation ahp strategic alliance partner announced sale subsidiary sherwooddavis geck operating company responsible sales marketing manufacturing angioseal device tyco international ltd tyco terms sale companys agreements ahp transferred tycos subsidiary kendall company kendall accordingly kendall replaced ahp companys strategic alliance partner march 1998 upon finalization sale companys relationship strategic alliance partner enabled obtain critical funding research develop angioseal conduct clinical trials gain regulatory approval us europe relationship provides access angioseal product line major worldwide markets following discussion analysis read conjunction consolidated financial statements notes thereto contained elsewhere report results operations fiscal year ended june 30 1998 compared fiscal year ended june 30 1997 revenues periods consisted net sales research development revenue milestone fees royalty income revenues increased 43 113 million year ended june 30 1998 fiscal 1998 79 million year ended june 30 1997 fiscal 1997 net sales products research development revenue increased 28 prior year royalty income increased 752 increase net sales mainly attributable increase angioseal components sold companys strategic alliance partner result increased demand us european markets well expansion companys thirdparty business collagen polymer customers approximately 178000 angioseal units sold endusers fiscal year 1998 compared 26000 fiscal 1997 increase royalty income represented angioseal royalties full year us sales compared nine months sales fiscal 1997 significant increase demand us european markets increase total royalty per unit resulting patent acquisition agreement see note 5 financial statements increase research development revenue related contract research development including clinical trials strategic alliance partner additional sizes product enhancements angioseal product line 11 million milestone fee represented final milestone license agreement earned company upon receipt fda approval first quarter fiscal 1997 cost products sold increased 33 41 million fiscal 1998 31 million fiscal 1997 increase reflected greater net sales products offset manufacturing inefficiencies realized startup phase production new sizes angioseal 6f 10f new biomaterials products fiscal year research development expense including regulatory clinical expenses increased 18 55 million fiscal 1998 47 million fiscal 1997 company expanded development additional angioseal sizes biomaterials products including resorbable polymers collagen increased clinical trial activity addition company significantly expanded development revascularization technology targets commencement clinical trials avs fiscal year 1999 selling general administrative expense decreased 3 61000 fiscal 1998 fiscal 1997 decrease primarily due reduction certain outside professional fees interest income decreased 14 540000 fiscal 1998 627000 fiscal 1997 decrease primarily attributable cash equivalent investment balances first quarter fiscal 1997 included funds used repayment credit agreement total cash investment balances remained relatively constant since time interest expense decreased 22 150000 fiscal 1998 193000 fiscal 1997 decrease also result repayment credit agreement october 1996 offset amounts drawn companys line credit current fiscal year interest charges recorded relation obligation companys patent acquisition agreement fiscal 1997 company received 13 million final settlement business interruption portion insurance claim related roof collapse amount 969000 recorded income nonoperating income decreased 47 8000 fiscal 1997 4000 fiscal 1998 fiscal 1997 nonoperating income represented primarily net gain sale fixed assets fiscal 1998 represented miscellaneous nonrecurring items fiscal year ended june 30 1997 compared fiscal year ended june 30 1996 revenues periods consisted net sales research development revenue milestone fees royalty income revenues increased 167 79 million fiscal 1997 30 million fiscal 1996 net sales products increased 178 research development revenue increased 80 royalty income increased 363 increase net sales mainly attributable increases resorbable component subassembly sales companys strategic alliance partner support increased demand european market launch 8f angioseal product us following fda approval september 1996 increase research development revenue related contract research development including clinical trials strategic alliance partner additional sizes product enhancements angioseal 11 million milestone fee represented final milestone license agreement earned company upon receipt fda approval first quarter fiscal 1997 increase royalty income represented angioseal royalties full year european sales commencement us sales compared nine months european sales fiscal 1996 cost products sold increased 87 31 million fiscal 1997 16 million fiscal 1996 fiscal 1997 cost products sold represented 16 gross profit margin change trend 24 negative gross profit margin fiscal 1996 favorable trend resulted manufacturing efficiencies realized production levels increased research development expense increased 31 47 million fiscal 1997 36 million fiscal 1996 company expanded development additional angioseal sizes biomaterials products including resorbable polymers collagen increased clinical trial activity continued development revascularization technology six additional research development employees hired fiscal 1997 part increased activity accordingly research development expenses well related personnel costs increased fiscal 1997 selling general administrative expense decreased 15 18 million fiscal 1997 21 million fiscal 1996 decrease primarily due final recording deferred compensation expense nonofficers directors fiscal 1996 reflect settlement certain employee stock rights ipo deferred compensation expense officers directors fiscal 1996 represented final recording deferred compensation december 1995 reflect settlement certain employee stock rights ipo product return charge 574000 fiscal 1996 due withdrawal two production lots subsequent inventory result internal routine testing issue resolved impact withdrawal results operations company interest income increased 30 627000 fiscal 1997 483000 fiscal 1996 increase represented interest earned cash equivalent investment balances remaining ipo held entire year fiscal 1997 compared six months fiscal 1996 interest expense decreased 80 193000 fiscal 1997 956000 fiscal 1996 decrease result repayment credit agreement companys strategic alliance partner upon receipt fda approval angioseal september 1996 remaining interest expense represented interest 100000 bank line credit entered october 1996 increased 500000 february 1997 fiscal 1997 company received 13 million final settlement business interruption portion insurance claim related roof collapse amount 288000 recorded receivable fiscal 1996 remainder net adjuster fees recorded component income fiscal 1997 company received 12 million final settlement property damage portion insurance claim fiscal 1996 946000 recorded component income fiscal 1997 majority total nonoperating income 8000 represented net gain sale fixed assets fiscal 1996 company nonoperating income 62000 resulting nonrecurring items liquidity capital resources company financed operations since inception sale equity securities licensing technology research development arrangements debt credit arrangements product sales company generated cash operations 6000 fiscal 1998 compared cash flow operations fiscal 1997 29 million change primarily due 30 million royalty advance received license agreement upon receipt fda approval angioseal fiscal 1997 royalty advance reduced throughout fiscal 1998 company exceeded minimum royalty stipulations licensing agreement addition company income operations 343000 fiscal 1998 compared loss operations fiscal 1997 262000 capital expenditures 18 million fiscal 1998 represented primarily leasehold improvements machinery equipment related continued expansion companys manufacturing capabilities principally related collagen polymer product lines capital expenditures funded essentially companys line credit company borrowed 15 million fiscal 1998 companys cash equivalents shortterm investments 78 million june 30 1998 addition company pledged 19 million investments included 78 million collateral secure bank loans made certain employees payment taxes incurred employees result receipt common stock time ipo exchange companys pledging collateral employees pledged common stock collateral company october 1996 company paid 65 million full settlement credit agreement strategic alliance partner also fiscal 1997 company received 500000 bank line credit june 30 1997 500000 remained outstanding accruing interest payable monthly prime rate 85 june 30 1997 line credit increased 500000 facility 20 million facility september 1997 converts term loan payable 60 equal installments beginning august 1 1998 november 1997 company acquired patents patent acquisition agreement exchange 200000 shares common stock series eight quarterly cash payments beginning march 31 1998 totaling 12 million patents recorded balance sheet value shares date agreement plus present value 12 million cash legal related costs incurred acquire patents present value cash payments 11 million recorded short longterm liabilities december 31 1997 reduced 879000 upon payment second installment june 30 1998 company plans continue expend substantial resources funding clinical trials gain regulatory approvals make additional marketing claims well expand research development activities angioseal revascularization technology biomaterials products company believes cash generated operations well funds available financing arrangements bank sufficient meet companys operating capital requirements next twelve months year 2000 compliance company began work computer year 2000 issue fiscal year 1998 expects complete efforts end fiscal year 1999 software applications hardware related technologies process upgraded replaced ensure systems year 2000 compliant replacing hardware software fashion considered normal cost business expensed capitalized appropriate company also working significant suppliers customers address impact year 2000 issues company warrant however companies year 2000 compliance activities completely successful management anticipate costs year 2000 compliance material effect companys results operations cash flows financial position company anticipates results operations fluctuate foreseeable future due number factors include companys strategic alliance partners performance marketing manufacturing distribution angioseal product line timing future regulatory approvals united states countries outside europe including japan results ongoing planned clinical trials angioseal products acceptance companys products marketplace competitive products generally particular designed sealing arterial site punctures statements contained form 10k historical facts forwardlooking statements made pursuant safe harbor provisions private securities litigation reform act 1995 company cautions number important factors could cause companys actual results fiscal 1999 beyond differ materially forwardlooking statements made behalf company important factors include without limitation time effort priority level companys strategic alliance partner successors attach angioseal strategic alliance partners ability successfully market manufacture angioseal companys ability manufacture angioseal components results ongoing clinical trials timing additional regulatory approvals announcements technological innovations introduction new products company competitors competition rival developers puncture closure devices general business conditions healthcare industry general economic conditions results operations past period considered indicative results expected future periods fluctuations operating results may also result fluctuations price common stock item 8 item 7 management’s discussion analysis financial condition results operations following discussion analysis read conjunction “selected consolidated financial data” financial statements related notes included report discussion analysis contains forwardlooking statements relating future events future financial performance statements predictions actual events results may differ materially evaluating statements carefully consider various factors identified report could cause actual results differ materially expressed implied forwardlooking statements including set forth “risk factors” annual report form 10k see “forwardlooking statements” overview revenues consist three components net sales research development revenue royalty income net sales net sales comprised sales biomaterials products triactiv device biomaterials year ipo fiscal 1996 biomaterials sales comprised entirely absorbable collagen polymer components angioseal supplied strategic alliance partner since time experienced significant sales growth biomaterials products expanded customer base marketing activities increased sales existing customers assisted customers development new product offerings biomaterials component net sales comprises 99 total net sales represents sale biomaterials products customers use following markets orthopaedics sports medicine spine cardiology drugbiologics delivery periodontal general surgery wound care two significant components biomaterials sales orthopaedic product sales absorbable components angioseal supplied st jude medical orthopaedic product sales consist primarily sales arthrex privately held orthopaedics company manufacture wide array sports medicine products orthovita publicly held orthopaedic biomaterials company began working arthrex fiscal 1998 since provided arthrex many varied sports medicine products commercial distribution fiscal 2004 sold first bone grafting spine products orthovita vitoss foam strips cylinders fiscal 2005 provided additional product lines orthovita vitoss scaffold foam shapes pack sales orthovita increased 142 fiscal 2004 fiscal 2005 table showing trends angioseal component orthopaedic sales fiscal 2004 fiscal 2005 percentage total biomaterials sales increase angioseal components percentage total biomaterials sales related continued end user sales volume growth angioseal device sales collagen plug component increased 34 129 million dollars fiscal year ended june 30 2005 compared 96 million fiscal year ended june 30 2004 absorbable polymer anchor component however decreased 9 29 million fiscal year ended june 30 2005 compared 32 million fiscal year ended june 30 2004 slightly offsetting collagen plug sales increase decline result ongoing transition manufacture absorbable polymer anchor st jude medical prior year timing certain increases required volume depending st jude medical capacity going forward anticipate consistency volume anchor component supply level formalized new supply agreement st jude medical effective june 30 2005 new supply agreement st jude medical required purchase 100 collagen plug requirements least 30 polymer anchor requirements kensey nash future portion biomaterials sales dependent upon continued success angioseal device vascular closure market today estimate angioseal device approximately 65 market based enduser sales excess 304 million fiscal year ended june 30 2005 angioseal market share may impacted future competition market new technologies introduced address diagnostic therapeutic treatment diseased coronary arteries decrease orthopaedic products sales percentage total biomaterials sales primarily related decrease sales arthrex represented 32 total biomaterials sales fiscal 2005 arthrex sales decreased 47 million 27 fiscal 2004 fiscal 2005 result inventory overstocking issue occurred fourth fiscal quarter fiscal 2004 believe arthrex worked excess inventory throughout course fiscal 2005 expect growth sales arthrex fiscal 2006 fiscal 2005 decrease sales arthrex partially offset 42 million 142 increase orthovita sales fiscal 2005 first full year sales codeveloped vitoss foam products fiscal 2004 orthovita’s end user sales strong orthovita forecasting growth excess 30 calendar year 2005 anticipate fiscal 2006 sales orthovita much 50 fiscal 2005 orthovita works inventory purchased conjunction previous product launches restructures ordering patterns associated new product launches overall combination new supply agreement st jude medical anticipated continued growth angioseal end user sales expected return growth arthrex sports medicine product business new business opportunities expect growth overall biomaterials sales despite forecasted decrease sales orthovita believe growth occur due greater acceptance medical community biomaterials technological advances expanded applications biomaterials products due greater market acceptance able expand biomaterials customer product base initiating new partnerships within medical device industry well expanding product lines current customers triactiv system triactiv system platform technology offering initial application protection embolization treatment diseased saphenous vein grafts also future applications treatment carotid artery disease removal thrombus amongst others embolic protection relatively new technology still subject acceptance medical community particularly future applications created new endovascular division responsible direct sales marketing us developing additional applications triactiv technology including devices without embolic protection part direct marketing strategy believe direct strategy endovascular markets allow us maximize return triactiv technology us launched triactiv system receiving fda clearance march 2005 newly formed direct sales force continue build sales team required address market demands product service existing accounts addition six person marketing team supported april 2005 product launch triactiv system presently working promotion efforts related current triactiv device well preparing upcoming launches new generations applications triactiv system sales triactiv system us 200000 first quarter commercial availability quarter ended june 30 2005 forecasting sales growth triactiv product platform fiscal 2006 based greater acceptance svg product medical community well launch new generation svg product additional applications second half fiscal 2006 europe triactiv system commercially launched may 2002 selling direct germany via distributors throughout rest europe india distributor agreements sales ireland switzerland austria italy netherlands united kingdom addition april 2005 initiated distribution agreement india first agreement asia process identifying distributors additional markets europe asia launched secondgeneration triactiv system triactiv® fx™ embolic protection system triactiv fx system april 2005 second generation device incorporates several important easeofuse design enhancements including integrated fully disposable flush extraction system new balloon inflator simplifies catheter exchanges procedure monorail flush catheter enhance device usage reduce procedure time triactiv sales europe 309000 fiscal year 2005 41 increase prior fiscal year sales europe increased fiscal 2004 european interventional procedures svgs substantially lower analysts’ company’s estimates previously indicated resulted lower anticipated product sales triactiv svg application europe however believe launch triactiv fx system svgs offering improvements easeofuse well future applications triactiv product platform including carotid artery thrombus removal applications improve total sales triactiv system european community total triactiv system sales approximately 1 total sales fiscal years ended june 30 2005 2004 anticipate sales triactiv system become significant component net sales fiscal 2006 beyond increase sales product us market gain new customers european asian markets introduce new versions applications product us europe research development revenue fiscal 2005 research development revenue derived three year 19 million national institute standards technology nist grant received october 2001 grant researching synthetic vascular graft also utilizing ptm technology project concluded october 2004 prior years research development revenue included additional revenue additional grant programs november 1999 received first nist grant since time also awarded second nist grant nih grant first nist grant 12 million grant threeyear period researching cartilage regeneration utilizing porous tissue matrix ptm technology although continue independently develop technology received remaining funds grant second quarter fiscal 2003 january 2003 received nih 100000 oneyear period researching sustained controlled release chemotherapeutic drugs treatment breast cancer utilizing ptm technology research grant completed early fiscal 2004 continuing independently develop drug delivery technology commercial use expectations future grant applications remaining grant revenue project grant revenue fiscal 2006 royalty income royalty income primarily consists royalties received st jude medical orthovita royalties st jude medical earned angioseal worldwide net sales anticipate sales angioseal device grow fiscal 2006 forecasted continued procedure growth st jude medical continues expand sales marketing efforts launch new generations product license agreement st jude medical final contractual decrease royalty rate 6 9 upon reaching four million cumulative units sold final rate reduction occurred april 2004 continued angioseal unit growth partially offset 33 decline royalty rate resulting decrease 12 royalty income st jude medical fiscal 2005 fiscal 2004 unit sales angioseal increased 19 fiscal 2005 fiscal 2004 expect royalty income angioseal device continue significant source revenue foreseeable future june 30 2005 approximately 59 million angioseal units sold march 2003 agreement orthovita codevelop commercialize vitoss foam products receive royalty orthovita’s enduser sales vitoss foam products addition august 2004 acquired proprietary rights third party inventor vitoss technology inventor 26 million assignment agreement assignment agreement company receives additional royalty orthovita enduser sales orthovita products containing vitoss technology total royalty received 40 million 34 million remaining june 30 2005 received first royalty agreements third quarter fiscal 2004 orthovita launched initial bone grafting spinal product lines vitoss scaffold foam strips cylinders royalty income orthovita increased since time orthovita launched three additional product lines vitoss scaffold foam flow shapes pack june october 2004 may 2005 respectively believe unique technology associated vitoss foam products growing spine market result orthovita component royalty income becoming significant next fiscal year beyond total royalty income received orthovita fiscal 2005 23 million cost products sold gross margin percentage fiscal 2005 consistent fiscal 2004 56 cost goods sold fiscal 2005 includes accelerated depreciation charge 440000 related transition new facility see item 2 liquidity capital resources effect acceleration depreciation charge decrease gross margin percentage approximately 1 excluding effect charge would experienced overall increase gross margin fiscal 2005 reflecting continued increase volume biomaterials product sales increased volume existing customers new customers resulted manufacturing efficiencies addition continue work process improvements including automation wherever possible continue make progress area fiscal 2006 anticipate gross margin biomaterials products continue improve process improvements continued increased sales volume occasionally offsetting efficiencies gained products mature margins achieved new product launches often minimal related startup process inefficiencies learning curves initiated two new product lines fiscal 2005 orthovita vitoss scaffold foam shapes vitoss scaffold foam pack initial phases production product lines incurred higher costs due learning curve associated initiating new products anticipate continued improvement gross margin biomaterials products improvements offset initial low margins approximately 25 40 triactiv product line associated low volumes startup inefficiencies engineering teams also working process improvements automation triactiv product anticipate margins come line overall product mix fiscal 2007 result expanding product mix fiscal 2006 believe total gross margin across product lines slightly improved fiscal 2005 excluding effect future charges related acceleration depreciation research development expense research development expense consists expenses incurred development proprietary technologies triactiv system absorbable nonabsorbable biomaterials products technologies development programs including expenses nist program addition acceleration depreciation charge 302000 recorded research development expense fourth quarter fiscal 2005 see item 2 liquidity capital resources major component research development expense since fiscal 2002 triactiv system us pivotal clinical study pride study randomized trial enrolling 894 patients 78 sites us europe completed enrollment pride study march 2004 submitted 510k application fda clearance market triactiv system united states july 28 2004 received clearance march 2005 started us clinical trial registry aspire angioplasty svgs post intervention removal embolic debris clinical study next generation triactiv system triactiv fx system third quarter fiscal 2005 expect complete enrollment december 2006 fda approval anticipated fourth quarter fiscal 2006 aspire study multicenter prospective registry designed support regulatory clearance triactiv fx system us saphenous vein graft svg indication study include approximately 100 120 patients 30 sites us europe cannot make assurances successful completion trial regulatory approval triactiv fx system future applications us europe clinical efforts pursuit fda approval continuing development future generations triactiv system well continued development proprietary biomaterials products technologies require significant research development expenditures anticipate research development expense including additional clinical trials increase pursue commercialization future generations triactiv system us explore opportunities indications related triactiv system well technologies including continued development proprietary biomaterials technologies believe research development expenditures increase dollars believe decrease percentage total revenue research development expense 25 total revenues fiscal year ended june 30 2005 compared 28 total revenue fiscal year ended june 30 2004 selling general administrative selling general administrative expenses include costs finance information technologies human resource business development departments well costs related sales marketing products also recorded acceleration depreciation charge related transition new facility see item 2 liquidity capital resources 71000 fourth quarter fiscal 2005 general administrative component increased period fiscal 2004 increase result overall growth business administrative requirements support growth personnel expenses incurred related compliance new sec corporate governance regulations also due growth business including increasing manufacturing volumes biomaterials products triactiv system new planning tracking requirements selling triactiv system directly market implemented new enterprise resource planning erp system new erp system integrates manufacturing quality finance sales marketing human resource processes single information system operational areas share information easily efficiently implementation began october 2004 completed march 2005 included costs training employees new system licensing fees new system addition amortization expense 477000 related assignment agreement discussed note 6 consolidated financial statements included form 10k included general administrative expense fiscal year ended june 30 2005 amortization period estimated 60 months date agreement sales marketing component selling general administrative consists expenses us europe related direct commercialization efforts triactiv system locations twentyfour person triactiv sales marketing team us five person sales marketing team headquartered european subsidiary kensey nash europe gmbh teams selling marketing product direct us german markets europe team supports distributor relationships rest europe asia sales marketing expenses increased fiscal 2005 period fiscal 2004 increase related primarily costs launch triactiv system us including costs associated creation new endovascular direct sales force marketing campaign launch anticipate sales marketing expenses increase continue sales marketing efforts triactiv product us europe sales marketing expenses expected increase substantially fiscal 2006 fiscal 2005 also continuing expand marketing efforts biomaterials business income tax expense effective income tax rate approximately 285 fiscal year 2005 284 fiscal year 2004 225 fiscal year 2003 fiscal 2005 effective income tax rate includes year’s research development tax credit well nontaxable interest income forecasting effective tax rate fiscal 2006 approximately 30 critical accounting policies “critical accounting policies” require application management’s difficult subjective complex judgments often result need make estimates matters inherently uncertain may change future periods intended comprehensive list significant accounting policies many cases accounting treatment particular transaction specifically dictated generally accepted accounting principles need management’s judgment application also areas selection available alternative policy would produce materially different result identified following critical accounting policies revenue recognition accounting stockbased compensation allowance doubtful accounts inventory valuation income taxes revenue recognition recognize revenue provisions staff accounting bulletin sab 104 revenue recognition sab 104 superseded sab 101 sab 104’s primary purpose rescind accounting guidance contained sab 101 related multiple element revenue arrangements modified result issuance emerging issues task force eitf issue 0021 accounting revenue arrangements multiple deliverables eitf 0021 adoption sab 104 material impact company’s financial position results operations sales revenue sales revenue recognized related product shipped advance payments received products services recorded deferred revenue recognized product shipped services performed shipments free board fob shipping point reduce sales estimated customer returns discounts allowances applicable majority products manufactured according customers’ specifications subject return failure meet specifications research development revenue research development contracts recognized related expenses incurred revenues recorded line item related government programs us government funds research high risk enabling technologies royalty revenue royalty revenue recognized related product sold recognize substantially royalty revenue end month accordance customer agreements see note 1 condensed consolidated financial statements revenue recognition accounting stockbased compensation end fiscal 2005 accounted stockbased compensation costs statement financial accounting standards sfas 123 accounting stockbased compensation sfas 123 amended sfas 148 accounting stockbased compensation transition disclosure amendment fasb statement 123 accounting stockbased compensation sfas 148 permits recognition fair value stockbased awards expense ii continued application intrinsic value method accounting principles board apb opinion 25 accounting stock issued employees apb 25 accounted stockbased employee director compensation plans recognition measurement principles apb 25 intrinsic value method compensation cost represents excess quoted market price common stock grant date amount grantee must pay stock policy grant stock options fair market value date grant therefore recognized compensation expense options granted employees options granted nonemployees defined sfas 123 amended sfas 148 eitf 9618 accounting equity instruments issued employees acquiring conjunction selling goods services recorded compensation expense contractual service period using fair market value method accordance sfas 123 requires using blackscholes option pricing model determine fair market value option original grant date granted options nonemployee outside consultants fiscal 2003 2004 see note 10 financial statements information regarding options granted nonemployee outside consultants july 2003 october 2002 account restricted shares nonemployee members board directors executive officers using intrinsic value method accordance apb 25 granted restricted shares members board directors executive officers fiscal 2004 2005 see note 16 condensed consolidated financial statements restricted stock awards made nonemployee members board directors executive officers company december 2004 fasb issued sfas 123r sharebased payment sfas 123r sfas 123r amends sfas 123 apb 25 requires cost sharebased payment transactions including employees nonemployees recognized financial statements sfas 123r applies sharebased payment transactions entity acquires goods services issuing offering issue shares share options equity instruments incurring liabilities 1 amounts based even part price entity’s shares equity instruments 2 require may require settlement issuance entity’s shares equity instruments statement effective company first interim period beginning june 15 2005 quarter ending september 30 2005 management currently assessing effect sfas 123r company’s financial position results operations date company expensed sharebased payments nonemployees restricted shares granted effect statement relate company’s expensing stock options restricted shares company implemented practice granting restricted shares members board directors well executive officers permitted stock option plans component board executive officer compensation arrangements response growing industry concerns related effect expensing stock options company diversified compensation arrangements reduce number total options granted board members executive officers compensation arrangements include granting restricted shares well executive officers greater component incentive cash compensation expense related board directors recorded component selling general administrative expense compensation expense related executive officers currently recorded component either selling general administrative expense research development expense dependent executive officer’s functional area first restricted shares granted board directors december 2003 first restricted shares executive officers granted july 2004 allowance doubtful accounts allowance doubtful accounts determined using combination factors ensure trade receivables balances overstated due uncollectibility maintain bad debt reserve customers based variety factors including length time receivables past due trends overall weighted average risk rating total portfolio significant onetime events historical experience customer also record additional reserves individual accounts become aware customer’s inability meet financial obligations us case bankruptcy filings deterioration customer’s operating results financial position circumstances related specific customers change estimates recoverability receivables would adjusted believe allowance june 30 2005 sufficient cover existing accounts receivable inventory valuation inventory stated lower cost market adjustments inventory made individual part level estimated excess obsolescence impaired balances reflect inventory lower cost market factors influencing adjustments include changes demand rapid technological changes product life cycle development plans component cost trends product pricing physical deterioration quality concerns revisions adjustments would required factors differ estimates income taxes estimated effective tax rate includes impact certain estimated research development tax credits nontaxable interest income material changes differences estimates could impact estimate effective tax rate results operations comparison fiscal years 2005 2004 following table summarizes operating results fiscal year ended june 30 2005 compared fiscal year ended june 30 2004 total revenue net sales total revenues increased 5 614 million fiscal 2005 582 million fiscal 2004 net sales products increased 11 404 million fiscal 2005 364 million fiscal 2004 increase net sales primarily attributable sales biomaterials products specifically cardiology products grew 30 fiscal 2005 fiscal 2004 cardiology product sales st jude medical largest cardiology customer 163 million compared 128 million prior year due increased collagen plug revenues including 540000 related development two new collagen plug product enhancements sales anchors st jude medical decreased 282000 prior year previously discussed orthopaedic sales decreased 4 974000 fiscal 2004 mainly related sales sports medicine products arthrex decreased 27 47 million almost entirely offset product sales orthovita increased 42 million 142 72 million 30 million fiscal 2004 addition triactiv sales approximately 515000 increased 137 prior year increase due sales us 213000 following company’s april launch triactiv system first quarter direct commercial sales us sales europe 303000 included sales new triactiv fx launched late march 2005 triactiv sales represented 1 total sales fiscal 2005 research development revenue research development revenues decreased 63 253000 fiscal 2005 688000 fiscal 2004 fiscal 2005 revenues generated nist synthetic vascular graft development grant concluded september 2004 prior fiscal year revenues generated nist synthetic vascular graft development grant nih breast cancer drug delivery grant concluded september 2003 october 2003 respectively decrease prior fiscal year reflects conclusion nist vascular graft development grant october 2004 provided 634000 revenue fiscal 2004 253000 fiscal 2005 royalty income royalty income decreased 2 208 million fiscal 2005 212 million fiscal 2004 angioseal royalty income decreased 12 185 million 209 million fiscal year 2005 2004 respectively decrease angioseal royalty income primarily due 33 decline 9 6 contracted royalty rate occurred april 2004 original rate 12 contractually reduced 12 9 accordance license agreements fiscal quarter ended december 31 2000 cumulative one million angioseal units sold one final contracted decrease royalty rate 6 occurred upon reaching four million cumulative units sold april 2004 effective royalty rate june 30 2005 decrease royalty rate partially offset greater number units sold royalty units increased 19 approximately 16 million angioseal units sold endusers fiscal 2005 compared approximately 13 million units sold fiscal 2004 believe increase units due st jude medical’s continued sales marketing efforts resulting greater market share overall increased adoption vascular closure devices market st jude medical’s market share estimated 65 fiscal 2005 60 fiscal 2004 worldwide market penetration vascular closure devices estimated approximately 47 fiscal 2005 approximately 40 fiscal 2005 2004 respectively partially offsetting angioseal royalty income decrease royalties orthovita vitoss foam product lines total royalty income orthovita approximately 23 million fiscal 2005 compared 288000 fiscal year 2004 royalties received march 2003 manufacturing development supply agreement two companies acquisition separate vitoss proprietary rights third party inventor vitoss technology discussed also see note 1 condensed consolidated financial statements patents proprietary rights cost products sold cost products sold increased 10 177 million fiscal 2005 161 million fiscal 2004 gross margin 56 periods due plans transition new facility acceleration depreciation charge described recorded 440000 component cost goods sold offsetting charge cost goods sold higher margins biomaterials products attributable higher volumes cardiology product sales resulted manufacturing efficiencies increased volume additional experience spine product manufacturing processes continued allocation overhead across greater sales volumes resulting decrease per unit costs higher margins biomaterials products slightly offset lower margins triactiv device related low volume early stage manufacturing process expect triactiv margins continue lower biomaterials product margins manufacturing process matures volumes increase research development expense research development expense decreased 8 151 million fiscal 2005 compared 164 million fiscal 2004 research development expense also decreased percentage total revenue 25 28 fiscal years ended june 30 2005 june 30 2004 respectively expense reductions primarily due triactiv system spending decreased 12 million 12 89 million fiscal year 2005 compared 101 million fiscal 2004 clinical trial expenses 557000 24 million less fiscal 2005 fiscal 2004 due conclusion pride clinical trial march 2004 clinical trial expenses fiscal 2005 related triactiv fx aspire study decrease offset increases personnel costs including travel expenses restricted share incentive compensation expense 894000 facility office costs including acceleration depreciation charge 350000 legal consulting expenses 156000 operational design costs 725000 associated new generations triactiv product specifically triactiv lfx system triactiv carotid system thrombus removal flush extraction system biomaterials proprietary technologies spending decreased 72000 62 million fiscal 2005 63 million fiscal 2004 primary reason decrease efforts several research development personnel throughout fiscal 2005 work performed reimbursed st jude medical resulting salaries personnel costs employees recorded component cost products sold related revenue recorded component sales work included development three new product enhancements angioseal collagen plug total applicable personnel costs related effort 346000 recorded cost products sold addition depreciation expense excluding acceleration depreciation related facility transition decreased 99000 related conclusion nist grant depreciation assets purchased nist grant fully depreciated conclusion grant october 2004 thereby reducing biomaterials depreciation expense fiscal 2005 compared fiscal 2004 offsetting decreases legal fees higher related greater number patent filings increased patent maintenance fees 112000 additional operational design development costs 278000 related development new products processes current prospective customers expect research development expenses increase investigate develop new products conduct clinical trials seek regulatory approvals proprietary products selling general administrative expense selling general administrative expense increased 36 118 million fiscal 2005 87 million fiscal 2004 general administrative expenses increased 18 million 63 million fiscal 2005 45 million fiscal 2004 attributable increases 372000 personnel costs including restricted stock expense 216000 facility costs including rent electric primarily depreciation increased 170000 including 64000 acceleration depreciation charge described 415000 professional services 132000 public company expenses including board compensation sec filing fees 170000 bad debt expense addition general administrative expense fiscal 2005 includes 477000 related amortization intellectual proprietary rights acquired august 2004 see note 1 patents proprietary rights personnel expense increased primarily due issuance restricted shares related expense 581000 fiscal 2005 compared 258000 fiscal 2004 professional service fees include audit tax fees sarbanesoxley consulting fees increased primarily result sarbanesoxley act 2002 company expensed 412000 fees related compliance fiscal year ended 2005 bad debt expense increased due prior year collection previously reserved amount 116000 current period bad debt expense 54000 resulting 170000 cumulative increase prior year comparable period sales marketing expenses increased 13 million 55 million fiscal 2005 42 million fiscal 2004 increase primarily result us commercial launch efforts triactiv system increased 14 million fiscal 2005 fiscal 2004 personnel expenses us sales marketing department increased 957000 relating expenses endovascular direct sales force june 30 2005 total 24 sales marketing personnel including 12 sales representatives compared total three sales marketing employees june 30 2004 travel costs increased 241000 due recruiting training conducted new sales team well postlaunch travel prospective customershospitals addition increase 91000 marketing expenses related prelaunch postlaunch activities product training new sales team creation marketing materials triactiv system european sales marketing costs decreased 4 91000 due conclusion first study examine cost effectiveness triactiv system saphenous vein graft patients support reimbursement product europe study concluded december 2004 first study results showed triactiv system substantially reduced 30day mace compared historical control patients treated embolic protection reductions complication rates used generate cost effectiveness analysis triactiv system important reimbursement european countries expected applied fiscal 2006 first study expenses 657000 fiscal 2004 compared 359000 fiscal 2005 decrease 298000 offset increases personnel marketing convention expenses 62000 67000 79000 respectively part due 7 increase foreign currency exchange rate well increased marketing efforts related launch new triactiv fx system net interest income interest expense decreased 61000 93 5000 fiscal 2005 66000 fiscal 2004 due lower principal balance debt balance continued make required quarterly payments interest income increased 11 13 million fiscal 2005 11 million fiscal 2004 although cash investment balances decreased offset higher interest rates nonoperating income expense nonoperating income 45000 fiscal 2005 compared nonoperating expense 16000 fiscal 2004 increase related primarily 54000 revenue recognized 500000 opportunity grant received commonwealth pennsylvania governor’s action team see liquidity capital resources section note 20 remainder due net loss gain sale fixed assets comparison fiscal years 2004 2003 following table summarizes operating results fiscal year ended june 30 2004 compared fiscal year ended june 30 2003 total revenue net sales total revenues increased 31 582 million fiscal 2004 444 million fiscal 2003 net sales products increased 34 364 million fiscal 2004 271 million fiscal 2003 increase net sales primarily attributable increased sales biomaterials products specifically orthopaedic products increased 97 fiscal 2004 fiscal 2003 orthopaedic product sales increased result increased sports medicine product sales arthrex largest orthopaedic customer initial sales new spine product line orthovita agreement entered march 2003 sales two customers increased 78 million 80 30 million entirely new business respectively fiscal 2003 increases partially offset 17 million 12 decrease angioseal component sales decrease angioseal component sales related ongoing transition manufacture absorbable polymer anchor us st jude medical offset part increases sales collagen component related increased sales volume angioseal device triactiv sales represented less 1 total sales fiscal 2004 fiscal 2003 research development revenue research development revenues decreased 28 688000 fiscal 2004 963000 fiscal 2003 fiscal 2004 revenues generated nist synthetic vascular graft development grant nih breast cancer drug delivery grant prior fiscal year revenues generated two grants addition nist articular cartilage grant nih breast cancer drug delivery grant provided revenue four twelve months fiscal 2004 project concluded october 2003 nist vascular graft grant provided revenue entire year decrease prior fiscal year reflects conclusion nist articular cartilage grant october 2002 provided 193000 revenue fiscal 2003 provide revenue fiscal 2004 addition decrease prior year reflected decrease reimbursements synthetic vascular graft grant generated 634000 revenue fiscal 2004 compared 724000 fiscal 2003 decrease attributable timing animal studies significant component total reimbursement grant specifically animal study concluded prior second quarter fiscal 2004 another animal study started late third fiscal quarter 2004 contrast fiscal 2003 animal study conducted throughout year following table summarizes research development revenue fiscal year ended june 30 2004 compared fiscal year ended june 30 2003 royalty income royalty income increased 30 212 million fiscal 2004 163 million fiscal 2003 increase royalty income primarily due increase angioseal royalties st jude medical increase occurred despite 33 decline 9 6 contracted angioseal royalty rate april 2004 royalty rate june 30 2004 6 increase royalty income despite fourth quarter reduction royalty rate reflected greater number units sold well increase average selling price angioseal royalty units increased 38 approximately 13 million angioseal units sold endusers fiscal 2004 compared approximately 967000 units sold fiscal 2003 believe increase units due st jude medical’s continued sales marketing efforts resulting greater market share overall increased adoption vascular closure devices market st jude medical’s market share estimated 60 fiscal 2004 55 fiscal 2003 worldwide market penetration estimated 40 approximately 35 fiscal 2004 2003 respectively st jude medical launched recent generation angioseal product line sts plus platform september 2003 commanding premium price previous version device fiscal 2004 royalty income also included new royalty orthovita march 2003 manufacturing development supply agreement two companies royalty received codeveloped vitoss products enduser sales products orthovita first royalty earned third quarter fiscal 2004 orthovita commercially launched first codeveloped products royalty income orthovita approximately 300000 fiscal year 2004 cost products sold cost products sold increased 32 161 million fiscal 2004 122 million fiscal 2003 gross margin increased 56 55 periods increase gross margin reflected higher margins biomaterials products attributable part higher volumes resulted manufacturing efficiencies well continued allocation overhead across greater sales volumes resulting decrease per unit costs higher margins slightly offset lower margins triactiv device new biomaterials products specifically orthovita triactiv margins continue lower biomaterials product margins manufacturing process matures volumes increase also initiated new product line third fiscal quarter 2004 orthovita’s vitoss foam products initial phases production product line incurred higher costs due learning curve associated new products research development expense research development expense increased 13 164 million fiscal 2004 compared 145 million fiscal 2003 research development expenses continued increase dollars decreased percentage total revenue 28 33 fiscal periods ended june 30 2004 june 30 2003 respectively expense increases primarily due development efforts biomaterials products including work nist grant biomaterials proprietary technologies spending increased 14 million 30 63 million fiscal 2004 49 million fiscal 2003 related primarily increases personnel costs totaling 763000 facility costs including rent electric depreciation 573000 support continued development new products processes current prospective customers expense increases also attributable continued development efforts triactiv device including clinical trial expenses research development expenses related triactiv system increased 493000 5 101 million fiscal 2004 96 million fiscal 2003 expense increases occurred personnel costs 372000 facility costs including rent electric depreciation 164000 patent counsel fees consulting costs 208000 support final efforts pride clinical study growth development efforts next generation triactiv device triactiv lfx cost increases partially offset 225000 decrease fiscal 2004 fiscal 2003 various product design costs related triactiv svg application fiscal 2004 many new design featuresease use improvements triactiv product third fiscal quarter 2004 many design enhancements implemented expenses related improvements level prior year addition decrease clinical trial costs 61000 due conclusion enrollment pride clinical study march 2004 selling general administrative expense selling general administrative expense increased 17 87 million fiscal 2004 74 million fiscal 2003 sales marketing expenses increased 900000 42 million fiscal 2004 33 million fiscal 2003 increase related primarily triactiv european sales marketing efforts increased 695000 mainly due marketing clinical study support third party reimbursement triactiv europe clinical study expenses increased 356000 657000 fiscal 2004 302000 fiscal 2003 addition increases occurred overall operations europe support clinical commercial efforts including personnel costs 195000 convention travel expenses 65000 well office facility costs including rent phone electric 56000 increases european sales marketing expenses include exchange rate premium fiscal 2003 2004 average exchange rate fiscal 2003 105 whereas average exchange rate fiscal 2004 119 increases approximately 60000 695000 related increase exchange rate 14 increases stated directly related difference exchange rate us marketing expenses increased 205000 17 million fiscal 2004 15 million fiscal 2003 increase primarily personnel expenses 148000 prelaunch activities marketing materials publications 52000 prepare commercial launch triactiv device us general administrative expenses increased 359000 45 million fiscal 2004 41 million fiscal 2003 attributable increases 392000 personnel costs 63000 facility costs including rent electric depreciation 321000 increased professional services public company expenses including investor relations sec filing fees personnel facility cost increases primarily related support continued sales research development growth increased professional fees well personnel costs related complying sarbanesoxley act 2002 soa offsetting increases decrease 218000 audit tax fees 210000 decrease allowance doubtful accounts although audit portion fees increased fiscal 2004 compared fiscal 2003 tax services fees fiscal 2004 decreased 275000 related 325000 professional service fee fiscal 2003 research development tax credit project performed 50500 professional service fee fiscal 2004 final portion research development tax credit project performed related accounts receivable allowance carrying receivables reserve amount due company filed bankruptcy outstanding balance subsequently paid reserve longer required net interest income interest expense decreased 80000 55 66000 fiscal 2004 145000 fiscal 2003 due lower principal balance debt balance continue make required quarterly payments interest income decreased 7 11 million fiscal 2004 12 million fiscal 2003 although cash investment balances increased offset lower interest rates nonoperating income expense nonoperating income 16000 fiscal 2004 compared nonoperating expense 700 fiscal 2003 nonoperating expense income periods represented primarily net loss gain sale fixed assets liquidity capital resources cash equivalents investments 449 million june 30 2005 decrease 162 million balance 611 end prior fiscal year june 30 2004 addition working capital 578 million june 30 2005 decrease 149 million working capital 727 million june 30 2004 operating activities net cash provided operating activities 123 million 199 million fiscal years ended june 30 2005 2004 respectively fiscal year ended june 30 2005 net income 129 million tax benefit exercise stock options 11 million noncash employee stockbased compensation 612000 noncash depreciation amortization 45 million cash used result changes asset liability balances 69 million decrease cash related change assets liabilities primarily due increase accounts receivable 35 million prepaid expenses current assets 22 million inventory 22 million decrease accounts payable accrued expenses 18 million partially offset decrease deferred tax asset 19 million increase current noncurrent deferred revenue 901000 increase accounts receivable primarily related increased sales volume final month fourth quarter fiscal 2005 compared period fiscal 2004 higher inventory levels related primarily build triactiv component parts result us commercial launch april 2005 prepaid expenses current assets related increase prepaid insurance due higher total premiums business policies fiscal 2005 fiscal 2004 125000 greater deposits equipment primarily related year end orders equipment placed new facility 2 million increase general prepaid balance various company expenses including limited maintenance contracts future exhibition expenses dues subscriptions 67000 accounts payable accrued expenses grew primarily trade accounts payable balance specifically purchases related new building business expansion increase accounts payable somewhat offset decrease accrued expenses related federal tax payments made fiscal 2005 deferred revenue balance increased related opportunity grant received department community economic development commonwealth pennsylvania dced see finally decrease deferred tax asset balance primarily due utilization majority deferred tax assets increases deferred tax liabilities see note 9 opportunity grant november 2004 company awarded 500000 opportunity grant dced grant awarded company recognition potential jobcreating economic development opportunities created company’s construction new facility within state pennsylvania grant conditioned upon meeting following three criteria 1 company create 238 fulltime jobs within 5 years beginning april 1 2003 date company’s request grant 2 company invest least 54250000 total project costs including limited personnel land building construction machinery equipment within three years beginning july 19 2004 date company’s facility groundbreaking 3 company operate new facility minimum 5 years company received cash payment 500000 third fiscal quarter 2005 revenue recognized earned longest period contained within grant commitment terms five years date occupancy company’s new facility date satisfaction last grant commitment expected december 2010 assuming original expectation transition new facility january 2006 june 30 2005 approximately 54054 revenue recognized related grant component income investing activities cash used investing activities 171 million year ended june 30 2005 result purchase redemption activity within investment portfolio capital spending related construction new facility see ongoing expansion manufacturing capabilities addition spent 26 million acquisition intellectual property rights inventor vitoss technology 250000 acquisition patents proprietary rights complementary biomaterials platform see note 6 period investments 271 million either matured sold called subsequently purchased new investments proceeds total investment purchases 221 million providing net cash investment activity 5 million see note 1 financial statements included annual report description availablefor sale securities 250 million capital spending plan fiscal 2005 20 million authorized new facility see discussion end fiscal 2005 remainder authorized continue expand research development manufacturing capabilities upgrade management information systems mis technology infrastructure total plan spent 193 million year ended june 30 2005 38 million related ongoing operations company remaining 155 million purchase land construction new facility 300 million capital spending plan fiscal 2006 expended primarily 20 million new facility see discussion also used continue expand research development manufacturing capabilities upgrade mis technology new facility new facility located approximately two miles existing facility exton pennsylvania long term proposed building site able accommodate 220000 square foot facility thus provide future growth continued expansion construction plan three phases phase one construction 160000 square foot building shell fitout 90000 square feet space manufacturing quality assurance operations phase one began first fiscal quarter 2005 expected completed early third quarter fiscal 2006 total estimated cost 35 million including land purchase phase two complete interior fitout 160000 square feet anticipated complete within four months phase one early fourth quarter fiscal 2006 second phase would allow complete transition personnel operations new facility exception model shop phase three would bring building 198000 square foot shell additional 13000 square feet fitout allow us bring entire organization new facility phase three expected complete june 30 2006 phases two three estimated additional cost 11 million including purchase additional land current plan finance construction building current available cash hand liquid investments associated management’s finalization plan transition operations new facility occurred april 30 2005 company record acceleration depreciation charge related assets abandoned time transition total value assets abandoned 49 million april 30 2005 acceleration depreciation charge 813000 recorded company’s fourth quarter ended june 30 2005 remaining 41 million expected charged fiscal year 2006 addition moving costs approximately 400000 total 45 million transition costs fiscal 2006 financing activities cash used financing activities 56 million year ended june 30 2005 result repayments longterm debt 219000 stock repurchases 79 million offset proceeds exercise stock options exercise stock options provided cash 25 million year ended june 30 2005 believe option exercises likely continue fiscal 2006 due current market price common stock compared average exercise price outstanding options debt september 1 2000 incurred obligation amount 45 million conjunction acquisition thm biomedical inc obligation due equal quarterly installments september 2004 entire obligation paid full debt remained balance sheet june 30 2005 stock repurchase program august 17 2004 announced board directors reinstated program repurchase issued outstanding shares company’s common stock six months date board reinstatement reinstated plan called repurchase 259500 shares balance original plan approved october 2003 year ended june 30 2005 repurchased retired 199867 shares common stock reinstated program cost approximately 51 million average market price 2568 per share program expired february 2005 march 16 2005 announced new stock repurchase program board approved additional 400000 issued outstanding shares common stock plan expires september 30 2005 first stock repurchase program plan continue repurchase shares cash time open market block trades otherwise repurchase program require company purchase specific dollar value number shares purchases program depend market conditions may commenced suspended time without prior notice june 30 2005 company repurchased retired 103133 shares common stock new program cost approximately 27 million average market price 2658 per share using available cash june 30 2005 296867 shares remaining repurchase program research development tax credit recorded tax credits 493536 984817 1500000 fiscal years ended june 30 2005 2004 2003 respectively entire tax credit recorded 2003 310000 2004 credit related qualified research development activities company period 1991 2003 general plan continue spend substantial amounts fund clinical trials gain regulatory approvals continue expand research development activities particularly triactiv system biomaterials products addition potential cash requirements associated announced reinstatement stock repurchase plan see continue fund construction new facility support continued growth biomaterials business commercial launch triactiv system discussed marketing selling triactiv system us direct sales force anticipate sales marketing expenses increase substantially continue invest build us sales team increased marketing efforts toward success triactiv product platform believe current cash investment balances addition cash generated operations sufficient meet operating financing capital requirements least next 12 months also believe cash investment balances sufficient longer term basis however depend numerous factors including market acceptance existing future products successful commercialization products development costs associated commercialization progress product development efforts magnitude scope efforts progress preclinical studies clinical trials product clearance fda agencies cost timing efforts expand manufacturing sales marketing capabilities cost filing prosecuting defending enforcing patent claims intellectual property rights competing technological market developments development strategic alliances marketing certain products terms future equity financing may dilutive stockholders terms debt financing may contain restrictive covenants limit ability pursue certain courses action ability obtain financing dependent status future business prospects well conditions prevailing relevant capital markets assurance given additional financing available us available us acceptable terms’ need arise presented summary contractual obligations june 30 2005 1 accordance accounting principles generally accepted united states obligations recorded consolidated balance sheet 2 see note 5 consolidated financial statements additional information operating leases estimate time periods cash equivalents adequate fund operations forward looking statement within meaning private securities litigation reform act 1995 subject risks uncertainties actual results may differ materially contemplated forwardlooking statements addition described factors may cause difference set forth caption “risk factors” annual report form 10k risk factors carefully consider risks uncertainties factors described addition information set forth report could materially adversely affect business operating results financial condition cash flows prospects well adversely affect value investment common stock risks related business triactiv system recently introduced united states triactiv system fails gain loses market acceptance business suffer expect sales triactiv system united states account significant portion revenue foreseeable future recent commercial introduction triactiv system limited product brand recognition know triactiv system successful long term market acceptance triactiv system may hindered physicians presented compelling data longterm studies safety efficacy triactiv system compared alternative procedures current plans conduct comparative studies addition demand triactiv system may increase quickly expect failure triactiv system significantly penetrate current new markets would negatively impact business financial condition results operations may able obtain necessary regulatory approvals triactiv fx system future generations triactiv device product platform united states fda cleared triactiv fx system marketing completed required clinical trials andor regulatory submissions future generations product platform prior granting approval commercial sale commencement clinical trials future generations device fda may require clarification information provided regulatory submissions information clinical studies granted fda approval may impose limitations uses products may marketed products may marketed experience delays unable receive clearance fda growth prospects diminished may successful commercializing current future generations triactiv device product platform direct sales force commercialize triactiv system recently approved sale united states well future versions triactiv device direct sales force may able successfully recruit develop train sales force sell market triactiv fx system future generations triactiv product platform recently began development initial direct sales marketing force must continue develop expand force prior experience hiring training sales marketing force may able expand maintain team adequate technical expertise capable supporting distribution unable successfully commercialize current future generations triactiv device growth prospects diminished derive substantial majority revenues three customers substantial majority total revenues derived three customers royalty income sales biomaterials st jude medical associated angioseal represented approximately 56 total revenue fiscal 2005 sales biomaterials products arthrex distributor orthopaedic products represented approximately 21 total revenues sales biomaterials products orthovita represented approximately 16 total revenue fiscal 2005 possible us predict future level demand products generated customers future demand angioseal customers st jude medical customer concentration exposes us risk changes business condition major customers risk loss major customer would adversely affect results operations example result inventory overstock adjustments sales arthrex fiscal 2005 decreased 128 million 175 million fiscal 2004 relationship customers subject change time anticipate substantial portion revenues continue come angioseal manufactured marketed distributed st jude medical license agreements st jude medical angioseal manufactured marketed sold worldwide basis st jude medical two significant sources revenue future expected sales collagen st jude medical use angioseal royalty income sale angioseal product line success angioseal depends part time effort attention st jude medical devotes angioseal product line success manufacturing marketing selling angioseal product line terms agreements st jude medical control pricing marketing strategy angioseal product line addition depend st jude medical successfully maintain levels manufacturing sufficient meet anticipated demand abide applicable manufacturing regulations seek reimbursement approvals st jude medical terminate arrangement time reason upon 12 months notice time sales marketing manufacturing distribution rights angioseal would returned us st jude medical may successfully pass future inspections manufacturing facility adequately perform manufacturing marketing selling duties failure st jude medical may negatively impact angioseal unit sales therefore reduce royalties biomaterials products successful operating results business may substantially impaired success existing biomaterials products well develop future depends variety factors including ability continue manufacture sell competitively price products acceptance products medical profession addition may required obtain regulatory approval future biomaterials products require substantial additional funds develop market biomaterials products expect fund growth biomaterials business operating income operating income may sufficient develop new biomaterials products date relied strategic partners customers market sell biomaterials products cannot assure commercialize products successfully existing developing sales force depend customers market obtain regulatory approvals biomaterials products depend efforts biomaterials customers marketing products include biomaterials components assurance customers’ enduse products include biomaterials components commercialized successfully customers otherwise able compete effectively markets products highly competitive likely become competitive competitors may able respond quickly new emerging technologies changes customer requirements markets current proposed products fragmented intensely competitive subject rapid change sensitive new product introductions enhancements expect competitive environment products become intense additional companies enter markets new techniques technologies adopted biomaterials medical devices compete directly indirectly customers range products technologies produced wide variety companies well processes procedures require use products competitors many existing competitors well number potential new competitors longer operating histories markets greater name recognition larger customer bases greater financial technical marketing resources biomaterials products compete products many larger companies industry vascular sealing device market products compete products sold datascope corporation perclose inc subsidiary abbott laboratories vascular solutions inc amongst smaller competitors majority vascular sealing performed manual compression represents primary competition triactiv system currently commercially available united sates europe competitors include boston scientific corporation johnson inc medtronic inc owns percusurge inc guidant corporation among others competitors may broader product lines allow negotiate exclusive longterm supply contracts offer comprehensive pricing products broader product lines may also provide competitors significant advantage marketing competing products group purchasing organizations managed care organizations increasingly seeking reduce costs centralized purchasing greater financial resources product development capabilities may allow competitors respond quickly new emerging technologies changes customer requirements may render products obsolete significant portion revenue depends sales medical devices customers enduser market also affected competition within markets devices competition within medical device market could also adverse effect business variety reasons including customers may compete directly larger dominant manufacturers extensive product lines greater sales marketing distribution capabilities also unable control factors may impact commercialization components end use products marketing sales efforts competitive pricing pressures within particular markets products accepted medical community products replaced new technologies business may suffer success existing products depends continued acceptance products medical community cannot predict whether products continue accepted acceptance sustained long term success products develop future depend adoption products targeted markets cannot predict quickly medical community accept future products extent future products used encounter difficulties introducing future products targeted markets operating results business may substantially impaired addition new technologies techniques may developed may render current products along development obsolete loss interruption supply key vendors could limit ability manufacture products purchase certain materials components products various suppliers components custom made us including many absorbable polymer suture raw materials used custom polymer products across markets loss interruption supply key vendors may require us find new vendors could experience production development delays seek new vendors may problems manufacturing delivering biomaterials products future biomaterials industry emerging area using many materials untested whose properties still known consequently time may experience unanticipated difficulties manufacturing delivering biomaterials products customers difficulties may include inability meet customer demand delays delivering products quality control problems certain biomaterials products use hazardous materials exposes us risk material environmental liabilities use hazardous substances research development manufacturing operations potentially subject material liabilities related personal injuries property damages may caused hazardous substance releases exposures facility decontamination costs cleanup costs related damages liabilities could substantially impair business operating results required comply increasingly stringent laws regulations governing environmental protection workplace safety including requirements governing handling storage disposal hazardous substances st jude medical’s international sales subject number risks could harm future international sales angioseal ability successfully commercialize new products international markets st jude medical sells angioseal product line internationally pays us royalty unit sold also sell triactiv device well products international markets royalties international sales angioseal product line st jude medical revenues international sales subject several risks including • impact recessions economies within outside united states • unexpected changes regulatory requirements tariffs trade barriers • weaker intellectual property rights protection countries • fluctuations exchange rates • potentially adverse tax consequences • political economic instability occurrence events could seriously harm st jude medical’s future international sales success depends key personnel loss could impair operating results business success depends significant extent upon efforts abilities joseph w kaufmann douglas g evans wendy f dicicco members senior management loss services one key employees could harm operating results business addition successful unless attract retain skilled personnel particularly areas research product development failure expand management systems controls support anticipated growth integrate future acquisitions could seriously harm operating results business operations continue grow expect expansion continue execute business strategy sustaining growth placed significant demands management administrative operational information technology manufacturing financial personnel resources accordingly future operating results depend ability officers key employees continue implement improve operational client support financial control systems effectively expand train manage employee base may able manage growth successfully acquisitions undertake could difficult integrate disrupt business dilute stockholder value harm operating results may acquire make investments complementary businesses technologies services products appropriate opportunities arise process integrating acquired business technology service product business operations may result unforeseen operating difficulties expenditures integration acquired company also may consume much management’s time attention could otherwise available ongoing development business moreover anticipated benefits acquisition may realized furthermore may unable identify negotiate finance future acquisitions successfully future acquisitions could result potentially dilutive issuances equity securities incurrence debt contingent liabilities amortization expenses related goodwill intangible assets building new manufacturing facility transition 100 manufacturing capabilities new facility encounter difficulties transition phase may lose revenue may unable maintain customer relationships manufacture products sell existing location exton pennsylvania purchased land currently constructing new manufacturing facility near existing facility plan transfer manufacturing processes new facility second quarter fiscal 2006 transition delayed may inadequate manufacturing capabilities meet customers’ requirements unable manufacture customers’ products unable meet production requirements existing new facility reason may lose revenue andor may able maintain relationships customers although carry business interruption insurance cover lost revenue profits insurance would cover losses experienced existing facility new facility complete cover transition delays complications addition business interruption insurance would compensate us loss opportunity potential adverse impact relations existing customers resulting inability produce products future operating results difficult predict may vary significantly quarter operating results varied significantly quarter past likely vary substantially future result number factors control including • market perception customer acceptance products • market perception acceptance customer’s products • efforts increase sales biomaterials products • efforts commercialize triactiv system existing developing sales force • efforts gain ce mark fda approval future generations triactiv device • loss significant orders • changes relationship st jude medical • establishment strategic alliances acquisitions • timely implementation new improved products • delays obtaining regulatory approvals • reimbursement products • increased competition • litigation concerning intellectual property rights medical device industry rely upon results operations particular quarter indication results full year quarter risks related intellectual property unable protect patents proprietary rights reputation competitiveness marketplace may materially damaged regard patents biomaterials trade secrets intellectual property important success rely upon patent law trade secret protection confidentiality agreements license agreements st jude medical protect proprietary rights although registered certain patents applicable international governmental authorities effective patent protection may available every country products made available sought protection intellectual property every country products may sold steps take protect proprietary rights may adequate ensure third parties infringe otherwise violate patents similar proprietary rights may accused infringing upon proprietary rights others related litigation could materially damage operating results business third parties may claim violated intellectual property rights adverse determination intellectual property litigation interference proceedings brought us could prohibit us selling products subject us significant liabilities third parties require us seek licenses third parties costs associated license arrangements may substantial could include ongoing royalties furthermore necessary licenses may available us satisfactory terms adverse determinations judicial administrative proceeding failure obtain necessary licenses could prevent us manufacturing selling products claims without merit could subject us costly litigation divert attention key personnel control use angioseal device trademark term angioseal trademark st jude medical goodwill generated marketing sales devices bearing angioseal trademark belongs st jude medical us st jude medical license agreements terminate would right call products “angioseal” unless purchase license trademark st jude medical without rights angioseal trademark would market products different trademark moreover upon termination st jude medical license agreements st jude medical would right compete us selling collagen puncture closure devices angioseal trademark thus purchasers puncture closure devices may likely recognize purchase products labeled angioseal regardless whether devices originate us risks related industry may face product liability claims could result costly litigation significant liabilities clinical testing manufacture sale medical products involve inherent risk human subjects clinical testing consumers products may suffer serious bodily injury death due side effects unintended negative reactions products accordingly clinical testing manufacture sale products entail significant risk product liability claims medical device industry general subject significant product liability litigation product liability claims without merit could result costly litigation reduced sales significant liabilities diversion management’s time attention resources cannot sure product liability insurance coverage adequate continue available us acceptable terms face uncertainty relating third party reimbursement products could seriously harmed changes reimbursement policies governmental private healthcare payers particularly extent changes affect reimbursement catheterization procedures angioseal products used physicians hospitals users products may fail obtain sufficient reimbursement healthcare payers procedures products used adverse changes may occur governmental private thirdparty payers’ policies toward reimbursement procedures products manufacturing activities subject extensive governmental regulation could make expensive time consuming us introduce new improved products manufacturing activities subject extensive regulation number governmental agencies including fda comparable international agencies required • obtain approval fda international agencies market sell new products • satisfy agencies’ requirements labeling sales promotional materials connection existing products • comply applicable manufacturing regulations • undergo rigorous inspections agencies compliance regulations agencies may delay prevent us introducing new improved products including future generations triactiv system furthermore may subject sanctions including temporary permanent suspension operations product recalls marketing restrictions fail comply laws regulations pertaining business also required demonstrate compliance fda’s quality system regulations fda enforces quality system regulations preapproval periodic postapproval inspections regulations relate product testing vendor qualification design control quality assurance well maintenance records documentation unable conform regulations required locate alternative manufacturers conform identifying qualifying alternative manufacturers may long costly difficult process could seriously harm business fda international regulatory agencies may also limit indications products approved regulatory agencies may restrict withdraw approvals received additional information becomes available support action risks related securities trading price common stock likely fluctuate substantially future trading price common stock may fluctuate widely result number factors control including • ability meet exceed forecasts expectations analysts investors • quarter variations operating results • announcements regarding clinical activities new products us competitors • general conditions medical device industry • changes forecasts earnings estimates analysts • partners’ ability meet exceed forecasts expectations analysts investors • price volume fluctuations overall stock market particularly affected market prices many medical device companies • general economic conditions addition market stock experienced may continue experience price volume fluctuations unrelated disproportionate operating performance result may able sell shares common stock price purchase past following periods volatility market price company’s securities class action litigation often instituted company securities litigation initiated us without merit could incur substantial costs management’s attention resources could diverted business future sales common stock public market management stockholders significant holdings could cause stock price fall sales substantial number shares common stock public market management significant stockholders perception sales could occur could cause market price common stock decline adversely affect future ability raise capital offering equity securities second amended restated certificate incorporation delaware law may discourage acquisition company provisions second amended restated certificate incorporation delaware law could make difficult third party acquire us even would beneficial stockholders forwardlooking statements report includes forwardlooking statements within meaning section 21e securities exchange act 1934 based forwardlooking statements largely current expectations projections future events trends affecting business report words “believe” “may” “will” “estimate” “continue” “anticipate” “intend” “expect” “plan” similar expressions relate kensey nash business management intended identify forwardlooking statements exclusive means identifying number risks uncertainties factors could cause actual results performance financial condition cash flows prospects opportunities differ materially expressed implied forwardlooking statements risks uncertainties factors include among things • general economic business conditions nationally markets • impact competition • anticipated trends business • existing future regulations affecting business • strategic alliances acquisition opportunities • risk factors set forth “risk factors” except expressly required federal securities laws undertake obligation publicly update revise forwardlooking statements whether result new information future events otherwise date report results operations past period considered indicative results expected future periods fluctuations operating results may also result fluctuations price common stock item 7a item 7 management’s discussion analysis financial condition results operations following discussion analysis read conjunction “selected consolidated financial data” financial statements related notes included report discussion analysis contains forwardlooking statements relating future events future financial performance statements predictions actual events results may differ materially evaluating statements carefully consider various factors identified report could cause actual results differ materially expressed implied forwardlooking statements including set forth “risk factors” annual report form 10k see “cautionary note regarding forwardlooking statements” overview provide extensive range products multiple medical markets primarily cardiovascular markets orthopaedic markets sports medicine spine extremities endovascular markets products place markets include range resorbable biomaterials products primarily cardiology orthopaedic markets well line products endovascular markets including devices applications thrombectomy chronic total occlusion markets revenues consist two components net sales includes biomaterials endovascular products royalty income net sales biomaterials sales sale angioseal components st jude medical sales biomaterial orthopaedic products including products applications primarily sports medicine spine markets continue primary source revenue table shows fiveyear trend angioseal component orthopaedic product sales manufacture two key resorbable components angioseal st jude medical 100 supply requirements collagen plug least 30 requirements polymer anchors supply contract expires december 2010 sales st jude medical however highly dependent ordering patterns vary significantly quarter variation ordering patterns apparent fiscal 2008 demonstrated decrease sales components fiscal 2007 fiscal 2007 exceptionally strong sales due part anchor orders exceeded contractual minimums expect sales angioseal components increase fiscal 2009 compared fiscal 2008 sales due increased st jude end user sales comparable period orthopaedic product sales increased 35 fiscal 2008 fiscal 2007 due increase sales current product lines part due increase customer base new product lines current customers expect sales orthopaedic products increase fiscal 2009 compared fiscal 2008 due devotion resources focus new business development new technologies innovation current customers net sales orthopaedic portion business dependent several factors including success current partners sports medicine spine markets continued acceptance biomaterialsbased products two markets well expanded future acceptance products ability offer new products technologies attract new partners markets due dependencies factors sales orthopaedic customers vary significantly quarter endovascular sales last several years kensey nash devoted significant resources bringing family proprietary endovascular products market us europe products focused emerging markets thrombectomy chronic total occlusions ctos sales endovascular products increased 12 total net sales fiscal 2008 compared 8 total net sales fiscal 2007 may 30 2008 completed sale product lines spectranetics transaction included manufacturing agreement continue manufacture endovascular products spectranetics minimum three years therefore continue recognize endovascular product sales revenue ship product spectranetics length manufacturing agreement sales however reduced transfer price compared direct market price reflected historical sales figures see also “sale endovascular business” discussion changes endovascular product line platform impacted results operations royalty income company also derives significant portion revenue profitability royalty income proprietary products developed codeveloped angioseal royalty income inventor original developer angioseal™ vascular closure device angioseal device reduces recovery time enhances patient comfort following diagnostic therapeutic cardiovascular catheterizations st jude medical inc exclusive worldwide rights development manufacturing sales marketing angioseal pursuant agreement provides us 6 royalty enduser product sales anticipate sales angioseal device continue modest growth pattern based forecasted continued procedure growth st jude medical’s continued expansion international markets potential success marketing new generations product vitoss® foam vitoss® bioactive vitoss® foam royalty income since 2003 partnered orthovita inc codevelop commercialize series unique proprietary bone void filler products branded vitoss foam first launched march 2004 receive fixed royalty orthovita’s enduser sales vitoss foam products targeted use orthopaedic market addition august 2004 entered agreement acquire proprietary rights third party inventor vitoss technology 26 million assignment agreement assignment agreement receive additional royalty orthovita enduser sales orthovita products containing vitoss technology total royalty received 40 million approximately 560000 received fiscal 2008 19 million remaining received june 30 2008 believe unique technology associated vitoss foam products growing orthopaedic market result orthovita component royalty income becoming significant next fiscal year beyond royalty generating relationships none materially contributes revenue time expect provide increased revenue related products gain market acceptance additional products commercialized sale endovascular business described “item 1 businessoverviewsale endovascular business” completed sale endovascular business spectranetics corporation may 30 2008 receiving 10 million closing payments opportunity additional 14 million various research development sales related milestone payments well additional royalty payments based future sales thromcat® safecross® products transaction also included manufacturing development regulatory services agreement discontinuance embolic protection platform described “item 1 businessoverviewdiscontinuance embolic protection platform” announced july 10 2007 made strategic decision cease activities related embolic protection platform recorded certain charges fiscal 2007 2008 related discontinuance new facility fiscal 2006 successfully completed construction moved operations new facility resulted significant facility transition expenses including acceleration depreciation certain abandoned leasehold improvement assets previous locations moving charges impact acceleration depreciation charges 42 million fiscal 2006 addition incurred moving costs totaling 543000 fiscal 2006 transition new facility completed fiscal 2006 accordingly additional facility transition charges recorded fiscal 2007 fiscal 2008 facility transition charges represented significant portion operating expenses fiscal 2006 therefore included following table show facility transition charges included within operating expense category income statement fiscal year ended june 30 2006 stockbased compensation following table summarizes total stockbased compensation expense result required adoption sfas 123r fiscal year 2006 within operating expense category income statements fiscal years presented acceleration stock awards publicly announced september 26 2007 “change control” defined fifth amended restated kensey nash corporation employee incentive compensation plan kensey nash corporation employee incentive compensation plan amended relevant date “employee plan” due purchase open market institutional investor 20 shares outstanding stock result outstanding unvested stock options stock appreciation rights nonvested stock held officers employees directors others plan automatically became vested case options stock appreciation rights exercisable full accelerated vesting resulted noncash charge approximately 30 million 016 per share tax affected primarily quarter ended september 30 2007 acceleration removed future equity compensation expense related outstanding stock options nonvested shares plan date acceleration however cashsettled stock appreciation rights including rights vesting accelerated continue marked market quarterly basis required generally accepted accounting principles equity compensation expense incurred related new stock compensation awards granted event see “liquidity capital resourcesstock appreciation rights sars buyback program” charge represented significant portion operating expenses fiscal 2008 therefore broken table show acceleration stockbased compensation charges included within operating expense category income statement fiscal year ended june 30 2008 following table summarizes stockbased compensation expense sfas 123r financial statements fiscal year ended june 30 2008 2007 critical accounting policies “critical accounting policies” require application management’s difficult subjective complex judgments often result need make estimates matters inherently uncertain may change future periods identified following critical accounting policies revenue recognition accounting stockbased compensation accounting investments debt equity securities inventory valuation income taxes revenue recognition recognize revenue provisions staff accounting bulletin sab 104 revenue recognition sab 104 superseded sab 101 revenue recognition financial statements sab 101 also follow provisions emerging issues task force issue 0021 revenue arrangements multiple deliverables eitf 0021 collaborative arrangements containing multiple revenue elements entered materially amended june 30 2003 sales revenue sales revenue recognized related product shipped service completed advance payments received products services recorded deferred revenue recognized product shipped services performed timing could subjective reduce sales estimated customer returns discounts allowances applicable products primarily manufactured according customers’ specifications subject return failure meet specifications royalty revenue royalty revenue recognized related product sold recognize substantially royalty revenue end month accordance customer agreements see note 1 revenue recognition consolidated financial statements included herein accounting stockbased compensation use various forms equity compensation including stock options nonvested stock grants cashsettled stock appreciation rights major part compensation programs retain provide incentives top management team members employees • fair value option grants estimated date grant using blackscholes optionpricing model uses weighted average assumptions expected volatilities based historical volatility common stock factors use historical data estimate option exercise employee termination behavior within valuation model separate groups employees similar historical exercise behavior considered separately valuation purposes expected term options derived historical exercise behavior represents period time options granted expected outstanding riskfree rate periods within contractual life option based us treasuries constant maturities effect time grant • nonvested stock granted nonemployee members board directors executive officers management accounted using fair value method sfas 123r fair value nonvested stock grants based upon closing price common stock date grant • cashsettled sars awarded stockbased payment transactions accounted sfas 123r classifies awards liabilities accordingly record awards component noncurrent liabilities balance sheet liability awards fair value award determines measurement liability balance sheet remeasured reporting period award settled fluctuations fair value liability award recorded increases decreases compensation cost either immediately remaining service period depending vested status award expected term cashsettled stock appreciation rights determined using simplified method accordance question 6 sec staff accounting bulletin topic 1402 “expected term” sab 107 time historical exercise behavior established believe calculation provides reasonable estimate expected term december 12 2007 sab 110 issued extend simplified method beyond 2007 companies concluded historical exercise experience sufficient provide reasonable basis revisions estimates methodologies could cause material impact financial statements accounting investments debt equity securities accordance statement financial accounting standards sfas 115 accounting certain investments debt equity securities sfas 115 classified entire investment portfolio availableforsale marketable securities secondary resale markets report portfolio fair value unrealized gains losses included stockholders’ equity realized gains losses income currently investment securities fair values less amortized cost therefore contain unrealized losses evaluated securities determined decline value related company industry specific event anticipate full recovery amortized costs respect securities maturity sooner event favorable market interest rate environment revisions classification investments andor determination anticipation full recovery amortized costs maturity sooner could result realizing gains losses investments therefore material impact financial statements june 30 2008 company compliance affirmative restrictive financial maintenance covenants inventory valuation inventory stated lower cost market adjustments inventory made individual part level estimated excess obsolescence impaired balances reflect inventory lower cost market factors influencing adjustments include changes demand technological changes product life cycle development plans component cost trends product pricing physical deterioration quality concerns revisions adjustments would required factors differ estimates income taxes estimated effective tax rate includes impact certain estimated research development tax credits nontaxable interest income material changes differences estimates could impact estimate effective tax rate results operations comparison fiscal years 2008 2007 total revenues total revenues increased 15 798 million fiscal 2008 695 million fiscal 2007 total net sales net sales products increased 20 538 million fiscal 2008 compared net sales 449 million fiscal 2007 16 increase biomaterials sales 64 increase endovascular sales biomaterials sales biomaterials sales 475 million fiscal 2008 16 increase compared 411 million fiscal 2007 biomaterials sales includes revenue recognized products shipped well revenue generated product development programs biomaterials customers increase primarily due increase orthopaedic sales 76 million 35 294 million fiscal 2008 compared 218 million fiscal 2007 orthopaedic sales growth primarily result sales arthrex inc 140 million represented increase 30 million 27 prior fiscal year additionally sales orthovita increased 19 million 35 73 million fiscal 2008 compared 54 million fiscal 2007 due strong end user sales existing products initial shipments new vitoss® bioactive foam product line fully launched orthovita fourth quarter fiscal 2008 fiscal 2008 orthopaedic sales growth also impacted 20 million new product sales resulting macropore biosurgery assets acquisition completed may 2007 biomaterials sales increased 716000 37 26 million fiscal 2008 compared 19 million fiscal 2007 offsetting increases 19 million 11 decrease sales angioseal components st jude medical 155 million fiscal 2008 compared 174 million fiscal 2007 collagen plug component sales 136 million decrease 5 sales anchor component 19 million decrease 39 asked supplement st jude medical’s production rates greater 30 fiscal 2007 see volume anchor sales fiscal 2008 endovascular sales endovascular sales 62 million fiscal 2008 64 increase compared sales 38 million fiscal 2007 sales us increased 39 million 28 million due continuation launch safecross device continued market acceptance thromcat system quickcat catheter fiscal year 2008 us sales included sales spectranetics inc late fiscal 2008 fourth quarter international endovascular sales increased 135 year 23 million 993000 due increased market acceptance thromcat quickcat devices fiscal 2008 gave 466000 us international sales credits customers fiscal 2007 related recall discontinuance embolic protection product line royalty income royalty income increased 6 260 million fiscal 2008 246 million fiscal 2007 st jude medical angioseal royalty income increased 3 214 million fiscal 2008 compared 208 million fiscal 2007 based st jude medical revenue approximately 360 million fiscal 2008 compared 350 million fiscal 2007 orthovita royalty income increased 19 fiscal 2008 fiscal 2007 total royalty income orthovita approximately 44 million fiscal 2008 compared 37 million fiscal 2007 enduser sales codeveloped vitoss® foam products increased 23 fiscal 2008 compared fiscal 2007 cost products sold cost products sold 272 million fiscal 2008 26 million increase 246 million fiscal 2007 gross margin net sales fiscal 2008 49 compared gross margin net sales 45 fiscal 2007 costs products sold fiscal 2008 included 20 million charges related sale endovascular division charge 252000 acceleration stock awards 155000 charges related discontinuance embolic protection platform charges incurred gross margin net sales would 54 instead 49 fiscal 2008 costs products sold fiscal 2007 included 34 million charges related discontinuance embolic protection platform charges incurred gross margin net sales would 53 instead 45 fiscal 2007 see “supplemental nongaap financial measures reconciliations” excluding special charges described change cost products sold increase 36 million 17 fiscal 2008 compared fiscal 2007 primarily related increase sales gross margin fiscal 2008 affected startup costs associated safecross product line initiated continued refine manufacturing process new product line look ahead fiscal 2009 believe higher volumes process improvements process automation lead improvement costs products improvements offset lower margins endovascular products due reduced pricing structure spectranetics see “item 7 overviewendovascular sales” research development expense research development expense 172 million fiscal 2008 compared 203 million fiscal 2007 research development expense fiscal 2008 included 10000 charges related sale endovascular division charge 835000 acceleration stockbased awards 93000 charges related discontinuance embolic protection platform fiscal 2007 included 729000 charges related discontinuance embolic protection platform see “supplemental nongaap financial measures reconciliations” excluding special charges described change research development expense decrease 33 million fiscal 2008 compared fiscal 2007 fiscal 2008 endovascular research development expense decreased 44 million offset part increase biomaterials research development expense 12 million comparable prior period decrease endovascular research development expense primarily due decrease personnel costs clinical trial expenses development services supplies related embolic protection platform discontinued july 2007 partially offsetting decreases research development expenses related discontinuance embolic protection platform additional costs related development thrombectomy cto platforms increase biomaterials research development expenses due increase personnel expenses well increase design development expenses annulus repair cartilage resorbable interbody fusion projects including special charges research development expenses 22 29 total revenues fiscal year ended 2008 2007 respectively believe research development expenditures total increase approximately 21 million fiscal 2009 increase biomaterials development efforts primarily related cartilage repair program expecting commence 300 400 person clinical trial cartilage product second half fiscal 2009 addition plan focus research development activities surrounding extracellular matrix technology ecm well development projects utilizing proprietary biomaterial technologies endovascular product research development also expected increase fiscal year 2009 compared fiscal year 2008 related new generations thromcat safecross devices per development contract spectranetics sales marketing expense sales marketing expense 147 million fiscal 2008 compared 125 million fiscal 2007 sales marketing expense fiscal 2008 included 24 million charges related sale endovascular division charge 260000 acceleration stockbased awards 71000 charges related discontinuance embolic protection platform fiscal 2007 included 87000 charges related discontinuance embolic protection platform see “supplemental nongaap financial measures reconciliations” excluding special charges described change sales marketing expense decrease 405000 fiscal 2008 compared fiscal 2007 decrease due 11 million decrease us sales marketing expenses offset part 682000 increase european sales marketing expenses sale endovascular business longer direct sales force us europe based timing sale endovascular business 11 months direct sales force fiscal 2008 compared 12 months fiscal 2007 despite fact growing sales force start fiscal 2008 change management’s direction sought strategic alternatives endovascular business drastically reduced marketing initiatives ability continue recruit retain sales people fiscal 2008 offsetting increase expenses beginning fiscal 2008 us personnel travel expenses sales marketing departments decreased 445000 fiscal 2008 compared fiscal 2007 addition 665000 decrease marketing expenses related conventions advertising expense product launches increase european sales marketing expenses primarily caused 445000 increase personnel travel expenses 129000 increase office costs professional fees 95000 increase marketing convention expenses part relates increase average exchange rate fiscal 2008 compared fiscal 2007 average euro dollar exchange rate fiscal 2008 147 versus average exchange rate fiscal 2007 131 increase approximately 12 general administrative expense general administrative expenses include costs finance information technologies human resource business development departments general administrative expense 128 million fiscal 2008 compared 83 million fiscal 2007 general administrative expense fiscal 2008 included 25 million charges related sale endovascular division charge 16 million acceleration stockbased awards 5000 charges related discontinuance embolic protection platform fiscal 2007 included 120000 charges related discontinuance embolic protection platform see “supplemental nongaap financial measures reconciliations” excluding special charges described change general administrative expense increase 533000 fiscal 2008 compared fiscal 2007 increase primarily result increase personnel costs 222000 including stockbased compensation expense increase 303000 amortization expense related amortization intangible asset acquired macropore biosurgery inc late fourth quarter fiscal 2007 interest income interest expense interest income increased 63 18 million fiscal 2008 11 million fiscal 2007 increase due primarily 60 increase average cash investment balance fiscal year ended june 30 2008 comparable prior year period well effect higher interest rates interest expense fiscal 2008 15 million compared 427000 prior year november 2007 borrowed remaining 27 million available mortgage see note 13 debt consolidated financial statements included 10k increasing outstanding balance 35 million compared 8 million prior year period thereby increasing interest paid mortgage nine month period mortgage hedged fixed interest rate swap 644 mortgage balance 342 million june 30 2008 incomeloss nonoperating loss 220000 fiscal 2008 decrease nonoperating loss 23000 fiscal 2007 nonoperating loss fiscal 2008 represents loss sale mutual fund investment offset gains sale selected municipal obligations nonoperating incomeloss also includes items gainloss exchange gainloss disposal fixed assets nonoperating income fiscal 2007 related primarily loss disposal fixed assets offset revenue recognized 500000 opportunity grant received commonwealth pennsylvania governor’s action team see note 20 opportunity grant consolidated financial statements included form 10k income tax expense tax expense fiscal 2008 18 million resulting effective tax rate 27 fiscal 2007 effective tax rate 18 effective tax rate impacted income tax benefit fiscal years 2007 2008 fiscal 2007 recorded retroactive adjustment tax provision result congressional approval extension research experimentation tax credit reduced effective tax rate see note 21 income taxes comparison fiscal years 2007 2006 total revenues total revenues increased 15 695 million fiscal 2007 604 million fiscal 2006 total net sales net sales products increased 19 449 million fiscal 2007 compared net sales 379 million fiscal 2006 12 increase biomaterials sales 221 increase endovascular sales biomaterials sales biomaterials sales 411 million fiscal 2007 12 increase compared 367 million fiscal 2006 biomaterials sales includes revenue recognized products shipped well revenue generated product development programs biomaterials customers increase primarily due increase sales angioseal components st jude medical 174 million fiscal 2007 compared 148 million fiscal 2006 17 increase despite 611000 volume discount sales fiscal 2007 collagen plug component sales 143 million increase 11 sales anchor component 31 million increase 55 asked supplement st jude medical’s production rates greater 30 additionally orthopaedic sales increased 12 million 6 218 million fiscal 2007 compared 206 million fiscal 2006 orthopaedic sales growth primarily result sales orthovita 54 million represented increase 22 million 70 prior fiscal year well 22 million increase sales zimmer new customers offsetting increases 23 million decrease sales arthrex inc well 11 million decrease sales medtronic due large launch quantities supplied medtronic fiscal 2006 biomaterials sales increased 649000 51 19 million fiscal 2007 compared 13 million fiscal 2006 endovascular sales endovascular sales 38 million fiscal 2007 221 increase compared sales 12 million fiscal 2006 sales us increased 212 28 million 895000 due introduction thromcat system continuation launch quickcat catheter fiscal year 2007 international endovascular sales increased 249 year 993000 284000 due introduction thromcat quickcat devices fiscal 2007 prior year international endovascular sales consisted entirely embolic protection product line since discontinued gave 466000 us international sales credits given customers fiscal 2007 related recall discontinuance embolic protection product line credits negatively impacted reported sales growth fiscal year ended june 30 2007 royalty income royalty income increased 9 246 million fiscal 2007 225 million fiscal 2006 st jude medical angioseal royalty income increased 6 208 million fiscal 2007 compared 196 million fiscal 2006 based st jude medical revenue approximately 350 million period orthovita royalty income increased 26 fiscal 2007 fiscal 2006 total royalty income orthovita approximately 37 million fiscal 2007 compared 29 million fiscal 2006 enduser sales codeveloped vitoss® foam products increased 29 fiscal 2007 compared fiscal 2006 cost products sold cost products sold 246 million fiscal 2007 40 million increase 206 million fiscal 2006 gross margin net sales fiscal 2007 45 compared gross margin net sales 45 fiscal 2006 costs products sold fiscal 2007 included 34 million charges related discontinuance embolic protection platform costs products sold fiscal 2006 included 25 million facility transition charges excluding special charges described comparison fiscal years 2008 2007 change cost products sold increase 31 million fiscal 2007 compared fiscal 2006 increase primarily due increase units sold also affected production scrap shop order variances embolic protection devices attempts made rectify issues relating recall conducted third fourth quarters fiscal year costs incurred announcement recall embolic protection devices prior decision discontinuance research development expense research development expense 203 million fiscal 2007 compared 190 million fiscal 2006 research development expense fiscal 2007 included 729000 charges related discontinuance embolic protection platform fiscal 2006 included 15 million facility transition charges excluding special charges described comparison fiscal years 2008 2007 change research development expense increase 21 million fiscal 2007 compared fiscal 2006 increase research development expense primarily related increase personnel expense 11 million increase clinical trial expense 648000 increase patent regulatory fees 272000 personnel expenses equity compensation increased 196000 increases salaries benefits increased 634000 increase clinical trial expenses due extent well timing trials took place period fiscal 2006 enrolling aspire study led fda clearance triactiv fx system fiscal 2007 commenced completed european study thromcat device native coronary anatomy initiated enrollment us european proguard trial carotid pivotal trial triactiv proguard device carotid anatomy due discontinuation embolic protection platform proguard trial since cancelled research development expenses 29 31 total revenues fiscal year ended 2007 2006 respectively research development expenditures total percentage revenue decreased fiscal 2008 compared fiscal 2007 decrease direct result discontinuance embolic protection line well clinical trials relating endovascular biomaterials product lines fiscal 2008 sales marketing expense sales marketing expense 125 million fiscal 2007 compared 94 million fiscal 2006 sales marketing expense fiscal 2007 included 87000 charges related discontinuance embolic protection platform fiscal 2006 included 170000 facility transition charges excluding special charges described comparison fiscal years 2008 2007 change sales marketing expense increase 32 million fiscal 2007 compared fiscal 2006 increase due 24 million increase us sales marketing expenses 724000 increase european sales marketing expenses us personnel travel expenses sales marketing departments increased 18 million fiscal 2007 compared fiscal 2006 increase related building endovascular direct sales force average 38 sales marketing employees us fiscal 2007 compared average 30 sales marketing employees fiscal 2006 addition increase 549000 marketing expenses related conventions advertising expense product launches increase european sales marketing expenses primarily caused 378000 increase personnel travel expenses 158000 increase office costs professional fees 146000 increase marketing convention expenses part relates increase average exchange rate fiscal 2007 compared fiscal 2006 average euro dollar exchange rate fiscal 2007 131 versus average exchange rate fiscal 2006 122 increase approximately 7 general administrative expense general administrative expenses include costs finance information technologies human resource business development departments general administrative expense 83 million fiscal 2007 compared 79 million fiscal 2006 general administrative expense fiscal 2007 included 120000 charges related discontinuance embolic protection platform fiscal 2006 included 503000 facility transition charges excluding special charges described comparison fiscal years 2008 2007 change general administrative expense increase 832000 fiscal 2007 compared fiscal 2006 increase primarily result increase personnel costs 595000 including stockbased compensation expense 239000 writeoff previously deferred costs related prospective acquisition longer pursued net interest income interest income increased 4 11 million fiscal 2007 10 million fiscal 2006 although 3 decrease average cash investment balance fiscal 2007 fiscal 2006 decrease offset higher interest rates decrease cash balances due primarily funding construction new facility throughout fiscal 2006 final payments beginning fiscal 2007 well 33 million acquisition intellectual property certain assets macropore biosurgery spinal orthopaedic business unit cytori therapeutics inc see note 10 acquisition certain assets macropore consolidated financial statements included herein interest expense fiscal 2007 427000 compared 71000 prior year borrowed cash variable rate secured commercial mortgage agreement hedged swap fixed interest rate 644 balance agreement 80 million june 30 2007 incomeloss nonoperating loss 23000 fiscal 2007 compared nonoperating income 82000 fiscal 2006 nonoperating expense fiscal 2007 primarily related loss disposal fixed assets offset revenue recognized 500000 opportunity grant received commonwealth pennsylvania governor’s action team see note 20 opportunity grant fiscal 2006 income primarily related revenue recognized opportunity grant offset loss foreign currency exchange loss disposal fixed assets income tax expense tax expense fiscal 2007 787000 resulting effective tax rate 18 consistent fiscal year 2006’s effective tax rate 18 effective tax rate impacted income tax benefit fiscal years 2006 2007 see note 21 income taxes liquidity capital resources cash equivalents investments 635 million june 30 2008 increase 292 million balance 343 million june 30 2007 end prior fiscal year addition working capital 829 million june 30 2008 increase 297 million working capital 532 million june 30 2007 increase working capital primarily result 270 million draw mortgage see note 13 debt sale endovascular business provided cash 100 million see note 25 sale endovascular business fiscal 2008 operating activities net cash provided operating activities 158 million fiscal year ended june 30 2008 fiscal year ended june 30 2008 net income 48 million net effect noncash employee stockbased compensation related tax events 60 million noncash depreciation amortization 73 million noncash employee stockbased compensation 53 million includes 30 million related acceleration stock awards discussed additionally undertook sar buyback program resulted 11 million use cash see cash used result changes asset liability balances 25 million decrease cash related change assets liabilities primarily due increase accounts receivable 22 million increase inventory 21 million 18 million deferred tax transactions offset increase 27 accounts payable accrued expenses investing activities cash provided investing activities 179 million fiscal year ended june 30 2008 result net purchase redemption activity within investment portfolio capital spending related ongoing expansion manufacturing capabilities period investments 376 million matured called subsequently purchased new investments 254 million proceeds resulting net proceeds cash investing transactions 122 million additionally received 100 million proceeds sale endovascular business also invested 41 million capital expenditures fiscal year ended june 30 2008 expand research manufacturing capabilities facility enhancements equipment machinery purchases financing activities cash provided financing activities 79 million fiscal year ended june 30 2008 amount primarily result draw 270 million remaining funds available 350 million mortgage fiscal 2008 additionally net effect exercise stockbased awards provided cash 62 million fiscal 2008 partially offsetting increases decrease cash 245 million stock repurchases 817000 repayments longterm debt stock repurchase program september 25 2007 announced board directors approved stock repurchase program provide us flexibility purchase shares common stock program replaced existing stock repurchase program allowed us repurchase total 250 million issued outstanding shares common stock june 23 2008 announced board directors expanded existing 250 million stock repurchase program order provide us flexibility buy shares new program allows us repurchase additional 100 million issued outstanding shares common stock expiration plan finance repurchases using available cash liquid investments cash operations fiscal 2008 repurchased retired 867839 shares common stock total cost 244 million average market price per share 2815 using available cash stock appreciation rights sars buyback program granted cashsettled sar awards eligible employees quarter ended september 30 2006 award granted provided participant right receive payment cash upon exercise appreciation market value share common stock award’s exercise price exercise price sar equal closing market price common stock date grant sars exercisable maximum term five years date grant vested period three years grant date first onethird grants scheduled vest quarter ended september 30 2007 quarter ended september 30 2007 vesting equity compensation awards automatically accelerated due “change control” defined employee plan see note 16 stockbased compensation consolidated financial statements included 10k additional information concerning accelerated vesting equity awards therefore granted cashsettled sar awards available exercise subject quarterly marktomarket adjustments november 14 2007 effort reduce exposure liability offered buy back sars current eligible employees excluding executive officers fair market value buyout price based closing price common stock december 14 2007 settlement date offer resulted purchase 173940 sars buyout price 647 per sar total 11 million net portion payroll taxes paid participating eligible employees remaining sars continue remeasured reporting period awards settled cannot predict market value common stock time exercise grants magnitude exercises particular time term grants general plan continue increase research development activities biomaterial products increase research development activities endovascular products based development contract spectranetics since sold endovascular product lines spectranetics portion operating expense specifically related sales marketing efforts virtually eliminated fiscal 2009 believe current cash investment balances future cash generated operations sufficient meet operating financing capital requirements next 12 months although believe cash investment balances also sufficient longer term basis depend numerous factors including market acceptance existing future products successful commercialization products development costs associated commercialization progress product development efforts magnitude scope efforts progress preclinical studies future clinical trials product clearance fda agencies cost timing efforts expand manufacturing sales marketing capabilities cost filing prosecuting defending enforcing patent claims intellectual property rights competing technological market developments development strategic alliances marketing certain products terms future equity financing undertake may dilutive stockholders terms debt financing may contain restrictive covenants limit ability pursue certain courses action ability obtain financing dependent status future business prospects well conditions prevailing relevant capital markets assurance given additional financing available us available us acceptable terms need arise contractual obligations presented summary contractual obligations june 30 2008 obligations related mortgage agreements purchase goods services enforceable legally binding 1 longterm debt obligations consist principal interest mortgage 342 million june 30 2008 accordance generally accepted accounting principles united states gaap interest obligations recorded consolidated balance sheet see note 13 debt consolidated financial statements included form 10k 2 obligations consist open purchase orders capital items primarily continued expansion research development manufacturing capabilities 3 accordance generally accepted accounting principles united states gaap obligations recorded consolidated balance sheet 4 liabilities uncertain tax positions aggregate amount 145081 omitted table due inability reliably estimate period cash settlement liabilities estimate time periods cash equivalents adequate fund operations forward looking statement within meaning private securities litigation reform act 1995 subject risks uncertainties actual results may differ materially contemplated forwardlooking statements addition described factors may cause difference set forth item 1a risk factors annual report form 10k supplemental nongaap financial measures reconciliations kensey nash corporation nongaap financial measures reconciliations adjusted income reconciliation note supplement management discussion analysis presented accordance gaap kensey nash corporation uses nongaap measures operating expense line items adjusted gaap results exclude certain expenses nongaap adjustments provided enhance users overall understanding historical current financial performance prospects future believe nongaap results provide useful information management investors excluding certain expenses believe indicative core operating results adjusted gaap results discontinuance embolic protection platform accelerated vesting stock awards sale endovascular business spectranetics excluded impact writeoffs inventory certain dedicated embolic protection equipment assets related decision june 2007 discontinue embolic protection product line additional charges related severance clinical trial closeout costs recorded fiscal year ended 2008 set forth reconciliation excluded impact acceleration vesting stock awards fiscal year ended 2008 results due “change control” defined equity compensation plan august 30 2007 ramius capital group llc affiliates acquired 20 percent company’s outstanding common stock excluded impact severance termination benefits fees asset impairment charges goodwill writeoff inventory upgrade liability fiscal year ended 2008 results related sale endovascular business spectranetics may 30 2008 nongaap measures provide investors management alternative method assessing kensey nash’s operating results manner consistent future presentation nongaap results one primary indicators management uses planning forecasting future periods presentation additional information considered isolation substitute results prepared accordance accounting principles generally accepted united states net income fiscal 2008 includes 30 million net charges 20 million aftertax charges 016 per share tax effected acceleration stock awards approximately 324000 charges 215000 aftertax charges 002 per share taxeffected related discontinuation company’s embolic protection platform incurred first quarter fiscal 2008 81 million net charges 54 million 044 per share taxeffected related sale company’s endovascular business fourth quarter fiscal year 2008 diluted earnings per share fourth quarter fiscal year 2007 included 47 million charges 31 million aftertax charges 025 per share tax effected related discontinuance company’s embolic protection platform b net income fiscal 2007 included 47 million charges 31 million aftertax charges 025 per share tax effected related discontinuance company’s embolic protection platform item 7a item 7a quantitative qualitative disclosures market risk interest income expense sensitive changes general level interest rates regard changes interest rates affect interest earned cash equivalents investments investment portfolio investment portfolio consists high quality municipal securities majority investments maturities ranging less one year approximately four years mitigate default risk investing believe safe high credit quality securities monitoring credit rating investment issuers portfolio includes marketable securities secondary resale markets auditcommitteeapproved investment strategy currently limits duration types investments availableforsale securities subject interest rate risk decreases market value interest rates increase june 30 2009 total investment portfolio consisted approximately 302 million investments may sold time portfolio includes availableforsale marketable securities secondary resale markets generally hold securities earlier call date maturity therefore expect results operations cash flows materially impacted due sudden change interest rates review investments identify evaluate investments indication possible impairment ability intent hold investments recovery respective fair values may maturity current requirement sell investments additional information regarding investments located note 2 consolidated financial statements included herein form 10k debt may 25 2006 entered 350 million aggregate tenyear fixed interest rate swap agreement swap citibank na manage market risk changes interest rates mortgage june 30 2009 taken full 350 million advance mortgage see note 13 consolidated financial statements included form 10k objective strategy undertaking swap hedge exposure variability cash flows interest expense associated future interest rate payments mortgage reduce interest rate risk event unfavorable interest rate environment currently utilize hypothetical derivative method determining hedge effectiveness hedged item period therefore expect results operations cash flows materially impacted due sudden change interest rates conditions underlying swap hedge item change risk hedged item would deemed ineffective hedge therefore would record changes fair value swap within consolidated statements income well consolidated statements cash flows additional information regarding swap located note 14 consolidated financial statements included form 10k foreign currency exchange rate risk company’s business directly dependent foreign operations company’s sales customers outside us significant however portion company’s total revenues including sales royalties dependent us based customers selling endusers outside us risk related changes foreign currency exchange rates relates royalties paid us dollars royalties received enduser sales within foreign countries currently taking affirmative steps hedge risk fluctuations foreign currency exchange rates continuing grow business reliant royalty income subject fluctuations exchange rates expect financial position results operations cash flows materially impacted due sudden change foreign currency exchange rates fluctuations relative us dollar item 8 item 7a quantitative qualitative disclosures market risk interest income expense sensitive changes general level interest rates regard changes interest rates affect interest earned cash equivalents investments well interest paid debt investment portfolio consists primarily high quality us government municipal corporate securities majority maturities ranging 314 years also certain municipal variable rate demand obligations maturities ranging 20 30 years municipal variablerate demand obligations putable weekly callable monthly basis mitigate default risk investing believe safe high credit quality securities monitoring credit rating investment issuers portfolio includes marketable securities secondary resale markets audit committee approved investment strategy currently limits duration investments availableforsale securities subject interest rate risk decrease market value interest rates increase june 30 2003 total portfolio consisted approximately 334 million investments may sold anytime portfolio includes availableforsale marketable securities secondary resale markets generally hold securities earlier call date maturity therefore expect results operations cash flows materially impacted due sudden change interest rates 11 million outstanding debt june 30 2003 related acquisition thm item 8 item 7a quantitative qualitative disclosures market risk interest income expense sensitive changes general level interest rates regard changes interest rates affect interest earned cash equivalents investments well interest paid debt investment portfolio consists primarily high quality us government securities certificates deposit average maturity nine years mitigate default risk investing believe safest highest credit quality securities monitoring credit rating investment issuers portfolio includes marketable securities active secondary resale markets ensure portfolio liquidity limitations regarding duration investments availableforsale securities subject interest rate risk decrease market value interest rates increase june 30 2002 total portfolio consisted approximately 303 million investments maturities ranging one fifteen years additionally generally hold securities earlier call date maturity therefore expect results operations cash flows materially impacted due sudden change interest rates 23 million outstanding debt june 30 2002 related acquisition thm item 8 item 7a quantitative qualitative disclosures market risk interest income expense sensitive changes general level interest rates regard changes interest rates affect interest earned cash equivalents investments investment portfolio investment portfolio consists primarily high quality municipal securities one mutual fund majority maturities ranging less one year approximately two years also five municipal variablerate demand obligations maturities ranging 17 34 years municipal variablerate demand obligations putable weekly callable monthly basis mitigate default risk investing believe safe high credit quality securities monitoring credit rating investment issuers portfolio includes marketable securities secondary resale markets auditcommitteeapproved investment strategy currently limits duration types investments availableforsale securities subject interest rate risk decreases market value interest rates increase june 30 2007 total investment portfolio consisted approximately 272 million investments may sold time portfolio includes availableforsale marketable securities secondary resale markets generally hold securities earlier call date maturity therefore expect results operations cash flows materially impacted due sudden change interest rates additional information regarding investments located note 2 consolidated financial statements company included herein debt may 25 2006 entered 350 million aggregate tenyear fixed interest rate swap agreement swap citibank na manage market risk changes interest rates mortgage june 30 2007 taken 80 million advance mortgage see note 14 consolidated financial statements company objective strategy undertaking swap hedge exposure variability cash flows interest expense associated future interest rate payments mortgage reduce interest rate risk event unfavorable interest rate environment therefore expect results operations cash flows materially impacted due sudden change interest rates additional information regarding swap located note 1under derivative instruments hedging activities note 14 consolidated financial statements company item 8 item 7a quantitative qualitative disclosures market risk interest income expense sensitive changes general level interest rates regard changes interest rates affect interest earned cash equivalents investments well fair value investments swap investment portfolio investment portfolio consists highly rated us government agency bonds municipal bonds issued states cities counties governmental entities majority investments maturities ranging less one year approximately three years mitigate default risk investing believe safe high credit quality securities monitoring credit rating investment issuers portfolio includes securities secondary resale markets audit committeeapproved investment strategy currently limits duration types investments relative diversification maturities maintain safety liquidity availableforsale securities subject interest rate risk decreases market value interest rates increase june 30 2010 total investment portfolio consisted approximately 426 million investments generally may sold time portfolio includes availableforsale securities secondary resale markets generally hold securities earlier call date maturity expect results operations cash flows materially impacted due sudden change interest rates review investments identify evaluate investments indication possible impairment experienced liquidity impairment issues investments however due recent economic conditions bond issuers’ financial condition credit markets continued highly volatile assurance conditions future adversely affect liquidity value investments government agency bonds municipal bonds challenging economic conditions continue investments portfolio experience additional ratings downgrades may incur impairments investment portfolio could negatively affect financial condition cash flows results operation intent sell investments recovery respective fair values may maturity current requirement sell investments additional information regarding investments located note 2 consolidated financial statements included herein form 10k debt may 25 2006 entered 35 million aggregate tenyear fixed interest rate swap citibank na manage market risk changes interest rates mortgage june 30 2010 outstanding principal mortgage 314 million see note 8 consolidated financial statements included form 10k objective strategy undertaking swap hedge exposure variability cash flows interest expense associated future interest rate payments mortgage reduce interest rate risk event unfavorable interest rate environment currently utilize hypothetical derivative method determining hedge effectiveness hedged item period expect results operations cash flows materially impacted due sudden change interest rates conditions underlying swap hedge item change risk hedged item would deemed ineffective hedge therefore would record changes fair value swap within consolidated statements income well consolidated statements cash flows additional information regarding swap located note 8 heading “interest rate swap agreement” consolidated financial statements included form 10k foreign currency exchange rate risk company’s business directly dependent foreign operations company’s sales customers outside us significant however portion company’s total revenues including sales royalties dependent us based customers selling endusers outside us risk related changes foreign currency exchange rates relates royalties paid us dollars royalties received enduser sales within foreign countries currently taking affirmative steps hedge risk fluctuations foreign currency exchange rates expect financial position results operations cash flows materially impacted due sudden change foreign currency exchange rates fluctuations relative us dollar item 8 item 7a quantitative qualitative disclosures market risk interest income expense sensitive changes general level interest rates regard changes interest rates affect interest earned cash equivalents investments investment portfolio investment portfolio consists primarily high quality municipal corporate obligations majority investments maturities ranging less one year four years addition company one security maturity approximately 10 years mitigate default risk investing believe safe high credit quality securities monitoring credit rating investment issuers portfolio includes marketable securities secondary resale markets audit committee approved investment strategy currently limits duration investments availableforsale securities subject interest rate risk decrease market value interest rates increase june 30 2006 total portfolio consisted approximately 223 million investments may sold anytime portfolio includes availableforsale marketable securities secondary resale markets generally hold securities earlier call date maturity therefore expect results operations cash flows materially impacted due sudden change interest rates additional information regarding investments located note 1 consolidated financial statements company investments debt may 25 2006 entered 35 million aggregate tenyear fixed interest rate swap agreement swap citibank na manage market risk changes interest rates secured commercial mortgage june 30 2006 taken 8 million advance mortgage see note 7 consolidated financial statements company objective strategy undertaking swap hedge exposure variability cash flows interest expense associated future interest rate payments mortgage reduce interest rate risk event unfavorable interest rate environment therefore expect results operations cash flows materially impacted due sudden change interest rates additional information regarding swap located note 1 derivative instruments hedging activities note 7 consolidated financial statements company item 8 item 7a quantitative qualitative disclosures market risk interest income expense sensitive changes general level interest rates regard changes interest rates affect interest earned cash equivalents investments well interest paid debt investment portfolio consists primarily high quality us government municipal corporate securities majority investments maturities ranging 2 13 years also certain municipal variable rate demand obligations maturities ranging 6 30 years municipal variablerate demand obligations putable weekly callable monthly basis mitigate default risk investing believe safe high credit quality securities monitoring credit rating investment issuers portfolio includes marketable securities secondary resale markets audit committee approved investment strategy currently limits duration investments availableforsale securities subject interest rate risk decrease market value interest rates increase june 30 2004 total portfolio consisted approximately 465 million investments may sold anytime portfolio includes availableforsale marketable securities secondary resale markets generally hold securities earlier call date maturity therefore expect results operations cash flows materially impacted due sudden change interest rates 219000 outstanding debt june 30 2004 related acquisition thm item 8 item 7a quantitative qualitative disclosures market risk interest income expense sensitive changes general level interest rates regard changes interest rates affect interest earned cash equivalents investments well fair value investments swap also affect borrowing rate available unsecured revolving credit facility investment portfolio investment portfolio consists high quality municipal securities majority investments maturities ranging less one year approximately three years mitigate default risk investing believe safe high credit quality securities monitoring credit rating investment issuers portfolio includes securities secondary resale markets audit committeeapproved investment strategy currently limits duration types investments availableforsale securities subject interest rate risk decreases market value interest rates increase june 30 2011 total investment portfolio consisted approximately 117 million investments generally may sold time portfolio includes availableforsale securities secondary resale markets generally hold securities earlier call date maturity expect results operations cash flows materially impacted due sudden change interest rates review investments identify evaluate investments indication possible impairment intent sell investments recovery respective fair values may maturity current requirement sell investments additional information regarding investments located note 2 consolidated financial statements included herein form 10k debt may 25 2006 entered 35 million aggregate tenyear fixed interest rate swap citibank na manage market risk changes interest rates mortgage june 30 2011 outstanding principal mortgage 30 million see note 10 consolidated financial statements included form 10k objective strategy undertaking swap hedge exposure variability cash flows interest expense associated future interest rate payments mortgage reduce interest rate risk event unfavorable interest rate environment currently utilize hypothetical derivative method determining hedge effectiveness hedged item period expect results operations cash flows materially impacted due sudden change interest rates conditions underlying swap hedge item change risk hedged item would deemed ineffective hedge therefore would record changes fair value swap within consolidated statements income well consolidated statements cash flows additional information regarding swap located note 10under heading “interest rate swap agreement” consolidated financial statements included form 10k may 26 2011 entered loan agency agreement “credit agreement” wells fargo bank national association wells fargo provides threeyear unsecured revolving credit facility revolving credit facility 35000000 see note 10 consolidated financial statements included form 10k terms credit agreement may borrow aggregate amount unused commitment revolving credit facility maturity date revolving credit facility may 25 2014 objective strategy entering credit agreement available resources may used working capital general corporate purposes company including permitted acquisitions capital expenditures june 30 2011 borrowings revolving credit facility interest rates fluctuate risk outstanding balance would impacted prevailing rate may impact ability repay outstanding balance foreign currency exchange rate risk company’s business directly dependent foreign operations company’s sales customers outside us significant however portion company’s total revenues including sales royalties dependent us based customers selling endusers outside us risk related changes foreign currency exchange rates relates royalties paid us dollars royalties received enduser sales within foreign countries addition cost method investment orteq united kingdombased company also made cash advance orteq structured convertible debt august 2011 currently taking affirmative steps hedge risk fluctuations foreign currency exchange rates expect financial position results operations cash flows materially impacted due sudden change foreign currency exchange rates fluctuations relative us dollar item 8 item 7a quantitative qualitative disclosures market risk interest income expense sensitive changes general level interest rates regard changes interest rates affect interest earned cash equivalents investments investment portfolio consists primarily high quality municipal us government corporate obligations majority investments maturities ranging approximately 4 months 5 years addition company one security maturity approximately 11 years also certain municipal variable rate demand obligations maturities ranging 5 30 years municipal variablerate demand obligations putable weekly callable monthly basis mitigate default risk investing believe safe high credit quality securities monitoring credit rating investment issuers portfolio includes marketable securities secondary resale markets audit committee approved investment strategy currently limits duration investments availableforsale securities subject interest rate risk decrease market value interest rates increase june 30 2005 total portfolio consisted approximately 407 million investments may sold anytime portfolio includes availableforsale marketable securities secondary resale markets generally hold securities earlier call date maturity therefore expect results operations cash flows materially impacted due sudden change interest rates outstanding debt june 30 2005 item 8 item 7a quantitative qualitative disclosures market risk interest income expense sensitive changes general level interest rates regard changes interest rates affect interest earned cash equivalents investments investment portfolio investment portfolio consists high quality municipal securities majority investments maturities ranging less one year approximately four half years june 30 2008 also one remaining municipal variablerate demand obligation maturity 24 years municipal variablerate demand obligation putable weekly callable monthly basis august 15 2008 variablerate demand obligation called par value mitigate default risk investing believe safe high credit quality securities monitoring credit rating investment issuers portfolio includes marketable securities secondary resale markets auditcommitteeapproved investment strategy currently limits duration types investments availableforsale securities subject interest rate risk decreases market value interest rates increase june 30 2008 total investment portfolio consisted approximately 148 million investments may sold time portfolio includes availableforsale marketable securities secondary resale markets generally hold securities earlier call date maturity therefore expect results operations cash flows materially impacted due sudden change interest rates additional information regarding investments located note 2 consolidated financial statements included herein debt may 25 2006 entered 350 million aggregate tenyear fixed interest rate swap agreement swap citibank na manage market risk changes interest rates mortgage june 30 2008 taken full 350 million advance mortgage see note 13 consolidated financial statements objective strategy undertaking swap hedge exposure variability cash flows interest expense associated future interest rate payments mortgage reduce interest rate risk event unfavorable interest rate environment therefore expect results operations cash flows materially impacted due sudden change interest rates additional information regarding swap located note 1under derivative instruments hedging activities item 8 item 8 financial statements supplementary data financial statements report independent auditors listed item 14 included annual report form 10k item 9 item 8 financial statements supplementary data financial statements report independent auditors listed item 14 included annual report form 10k item 9 item 8 financial statements supplementary data financial statements report independent auditors listed item 14 included annual report form 10k item 9 item 8 financial statements supplementary data following consolidated financial statements related notes thereto kensey nash corporation report independent registered public accounting firm filed part form 10k report independent registered public accounting firm board directors stockholders kensey nash corporation exton pennsylvania audited accompanying consolidated balance sheets kensey nash corporation subsidiaries “company” june 30 2009 2008 related consolidated statements income stockholders’ equity cash flows three years period ended june 30 2009 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position kensey nash corporation subsidiaries june 30 2009 2008 results operations cash flows three years period ended june 30 2009 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting june 30 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated september 14 2009 expressed unqualified opinion company’s internal control financial reporting deloitte touche llp philadelphia pennsylvania september 14 2009 kensey nash corporation consolidated balance sheets see notes consolidated financial statements kensey nash corporation consolidated statements income see notes consolidated financial statements kensey nash corporation consolidated statements stockholders’ equity see notes consolidated financial statements kensey nash corporation consolidated statements cash flows see notes consolidated financial statements kensey nash corporation notes consolidated financial statements years ended june 30 2009 2008 2007 1 summary significant accounting policies description companykensey nash corporation company leading medical technology company provides innovative solutions technologies wide range medical procedures company leader developing manufacturing processing resorbable biomaterials products incorporating proprietary collagen synthetic polymer technology expertise used develop commercialize products strategic partners company extensive range products sold multiple medical markets including cardiology orthopaedic sports medicine spine endovascular general surgery markets company known pioneer field arterial puncture closure inventor developer angioseal™ vascular closure device licensed st jude medical inc kensey nash corporation incorporated delaware august 6 1984 principles consolidation basis presentationthe consolidated financial statements include accounts kensey nash corporation wholly owned subsidiaries intercompany transactions balances eliminated preparation consolidated financial statements conformity accounting principles generally accepted united states america us gaap necessarily requires management make estimates assumptions estimates assumptions may differ actual results affect reported amounts assets liabilities disclosure contingent assets liabilities dates financial statements well reported amounts revenue expense periods presented consolidated statements income years ended june 30 2008 2007 reclassified reflect aggregated selling general administrative expenses previously separated two line items costs aggregated due elimination company’s direct sales marketing efforts endovascular products sale product lines spectranetics corporation spectranetics may 2008 impact amounts presented income operations subsequent eventsthe company evaluated subsequent events date financial statements issued september 14 2009 recognized unrecognized subsequent events noted discontinuance embolic protection platformon july 10 2007 company announced made strategic decision cease activities embolic protection platform includes triactiv® fx proguard™ product line including proguard clinical trial product manufacturing sales marketing research development activities see note 25 additional information discussion asset impairment related charges sale endovascular divisionon may 13 2008 company announced entered definitive agreement sell endovascular business spectranetics transaction includes sale thromcat® quickcat™ safecross® product lines established strategic partnership company spectranetics see note 26 additional information discussion transaction related charges cash equivalentscash cash equivalents represent cash banks shortterm investments original maturity less three months fair value financial instrumentsthe carrying amounts financial instruments including cash equivalents shortterm investments accounts receivable accounts payable debt approximated fair value june 30 2009 2008 see note 2 note 14 regarding fair value determination certain instruments comprehensive incomethe company accounts comprehensive income provisions sfas 130 reporting comprehensive income sfas 130 accordingly accumulated comprehensive loss income shown consolidated statements stockholders’ equity june 30 2009 2008 2007 comprised net unrealized gains losses company’s availableforsale securities foreign currency translation adjustments change interest rate swap value included company’s net income fiscal year ended june 30 2008 237413 currency translation adjustments written result sale gmbh subsidiary spectranetics may 30 2008 net tax effects benefit fiscal 2009 2008 2007 comprehensive loss income 658775 697759 28946 respectively property plant equipmentproperty plant equipment consists primarily building land machinery equipment construction progress recorded cost maintenance repairs expensed incurred building machinery furniture equipment depreciated using straightline method useful life ranging two 30 years depreciation expense property plant equipment 5367713 5806925 6920431 fiscal year ended june 30 2009 2008 2007 respectively goodwillgoodwill represents excess cost fair market value identifiable net assets thm biomedical inc thm company acquired september 2000 macropore biosurgery business unit macropore acquired may 2007 see notes 9 10 acquisitions accounted sfas 141 business combinations sfas 141 sfas 142 goodwill intangible assets sfas 142 sfas 142 goodwill intangible assets indefinite useful lives amortized subject impairment tests annual basis interim date certain events circumstances indicate impairment loss may incurred intangible assets definite useful lives continue amortized respective useful lives impairment longlived assetslonglived assets reviewed impairment whenever events circumstances indicate carrying amount asset may recoverable undiscounted expected future cash flows generated related asset less carrying value asset company measures amount impairment comparing carrying amount asset fair value estimation fair value generally measured discounting expected future cash flows rate company borrows company’s weighted average cost capital accounts receivable allowancethe company trade receivable allowances 13513 14713 june 30 2009 2008 respectively company established trade receivable allowances 0 12000 wrote amounts totaling 1200 5506 years ended june 30 2009 2008 respectively amounts included selling general administrative expense years ended june 30 2009 2008 revenue recognition sales revenue company recognizes revenue provisions staff accounting bulletin sab 104 revenue recognition sab 104 superseded sab 101 revenue recognition financial statements sab 101 addition company follows provisions emerging issues task force issue 0021 revenue arrangements multiple deliverables eitf 0021 certain collaborative arrangements containing multiple revenue elements entered materially amended june 30 2003 sales revenue generally recognized products shipped services completed advance payments received products services recorded deferred revenue recognized product shipped services performed company reduces sales revenue estimated customer returns allowances including credits discounts company net sales return provisions credits discounts 33000 51886 541446 years ended june 30 2009 2008 2007 respectively significant amount fiscal 2007 compared fiscal 2009 fiscal 2008 related sales credits given embolic protection products related either product recall discontinuance program royalty income company generally recognizes royalty revenue end month relevant net total enduser product sales dollars reported company month royalty payments generally received within 45 days end calendar quarter research development costsresearch development costs charged expense incurred income taxesthe company accounts income taxes provisions sfas 109 accounting income taxes sfas 109 see note 22 earnings per shareearnings per share calculated accordance sfas 128 earnings per share sfas 128 requires company report basic diluted earnings per share eps basic diluted eps computed using weighted average number shares common stock outstanding common equivalent shares options nonvested stock awards included diluted computation effect dilutive see note 23 options purchase shares common stock outstanding years ended june 30 2009 2008 2007 included computation diluted eps options would antidilutive shown table stockbased compensationthe company adopted provisions sfas 123r sharebased payment fas 123r effective july 1 2005 using modified prospective approach accounts sharebased compensation applying fair value method expensing stock options nonvested stock awards company generally recognizes compensation expense stockbased awards granted relevant vesting period awards fair value stock options cashsettled stock appreciation rights sars determined using blackscholes model relevant expense amortized applicable vesting period stock options marked market sars see note 17 compensation expense related stockbased awards classified consolidated statements income within line items salary expense compensation expense related stockbased awards granted members board directors recorded component selling general administrative expense apb 25 company’s policy grant employee stock options exercise price equal fair market value company’s common stock date grant therefore recording compensation expense prior adoption fas 123r company expensed sharebased payments nonemployee outside consultants defined sfas 123 based upon fair market value grants nonvested shares granted using intrinsic value method apb 25 derivative instruments hedging activitiesthe company recognizes derivatives either assets liabilities balance sheet depending company’s rights obligations applicable derivative contract measures instruments fair value see note 14 change derivative’s fair value recorded period current earnings accumulated comprehensive income oci depending derivative designated part hedge transaction type hedge transaction new accounting pronouncements adopted may 2009 financial accounting standards board fasb issued statement financial accounting standards sfas statement 165 subsequent events sfas 165 sfas 165 establishes general standards accounting disclosure events occur balance sheet date financial statements issued available issued entities required disclose date subsequent events evaluated sfas 165 effective interim annual financial periods ending june 15 2009 must applied prospectively sfas 165 adopted june 30 2009 company included required disclosures standard note 1 “summary significant accounting policies” april 2009 fasb issued three new fasb staff positions fsps impact accounting disclosure related certain financial instruments fasb staff position 1574 determining fair value volume level activity asset liability significantly decreased identifying transactions orderly fsp 1574 provides additional guidance estimating fair value accordance sfas 157 volume level activity asset liability significantly decreased active market price inputs used represent distressed sales fsp 1574 also includes guidance identifying circumstances indicate transaction orderly reaffirms need use judgment evaluating current markets fsp fas 1574 adopted june 30 2009 material impact consolidated financial position results operations cash flows fasb staff position fas 1152 fas 1242 recognition presentation otherthantemporary impairments fsp 1152 amends otherthantemporary impairment guidance us gaap debt securities make guidance operational improve presentation disclosure otherthantemporary impairments debt equity securities financial statements includes intent requirement sell security recovery security expected recover fsp 1152 amend existing recognition measurement guidance related otherthantemporary impairments equity securities fsp fas 1152 fas 1242 adopted june 30 2009 impact consolidated financial position results operations cash flows may 2008 fasb issued sfas 162 hierarchy generally accepted accounting principles sfas 162 sfas 162 identifies sources us gaap lists categories descending order effective november 15 2008 adoption sfas 162 affect company’s financial position results operations cash flows march 2008 fasb issued sfas 161 disclosures derivative instruments hedging activitiesan amendment fasb statement 133 sfas 161 sfas 161 changes disclosure requirements derivative instruments hedging activities requiring enhanced disclosure 1 entity uses derivative instruments 2 derivative instruments related hedged items accounted fasb statement 133 related interpretations 3 derivative instruments related hedged items affect entity’s financial position financial performance cash flows meet objectives sfas 161 requires qualitative disclosures objectives strategies using derivatives quantitative disclosures fair value amounts gains losses derivative instruments disclosures creditriskrelated contingent features derivative agreements disclosure framework intended better convey purpose derivative use terms risks entity intending manage sfas 161 effective fiscal years interim periods beginning november 15 2008 company third quarter fiscal 2009 ended march 31 2009 adoption sfas 161 material impact company’s financial position results operations cash flows see note 14 additional information regarding company’s adoption sfas 161 june 2007 fasb ratified consensus reached eitf issue 073 accounting nonrefundable advance payments goods services used future research development activities eitf 073 scope eitf 073 limited nonrefundable advance payments goods services used rendered future research development activities pursuant executory contractual arrangement nonrefundable advance payments future research development activities materials equipment facilities purchased intangible assets alternative future use research development projects otherwise continue recognized accordance guidance sfas 2 accounting research development costs refundable advance payments future research development activities excluded scope eitf 073 eitf 073 effective fiscal years beginning december 15 2007 applies new contracts entered effective date july 1 2008 company’s adoption eitf 073 material impact company’s financial position results operations cash flows february 2007 fasb issued sfas 159 fair value option financial assets financial liabilities sfas 159 sfas 159 permits entities choose measure many financial instruments certain items fair value sfas 159 effective fiscal years beginning november 15 2007 company 2009 fiscal year unrealized gains losses items fair value option elected reported earnings sfas 159 affect existing accounting literature requires certain assets liabilities carried fair value july 1 2008 company elected apply sfas 159 measure financial assets liabilities fair value previously recorded fair value existing accounting literature september 2006 fasb issued sfas 157 fair value measurements sfas 157 sfas 157 establishes standard definition fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements effective financial statements issued fiscal years beginning november 15 2007 company 2009 fiscal year september 2008 fasb issued fsp 1573 determining fair value financial asset market asset active provide clarification application sfas 157 market active provide example illustrate key considerations determining fair value financial asset nonactive market adoption sfas 157 material impact company’s financial position results operations cash flows see note 14 information discussion relating company’s adoption sfas 157 july 1 2008 financial assets financial liabilities adopted november 2007 fasb ratified consensus reached eitf issue 071 accounting collaborative arrangements related development commercialization intellectual property eitf 071 issue effective financial statements issued fiscal years beginning december 15 2008 company 2010 fiscal year issue addresses income statement classification payments made parties collaborative arrangement company yet assessed impact adoption eitf 071 financial position cash flows results operations december 2007 fasb issued sfas 141 revised business combinations sfas 141r sfas 141r applies transactions events entity acquirer obtains control one businesses acquiree including sometimes referred “true mergers” “mergers equals” combinations achieved without transfer consideration example contract alone lapse minority veto rights statement applies business entities including mutual entities previously used poolingofinterests method accounting business combinations sfas 141r effective fiscal years beginning december 15 2008 company 2010 fiscal year company yet assessed impact adoption sfas 141r financial position cash flows results operations april 2008 fasb issued fasb staff position 1423 determination useful life intangible assets fsp 1423 fsp 1423 amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset sfas 142 goodwill intangible assets fsp 1423 effective prospective basis intangible assets acquired disclosures intangible assets recognized fiscal years beginning december 15 2008 company first quarter 2010 fiscal year early adoption prohibited company yet assessed impact adoption sfas 1423 financial position cash flows results operations april 2009 fasb issued fasb staff position fas 1071 apb 281 interim disclosures fair value financial instruments fsp 1071 apb 281 fas 1071 amends fasb statement 107 disclosures fair value financial instruments apb opinion 28 interim financial reporting respectively require disclosure fair value financial instruments interim reporting periods publicly traded companies addition annual financial statements statement effective interim periods ending june 15 2009 company first quarter 2010 fiscal year company plans adopt sfas 1071 apb 281 provide additional disclosure requirements first interim period fiscal 2010 adoption fsp 1071 apb 281 expected material impact company’s results operations cash flows financial position june 2009 fasb issued sfas 168 fasb accounting standards codification hierarchy generally accepted accounting principles sfas 168 establishes fasb accounting standards codification single source authoritative us gaap recognized fasb applied nongovernmental entities effective codification supersede existing nonsec accounting reporting standards nongrandfathered nonsec accounting literature included codification become nonauthoritative codification change current us gaap reorganizes us gaap topical structure sfas 168 codification effective financial statements issued interim annual periods ending september 15 2009 company first quarter 2010 fiscal year adoption sfas 168 expected material impact company’s results operations cash flows financial position previous references made us gaap literature however notes company’s consolidated financial statements elsewhere filing sec updated references new codification 2 investments june 30 2009 consisted nontaxable taxable high quality municipal obligations company accounted investment portfolio accordance statement financial accounting standards sfas 115 accounting certain investments debt equity securities sfas 115 related interpretations staff positions fsp 1152 company classified entire investment portfolio availableforsale marketable securities secondary resale markets portfolio reported fair value unrealized gains losses included stockholders’ equity see comprehensive income realized gains losses income fair value availableforsale marketable securities obtained broker quotes using pricing matrices based inputs quoted prices identical similar assets municipal bond market based various inputs directly indirectly observable following summary availableforsale marketable securities june 30 2009 2008 company’s municipal obligations maturities ranging less one year approximately four years certain investment securities included municipal obligations category shown currently fair values less amortized costs therefore contain unrealized losses company evaluated securities determined decline value related company industry specific event june 30 2009 15 44 investment securities unrealized loss position gross unrealized losses related investments due changes interest rates given company ability intent hold investments recovery fair values may maturity current requirement sell investments company consider investments otherthantemporarily impaired june 30 2009 company reviews investments identify evaluate investments indication possible impairment company anticipates full recovery amortized costs respect securities maturity sooner event favorable market interest rate environment lengths time securities continuous unrealized loss position aggregated investment within municipal obligations category june 30 2009 follows 3 inventory stated lower cost determined average cost method approximates firstin firstout market value inventory primarily includes cost material utilized processing company’s products follows adjustments inventory made individual part level estimated excess obsolescence impaired balances reflect inventory lower cost market factors influencing adjustments include changes demand rapid technological changes product life cycle development plans component cost trends product pricing physical deterioration quality concerns revisions adjustments would required factors differ company’s estimates 4 corporate facility fiscal 2006 company completed primary construction relocated operations 202500 square foot corporate facility located exton pennsylvania total cost facility including purchase land approximately 49 million company financed construction facility available cash hand sale liquid investments continuing operations project term may 2006 company entered secured commercial mortgage secured building land allows company draw 35 million currently outstanding see note 13 5 select customer agreements st jude medical inc license agreementsunder two license agreements one us foreign territories st jude medical exclusive worldwide rights manufacture market angioseal™ vascular closure device angioseal license agreements company receives approximate 6 royalty sales price every angioseal unit sold st jude medical component supply contractunder supply contract executed st jude medical 2005 company exclusive supplier 100 collagen plug least 30 bioresorbable polymer anchor components angioseal term agreement expires december 2010 part agreement company received 10 million origination fee upon execution consideration company’s ongoing investments collagen research development june 30 2009 company recognized 875382 origination fee remaining 124618 recorded deferred revenue recognized remaining period contract orthovita inc company development manufacturing supply agreement orthovita company develops commercializes products based orthovita’s proprietary vitoss™ bone graft substitute material combination company’s proprietary biomaterials orthovita agreement orthovita agreement products codeveloped company manufactures products orthovita markets sells products worldwide also orthovita agreement company receives royalty payment codeveloped vitoss™ vitoss™ foam vitoss™ bioactive foam products based upon orthovita’s net total enduser sales products separate transaction august 2004 company acquired proprietary rights third party rights vitoss™ technology acquisition included economic rights third party include royalty products sold containing vitoss™ technology total royalty amount 4035782 spectranetics corporation see note 26 additional information regarding company’s agreements spectranetics 6 concentration credit risk financial instruments potentially subject company significant concentrations credit risk consist primarily cash equivalents investments accounts receivable debt see note 13 company manages cash equivalents investments based established guidelines relative diversification maturities maintain safety liquidity single component company’s investment portfolio represented 4 13 total investments june 30 2009 2008 respectively trade receivables primarily due st jude medical arthrex orthovita represented approximately 31 26 22 company’s total trade receivables respectively june 30 2009 trade receivables companies represented approximately 28 14 company’s total trade receivables respectively june 30 2008 royalty receivables primarily due st jude medical orthovita represented approximately 83 16 company’s total royalty receivable balance june 30 2009 respectively royalty receivables st jude medical orthovita represented approximately 82 18 company’s total royalty receivable balance june 30 2008 respectively see note 5 customers’ receivable balances deemed uncollectible would material adverse effect company’s results operations financial condition company performs ongoing credit evaluations customers’ financial conditions require collateral support customer receivables see note 18 additional information regarding significant customer revenue disclosure 7 acquired patents intangible assets costs internally developed patents expensed incurred due long development cycle products company’s inability measure recoverability costs incurred time company acquired portfolios patents intangibles believes beneficial complimentary company’s existing intellectual property material processing knowledge platform june 30 2009 company’s acquired patents intangible assets include portfolio puncture closure patents acquired november 1997 patents acquired asset purchase thm biomedical inc thm 2000 certain intellectual property rights related vitoss™ product line acquired third party inventor 2004 certain assets macropore biosurgery inc macropore acquired 2007 see note 9 company amortizes entire cost acquired patents intangible assets respective remaining periods economic benefit ranging approximately one seven years june 30 2009 gross carrying amount patents intangible assets june 30 2009 8346366 accumulated amortization 5661326 amortization expense patents intangible assets 1122937 1075914 845976 fiscal years ended june 30 2009 2008 2007 respectively included expense fiscal years ended june 30 2008 2007 176756 186596 respectively amortization expense related certain patents sold spectranetics table details estimated amortization expense company’s previously acquired patents intangible assets next five fiscal years 8 certain patent proprietary rights agreements patent acquisition agreement november 1997 company entered agreement patent acquisition agreement acquire portfolio puncture closure patents patent applications well rights seller preexisting licensing agreement addition september 2000 conjunction acquisition thm company acquired separate portfolio patents related biomaterials business costs patent acquisition agreement patents acquired part thm acquisition amortized remaining periods economic benefit ranging less one year seven years june 30 2009 assignment agreement august 2004 company acquired intellectual property rights third party inventor vitoss technology inventor 2600000 assignment agreement inventor assignment agreement assignment agreement company receives intellectual property rights inventor previously assigned orthovita also assignment agreement company generally receives royalty within 45 days end calendar quarter orthovita sale orthovita products containing vitoss technology total royalty received 4035782 june 30 2009 company recognized cumulative royalty income 2825916 assignment agreement 1209866 yet received entire cost proprietary rights expected amortized approximately 77month period represents time period company currently anticipates receiving economic benefit relation proprietary rights 9 acquisitions macropore may 2007 company acquired certain assets macropore leading developer bioresorbable products targeted spinal craniofacial orthopaedic surgery applications approximately 32 million cash plus acquisition costs 187988 acquisition accounted purchase method accounting macropore’s results operations included company since date acquisition valuation purchase price allocation represents estimated fair market value based riskadjusted cash flows related identifiable assets excess cost net assets acquired allocated goodwill management responsible valuation considered number factors including internal third party valuations appraisals following summary allocation business unit acquired company encompasses manufacturing six bioresorbable product lines sold exclusively leading orthopaedic device company worldwide distribution identified intangible asset customer relationship 1650000 june 30 2009 amortized fiveyear term manufacturing development supply agreement company gross carrying amount acquired intangible asset june 30 2009 1650000 amortization expense acquired intangible assets 330000 330167 27333 fiscal years ended june 30 2009 2008 2007 respectively included within selling general administrative expense amortization expense acquired intangible assets currently estimated 330000 fiscal years ending june 30 2010 2011 302500 fiscal year ending june 30 2012 acquisition accounted purchase method accounting macropore’s results operations included company since date acquisition 10 goodwill company accounts goodwill provisions sfas 142 goodwill intangible assets sfas 142 sfas 142 goodwill intangible assets indefinite useful lives amortized subject impairment tests annual basis interim date certain events circumstances indicate impairment loss may incurred recent tests june 30 2009 2008 2007 indicated goodwill impaired net carrying amount goodwill june 30 2009 4366273 remained unchanged year ended june 30 2008 11 accrued expenses june 30 2009 2008 accrued expenses consisted following 12 leases june 30 2009 company noncancelable lease obligations company rent expense fiscal 2009 rent expense fiscal years ended june 30 2008 2007 approximately 23000 13000 respectively rent expense operating leases consisted previously occupied space company’s eschborn germany location canceled fiscal 2008 result sale endovascular business 13 debt secured commercial mortgageon may 25 2006 company entered agreement secured commercial mortgage citibank fsb mortgage provided company ability take aggregate advances 35 million november 25 2007 draw period secured company’s facility land exton pennsylvania may 25 2006 november 23 2007 company took 8 million 27 million advances respectively mortgage bears interest onemonth libor plus 082 loan credit spread mortgage company required pay interest outstanding principal amount draw period beginning december 25 2007 company began paying principal interest based 25 year straightline amortization schedule june 30 2009 outstanding mortgage balance 328 million remaining principal payments due detailed mortgage contains various conditions borrowing including affirmative restrictive financial maintenance covenants certain significant covenants require company maintain minimum fixed charge coverage ratio ebitda defined mortgage debt service equal greater 150to10 interest rate hedge least 50 percent outstanding principal balance mortgage interest rate protection product reasonably acceptable citibank fsb interest rate swap agreementin order hedge interest rate risk mortgage company entered 35 million aggregate 10year fixed interest rate swap agreement swap citibank na swap secured company’s facility land exton pennsylvania company using swap cash flow hedge company’s interest payments mortgage swap converts variable libor portion mortgage payments fixed rate 644 562 fixed interest rate plus 082 loan credit spread swap classified cash flow hedge due hedging forecasted interest rate payments accordance sfas 133 accounting derivative instruments hedging activities sfas 133 amended sfass 137 138 149 161 recorded consolidated balance sheets fair value company performs marktomarket adjustment end period establishing fair value company includes evaluates dealer quotes counterparty’s ability settle asset liability creditworthiness additionally current interest rates collateralization mortgage swap land building adverse company industry specific events would impact fair value measurement considered june 30 2009 2008 fair value swap unrealized loss position 4502900 2926884 net tax 2487718 1641894 net tax respectively gross unrealized loss position included noncurrent liabilities netoftax position included accumulated comprehensive loss consolidated balance sheets value represents estimated amount company would pay terminate swap conditions underlying swap hedge item change swap considered highly effective accordance sfas 133 changes fair value included comprehensive loss impact company’s consolidated statements cash flows effective portion swap gains losses due changes fair value recorded component accumulated comprehensive loss consolidated balance sheets reclassified earnings period periods hedged forecasted transaction affects earnings company utilizes hypothetical derivative method determining hedge effectiveness period transactions would cause ineffectiveness would include prepayment mortgage adverse company industry specific event would impact fair value measurement would result company reclassifying ineffective portion current earnings impact company’s consolidated statements cash flows interest expense swap recorded earnings fixed rate set forth swap fiscal years ended june 30 2009 2008 2007 amounts recognized current earnings due ineffectiveness amounts excluded assessment hedge effectiveness amount reported unrealized loss interest rate swap accumulated oci account within stockholders’ equity represents net unrealized loss swap designated cash flow hedge company anticipate material unrealized losses recognized within next 12 months anticipated transactions mortgage swap occur company presented sfas 161 quantitative disclosure swap fair value amounts unrealized gains losses june 30 2009 table 14 fair value financial assets financial liabilities effective july 1 2008 company adopted provisions sfas 157 financial assets financial liabilities sfas 157 defines fair value exit price amount would received selling asset paid transfer liability orderly transaction market participants measurement date sfas 157 related interpretations staff positions fsp 1573 1574 establish hierarchy prioritizes fair value measurements based types inputs used various valuation techniques categorization within valuation hierarchy based upon lowest level input significant fair value measurement company’s assessment significance particular input fair value measurement requires judgment may affect valuation financial assets financial liabilities placement within fair value hierarchy levels hierarchy described • level 1observable inputs quoted prices unadjusted active markets identical assets liabilities • level 2inputs quoted prices active markets identical assets liabilities inputs quoted prices identical similar assets liabilities inactive markets inputs either directly indirectly observable • level 3unobservable inputs little market data exists therefore requiring entity develop assumptions following table presents company’s financial assets liabilities measured fair value recurring basis june 30 2009 company’s money market funds classified along company’s cash balances cash equivalents within consolidated balance sheets money market funds valued quoted prices active markets 15 preferred stock company authorized preferred stock consisting 100000 shares 001 par value 25000 designated series junior participating preferred stock discussed 75000 undesignated board directors may authorize issuance preferred stock ranks senior common stock respect payment dividends distribution assets liquidation addition board directors authorized fix limitations restrictions upon payment dividends common stock effective shares preferred stock outstanding board directors without stockholder approval issue preferred stock voting conversion rights could adversely affect voting power holders common stock june 30 2009 2008 shares preferred stock outstanding company present intention issue shares preferred stock except shares series preferred stock defined may issued pursuant stockholders’ rights plan described stockholders’ rights plan june 19 2009 company announced board directors adopted stockholders’ rights plan rights plan designed protect company stockholders potentially coercive takeover practices bids prevent acquiror gaining control company without offering fair price stockholders company adopted plan order give board directors time evaluate respond unsolicited future takeover attempts rights plan company distributed dividend one preferred stock purchase right share common stock held record close business june 19 2009 rights plan term 10 years expire june 19 2019 unless company earlier redeems rights board directors terminates rights plan right becomes exercisable entitles holder buy one onethousandth share series junior participating preferred stock collectively preferred shares 20000 subject certain conditions plan exercise price may change pursuant certificate designations series junior participating preferred stock series preferred stock 25000 shares series preferred stock authorized issuance share series preferred stock entitle holder thereof 1000 votes matters submitted vote stockholders company holders shares series preferred stock holders shares common stock company capital stock company general voting rights vote together one class matters submitted vote stockholders company holders shares series preferred stock entitled receive declared board directors dividends payable dividends declared shares common stock company amount subject adjustment equal 1000 times aggregate per share amount cash dividends 1000 times aggregate per share amount noncash dividends distributions declared shares company’s common stock june 30 2009 shares series preferred stock outstanding 16 stock repurchase program time company made repurchases stock authorized various programs established company’s board directors miscellaneous transactions repurchases programs dependent market conditions commenced suspended time without prior notice repurchase programs typically specified expiration date march 18 2009 company announced board directors approved new stock repurchase program allows company repurchase total 600000 issued outstanding shares common stock june 30 2009 194705 shares remaining repurchase march 18 2009 program year ended june 30 2009 company repurchased retired 806666 shares common stock cost 19294595 average market price 2392 per share using available cash commissions related costs associated stock repurchases totaled 32265 additional 3500 shares repurchased june 2009 settled july 2009 cost 87279 average market price per share 2494 year ended june 30 2008 company repurchased retired 867839 shares common stock cost 24426699 average market price 2815 per share using available cash repurchases stock fiscal year 2008 done repurchase plans approved board directors september 25 2007 june 23 2008 allowed 25 million 10 million respectively expiration commissions related administrative costs associated stock repurchased fiscal year ended june 30 2008 totaled 36040 shares repurchased settled june 30 2008 year ended june 30 2007 company repurchased retired 10000 shares common stock cost 238000 average market price 2380 per share using available cash repurchases stock fiscal year 2007 done repurchase plan approved board directors march 16 2005 allowed 400000 shares repurchased expiration commission costs associated stock repurchased fiscal year ended june 30 2007 totaled 400 17 stockbased compensation company applies provisions sfas 123r using modified prospective approach accounts stockbased compensation applying fair value method expensing stock options nonvested stock awards cash settled stock appreciation rights total stockbased compensation expense 2062457 5323155 2895464 years ended june 30 2009 2008 2007 respectively fiscal year 2008 stockbased compensation expense included onetime accelerated vesting charge 2974033 described total income tax benefit recognized consolidated statements income sharebased compensation costs 721860 1809873 984458 years ended june 30 2009 2008 2007 respectively compensation expense related stockbased awards classified consolidated statements income within line items personnel expense recorded awards’ relevant vesting period compensation expense related stockbased awards granted members board directors recorded component selling general administrative expense december 10 2008 company held 2008 annual meeting stockholders 2008 meeting stockholders considered approved company’s seventh amended restated kensey nash corporation employee incentive compensation plan employee plan employee plan became effective immediately upon stockholders’ approval employee plan authorized additional 700000 shares company’s common stock issuance 100000 shares may issued restricted stock bonus stock stockbased awards stock options stock appreciation rights approval employee plan 2008 meeting also increased participant maximum aggregate amount may paid cash based awards employee plan fiscal year 500000 1 million purpose employee plan reward officers nonemployee directors employees company well consultants contributed hired contribute growth success company june 30 2009 total number shares authorized issuance employee plan 5400000 options purchase total 1670904 shares company’s common stock weighted average exercise price 2385 outstanding 58456 nonvested stock awards outstanding options purchase total 2876435 shares company’s common stock previously exercisedissued 794205 shares remained available new awards company also nonemployee directors’ stock option plan directors’ plan june 30 2009 total 410000 shares authorized issuance directors’ plan nonqualified options purchase total 233000 shares company’s common stock weighted average exercise price 2114 outstanding options purchase total 19500 shares expired options purchase total 157500 shares previously exercised result shares remained available new awards directors’ plan awards previously granted directors’ plan granted employee plan consideration service board directors date annual meeting stockholders company nonemployee director elected reelected continues serve director term expired receives grant nonvested stock awards vests three equal installments first three anniversaries grant date discretion compensation committee additional grants options purchase shares common stock may made nonemployee director time exercisable fair market value shares date grant options would typically exercisable maximum term 10 years date grant would vest three equal annual installments first three anniversaries grant accelerated vesting equity awards acquisition ramius capital group llc affiliates 20 percent company’s outstanding common stock august 30 2007 constituted “change control” defined employee plan existed result outstanding unvested stock options cashsettled stock appreciation rights sars nonvested stock awards held officers employees directors others plan automatically became vested case options stock appreciation rights exercisable full part accelerated vesting unvested stock option grants purchase 114405 shares company’s common stock became fully vested exercisable options nonemployee members board directors held options purchase 37500 shares nonexecutive employees held options purchase remaining 76905 shares unvested stock options held executive officers compensation expense would otherwise recorded weighted average period 185 years 920131 607286 net related tax effects recognized accelerated vesting charge fiscal year ended june 30 2008 addition 283690 sars also became fully vested exercisable august 30 2007 sars 179690 awards granted employees stock price 2988 remaining 104000 sar awards granted officers stock price 3136 accelerated vesting charge 429760 283642 net related tax effects recognized fiscal year ended june 30 2008 total 94537 shares nonvested stock awards became fully vested released market value 2397 per share closing price company’s common stock august 30 2007 nonemployee members board directors held 34780 shares 45031 shares held officers employees held remaining 14726 shares compensation expense 1624142 1071934 net related tax effects otherwise would recorded weighted average period 136 years recognized fiscal year ended june 30 2008 accelerated vesting charge stock options stock options granted officers employees members board directors company well nonemployee outside consultants fair value calculated blackscholes optionpricing model years ended june 30 2009 2008 2007 company recognized expense 1939330 1901510 877947 respectively related stock options included fiscal year 2008 stock option expense 920131 related accelerated vesting charge described june 30 2009 4315800 unrecognized compensation costs related unvested stock options granted two equity compensation plans cost expected recognized weightedaverage period 203 years total intrinsic value options exercised years ended june 30 2009 2008 2007 5052764 7717073 5011216 respectively summary stock option activity plans fiscal years ended june 30 2009 2008 2007 follows fair value option grant estimated date grant using blackscholes optionpricing model uses weighted average assumptions noted following table options exercisable maximum term ten years date grant typically vest periods zero three years grant date expected volatilities based historical volatility company’s common stock factors company uses historical data estimate option exercise employee termination within valuation model separate groups employees similar historical exercise behavior considered separately valuation purposes expected term options derived historical exercise behavior represents period time options granted expected outstanding terms given results certain groups employees exhibiting different behavior riskfree rate periods within contractual life option based us treasuries constant maturities effect time grant assumptions used calculate fair value options granted directors’ plan employee plan using blackscholes optionpricing model set forth following table following table summarizes significant option groups outstanding employee directors’ plans june 30 2009 related weighted average exercise price remaining contractual life information nonvested stock awards nonvested stock awards granted nonemployee members board directors executive officers certain management company nonemployee outside consultant pursuant employee plan nonvested shares granted executive officers management nonemployee members board directors nonemployee consultants usually referred restricted stock sfas 123r reserves term fully vested outstanding shares whose sale contractually governmentally prohibited specified period time fair value based upon closing price company’s common stock date grant fiscal years ended june 30 2009 2008 2007 company recognized expense 513630 2050892 1575546 respectively related nonvested stock awards included fiscal year 2008 nonvested stock award expense 1624142 related accelerated vesting charge described june 30 2009 estimated 960000 unrecognized compensation costs related nonvested stock awards granted company’s two equity compensation plans cost expected recognized weighted average period 239 years total fair value shares vested years ended june 30 2009 2008 2007 271714 2487246 1540228 respectively company granted shares nonvested common stock nonemployee members board directors executive officer company’s fiscal year ended june 30 2009 year ended june 30 2008 company granted shares nonvested common stock non employee members board directors nonemployee consultant company granted shares nonvested common stock nonemployee members board directors executive officers management company year ended june 30 2007 shares granted executive officers management generally vest three equal annual installments based solely continued employment company shares granted nonemployee members board directors also vest three equal annual installments anniversary date grant based solely continuation service company shares granted nonemployee consultant vest quarterly two years based performance services twoyear period company unvested shares forfeited upon termination service board directors employment applicable following table outlines nonvested stock awards fiscal years ended june 30 2009 2008 2007 cash settled stock appreciation rights cashsettled stock appreciation rights sars awards granted eligible employees fiscal year ended june 30 2007 sars awards granted fiscal year ended june 30 2009 2008 award granted provides participant right receive payment cash upon exercise appreciation market value specified number shares company’s common stock award’s exercise price pershare exercise price sar equal closing market price share company’s common stock date grant november 14 2007 company offered buy back sars current eligible employees excluding executive officers fair market value buyout price based closing price company’s common stock december 14 2007 offer resulted company purchasing 173940 sars buyout price 647 per sar total 1125392 excluding company’s portion payroll taxes paid participating eligible employees represented approximately 99 participation eligible employees sars outstanding fiscal years ended june 30 2009 2008 2007 company recognized benefitexpense 390503 1370753 441971 respectively related outstandingawarded sars included fiscal year 2008 sar award expense 429760 related accelerated vesting charge described june 30 2009 average fair market value remaining sar 312 related liability remaining sars 295764 sars continue remeasured reporting period awards settled cash settled sars exercised repurchased company’s fiscal year 2009 total 1126457 excluding company payroll tax sharebased liabilities paid cash settled sars exercised repurchased fiscal year 2008 following table outlines cashsettled sar awards fiscal years ended june 30 2009 2008 2007 grants fiscal year fair value sar estimated date grant using blackscholes optionpricing model uses weighted average assumptions noted following table sars exercisable maximum term five years date grant vest period three years grant date subject acceleration discussed expected volatilities based historical volatility company’s common stock factors company uses historical data estimate sar employee termination behavior within valuation model separate groups employees similar historical exercise behavior considered separately valuation purposes expected term cashsettled sars determined using simplified method accordance question 6 sec sab 107 topic 1402 “expected term” time historical exercise behavior established company believes calculation provides reasonable estimate expected term december 12 2007 sab 110 issued extend simplified method beyond 2007 companies concluded historical exercise experience sufficient provide reasonable basis riskfree rate periods within contractual life sar based us treasuries constant maturities effect time grant cashsettled sars awarded stockbased payment transactions accounted sfas 123r sharebased payment sfas 123r classifies awards liabilities accordingly company records awards component current liabilities consolidated balance sheets liability awards fair value award determines measurement liability balance sheet remeasured reporting period award settled fluctuations fair value liability award recorded increases decreases compensation cost either immediately remaining service period depending vested status award see “accelerated vesting equity awards” 18 segment reporting operating segments identified components enterprise separate discrete financial information available evaluation chief operating decisionmaking group making decisions regarding allocate resources assess performance based criteria established sfas 131 disclosures segments enterprise related information sfas 131 company’s operations products aggregated single reportable segment since similar economic characteristics production processes types customers distribution methods company provides extensive range products multiple medical markets primarily cardiovascular orthopaedic sports medicine spine endovascular general surgery markets many products based company’s significant expertise design development manufacturing processing resorbable biomaterials products led partnerships commercialize technologies company designs markets various resorbable polymer collagen products company also receives royalty revenue primarily sale angioseal units st jude medical sales vitoss foam bioactive vitoss foam products orthovita respect endovascular products company manufactures certain endovascular products manufacturing licensing agreement development regulatory services agreement spectranetics prior july 10 2007 designed manufactured marketed sold embolic protection devices net sales product line reconciliation total revenue follows years ended june 30 2009 2008 2007 revenues st jude medical arthrex orthovita represented following percentages total revenues company’s revenues categorized geographically revenues attributed country based location customer company’s business directly dependent foreign operations company’s sales customers outside us significant however portion company’s revenues including sales royalties dependent us based customers selling endusers outside us years ended june 30 2008 2007 company’s revenues associated foreign countries included direct sales endovascular products product lines subsequently sold spectranetics corporation may 2008 one country company sells products us represented 10 company’s revenues fiscal 2009 addition company’s longlived assets located us 19 commitment contingencies certain compensation employment agreements company entered employment agreements certain named executive officers employment agreements provide among things aggregate annual base salaries 1881000 fiscal 2012 purchase commitments june 30 2009 company outstanding noncancelable cancelable purchase commitments amount 1373049 related inventory capital expenditures goods services research development contractual obligations development regulatory services agreement spectranetics amended company’s contributions limited maximum amount 2750000 toward expenses associated clinical studies obtain approval fda certain nextgeneration endovascular products see note 26 additional information discussion agreement 20 retirement plan company voluntary 401k salary reduction plan trust 401k plan employees least 21 years age eligible participate company provides 50 discretionary matching contribution 6 employee’s total salaried compensation employee contributions total company contributions 401k plan fiscal years ended june 30 2009 2008 2007 427540 490658 477603 respectively 21 opportunity grant november 2004 company awarded 500000 grant opportunity grant program department community economic development commonwealth pennsylvania department grant awarded company potential jobcreating economic development opportunities created company’s construction new facility within state pennsylvania grant conditioned upon certain employment growth capital investment provisions result company’s decision discontinue embolic protection platform sale endovascular business job creation condition grant program completely fulfilled although company exceeded required investment facility continued meet occupancy criterion company petitioned department reference failure meet job creation criterion august 2008 company received letter department imposing charge 150000 satisfy breach grant company paid assessed charge first quarter fiscal 2009 company recognized 133784 deferred revenue component incomeloss consolidated statements income fiscal year ended june 30 2009 result august 2008 payment department regarding opportunity grant revenue recognized related grant fiscal year ended june 30 2008 due management’s uncertainty company’s ability meet job creation criterion revenue related grant fiscal year ended june 30 2007 81081 recognized component incomeloss remaining deferred revenue opportunity grant june 30 2009 22 income taxes company accounts taxes provisions sfas 109 accounting income taxes sfas 109 company adopted provisions fin 48 july 1 2007 connection adoption company recorded net decrease retained earnings 204615 reclassified certain previously recognized deferred tax attributes fin 48 liabilities amount unrecognized tax benefits june 30 2009 2008 140650 193132 respectively gross unrecognized tax benefits recognized 139183 176795 would impact company’s tax rate june 30 2009 2008 respectively upon initial adoption fin 48 july 1 2007 company recorded 18330 potential interest penalties unrecognized tax benefits interest penalties included interest expense income loss respectively consolidated statements income company recorded interest penalties 1211 14667 fiscal years ended june 30 2009 2008 respectively changes company’s uncertain tax positions years ended june 30 2009 2008 follows company subsidiaries file us federal various state income tax returns company longer subject us federal income tax examination years prior fiscal 2005 due expiration applicable statutes limitation company expect total amount unrecognized tax benefits change significantly next 12 months result october 2008 congressional approval extension research experimentation tax credit company recorded retroactive adjustments tax provision second fiscal quarter ended december 31 2008 company recorded tax credits 464362 219232 512963 fiscal years ended june 30 2009 2008 2007 respectively earnings income taxes earned within outside united states shown provision income taxes composed following differences company’s income tax expense benefit income tax expense benefit computed using us federal income tax rate follows significant components company’s deferred tax assets liabilities follows portion company’s deferred tax asset offset valuation allowance relating state nol carryforwards due restrictions imposed uncertainty surrounding use valuation allowance reduces deferred tax assets amount represents management’s best estimate amount deferred tax assets likely realized june 30 2009 company state nol carryforward approximately 600 million expire 2027 longer federal nol carryforward company recorded full valuation allowance state net operating losses approximately 600 million company longer foreign nol result sale endovascular business 23 earnings per share following table shows reconciliation numerators denominators basic diluted eps calculations income numerator weighted average number shares denominator 24 quarterly financial data unaudited summarized quarterly results operations company years ended june 30 2009 2008 presented quarterly total year earnings per share calculated independently based weighted average number shares outstanding period 25 discontinuance embolic protection platform july 10 2007 company announced ceased activities embolic protection platform includes triactiv® fx proguard™ product line including proguard clinical trial product manufacturing sales marketing research development activities strategic decision made reduce costs provide better resource allocation company’s endovascular biomaterials businesses allow company’s sales force focus company’s thrombectomy chronic total occlusion platforms company believed changing embolic protection market dynamics negative particularly carotid market cost participate effectively markets high warrant investment connection discontinuance embolic protection program company recognized asset impairment related charges totaling approximately 50 million taxes fiscal year 2008 charges included cash charges primarily related severance clinical trial contract termination costs totaling approximately 04 million aggregate charges also included noncash charges totaling approximately 46 primarily related abandonment inventory machinery equipment approximately 50 million charges approximately 47 million including 46 million noncash asset impairment charges 01 million cash charges recorded fourth quarter ended june 30 2007 remainder recognized first fiscal quarter 2008 charges fiscal year ended june 30 2008 presented within company’s results continuing operations depicted table severance charges decision communicated affected employees july 10 2007 resulted net reduction 11 personnel employee severance costs 02 million severance costs recognized company’s financial statements first quarter fiscal 2008 asset impairment charges company recorded pretax charges fourth quarter fiscal 2007 abandonment certain embolic protection machinery equipment approximately 13 million company also recorded inventory related embolic protection charges quarter approximately 30 million addition charges approximately 03 million proguard clinical trial assets incurred quarter contract termination charges fourth quarter fiscal 2007 company incurred pretax charges approximately 01 million contract termination embolic protection related charges remaining contract termination costs approximately 01 million including reduction clinical trial expenses 01 million recognized first fiscal quarter 2008 cash charges related contract termination embolic protection related charges totaled approximately 02 million fourth quarter fiscal 2007 26 sale endovascular business may 30 2008 company completed sale endovascular business spectranetics strategic decision sell endovascular business made maximize value company’s endovascular business forming strategic relationship spectranetics relationship similar company’s partnerships biomaterials market allows company focus core competencies research development regulatory clinical development manufacturing utilizing strengths partners’ existing wellestablished sales marketing organizations pursuant asset purchase agreement dated may 12 2008 company sold spectranetics assets related quickcat™ thromcat® safecross® product lines including stock european subsidiary kensey nash europe gmbh 100 million cash payment closing opportunity additional 80 million research development milestone payments 60 million cumulative sales milestone payment additional royalty payments based future sales thromcat safecross products transition manufacturing products company spectranetics payments related agreements described may 30 2008 company spectranetics also entered manufacturing licensing agreement pursuant company manufacture spectranetics endovascular products acquired spectranetics asset purchase agreement minimum six months quickcat initial three year period ending may 2011 thromcat safecross spectranetics purchase products exclusively company specified time periods ranging minimum six months quickcat three years thromcat safecross spectranetics extended company’s initial six month manufacturing period quickcat product december 31 2009 arrangement manufacture thromcat safecross may extended beyond initial threeyear manufacturing period agreement parties manufacturing period spectranetics pay transfer prices products based company’s cost manufacture products plus percentage enduser sales price thromcat safecross products additionally company’s manufacture thromcat safecross products transferred spectranetics obligated pay company royalty enduser sales products amount royalty based upon timing reason manufacturing transfer certain cases upon amount revenue generated thromcat safecross products applicable year royalty subject reduction depending upon scope patent protection obtained thromcat product company’s manufacture quickcat product transferred spectranetics obligation make royalty payments company related enduser sales quickcat product also may 30 2008 company spectranetics entered development regulatory services agreement pursuant company conduct work develop obtain regulatory approval fda certain nextgeneration safecross thromcat products company’s expense behalf spectranetics intellectual property resulting development work clinical studies required obtain approval fda nextgeneration products costs shared equally company spectranetics however pursuant amendment development regulatory services agreement company’s contributions limited maximum amount 2750000 toward clinical studies spectranetics pay company 80 million upon completion product development activities regulatory approvals certain nextgeneration products milestones recorded revenue recognized period agreement including date receipt latest expected regulatory approvals andor completion product development activities october 2008 company announced accomplishment first milestone agreement development next generation safecross system resulted 10 million payment june 2009 company announced accomplishment second milestone agreement company achieved european ce mark approval thromcat xt thrombectomy catheter system resulted 15 million payment fiscal 2009 company recognized 625000 revenue milestones spectranetics indicated company desire discontinue sales safecross products desire transfer manufacturing quickcat product spectranetics effective december 31 2009 spectranetics discontinues sales safecross products achievement 60 million cumulative sales milestone based upon sales safecross thromcat quickcat products negatively impacted item 9 item 8 financial statements supplementary data financial statements supplementary data required item set forth item 15 annual report form 10k item 9 item 8 financial statements supplementary data financial statements report independent auditors listed item 14 included annual report form 10k item 9 item 8 financial statements supplementary data financial statements report independent auditors listed item 14 included annual report form 10k item 9 item 8 financial statements supplementary data following consolidated financial statements related notes thereto kensey nash corporation report independent registered public accounting firm filed part form 10k report independent registered public accounting firm board directors stockholders kensey nash corporation exton pennsylvania audited accompanying consolidated balance sheets kensey nash corporation subsidiaries “company” june 30 2007 2006 related consolidated statements income stockholders’ equity cash flows three years period ended june 30 2007 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position kensey nash corporation subsidiaries june 30 2007 2006 results operations cash flows three years period ended june 30 2007 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting june 30 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated september 12 2007 expressed unqualified opinion company’s internal control financial reporting deloitte touche llp philadelphia pennsylvania september 12 2007 kensey nash corporation consolidated balance sheets see notes consolidated financial statements kensey nash corporation consolidated statements income see notes consolidated financial statements kensey nash corporation consolidated statements stockholders’ equity see notes consolidated financial statements kensey nash corporation consolidated statements cash flows see notes consolidated financial statements kensey nash corporation notes consolidated financial statements years ended june 30 2007 2006 2005 1 summary significant accounting policies description companykensey nash corporation “company” medical device biomaterials company strives consistently deliver innovative products help healthcare professionals improve patients’ lives reduce healthcare costs kensey nash corporation incorporated delaware august 6 1984 kensey nash holding company incorporated delaware january 8 1992 formed hold title certain company patents operations kensey nash gmbh incorporated germany january 2002 formed purpose european sales marketing company’s endovascular products ilt acquisition sub inc formerly thm acquisition sub inc macropore acquisition sub inc incorporated delaware april 2006 may 2007 respectively formed acquire certain assets acquired companies see notes 9 10 principles consolidation basis presentationthe consolidated financial statements include accounts kensey nash corporation kensey nash holding company kensey nash europe gmbh intercompany transactions balances eliminated preparation consolidated financial statements conformity accounting principles generally accepted united states america necessarily requires management make estimates assumptions estimates assumptions may differ actual results affect reported amounts assets liabilities disclosure contingent assets liabilities dates financial statements well reported amounts revenue expense periods presented consolidated statements income june 30 2006 2005 reclassified include product line information biomaterials endovascular sales addition reclassifications made reflect separate components sales marketing general administrative expenses previously aggregated impact amounts presented income operations discontinuance embolic protection platformon july 10 2007 company announced made strategic decision cease activities embolic protection platform includes triactiv® fx proguard™ product line including proguard clinical trial product manufacturing sales marketing research development activities see note 25 additional information discussion asset impairment related charges cash equivalentscash cash equivalents represent cash banks shortterm investments original maturity less three months fair value financial instrumentsthe carrying amounts financial instruments including cash equivalents shortterm investments accounts receivable accounts payable debt approximated fair value june 30 2007 2006 fair value shortterm investments based quoted market prices comprehensive incomethe company accounts comprehensive income provisions sfas 130 reporting comprehensive income sfas 130 accordingly accumulated comprehensive loss income shown consolidated statements stockholders’ equity june 30 2007 2006 2005 comprised net unrealized gains losses company’s availableforsale securities foreign currency translation adjustments change interest rate swap value net tax effects benefitexpense fiscal 2007 2006 2005 comprehensive loss income 28946 60376 76038 respectively property plant equipmentproperty plant equipment consists primarily building land machinery equipment construction progress recorded cost maintenance repairs expensed incurred building machinery furniture equipment depreciated using straightline method useful life ranging two thirty years depreciation expense property plant equipment 6920431 8353605 4899061 fiscal year ending june 30 2007 2006 2005 respectively goodwillgoodwill represents excess cost fair market value identifiable net assets thm biomedical inc thm company acquired september 2000 intraluminal therapeutics inc ilt acquired may 2006 see notes 9 11 macropore biosurgery business unit macropore acquired may 2007 see notes 10 11 acquisitions accounted sfas 141 business combinations sfas 141 sfas 142 goodwill intangible assets sfas 142 sfas 142 goodwill intangible assets indefinite useful lives amortized subject annual impairment tests intangible assets definite useful lives continue amortized respective useful lives impairment longlived assetslonglived assets reviewed impairment whenever events circumstances indicate carrying amount asset may recoverable undiscounted expected future cash flows generated related asset less carrying value asset company measures amount impairment comparing carrying amount asset fair value estimation fair value generally measured discounting expected future cash flows rate company borrows accounts receivable allowancethe company trade receivable allowances 8219 8804 june 30 2007 2006 respectively company established trade receivable allowances 2000 59580 wrote amounts totaling 2585 59473 years ended june 30 2007 2006 respectively amounts included general administrative expense years ended june 30 2007 2006 revenue recognition sales revenue company recognizes revenue provisions staff accounting bulletin sab 104 revenue recognition sab 104 superseded sab 101 revenue recognition financial statements sab 101 sales revenue recognized products shipped services completed advance payments received products services recorded deferred revenue recognized product shipped services performed company reduces sales revenue estimated customer returns allowances including discounts company net sales returns provisions credits discounts 541446 9195 146237 years ended june 30 2007 2006 2005 respectively significant increase fiscal 2007 related sales credits given embolic protection products either related product recall discontinuance program research development revenue research development contracts recognized related expenses incurred revenues recorded line item derived government programs us government funds research high risk enabling technologies program reflected consolidated statements income fiscal 2005 award research synthetic vascular graft concluded september 2004 royalty income company generally recognizes royalty revenue end month relevant net total enduser product sales dollars reported company month royalty payments generally received within 45 days end calendar quarter research development costsresearch development costs charged expense incurred income taxesthe company accounts income taxes provisions sfas 109 accounting income taxes sfas 109 see note 22 earnings per shareearnings per share calculated accordance sfas 128 earnings per share sfas 128 requires company report basic diluted earnings per share eps basic diluted eps computed using weighted average number shares common stock outstanding common equivalent shares options nonvested stock awards included diluted computation effect dilutive see note 23 options nonvested stock awards purchase shares common stock outstanding years ended june 30 2007 2006 2005 included computation diluted eps options nonvested stock awards would antidilutive shown table stockbased compensationon december 16 2004 financial accounting standards board fasb finalized sfas 123r amends sfas 123 supersedes apb 25 requires cost sharebased payment transactions including employees nonemployee directors recognized financial statements stockbased compensation costs prior july 1 2005 accounted company sfas 123 accounting stockbased compensation sfas 123 permitted recognition fair value stockbased awards expense ii continued application intrinsic value method accounting principles board opinion 25 accounting stock issued employees apb 25 company previously accounted stockbased employee director compensation plans recognition measurement principles apb 25 intrinsic value method compensation cost represented excess quoted market price company’s common stock grant date amount grantee must pay stock company’s policy grant employee stock options exercise price equal fair market value company’s common stock date grant therefore recording compensation expense apb 25 prior adoption sfas 123r sharebased payment fas 123r company expensed sharebased payments nonemployee outside consultants defined sfas 123 based upon fair market value grants nonvested shares granted using intrinsic value method apb 25 effective july 1 2005 company adopted provisions sfas 123r using modified prospective approach accounts sharebased compensation applying fair value method expensing stock options nonvested stock awards referred previous sec filings restricted stock awards restricted shares see accordingly adoption sfas 123r’s fair value method resulted compensation costs company’s two equity compensation plans prior adoption sfas 123r compensation costs company’s equity compensation plans determined based fair market value stock options nonvested stock consistent provisions sfas 123 amended sfas 148 accounting stockbased compensationtransition disclosurean amendment fasb statement 123 accounting stockbased compensation sfas 148 company’s net income earnings per share year ended june 30 2005 would reduced pro forma amounts 1 amounts represent compensation expense determined fair market value method included reported net income net related tax effect 2 amounts represent compensation expense determined intrinsic value method included reported net income net related tax effects 3 amounts represent compensation expense determined fair market value based method awards net related tax effects derivative instruments hedging activitiesthe company recognizes derivatives either assets liabilities balance sheet depending company’s rights obligations applicable derivative contract measures instruments fair value change derivative’s fair value recorded period current earnings accumulated comprehensive income oci depending derivative designated part hedge transaction type hedge transaction new accounting pronouncementsin may 2005 financial accounting standards board fasb issued sfas 154 accounting changes error correctionsa replacement apb opinion 20 fasb statement 3 sfas 154 sfas 154 replaces apb opinion 20 accounting changes fasb statement 3 reporting accounting changes interim financial statements changes requirements accounting reporting change accounting principle company’s adoption july 1 2006 sfas 154 material impact company’s financial position results operations july 2006 fasb issued fasb interpretation 48 accounting uncertainty income taxes fin 48 fin 48 interpretation fasb statement 109 accounting income taxes seeks reduce diversity practice associated certain aspects measurement recognition accounting income taxes fin 48 clarifies accounting uncertainty income taxes recognized enterprise’s financial statements prescribes threshold morelikelythannot recognition tax benefits uncertain tax positions taken expected taken tax return fin 48 also provides related guidance measurement derecognition classification interest penalties disclosure differences amounts recognized financial statements prior adoption fin 48 amounts reported adoption accounted cumulativeeffect adjustment recorded beginning balance retained earnings fin 48 effective fiscal years beginning december 15 2006 company required adopt first quarter fiscal year 2008 company currently evaluating impact adoption fin 48 financial statements september 2006 securities exchange commission sec issued sab 108 sab 108 considering effects prior year misstatements quantifying misstatements current year financial statements provides interpretive guidance consideration effects prior year misstatements quantifying current year misstatements purpose materiality assessment sab 108 effective annual financial statements covering first fiscal year ending november 15 2006 earlier application encouraged interim period first fiscal year ending november 15 2006 filed publication sab 108 september 13 2006 company’s adoption june 30 2007 sab 108 material impact company’s financial position results operations september 2006 fasb issued sfas 157 fair value measurements sfas 157 sfas 157 establishes standard definition fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements sfas 157 effective financial statements issued fiscal years beginning november 15 2007 company’s 2009 fiscal year company yet assessed impact adoption sfas 157 financial position results operations february 2007 fasb issued sfas 159 fair value option financial assets financial liabilities sfas 159 sfas 159 permits entities choose measure many financial instruments certain items fair value sfas 159 effective fiscal years beginning november 15 2007 company’s 2009 fiscal year company yet assessed impact adoption sfas 159 financial position results operations june 2007 fasb ratified consensus reached eitf issue 073 accounting nonrefundable advance payments goods services used future research development activities eitf 073 scope issue limited nonrefundable advance payments goods services used rendered future research development activities pursuant executory contractual arrangement nonrefundable advance payments future research development activities materials equipment facilities purchased intangible assets alternative future use research development projects otherwise recognized accordance guidance sfas 2 refundable advance payments future research development activities excluded scope issue effective fiscal years beginning december 15 2007 company’s 2009 fiscal year interim periods within fiscal years issue applies prospectively new contracts entered effective date company expect adoption eitf 073 material impact financial position results operations june 2006 fasb ratified consensus reached eitf issue 063 taxes collected customers remitted governmental authorities presented income statement gross versus net presentation eitf 063 scope issue includes tax assessed governmental authority imposed concurrent specific revenueproducing transaction seller customer may include limited sales use value added excise taxes presentation taxes either gross basis included revenues costs net basis excluded revenues accounting policy decision disclosed addition taxes reported gross basis entity disclose amounts taxes interim annual financial statements period income statement presented amounts significant disclosures required issue applied retrospectively interim annual financial statements periods presented issue applies financial reports interim annual reporting periods beginning december 15 2006 company’s 2007 fiscal year company incurs value added tax vat sales made kensey nash europe gmbh excludes presents net basis taxes revenues company’s adoption eitf 063 material impact company’s financial position results operations 2 investments june 30 2007 consisted primarily high quality municipal obligations one mutual fund accordance statement financial accounting standards sfas 115 accounting certain investments debt equity securities sfas 115 company classified entire investment portfolio availableforsale marketable securities secondary resale markets portfolio reported fair value unrealized gains losses included stockholders’ equity see comprehensive income realized gains losses income following disclosures provided accordance emerging issues task force issue eitf 031 meaning otherthantemporary impairment application certain investments eitf 031 securities fair value cost balance sheet dates temporary impairment recognized financial statements following summary availableforsale securities june 30 2007 2006 majority investments listed june 30 2007 maturities ranging less one year approximately two years addition company five municipal variablerate demand obligations maturities ranging 17 34 years municipal variablerate demand obligations putable weekly callable monthly basis investment securities shown currently fair values less amortized costs therefore contain unrealized losses company evaluated securities determined decline value related company industry specific event june 30 2007 approximately 21 25 investment securities unrealized losses company anticipates full recovery amortized costs respect securities maturity sooner event favorable market interest rate environment lengths time securities continuous unrealized loss position aggregated investment category june 30 2007 follows 3 inventory stated lower cost determined average cost method approximates firstin firstout market value inventory primarily includes cost material utilized processing company’s products follows adjustments inventory made individual part level estimated excess obsolescence impaired balances reflect inventory lower cost market factors influencing adjustments include changes demand rapid technological changes product life cycle development plans component cost trends product pricing physical deterioration quality concerns revisions adjustments would required factors differ company’s estimates 4 new facility fiscal 2006 company completed primary construction relocated operations new 202500 square foot facility total cost project including land purchases approximately 49 million company financed construction facility available cash hand sale liquid investments project term may 2006 company entered secured commercial mortgage secured building land allows company draw 35 million 8 million currently outstanding see note 14 conjunction move new facility company abandoned previously occupied leased space thus recorded accelerated depreciation transition charges 50 million related leasehold improvement assets abandoned fiscal 2006 5 select customer agreements st jude medical inc license agreementsunder two license agreements one us foreign territories st jude medical exclusive worldwide rights manufacture market current future versions angioseal™ vascular closure device angioseal license agreement company receives 6 royalty sales price every angioseal™ unit sold st jude medical june 30 2007 approximately 94 million angioseal units sold lifetodate component supply contractin fiscal 2005 company executed new supply contract st jude medical appointed company exclusive supplier 100 collagen sponge least 30 bioresorbable polymer anchor components angioseal term agreement contract expires december 2010 part agreement company received 10 million origination fee upon execution consideration company’s ongoing investments collagen research development company recognized 543000 10 million period ended june 30 2005 related research development work already performed remaining 457000 recorded deferred revenue balance 290775 remaining june 30 2007 recorded revenue remaining period contract orthovita inc fiscal 2003 company entered development manufacturing supply agreement orthovita company develops commercializes products based orthovita’s proprietary vitoss® bone graft substitute material combination company’s proprietary biomaterials orthovita agreement orthovita agreement products codeveloped company manufactures products orthovita markets sells products worldwide also orthovita agreement company receives royalty payment codeveloped vitoss foam products based upon orthovita’s total enduser net sales products first royalty earned february 2004 first codeveloped product commercially launched orthovita addition separate transaction company acquired proprietary rights third party vitoss technology acquisition entitled company certain rights including economic rights third party economic rights include royalty products sold containing vitoss technology 6 concentration credit risk financial instruments potentially subject company significant concentrations credit risk consist primarily cash equivalents investments accounts receivable company places cash equivalents investments high quality financial institutions established guidelines relative diversification maturities maintain safety high liquidity single component company’s investment portfolio represented 18 11 total investments june 30 2007 2006 respectively respect trade royalty receivables primarily due st jude medical 31 88 40 86 total trade royalty receivables respectively june 30 2007 2006 see note 5 trade receivables due two customers arthrex orthovita approximately 19 17 respectively trade receivables june 30 2007 customers’ receivable balances deemed uncollectible would material adverse effect company’s results operations financial condition company performs ongoing credit evaluations customers’ financial conditions require collateral support customer receivables 7 acquired patents intangible assets costs internally developed patents expensed incurred due long development cycle patents company’s inability measure recoverability costs incurred entire cost acquired patents intangible assets amortized remaining period economic benefit ranging 2 14 years june 30 2007 see notes 8 9 10 gross carrying amount patents intangible assets june 30 2007 10131366 accumulated amortization 4087962 date amortization expense patents intangible assets 845976 811204 745040 fiscal years ended june 30 2007 2006 2005 respectively estimated amortization expense patents intangible assets fiscal year 2008 fiscal year 2012 follows 8 certain patent proprietary rights agreements patent acquisition agreement november 1997 company entered agreement patent acquisition agreement acquire portfolio puncture closure patents patent applications well rights seller preexisting licensing agreement addition september 2000 conjunction acquisition thm company acquired separate portfolio patents related biomaterials business costs patent acquisition agreement patents acquired part thm acquisition amortized remaining periods economic benefit ranging 2 9 years june 30 2007 assignment agreement august 2004 company acquired intellectual property rights third party inventor vitoss technology inventor 2600000 assignment agreement inventor assignment agreement assignment agreement company receives intellectual property rights inventor previously assigned orthovita also assignment agreement company receives royalty orthovita sale orthovita products containing vitoss technology total royalty received 4035782 june 30 2007 company recognized cumulative royalty income 1625190 assignment agreement 2410592 yet received entire cost proprietary rights amortized 60month period company anticipates receiving economic benefit relation proprietary rights technology purchase agreement march 2005 company entered agreement acquire patents proprietary rights pair inventors technology purchase agreement intellectual property processing information acquired technology purchase agreement complimentary broadens company’s existing biomaterials intellectual property materials processing knowledge platform technology purchase agreement company paid 250000 patents upon execution agreement obligated pay certain milestone payments royalties upon achievement certain product development commercial launch goals products incorporate acquired patent technology initial 250000 purchase price patents amortized remaining period economic benefit patents currently estimated approximately 13 years june 30 2007 9 acquisition certain assets intraluminal therapeutics inc may 2006 company acquired certain assets intraluminal therapeutics inc ilt company focused emerging market opportunity treatment chronic total occlusions “cto” 80 million cash plus acquisition costs 197384 total 80 million purchase price 10 million escrowed one year included restricted cash balance sheet june 30 2006 valuation purchase price allocation represents estimated fair market value based riskadjusted cash flows related identifiable assets excess cost net assets acquired allocated goodwill management responsible valuation considered number factors including internal third party valuations appraisals estimating fair value following summary allocation including net adjustments 49055 recognized since june 30 2006 components certain acquired intangible assets acquisition date follows gross carrying amount acquired intangible assets june 30 2007 1470000 amortization expense acquired intangible assets 180763 fiscal year ended june 30 2007 included within research development expense amortization expense acquired intangible assets currently estimated 175303 173497 fiscal years ending june 30 2008 2009 respectively 153636 fiscal years ending june 30 2010 2011 2012 total amount goodwill 64 million amount expected fully deductible tax purposes acquisition accounted purchase method accounting ilt’s results operations included company since date acquisition following unaudited proforma financial information assumes acquisition occurred beginning earliest period presented pro forma results based certain assumptions estimates pro forma results necessarily represent results would occurred acquisition taken place beginning specified periods indicative results future combined operations 10 acquisition certain assets macropore may 2007 company acquired certain assets macropore leading developer bioresorbable products targeted spinal craniofacial orthopaedic surgery applications approximately 32 million cash company incurred related acquisition costs 125690 june 30 2007 valuation purchase price allocation represents estimated fair market value based riskadjusted cash flows related identifiable assets excess cost net assets acquired allocated goodwill management responsible valuation considered number factors including internal third party valuations appraisals estimating fair value following summary allocation business unit acquired company encompasses manufacturing six bioresorbable product lines sold exclusively leading orthopaedic device company worldwide distribution identified intangible asset customer relationship 1640000 june 30 2007 amortized fiveyear term manufacturing development supply agreement company gross carrying amount acquired intangible asset june 30 2007 1640000 amortization expense acquired intangible assets 27333 fiscal year ended june 30 2007 included within general administrative expense amortization expense acquired intangible assets currently estimated 328000 fiscal years ending june 30 2008 2011 300667 fiscal year ending june 30 2012 acquisition accounted purchase method accounting macropore’s results operations included company since date acquisition 11 goodwill company accounts goodwill provisions sfas 142 sfas 142 goodwill amortized subject annual impairment tests company established annual impairment testing date june 30th fiscal year recent tests fiscal 2007 2006 2005 indicated goodwill impaired net carrying amount goodwill increased year ended june 30 2007 june 30 2006 approximately 10 million related acquisition certain assets macropore additional costs allocations related acquisition certain assets ilt see notes 9 10 amount expected fully deductible tax purposes following table indicates company’s total goodwill balances dates presented 12 accrued expenses june 30 2007 2006 accrued expenses consisted following 13 leases june 30 2007 company noncancelable lease obligations rent expense operating leases consisted rent company’s eschborn germany location previously occupied leased space exton pennsylvania abandoned fiscal 2006 result transition company’s newly owned facility rent expense fiscal years ended june 30 2007 2006 2005 approximately 13000 765000 986000 respectively 14 debt secured commercial mortgageon may 25 2006 company entered agreement secured commercial mortgage citibank fsb mortgage provides company ability take aggregate advances 35 million november 25 2007 draw period secured company’s facility land located 735 pennsylvania drive exton pennsylvania 19341 may 25 2006 company took 8 million advance mortgage bears interest libor plus 082 loan credit spread company intends taking additional 27 million proceeds november 25 2007 mortgage company required pay interest outstanding principal amount draw period draw period beginning december 25 2007 company shall pay principal interest based twentyfive year straightline amortization schedule mortgage contains various conditions borrowing affirmative restrictive financial maintenance covenants certain significant covenants require company maintain minimum fixed charge coverage ratio ebitda defined mortgage debt service equal greater 150to 10 interest rate hedge least fifty percent outstanding principal balance mortgage interest rate protection product reasonably acceptable citibank fsb june 30 2007 company compliance affirmative restrictive financial maintenance covenants interest rate swap agreementin order hedge interest rate risk mortgage company also entered 35 million aggregate tenyear fixed interest rate swap agreement “swap” citibank na company using swap cash flow hedge company’s interest payments mortgage swap converts variable libor portion mortgage payments fixed rate 644 562 fixed interest rate plus 082 loan credit spread critical terms swap hedge item change swap considered highly effective changes fair value included comprehensive income june 30 2007 2006 respectively fair value swap unrealized loss position 298350 196911 net tax 85834 included accumulated comprehensive loss consolidated balance sheet fair value interest rate swapthe company designated swap cash flow hedge required record fair value swap perform marktomarket adjustment end period fair value swap obtained dealer quotes value represents estimated amount company would receive pay terminate agreements taking consideration current interest rates creditworthiness counterparties cash flow hedgethe swap classified cash flow hedge due hedging forecasted interest rate payments accordance sfas 133 accounting derivative instruments hedging activities amended sfas 137 138 149 recorded consolidated balance sheet fair value company’s objective strategy undertaking swap hedge exposure variability cash flows interest expense associated future interest rate payments secured commercial mortgage reduce company’s interest rate risk event unfavorable interest rate environment effective portion swap gains losses due changes fair value recorded component oci reclassified earnings period periods hedged forecasted transaction affects earnings company utilizes hypothetical derivative method determining hedge effectiveness period transactions would cause ineffectiveness result company reclassifying ineffective portion current earnings would include prepayment secured commercial mortgage andor company’s election prime interest rate option draw company’s secured commercial mortgage interest expense swap recorded earnings fixed rate set forth swap fiscal year ended june 30 2007 amount recognized current earnings due ineffectiveness amounts excluded assessment hedge effectiveness amount reported unrealized loss interest rate swap accumulated oci account within stockholders’ equity represents net unrealized loss swap designated cash flow hedge company anticipate material unrealized losses recognized within subsequent 12 months anticipated transactions occur company derivative instruments fiscal year ended june 30 2005 15 preferred stock company authorized class undesignated preferred stock consisting 100000 shares 001 par value board directors may authorize issuance preferred stock ranks senior common stock respect payment dividends distribution assets liquidation addition board directors authorized fix limitations restrictions upon payment dividends common stock effective shares preferred stock outstanding board directors without stockholder approval issue preferred stock voting conversion rights could adversely affect voting power holders common stock june 30 2007 2006 shares preferred stock outstanding company present intention issue shares preferred stock 16 stock repurchase program time company made repurchases stock authorized various programs established company’s board directors june 30 2007 266867 shares remaining repurchase recently authorized program 400000 shares repurchased expiration date quarter ended june 30 2007 company repurchased retired 10000 shares common stock cost 238000 average market price 2380 per share using available cash year ended june 30 2006 company repurchased retired 20000 shares common stock cost 441000 average market price 2205 per share using available cash year ended june 30 2005 company repurchased retired 303000 shares common stock cost approximately 79 million average market price 2599 per share using available cash 17 stockbased compensation effective july 1 2005 company adopted provisions sfas 123r using modified prospective approach accounts stockbased compensation applying fair value method expensing stock options nonvested stock awards cash settled stock appreciation rights accordingly total stockbased compensation expense 2895464 2358848 years ended june 30 2007 2006 respectively total income tax benefit recognized consolidated statements income sharebased compensation costs 984458 802008 years ended june 30 2007 2006 respectively compensation expense related stockbased awards classified statement operations within line items salary expense recorded awards’ relevant vesting period compensation expense related stockbased awards granted members board directors recorded component general administrative expense company employee incentive compensation plan “employee plan” officers nonemployee directors employees company reward individuals contributed hired contribute growth success company june 30 2007 total number shares authorized issuance employee plan 4350000 options purchase total 1859985 shares company’s common stock weighted average exercise price 1856 outstanding 105035 nonvested stock awards outstanding options purchase total 2038988 shares company’s common stock previously exercisedissued 345992 shares remained available new awards employee plan december 6 2006 company held 2006 annual meeting stockholders considered approved company’s fifth amended restated kensey nash corporation employee incentive compensation plan “amended plan” amended plan became effective immediately upon stockholders’ approval amended plan authorized additional 300000 shares company’s common stock issuance 75000 shares may issued nonvested stock bonus stock stockbased awards stock options stock appreciation rights june 30 2007 265883 shares remaining issuance amended plan 50833 shares remaining issued nonvested stock bonus stock stockbased awards company also nonemployee directors’ stock option plan “directors’ plan” june 30 2007 total 410000 shares authorized issuance directors’ plan nonqualified options purchase total 327500 shares company’s common stock weighted average exercise price 2012 outstanding options purchase total 82500 shares company’s common stock previously exercised directors’ plan result shares remained available new awards directors’ plan awards previously granted directors’ plan granted employee plan nonemployee director receives initial grant options purchase 5000 shares common stock upon appointment board directors exercisable fair market value shares date grant consideration service board directors date annual meeting stockholders company nonemployee director elected reelected continues serve director term expired receives option purchase 7500 shares common stock exercisable fair market value shares date grant addition nonemployee director serves committee date annual meeting receives additional option purchase 1500 shares common stock exercisable fair market value shares date grant committee member entitled single option purchase 1500 shares even serves multiple committees chairman board receives oneandonehalf times standard nonemployee director awards continuation service options purchase 11250 shares common stock receive additional shares serving committees addition additional grants options may made time determined compensation committee board directors stock options stock options granted employees members board directors company well nonemployee outside consultants fair value calculated blackscholes optionpricing model years ended june 30 2007 2006 company recognized expense 877947 960387 respectively related stock options june 30 2007 1004961 unrecognized compensation costs related unvested stock options granted two equity compensation plans cost expected recognized weightedaverage period 201 years total intrinsic value options exercised years ended june 30 2007 2006 2005 5011216 3096377 3154569 respectively summary stock option activity plans fiscal years ended june 30 2007 2006 2005 follows fair value option grant estimated date grant using blackscholes optionpricing model uses weighted average assumptions noted following table options exercisable maximum term ten years date grant typically vest periods zero three years grant date expected volatilities based historical volatility company’s common stock factors company uses historical data estimate option exercise employee termination within valuation model separate groups employees similar historical exercise behavior considered separately valuation purposes expected term options derived historical exercise behavior represents period time options granted expected outstanding terms given results certain groups employees exhibiting different behavior riskfree rate periods within contractual life option based us treasuries constant maturities effect time grant assumptions used calculate fair value options directors’ plan employee plan using blackscholes optionpricing model set forth following table following table summarizes significant option groups outstanding employee directors’ plans june 30 2007 related weighted average exercise price remaining contractual life information accelerated vesting stock optionson april 27 2005 company’s board directors approved acceleration vesting certain unvested “outofthemoney” stock options exercise prices equal greater 2735 per share price date acceleration previously awarded company’s employees including executive officers management equity compensation plans acceleration vesting effective stock options outstanding may 4 2005 options purchase 547815 shares common stock options purchase 431000 shares held executive officers management 47 shares underlying company’s outstanding unvested options subject acceleration stock option acceleration immediate dilutive effect earnings per share majority employee group historical expected option term approximately 6 years compensation expense would recorded weighted average period 212 years adoption sfas 123r absent accelerated vesting approximately 52 million 37 million net related tax effects 42 million 30 million net related tax effects related stock options held executive officers directors purpose acceleration enable company decrease future recognized compensation expense associated options upon adoption sfas 123r nonvested stock awards nonvested stock awards granted nonemployee members board directors executive officers certain management company nonvested shares granted executive officers management nonemployee members board directors usually referred restricted shares sfas 123r reserves term fully vested outstanding shares whose sale contractually governmentally prohibited specified period time fair value based upon closing price company’s common stock date grant fiscal years ended june 30 2007 2006 2005 company recognized expense 1575546 1398461 764627 respectively related nonvested stock awards june 30 2007 estimated 1995551 unrecognized compensation costs related nonvested stock awards granted company’s two equity compensation plans cost expected recognized weighted average period 140 years total fair value shares vested years ended june 30 2007 2006 2005 1540228 529832 462225 respectively fiscal year 2005 company granted shares nonvested common stock nonemployee members board directors executive officers addition part shift focus company’s equity compensation program stock options nonvested stock company granted shares nonvested common stock management company years ended june 30 2007 2006 shares granted nonemployee members board directors prior december 2005 vested three equal annual installments contingent upon company’s achievement certain earningspershare targets company common stock price targets continued service board member anniversary date grant beginning december 2005 nonvested stock grants awarded nonemployee members board directors vest solely continuation service longer subject performance measures attributes grants remain described previously awarded nonvested stock grants remain subject original provisions effect time grant shares granted executive officers management vest three equal annual installments based solely continued employment company unvested shares forfeited upon termination service board directors employment applicable following table outlines nonvested stock awards fiscal years ended june 30 2007 2006 2005 cash settled stock appreciation rights fiscal year ended june 30 2007 company granted cashsettled stock appreciation rights sars awards eligible employees award granted provides participant right receive payment cash upon exercise appreciation market value specified number shares company’s common stock award’s exercise price pershare exercise price sar equal closing market price share company’s common stock date grant year ended june 30 2007 company recognized expense 441971 related outstandingawarded sars june 30 2007 estimated 1303119 unrecognized compensation costs related sars cost remeasured reporting period award settled expected recognized weighted average period 225 years june 30 2007 cash settled sars vested sharebased liabilities paid following table outlines cashsettled sar awards year ended june 30 2007 fair value sar grant estimated using blackscholes optionpricing model uses weighted average assumptions noted following table sars exercisable maximum term five years date grant vest period three years grant date expected volatilities based historical volatility company’s common stock factors company uses historical data estimate sar employee termination within valuation model separate groups employees similar historical exercise behavior considered separately valuation purposes expected term cashsettled stock appreciation rights determined accordance question 6 sec sab 107 topic 1402 “expected term” time historical exercise behavior established riskfree rate periods within contractual life sar based us treasuries constant maturities cashsettled sars awarded stockbased payment transactions accounted sfas 123r classifies awards liabilities accordingly company records awards component noncurrent liabilities balance sheet liability awards fair value award determines measurement liability balance sheet remeasured reporting period award settled fluctuations fair value liability award recorded increases decreases compensation cost either immediately remaining service period depending vested status award 18 segment reporting operating segments identified components enterprise separate discrete financial information available evaluation chief operating decisionmaking group making decisions regarding allocate resources assess performance based criteria established sfas 131 disclosures segments enterprise related information sfas 131 company’s operations products aggregated single reportable segment since similar economic characteristics production processes types customers distribution methods company’s primary products medical devices include biomaterials products endovascular devices respect biomaterials products company designs andor manufactures markets various absorbable polymer collagen products used numerous applications including orthopaedic cardiology drugbiologics delivery periodontal general surgery wound care respect endovascular products company currently designs manufactures markets sells thrombectomy chronic total occlusion devices prior july 10 2007 designed manufactured marketed sold embolic protection devices 2005 company received research development revenue certain research development contracts grants company also receives royalty revenue primarily sale angioseal units st jude medical sales vitoss foam products orthovita net sales product line reconciliation total revenue follows years ended june 30 2007 2006 2005 revenues st jude medical arthrex orthovita represented following percentages total revenues company’s revenues external customers categorized geographically revenues attributed country based location customer company’s business dependent foreign operations one country us represented 10 company’s revenues addition company’s longlived assets located us 19 certain compensation employment agreements company entered employment agreements certain officers employment agreements provide aggregate annual base salaries 791600 fiscal 2008 20 retirement plan company voluntary 401k salary reduction plan trust 401k plan employees least 21 years age eligible participate company provides 50 discretionary matching contribution 6 employee’s total salaried compensation employee contributions employer contributions 401k plan fiscal years ended june 30 2007 2006 2005 477603 418943 348538 respectively 21 opportunity grant november 2004 company awarded 500000 grant opportunity grant program department community economic development commonwealth pennsylvania grant awarded company potential jobcreating economic development opportunities created company’s construction new facility within state pennsylvania grant conditioned upon following 1 company create 238 fulltime jobs within five years beginning april 1 2003 date company’s request grant 2 company invest least 54250000 total project costs including limited personnel land building construction within three years beginning july 19 2004 date company’s facility groundbreaking 3 company operate new facility minimum five years date occupancy december 2005 company received cash payment 500000 third quarter fiscal 2005 revenue recognized component income related grant 81081 fiscal years ended june 30 2007 2006 54054 fiscal year ended june 30 2005 remaining revenue opportunity grant estimated 283784 company believes recent decision discontinue embolic protection platform may impact job creation requirementunder grant program company formally requested extension exception requirement department community economic development commonwealth pennsylvania waiting final response unless company receives exception waiver remaining revenue recognized 22 income taxes company accounts income taxes sfas 109 generally provides deferred tax assets liabilities recognized temporary differences financial reporting basis tax basis company’s assets liabilities expected benefits utilizing net operating loss nol carryforwards impact deferred taxes changes tax rates laws applied years temporary differences expected settled reflected financial statements period enactment result congressional approval extension research experimentation tax credit company recorded retroactive adjustments tax provision second quarter ended december 31 2006the company continues record research development tax credits component current tax provision related ongoing performance qualified research development company recorded tax credits 512963 528017 493536 fiscal years ended june 30 2007 2006 2005 respectively earnings income taxes earned within outside united states shown provision income taxes composed following differences company’s income tax expense benefit income tax expense benefit computed using us federal income tax rate follows significant components company’s deferred tax assets liabilities follows portion company’s deferred tax asset offset valuation allowance relating state nol carryforwards due restrictions imposed uncertainty surrounding use valuation allowance reduces deferred tax assets amount represents management’s best estimate amount deferred tax assets likely realized june 30 2007 company federal nol carryforward approximately 20 million state nol carryforward totaling 600 million expire 2027 company recorded full valuation allowance state net operating losses 600 million addition company foreign nol carryforward 297022 june 30 2007 expire 23 earnings per share following table shows reconciliation numerators denominators basic diluted eps calculations income numerator weighted average number shares denominator 24 quarterly financial data unaudited summarized quarterly results operations company years ended june 30 2007 2006 presented quarterly total year earnings per share calculated independently based weighted average number shares outstanding period 25 discontinuance embolic protection platform july 10 2007 company announced ceased activities embolic protection platform includes triactiv® fx proguard™ product line including proguard clinical trial product manufacturing sales marketing research development activities strategic decision made reduce costs provide better resource allocation company’s endovascular biomaterials businesses allow company’s sales force focus company’s thrombectomy chronic total occlusion platforms company believes changing embolic protection market dynamics negative particularly carotid market cost participate effectively markets high warrant investment company believes discontinuance embolic protection platform allow sales personnel better focus efforts thrombectomy chronic total occlusion products produce higher return invested time account company expects recognize asset impairment related charges totaling approximately 53 million taxes charges include cash charges primarily related severance clinical trial contract termination costs totaling approximately 07 million aggregate charges also include noncash charges totaling approximately 46 primarily related abandonment inventory machinery equipment approximately 53 million charges approximately 47 million including 46 million noncash asset impairment charges 01 million cash charges recorded fourth quarter ending june 30 2007 remainder expected recognized first fiscal quarter 2008 charges presented within company’s results continuing operations depicted table severance charges decision communicated affected employees july 10 2007 resulted net reduction 10 personnel employee severance costs approximately 02 million severance costs recognized company’s financial statements company’s first quarter fiscal 2008 ending september 30 2007 asset impairment charges company fourth quarter fiscal 2007 financial statements recorded pretax charges abandonment certain embolic protection machinery equipment approximately 13 million company also recorded inventory related embolic protection charges approximately 30 million addition charges approximately 03 million proguard clinical trial assets incurred contract termination charges fourth quarter fiscal 2007 company incurred pretax charges approximately 01 million contract termination embolic protection related charges remaining contract termination costs approximately 04 million including 02 million clinical trial cancellation fees recognized fiscal 2008 cash charges related contract termination embolic protection related charges estimated approximately 05 million item 9 item 8 financial statements supplementary data following consolidated financial statements related notes thereto kensey nash corporation report independent registered public accounting firm filed part form 10k schedules omitted either applicable information required therein shown consolidated financial statements notes thereto report independent registered public accounting firm board directors stockholders kensey nash corporation exton pennsylvania audited accompanying consolidated balance sheets kensey nash corporation subsidiaries “company” june 30 2010 2009 related consolidated statements income stockholders’ equity cash flows three years period ended june 30 2010 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position kensey nash corporation subsidiaries june 30 2010 2009 results operations cash flows three years period ended june 30 2010 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting june 30 2010 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated september 10 2010 expressed unqualified opinion company’s internal control financial reporting deloitte touche llp philadelphia pennsylvania september 10 kensey nash corporation consolidated balance sheets see notes consolidated financial statements kensey nash corporation consolidated statements income see notes consolidated financial statements kensey nash corporation consolidated statements stockholders’ equity see notes consolidated financial statements kensey nash corporation consolidated statements cash flows see notes consolidated financial statements kensey nash corporation notes consolidated financial statements years ended june 30 2010 2009 2008 1 summary significant accounting policies description company kensey nash corporation medical device company primarily focused field regenerative medicine application devices materials therapies help repair damaged diseased tissues company recognized leader innovative product development well broad portfolio resorbable biomaterials products company extensive range products sold strategic partners multiple large medical markets including cardiology orthopaedic sports medicine spinal general surgery company also ongoing development manufacturing program products endovascular market kensey nash corporation incorporated delaware august 6 1984 principles consolidation basis presentation consolidated financial statements include accounts kensey nash corporation wholly owned subsidiaries company intercompany transactions balances eliminated preparation financial statements conformity accounting principles generally accepted united states america us gaap notes financial statements requires management make estimates assumptions estimates assumptions may differ actual results affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements well reported amounts revenues expenses cash flows periods presented subsequent events company evaluated events transactions subsequent balance sheet date based evaluation company aware events transactions occurred subsequent balance sheet date prior filing form 10k would require recognition disclosure consolidated financial statements sale endovascular division may 13 2008 company announced entered definitive agreement sell endovascular business spectranetics transaction includes sale thromcat® quickcat™ safecross® product lines established strategic partnership company spectranetics see note 19 additional information discussion transaction related charges cash equivalents cash equivalents represent cash banks shortterm investments original maturity less three months fair value financial instruments carrying amounts financial instruments including cash equivalents investments accounts receivable accounts payable debt approximated fair value june 30 2010 2009 see note 2 note 9 regarding fair value determination certain instruments comprehensive income company accounts comprehensive income disclosure provisions financial accounting standards board fasb accounting standards codification asc topic 220 “comprehensive income” accordingly accumulated comprehensive lossincome shown consolidated statements stockholders’ equity june 30 2010 2009 2008 comprised net unrealized gains losses company’s availableforsale securities foreign currency translation adjustments change interest rate swap value included company’s net income fiscal year ended june 30 2008 237413 currency translation adjustments written result sale kensey nash europe gmbh subsidiary spectranetics may 30 2008 net tax effects benefit fiscal 2010 2009 2008 comprehensive loss 218826 658775 697759 respectively property plant equipment property plant equipment consist primarily building land machinery equipment construction progress recorded cost maintenance repairs typically expensed incurred building machinery furniture equipment depreciated using straightline method useful lives ranging two 30 years depreciation expense property plant equipment 5212039 5367713 5806925 fiscal years ended june 30 2010 2009 2008 respectively fiscal 2010 fire occurred contained small manufacturing area within company’s corporate headquarters building company’s property insurance policy covered remediation efforts fixed asset replacements subject 25000 deductible company recognized gain 775000 within cost products sold upon final settlement insurance carrier remediation recovery efforts completed total 13 million received insurance proceeds remediation efforts replacement value fixed assets expenses company replaced damaged fixed assets total value approximately 480000 remaining insurance proceeds used company pay related expenses added general company funds total insurance proceeds including amounts relating outside remediation services fixed assets classified within investing activities section consolidated statement cash flows balance insurance proceeds used company pay related expenses classified within operating activities section consolidated statement cash flows goodwill represents excess cost fair market value identifiable net assets thm biomedical inc thm company acquired september 2000 macropore biosurgery business unit macropore acquired may 2007 acquisitions accounted provisions fasb asc topic 805 “business combinations” fasb asc topic 350 “intangibles goodwill other” net carrying amount goodwill june 30 2010 4366273 remained unchanged year ended june 30 2009 accounting standards provide goodwill intangible assets indefinite useful lives amortized subject impairment tests annual basis interim date certain events circumstances indicate impairment loss may incurred intangible assets definite useful lives continue amortized respective useful lives annual assessments june 30 2010 2009 2008 indicated goodwill impaired impairment longlived assets longlived assets reviewed impairment whenever events circumstances indicate carrying amount asset may recoverable undiscounted expected future cash flows generated related asset less carrying value asset company measures amount impairment comparing carrying amount asset fair value estimation fair value generally measured discounting expected future cash flows accounts receivable allowance company trade receivable allowance balance 13513 june 30 2010 2009 included selling general administrative expense fiscal years ended june 30 2010 2009 2008 write offs totaling 0 1200 5506 respectively revenue recognition sales revenue company recognizes revenue accordance fasb asc subtopic 60510s99 “revenue recognition” addition company accounts certain customer arrangements containing multiple revenue elements entered materially amended june 30 2003 accordance fasb asc subtopic 60525 “multiple element arrangements” sales revenue generally recognized products shipped services completed advance payments received products services recorded deferred revenue recognized product shipped services performed company reduces sales revenue estimated customer returns allowances company recorded net sales return provisions credits discounts 30064 33000 51886 years ended june 30 2010 2009 2008 respectively royalty income company generally recognizes royalty revenue end month relevant net total enduser product sales dollars reported company month royalty payments generally received within 45 days end calendar quarter research development costs research development costs charged expense incurred income taxes company accounts income taxes provisions fasb asc subtopic 740 “income taxes” see note 16 earnings per share earnings per share eps calculated accordance fasb asc topic 260 “earnings per share” asc 260 basic diluted eps computed using weighted average number shares common stock outstanding common equivalent shares options nonvested stock awards included diluted computation effect dilutive see note 17 nonvested stock awards included years ended june 30 2010 2009 2008 antidilutive options purchase shares company’s common stock outstanding years ended june 30 2010 2009 2008 included computation diluted eps options would antidilutive shown table sharebased compensation company accounts sharebased compensation plans accordance fasb asc topic 718 “compensation stock expense”asc 718 whereby sharebased compensation cost measured grant date based estimated fair value award recognized expense income statement requisite service period company generally recognizes compensation expense sharebased awards granted relevant vesting period awards fair value stock options cashsettled stock appreciation rights sars determined using blackscholes model relevant expense amortized applicable vesting period stock options marked market sars see note 12 compensation expense related sharebased awards classified consolidated statements income within line items salary consulting expense respect award recipients recorded awards’ relevant vesting periods compensation expense related sharebased awards granted members board directors recorded component selling general administrative expense consolidated statements income derivative instruments hedging activities company recognizes derivative cash flow hedge measures instrument fair value either asset liability balance sheet depending company’s rights obligations derivative contract see note 9 change derivative’s fair value recorded period accumulated comprehensive loss consolidated balance sheets oci new accounting pronouncements adopted june 2009 fasb issued asc topic 105 asc 105 “generally accepted accounting principles” formerly statement financial accounting standards sfas 168 “the fasb accounting standards codification hierarchy generally accepted accounting principles” asc 105 establishes fasb asc codification single source authoritative nongovernmental us gaap existing accounting standard documents fasb american institute certified public accountants emerging issues task force related literature excluding rules guidance securities exchange commission superseded codification accounting literature included codification become nonauthoritative codification effective interim annual periods ending september 15 2009 company adopted standard first quarter fiscal 2010 references authoritative accounting literature referenced accordance codification fasb issue accounting standards updates asu serve update codification provide background information guidance provide basis conclusions changes codification november 2007 fasb issued asc topic 808 “collaborative arrangements” standard requires company disclose nature purpose collaborative arrangements annual financial statements rights obligations collaborative arrangements stage underlying endeavor’s life cycle company’s accounting policies arrangements statement income classification amount significant financial statement amounts related collaborative arrangements standard effective fiscal years beginning december 15 2008 company july 1 2009 fiscal 2010 companies required apply provisions retrospective application collaborative arrangements existing adoption change accounting principle impracticable apply consensus specific arrangement disclosure required regarding reason retrospective application practicable effects reclassification current period company’s adoption standard material impact company’s financial position results operations cash flows december 2007 fasb issued asc topic 805 “business combinations” standard requires recognition assets acquired liabilities assumed noncontrolling interest acquiree acquisition date measured fair values date business combination achieved stages standard requires recognition identifiable assets liabilities well noncontrolling interest acquiree full amounts fair values standard also requires fair value acquired inprocess research development iprd recorded indefinite lived intangibles contingent consideration recorded acquisition date restructuring acquisitionrelated deal costs expensed incurred addition excess fair value net assets acquired purchase price subsequent changes estimated contingencies recorded earnings standard effective prospectively business combinations acquisition date fiscal years beginning december 15 2008 company july 1 2009 fiscal 2010 impact standard company’s financial position results operations cash flows depend upon nature terms size acquisitions company may consummate future april 2008 fasb issued accounting guidance contained within asc subtopic 35030 “intangibles goodwill other” asc 35030 fasb asc topic 275 “risk uncertainties” asc 275 standard amended factors considered developing renewal extension assumptions used determine useful life recognized intangible asset previously issued goodwill intangible assets topics requirements determining useful lives related disclosure requirements must applied prospectively intangible assets recognized subsequent effective date standard effective fiscal years beginning december 15 2008 company july 1 2009 fiscal 2010 company’s adoption standard material impact company’s financial position results operations cash flows april 2009 fasb issued asc topic 825 “financial instruments” standard requires disclosures fair value financial instruments interim reporting periods well annual financial statements whether reflected balance sheet date fair value company adopted disclosure requirements standard first quarter fiscal 2010 company’s adoption standard material impact company’s financial position results operations cash flows however result enhanced disclosure fair value financial instruments see note 9 fair value company’s financial instruments august 2009 fasb issued asu 200905 “fair value measurements disclosure” asc topic 820 effective immediately company’s first quarter fiscal 2010 provides guidance fair value measurements liabilities amended asc subtopic 82010 company’s adoption update material impact company’s financial position results operations cash flows see note 9 fair value company’s financial instruments january 2010 fasb issued asu 201006 “fair value measurements disclosures asc topic 820” improve clarify existing fair value disclosures including requirements entities disclose significant transfers fair value hierarchy levels 1 2 along description reasons transfers well disclose inputs valuation techniques used fair value measurements level 2 level 3 hierarchy company adopted disclosure requirements standard third quarter fiscal 2010 guidance provides disclosure requirements company’s adoption update material impact company’s financial position results operations cash flows see note 9 fair value company’s financial instruments adopted october 2009 fasb issued asu 200913 “revenue recognition multipledeliverable revenue arrangements fasb asc topic 605” amends asc subtopic 60525 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 company fiscal 2011 alternatively adoption may retrospective basis early application permitted statement provides principles allocation consideration among multipleelements based element’s estimated selling price vendorspecific vsoe thirdparty evidence tpe value available statement allows flexibility identifying accounting separate deliverables arrangement introduces estimated selling price method valuing elements bundled arrangement vsoe tpe selling price available significantly expands related disclosure requirements company’s adoption new accounting update july 1 2010 fiscal 2011 significant impact company’s consolidated financial position results operations cash flows however company continue assess impact future arrangements entered materially modified company’s adoption april 2010 fasb issued asu 201017 “milestone method revenue recognition fasb asc topic 605” effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 company fiscal 2011 statement provides criteria recognizing achievement milestone entirety revenue period milestone achieved milestone meets criteria considered substantive made inception arrangement company’s adoption new accounting update july 1 2010 fiscal 2011 significant impact company’s consolidated financial position results operations cash flows however company continue assess impact future arrangements entered materially modified company’s adoption 2 investments june 30 2010 consist nontaxable taxable high quality municipal obligations nontaxable taxable us government securities accordance fasb asc topic 320 “investments debt equity securities” company classified entire investment portfolio availableforsale securities secondary resale markets portfolio reported fair value unrealized gains losses included comprehensive income stockholders’ equity realized gains losses included incomeexpense following summary availableforsale securities june 30 2010 june 30 2009 company’s us government securities comprised us government agency debt instruments june 30 2010 company’s investments maturities ranging less one year approximately three years fair values company’s municipal obligations us government agency debt instruments obtained broker quotes using pricing matrices based inputs may include quoted prices identical similar assets municipal us government bond market based various inputs directly indirectly observable certain investment securities shown june 30 2010 fair values less amortized costs therefore contained unrealized losses company evaluated investments determined decline value related company industry specific event june 30 2010 8 56 investments unrealized losses gross unrealized losses related investments due either changes interest rates investments obtained premium given company intent sell investments recovery fair value may maturity current requirement sell investments company consider investments otherthantemporarily impaired june 30 2010 company anticipates full recovery amortized costs respect investments maturity sooner event favorable market interest rate environment duration time investments continuous unrealized loss position june 30 2010 follows 3 inventory stated lower cost determined average cost method approximates firstin firstout market value inventory primarily includes cost material utilized processing company’s products follows adjustments inventory made individual part level estimated excess obsolescence impaired balances reflect inventory lower cost market factors influencing adjustments include changes demand rapid technological changes product life cycle development plans component cost trends product pricing physical deterioration quality concerns revisions adjustments would required factors differ company’s estimates june 30 2010 inventory balances also reflect company’s implemented cost reduction plan occurred second quarter fiscal 2010 primarily associated reduced endovascular activities lower production volume included reduced work schedules connection plan company incurred 944000 pretax unabsorbed overhead expense charge second quarter fiscal 2010 4 select customer agreements st jude medical inc license agreements license agreements st jude medical st jude medical exclusive worldwide rights manufacture market angiosealtm vascular closure device angioseal company receives approximate 6 royalty enduser product sales st jude medical existing component supply contract supply agreement executed st jude medical 2005 company exclusive supplier 100 collagen plug least 30 bioresorbable polymer anchor components angioseal term agreement expires december 2010 part agreement company received 10 million origination fee upon execution consideration company’s ongoing investments collagen research development june 30 2010 company recognized 958460 origination fee remaining 41540 recorded deferred revenue recognized remaining period contract new collagen supply agreement june 23 2010 company entered new twoyear supply agreement st jude medical effective period january 1 2011 december 31 2012 new supply agreement company exclusive outside supplier collagen plugs st jude medical new supply agreement provides calendar year 2011 minimum order levels equivalent approximately 25 fiscal year 2010 annual collagen plug sales calendar year 2012 minimum order levels equivalent approximately 20 fiscal year 2010 collagen plug sales new supply agreement call company supply polymer anchors st jude medical orthovita inc company development manufacturing supply agreement orthovita company develops commercializes products based orthovita’s proprietary vitoss™ bone graft substitute material combination company’s proprietary biomaterials orthovita agreement orthovita agreement company manufactures products orthovita markets sells products worldwide orthovita agreement company receives royalty payments codeveloped vitoss™ vitoss™ foam vitoss™ bioactive foam products based upon orthovita’s net total enduser sales products separate transaction august 2004 company entered agreement assignment agreement whereby company acquired intellectual property rights third party rights vitoss™ technology inventor vitoss™ technology inventor 2600000 assignment agreement company received intellectual property rights inventor previously assigned orthovita also assignment agreement company generally receives royalty sale orthovita products containing vitoss™ technology total received 4035782 entire cost proprietary rights expected amortized approximate 82 month period june 30 2010 company recognized cumulative royalty income 3452283 assignment agreement 583499 yet received company currently anticipates receiving remaining economic benefit relation proprietary rights fiscal 2011 5 concentration credit risk financial instruments potentially subject company significant concentrations credit risk consist primarily cash equivalents investments accounts receivable debt see note 8 company manages cash equivalents investments based established guidelines relative diversification maturities maintain safety liquidity single component company’s investment portfolio represented 11 4 total investments june 30 2010 2009 respectively trade receivables primarily due st jude medical arthrex orthovita represented approximately 40 29 13 company’s total trade receivables respectively june 30 2010 trade receivables companies represented approximately 31 26 22 company’s total trade receivables respectively june 30 2009 royalty receivables primarily due st jude medical orthovita represented approximately 90 9 respectively company’s total royalty receivable balance june 30 2010 royalty receivables st jude medical orthovita represented approximately 83 16 respectively company’s total royalty receivable balance june 30 2009 see note 4 customers’ receivable balances deemed uncollectible would material adverse effect company’s results operations financial condition company performs ongoing credit evaluations customers’ financial conditions require collateral support customer receivables see note 13 additional information regarding significant customer revenue disclosure 6 acquired patents intangible assets costs internally developed patents expensed incurred due long development cycle products company’s inability measure recoverability costs incurred time company acquired portfolios patents intangibles believes beneficial complementary company’s existing intellectual property material processing knowledge platform acquisitions included portfolio puncture closure patents acquired november 1997 patents acquired asset purchase thm biomedical inc thm 2000 certain intellectual property rights related vitoss™ product line acquired third party inventor 2004 see note 4 certain assets macropore biosurgery inc macropore acquired 2007 well smaller purchases company amortizes entire cost acquired patents intangible assets respective remaining periods economic benefit ranging approximately 1 6 years june 30 2010 gross carrying amount patents intangible assets june 30 2010 8677200 accumulated amortization 6628605 amortization expense patents intangible assets 967279 1122937 1075914 fiscal years ended june 30 2010 2009 2008 respectively included expense fiscal year ended june 30 2008 176756 amortization expense related certain patents sold spectranetics table details estimated amortization expense june 30 2010 next five fiscal years patents intangible assets previously acquired company 7 accrued expenses june 30 2010 2009 accrued expenses consisted following company incurred severance charge 1011058 second quarter ended december 31 2009 primarily result voluntary retirement program included line items salary expense consolidated statements income june 30 2010 82277 remaining related severance charge included accrued payroll related compensation 8 debt secured commercial mortgage may 25 2006 company entered agreement 35 million secured commercial mortgage citibank fsb mortgage secured company’s facility land exton pennsylvania bears interest onemonth libor plus 082 loan credit spread june 30 2010 outstanding mortgage balance 314 million remaining principal payments due detailed mortgage contains various conditions borrowing including affirmative restrictive financial maintenance covenants certain significant covenants require company maintain minimum fixed charge coverage ratio ebitda defined mortgage debt service equal greater 150to10 interest rate hedge least 50 percent outstanding principal balance mortgage interest rate protection product reasonably acceptable citibank fsb interest rate swap agreement order hedge interest rate risk mortgage company entered 35 million aggregate 10year fixed interest rate swap agreement swap citibank na may 2006 swap secured company’s facility land exton pennsylvania company using swap cash flow hedge company’s interest payments mortgage swap converts variable libor portion mortgage payments fixed rate 644 562 fixed interest rate plus 082 loan credit spread company follows provisions fasb asc topic 815 “derivatives hedging” account swap cash flow hedge due hedging forecasted interest rate payments record swap fair value consolidated balance sheets value represents estimated amount company would receive pay terminate swap company records marktomarket adjustment end period establishing fair value company includes evaluates dealer quotes counterparty’s ability settle asset liability counterparty’s creditworthiness additionally current interest rates collateralization mortgage swap land building adverse company industry specific events would impact fair value measurement considered company utilizes hypothetical derivative method determining hedge effectiveness period transactions would cause ineffectiveness would include prepayment mortgage adverse company industry specific event would impact fair value measurement would result company reclassifying ineffective portion current earnings impact consolidated statements cash flows conditions underlying swap hedge item change swap considered highly effective portion swap’s gain loss due change fair value reported component accumulated comprehensive loss impact consolidated statements income cash flows june 30 2010 2009 fair value swap unrealized loss position 5542509 3602631 net tax 4502900 2926885 net tax respectively gross unrealized loss position included noncurrent liabilities net tax position included accumulated comprehensive loss consolidated balance sheets interest expense swap recorded earnings fixed rate set forth swap fiscal years ended june 30 2010 2009 2008 amounts recognized current earnings due ineffectiveness amounts excluded assessment hedge effectiveness company anticipate material unrealized losses recognized within next 12 months anticipated transactions mortgage swap occur unless mortgage portion thereof prepaid following table summarizes fair value swap june 30 2010 june 30 2009 consolidated balance sheet following tables summarize swap’s impact accumulated comprehensive loss earnings years ended june 30 2010 2009 9 fair value financial assets financial liabilities company follows provisions fasb asc topic 820 fair value measurement recognition disclosure purposes financial assets financial liabilities remeasured reported fair value reporting period company measures certain financial assets liabilities fair value recurring basis including cash equivalents availableforsale securities swap company’s assessment significance particular input fair value measurement requires judgment may affect valuation financial assets financial liabilities placement within fair value hierarchy categorization based threetier valuation hierarchy prioritizes inputs used measuring fair value follows • level 1 observable inputs quoted prices unadjusted active markets identical assets liabilities • level 2 inputs quoted prices active markets identical assets liabilities inputs quoted prices identical similar assets liabilities inactive markets inputs either directly indirectly observable • level 3 unobservable inputs little market data exists therefore requiring entity develop assumptions following table presents company’s financial assets liabilities measured fair value recurring basis june 30 2010 june 30 2009 company’s money market funds classified along company’s cash balances cash equivalents within consolidated balance sheets money market funds valued quoted prices active markets company follows disclosure provisions fasb asc topic 825 “financial instruments” asc 825 disclosure purposes financial assets financial liabilities measured fair value june 30 2010 financial assets liabilities recorded consolidated balance sheets measured fair value recurring basis include accounts receivable net accounts payable debt obligations carrying value accounts receivable net accounts payable current debt obligations approximate fair value due shortterm nature instruments fair value longterm debt quoted market price available evaluated based among factors interest rates currently available company debt similar terms remaining payments considerations company’s creditworthiness company determined recorded book value longterm debt approximates fair value june 30 2010 due variable libor portion mortgage payments 10 preferred stock company authorized preferred stock consisting 100000 shares 001 par value 25000 designated series junior participating preferred stock discussed 75000 undesignated board directors may authorize issuance preferred stock ranks senior common stock respect payment dividends distribution assets liquidation addition board directors authorized fix limitations restrictions upon payment dividends common stock effective shares preferred stock outstanding board directors without stockholder approval issue preferred stock voting conversion rights could adversely affect voting power holders common stock june 30 2010 2009 shares preferred stock outstanding company present intention issue shares preferred stock except shares series preferred stock defined may issued pursuant stockholders’ rights plan described stockholders’ rights plan june 19 2009 company announced board directors adopted stockholders’ rights plan rights plan designed protect company stockholders potentially coercive takeover practices bids prevent acquiror gaining control company without offering fair price stockholders company adopted plan order give board directors time evaluate respond unsolicited potential takeover attempts rights plan company distributed dividend one preferred stock purchase right share common stock held record close business june 19 2009 rights plan term 10 years expire june 19 2019 unless company earlier redeems rights board directors terminates rights plan right becomes exercisable entitles holder buy one onethousandth share series junior participating preferred stock collectively preferred shares 20000 subject certain conditions plan exercise price may change pursuant certificate designations series junior participating preferred stock series preferred stock 25000 shares series preferred stock authorized issuance share series preferred stock entitle holder thereof 1000 votes matters submitted vote stockholders company holders shares series preferred stock holders shares common stock company capital stock company general voting rights vote together one class matters submitted vote stockholders company holders shares series preferred stock entitled receive declared board directors dividends payable dividends declared shares common stock company amount subject adjustment equal 1000 times aggregate per share amount cash dividends 1000 times aggregate per share amount noncash dividends distributions declared shares company’s common stock june 30 2010 2009 shares series preferred stock outstanding 11 stock repurchase program time company made repurchases stock authorized various stock repurchase programs established company’s board directors miscellaneous transactions june 16 2010 company announced board directors approved stock repurchase program allowing company repurchase total 30 million issued outstanding shares common stock year ended june 30 2010 company repurchased retired 1794705 shares common stock total cost approximately 41309153 average market price 2302 per share using available cash commissions related costs associated stock repurchases totaled 55788 additional 34400 shares repurchased june 2010 settled july 2010 cost 811054 average market price per share 2358 june 30 2010 29188946 remaining available repurchase current stock repurchase program amount remaining repurchase company’s prior stock repurchase programs year ended june 30 2009 company repurchased retired 806666 shares common stock cost 19294595 average market price 2392 per share using available cash commissions related costs associated stock repurchases totaled 32265 additional 3500 shares repurchased june 2009 settled july 2009 cost 87279 average market price per share 2494 year ended june 30 2008 company repurchased retired 867839 shares common stock cost 24426699 average market price 2815 per share using available cash commissions related costs associated stock repurchased totaled 36040 share repurchases settled june 30 2008 12 sharebased compensation company accounts sharebased compensation plans accordance asc 718 compensation expense related sharebased awards classified consolidated statements income within line items salary consulting expense respect award recipients recorded awards’ relevant vesting periods compensation expense related sharebased awards granted members board directors recorded component selling general administrative expense consolidated statements income following table provides summary company’s sharebased compensation expense sharebased compensation expense fiscal year 2008 included onetime accelerated vesting charge 2974033 described detail accelerated vesting equity awards acquisition ramius capital group llc affiliates 20 percent company’s outstanding common stock august 30 2007 constituted “change control” defined employee plan existed result outstanding unvested stock options cashsettled stock appreciation rights sars nonvested stock awards held officers employees directors others plan automatically became vested case options stock appreciation rights exercisable full part accelerated vesting unvested stock option grants purchase 114405 shares company’s common stock became fully vested exercisable options nonemployee members board directors held options purchase 37500 shares nonexecutive employees held options purchase remaining 76905 shares unvested stock options held executive officers compensation expense would otherwise recorded weighted average period 185 years 920131 607286 net related tax effects recognized accelerated vesting charge fiscal year ended june 30 2008 total 94537 shares nonvested stock awards became fully vested released market value 2397 per share closing price company’s common stock august 30 2007 nonemployee members board directors held 34780 shares 45031 shares held officers employees held remaining 14726 shares compensation expense 1624142 1071934 net related tax effects otherwise would recorded weighted average period 136 years recognized fiscal year ended june 30 2008 accelerated vesting charge addition 283690 sars also became fully vested exercisable august 30 2007 sars 179690 awards granted employees stock price 2988 remaining 104000 sars awards granted officers stock price 3136 accelerated vesting charge 429760 283642 net related tax effects recognized fiscal year ended june 30 2008 stock options stock options granted officers employees members board directors company well nonemployee outside consultants company’s seventh amended restated kensey nash corporation employee incentive compensation plan prior versions incentive compensation plan employee plan company also nonemployee directors’ stock option plan directors’ plan shares available new awards plan awards type granted previously directors’ plan granted employee plan fair value option grant estimated date grant using blackscholes optionpricing model uses assumptions noted following table options exercisable maximum term ten years date grant typically vest periods zero four years grant date expected volatilities based historical volatility company’s common stock factors company uses historical data estimate option exercise employee termination within valuation model separate groups employees similar historical exercise behavior considered separately valuation purposes expected terms options derived historical exercise behavior represent periods time options granted expected outstanding total intrinsic value options exercised years ended june 30 2010 2009 2008 787511 5052764 7717073 respectively summary stock option activity plans fiscal years ended june 30 2010 2009 2008 follows nonvested stock awards nonvested stock awards granted nonemployee members board directors executive officers certain management company nonemployee outside consultant pursuant employee plan generally vest three equal annual installments based solely continued employment service applicable company nonvested stock awards granted executive officers management nonemployee members board directors nonemployee consultants usually referred restricted stock asc 718 reserves term fully vested outstanding shares sale contractually governmentally prohibited specified period time fair value based upon closing price company’s common stock date grant total fair value shares vested years ended june 30 2010 2009 2008 496692 271714 2487246 respectively following table outlines nonvested stock award activity fiscal years ended june 30 2010 2009 2008 cash settled stock appreciation rights cashsettled stock appreciation rights sars awards granted eligible employees fiscal year ended june 30 2007 provided participant right receive payment cash upon exercise appreciation market value specified number shares company’s common stock award’s exercise price sars awards granted fiscal years ended june 30 2010 2009 2008 pershare exercise price sar equal closing market price share company’s common stock date grant november 14 2007 company offered buy back sars current eligible employees excluding executive officers fair market value buyout price based closing price company’s common stock december 14 2007 offer resulted company purchasing 173940 sars buyout price 647 per sar total 1125392 excluding company’s portion payroll taxes paid participating eligible employees represented approximately 99 participation eligible employees sars outstanding june 30 2010 average fair market value remaining sar 139 related liability remaining sars 131836 sars continue remeasured reporting period awards settled cash settled sars exercised repurchased company’s fiscal years 2010 2009 total 1126457 excluding company payroll tax sharebased liabilities paid cash settled sars exercised repurchased fiscal year 2008 following table outlines cashsettled sar award activity fiscal years ended june 30 2010 2009 2008 grants fiscal year fair value sar award remeasured reporting period using blackscholes optionpricing model uses assumptions noted following table sars exercisable maximum term five years date grant originally vest period three years grant date expected volatilities based historical volatility company’s common stock factors company uses historical data estimate sar employee termination behavior within valuation model separate groups employees similar historical exercise behavior considered separately valuation purposes riskfree rate periods within contractual life sar based us treasuries constant maturities effect time grant 13 segment reporting company’s operations products aggregated single reportable segment since similar economic characteristics production processes types customers distribution methods provisions fasb asc topic 280 “segment reporting” asc 280 operating segments identified components enterprise separate discrete financial information available evaluation chief operating decisionmaking group making decisions regarding allocate resources assess performance company generates revenue sale biomaterials products sold primarily cardiovascular orthopaedic sports medicine spinal general surgery markets largest biomaterials customers include st jude medical arthrex orthovita company also recognizes revenue shipment certain endovascular products manufactured manufacturing licensing agreement well recognizes revenue generated product development programs spectranetics company also receives royalty income generated primarily net enduser sale angioseal units st jude medical sales vitoss™ foam vitoss™ bioactive foam products orthovita net sales product line reconciliation total revenue follows years ended june 30 2010 2009 2008 revenues st jude medical arthrex orthovita represented following percentages total revenues company revenues attributed country based location customer company’s business directly dependent foreign operations company’s sales customers outside us significant however portion company’s revenues including sales royalties dependent us based customers selling endusers outside us year ended june 30 2008 company’s revenues associated foreign countries included direct sales endovascular products product lines subsequently sold spectranetics may 2008 one country company sells products us represented 10 company’s revenues fiscal 2010 addition company’s longlived assets located us company’s revenues categorized geographically 14 commitment contigencies certain compensation employment agreements company entered employment agreements certain named executive officers june 30 2010 employment agreements provided among things annual base salaries aggregate amount less 1615663 date fiscal 2012 purchase commitments june 30 2010 company outstanding noncancelable cancelable purchase commitments amount 1093443 related inventory capital expenditures goods services research development contractual obligations development regulatory services agreement spectranetics amended company’s contributions limited maximum amount 2750000 toward expenses associated clinical studies obtain approval fda certain nextgeneration endovascular products reduced total cumulative expenses incurred june 30 2010 approximately 30000 see note 19 additional information discussion agreement 15 retirement plan company voluntary 401k salary reduction plan trust 401k plan employees least 21 years age eligible participate company provides 50 discretionary matching contribution 6 employee’s total salaried compensation employee contributions total company contributions 401k plan fiscal years ended june 30 2010 2009 2008 388720 427540 490658 respectively 16 income taxes income tax expense net income taxes earned within outside united states shown provision income taxes composed following differences company’s income tax expense income tax expense benefit computed using us federal income tax rate follows deferred taxes significant components company’s deferred tax assets liabilities follows portion company’s deferred tax asset offset valuation allowance relating state net operating loss nol carryforwards due restrictions imposed uncertainty surrounding use valuation allowance reduces deferred tax assets amount represents management’s best estimate amount deferred tax assets likely realized june 30 2010 company state nol carryforward approximately 600 million expire 2028 longer federal nol carryforward company recorded full valuation allowance state net operating losses approximately 600 million company longer foreign nol result sale endovascular business may 2008 company awaiting congressional approval extending research experimentation tax credit calendar year 2010 unless time tax credit extension approved company claim research development tax credits december 31 2009 component tax provision related ongoing performance qualified research development previously approved october 2008 congressional extension tax credit fiscal 2009 company recorded tax credit adjustments tax provision also retroactive adjustment second quarter ended december 31 2008 company recorded tax credits 265249 464362 219232 fiscal years ended june 30 2010 2009 2008 respectively uncertain tax positions company adopted provisions fasb asc subtopic 74010 “income taxes” july 1 2007 connection adoption company recorded net decrease retained earnings 204615 unrecognized tax liabilities plus 18330 potential interest penalties amount unrecognized tax benefits june 30 2010 2009 2008 117216 140650 193132 respectively gross unrecognized tax benefits recognized 115359 139183 176795 would impact company’s tax rate june 30 2010 2009 2008 respectively company recorded interest penalties 1222 1211 14667 fiscal years ended june 30 2010 2009 2008 respectively interest penalties included interest expense income loss respectively consolidated statements income changes company’s uncertain tax positions years ended june 30 2010 2009 2008 follows company subsidiaries file us federal various state income tax returns company longer subject us federal income tax examination years prior fiscal 2006 due expiration applicable statutes limitation company expect total amount unrecognized tax benefits change significantly next 12 months 17 earnings per share following table shows reconciliation numerators denominators basic diluted eps calculations income numerator weighted average number shares denominator 18 quarterly financial data unaudited summarized quarterly results operations company years ended june 30 2010 2009 presented quarterly total year earnings per share calculated independently based weighted average number shares outstanding period 19 sale endovascular business may 30 2008 company completed sale endovascular business spectranetics pursuant asset purchase agreement dated may 12 2008 company sold spectranetics assets related quickcat™ quickcat thromcat® thromcat safecross® safecross product lines including stock european subsidiary kensey nash europe gmbh 100 million cash payment closing opportunity additional 80 million research development milestone payments 60 million cumulative sales milestone payment additional royalty payments based future sales thromcat safecross products transition manufacturing products company spectranetics payments related agreements described may 30 2008 company spectranetics also entered manufacturing licensing agreement pursuant company agreed manufacture spectranetics endovascular products acquired spectranetics asset purchase agreement minimum six months quickcat initial three year period ending may 2011 thromcat safecross spectranetics purchase products specified time periods spectranetics agreed manufacturing period would pay transfer prices products based company’s cost manufacture products plus percentage enduser sales price thromcat safecross products additionally spectranetics agreed company’s manufacture thromcat safecross products transferred spectranetics obligated pay company royalty enduser sales products spectranetics extended company’s manufacturing period quickcat product december 31 2009 company’s second quarter fiscal 2010 last quarter reflecting product sales quickcat device quickcat manufacturing transferred spectranetics december 31 2009 spectranetics obligation make royalty payments company related enduser sales quickcat product previously disclosed spectranetics publicly announced discontinuation sales safecross product line company’s second quarter fiscal 2010 spectranetics’ decision discontinue safecross product line negatively impacts company’s ability receive future royalties based sales safecross product minimum delays company’s achievement 60 million cumulative sales milestone based upon sales safecross thromcat quickcat products june 2010 company’s manufacturing endovascular product line limited thromcat product second quarter fiscal 2010 pursuant terms manufacturing licensing agreement spectranetics company notified spectranetics begin manufacture thromcat product end threeyear manufacturing period expected fourth quarter fiscal 2011 following transition manufacturing thromcat product spectranetics pay company predetermined royalty rate enduser sales thromcat product amount royalty based upon timing reason manufacturing transfer certain cases upon amount revenue generated thromcat products applicable year royalty subject reduction depending upon scope patent protection obtained thromcat product may 30 2008 company spectranetics also entered development regulatory services agreement pursuant company agreed conduct work develop obtain regulatory approval fda certain nextgeneration safecross thromcat products company’s expense behalf spectranetics owns intellectual property resulting development work clinical studies required obtain approval fda nextgeneration products costs shared equally company spectranetics however pursuant amendment development regulatory services agreement company’s contributions limited maximum amount 2750000 toward clinical studies spectranetics pay company 80 million upon completion product development activities regulatory approvals certain nextgeneration products milestones recorded revenue recognized period agreement including date receipt latest expected regulatory approvals andor completion product development activities fiscal 2009 company announced accomplishment two milestones agreement resulted 25 million payments company recognized 577000 625000 respectively revenue milestones fiscal years 2010 2009 item 9 item 8 financial statements supplementary data financial statements supplementary data required item set forth part iv item 15 annual report form 10k item 9 item 8 financial statements supplementary data financial statements report independent auditors listed item 14 included annual report form 10k item 9 item 8 financial statements supplementary data financial statements supplementary data required item set forth item 15 annual report form 10k item 9 item 8 financial statements supplementary data following consolidated financial statements related notes thereto kensey nash corporation report independent registered public accounting firm filed part form 10k schedules omitted either applicable information required therein shown consolidated financial statements notes thereto report independent registered public accounting firm board directors stockholders kensey nash corporation exton pennsylvania audited accompanying consolidated balance sheets kensey nash corporation subsidiaries “company” june 30 2011 2010 related consolidated statements income stockholders’ equity cash flows three years period ended june 30 2011 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position kensey nash corporation subsidiaries june 30 2011 2010 results operations cash flows three years period ended june 30 2011 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting june 30 2011 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated september 12 2011 expressed unqualified opinion company’s internal control financial reporting deloitte touche llp philadelphia pennsylvania september 12 kensey nash corporation consolidated balance sheets see notes consolidated financial statements kensey nash corporation consolidated statements income see notes consolidated financial statements kensey nash corporation consolidated statements stockholders’ equity see notes consolidated financial statements kensey nash corporation consolidated statements cash flows see notes consolidated financial statements kensey nash corporation notes consolidated financial statements years ended june 30 2011 2010 2009 1 summary significant accounting policies description companykensey nash corporation incorporated delaware 1984 medical device product development manufacturing company history innovation success bringing new products market company focuses regenerative medicine creating products technologies help human body heal company recognized leader innovative product development well broad portfolio resorbable biomaterials products company extensive range products sold strategic partners multiple large medical markets including cardiology orthopaedic sports medicine spinal craniomaxillofacial cmf trauma general surgery kensey nash corporation incorporated delaware august 6 1984 january 28 2011 company acquired substantially assets certain operational liabilities nerites corporation nerites may 24 2011 company acquired certain operational assets certain liabilities relating business product lines norian corporation norian see note 5 additional information acquisitions company’s acquisitions added additional revenues expenses company’s results operations comparison historical operating results acquisitions included company’s consolidated financial statements beginning respective acquisition date principles consolidation basis presentationthe consolidated financial statements include accounts kensey nash corporation wholly owned subsidiaries company intercompany transactions balances eliminated preparation financial statements conformity accounting principles generally accepted united states america us gaap notes financial statements requires management make estimates assumptions estimates assumptions may differ actual results affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements well reported amounts revenues expenses cash flows periods presented subsequent eventsthe company evaluated events transactions subsequent balance sheet date based evaluation exception company’s august 2011 cash advance made orteq ltd orteq sports medicine orteq disclosed note 8 company aware events transactions occurred subsequent balance sheet date prior filing form 10k would require recognition disclosure consolidated financial statements cash equivalentscash cash equivalents represent cash banks highlyliquid shortterm investments original maturity less three months highlyliquid shortterm investments readily convertible known amounts cash near maturity present insignificant risk changes value changes interest rates fair value financial instrumentsthe carrying amounts financial instruments including cash equivalents investments accounts receivable accounts payable debt approximated fair value june 30 2011 2010 see note 2 note 11 regarding fair value determination certain instruments business combinationsin accordance financial accounting standards board fasb accounting standards codification asc topic 805 “business combinations” asc 805 company allocates purchase price acquired companies tangible intangible assets acquired liabilities assumed based estimated fair values valuations performed assist determining fair values assets acquired liabilities assumed requires management make significant estimates assumptions particular respect intangible assets management makes estimates fair value based upon assumptions believed reasonable estimates based part historical experience information obtained management acquired companies expectations future cash flows transaction costs restructuring costs associated business combination transaction expensed incurred inprocess research development iprd business combination accounted indefinitelived asset balance sheet associated research development efforts completed abandoned classified indefinitelived asset acquired iprd would subject impairment testing company would determine useful life intangible asset completion abandonment associated research development efforts alternatively asset acquisition company accounts iprd accordance fasb asc topic 730 “research development” whereby costs intangible assets purchased others particular research development project alternative future uses research development projects otherwise therefore separate economic values research development costs time costs incurred would expensed capitalized alternative future use comprehensive incomethe company accounts comprehensive income disclosure provisions fasb asc topic 220 “comprehensive income” accordingly accumulated comprehensive lossincome shown consolidated statements stockholders’ equity june 30 2011 2010 2009 comprised net unrealized gains losses company’s availableforsale securities change interest rate swap value net tax effectsbenefit fiscal 2011 2010 2009 comprehensive loss 62440 218826 658775 respectively property plant equipmentproperty plant equipment consist primarily land building machinery furniture equipment construction progress recorded cost maintenance repairs typically expensed incurred building machinery furniture equipment depreciated using straightline method useful lives ranging two 30 years depreciation expense property plant equipment 5138714 5212039 5367713 fiscal years ended june 30 2011 2010 2009 respectively fiscal 2011 connection acquisition assets norian company acquired manufacturing development facility west chester pennsylvania consisting approximately 37000 square feet see note 5 additional information fiscal 2010 fire occurred contained small manufacturing area within company’s corporate headquarters building located exton pennsylvania company’s property insurance policy covered remediation efforts fixed asset replacements subject 25000 deductible company recognized gain 775000 within cost products sold upon final settlement insurance carrier remediation recovery efforts completed total 13 million received insurance proceeds remediation efforts replacement value fixed assets expenses company replaced damaged fixed assets total value approximately 480000 remaining insurance proceeds used company pay related expenses added general company funds total insurance proceeds including amounts relating outside remediation services fixed assets classified within investing activities section fiscal 2010 consolidated statement cash flows balance insurance proceeds used company pay related expenses classified within operating activities section fiscal 2010 consolidated statement cash flows goodwillgoodwill represents excess cost fair market value identifiable net assets thm biomedical inc thm company acquired september 2000 macropore biosurgery business unit macropore acquired may 2007 acquisitions accounted provisions asc 805 fasb asc topic 350 “intangiblesgoodwill other” net carrying amount goodwill june 30 2011 4366273 remained unchanged year ended june 30 2010 accounting standards provide goodwill intangible assets indefinite useful lives amortized subject impairment tests annual basis interim date certain events circumstances indicate impairment loss may incurred intangible assets definite useful lives continue amortized respective useful lives annual assessments june 30 2011 2010 2009 indicated goodwill impaired impairment longlived assetslonglived assets reviewed impairment whenever events circumstances indicate carrying amount asset may recoverable undiscounted expected future cash flows generated related asset less carrying value asset company measures amount impairment comparing carrying amount asset fair value estimation fair value generally measured discounting expected future cash flows accounts receivable allowancethe company trade receivable allowance balance 5867 june 30 2011 13513 june 30 2010 2009 included selling general administrative expense fiscal years ended june 30 2011 2010 2009 write offs totaling 7646 0 1200 respectively revenue recognition sales revenue company recognizes revenue accordance fasb asc subtopic 60510s99 “revenue recognition” asc 60510s99 sales revenue recognized products shipped services completed advance payments received products services recorded deferred revenue recognized product shipped services performed company reduces sales revenue estimated customer returns allowances company recorded net sales return provisions credits discounts 30064 years ended june 30 2011 2010 33000 year ended june 30 2009 addition company accounts customer arrangements containing multiple revenue elements accordance fasb asc subtopic 60525 “multiple element arrangements” asc 60525 company considers variety factors determining appropriate method accounting multiple elements agreements including whether various elements separated accounted individually separate units accounting company’s multiple element arrangements combined single unit accounting revenues deferred recognized expected period performance specific methodology recognition revenue determined casebycase basis according facts circumstances applicable agreement upfront nonrefundable payments standalone value recorded deferred revenue received recognized revenues expected period performance company evaluates milestone payments individual basis recognizes revenue nonrefundable milestone payments earnings process complete payment reasonably assured nonrefundable milestone payments related arrangements company continuing performance obligations recognized using contingencyadjusted performance model period performance revenue recognized milestone proportionately extent performance period date remainder ratably spread remaining performance period arrangement company also recognizes grant revenue research development related us government programs period related expenses incurred royalty income company recognizes royalty revenue end quarter relevant net total enduser product sales dollars reported customers company quarter royalty payments typically received within 45 days end calendar quarter research development costsresearch development costs charged expense incurred income taxesthe company accounts income taxes provisions fasb asc subtopic 740 “income taxes” see note 18 earnings per shareearnings per share eps calculated accordance fasb asc topic 260 “earnings per share” asc 260 basic diluted eps computed using weighted average number shares common stock outstanding common equivalent shares options nonvested stock awards included diluted computation effect dilutive see note 19 nonvested stock awards included years ended june 30 2011 2010 2009 antidilutive options purchase shares company’s common stock outstanding years ended june 30 2011 2010 2009 included computation diluted eps options would antidilutive shown table sharebased compensationthe company accounts sharebased compensation plans accordance fasb asc topic 718 “compensationstock expense” asc 718 whereby sharebased compensation cost measured grant date based estimated fair value award recognized expense income statement requisite service period company generally recognizes compensation expense sharebased awards granted relevant vesting period awards fair value stock options cashsettled stock appreciation rights sars determined using blackscholes model relevant expense amortized applicable vesting period stock options marked market sars see note 14 compensation expense related sharebased awards classified consolidated statements income within line items salary consulting expense respect award recipients recorded awards’ relevant vesting periods compensation expense related sharebased awards granted members board directors recorded component selling general administrative expense consolidated statements income derivative instruments hedging activitiesthe company recognizes derivative cash flow hedge measures instrument fair value either asset liability balance sheet depending company’s rights obligations derivative contract see note 11 change derivative’s fair value recorded period accumulated comprehensive loss consolidated balance sheets new accounting pronouncements adopted october 2009 fasb issued asu 200913 “revenue recognition multipledeliverable revenue arrangements fasb asc topic 605” amended asc subtopic 60525 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 company fiscal year ending june 30 2011 fiscal 2011 alternatively adoption could made retrospective basis early application permitted statement provides principles allocation consideration among multipleelements based element’s estimated selling price vendorspecific vsoe thirdparty evidence tpe value available statement allows flexibility identifying accounting separate deliverables arrangement introduces estimated selling price method valuing elements bundled arrangement vsoe tpe selling price available significantly expands related disclosure requirements company’s prospective adoption new accounting update july 1 2010 significant impact company’s consolidated financial position results operations cash flows however company continue assess impact future arrangements entered materially modified company’s adoption april 2010 fasb issued asu 201017 “milestone method revenue recognition fasb asc topic 605” effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 company fiscal 2011 statement provides criteria recognizing achievement milestone entirety revenue period milestone achieved milestone meets criteria considered substantive made inception arrangement company’s prospective adoption new accounting update july 1 2010 significant impact company’s consolidated financial position results operations cash flows however company continue assess impact future arrangements entered materially modified company’s adoption adopted june 2011 fasb issued accounting standards update asu 201105 “comprehensive income topic 220presentation comprehensive income” require entity present total comprehensive income components net income components comprehensive income either single continuous statement comprehensive income two separate consecutive statements asu 201105 eliminates option present components comprehensive income part statement equity asu 201105 effective company first quarter fiscal 2013 company’s pending adoption asu 201105 expected material effect company’s financial position results operations cash flows change required presentation format may 2011 fasb issued asu 201104 “amendments achieve common fair value measurement disclosure requirements us gaap international financial reporting standards ifrs topic 820fair value measurement” asu 201104 provide consistent definition fair value ensure fair value measurement disclosure requirements similar us gaap ifrs asu 201104 effective company third quarter fiscal 2012 company currently evaluating impact pending adoption asu 201104 consolidated financial statements december 2010 fasb issued asu 201029 “disclosure supplementary pro forma information business combinations topic 805business combinations” asu 201029 improve consistency pro forma disclosures calculated additionally asu 201029 enhances disclosure requirements requires description nature amount material nonrecurring pro forma adjustments directly attributable business combination asu 201029 effective company fiscal 2012 applied prospectively business combinations entered fiscal years beginning december 15 2010 company’s fiscal 2012 company adopt asu 201029 fiscal 2012 expected material impact consolidated financial statements 2 investments june 30 2011 consist nontaxable taxable high quality municipal obligations accordance fasb asc topic 320 “investmentsdebt equity securities” company classified entire investment portfolio availableforsale securities secondary resale markets portfolio reported fair value unrealized gains losses included comprehensive income stockholders’ equity realized gains losses included incomeexpense consolidated statement operations june 30 2011 investments unrealized losses within company’s portfolio following summary availableforsale securities june 30 2011 june 30 2010 june 30 2011 company’s investments maturities ranging less one year approximately two years company’s us government securities matured october 2010 comprised us government agency debt instruments fair values company’s municipal obligations us government agency debt instruments obtained broker quotes using pricing matrices based inputs may include quoted prices identical similar assets municipal us government bond market based various inputs directly indirectly observable 3 inventory stated lower cost determined average cost method approximates firstin firstout market value inventory primarily includes cost material utilized processing company’s products follows adjustments inventory made individual part level estimated excess obsolescence impaired balances reflect inventory lower cost market factors influencing adjustments include changes demand rapid technological changes product life cycle development plans component cost trends product pricing physical deterioration quality concerns revisions adjustments would required factors differ company’s estimates june 30 2011 gross inventory balance includes inventory acquired result company’s may 2011 acquisition certain operational assets certain liabilities relating business norian see note 5 company “steppedup” acquired inventory fair value acquisition date accordance asc 805 company’s purchase accounting adjustment fair value inventory commonly referred “steppedup value” 1286016 represented estimated capitalized manufacturing profit acquired inventory date acquisition company expensed 257203 fourth quarter fiscal 2011 nonrecurring noncash charge cost products sold recognized expected inventory turnover period related inventory sold approximates 6 month period capitalized manufacturing profit added inventory purchase accounting expected sold within approximately 6 months date acquisition company’s second quarter fiscal 2012 june 30 2010 inventory balances also reflect company’s implemented cost reduction plan occurred second quarter fiscal 2010 primarily associated reduced endovascular activities lower production volume included reduced work schedules connection plan company incurred 944000 pretax unabsorbed overhead expense charge second quarter fiscal 2010 4 select customer agreements select customer agreements otherwise discussed elsewhere notes consolidated financial statements st jude medical inc license agreementsunder license agreements st jude medical st jude medical exclusive worldwide rights manufacture market angioseal™ vascular closure device angioseal company receives approximate 6 royalty enduser product sales st jude medical prior component supply contractunder supply agreement executed st jude medical 2005 company exclusive supplier 100 collagen plug least 30 bioresorbable polymer anchor components angioseal term agreement expired december 31 2010 part agreement company received 10 million origination fee upon execution consideration company’s ongoing investments collagen research development december 31 2010 company recognized full 10 million origination fee company’s first second quarters fiscal 2011 st jude medical purchased approximately 81 million angioseal components prior component supply contract current collagen supply agreementon june 23 2010 company entered new twoyear supply agreement st jude medical effective period january 1 2011 december 31 2012 new supply agreement company exclusive outside supplier collagen plugs st jude medical new supply agreement provides contractual minimum order levels collagen plugs calendar years 2011 2012 company’s third fourth quarters fiscal 2011 st jude medical fulfilled calendar 2011 contractual minimum order levels new supply agreement approximately 4 million collagen plug sales company june 30 2011 st jude medical placed calendar 2012 order approximately 64 million collagen plugs calendar 2012 order exceeded contractually minimum level provides collagen plug sales recognized company ships product company’s second half fiscal 2012 first half fiscal 2013 new supply agreement call company supply polymer anchors st jude medical orthovita inc company development manufacturing supply agreement orthovita company develops commercializes products based orthovita’s proprietary vitoss™ bone graft substitute material combination company’s proprietary biomaterials orthovita agreement orthovita agreement company manufactures products orthovita markets sells products worldwide orthovita agreement company receives royalty payments codeveloped vitoss™ vitoss™ foam vitoss™ bioactive foam products based upon orthovita’s net total enduser sales products separate transaction august 2004 company entered agreement assignment agreement whereby company acquired intellectual property rights third party rights vitoss™ technology inventor vitoss™ technology inventor 2600000 assignment agreement company received intellectual property rights inventor previously assigned orthovita also assignment agreement company primarily receives royalty sale orthovita products containing vitoss™ technology total received 4035782 entire cost proprietary rights expected amortized approximate 83 month period june 30 2011 company recognized cumulative royalty income 4018316 assignment agreement 17466 yet received company currently anticipates receiving remaining economic benefit relation proprietary rights first quarter fiscal 2012 5 acquisitions asset acquisition nerites corporation january 2011 company acquired substantially assets certain operational liabilities nerites privatelyheld development stage company based wisconsin 19741761 plus acquisitionrelated costs 326673 approximately 167 million purchase price paid acquisition date financed company’s available cash investments hand remaining 30 million 15 million reported component current liabilities noncurrent liabilities consolidated balance sheet june 30 2011 held back company terms acquisition security certain potential nerites indemnification obligations expected financed cash hand 30 million holdback amount 15 million released first second anniversaries acquisition date nerites extent holdback amount applied toward indemnification obligations nerites surgical adhesive based biomaterials’ technology company founded 2004 design develop products technology inspired mussel adhesive proteins company accounted transaction asset acquisition based evaluation accounting guidance asc topic 805 considering early research stage nerites’ technology company concluded acquired net assets nerites constitute business defined asc 805 due incomplete nature inputs absence processes market participant perspective acquisition date nerites spent approximately 142 million ongoing research initiatives targeted developing three potential platform technologies researching prior acquisition liquid adhesivessealants thin film adhesives antifoulingantibacterial coating capabilities nerites’ early research stage technology based complex chemistry produces adhesive material novel unproven previously unknown within medical device community nerites’ technology intellectual property primarily focus chemical formulation involved creating molecule adhesive material time acquisition nerites still testing feasibility adhesive technology primarily focused identifying mechanical physical properties reaction attributes adhesive raw material serve starting point medical device substantial additional research development required finalize raw material formulation unique processes specific formulation needs developed enable formulation ability manufactured commercially viable medical device risk marketable material formulation may never developed ultimately medical device would potentially need complete clinical trials receive regulatory approvals prior potential commercialization accounting transaction asset acquisition company initially assigned value consideration transferred plus acquisition related costs tangible assets identifiable intangible assets acquired operational liabilities assumed based fair values date acquisition additionally company allocated value identifiable intangible assets based relative fair values differ significantly fair values company assessed fair value assets including intangible assets iprd using variety methods including presentvalue models asset initially measured fair value perspective market participant accounting asset acquisitions requires extensive use accounting estimates judgments allocate total cost acquisition tangible intangible assets acquired liabilities assumed including iprd management responsible valuation considered number factors including internal third party valuations appraisals following summary allocation total cost acquisition approximate 18 million acquired intangibles 1588558 assigned knowhow related nerites’ adhesive technology estimated useful life 25 years based estimated remaining period economic benefit technology 159868 assigned assembled workforce estimated useful life two years 64756 assigned government grant applications estimated useful life two years acquired iprd asset acquisition accounted accordance fasb asc topic 730 “research development” asc 730 date acquisition company determined development projects underway nerites yet reached technological feasibility research process alternative future uses accordingly acquired iprd charged expense consolidated statements income acquisition date acquired iprd charge expected deductible 15year period income tax purposes 18233006 value assigned acquired iprd determined using multiperiod excess earnings method mpeem attribution model income approach incorporates estimating costs develop acquired technology commercially viable medical devices estimating resulting net cash flows projects discounting estimated net cash flows present value company also considered tangible intangible assets required successful exploitation technology resulting acquired iprd projects adjusted estimated future cash flows charge reflecting contribution value assets contributory tangible intangible assets include working capital fixed assets knowhow assembled workforce government grant applications resulting estimated net cash flows projects based management’s estimates cost products sold operating cost expenses income taxes associated projects market rate return utilized based market participant data discount net cash flows present value due nature forecast risk associated projected growth profitability research projects discount rate 365 percent considered appropriate acquired iprd discount rate commensurate project’s stage development risks relative technology’s feasibility viability commercial acceptance acquisition date company planned develop portfolio hybrid adhesivebased products integrate extracellular matrix ecm collagen polymer technology platforms applications general neurologic plasticreconstructive orthopaedic urologic cardiovascular thoracic surgical specialties initial acquired iprd product targets included devices 1 repairing defects abdominal walls 2 meniscal tears 3 articular cartilage resurfacing 4 dural membranes 5 gastrointestinal tracts date acquisition five projects expected utilize adhesive technology 100 dependent developing adhesive raw material described date acquisition company expected spend approximately 250 million next seven years bring five projects development technological feasibility date acquisition assuming research development program create adhesive raw material successful company expected begin receiving estimated revenues five inprocess projects fiscal 2013 2017 depending project determining portion total cost acquisition allocate acquired iprd required company make significant estimates assumptions based unobservable inputs including limited estimates timing expected costs complete acquired iprd projects ability manufacture commercialize products projections marketing authorization regulatory approvals relevant market sizes penetration growth factors current expected trends technology product life cycles nature expected timing new product introductions company competitors estimates future cash flows product sales resulting completed products inprocess projects appropriate discount rates probability rates company believed foregoing estimates assumptions used acquired iprd analysis reasonable based upon company’s best estimate likely outcomes clinical development given available facts circumstances time acquisition assurance given however underlying assumptions used estimate expected project sales development costs profitability events associated projects ultimately prove appropriate product development projects successful revenue profitability company may adversely affected future periods additionally value acquired intangible assets may become impaired asset acquisition norian may 24 2011 date acquisition company completed acquisition certain operational assets certain liabilities relating business product lines norian wholly owned subsidiary synthes inc synthes pursuant asset purchase agreement related property purchase agreement total purchase price approximately 26 million 22 million pursuant asset purchase agreement 4 million pursuant property purchase agreement date acquisition company paid synthes total cash consideration 11855959 company’s available cash hand company required pay remaining 14 million earlier date transfer manufacturing operation purchased west chester pennsylvania facility company’s corporate headquarters facility located exton pennsylvania completed 18month anniversary date acquisition 14 million deferred payment classified company longterm liability may 24 2011 company also entered supply agreement synthes usa sales llc subsidiary synthes provides company exclusive manufacturer supplier norian product lines acquired company asset purchase agreement pursuant synthes purchase requirements products exclusively company terms set forth supply agreement supply agreement effective date acquisition term 10 years automatically renew successive twoyear terms also may 24 2011 company entered research development agreement synthes develop certain related future products norian engaged development manufacturing marketing bone repair cement proprietary cancellous bone replacement material designed use structurally compromised cancellous bone additionally norian also manufactured sold related delivery systems including mixers delivery devices needles sale norian synthes result requirement synthes norian divest norian business agreements entered october 2010 us department justice office inspector general department health human services “oig” sale consummated resolve investigation related indictment synthes norian four individuals executives synthes period question charging violations us food drug cosmetic act connection certain marketing promotional practices involving norian corporation products period may 2002 july 2004 filed united states attorney’s office eastern district pennsylvania agreements synthes agreed pay fines also agreed divest norian business accordance asc 805 company accounted asset acquisition using purchase method accounting us gaap purchase method accounting total purchase price allocated tangible intangible acquired assets assumed liabilities norian based respective estimated fair values date acquisition approximate 26 million purchase price allocated based upon estimates fair value assets acquired liabilities assumed independent valuation specialists conducted valuation assist management company determining estimated fair values property machinery equipment intangibles company’s management responsible internal third party valuations appraisals work performed independent valuation specialists considered management’s estimates fair values reflected following summarizes estimated allocation fair values assets acquired liabilities assumed acquisition date based purchase price allocation fair value identifiable net assets acquired exceeded fair value consideration paid primarily result fair values assigned acquired building land well additional steppedup inventory fair value represents estimated capitalized manufacturing profit acquired inventory company recognized gain bargain purchase net assets acquired deferred taxes 514146 fourth quarter fiscal year 2011 result fair value net assets acquired exceeding purchase price company reported 514146 gain bargain purchase deferred taxes included within selling general administrative consolidated statements income year ended june 30 2011 company incurred june 30 2011 total 506000 acquisition related costs including professional legal fees related acquisition expensed incurred accordance asc 805 reported component selling general administrative expense consolidated statements income year ended june 30 2011 purchase method accounting company assigned 13790000 total purchase price intangible asset customer relationship amortized remaining period economic benefit 15 years reported component selling general administrative expense company reported depreciation expense associated building machinery furniture equipment component cost products sold consolidated statements income year ended june 30 2011 company acquired inventory 7511396 included company’s purchase accounting adjustment fair value inventory commonly referred “steppedup value” 1286016 representing estimated capitalized manufacturing profit acquired inventory company record nonrecurring noncash charge cost products sold recognized expected inventory turnover period related inventory sold approximate 6 month period date acquisition company’s second quarter fiscal 2012 company expensed 257203 fourth quarter fiscal 2011 included within cost products sold consolidated statements income year ended june 30 2011 date acquisition company assume additional liabilities norian personnel related bonus vacation accruals certain norian employees connection acquisition pursuant property purchase agreement company acquired manufacturing development facility west chester pennsylvania consisting approximately 37000 square feet additionally company entered 10year lease agreement synthes company lease entire building back synthes turn sublease portion building company approximately 18 months company process transitioning manufacturing norian product west chester facility exton facility results operations associated norian consolidated company since date acquisition total revenues 1378152 net income 84768 attributable norian product sales recognized consolidated statement income fiscal year ended june 30 2011 following unaudited pro forma information sets forth combined revenues net income company historical unaudited norian financial information fiscal years ended june 30 2011 2010 acquisition occurred beginning periods presented historically norian maintained certain distinct separate accounts synthes therefore certain corporate overhead expenses including limited human resources legal finance tax treasury functions expenses intangible amortization related income taxes historically identified accounted separate historical unaudited financial records norian addition historical unaudited norian financial information included pro forma includes total revenue norian product sales sold arm’slength synthes responsible subsequently selling products enduser market historical unaudited norian financial information reflected manufacturing selling product lines intercompany armslength transactions synthes negotiated prices therefore unaudited pro forma information presented necessarily indicative would attained transaction occurred earlier date results necessarily indicative future consolidated results operations company 6 concentration credit risk financial instruments potentially subject company significant concentrations credit risk consist primarily cash equivalents investments accounts receivable debt see note 10 company manages cash equivalents investments based established guidelines relative diversification maturities maintain safety liquidity single component company’s investment portfolio represented 10 11 total investments june 30 2011 2010 respectively company’s trade receivables june 30 2011 primarily due synthes orthovita arthrex represented approximately 29 28 26 respectively company’s total trade company’s trade receivables june 30 2010 due synthes orthovita arthrex well st jude medical represented approximately 1 13 29 40 respectively company’s total trade receivables june 30 2010 company’s royalty receivables primarily due st jude medical orthovita represented approximately 80 18 respectively company’s total royalty receivable balance june 30 2011 approximately 90 9 respectively company’s total royalty receivable balance june 30 2010 see note 4 customers’ receivable balances deemed uncollectible would material adverse effect company’s results operations financial condition company performs ongoing credit evaluations customers’ financial conditions require collateral support customer receivables see note 15 additional information regarding significant customer revenue disclosure 7 acquired patents intangible assets costs internally developed patents expensed incurred due long development cycle products company’s inability measure recoverability costs incurred time company acquired portfolios patents intangibles believes beneficial complementary company’s existing intellectual property material processing knowledge platform acquisitions included portfolio puncture closure patents acquired november 1997 patents acquired asset purchase thm biomedical inc thm 2000 certain intellectual property rights related vitoss™ product line acquired third party inventor 2004 see note 4 certain assets macropore biosurgery inc macropore acquired 2007 well smaller purchases fiscal 2011 company acquired following intangible assets december 21 2010 addition making noncontrolling minority costmethod investment orteq see note 8 company entered manufacturing supply agreement orteq acquired exclusive worldwide manufacturing rights actifit® actifit product line period ten years beginning date first us commercial sale company assigned 1632230 cost manufacturing rights related costs associated transaction actifit biocompatible synthetic meniscal scaffold received ce mark approval 2008 treatment irreparable partial meniscal tears currently sold throughout europe acquired manufacturing rights expected amortized period economic benefit approximately 13 years amortization expected begin fiscal 2012 company begins manufacture actifit product line january 28 2011 company acquired certain intangible assets nerites asset acquisition transaction see note 5 company assigned 1813182 total acquisition costs intangible assets amortized remaining period economic benefit ranging 2 25 years depending intangible asset may 24 2011 company acquired intangible asset customer relationship norian asset acquisition transaction see note 5 purchase method accounting company assigned 13790000 total purchase price intangible asset customer relationship amortized remaining period economic benefit 15 years company amortizes entire cost acquired patents intangible assets respective remaining periods economic benefit ranging approximately 1 25 years june 30 2011 gross carrying amount patents intangible assets june 30 2011 25912611 accumulated amortization 7730462 gross carrying amount patents intangible assets june 30 2010 8677200 accumulated amortization 6628605 total amortization expense patents intangible assets 1101858 967279 1122937 fiscal years ended june 30 2011 2010 2009 respectively table details estimated amortization expense june 30 2011 next five fiscal years patents intangible assets previously acquired company 8 cost method investment december 21 2010 company made noncontrolling minority costmethod investment recorded value 2452665 preferred shares orteq company accounted investment orteq cost method orteq privatelyheld medical device company headquartered london united kingdom specializing field biodegradable polymer technology meniscus repair company approximate 8 ownership interest orteq ability exercise significant influence orteq’s financial operating policies cost method investment assessed impairment indicators impairment june 30 2011 subsequent june 30 2011 august 19 2011 company’s option pursuant ancillary agreement company made additional investment orteq approximately 637000 british pounds 1055063 form cash advance structured convertible debt orteq previously disclosed investment agreement orteq company committed making additional minority costmethod investment approximately 637000 british pounds preferred shares orteq payable us dollars orteq receives approval conditional approval fda conduct investigational device exemption product pivotal trial second anniversary company’s initial investment december 21 2012 otherwise earlier company’s option prior december 21 2012 ancillary agreement company option convert cash advance preferred shares orteq additional costmethod investment agreement convert cash advance shares cash advance accrued interest payable orteq company prior august 2016 additional cash investment orteq impact company’s ownership interest orteq event company pursuant ancillary agreement agrees convert cash advance preferred shares company’s ownership interest orteq would continue less 10 9 accrued expenses june 30 2011 2010 accrued expenses consisted following company’s payroll accrual prior fiscal year ended june 30 2010 amongst compensation related items included cash bonus approximately 19 million company paid fiscal 2011 well remaining severance amount 82277 primarily resulting voluntary retirement program occurred company’s second quarter ended december 31 2009 fiscal 2010 company incurred total severance charge 1011058 included line items salary expense consolidated statements income june 30 2011 accrual remaining related severance charge included accrued payroll related compensation 10 debt secured commercial mortgageon may 25 2006 company entered agreement 35 million secured commercial mortgage citibank fsb mortgage secured company’s facility land exton pennsylvania bears interest onemonth libor plus 082 loan credit spread june 30 2011 outstanding mortgage balance 30 million remaining principal payments due detailed mortgage contains various conditions borrowing including affirmative restrictive financial maintenance covenants certain significant covenants require company maintain minimum fixed charge coverage ratio ebitda defined mortgage debt service equal greater 150to10 interest rate hedge least 50 percent outstanding principal balance mortgage interest rate protection product reasonably acceptable citibank fsb interest rate swap agreementin order hedge interest rate risk mortgage company entered 35 million aggregate 10year fixed interest rate swap agreement swap citibank na may 2006 swap secured company’s facility land exton pennsylvania company using swap cash flow hedge company’s interest payments mortgage swap converts variable libor portion mortgage payments fixed rate 644 562 fixed interest rate plus 082 loan credit spread company follows provisions fasb asc topic 815 “derivatives hedging” account swap cash flow hedge due hedging forecasted interest rate payments record swap fair value consolidated balance sheets value represents estimated amount company would receive pay terminate swap company records marktomarket adjustment end period establishing fair value company includes evaluates dealer quotes counterparty’s ability settle asset liability counterparty’s creditworthiness additionally current interest rates collateralization mortgage swap land building adverse company industry specific events would impact fair value measurement considered company utilizes hypothetical derivative method determining hedge effectiveness period transactions would cause ineffectiveness would include prepayment mortgage adverse company industry specific event would impact fair value measurement would result company reclassifying ineffective portion current earnings conditions underlying swap hedge item change swap considered highly effective portion swap’s gain loss due change fair value reported component accumulated comprehensive loss impact consolidated statements income cash flows june 30 2011 2010 fair value swap unrealized loss position 4919658 3009270 net tax 5542509 3602631 net tax respectively gross unrealized loss position included noncurrent liabilities net tax position included accumulated comprehensive loss consolidated balance sheets interest expense swap recorded earnings fixed rate set forth swap fiscal years ended june 30 2011 2010 2009 amounts recognized current earnings due ineffectiveness amounts excluded assessment hedge effectiveness company anticipate material unrealized losses recognized within next 12 months anticipated transactions mortgage swap occur unless mortgage portion thereof prepaid following table summarizes fair value swap june 30 2011 june 30 2010 consolidated balance sheet following tables summarize swap’s impact accumulated comprehensive loss earnings years ended june 30 2011 2010 credit agreementon may 26 2011 company entered loan agency agreement credit agreement wells fargo bank national association wells fargo credit agreement provides threeyear unsecured revolving credit facility revolving credit facility 35000000 evidenced revolving credit note dated may 26 2011 issued company favor wells fargo terms credit agreement company may borrow aggregate amount unused commitment revolving credit facility revolving credit facility may used working capital general corporate purposes company including permitted acquisitions capital expenditures borrowings revolving credit facility company’s option bear interest rate based upon london inter bank offering rate libor effect one two three sixmonth periods elected company plus applicable margin election made onemonth libor plus applicable margin credit agreement terminate may 25 2014 unless lenders elect extend credit agreement two additional oneyear periods upon request company contains customary representations covenants events default certain significant covenants set forth credit agreement require company maintain maximum funded debt ebitda calculation 30 ii minimum tangible net worth 35 million iii minimum fixed charge coverage ratio 15 iv impose restrictions indebtedness liens company’s assets fiscal 2011 june 30 2011 borrowings revolving credit facility 11 fair value financial assets financial liabilities company follows provisions fasb asc topic 820 fair value measurement recognition disclosure purposes financial assets financial liabilities remeasured reported fair value reporting period company measures certain financial assets liabilities fair value recurring basis including cash equivalents availableforsale securities swap company’s assessment significance particular input fair value measurement requires judgment may affect valuation financial assets financial liabilities placement within fair value hierarchy categorization based threetier valuation hierarchy prioritizes inputs used measuring fair value follows • level 1observable inputs quoted prices unadjusted active markets identical assets liabilities • level 2inputs quoted prices active markets identical assets liabilities inputs quoted prices identical similar assets liabilities inactive markets inputs either directly indirectly observable • level 3unobservable inputs little market data exists therefore requiring entity develop assumptions following table presents company’s financial assets liabilities measured fair value recurring basis june 30 2011 june 30 2010 company’s money market funds classified along company’s cash balances cash equivalents within consolidated balance sheets money market funds valued quoted prices active markets company follows disclosure provisions fasb asc topic 825 “financial instruments” asc 825 disclosure purposes financial assets financial liabilities measured fair value june 30 2011 financial assets liabilities recorded consolidated balance sheets measured fair value recurring basis include accounts receivable net accounts payable deferred acquisition payments debt obligations carrying value accounts receivable net accounts payable current debt obligations approximate fair value due shortterm nature instruments fair value longterm debt quoted market price available evaluated based among factors interest rates currently available company debt similar terms remaining payments considerations company’s creditworthiness company determined recorded book value longterm debt approximates fair value june 30 2011 due variable libor portion mortgage payments 12 preferred stock company authorized preferred stock consisting 100000 shares 001 par value 25000 designated series junior participating preferred stock discussed 75000 undesignated board directors may authorize issuance preferred stock ranks senior common stock respect payment dividends distribution assets liquidation addition board directors authorized fix limitations restrictions upon payment dividends common stock effective shares preferred stock outstanding board directors without stockholder approval issue preferred stock voting conversion rights could adversely affect voting power holders common stock june 30 2011 2010 shares preferred stock outstanding company present intention issue shares preferred stock except shares series preferred stock defined may issued pursuant stockholders’ rights plan described stockholders’ rights plan june 19 2009 company announced board directors adopted stockholders’ rights plan rights plan designed protect company stockholders potentially coercive takeover practices bids prevent acquiror gaining control company without offering fair price stockholders company adopted plan order give board directors time evaluate respond unsolicited potential takeover attempts rights plan company distributed dividend one preferred stock purchase right share common stock held record close business june 19 2009 rights plan term 10 years expire june 19 2019 unless company earlier redeems rights board directors terminates rights plan right becomes exercisable entitles holder buy one onethousandth share series junior participating preferred stock collectively preferred shares 20000 subject certain conditions plan exercise price may change pursuant certificate designations series junior participating preferred stock series preferred stock 25000 shares series preferred stock authorized issuance share series preferred stock entitle holder thereof 1000 votes matters submitted vote stockholders company holders shares series preferred stock holders shares common stock company capital stock company general voting rights vote together one class matters submitted vote stockholders company holders shares series preferred stock entitled receive declared board directors dividends payable dividends declared shares common stock company amount subject adjustment equal 1000 times aggregate per share amount cash dividends 1000 times aggregate per share amount noncash dividends distributions declared shares company’s common stock june 30 2011 2010 shares series preferred stock outstanding 13 stock repurchase program time company made repurchases stock authorized various stock repurchase programs established company’s board directors miscellaneous transactions june 16 2010 company announced board directors approved stock repurchase program allowing company repurchase total 30 million issued outstanding shares common stock year ended june 30 2011 company repurchased retired 1175738 shares common stock total cost approximately 29999994 average market price 2552 per share using available cash included totals 34400 shares repurchased june 2010 settled july 2010 cost 811054 average price per share 2358 june 30 2011 amount remaining repurchase company’s current prior stock repurchase programs year ended june 30 2010 company repurchased retired 1794705 shares common stock cost 41309153 average market price 2302 per share using available cash additional 3500 shares repurchased june 2009 settled july 2009 cost 87279 average market price per share 2494 year ended june 30 2009 company repurchased retired 806666 shares common stock cost 19294595 average market price 2392 per share using available cash 14 sharebased compensation company accounts sharebased compensation plans accordance asc 718 compensation expense related sharebased awards classified consolidated statements income within line items salary consulting expense respect award recipients recorded awards’ relevant vesting periods compensation expense related sharebased awards granted members board directors recorded component selling general administrative expense consolidated statements income following table provides summary company’s sharebased compensation expense stock options stock options granted officers employees members board directors company well nonemployee outside consultants company’s eighth amended restated kensey nash corporation employee incentive compensation plan prior versions incentive compensation plan employee plan addition company also nonemployee directors’ stock option plan directors’ plan shares available new awards type granted previously directors’ plan granted employee plan fair value option grant employee plan estimated date grant using blackscholes optionpricing model uses assumptions noted following table options exercisable maximum term ten years date grant typically vest periods zero four years grant date expected volatilities based historical volatility company’s common stock factors company uses historical data estimate option exercise employee termination within valuation model separate groups employees similar historical exercise behavior considered separately valuation purposes expected terms options derived historical exercise behavior represent periods time options granted expected outstanding total intrinsic value options exercised years ended june 30 2011 2010 2009 5505908 787511 5052764 respectively summary stock option activity plans fiscal years ended june 30 2011 2010 2009 follows nonvested stock awards nonvested stock awards granted nonemployee members board directors executive officers certain management company nonemployee outside consultant pursuant employee plan generally vest three equal annual installments based solely continued employment service applicable company nonvested stock awards granted executive officers management nonemployee members board directors nonemployee consultants usually referred restricted stock asc 718 reserves term fully vested outstanding shares sale contractually governmentally prohibited specified period time fair value based upon closing price company’s common stock date grant total fair value shares vested years ended june 30 2011 2010 2009 712180 496692 271714 respectively following table outlines nonvested stock award activity fiscal years ended june 30 2011 2010 2009 cash settled stock appreciation rights cashsettled stock appreciation rights sars awards granted eligible employees fiscal year ended june 30 2007 provided participant right receive payment cash upon exercise appreciation market value specified number shares company’s common stock award’s exercise price sars awards granted fiscal years ended june 30 2011 2010 2009 pershare exercise price sar equal closing market price share company’s common stock date grant november 14 2007 company offered buy back sars current eligible employees excluding executive officers fair market value buyout price based closing price company’s common stock december 14 2007 offer resulted company purchasing 173940 sars buyout price 647 per sar total 1125392 excluding company’s portion payroll taxes paid participating eligible employees represented approximately 99 participation eligible employees sars outstanding june 30 2011 average fair market value remaining sar 05 related liability remaining sars 4784 sars continue remeasured reporting period awards settled cash settled sars exercised repurchased company’s fiscal years 2011 2010 following table outlines cashsettled sar award activity fiscal years ended june 30 2011 2010 2009 fair value sar award remeasured reporting period using blackscholes optionpricing model uses assumptions noted following table sars exercisable maximum term five years date grant originally vest period three years grant date expected volatilities based historical volatility company’s common stock factors company uses historical data estimate sar employee termination behavior within valuation model separate groups employees similar historical exercise behavior considered separately valuation purposes riskfree rate periods within contractual life sar based us treasuries constant maturities effect time grant 15 segment reporting company’s operations products aggregated single reportable segment since similar economic characteristics production processes types customers distribution methods provisions fasb asc topic 280 “segment reporting” asc 280 operating segments identified components enterprise separate discrete financial information available evaluation chief operating decisionmaking group making decisions regarding allocate resources assess performance company generates revenue sale products sold primarily cardiovascular orthopaedic sports medicine spinal general surgery markets largest customers include st jude medical arthrex orthovita synthes company also receives royalty income generated primarily net enduser sale angioseal units st jude medical sales vitoss™ foam vitoss™ bioactive foam products orthovita net sales product line reconciliation total revenue follows years ended june 30 2011 2010 2009 revenues st jude medical arthrex orthovita synthes represented following percentages total revenues company revenues attributed country based location customer company’s business directly dependent foreign operations company’s sales customers outside us significant however portion company’s revenues including sales royalties dependent us based customers selling endusers outside us one country company sells products us represented 10 company’s revenues fiscal 2011 addition company’s longlived assets located us company’s revenues categorized geographically 16 commitment contigencies certain compensation employment agreements company entered employment agreements certain named executive officers june 30 2011 employment agreements provided among things annual base salaries aggregate amount less 1294773 date fiscal 2013 purchase commitments june 30 2011 company outstanding noncancelable cancelable purchase commitments amount 1903345 related inventory capital expenditures goods services research development contractual obligations company’s development regulatory services agreement spectranetics amended company’s future contributions limited maximum amount 2750000 toward expenses associated clinical studies obtain approval fda certain nextgeneration endovascular products reduced total cumulative expenses incurred june 30 2011 approximately 30000 company entered research development service agreements certain customers provide company share certain regulatory clinical costs associated future research development activities amounts timing future payment obligations cannot currently determined research development costs agreements would expensed incurred cost method investment obligations subsequent june 30 2011 august 19 2011 company’s option pursuant ancillary agreement company made cash advance orteq approximately 637000 british pounds 1055063 form cash advance structured convertible debt orteq see note 8 additional information nerites purchase price obligations pursuant terms asset purchase agreement entered nerites company held back 30 million purchase price security certain potential indemnification obligations nerites company release 30 million acquisition purchase price nerites increments 15 million first second anniversaries acquisition date extent holdback amount applied toward indemnification obligations see note 5 additional information norian purchase price obligation pursuant terms asset purchase agreement entered norian company required pay remaining 14 million purchase price earlier date transfer manufacturing operations purchased west chester pennsylvania facility company’s corporate headquarters facility located exton pennsylvania completed 18month anniversary date acquisition see note 5 additional information operating lease commitments result company’s asset acquisition nerites company became party leased space madison wisconsin well lease office equipment june 30 2011 company’s minimum future annual rental commitment noncancelable operating leases related nerites 119797 pursuant company’s acquisition certain assets norian company entered 18month sublease agreement synthes rent manufacturing space company’s west chester pennsylvania facility june 30 2011 company’s minimum future annual rental commitment noncancelable operating leases related norian 1105000 june 30 2011 company’s total minimum future annual rental commitment noncancelable operating leases 1224797 following table schedule year future minimum lease payments operating leases original terms excess one year 17 retirement plan company voluntary 401k savings plan 401k plan employees least 21 years age three months service company eligible participate company provides 50 discretionary matching contribution first 6 employee’s total salaried compensation employee contributions total company contributions 401k plan fiscal years ended june 30 2011 2010 2009 384503 388720 427540 respectively 18 income taxes income tax expense income taxes earned within united states shown table provision income taxes composed following differences company’s income tax expense income tax expense benefit computed using us federal income tax rate follows deferred taxes significant components company’s deferred tax assets liabilities follows portion company’s deferred tax asset offset valuation allowance relating state net operating loss nol carryforwards due restrictions imposed uncertainty surrounding use valuation allowance reduces deferred tax assets amount represents management’s best estimate amount deferred tax assets likely realized june 30 2011 company state nol carryforwards approximately 619 million expire 2029 longer federal nol carryforward company recorded valuation allowance states’ net operating losses uncertainty surrounding use 619 million result december 2010 congressional approval extension research experimentation tax credit company recorded retroactive adjustments tax provision quarter ended december 31 2010 fiscal 2011 adjustments reflect fact legislation retroactive january 1 2010 therefore reduced company’s effective tax rate fiscal 2011 company recorded total rd tax credits 442574 265249 464362 fiscal years ended june 30 2011 2010 2009 respectively uncertain tax positions company adopted provisions fasb asc subtopic 74010 “income taxes” july 1 2007 amount unrecognized tax benefits june 30 2011 2010 2009 103694 117216 140650 respectively gross unrecognized tax benefits recognized 101837 115359 139183 would impact company’s tax rate june 30 2011 2010 2009 respectively company recorded interest penalties less 2000 fiscal years ended june 30 2011 2010 2009 interest penalties included interest expense income loss respectively consolidated statements income changes company’s uncertain tax positions years ended june 30 2011 2010 2009 follows company subsidiaries file us federal various state income tax returns company longer subject us federal income tax examination years prior fiscal 2005 due expiration applicable statutes limitation company expect total amount unrecognized tax benefits change significantly next 12 months 19 earnings per share following table shows reconciliation numerators denominators basic diluted eps calculations income numerator weighted average number shares denominator 20 quarterly financial data unaudited summarized quarterly results operations company years ended june 30 2011 2010 presented total operating costs expenses company’s third quarter fiscal 2011 included iprd charge 18233006 related company’s asset acquisition nerites january 2011 see note 5 quarterly total year earnings per share calculated independently based weighted average number shares outstanding period 21 sale endovascular business may 30 2008 company completed sale endovascular business spectranetics pursuant asset purchase agreement company sold spectranetics assets related quickcat™ quickcat thromcat® thromcat safecross® safecross product lines including stock european subsidiary kensey nash europe gmbh 100 million cash payment closing opportunity additional 80 million research development milestone payments 60 million cumulative sales milestone payment additional royalty payments based future sales thromcat safecross products transition manufacturing products company spectranetics payments related agreements described may 30 2008 company spectranetics also entered manufacturing licensing agreement pursuant company agreed manufacture spectranetics endovascular products acquired spectranetics asset purchase agreement spectranetics purchase products specified time periods spectranetics agreed manufacturing period would pay transfer prices products based company’s cost manufacture products plus percentage enduser sales price thromcat safecross products additionally spectranetics agreed company’s manufacture thromcat safecross products transferred spectranetics obligated pay company royalty enduser sales products company’s second quarter ended december 31 2009 prior fiscal 2010 last quarter reflecting product sales quickcat device company transferred quickcat manufacturing spectranetics december 31 2009 spectranetics obligation make royalty payments company related enduser sales quickcat product previously disclosed spectranetics publicly announced discontinuation sales safecross product line company’s second quarter fiscal 2010 spectranetics’ decision discontinue safecross product line negatively impacts company’s ability receive future royalties based sales safecross product minimum delays company’s achievement 6 million cumulative sales milestone based upon sales safecross thromcat quickcat products milestone due company spectranetics reaches cumulative 20 million end user sales product lines purchased spnc company may 2008 fiscal 2011 company’s manufacturing endovascular product line limited thromcat product company’s fourth quarter fiscal 2011 ended june 30 2011 last quarter reflecting sales thromcat product thromcat manufacturing transferred spectranetics may 2011 pursuant terms manufacturing licensing agreement spectranetics following transition manufacturing thromcat product spectranetics pay company predetermined royalty rate enduser sales thromcat product amount royalty based upon timing reason manufacturing transfer certain cases upon amount revenue generated thromcat products applicable year royalty subject reduction depending upon scope patent protection obtained thromcat product may 30 2008 company spectranetics also entered development regulatory services agreement pursuant company agreed conduct work develop obtain regulatory approval fda certain nextgeneration safecross thromcat products company’s expense behalf spectranetics owns intellectual property resulting development work clinical studies required obtain approval fda nextgeneration products costs shared equally company spectranetics however pursuant amendment development regulatory services agreement company’s contributions limited maximum amount 2750000 toward clinical studies spectranetics pay company 80 million upon completion product development activities regulatory approvals certain nextgeneration products milestones recorded revenue recognized period agreement including date receipt latest expected regulatory approvals andor completion product development activities fiscal 2009 company announced accomplishment two milestones agreement resulted total payment 25 million company recognized 577000 revenue fiscal 2011 well fiscal 2010 item 9 item 8 financial statements supplementary data financial statements report independent auditors listed item 14 included annual report form 10k item 9 item 8 financial statements supplementary data financial statements supplementary data required item set forth part iv item 15 annual report form 10k item 9 item 8 financial statements supplementary data following consolidated financial statements related notes thereto kensey nash corporation report independent registered public accounting firm filed part form 10k report independent registered public accounting firm board directors stockholders kensey nash corporation exton pennsylvania audited accompanying consolidated balance sheets kensey nash corporation subsidiaries “company” june 30 2008 2007 related consolidated statements income stockholders’ equity cash flows three years period ended june 30 2008 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position kensey nash corporation subsidiaries june 30 2008 2007 results operations cash flows three years period ended june 30 2008 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting june 30 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated september 15 2008 expressed unqualified opinion company’s internal control financial reporting deloitte touche llp philadelphia pennsylvania september 15 2008 kensey nash corporation consolidated balance sheets see notes consolidated financial statements kensey nash corporation consolidated statements income see notes consolidated financial statements kensey nash corporation consolidated statements stockholders’ equity see notes consolidated financial statements kensey nash corporation consolidated statements cash flows see notes consolidated financial statements kensey nash corporation notes consolidated financial statements years ended june 30 2008 2007 2006 1 summary significant accounting policies description companykensey nash corporation “company” medical technology company providing innovative solutions technologies wide range medical procedures kensey nash corporation incorporated delaware august 6 1984 kensey nash holding company incorporated delaware january 8 1992 formed hold title certain company patents operations kensey nash gmbh incorporated germany january 2002 formed purpose european sales marketing company’s endovascular products divested may 2008 see note 25 ilt acquisition sub inc formerly thm acquisition sub inc macropore acquisition sub inc incorporated delaware april 2006 may 2007 respectively formed acquire certain assets acquired companies see note 9 principles consolidation basis presentationthe consolidated financial statements include accounts kensey nash corporation kensey nash holding company kensey nash europe gmbh intercompany transactions balances eliminated june 30 2008 kensey nash europe gmbh longer included accounts kensey nash corporation see note 25 additional information preparation consolidated financial statements conformity accounting principles generally accepted united states america necessarily requires management make estimates assumptions estimates assumptions may differ actual results affect reported amounts assets liabilities disclosure contingent assets liabilities dates financial statements well reported amounts revenue expense periods presented consolidated statement income year ended june 30 2006 reclassified include product line information biomaterials endovascular sales addition reclassifications made reflect separate components sales marketing general administrative expenses previously aggregated impact amounts presented income operations discontinuance embolic protection platformon july 10 2007 company announced made strategic decision cease activities embolic protection platform includes triactiv® fx proguard™ product line including proguard clinical trial product manufacturing sales marketing research development activities see note 24 additional information discussion asset impairment related charges sale endovascular divisionon may 13 2008 company announced entered definitive agreement sell endovascular business spectranetics corporation nasdaq spnc transaction includes sale thromcat™ quickcat™ safecross™ product lines established strategic partnership company spectranetics see note 25 additional information discussion transaction related charges cash equivalentscash cash equivalents represent cash banks shortterm investments original maturity less three months fair value financial instrumentsthe carrying amounts financial instruments including cash equivalents shortterm investments accounts receivable accounts payable debt approximated fair value june 30 2008 2007 fair value shortterm investments based quoted market prices comprehensive incomethe company accounts comprehensive income provisions sfas 130 reporting comprehensive income sfas 130 accordingly accumulated comprehensive loss income shown consolidated statements stockholders’ equity june 30 2008 2007 2006 comprised net unrealized gains losses company’s availableforsale securities foreign currency translation adjustments change interest rate swap value included company’s net income fiscal year ended june 30 2008 237413 currency translation adjustments written result sale gmbh subsidiary spectranetics may 30 2008 net tax effects benefit fiscal 2008 2007 2006 comprehensive loss income 697759 28946 60376 respectively property plant equipmentproperty plant equipment consists primarily building land machinery equipment construction progress recorded cost maintenance repairs expensed incurred building machinery furniture equipment depreciated using straightline method useful life ranging two 30 years depreciation expense property plant equipment 5806925 6920431 8353605 fiscal year ended june 30 2008 2007 2006 respectively goodwillgoodwill represents excess cost fair market value identifiable net assets thm biomedical inc thm company acquired september 2000 macropore biosurgery business unit macropore acquired may 2007 see notes 9 10 acquisitions accounted sfas 141 business combinations sfas 141 sfas 142 goodwill intangible assets sfas 142 sfas 142 goodwill intangible assets indefinite useful lives amortized subject annual impairment tests intangible assets definite useful lives continue amortized respective useful lives impairment longlived assetslonglived assets reviewed impairment whenever events circumstances indicate carrying amount asset may recoverable undiscounted expected future cash flows generated related asset less carrying value asset company measures amount impairment comparing carrying amount asset fair value estimation fair value generally measured discounting expected future cash flows rate company borrows accounts receivable allowancethe company trade receivable allowances 14713 8219 june 30 2008 2007 respectively company established trade receivable allowances 12000 2000 wrote amounts totaling 5506 2585 years ended june 30 2008 2007 respectively amounts included general administrative expense years ended june 30 2008 2007 revenue recognition sales revenue company recognizes revenue provisions staff accounting bulletin sab 104 revenue recognition sab 104 superseded sab 101 revenue recognition financial statements sab 101 addition company follows provisions emerging issues task force issue 0021 revenue arrangements multiple deliverables eitf 0021 certain collaborative arrangements containing multiple revenue elements entered materially amended june 30 2003 sales revenue recognized products shipped services completed advance payments received products services recorded deferred revenue recognized product shipped services performed company reduces sales revenue estimated customer returns allowances including credits discounts company net sales return provisions credits discounts 51886 541446 9195 years ended june 30 2008 2007 2006 respectively significant increase fiscal 2007 related sales credits given embolic protection products either related product recall discontinuance program royalty income company generally recognizes royalty revenue end month relevant net total enduser product sales dollars reported company month royalty payments generally received within 45 days end calendar quarter research development costsresearch development costs charged expense incurred income taxesthe company accounts income taxes provisions sfas 109 accounting income taxes sfas 109 see note 21 earnings per shareearnings per share calculated accordance sfas 128 earnings per share sfas 128 requires company report basic diluted earnings per share eps basic diluted eps computed using weighted average number shares common stock outstanding common equivalent shares options nonvested stock awards included diluted computation effect dilutive see note 22 options nonvested stock awards purchase shares common stock outstanding years ended june 30 2008 2007 2006 included computation diluted eps options nonvested stock awards would antidilutive shown table stockbased compensationthe company adopted provisions sfas 123r sharebased payment fas 123r effective july 1 2005 using modified prospective approach accounts sharebased compensation applying fair value method expensing stock options nonvested stock awards company generally recognizes compensation expense stockbased awards granted relevant vesting period awards fair value stock options cashsettled stock appreciation rights “sars” determined using blackscholes model relevant expense amortized applicable vesting period stock options marked market sars see note 16 compensation expense related stockbased awards classified consolidated statements income within line items salary expense compensation expense related stockbased awards granted members board directors recorded component general administrative expense apb 25 company’s policy grant employee stock options exercise price equal fair market value company’s common stock date grant therefore recording compensation expense prior adoption sfas 123r sharebased payment fas 123r company expensed sharebased payments nonemployee outside consultants defined sfas 123 based upon fair market value grants nonvested shares granted using intrinsic value method apb 25 derivative instruments hedging activitiesthe company recognizes derivatives either assets liabilities balance sheet depending company’s rights obligations applicable derivative contract measures instruments fair value change derivative’s fair value recorded period current earnings accumulated comprehensive income oci depending derivative designated part hedge transaction type hedge transaction new accounting pronouncements adopted july 2006 fasb issued fasb interpretation 48 accounting uncertainty income taxes fin 48 fin 48 interpretation fasb statement 109 accounting income taxes seeks reduce diversity practice associated certain aspects measurement recognition accounting income taxes fin 48 clarifies accounting uncertainty income taxes recognized enterprise’s financial statements prescribes threshold morelikelythannot recognition tax benefits uncertain tax positions taken expected taken tax return fin 48 also provides related guidance measurement derecognition classification interest penalties disclosure see note 21 additional information discussion relating adoption fin 48 july 1 2007 adopted september 2006 fasb issued statement financial accounting standards sfas 157 fair value measurements sfas 157 sfas 157 establishes standard definition fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements sfas 157 effective financial statements issued fiscal years beginning november 15 2007 company 2009 fiscal year except nonfinancial assets liabilities recognized disclosed fair value nonrecurring basis effective date fiscal years beginning november 15 2008 company’s 2010 fiscal year company yet assessed impact adoption sfas 157 financial position cash flows results operations february 2007 fasb issued sfas 159 fair value option financial assets financial liabilities sfas 159 sfas 159 permits entities choose measure many financial instruments certain items fair value sfas 159 effective fiscal years beginning november 15 2007 company’s 2009 fiscal year unrealized gains losses items fair value option elected reported earnings sfas 159 affect existing accounting literature requires certain assets liabilities carried fair value july 1 2008 company elected apply sfas 159 measure financial assets liabilities fair value previously recorded fair value existing accounting literature june 2007 fasb ratified consensus reached eitf issue 073 accounting nonrefundable advance payments goods services used future research development activities eitf 073 scope eitf 073 limited nonrefundable advance payments goods services used rendered future research development activities pursuant executory contractual arrangement nonrefundable advance payments future research development activities materials equipment facilities purchased intangible assets alternative future use research development projects otherwise recognized accordance guidance sfas 2 refundable advance payments future research development activities excluded scope issue eitf 073 effective fiscal years beginning december 15 2007 company’s 2009 fiscal year interim periods within fiscal years eitf 073 applies prospectively new contracts entered effective date company expect adoption eitf 073 material impact financial position results operations november 2007 fasb ratified consensus reached eitf issue 071 accounting collaborative arrangements related development commercialization intellectual property eitf 071 issue effective financial statements issued fiscal years beginning december 15 2008 company 2010 fiscal year issue addresses income statement classification payments made parties collaborative arrangement adoption eitf 071 expected material impact company’s results operations cash flows financial position december 2007 fasb issued sfas 141 revised business combinations sfas 141r sfas 141r applies transactions events entity acquirer obtains control one businesses acquiree including sometimes referred “true mergers” “mergers equals” combinations achieved without transfer consideration example contract alone lapse minority veto rights statement applies business entities including mutual entities previously used poolingofinterests method accounting business combinations sfas 141r effective fiscal years beginning december 15 2008 company 2010 fiscal year company yet assessed impact adoption sfas 141r financial position cash flows results operations march 2008 fasb issued sfas 161 disclosures derivative instruments hedging activitiesan amendment fasb statement 133 sfas 161 sfas 161 changes disclosure requirements derivative instruments hedging activities statement requires objectives using derivative instruments disclosed terms underlying risk accounting designation sfas 161 effective fiscal years interim periods beginning november 15 2008 company third quarter fiscal year 2009 company expect adoption sfas 161 material impact financial position cash flows results operations may 2008 fasb issued sfas 162 hierarchy generally accepted accounting principles sfas 162 sfas 162 identifies sources generally accepted accounting principles gaap us lists categories descending order entity follow highest category gaap applicable accounting transactions sfas 162 effective 60 days following sec’s approval public company accounting oversight board amendments au section 411 meaning present fairly conformity generally accepted accounting principles adoption sfas 162 material effect company’s consolidated financial statements 2 investments june 30 2008 consisted primarily high quality municipal obligations accordance sfas 115 accounting certain investments debt equity securities sfas 115 company classified entire investment portfolio availableforsale marketable securities secondary resale markets portfolio reported fair value unrealized gains losses included stockholders’ equity see comprehensive income realized gains losses income following summary availableforsale securities june 30 2008 2007 february 2008 company part broader investment strategy sold mutual fund investment redeemed selected municipal obligations designated municipal obligations sold gain position offset realized loss sale mutual fund investment company one variablerate municipal demand obligation matures 24 years municipal variablerate demand obligation putable weekly callable monthly basis remaining investments included municipal obligations category maturities ranging less one year approximately four years certain investment securities included municipal obligations category shown currently fair values less amortized costs therefore contain unrealized losses company evaluated securities determined decline value related company industry specific event june 30 2008 six 19 investment securities unrealized losses company anticipates full recovery amortized costs respect securities maturity sooner event favorable market interest rate environment lengths time securities continuous unrealized loss position aggregated investment within municipal obligations category june 30 2008 follows 3 inventory stated lower cost determined average cost method approximates firstin firstout market value inventory primarily includes cost material utilized processing company’s products follows adjustments inventory made individual part level estimated excess obsolescence impaired balances reflect inventory lower cost market factors influencing adjustments include changes demand rapid technological changes product life cycle development plans component cost trends product pricing physical deterioration quality concerns revisions adjustments would required factors differ company’s estimates 4 corporate facility fiscal 2006 company completed primary construction relocated operations 202500 square foot facility total cost project including land purchases approximately 49 million company financed construction facility available cash hand sale liquid investments project term may 2006 company entered secured commercial mortgage secured building land allows company draw 35 million currently outstanding see note 13 conjunction move new facility company abandoned previously occupied leased space thus recorded accelerated depreciation transition charges 50 million related leasehold improvement assets abandoned fiscal 2006 5 select customer agreements st jude medical inc license agreementsunder two license agreements one us foreign territories st jude medical exclusive worldwide rights manufacture market current future versions angioseal™ vascular closure device angioseal license agreements company receives approximate 6 royalty net sales every angioseal™ unit sold st jude medical component supply contractunder supply contract executed st jude medical 2005 company exclusive supplier 100 collagen plug least 30 bioresorbable polymer anchor components angioseal term agreement expires december 2010 part agreement company received 10 million origination fee upon execution consideration company’s ongoing investments collagen research development june 30 2008 company recognized 792303 10 million remaining 207697 recorded deferred revenue recognized remaining period contract orthovita inc fiscal 2003 company entered development manufacturing supply agreement orthovita company develops commercializes products based orthovita’s proprietary vitoss® bone graft substitute material combination company’s proprietary biomaterials orthovita agreement orthovita agreement products codeveloped company manufactures products orthovita markets sells products worldwide also orthovita agreement company receives royalty payment codeveloped vitoss® foam products based upon orthovita’s total enduser net sales products separate transaction august 2004 company acquired proprietary rights third party vitoss® technology acquisition included economic rights third party include royalty products sold containing vitoss® technology 6 concentration credit risk financial instruments potentially subject company significant concentrations credit risk consist primarily cash equivalents investments accounts receivable company places cash equivalents investments high quality financial institutions established guidelines relative diversification maturities maintain safety high liquidity single component company’s investment portfolio represented 13 18 total investments june 30 2008 2007 respectively trade receivables primarily due st jude medical arthrex orthovita represented approximately 28 14 company’s total trade receivables respectively june 30 2008 trade receivables companies represented approximately 31 19 17 company’s total trade receivables respectively june 30 2007 royalty receivables primarily due st jude medical represented approximately 82 88 company’s total royalty receivable balances june 30 2008 2007 respectively see note 5 customers’ receivable balances deemed uncollectible would material adverse effect company’s results operations financial condition company performs ongoing credit evaluations customers’ financial conditions require collateral support customer receivables 7 acquired patents intangible assets costs internally developed patents expensed incurred due long development cycle patents company’s inability measure recoverability costs incurred time company acquired portfolios patents believes beneficial ongoing businesses acquisitions included portfolio puncture closure patents november 1997 patents acquired asset purchase thm biomedical inc thm 2000 certain intellectual property rights related vitoss® product line acquired third party inventor 2004 intangible assets acquired part purchase certain assets intraluminal therapeutics inc ilt 2006 divested may 2008 conjunction sale company’s endovascular business see note 25 recently certain assets macropore biosurgery inc macropore 2007 see note 9 among smaller purchases company amortizes entire cost acquired patents intangible assets respective remaining periods economic benefit ranging approximately one 12 years june 30 2008 gross carrying amount patents intangible assets june 30 2008 8596366 accumulated amortization 4788389 amortization expense patents intangible assets 1075914 845976 811204 fiscal years ended june 30 2008 2007 2006 respectively included expense fiscal years ended june 30 2008 2007 2006 176756 186596 12135 respectively amortization expense related certain patents sold spectranetics table details estimated amortization expense company’s previously acquired patents intangible assets next five fiscal years 8 certain patent proprietary rights agreements patent acquisition agreement november 1997 company entered agreement patent acquisition agreement acquire portfolio puncture closure patents patent applications well rights seller preexisting licensing agreement addition september 2000 conjunction acquisition thm company acquired separate portfolio patents related biomaterials business costs patent acquisition agreement patents acquired part thm acquisition amortized remaining periods economic benefit ranging 1 8 years june 30 2008 assignment agreement august 2004 company acquired intellectual property rights third party inventor vitoss technology inventor 2600000 assignment agreement inventor assignment agreement assignment agreement company receives intellectual property rights inventor previously assigned orthovita also assignment agreement company generally receives royalty within 45 days end calendar quarter orthovita sale orthovita products containing vitoss technology total royalty received 4035782 june 30 2008 company recognized cumulative royalty income 2183689 assignment agreement 1852093 yet received entire cost proprietary rights amortized 60month period company anticipates receiving economic benefit relation proprietary rights technology purchase agreement march 2005 company entered agreement acquire patents proprietary rights pair inventors technology purchase agreement intellectual property processing information acquired technology purchase agreement complimentary broadens company’s existing biomaterials intellectual property materials processing knowledge platform technology purchase agreement company paid 250000 patents upon execution agreement obligated pay certain milestone payments royalties upon achievement certain product development commercial launch goals products incorporate acquired patent technology initial 250000 purchase price patents amortized remaining period economic benefit patents currently estimated approximately 12 years june 30 2008 9 acquisitions intraluminal therapeutics inc may 2006 company acquired certain assets intraluminal therapeutics inc ilt company focused emerging market opportunity treatment chronic total occlusions cto 80 million cash plus acquisition costs 197384 valuation purchase price allocation represents estimated fair market value based riskadjusted cash flows related identifiable assets excess cost net assets acquired allocated goodwill management responsible valuation considered number factors including internal third party valuations appraisals estimating fair value following summary allocation components certain acquired intangible assets acquisition date follows amortization expense acquired intangible assets 350606 may 30 2008 date sale endovascular business ilt technology cto products included sale see note 25 180763 fiscal year ended june 30 2007 included within research development expense total amount goodwill 64 million amount fully deducted tax purposes acquisition accounted purchase method accounting ilt’s results operations included company date acquisition may 30 2008 following unaudited proforma financial information assumes acquisition occurred beginning earliest period presented pro forma results based certain assumptions estimates pro forma results necessarily represent results would occurred acquisition taken place beginning specified periods indicative results future combined operations macropore may 2007 company acquired certain assets macropore leading developer bioresorbable products targeted spinal craniofacial orthopaedic surgery applications approximately 32 million cash plus related acquisition costs 125690 company incurred additional related acquisition costs 62298 fiscal year ended june 30 2008 valuation purchase price allocation represents estimated fair market value based riskadjusted cash flows related identifiable assets excess cost net assets acquired allocated goodwill management responsible valuation considered number factors including internal third party valuations appraisals estimating fair value following summary allocation business unit acquired company encompasses manufacturing six bioresorbable product lines sold exclusively leading orthopaedic device company worldwide distribution identified intangible asset customer relationship 1650000 june 30 2008 amortized fiveyear term manufacturing development supply agreement company gross carrying amount acquired intangible asset june 30 2008 1650000 amortization expense acquired intangible assets 330167 27333 fiscal years ended june 30 2008 2007 respectively included within general administrative expense amortization expense acquired intangible assets currently estimated 330000 fiscal years ending june 30 2009 2011 302500 fiscal year ending june 30 2012 acquisition accounted purchase method accounting macropore’s results operations included company since date acquisition 10 goodwill company accounts goodwill provisions sfas 142 sfas 142 goodwill amortized subject annual impairment tests company established annual impairment testing date june 30 fiscal year recent tests june 30 2008 2007 2006 indicated goodwill impaired net carrying amount goodwill decreased year ended june 30 2008 june 30 2007 approximately 63 million related primarily sale endovascular business spectranetics see note 25 amount expected fully deductible tax purposes following table indicates company’s total goodwill balances dates presented 11 accrued expenses june 30 2008 2007 accrued expenses consisted following 12 leases june 30 2008 company noncancelable lease obligations rent expense operating leases consisted rent company’s eschborn germany location previously occupied leased space exton pennsylvania abandoned fiscal 2006 result transition company’s newly owned facility rent expense fiscal years ended june 30 2008 2007 2006 approximately 23000 13000 765000 respectively 13 debt secured commercial mortgageon may 25 2006 company entered agreement secured commercial mortgage citibank fsb mortgage provided company ability take aggregate advances 35 million november 25 2007 draw period secured company’s facility land exton pennsylvania may 25 2006 november 23 2007 company took 8 million 27 million advances respectively mortgage bear interest libor plus 082 loan credit spread june 30 2008 outstanding mortgage balance 342 million remaining principal payments due detailed mortgage company required pay interest outstanding principal amount draw period beginning december 25 2007 company began paying principal interest based 25 year straightline amortization schedule mortgage contains various conditions borrowing including affirmative restrictive financial maintenance covenants certain significant covenants require company maintain minimum fixed charge coverage ratio ebitda defined mortgage debt service equal greater 150to10 interest rate hedge least 50 percent outstanding principal balance mortgage interest rate protection product reasonably acceptable citibank fsb interest rate swap agreementin order hedge interest rate risk mortgage company also entered 35 million aggregate tenyear fixed interest rate swap agreement swap citibank na company using swap cash flow hedge company’s interest payments mortgage swap converts variable libor portion mortgage payments fixed rate 644 562 fixed interest rate plus 082 loan credit spread critical terms swap hedge item change swap considered highly effective accordance sfas 133 accounting derivative instruments hedging activities sfas 133 amended sfas 137 138 149 changes fair value included comprehensive incomeloss june 30 2008 2007 fair value swap unrealized loss position 2487718 1641894 net tax 298350 196911 net tax respectively included accumulated comprehensive loss consolidated balance sheets fair value interest rate swapthe company designated swap cash flow hedge company required record fair value swap perform marktomarket adjustment end period fair value swap obtained dealer quotes value represents estimated amount company would receive pay terminate agreements taking consideration current interest rates creditworthiness counterparties cash flow hedgethe swap classified cash flow hedge due hedging forecasted interest rate payments accordance sfas 133 accounting derivative instruments hedging activities amended sfas 137 138 149 recorded consolidated balance sheet fair value company’s objective strategy undertaking swap hedge exposure variability cash flows interest expense associated future interest rate payments secured commercial mortgage reduce company’s interest rate risk event unfavorable interest rate environment effective portion swap gains losses due changes fair value recorded component comprehensive incomeloss reclassified earnings period periods hedged forecasted transaction affects earnings company utilizes hypothetical derivative method determining hedge effectiveness period transactions would cause ineffectiveness result company reclassifying ineffective portion current earnings would include prepayment mortgage andor company’s election prime interest rate option rather libor draw mortgage interest expense swap recorded earnings fixed rate set forth swap fiscal years ended june 30 2008 2007 amounts recognized current earnings due ineffectiveness amounts excluded assessment hedge effectiveness amount reported unrealized loss interest rate swap accumulated oci account within stockholders’ equity represents net unrealized loss swap designated cash flow hedge company anticipate material unrealized losses recognized within next 12 months anticipated transactions occur 14 preferred stock company authorized class undesignated preferred stock consisting 100000 shares 001 par value board directors may authorize issuance preferred stock ranks senior common stock respect payment dividends distribution assets liquidation addition board directors authorized fix limitations restrictions upon payment dividends common stock effective shares preferred stock outstanding board directors without stockholder approval issue preferred stock voting conversion rights could adversely affect voting power holders common stock june 30 2008 2007 shares preferred stock outstanding company present intention issue shares preferred stock 15 stock repurchase program time company made repurchases stock authorized various programs established company’s board directors september 25 2007 company announced board directors approved stock repurchase program replaced company’s existing program allowed company repurchase total 25 million issued outstanding shares common stock june 23 2008 company announced board directors approved new stock repurchase program provide company flexibility buy shares new program allows company repurchase additional 100 million issued outstanding shares common stock expiration repurchase program require company purchase specific number shares purchases program depend market conditions may commenced august 25 2008 suspended time without prior notice june 30 2008 573301 remaining repurchase september 25 2007 plan 10 million available repurchase recently authorized program june 23 2008 plan year ended june 30 2008 company repurchased retired 867839 shares common stock cost 24426699 average market price 2815 per share using available cash commission related administrative costs associated stock repurchased totaled 34714 1326 respectively shares repurchased settled june 30 2008 year ended june 30 2007 company repurchased retired 10000 shares common stock cost 238000 average market price 2380 per share using available cash repurchases stock fiscal year 2007 done repurchase plan approved board march 16 2005 allowed 400000 shares repurchased expiration commission costs associated stock repurchased fiscal year ended june 30 2007 totaled 400 year ended june 30 2006 company repurchased retired 20000 shares common stock cost 441000 average market price 2205 per share using available cash commission costs associated stock repurchased fiscal year ended june 30 2006 totaled 800 16 stockbased compensation company uses provisions sfas 123r using modified prospective approach accounts stockbased compensation applying fair value method expensing stock options nonvested stock awards cash settled stock appreciation rights accordingly total stockbased compensation expense 5323155 2895464 2358848 years ended june 30 2008 2007 2006 respectively fiscal year 2008 stockbased compensation expense includes onetime accelerated vesting charge 2974033 described total income tax benefit recognized consolidated statements income sharebased compensation costs 1809873 984458 802008 years ended june 30 2008 2007 2006 respectively compensation expense related stockbased awards classified statement operations within line items salary expense recorded awards’ relevant vesting period compensation expense related stockbased awards granted members board directors recorded component general administrative expense december 5 2007 company held 2007 annual meeting stockholders considered approved company’s sixth amended restated kensey nash corporation employee incentive compensation plan employee plan employee plan became effective immediately upon stockholders’ approval employee plan authorized additional 350000 shares company’s common stock issuance increased 20 50 percentage company’s shares common stock stockholder must acquire trigger change control employee plan company employee incentive compensation plan “employee plan” officers nonemployee directors employees company reward individuals contributed hired contribute growth success company june 30 2008 total number shares authorized issuance employee plan 4700000 options purchase total 1639044 shares company’s common stock weighted average exercise price 2162 outstanding 31199 nonvested stock awards outstanding options purchase total 2617653 shares company’s common stock previously exercisedissued 412104 shares remained available new awards company also nonemployee directors’ stock option plan “directors’ plan” june 30 2008 total 410000 shares authorized issuance directors’ plan nonqualified options purchase total 310500 shares company’s common stock weighted average exercise price 2043 outstanding options purchase total 99500 shares company’s common stock previously exercised directors’ plan result shares remained available new awards directors’ plan awards previously granted directors’ plan granted employee plan consideration service board directors date annual meeting stockholders company nonemployee director elected reelected continues serve director term expired receives grant restricted common stock vests three equal installments first three anniversaries grant date subject achievement certain targets discretion compensation committee additional grants options purchase shares common stock may made nonemployee director time exercisable fair market value shares date grant options would typically exercisable maximum term 10 years date grant would vest three equal annual parts first three anniversaries grant accelerated vesting equity awards august 30 2007 acquisition ramius capital group llc affiliates 20 percent companys outstanding common stock constituted “change control” defined employee plan result outstanding unvested stock options stock appreciation rights sars nonvested stock awards held officers employees directors others plan automatically became vested case options stock appreciation rights exercisable full part accelerated vesting unvested stock option grants purchase 114405 shares company’s common stock became fully vested exercisable options nonemployee members board directors held options purchase 37500 shares employees held options purchase remaining 76905 shares unvested stock options held executive officers compensation expense would otherwise recorded weighted average period 185 years 920131 607286 net related tax effects recognized accelerated vesting charge fiscal year ended june 30 2008 addition 283690 sars also became fully vested exercisable august 30 2007 sars 179690 awards granted employees stock price 2988 remaining 104000 sar awards granted officers stock price 3136 accelerated vesting charge 429760 283642 net related tax effects recognized fiscal year ended june 30 2008 total 94537 shares nonvested stock awards became fully vested released market value 2397 per share closing price company’s common stock august 30 2007 nonemployee members board directors held 34780 shares 45031 shares held officers employees held remaining 14726 shares compensation expense 1624142 1071934 net related tax effects otherwise would recorded weighted average period 136 years recognized fiscal year ended june 30 2008 accelerated vesting charge stock options stock options granted employees members board directors company well nonemployee outside consultants fair value calculated blackscholes optionpricing model years ended june 30 2008 2007 2006 company recognized expense 1901510 877947 960387 respectively related stock options included fiscal year 2008 stock option expense 920131 related accelerated vesting charge described june 30 2008 2603002 unrecognized compensation costs related unvested stock options granted two equity compensation plans cost expected recognized weightedaverage period 232 years total intrinsic value options exercised years ended june 30 2008 2007 2006 7717073 5011216 3096377 respectively summary stock option activity plans fiscal years ended june 30 2008 2007 2006 follows fair value option grant estimated date grant using blackscholes optionpricing model uses weighted average assumptions noted following table options exercisable maximum term ten years date grant typically vest periods zero three years grant date expected volatilities based historical volatility company’s common stock factors company uses historical data estimate option exercise employee termination within valuation model separate groups employees similar historical exercise behavior considered separately valuation purposes expected term options derived historical exercise behavior represents period time options granted expected outstanding terms given results certain groups employees exhibiting different behavior riskfree rate periods within contractual life option based us treasuries constant maturities effect time grant assumptions used calculate fair value options granted directors’ plan employee plan using blackscholes optionpricing model set forth following table following table summarizes significant option groups outstanding employee directors’ plans june 30 2008 related weighted average exercise price remaining contractual life information nonvested stock awards nonvested stock awards granted nonemployee members board directors executive officers certain management company nonemployee outside consultant pursuant employee plan nonvested shares granted executive officers management nonemployee members board directors nonemployee consultants usually referred restricted shares sfas 123r reserves term fully vested outstanding shares whose sale contractually governmentally prohibited specified period time fair value based upon closing price company’s common stock date grant fiscal years ended june 30 2008 2007 2006 company recognized expense 2050892 1575546 1398461 respectively related nonvested stock awards included fiscal year 2008 nonvested stock award expense 1624142 related accelerated vesting charge described june 30 2008 estimated 754881 unrecognized compensation costs related nonvested stock awards granted company’s two equity compensation plans cost expected recognized weighted average period 234 years total fair value shares vested years ended june 30 2008 2007 2006 2487246 1540228 529832 respectively year ended june 30 2008 company granted shares nonvested common stock nonemployee members board directors nonemployee consultant company granted shares nonvested common stock nonemployee members board directors executive officers management company years ended june 30 2007 2006 shares granted executive officers management vest three equal annual installments based solely continued employment company shares granted nonemployee members board directors also vest three equal annual installments anniversary date grant based solely continuation service company shares granted nonemployee consultant vest quarterly two years based performance services two year period company unvested shares forfeited upon termination service board directors employment applicable following table outlines nonvested stock awards fiscal years ended june 30 2008 2007 2006 cash settled stock appreciation rights cashsettled stock appreciation rights sars awards granted eligible employees fiscal year ended june 30 2007 sars awards granted fiscal year ended june 30 2008 award granted provides participant right receive payment cash upon exercise appreciation market value specified number shares company’s common stock award’s exercise price pershare exercise price sar equal closing market price share company’s common stock date grant november 14 2007 company offered buy back sars current eligible employees excluding executive officers fair market value buyout price based closing price company’s common stock december 14 2007 offer resulted company purchasing 173940 sars buyout price 647 per sar total 1125392 excluding company’s portion payroll taxes paid participating eligible employees represented approximately 99 participation eligible employees sars outstanding fiscal years ended june 30 2008 2007 company recognized expense 1370753 441971 respectively related outstandingawarded sars included fiscal year 2008 sar award expense 429760 related accelerated vesting charge described result accelerated vesting equity awards june 30 2008 unrecognized compensation costs related sars june 30 2008 average fair market value remaining sar 655 related liability remaining sars 686267 sars continue remeasured reporting period awards settled june 30 2008 total 1126457 excluding company payroll tax sharebased liabilities paid cash settled sars exercised repurchased fiscal year 2008 following table outlines cashsettled sar awards fiscal years ended june 30 2008 2007 fair value sar grant estimated using blackscholes optionpricing model uses weighted average assumptions noted following table sars exercisable maximum term five years date grant vest period three years grant date expected volatilities based historical volatility company’s common stock factors company uses historical data estimate sar employee termination within valuation model separate groups employees similar historical exercise behavior considered separately valuation purposes expected term cashsettled stock appreciation rights determined using simplified method accordance question 6 sec sab 107 topic 1402 “expected term” time historical exercise behavior established company believes calculation provides reasonable estimate expected term december 12 2007 sab 110 issued extend simplified method beyond 2007 companies concluded historical exercise experience sufficient provide reasonable basis riskfree rate periods within contractual life sar based us treasuries constant maturities cashsettled sars awarded stockbased payment transactions accounted sfas 123r classifies awards liabilities accordingly company records awards component noncurrent liabilities balance sheet liability awards fair value award determines measurement liability balance sheet remeasured reporting period award settled fluctuations fair value liability award recorded increases decreases compensation cost either immediately remaining service period depending vested status award 17 segment reporting operating segments identified components enterprise separate discrete financial information available evaluation chief operating decisionmaking group making decisions regarding allocate resources assess performance based criteria established sfas 131 disclosures segments enterprise related information sfas 131 company’s operations products aggregated single reportable segment since similar economic characteristics production processes types customers distribution methods company provides extensive range products multiple medical markets primarily sports medicine spine endovascular markets many products based company’s significant expertise design development manufacturing processing resorbable biomaterials led partnerships commercialize technologies company designs markets various resorbable polymer collagen products respect endovascular products company currently designs manufactures thrombectomy chronic total occlusion devices prior july 10 2007 designed manufactured marketed sold embolic protection devices company also receives royalty revenue primarily sale angioseal units st jude medical sales vitoss foam products orthovita net sales product line reconciliation total revenue follows years ended june 30 2008 2007 2006 revenues st jude medical arthrex orthovita represented following percentages total revenues company’s revenues external customers categorized geographically revenues attributed country based location customer company’s business dependent foreign operations one country us represented 10 company’s revenues addition company’s longlived assets located us 18 certain compensation employment agreements company entered employment agreements certain officers employment agreements provide among things aggregate annual base salaries 811360 fiscal 2009 19 retirement plan company voluntary 401k salary reduction plan trust 401k plan employees least 21 years age eligible participate company provides 50 discretionary matching contribution 6 employee’s total salaried compensation employee contributions total company contributions 401k plan fiscal years ended june 30 2008 2007 2006 490658 477603 418943 respectively 20 opportunity grant november 2004 company awarded 500000 grant opportunity grant program department community economic development commonwealth pennsylvania department grant awarded company potential jobcreating economic development opportunities created company’s construction new facility within state pennsylvania grant conditioned upon following 1 company would create 238 fulltime jobs within five years beginning april 1 2003 date company’s request grant 2 company would invest least 54250000 total project costs including limited personnel land building construction within three years beginning july 19 2004 date company’s facility groundbreaking 3 company would operate new facility minimum five years date occupancy december 2005 company received cash payment 500000 third quarter fiscal 2005 result company’s decision discontinue embolic protection platform recent sale endovascular business job creation requirement grant program met company petitioned state reference failure meet criteria although exceeding required investment facility continuing meet occupancy criterion subsequent june 30 2008 company received letter department stating would impose penalty 150000 satisfy breach grant company expects pay entire penalty end first quarter fiscal year 2009 revenue recognized related grant fiscal year ended june 30 2008 due management’s uncertainty company’s ability meet job creation criteria revenue related grant fiscal years ended june 30 2007 2006 81081 recognized component income remaining deferred revenue opportunity grant 187838 june 30 2008 21 income taxes company accounts taxes provisions sfas 109 accounting income taxes sfas 109 company adopted provisions fin 48 july 1 2007 connection adoption company recorded net decrease retained earnings 204615 reclassified certain previously recognized deferred tax attributes fin 48 liabilities amount unrecognized tax benefits june 30 2008 193132 176795 would impact company’s tax rate recognized upon initial adoption fin 48 july 1 2007 company recorded 18330 potential interest penalties unrecognized tax benefits interest penalties included interest expense respectively consolidated statements income additional interest penalties 8712 5955 recorded fiscal year ended june 30 2008 respectively changes company’s uncertain tax positions year ended june 30 2008 follows company subsidiaries file us federal various state income tax returns company longer subject us federal pennsylvania income tax examination years prior fiscal 2005 due expiration applicable statutes limitation company expect total amount unrecognized tax benefits change significantly next 12 months company awaiting congressional approval extending research experimentation tax credit calendar year 2008 unless time 2008 tax credit extension approved company claim research development tax credits december 31 2007 component tax provision related ongoing performance qualified research development previously approved congressional extension tax credit december 2007 enabled company record retroactive adjustments tax provision second quarter ended december 31 2006 company recorded tax credits 219232 512963 528017 fiscal years ended june 30 2008 2007 2006 respectively earnings income taxes earned within outside united states shown provision income taxes composed following differences company’s income tax expense benefit income tax expense benefit computed using us federal income tax rate follows significant components companys deferred tax assets liabilities follows portion company’s deferred tax asset offset valuation allowance relating state nol carryforwards due restrictions imposed uncertainty surrounding use valuation allowance reduces deferred tax assets amount represents management’s best estimate amount deferred tax assets likely realized june 30 2008 company state nol carryforward totaling 600 million expire 2027 longer federal nol carryforward company recorded full valuation allowance state net operating losses 600 million company longer foreign nol result sale endovascular division 22 earnings per share following table shows reconciliation numerators denominators basic diluted eps calculations income numerator weighted average number shares denominator 23 quarterly financial data unaudited summarized quarterly results operations company years ended june 30 2008 2007 presented quarterly total year earnings per share calculated independently based weighted average number shares outstanding period 24 discontinuance embolic protection platform july 10 2007 company announced ceased activities embolic protection platform includes triactiv® fx proguard™ product line including proguard clinical trial product manufacturing sales marketing research development activities strategic decision made reduce costs provide better resource allocation company’s endovascular biomaterials businesses allow company’s sales force focus company’s thrombectomy chronic total occlusion platforms company believed changing embolic protection market dynamics negative particularly carotid market cost participate effectively markets high warrant investment company recognized asset impairment related charges totaling approximately 50 million taxes charges include cash charges primarily related severance clinical trial contract termination costs totaling approximately 04 million aggregate charges also include noncash charges totaling approximately 46 primarily related abandonment inventory machinery equipment approximately 50 million charges approximately 47 million including 46 million noncash asset impairment charges 01 million cash charges recorded fourth quarter ended june 30 2007 remainder recognized first fiscal quarter 2008 charges fiscal year ended june 30 2008 presented within company’s results continuing operations depicted table severance charges decision communicated affected employees july 10 2007 resulted net reduction 11 personnel employee severance costs 02 million severance costs recognized company’s financial statements first fiscal quarter 2008 asset impairment charges company recorded pretax charges fourth quarter fiscal 2007 abandonment certain embolic protection machinery equipment approximately 13 million company also recorded inventory related embolic protection charges quarter approximately 30 million addition charges approximately 03 million proguard clinical trial assets incurred quarter contract termination charges fourth quarter fiscal 2007 company incurred pretax charges approximately 01 million contract termination embolic protection related charges remaining contract termination costs approximately 01 million including reduction clinical trial expenses 01 million recognized first fiscal quarter 2008 cash charges related contract termination embolic protection related charges totaled approximately 02 million fourth quarter fiscal 2007 25 sale endovascular business may 30 2008 company completed sale endovascular business spectranetics corporation “spectranetics” strategic decision sell endovascular business made maximize value company’s endovascular business forming strategic relationship spectranetics company believes well positioned maximize adoption company’s technologies thrombus removal chronic total occlusion markets relationship similar company’s partnerships biomaterials market allows kensey nash focus core competencies rd regulatory clinical development manufacturing utilizing strengths partners’ existing wellestablished sales marketing organizations pursuant asset purchase agreement dated may 12 2008 company sold spectranetics assets related quickcat™ thromcat® safecross® product lines including european subsidiary kensey nash europe gmbh 100 million cash terms asset purchase agreement spectranetics pay company additional 60 million cumulative sales acquired products reach 200 million may pay company additional 80 million upon achievement certain milestones described may 30 2008 company spectranetics also entered manufacturing licensing agreement pursuant company manufacture spectranetics endovascular products acquired spectranetics asset purchase agreement spectranetics purchase products exclusively company specified time periods ranging six months quickcat™ three years thromcat® safecross® arrangement manufacture thromcat® safecross® may extended beyond initial threeyear manufacturing period agreement parties time spectranetics pay transfer prices products based company’s cost manufacture products plus percentage end user sales price thromcat safecross products additionally company’s manufacture thromcat safecross products transferred spectranetics obligated pay company royalty sales products amount royalty based upon timing reason manufacturing transfer certain cases upon amount revenue generated thromcat safecross products applicable year royalty subject reduction depending upon scope patent protection obtained thromcat product company’s manufacture quickcat product transferred spectranetics obligation make additional payments company related future sales quickcat product also may 30 2008 company spectranetics entered development regulatory services agreement pursuant company conduct work develop obtain regulatory approval fda certain nextgeneration safecross® thromcat® products company’s expense behalf spectranetics intellectual property resulting development work clinical studies required obtain approval fda nextgeneration products costs shared equally company spectranetics pay company 80 million upon completion product development activities regulatory approvals certain nextgeneration products company received initial 100 million cash proceeds asset purchase agreement assets liabilities stockholders’ equity related endovascular business sold spectranetics follows company incurred additional expenses connection sale follows company received initial cash payment 100 million sale endovascular business including stock kensey nash europe gmbh exchange net tangible assets 33 million intangible assets 13 million addition company reduced goodwill 64 million recorded asset impairment charges totaling approximately 14 million recognized transaction related costs approximately 32 million including transaction contract termination fees obligation upgrade existing inventory development regulatory services agreement also conjunction transaction company recorded onetime charge approximately 24 million associated severance related costs upon closing transaction result components described company recognized 81 net charges related sale endovascular business loss include future benefit achieving future milestones royalties received agreements expected exceed cost accomplishing milestones following table shows charges resulting sale company’s endovascular business operating expense category consolidated statements income fiscal 2008 item 9 item 15 exhibits financial statement schedules consolidated financial statements schedules incorporated reference item 8 report form 10k 15 b financial statement schedules omitted required applicable information scheduled financial statements notes thereto 15 c exhibits  management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 14th day september 2009 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 14th day september 2009 signature titles joseph w kaufmann joseph w kaufmann chief executive officer principal executive officer president secretary director john e nash pe john e nash pe vice president new technologies director emeritus douglas g evans pe douglas g evans pe chief operating officer assistant secretary director michael celano michael celano chief financial officer principal financial accounting officer robert j bobb robert j bobb director harold n chefitz harold n chefitz director walter r maupay jr walter r maupay jr director c mccollister evarts md c mccollister evarts md director steven j lee steven j lee director item 15 exhibits financial statement schedules reports form 8k 15a 1 financial statements following financial statements included report independent auditors report consolidated balance sheets june 30 2003 2002 consolidated statements income years ended june 30 2003 2002 2001 consolidated statements stockholders equity years ended june 30 2003 2002 2001 consolidated statements cash flows years ended june 30 2003 2002 2001 notes consolidated financial statements independent auditors report board directors shareholders kensey nash corporation audited accompanying consolidated balance sheets kensey nash corporation subsidiaries company june 30 2003 2002 related consolidated statements income stockholders equity cash flows three years period ended june 30 2003 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position company june 30 2003 2002 results operations cash flows three years period ended june 30 2003 conformity accounting principles generally accepted united states america deloitte touche llp philadelphia pennsylvania august 15 2003 kensey nash corporation consolidated balance sheets see notes consolidated financial statements kensey nash corporation consolidated statements income see notes consolidated financial statements kensey nash corporation consolidated statements stockholders equity kensey nash corporation consolidated statements cash flows supplemental disclosure financing information year ended june 30 2001 company entered acquisition obligation connection acquisition thm biomedical inc see note 4 present value acquisition obligation date acquisition 2309386 see notes consolidated financial statements kensey nash corporation notes consolidated financial statements years ended june 30 2003 2002 2001 1 summary significant accounting policies business kensey nash leader development manufacturing cardiovascular medical technology devices embolic protection arterial puncture closure company developing triactivr balloon protected flush extraction system triactiv device designed provide embolic protection saphenous vein graft treatment received european ce mark approval triactiv january 2002 commercialized device fourth quarter fiscal year ended june 30 2002 fiscal 2002 marketing selling device europe direct sales force germany distributors throughout rest europe clinical trials underway united states also developing additional applications triactiv including treatment diseased carotid native arteries well ami additionally company original designer developer manufacturer angioseal vascular closure device angioseal leading product arterial puncture closure manufactured marketed sold st jude medical inc device designed seal close femoral artery punctures made diagnostic therapeutic cardiovascular catheterizations developed assisted developing manufacturing absorbable biomaterials products leading companies orthopaedic cardiology drugbiologics delivery periodontal general surgery wound care markets incorporation products also independently behalf customers designing developing various new absorbable biomaterials products markets company incorporated delaware august 6 1984 principles consolidation basis presentation consolidated financial statements include accounts kensey nash corporation kensey nash holding company kensey nash europe gmbh intercompany transactions balances eliminated kensey nash holding company incorporated delaware january 8 1992 formed hold title certain company patents operations kensey nash gmbh incorporated germany january 2002 formed purpose european sales marketing triactiv commercially launched europe may 2002 preparation consolidated financial statements conformity accounting principles generally accepted united states america necessarily requires management make estimates assumptions estimates assumptions may differ actual results affect reported amounts assets liabilities disclosure contingent assets liabilities dates financial statements well reported amounts revenue expense periods presented cash equivalents cash equivalents represent cash banks shortterm investments original maturity less three months fair value financial instruments carrying amounts financial instruments including cash equivalents shortterm investments accounts receivable accounts payable debt approximated fair value june 30 2003 2002 fair value shortterm investments based quoted market prices investments june 30 2003 consisted primarily high quality us government municipal corporate obligations accordance statement financial accounting standards sfas 115 accounting certain investments debt equity securities sfas 115 company classified entire investment portfolio availableforsale marketable securities secondary resale markets companys entire investment portfolio reported fair value unrealized gains losses included stockholders equity see comprehensive income following summary availableforsale securities june 30 2003 2002 majority investments maturities ranging 314 years also certain municipal variable rate demand obligations maturities ranging 20 30 years municipal variablerate demand obligations putable weekly callable monthly basis realized gains losses investments years ended june 30 2003 2002 2001 year ended june 30 2002 certain securities pledged collateral presented restricted investments see note 11 comprehensive income company accounts comprehensive income provisions sfas 130 reporting comprehensive income sfas 130 accordingly accumulated comprehensive loss income shown consolidated statements shareholders equity june 30 2003 2002 2001 comprised net unrealized gains losses companys availableforsale securities foreign currency translation adjustments tax effect 2003 2002 2001 comprehensive income 68073 21006 131504 respectively inventory stated lower cost determined average cost method approximates firstin firstout market inventory primarily includes cost material utilized processing companys products follows property plant equipment property plant equipment consists primarily machinery equipment leasehold improvements recorded cost maintenance repairs expensed incurred machinery furniture equipment depreciated using straightline method useful life ranging one seven years leasehold improvements amortized using straightline method lesser term lease useful life asset goodwill represents excess cost fair value identifiable net assets thm biomedical inc thm company acquired september 2000 see note 4 thm acquisition note 3 goodwill effective july 1 2001 company adopted sfas 141 business combinations sfas 141 sfas 142 goodwill intangible assets sfas 142 sfas 141 requires purchase method accounting used business combinations subsequent june 30 2001 specifies criteria recognizing intangible assets acquired business combination sfas 142 goodwill intangible assets indefinite useful lives longer amortized subject annual impairment tests intangible assets definite useful lives continue amortized respective useful lives company recorded 100036 goodwill amortization expense year ended june 30 2001 goodwill amortization expense years ended june 30 2002 2003 would 205111 respectively company adopted sfas 142 adoption sfas 142 result reclassification intangible assets changes amortization periods intangible assets definite lives impairment intangible assets impairment longlived assets longlived assets reviewed impairment whenever events circumstances indicate carrying amount asset may recoverable undiscounted expected future cash flows generated related asset less carrying value asset company measures amount impairment comparing carrying amount asset fair value estimation fair value generally measured discounting expected future cash flows rate company borrows accounts receivable allowance company trade receivable allowances 131582 42500 june 30 2003 2002 respectively company established trade receivable allowances 93474 68357 wrote amounts totaling 4392 26857 years ended june 30 2003 2002 respectively amounts included selling general administrative expense years ended june 30 2003 2002 patents costs internally developed patents expensed incurred due long development cycle patents companys inability measure recoverability costs incurred entire cost acquired patents amortized remaining period economic benefit ranging 6 11 years june 30 2003 gross carrying amount patents june 30 2003 4096366 accumulated amortization 1422718 amortization expense patents 263026 fiscal year ended june 30 2003 amortization expense companys acquired patents estimated 263026 years ending june 30 2004 2005 2006 2007 2008 revenue recognition company recognizes revenue provisions staff accounting bulletin sab 101 revenue recognition financial statements sab 101 accordingly sales revenue recognized related product shipped product shipped free board shipping point revenue research development contracts recognized related expenses incurred advance payments received products services recorded deferred revenue recognized product shipped services performed company receives 9 royalty every angioseal unit sold st jude medical licensee original rate 12 contractually reduced 12 9 accordance licensing agreements quarter ended december 31 2000 cumulative one million angioseal units sold one decrease royalty rate 6 upon reaching four million cumulative units sold anticipate final rate reduction occur fourth quarter fiscal 2004 june 30 2003 approximately three million angioseal units sold company recognizes royalty revenue accordance licensing agreement company st jude medical end month st jude medical advises company total angioseal sales dollars month royalty payments received within 45 days end calendar quarter income taxes company accounts income taxes provisions sfas 109 accounting income taxes sfas 109 see note 10 earnings per share earnings per share calculated accordance sfas 128 earnings per share sfas 128 requires company report basic diluted earnings per share eps basic diluted eps computed using weighted average number shares common stock outstanding common equivalent shares options included diluted computation effect dilutive see note 17 stockbased compensation stockbased compensation cost accounted sfas 123 accounting stockbased compensation sfas 123 permits recognition fair value stockbased awards expense ii continued application intrinsic value method accounting principles board opinion 25 accounting stock issued employees apb 25 company accounts stockbased employee director compensation plans recognition measurement principles apb 25 intrinsic value method compensation cost represents excess quoted market price companys common stock grant date amount grantee must pay stock companys policy grant stock options fair market value date grant see note 16 options granted nonemployees defined sfas 123 recorded compensation expense see note 12 options granted outside consultant company october 2002 company grant options nonemployees nonemployee directors fiscal years ended june 30 2002 2001 december 2002 fasb issued sfas 148 accounting stockbased compensation transition disclosure amendment fasb statement 123 accounting stockbased compensation sfas 148 company implemented disclosure provisions sfas 148 period ended december 31 2002 accordingly compensation cost recognized companys two stock option plans compensation cost plans determined based fair market value options grant date consistent provisions sfas 123 amended sfas 148 companys fullytaxed net income earnings per share would reduced pro forma amounts derivative instruments hedging activities company recognizes derivatives either assets liabilities balance sheet depending companys rights obligations applicable derivative contract measures instruments fair value company derivative instruments fiscal years ended june 30 2003 2002 2001 new accounting pronouncements june 2001 fasb issued sfas 143 accounting asset retirement obligations sfas 143 sfas 143 addresses accounting standards obligations associated retirement tangible longlived assets associated asset retirement costs effective companys fiscal year ended june 30 2003 adoption statement material impact companys financial position results operations august 2001 fasb issued sfas 144 accounting impairment disposal longlived assets sfas 144 sfas 144 retains requirements sfas 121 accounting impairment longlived assets longlived assets disposed recognize impairment loss carrying amount longlived asset recoverable undiscounted cash flow b measure impairment loss difference carrying amount fair value asset sfas 144 establishes single model accounting longlived assets disposed sale effective companys fiscal year ended june 30 2003 adoption sfas 144 material impact companys financial position results operations june 2002 fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 requires liability cost associated exit disposal activity recognized liability incurred rather date commitment exit disposal plan nullifies emerging issues task force eitf 943 sfas 146 applies exit disposal activities initiated december 31 2002 sfas 146 material impact companys financial position results operations november 2002 fasb issued financial interpretation 45 fin 45 guarantors accounting disclosure requirements guarantees including indirect guarantees others fin 45 requires liability recorded guarantors balance sheet upon issuance guarantee addition fin 45 requires disclosure guarantees entity issued including reconciliation changes entitys product warranty liabilities initial recognition initial measurement provisions fin 45 applicable prospective basis guarantees issued modified december 31 2002 irrespective guarantors fiscal year end disclosure requirements fin 45 effective financial statements interim annual periods ending december 15 2002 adoption fin 45 material impact companys financial position results operations december 2002 fasb issued sfas 148 accounting stockbased compensation transition disclosure amendment fasb statement 123 accounting stockbased compensation sfas 148 provide alternative methods transition voluntary change fair value based method accounting stockbased employee compensation addition sfas 148 amends disclosure requirements sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results effective companys interim periods beginning january 1 2003 june 30 2003 adopted disclosureonly provisions sfas 148 continue account stockbased compensation apb opinion 25 accounting stock issued employees adoption sfas 148 impact financial position results operations january 2003 fasb issued financial interpretation 46 fin 46 consolidation variable interest entities interpretation accounting research bulletin 51 consolidated financial statements fin 46 requires unconsolidated variable interest entities consolidated primary beneficiaries applies immediately variable interest entities created january 31 2003 existing entities periods beginning june 15 2003 company affiliated variable interest entity currently fin 46 impact financial position results operations however adopt provisions fin 46 time become applicable business april 2003 fasb issued sfas 149 amendment statement 133 derivative instruments hedging activities sfas 149 amends clarifies financial accounting reporting derivative instruments including certain derivative instruments embedded contracts collectively referred derivatives hedging activities fasb statement 133 accounting derivative instruments hedging activities sfas 133 sfas 149 effective contracts entered modified hedging relationships designated june 30 2003 provisions sfas 149 relate sfas 133 implementation issues continue applied accordance respective dates companys adoption sfas 149 expected material impact companys financial position results operations may 2003 fasb issued sfas 150 accounting certain financial instruments characteristics liabilities equity sfas 150 establishes standards issuer classifies measures certain financial instruments characteristics liabilities equity requires issuer classify financial instrument within scope liability asset circumstances sfas 150 effective financial instruments entered modified may 31 2003 otherwise effective beginning first interim period beginning june 15 2003 companys adoption sfas 150 expected material impact companys financial position results operations presentation certain items 2002 consolidated financial statements reclassified conform presentation 2003 consolidated financial statements 2 strategic alliance agreements company strategic alliance st jude medical inc st jude medical incorporates united states foreign license agreements together license agreements collagen supply agreement see license agreements license agreements st jude medical exclusive rights manufacture market current future sizes angioseal worldwide also license agreements company receives royalty payments based upon percentage revenues generated sale angioseal collagen supply agreement pursuant agreement st jude medical company manufactures collagen used angioseal agreement contains minimum purchase requirement st jude medical price fluctuates based product size cumulative quantities sold three years ended november 30 2005 3 goodwill company adopted provisions sfas 142 july 1 2001 sfas 142 goodwill longer amortized subject annual impairment tests company established annual impairment testing date june 30th fiscal year changes net carrying amount goodwill year ended june 30 2003 june 30 2002 company completed initial required goodwill impairment test sfas 142 first quarter fiscal 2002 recent tests fiscal 2003 2002 indicated goodwill impaired following table reconciles net income basic diluted earnings per share fiscal years ended june 30 2003 2002 2001 statement effective july 1 1999 4 thm acquisition september 1 2000 company acquired thm developer porous biodegradable tissueengineering devices repair replacement musculoskeletal tissues approximately 105 million plus acquisition costs approximately 239000 transaction financed 66 million companys cash note payable shareholders thm amount 45 million acquisition obligation acquisition obligation due equal quarterly installments 281250 beginning december 31 2000 ending september 30 2004 accordingly present value cash payments discounted based upon companys available borrowing rate 75 3833970 recorded liability companys consolidated financial statements remaining balance 1056136 june 30 2003 quarter ended march 31 2003 company repaid certain debt holders thereby reducing companys remaining quarterly installments 223256 september 30 2004 acquisition accounted purchase method accounting thms results operations included company since date acquisition purchase price allocated assets acquired liabilities assumed based estimated fair values date acquisition allocation resulted goodwill approximately 34 million following summary allocation thousands significant portion purchase price identified acquired inprocess research development iprd valuation iprd performed independent appraisal using proven valuation procedures techniques represented estimated fair market value based riskadjusted cash flows related iprd programs iprd consists four primary research development programs expected reach completion late 2003 2005 date acquisition development programs yet reached technological feasibility iprd alternative future uses accordingly costs immediately expensed consolidated statement operations acquisition date following unaudited proforma financial information assumes acquisition occurred beginning period presented pro forma fiscal year 2001 financial information reflects iprd charge 76 million pro forma results based certain assumptions estimates pro forma results necessarily represent results would occurred acquisition taken place beginning specified periods indicative results future combined operations 5 leases june 30 2003 future minimum annual rental commitments noncancelable lease obligations follows rent expense operating leases consists rent companys facilities exton pennsylvania duluth minnesota eschborn germany rent expense fiscal years ended june 30 2003 2002 2001 approximately 697000 511000 402000 respectively 6 officer loans company granted loans current officer company totaling 20 million personal use collateralized officers stock interest loans ranged 525 7 based prime rate interest total interest income earned company loans 91607 92092 66166 fiscal years ended june 30 2003 2002 2001 respectively capitalized loan balance additional principal amounts loaned annual period ended june 30 2003 interest principal loans due earlier sale portion officers stock march 2003 sarbanesoxley act 2002 soa loans could renewed extended due date june 30 2003 officer repaid entire loan amount full 7 patent acquisition agreement november 1997 company entered agreement patent acquisition agreement acquire portfolio puncture closure patents patent applications well rights seller preexisting licensing agreement acquired patents valued share price per share companys common stock multiplied number shares issued date patent acquisition agreement plus present value cash payments legal related costs incurred acquire patents amortized average remaining useful life acquired portfolio time acquisition approximately 15 years june 30 2003 remaining period amortization approximately 9 years 8 debt acquisition obligation june 30 2003 company 1056136 outstanding acquisition obligation see note 4 836989 current june 30 2003 9 retirement plan company 401k salary reduction plan trust 401k plan employees least 21 years age eligible participate contributions 401k plan made employees employee salary reduction election effective october 1 1999 company implemented 25 discretionary matching contribution 6 employees total compensation employee contributions employer contributions 401k plan 2003 2002 2001 117796 87500 70234 respectively 10 income taxes company accounts income taxes sfas 109 generally provides deferred tax assets liabilities recognized temporary differences financial reporting basis tax basis companys assets liabilities expected benefits utilizing net operating loss nol carryforwards impact deferred taxes changes tax rates laws applied years temporary differences expected settled reflected financial statements period enactment fourth quarter fiscal year ended june 30 2003 company recorded research development tax credit 15 million tax credit relates qualified research development activities company 2001 fiscal year company recognized tax benefit related realization certain deferred assets previously offset valuation allowance earnings income taxes earned within outside united states shown provision income taxes composed following differences companys income tax expense benefit income tax expense benefit computed using us federal income tax rate follows significant components companys deferred tax assets follows portion companys deferred tax asset offset valuation allowance relating state nol carryforwards due restrictions imposed state uncertainty surrounding use valuation allowance reduces deferred tax assets amount represents managements best estimate amount deferred tax assets likely realized june 30 2003 company nol carryforwards state tax purposes totaling 200 million expire though 2013 addition company foreign net operating loss 03 million june 30 2003 expire 11 commitments contingencies june 30 2002 company pledged 2113072 investments collateral secure bank loan officer used officer payment taxes incurred result receipt common stock companys initial public offering december 1995 exchange company pledging collateral loans affected officer pledged common stock collateral company companys security pledge 2161999 including interest accrued related loans released bank february 13 2003 officers loans bank repaid full 12 consulting contracts october 2002 company granted options purchase 50000 shares common stock physician pursuant fiveyear consulting agreement related development carotid artery application triactivr balloon protected flush extraction system company calculated fair value nonemployee options accordance sfas 123 375550 using blackscholes optionpricing model amount recorded prepaid consulting expense increase additional paid capital december 31 2002 prepaid expense amortized research development expense fiveyear term agreement accordingly 56333 recorded component research development expense year ended june 30 2003 13 concentration credit risk financial instruments potentially subject company significant concentrations credit risk consist primarily cash equivalents investments accounts receivable company places cash equivalents investments high quality financial institutions established guidelines relative diversification maturities maintain safety high liquidity single component companys investment portfolio represented 11 13 total investments june 30 2003 june 30 2002 respectively respect trade royalty receivables primarily st jude medical 42 100 36 100 trade royalty receivables respectively june 30 2003 2002 see note 2 trade receivable one customer 35 trade receivables june 30 2003 either one customers receivable balances deemed uncollectable would material adverse effect companys results operations financial condition company performs ongoing credit evaluations remainder customers financial conditions require collateral support customer receivables 14 certain compensation employment agreements company entered employment agreements certain officers provide aggregate annual base salaries 680000 june 30 2003 15 preferred stock company authorized class undesignated preferred stock consisting 100000 shares 001 par value board directors may authorize issuance preferred stock ranks senior common stock respect payment dividends distribution assets liquidation addition board directors authorized fix limitations restrictions upon payment dividends common stock effective shares preferred stock outstanding board directors without stockholder approval issue preferred stock voting conversion rights could adversely affect voting power holders common stock june 30 2003 2002 shares preferred stock outstanding company present intention issue shares preferred stock 16 stock option plans company employee incentive compensation plan employee plan flexible plan provides employee plan committee broad discretion award eligible participants stockbased performancerelated incentives committee deems appropriate persons eligible participate employee plan officers employees company opinion committee contribute growth success company compensation committee board directors oversees committee may grant nonqualified stock options incentive stock options combination thereof participants employee plan provides total 32 million shares available option grants options granted provide purchase common stock prices determined compensation committee event less closing price stock date grant june 30 2003 awards consist solely stock options summarized table company also nonemployee directors stock option plan directors plan directors plan grants nonqualified stock options purchase common stock directors employees directors plan total 410000 shares available option grants nonemployee director granted option purchase 5000 shares common stock directors plans effective date addition directors plan provides grant option purchase 7500 shares common stock nonemployee director date regular annual stockholder meeting participant must either continuing nonemployee director subsequent meeting elected meeting serve nonemployee director options granted directors plan must provide purchase common stock closing price stock date grant plans options exercisable maximum term ten years date grant vest periods zero four years based grant date summary stock option activity plans years ended june 30 2003 2002 2001 follows fair value option grant estimated date grant using blackscholes optionpricing model following weighted average assumptions used grants following table summarizes significant option groups outstanding june 30 2003 related weighted average exercise price remaining contractual life information follows 17 earnings per share following table shows reconciliation numerators denominators basic diluted eps calculations income numerator weighted average number shares denominator 18 segment reporting operating segments identified components enterprise separate discrete financial information available evaluation chief operating decisionmaking group making decisions regarding allocate resources assess performance based criteria established sfas 131 disclosures segments enterprise related information sfas 131 companys operations products aggregated single reportable segment since similar economic characteristics production processes types customers distribution methods companys primary products medical devices include biomaterials puncture closure angioseal embolic protection triactiv puncture closure primarily represented angioseal device component sales st jude medical respect biomaterials products company designs andor manufactures markets various absorbable polymer collagen products use numerous applications including orthopaedic cardiology drugbiologics delivery periodontal general surgery wound care company also receives royalty revenue sale angioseal units st jude medical research development revenue certain research development contracts grants triactiv commercially launched europe fourth quarter fiscal 2002 net sales product line reconciliation total revenue follows years ended june 30 2003 2002 2001 revenues st jude medical represented following percentages revenues company companys revenues external customers summarized revenues attributed country based location customer one country us represented 10 companys revenues addition companys longlived assets located us 19 quarterly financial data unaudited summarized quarterly results operations company years ended june 30 2003 june 30 2002 presented quarterly total year earnings per share calculated independently based weighted average number shares outstanding period 20 litigation company along st jude medical filed patent infringement suit perclose inc competitor puncture closure market original suit filed 1998 along subsequent amendment filed 1999 filed federal district court eastern district pennsylvania claim perclose infringes companys us patent numbers 5676689 5861004 patents cover systems methods related sealing percutaneous punctures company sought damages order permanently enjoin perclose making using selling products infringe patents november 1999 abbott laboratories acquired perclose filed four counterclaims companys suit answer complaint first counterclaim sought declare companys patents invalid infringed additional counterclaims asserted perclose alleged companys claims frivolous asserted various antitrust counterclaims including price discrimination predatory pricing attempted monopolization puncture closure market us district court eastern district pennsylvania entered markman hearing order regarding claims interpretation favor defendant perclose judge denied companys motion reconsideration august 21 2001 parties stipulated final judgement entered october 19 2001 november 15 2001 company filed timely notice appeal thereby initiating appeal court appeals federal circuit cafc oral arguments heard december 3 2002 february 5 2003 cafc issued opinion affirmed district courts decision company decided appeal decision therefore case concluded company expensed legal costs component selling general administrative expenses services incurred expenses related lawsuit anticipated 15a 2 financial statement schedules omitted required applicable information scheduled financial statements notes thereto 15a 3 exhibits exhibit incorporated reference exhibit number current report form 8k filed sec november 30 2000 exhibit incorporated reference exhibit number registration statement form s1 registration 3398722 exhibit incorporated reference exhibit number quarterly report form 10q quarterly period ended september 30 2001 exhibit incorporated reference exhibit 43 44 registration statement form s8 registration 33371050 exhibit incorporated reference exhibit number annual report form 10k fiscal year ended june 30 2001 exhibit incorporated reference exhibit number registration statement form s3 registration 33335494 management contract compensatory plan arrangement required filed exhibit annual report form 10k 15b reports form 8k filed form 8k august 13 2003 furnish press release announcing results operations financial position three month period fiscal year ended june 30 2003 pursuant items 7 12 form 8k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 29th day september 2003 kensey nash corporation wendy f dicicco wendy f dicicco chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 29th day september 2003 item 15 exhibits financial statement schedules 15a consolidated financial statements schedules incorporated reference item 8 report form 10k 15b financial statement schedules omitted required applicable information scheduled financial statements notes thereto 15c exhibits 1 exhibit incorporated reference exhibit number registration statement form s1 registration 3398722 2 exhibit incorporated reference exhibit number current report form 8k filed sec december 6 2006 3 exhibit incorporated reference exhibit 45 registration statement form s8 registration 33371050 4 exhibit incorporated reference exhibit number registration statement form s3 registration 33335494 5 exhibit incorporated reference exhibit number 101 current report form 8k filed sec december 12 2006 6 exhibit incorporated reference exhibit number quarterly report form 10q quarterly period ended march 31 2005 7 exhibit incorporated reference exhibit number 10 current report form 8k filed sec june 21 2005 8 exhibit incorporated reference exhibit number annual report form 10k annual period ended june 30 2006 9 exhibit incorporated reference exhibit number current report form 8k filed sec june 1 2006 10 exhibit incorporated reference exhibit number current report form 8k filed sec july 3 2007 11 exhibit incorporated reference exhibit number quarterly report form 10q quarterly period ended september 30 2001  management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 13th day september 2007 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 13th day september 2007 signature titles joseph w kaufmann joseph w kaufmann chief executive officer principal executive officer president secretary director john e nash pe john e nash pe vice president new technologies director douglas g evans pe douglas g evans pe chief operating officer assistant secretary director wendy f dicicco cpa wendy f dicicco cpa chief financial officer principal financial accounting officer robert j bobb robert j bobb director harold n chefitz harold n chefitz director walter r maupay jr walter r maupay jr director c mccollister evarts md c mccollister evarts md director steven j lee steven j lee director kim rosenberg kim rosenberg director item 15 financial statement schedules exhibits 15 consolidated financial statements schedules incorporated reference item 8 report form 10k 15 b 15 c financial statement schedules exhibits financial statement schedules omitted required applicable information scheduled financial statements notes thereto exhibits  management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 10th day september 2010 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 10th day september 2010 signature titles joseph w kaufmann chief executive officer principal executive officer president joseph w kaufmann secretary director douglas g evans pe chief operating officer assistant secretary director douglas g evans pe michael celano chief financial officer principal financial accounting officer michael celano robert j bobb director robert j bobb harold n chefitz director harold n chefitz walter r maupay jr director walter r maupay jr c mccollister evarts md director c mccollister evarts md donald e morel jr phd director donald e morel jr phd item 15 exhibits financial statement schedules 15 1 financial statements following financial statements included report independent registered public accounting firm board directors stockholders kensey nash corporation exton pennsylvania audited accompanying consolidated balance sheets kensey nash corporation subsidiaries “company” june 30 2006 2005 related consolidated statements income stockholders’ equity cash flows three years period ended june 30 2006 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position kensey nash corporation subsidiaries june 30 2006 2005 results operations cash flows three years period ended june 30 2006 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states effectiveness company’s internal control financial reporting june 30 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated september 13 2006 expressed unqualified opinion management’s assessment effectiveness company’s internal control financial reporting unqualified opinion effectiveness company’s internal control financial reporting deloitte touche llp philadelphia pennsylvania september 13 2006 kensey nash corporation consolidated balance sheets see notes consolidated financial statements kensey nash corporation consolidated statements income see notes consolidated financial statements kensey nash corporation consolidated statements stockholders’ equity see notes consolidated financial statements kensey nash corporation consolidated statements cash flows see notes consolidated financial statements kensey nash corporation notes consolidated financial statements years ended june 30 2006 2005 2004 1 summary significant accounting policies principles consolidation basis presentation consolidated financial statements include accounts kensey nash corporation kensey nash holding company kensey nash europe gmbh intercompany transactions balances eliminated company incorporated delaware august 6 1984 kensey nash holding company incorporated delaware january 8 1992 formed hold title certain company patents operations kensey nash gmbh incorporated germany january 2002 formed purpose european sales marketing triactiv® embolic protection system triactiv system commercially launched europe may 2002 preparation consolidated financial statements conformity accounting principles generally accepted united states america necessarily requires management make estimates assumptions estimates assumptions may differ actual results affect reported amounts assets liabilities disclosure contingent assets liabilities dates financial statements well reported amounts revenue expense periods presented certain reclassifications made prior period balances conform current period presentation cash equivalents cash equivalents represent cash banks shortterm investments original maturity less three months fair value financial instruments carrying amounts financial instruments including cash equivalents shortterm investments accounts receivable accounts payable debt approximated fair value june 30 2006 2005 fair value shortterm investments based quoted market prices investments june 30 2006 consisted primarily high quality municipal corporate obligations accordance statement financial accounting standards sfas 115 accounting certain investments debt equity securities sfas 115 company classified entire investment portfolio availableforsale marketable securities secondary resale markets company’s entire investment portfolio reported fair value unrealized gains losses included stockholders’ equity see comprehensive income realized gains losses income following disclosures provided accordance emerging issues task force issue eitf 031 meaning otherthantemporary impairment application certain investments eitf 031 securities fair value cost balance sheet date temporary impairment recognized financial statements following summary availableforsale securities june 30 2006 2005 majority investments maturities ranging approximately less one year four years addition company one security maturity approximately 10 years investment securities shown currently fair values less amortized cost therefore contain unrealized losses company evaluated securities determined decline value related company industry specific event june 30 2006 approximately 32 35 investment securities unrealized losses company anticipates full recovery amortized costs respect securities maturity sooner event favorable market interest rate environment lengths time individual securities continuous unrealized loss position aggregated investment category june 30 2006 follows comprehensive income company accounts comprehensive income provisions sfas 130 reporting comprehensive income sfas 130 accordingly accumulated comprehensive loss income shown consolidated statements stockholders’ equity june 30 2006 2005 2004 comprised net unrealized gains losses company’s availableforsale securities foreign currency translation adjustments interest rate swap tax effect fiscal 2006 2005 2004 comprehensive income 60376 76038 147428 respectively inventory stated lower cost determined average cost method approximates firstin firstout market inventory primarily includes cost material utilized processing company’s products follows adjustments inventory made individual part level estimated excess obsolescence impaired balances reflect inventory lower cost market factors influencing adjustments include changes demand rapid technological changes product life cycle development plans component cost trends product pricing physical deterioration quality concerns revisions adjustments would required factors differ company’s estimates property plant equipment property plant equipment consists primarily building land machinery equipment construction progress recorded cost maintenance repairs expensed incurred building machinery furniture equipment depreciated using straightline method useful life ranging two thirty years construction new facility company’s new facility located approximately two miles previous leased facilities exton pennsylvania new building site consolidates us operations research development administrative areas 202500 square foot facility thus provides future growth continued expansion construction plan three phases phase one consisted land building shell 162000 square feet fit 105000 square feet manufacturing quality assurance operations phase completed december 2005 approximate cost 273 million remaining building shell phases two three complete consists 40000 square feet additional fit approximately 70000 square feet additional cost phases two three approximately 22 million aggregate including purchase additional land required complete expansion january 2006 purchased additional parcel land existing site 13 million total cost project approximately 49 million associated management’s april 30 2005 finalization plan transition operations new facility recorded acceleration depreciation charges related assets abandoned time transition total net book value assets abandoned 49 million april 30 2005 acceleration depreciation charge 813000 recorded quarter ended june 30 2005 total facility transition costs fiscal 2006 47 million 42 million accelerated depreciation 543000 moving costs goodwill represents excess cost fair value identifiable net assets thm biomedical inc thm company acquired september 2000 intraluminal therapeutics inc ilt business acquired may 2006 see note 3 effective july 1 2001 company adopted sfas 141 business combinations sfas 141 sfas 142 goodwill intangible assets sfas 142 sfas 141 requires purchase method accounting used business combinations subsequent june 30 2001 specifies criteria recognizing intangible assets acquired business combination sfas 142 goodwill intangible assets indefinite useful lives longer amortized subject annual impairment tests intangible assets definite useful lives continue amortized respective useful lives adoption sfas 142 result reclassification intangible assets changes amortization periods intangible assets definite lives impairment intangible assets impairment longlived assets longlived assets reviewed impairment whenever events circumstances indicate carrying amount asset may recoverable undiscounted expected future cash flows generated related asset less carrying value asset company measures amount impairment comparing carrying amount asset fair value estimation fair value generally measured discounting expected future cash flows rate company borrows accounts receivable allowance company trade receivable allowances 8804 8697 june 30 2006 2005 respectively company established trade receivable allowances 59580 122357 wrote amounts totaling 59473 59799 years ended june 30 2006 2005 respectively addition year ended june 30 2005 company reduced accounts receivable allowance established year 67451 primarily established customer negotiations disputed payment portion customer’s outstanding balance paid remaining portion written specific allowance recovered portion longer needed amounts included selling general administrative expense years ended june 30 2006 2005 patents intangible assets costs internally developed patents expensed incurred due long development cycle patents company’s inability measure recoverability costs incurred entire cost acquired patents intangible assets amortized remaining period economic benefit ranging 3 15 years june 30 2006 see note 6 21 gross carrying amount patents intangible assets june 30 2006 8491366 accumulated amortization 3241987 amortization expense patents intangible assets 811204 fiscal year ended june 30 2006 745040 fiscal year ended june 30 2005 263026 fiscal years ended june 30 2004 amortization expense company’s acquired patents intangible assets estimated 985664 fiscal year ended june 30 2007 980204 fiscal year ended june 30 2008 978399 fiscal year ended june 30 2009 481345 fiscal year ended june 30 2010 437486 fiscal year ending june 30 2011 revenue recognition sales revenue company recognizes revenue provisions staff accounting bulletin sab 104 revenue recognition sab 104 superseded sab 101 revenue recognition financial statements sab 101 accordingly sales revenue recognized related product shipped products shipped freightonboard shipping point advance payments received products services recorded deferred revenue recognized product shipped services performed company reduces sales revenue estimated customer returns allowances including discounts company manufactures medical products specifically customer specifications majority customers subject return failure meet customer specifications company sales returns allowances discounts 9195 146237 135305 years ended june 30 2006 2005 2004 respectively research development revenue research development contracts recognized related expenses incurred revenues recorded line item derived government programs us government funds research high risk enabling technologies program reflected statement operations fiscal 2004 2005 award research synthetic vascular graft concluded september 2004 also included fiscal 2004 statements operations award research breast cancer drug delivery technology concluded october 2003 royalty income company recognizes substantially royalty revenue end month accordance agreements st jude medical inc st jude medical orthovita inc orthovita company advised respective party net total enduser product sales dollars month royalty payments parties generally received within 45 days end calendar quarter company receives 6 royalty every angioseal™ unit sold st jude medical license agreement june 30 2006 approximately 76 million angioseal units sold company receives royalty codeveloped vitoss foam product sales orthovita royalty pursuant agreement entered company orthovita march 2003 first royalty earned february 2004 first codeveloped product commercially launched orthovita addition separate transaction company acquired proprietary rights third party vitoss technology acquisition entitled company certain rights including economic rights third party economic rights included royalty products containing vitoss technology research development research development costs charged expense incurred income taxes company accounts income taxes provisions sfas 109 accounting income taxes sfas 109 see note 9 earnings per share earnings per share calculated accordance sfas 128 earnings per share sfas 128 requires company report basic diluted earnings per share eps basic diluted eps computed using weighted average number shares common stock outstanding common equivalent shares options nonvested stock awards included diluted computation effect dilutive see note 17 options nonvested stock awards purchase shares common stock outstanding years ended june 30 2006 2005 2004 included computation diluted eps exercise prices options exceeded average market price would antidilutive shown table stockbased compensation stockbased compensation costs prior july 1 2005 accounted company sfas 123 accounting stockbased compensation sfas 123 permitted recognition fair value stockbased awards expense ii continued application intrinsic value method accounting principles board opinion 25 accounting stock issued employees apb 25 company previously accounted stockbased employee director compensation plans recognition measurement principles apb 25 intrinsic value method compensation cost represented excess quoted market price company’s common stock grant date amount grantee must pay stock company’s policy grant employee stock options exercise price equal fair market value company’s common stock date grant therefore recording compensation expense apb 25 prior adoption sfas 123r sharebased payment fas 123r company expensed sharebased payments nonemployee outside consultants defined sfas 123 based upon fair market value grants nonvested shares granted using intrinsic value method apb 25 december 16 2004 financial accounting standards board fasb finalized sfas 123r amends sfas 123 supersedes apb 25 requires cost sharebased payment transactions including employees nonemployee directors recognized financial statements sfas 123r applies sharebased payment transactions entity acquires goods services issuing offering issue shares share options equity instruments except held employee stock ownership plan esop incurring liabilities 1 amounts based even part price entity’s shares equity instruments 2 require may require settlement issuance entity’s shares equity instruments statement effective first annual reporting period beginning june 15 2005 company’s fiscal quarter ended september 30 2005 effective july 1 2005 company adopted provisions sfas 123r using modified prospective approach accounts sharebased compensation applying fair value method expensing stock options nonvested stock awards referred previous sec filings restricted stock awards restricted shares see accordingly adoption sfas 123r’s fair value method resulted compensation costs company’s two equity compensation plans compensation cost charged income result adoption sfas 123r plans 2358848 year ended june 30 2006 total income tax benefit recognized statement income sharebased compensation costs 802008 year ended june 30 2006 stock options stock options granted employee nonemployee members board directors recorded compensation expense using fair value method sfas 123r fair value calculated blackscholes optionpricing model see note 15 additional information nonvested stock awards nonvested shares granted executive officers management nonemployee members board directors recorded compensation expense using fair value method sfas 123r fair value based upon closing price company’s common stock date grant see note 16 nonvested stock awards granted nonemployee members board directors executive officers certain management company nonvested shares granted executive officers management nonemployee members board directors usually referred restricted shares sfas 123r reserves term fully vested outstanding shares whose sale contractually governmentally prohibited specified period time nonemployee stock options granted nonemployee outside consultants defined sfas 123 r recorded compensation expense using fair value method sfas 123r fair value calculated blackscholes optionpricing model see note 10 discussion options granted nonemployee outside consultants july 2003 october 2002 march 2005 us securities exchange commission sec issued sab 107 sab 107 sharebased payment expressed views sec staff regarding application statement 123r april 2005 sec issued release 338568 amendment rule 401a regulation sx regarding compliance date statement 123r among things sab 107 release 338568 provided interpretive guidance related interaction statement 123r certain sec rules regulations provided sec staff’s views regarding valuation sharebased payment arrangements public companies changed required adoption date standard periods beginning june 15 2005 company’s fiscal quarter ended september 30 2005 prior adoption sfas 123r compensation costs company’s equity compensation plans determined based fair market value stock options nonvested stock consistent provisions sfas 123 amended sfas 148 accounting stockbased compensation transition disclosure amendment fasb statement 123 accounting stockbased compensation sfas 148 company’s net income earnings per share years ended june 30 2005 2004 would reduced pro forma amounts 1 amounts represent compensation expense determined fair market value method included reported net income net related tax effect 2 amounts represent compensation expense determined intrinsic value method included reported net income net related tax effects 3 amounts represent compensation expense determined fair market value based method awards net related tax effects accelerated vesting stock options april 27 2005 company’s board directors approved acceleration vesting certain unvested “outofthemoney” stock options exercise prices equal greater 2735 per share price date acceleration previously awarded company’s employees including executive officers management equity compensation plans acceleration vesting effective stock options outstanding may 4 2005 options purchase 547815 shares common stock options purchase 431000 shares held executive officers management 47 shares underlying company’s outstanding unvested options subject acceleration anticipate stock option acceleration immediate dilutive effect earnings per share majority employee group historical expected option term approximately 6 years compensation expense would recorded weighted average period 212 years adoption sfas 123r absent accelerated vesting approximately 52 million 37 million net related tax effects 42 million 30 million net related tax effects related stock options held executive officers directors purpose acceleration enable company decrease future recognized compensation expense associated options upon adoption sfas 123r derivative instruments hedging activities company recognizes derivatives either assets liabilities balance sheet depending company’s rights obligations applicable derivative contract measures instruments fair value change derivative’s fair value recorded period current earnings accumulated comprehensive income oci depending derivative designated part hedge transaction type hedge transaction cash flow hedge may 25 2006 company entered 35 million aggregate tenyear fixed interest rate swap agreement swap citibank na manage market risk changes interest rates secured commercial mortgage see note 7 transaction involves hedging forecasted interest rate payments derivative instrument classified cash flow hedge accordance sfas 133 accounting derivative instruments hedging activities amended sfas 137 138 149 recorded consolidated balance sheet fair value company’s objective strategy undertaking swap hedge exposure variability cash flows interest expense associated future interest rate payments secured commercial mortgage reduce company’s interest rate risk event unfavorable interest rate environment effective portion interest rate swap gains losses due changes fair value recorded component oci reclassified earnings period periods hedged forecasted transaction affects earnings company utilizes hypothetical derivative method determining hedge effectiveness period transactions would cause ineffectiveness result company reclassifying ineffective portion current earnings would include prepayment secured commercial mortgage andor company’s election prime interest rate option draw company’s secured commercial mortgage see note 7 interest expense swap recorded earnings fixed rate set forth swap fiscal year ended june 30 2006 amount recognized current earnings due ineffectiveness amounts excluded assessment hedge effectiveness amount reported unrealized loss interest rate swap accumulated oci account within stockholders’ equity represents net unrealized loss swap designated cash flow hedge company anticipate material unrealized losses recognized within subsequent 12 months anticipated transactions occur company derivative instruments fiscal years ended june 30 2005 2004 new accounting pronouncements november 2004 fasb issued sfas 151 inventory costs sfas 151 sfas 151 amends accounting abnormal amounts idle facility expense freight handling costs wasted material spoilage guidance arb 43 arb 43 previously required items “so abnormal” treated current period charges sfas 151 requires items recognized currentperiod charges regardless whether meet criterion “so abnormal” addition sfas 151 requires allocation fixed production overheads costs conversion based normal capacity production facilities statement effective inventory costs incurred fiscal years beginning june 15 2005 company’s fiscal year ended june 30 2006 company’s adoption sfas 151 material impact company’s financial position results operations december 2004 fasb issued sfas 153 exchanges nonmonetary assets sfas 153 amendment opinion 29 accounting nonmonetary transactions opinion 29 sfas 153 eliminates certain differences guidance opinion 29 compared guidance contained standards issued international accounting standards board amendment opinion 29 eliminates fair value exception nonmonetary exchanges similar productive assets replaces general exception exchanges nonmonetary assets commercial substance exchange commercial substance future cash flows entity expected change significantly result exchange sfas 153 effective nonmonetary asset exchanges occurring periods beginning june 15 2005 company’s fiscal quarter ended september 30 2005 company’s adoption sfas 153 material impact company’s financial position results operations december 2004 fasb issued two fasb staff positions fsp 1091 application fasb statement 109 accounting income taxes tax deduction provided usbased manufacturers american jobs creation act 2004 fsp 1091 fsp 1092 accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004 fsp 1092 fsp 1091 clarifies tax deduction domestic manufacturers american jobs creation act 2004 act accounted special deduction accordance fasb statement 109 accounting income taxes fsp 1092 provides enterprises time beyond financialreporting period act took effect evaluate act’s impact enterprise’s plan reinvestment repatriation certain foreign earnings purposes applying sfas 109 fsp 1091 1092 effective upon issuance december 2004 company’s adoptions fsp 1091 1092 material impact company’s financial position results operations march 2005 fasb issued interpretation 47 accounting conditional asset retirement obligations interpretation fasb statement 143 fin 47 fin 47 requires entity recognize liability fair value conditional asset retirement obligation fair value reasonably estimated fin 47 states conditional asset retirement obligation legal obligation perform asset retirement activity timing method settlement conditional upon future event may within control entity fin 47 effective later end first fiscal year ending december 15 2005 company’s fiscal year ending june 30 2006 retrospective application interim financial information permitted required company’s adoption fin 47 material impact company’s financial position results operations may 2005 fasb issued fasb statement 154 accounting changes error corrections sfas 154 sfas 154 supersedes apb opinion 20 accounting changes fasb statement 3 reporting accounting changes interim financial statements generally provisions sfas 154 similar provisions opinion 20 statement 3 however sfas 154 requires retrospective application prior periods’ financial statements voluntary change accounting principle recognition cumulative effect voluntary change accounting principle net earnings period change would permitted retrospective application prior periods’ financial statements impracticable statement 154 effective beginning company’s 2007 fiscal year currently evaluating impact sfas 154 financial statements july 2006 fasb issued fasb interpretation 48 accounting uncertainty income taxes fin 48 fin 48 interpretation fasb statement 109 accounting income taxes seeks reduce diversity practice associated certain aspects measurement recognition accounting income taxes addition fin 48 requires expanded disclosure respect uncertainty income taxes effective beginning company’s 2007 fiscal year currently evaluating impact fin 48 financial statements 2 strategic alliance agreements st jude medical inc company strategic alliance st jude medical inc st jude medical incorporates united states foreign license agreements together license agreements collagen supply agreement angioseal vascular closure device component supply contract see license agreements license agreements st jude medical exclusive rights manufacture market current future sizes angioseal worldwide also license agreements company receives royalty payments based upon percentage revenues generated sale angioseal collagen supply agreement pursuant agreement st jude medical company manufactures collagen plug component angioseal original agreement threeyear agreement scheduled expire november 30 2005 contained minimum purchase requirement st jude medical pricing fluctuated based product size cumulative quantities sold angioseal vascular closure device component supply contract june 15 2005 company executed new angioseal vascular closure device component supply contract “contract” licensee st jude medical inc contract effective june 30 2005 expire december 2010 provides company exclusively supply 100 st jude medical’s requirements collagen component current future versions angioseal device well 30 st jude medical’s bioresorbable polymer anchor requirements term agreement although st jude medical historically purchased 100 collagen requirements company contractual obligation 50 requirements addition two companies informal verbal agreement company provided st jude medical approximately 20 annual anchor component requirements new contract adds 100 collagen component exclusivity formal increased commitment supply anchor component 30 total annual requirements provides five half year term compared existing contract threeyear term addition future revenue derived component sales company received 1 million origination fee upon signing consideration company’s required investment including development efforts provide collagen components specified contract agreement company commercialize new proprietary collagen technologies incorporation angioseal device contract also provides st jude medical access company’s new closed herd collagen sources orthovita march 2003 company entered development manufacturing supply agreement orthovita company develops commercializes products based orthovita’s proprietary vitoss bone graft substitute material combination company’s proprietary biomaterials orthovita agreement orthovita agreement products codeveloped kensey nash manufactures products orthovita markets sells products worldwide also orthovita agreement kensey nash receives royalty payment based upon orthovita’s total enduser sales codeveloped products july 2004 company acquired intellectual property rights third party inventor vitoss technology inventor 26 million assignment agreement inventor assignment agreement assignment agreement company receives intellectual property rights inventor previously assigned orthovita also assignment agreement company receive royalty orthovita sale orthovita products containing vitoss technology total royalty received 4035782 3 goodwill company accounts goodwill provisions sfas 142 sfas 142 goodwill longer amortized subject annual impairment tests company established annual impairment testing date june 30th fiscal year company completed initial required goodwill impairment test sfas 142 first quarter fiscal 2002 net carrying amount goodwill increased 63 million year ended june 30 2006 june 30 2005 related acquisition ilt see note 21 recent tests fiscal 2006 2005 2004 indicated goodwill impaired 4 accrued expenses june 30 2006 june 30 2005 accrued expenses consisted following 5 leases june 30 2006 future minimum annual rental commitments noncancelable lease obligations follows rent expense operating leases consists rent company’s facilities exton pennsylvania eschborn germany rent expense fiscal years ended june 30 2006 2005 2004 approximately 765000 986000 811000 respectively 6 patent proprietary rights agreements patent acquisition agreement november 1997 company entered agreement patent acquisition agreement acquire portfolio puncture closure patents patent applications well rights seller preexisting licensing agreement addition september 2000 conjunction acquisition thm company acquired separate portfolio patents related biomaterials business costs patent acquisition agreement patents acquired part thm acquisition amortized remaining periods economic benefit ranging 3 10 years june 30 2006 gross carrying amount patents june 30 2006 4096366 accumulated amortization 2211795 amortization expense patents 263026 year ended june 30 2006 included within research development expense amortization expense company’s acquired patents estimated 263026 years ending june 30 2007 2008 2009 262500 fiscal year ending june 30 2010 261973 fiscal year ending june 30 2011 assignment agreement august 2004 company acquired intellectual property rights third party inventor vitoss technology inventor 2600000 assignment agreement inventor assignment agreement assignment agreement company receives intellectual property rights inventor previously assigned orthovita also assignment agreement company receives royalty orthovita sale orthovita products containing vitoss technology total royalty received 4035782 june 30 2006 company recognized royalty income 1075046 assignment agreement 2960736 yet received entire cost proprietary rights amortized 60month period company anticipates receiving economic benefit relation proprietary rights amortization expense proprietary rights 520000 year ended june 30 2006 included within selling general administrative expense amortization expense proprietary rights estimated 520000 fiscal years ending june 30 2007 fiscal 2009 43334 year ending june 30 2010 technology purchase agreement march 2005 company entered agreement acquire patents proprietary rights pair inventors technology purchase agreement intellectual property processing information acquired technology purchase agreement complimentary broadens company’s existing biomaterials intellectual property materials processing knowledge platform technology purchase agreement company paid 250000 patents upon execution agreement obligated pay certain milestone payments royalties upon achievement certain product development commercial launch goals products incorporate acquired patent technology company anticipates patents proprietary rights acquired enhance existing biomaterials platform alternative future uses expand platform initial 250000 purchase price patents amortized remaining period economic benefit patents currently estimated approximately 14 years june 30 2006 gross carrying amount acquired technology june 30 2006 250000 amortization expense acquired technology 16043 fiscal year ending june 30 2006 included within research development expense amortization expense acquired technology currently estimated 16043 fiscal years ending june 30 2007 2008 2009 2010 2011 7 debt acquisition obligation september 1 2000 conjunction acquisition thm biomedical company incurred note payable amount 45 million acquisition obligation acquisition obligation due equal quarterly installments 281250 beginning december 31 2000 ending september 30 2004 accordingly present value cash payments discounted based upon company’s available borrowing rate 75 3833970 recorded liability company’s consolidated financial statements quarter ended march 31 2003 company repaid certain debt holders thereby reducing company’s remaining quarterly installments 223256 september 30 2004 september 30 2004 company repaid entire acquisition obligation secured commercial mortgage may 25 2006 kensey nash corporation “company” entered agreement secured commercial mortgage “mortgage” citibank fsb “bank” mortgage provides company ability take aggregate advances 35 million november 25 2007 “draw period” secured company’s facility located 735 pennsylvania drive exton pennsylvania 19341 advances mortgage shall bear interest computed daily outstanding principal balance time advance paid full time advance company elect one two following interest rate options 1 libo rate option fluctuating interest rate equal one month libo rate reset monthly plus eightytwo basis points loan credit spread 2 prime rate option fluctuating interest rate per annum equal prime rate june 30 2006 company taken 8 million advance mortgage company entered 35 million aggregate tenyear fixed interest rate swap agreement see note 1 citibank na hedge interest rate risk mortgage swap agreement bears interest fixed rate 562 exclusive loan credit spread june 30 2006 notional amount 80 million advanced mortgage matched interest rate swap including loan credit spread company’s maximum interest rate exposure tenyear term swap 644 562 fixed interest rate plus 82 loan credit spread swap interest paid current outstanding principal balance mortgage commencing june 25 2006 company required pay interest outstanding principal amount mortgage draw period draw period beginning december 25 2007 company shall pay principal interest based twentyfive year straightline amortization schedule mortgage contains various conditions borrowing affirmative restrictive financial maintenance covenants certain significant covenants require company maintain minimum fixed charge coverage ratio ebitda defined mortgage debt service equal greater 150 10 maintain interest rate hedge least fifty percent outstanding principal balance mortgage interest rate protection product reasonably acceptable bank mortgage also contains various events default occurrence could result termination bank acceleration company’s obligations mortgage events default include without limitation payment defaults ii breaches covenants mortgage certain breaches grace period iii bankruptcy events iv crossdefaults v transfer mortgaged premises june 30 2006 company compliance affirmative restrictive financial maintenance covenants 8 retirement plan company 401k salary reduction plan trust 401k plan employees least 21 years age eligible participate contributions 401k plan made employees employee salary reduction election effective october 1 1999 company implemented 25 discretionary matching contribution 6 employee’s total compensation employee contributions effective july 1 2004 company revised discretionary matching contribution 50 6 employee’s total compensation employee contributions employer contributions 401k plan 2006 2005 2004 418943 348538 143694 respectively 9 income taxes company accounts income taxes sfas 109 generally provides deferred tax assets liabilities recognized temporary differences financial reporting basis tax basis company’s assets liabilities expected benefits utilizing net operating loss nol carryforwards impact deferred taxes changes tax rates laws applied years temporary differences expected settled reflected financial statements period enactment company recorded tax credits 528017 493536 984817 fiscal years ended june 30 2006 2005 2004 respectively fourth quarter fiscal 2003 company performed retrospective research development tax credit study fiscal years 1993 2003 study resulted retrospective tax credit 22 million majority recorded fourth quarter fiscal 2003 remainder recorded subsequent years company continues record research development tax credits component current tax provision related ongoing performance qualified research development earnings income taxes earned within outside united states shown provision income taxes composed following differences company’s income tax expense benefit income tax expense benefit computed using us federal income tax rate follows significant components company’s deferred tax assets liabilities follows portion company’s deferred tax asset offset valuation allowance relating state nol carryforwards due restrictions imposed uncertainty surrounding use valuation allowance reduces deferred tax assets amount represents management’s best estimate amount deferred tax assets likely realized june 30 2006 company nol carryforwards state tax purposes totaling 400 million expire 2027 addition company foreign net operating loss 312171 june 30 2006 expire 10 consulting contracts october 2002 company granted options purchase 50000 shares common stock physician pursuant fiveyear consulting agreement related development carotid artery application triactiv system july 2003 company granted options purchase 1500 shares common stock physician pursuant twoyear consulting agreement related development orthopaedic applications company’s porous nonporous tissue fixation regeneration devices drug delivery devices company calculated fair value nonemployee options accordance sfas no123 375550 11378 october 2002 july 2003 grants respectively using blackscholes optionpricing model amounts recorded prepaid consulting expense increases additional paid capital quarters ended december 31 2002 september 30 2003 respectively prepaid expense amortized research development expense terms agreements accordingly 75110 recorded component research development expense period ended june 30 2006 80799 period ended june 30 2005 11 stock repurchase program october 23 2003 announced board directors approved program repurchase 400000 issued outstanding shares common stock six months date board approval second quarter fiscal year 2004 company repurchased retired 140500 shares common stock program cost approximately 30 million average market price 2134 per share financed repurchases using available cash august 17 2004 announced board directors reinstated program repurchase issued outstanding shares company’s common stock six months date board reinstatement reinstated plan called repurchase 259500 shares balance original plan approved october 2003 year ended june 30 2005 repurchased retired 199867 shares common stock reinstated program cost approximately 51 million average market price 2568 per share program expired february 2005 march 16 2005 announced new program additional 400000 issued outstanding shares common stock approved repurchase board directors june 30 2005 repurchased retired 103133 shares common stock new program cost approximately 27 million average market price 2658 per share using available cash june 30 2005 296867 shares remaining repurchase program plan scheduled expire september 30 2005 extended indefinitely terminated board directors quarter ended december 31 2005 repurchased retired 20000 shares common stock cost 441000 average market price 2205 per share using available cash june 30 2006 276867 shares remaining repurchase program 12 concentration credit risk financial instruments potentially subject company significant concentrations credit risk consist primarily cash equivalents investments accounts receivable company places cash equivalents investments high quality financial institutions established guidelines relative diversification maturities maintain safety high liquidity single component company’s investment portfolio represented 11 15 total investments june 30 2006 june 30 2005 respectively respect trade royalty receivables primarily st jude medical 40 86 32 89 trade royalty receivables respectively june 30 2006 2005 see note 2 trade receivables two customers arthrex orthovita approximately 30 13 respectively trade receivables june 30 2006 customers’ receivable balances deemed uncollectible would material adverse effect company’s results operations financial condition company performs ongoing credit evaluations customers’ financial conditions require collateral support customer receivables 13 certain compensation employment agreements company entered employment agreements certain officers provided aggregate annual base salaries 737600 june 30 2007 14 preferred stock company authorized class undesignated preferred stock consisting 100000 shares 001 par value board directors may authorize issuance preferred stock ranks senior common stock respect payment dividends distribution assets liquidation addition board directors authorized fix limitations restrictions upon payment dividends common stock effective shares preferred stock outstanding board directors without stockholder approval issue preferred stock voting conversion rights could adversely affect voting power holders common stock june 30 2006 2005 shares preferred stock outstanding company present intention issue shares preferred stock 15 stock option plans company employee incentive compensation plan employee plan flexible plan provides compensation committee board directors committee broad discretion award eligible participants stockbased performancerelated incentives committee deems appropriate persons eligible participate employee plan officers nonemployee directors’ employees company opinion committee contribute growth success company committee oversees employee plan may grant nonqualified stock options incentive stock options nonvested stock see note 16 combination thereof participants june 30 2006 awards employee plan consisted stock options nonvested stock june 30 2006 total number shares authorized issuance employee plan 4050000 options purchase total 2146107 shares company’s common stock weighted average exercise price 1778 outstanding 143822 nonvested stock awards outstanding options purchase total 1706030 shares company’s common stock previously exercisedissued 54041 shares remained available new awards employee plan options granted provide purchase common stock prices determined compensation committee event less closing price stock date grant company also nonemployee directors’ stock option plan directors’ plan directors’ plan grants nonqualified stock options purchase common stock directors employees june 30 2006 total 410000 shares authorized issuance directors’ plan options purchase total 337000 shares company’s common stock weighted average exercise price 2007 outstanding options purchase total 73000 shares company’s common stock previously exercised directors’ plan result zero shares remained available new awards directors’ plan awards previously granted board directors plan granted employee plan nonemployee director receives initial grant options purchase 5000 shares common stock upon appointment board directors exercisable fair market value shares date grant consideration service board directors date annual meeting stockholders company nonemployee director elected reelected continues serve director term expired receives option purchase 7500 shares common stock exercisable fair market value shares date grant addition nonemployee director serves committee date annual meeting receives additional option purchase 1500 shares common stock exercisable fair market value shares date grant committee member entitled single option purchase 1500 shares even serves multiple committees chairman board receives oneandonehalf times standard nonemployee director awards continuation service options purchase 11250 shares common stock receive additional shares serving committees addition additional grants options may made time determined compensation committee plans options exercisable maximum term ten years date grant vest periods zero three years grant date summary stock option see note 16 nonvested stock activity plans fiscal years ended june 30 2006 2005 2004 follows fair value option grant estimated date grant using blackscholes optionpricing model uses weighted average assumptions noted following table expected volatilities based historical volatility company’s common stock factors company uses historical data estimate option exercise employee termination within valuation model separate groups employees similar historical exercise behavior considered separately valuation purposes expected term options derived historical exercise behavior represents period time options granted expected outstanding terms given results certain groups employees exhibiting different behavior riskfree rate periods within contractual life option based us treasuries constant maturities effect time grant following table summarizes significant option groups outstanding june 30 2006 related weighted average exercise price remaining contractual life information follows compensation expense related stock options recorded component either cost goods sold selling general administrative expense research development expense dependent employee receiving stock options year ended june 30 2006 company recognized expense 960387 related stock options june 30 2006 1751894 unrecognized compensation costs related unvested stock options granted two equity compensation plans cost expected recognized weightedaverage period 200 years 16 nonvested stock company may provide nonvested stock grants stockholder approved employee incentive compensation plan fiscal years 2004 2005 company granted shares nonvested common stock nonemployee members board directors executive officers addition part shift focus company’s equity compensation program stock options nonvested stock company granted shares nonvested common stock management company year ended june 30 2006 shares granted nonemployee members board directors prior december 2005 vested three equal annual installments contingent upon company’s achievement certain earningspershare targets company common stock price targets continued service board member anniversary date grant beginning december 2005 nonvested stock grants awarded nonemployee members board directors longer subject achievement certain earnings per share targets company common stock price targets attributes grants remain described previously awarded nonvested stock grants remain subject original provisions effect time grant shares granted executive officers management vest three equal annual installments based solely continued employment company unvested shares forfeited upon termination service board directors employment applicable company made following grants nonemployee directors executive officers management fiscal years ended june 30 2006 2005 2004 fair value disclosed based upon closing price company’s common stock date grant compensation expense related nonvested stock grants recorded threeyear vesting period grants compensation expense related shares issued members board directors recorded component selling general administrative expense compensation expense related executive officer management shares recorded component either cost goods sold selling general administrative expense research development expense dependent executive officer management team member received shares fiscal years ended june 30 2006 2005 2004 company recognized expense 1398461 764627 33255 respectively related nonvested stock awards june 30 2006 estimated 3098586 unrecognized compensation costs related nonvested stock awards granted company’s two equity compensation plans cost expected recognized weighted average period 193 years following summary nonvested stock transactions fiscal years ended june 30 2006 2005 2004 17 earnings per share following table shows reconciliation numerators denominators basic diluted eps calculations income numerator weighted average number shares denominator 18 segment reporting operating segments identified components enterprise separate discrete financial information available evaluation chief operating decisionmaking group making decisions regarding allocate resources assess performance based criteria established sfas 131 disclosures segments enterprise related information sfas 131 company’s operations products aggregated single reportable segment since similar economic characteristics production processes types customers distribution methods company’s primary products medical devices include biomaterials endovascular devices respect biomaterials products company designs andor manufactures markets various absorbable polymer collagen products use numerous applications including orthopaedic cardiology drugbiologics delivery periodontal general surgery wound care company also receives royalty revenue sale angioseal units st jude medical sales vitoss foam product orthovita prior years company received research development revenue certain research development contracts grants respect endovascular products company designs manufactures embolic protection thrombectomy devices commercially launched first endovascular device europe fourth quarter fiscal 2002 commercially launched first endovascular device united states fourth quarter fiscal 2005 net sales product line reconciliation total revenue follows years ended june 30 2006 2005 2004 revenues st jude medical represented following percentages total revenues company years ended june 30 2006 2005 2004 revenues arthrex represented following percentages total revenues company years ended june 30 2006 2005 2004 revenues orthovita represented following percentages total revenues company’s revenues external customers summarized revenues attributed country based location customer company’s business dependent foreign operations one country us represented 10 company’s revenues addition company’s longlived assets located us 19 quarterly financial data unaudited summarized quarterly results operations company years ended june 30 2006 june 30 2005 presented quarterly total year earnings per share calculated independently based weighted average number shares outstanding period 20 opportunity grant november 2004 company awarded 500000 grant opportunity grant program department community economic development commonwealth pennsylvania grant awarded company potential jobcreating economic development opportunities created company’s construction new facility within state pennsylvania grant conditioned upon meeting following 1 company create 238 fulltime jobs within 5 years beginning april 1 2003 date company’s request grant 2 company invest least 54250000 total project costs including limited personnel land building construction within three years beginning july 19 2004 date company’s facility groundbreaking 3 company operate new facility minimum 5 years company received cash payment 500000 third fiscal quarter 2005 revenue recognized earned longest period contained within grant commitment term five years date occupancy company’s new facility date satisfaction last grant commitment expected december 2010 assuming original expectation transition new facility january 2006 fiscal year ended june 30 2006 approximately 81081 revenue recognized related grant component income revenue opportunity grant estimated 81081 years ending june 30 2007 2010 40543 fiscal year ended june 30 2011 21 acquisition intraluminal therapeutics inc may 2006 company acquired assets intraluminal therapeutics inc “ilt” company focused emerging market opportunity chronic total occlusion “cto” complete vessel blockage common coronary peripheral vessels cash 8 million plus acquisition costs 148000 company part asset purchase agreement escrowed 1 million 8 million purchase price purposes securing ilt’s postclosing obligations covering postclosing obligations remaining cash interest earned disbursed within twelve months date acquisition assets acquired included inventory fixed assets certain intangible assets broaden company’s existing endovascular intellectual property knowledge platform company also anticipates assets acquired add company’s future plans chronic total occlusion market valuation purchase price allocation performed independent appraisal using proven valuation procedures techniques represents estimated fair market value based riskadjusted cash flows related identifiable assets excess cost net assets acquired allocated goodwill following summary allocation thousands components acquired intangible assets listed table acquisition date utilized independent third party valuation follows gross carrying amount acquired intangible assets june 30 2006 1470000 amortization expense acquired intangible assets 9149 fiscal year ending june 30 2006 included within research development expense amortization expense acquired intangible assets currently estimated 180762 fiscal year ending june 30 2007 175303 fiscal year ending june 30 2008 173497 fiscal year ending june 30 2009 153636 fiscal years ending june 30 2010 2011 total amount goodwill totaled 63 million amount expected fully deductible tax purposes acquisition accounted purchase method accounting ilt’s results operations included company since date acquisition following unaudited proforma financial information assumes acquisition occurred beginning earliest period presented pro forma results based certain assumptions estimates pro forma results necessarily represent results would occurred acquisition taken place beginning specified periods indicative results future combined operations 15 2 financial statement schedules omitted required applicable information scheduled financial statements notes thereto 15 3 exhibits signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 13th day september 2006 kensey nash corporation wendy f dicicco cpa wendy f dicicco cpa chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 13th day september 2006 signature titles joseph w kaufmann joseph w kaufmann chief executive officer principal executive officer president secretary director john e nash pe vice president new technologies director john e nash pe douglas g evans pe chief operating officer assistant secretary director douglas g evans pe wendy f dicicco cpa chief financial officer principal financial accounting officer wendy f dicicco cpa robert j bobb director robert j bobb harold n chefitz director harold n chefitz walter r maupay jr director walter r maupay jr c mccollister evarts md director c mccollister evarts md steven j lee director steven j lee kim rosenberg director kim rosenberg item 15 exhibits financial statement schedules 15a 1 financial statements following financial statements included report independent registered public accounting firm consolidated balance sheets june 30 2004 2003 consolidated statements income years ended june 30 2004 2003 2002 consolidated statements stockholders equity years ended june 30 2004 2003 2002 consolidated statements cash flows years ended june 30 2004 2003 2002 notes consolidated financial statements report independent registered public accounting firm board directors stockholders kensey nash corporation exton pennsylvania audited accompanying consolidated balance sheets kensey nash corporation subsidiaries company june 30 2004 2003 related consolidated statements income stockholders equity cash flows three years period ended june 30 2004 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position company june 30 2004 2003 results operations cash flows three years period ended june 30 2004 conformity accounting principles generally accepted united states america deloitte touche llp philadelphia pennsylvania september 13 2004 kensey nash corporation consolidated balance sheets see notes consolidated financial statements kensey nash corporation consolidated statements income see notes consolidated financial statements kensey nash corporation consolidated statements stockholders equity see notes consolidated financial statements kensey nash corporation consolidated statements cash flows see notes consolidated financial statements kensey nash corporation notes consolidated financial statements years ended june 30 2004 2003 2002 1 summary significant accounting policies business kensey nash corporation leading medical technology company providing innovative solutions via novel technologies wide range medical procedures expanded well beyond beginnings arterial puncture closure today provide wide range products multiple medical markets primarily cardiovascular sports medicine spine amongst others inventor angiosealtm vascular closure device angioseal device designed seal close femoral artery punctures made diagnostic therapeutic cardiovascular catheterizations first company place absorbable biomaterial component human vascular system pioneers field absorbable biomaterials developed significant experience expertise competitive advantage design development manufacture processing absorbable biomaterials medical applications developed assisted developing manufacturing absorbable biomaterials products leading companies orthopaedic cardiology drugbiologics delivery periodontal general surgery wound care markets incorporation products also independently behalf customers designing developing various new absorbable biomaterials products markets kensey nash also developing triactivr balloon protected flush extraction system triactiv device designed provide embolic protection treatment diseased vessels received european ce mark approval saphenous vein graft svg application triactiv january 2002 commercialized device fourth quarter fiscal year ended june 30 2002 fiscal 2002 marketing selling device europe direct sales force germany distributors throughout rest europe enrollment us pivotal clinical study pride study triactiv svg application completed march 2004 510k application submitted fda early first fiscal quarter 2005 anticipate approval implementation direct sales team end second fiscal quarter 2005 subsequent us market launch system early third fiscal quarter 2005 future generations triactiv currently development clinical trials designed address additional markets future applications expected include treatment diseased carotid native coronary peripheral arteries including removal thrombus acute myocardial infarction ami heart attack mentioned original designer developer manufacturer angioseal leading product arterial puncture closure angioseal manufactured marketed sold st jude medical inc company incorporated delaware august 6 1984 principles consolidation basis presentation consolidated financial statements include accounts kensey nash corporation kensey nash holding company kensey nash europe gmbh intercompany transactions balances eliminated kensey nash holding company incorporated delaware january 8 1992 formed hold title certain company patents operations kensey nash gmbh incorporated germany january 2002 formed purpose european sales marketing triactiv commercially launched europe fiscal 2002 preparation consolidated financial statements conformity accounting principles generally accepted united states america necessarily requires management make estimates assumptions estimates assumptions may differ actual results affect reported amounts assets liabilities disclosure contingent assets liabilities dates financial statements well reported amounts revenue expense periods presented cash equivalents cash equivalents represent cash banks shortterm investments original maturity less three months fair value financial instruments carrying amounts financial instruments including cash equivalents shortterm investments accounts receivable accounts payable debt approximated fair value june 30 2004 2003 fair value shortterm investments based quoted market prices investments june 30 2004 consisted primarily high quality us corporate municipal obligations accordance statement financial accounting standards sfas 115 accounting certain investments debt equity securities sfas 115 company classified entire investment portfolio availableforsale marketable securities secondary resale markets companys entire investment portfolio reported fair value unrealized gains losses included stockholders equity see comprehensive income march 2004 fasb ratified emerging issues task force issue eitf 031 meaning otherthantemporary impairment application certain investments eitf 031 requires certain quantitative qualitative disclosures securities accounted sfas 115 accounting certain investments debt equity securities impaired balance sheet date otherthan temporary impairment recognized disclosure requirements eitf 031 effective fiscal years ending december 15 2003 recognition measurement requirements effective periods beginning june 15 2004 company included required disclosures financial statements companys adoption recognition measurement requirements eitf 031 expected material impact companys financial position results operations following summary availableforsale securities june 30 2004 2003 majority investments maturities ranging 213 years also certain municipal variable rate demand obligations maturities ranging 6 30 years municipal variablerate demand obligations putable weekly callable monthly basis realized gains losses investments years ended june 30 2004 2003 2002 investment securities shown currently fair values less amortized cost therefore contain unrealized losses company evaluated securities determined decline value related company industry specific event approximately thirtyeight fortyfive investment securities unrealized losses company anticipates full recovery amortized costs respect securities maturity sooner event favorable market interest rate environment length time individual securities continuous unrealized loss position aggregated investment category june 30 2004 follows comprehensive income company accounts comprehensive income provisions sfas 130 reporting comprehensive income sfas 130 accordingly accumulated comprehensive loss income shown consolidated statements stockholders equity june 30 2004 2003 2002 comprised net unrealized gains losses companys availableforsale securities foreign currency translation adjustments tax effect 2004 2003 2002 comprehensive income 147428 68073 21006 respectively inventory stated lower cost determined average cost method approximates firstin firstout market inventory primarily includes cost material utilized processing companys products follows property plant equipment property plant equipment consists primarily machinery equipment leasehold improvements recorded cost maintenance repairs expensed incurred machinery furniture equipment depreciated using straightline method useful life ranging one seven years leasehold improvements amortized using straightline method lesser term lease useful life asset construction new facility address companys current future facilities requirements august 2004 company entered agreement purchase land construction new facility new facility located chester county pennsylvania approximately two miles companys existing location long term proposed building site accommodate 220000 square foot facility thus provide companys future growth continued expansion companys construction plan three phases phase one include construction 162000 square foot building shell fitout 90000 square feet space companys manufacturing quality assurance operations personnel phase one began august 2004 continue period approximately eighteen months total estimated cost 26 million including land purchase phase two would increase total building shell size 175000 square feet add another 85000 square feet fitout anticipated complete end five years second phase would allow complete transition companys personnel operations new facility within five years phase three would complete building maximum 220000 square feet necessary company intends finance construction building current available cash hand cash operations andor liquid investments goodwill represents excess cost fair value identifiable net assets thm biomedical inc thm company acquired september 2000 see note 3 effective july 1 2001 company adopted sfas 141 business combinations sfas 141 sfas 142 goodwill intangible assets sfas 142 sfas 141 requires purchase method accounting used business combinations subsequent june 30 2001 specifies criteria recognizing intangible assets acquired business combination sfas 142 goodwill intangible assets indefinite useful lives longer amortized subject annual impairment tests intangible assets definite useful lives continue amortized respective useful lives adoption sfas 142 result reclassification intangible assets changes amortization periods intangible assets definite lives impairment intangible assets impairment longlived assets longlived assets reviewed impairment whenever events circumstances indicate carrying amount asset may recoverable undiscounted expected future cash flows generated related asset less carrying value asset company measures amount impairment comparing carrying amount asset fair value estimation fair value generally measured discounting expected future cash flows rate company borrows accounts receivable allowance company trade receivable allowances 13590 131582 june 30 2004 2003 respectively company established trade receivable allowances 15500 93474 wrote amounts totaling 1718 4392 years ended june 30 2004 2003 respectively addition year ended june 30 2004 company reduced prior year accounts receivable allowance 110382 primarily established customer filed bankruptcy customers outstanding balance since paid specific allowance longer needed amounts included selling general administrative expense years ended june 30 2004 2003 patents costs internally developed patents expensed incurred due long development cycle patents companys inability measure recoverability costs incurred entire cost acquired patents amortized remaining period economic benefit ranging 5 10 years june 30 2004 gross carrying amount patents june 30 2004 4096366 accumulated amortization 1685743 amortization expense patents 263026 fiscal years ended june 30 2004 2003 2002 amortization expense companys acquired patents estimated 263026 years ending june 30 2005 2006 2007 2008 2009 revenue recognition company recognizes revenue provisions staff accounting bulletin sab 101 revenue recognition financial statements sab 101 accordingly sales revenue recognized related product shipped product shipped freeonboard shipping point revenue research development contracts recognized related expenses incurred royalty revenue recognized related product sold advance payments received products services recorded deferred revenue recognized product shipped services performed company receives royalty every angioseal unit sold st jude medical licensee original rate 12 contractually reduced 12 9 accordance licensing agreements quarter ended december 31 2000 cumulative one million angioseal units sold final contracted decrease royalty rate 6 occurred april 2004 four million cumulative units sold june 30 2004 approximately 43 million angioseal units sold company receives 10 royalty codeveloped vitoss product sales orthovita royalty pursuant agreement entered company orthovita march 2003 see note 2 first royalty earned february 2004 first codeveloped product commercially launched orthovita company recognizes substantially royalty revenue accordance st jude medical orthovita agreements end month company advised respective party total enduser product sales dollars month royalty payments received within 45 days end calendar quarter income taxes company accounts income taxes provisions sfas 109 accounting income taxes sfas 109 see note 8 earnings per share earnings per share calculated accordance sfas 128 earnings per share sfas 128 requires company report basic diluted earnings per share eps basic diluted eps computed using weighted average number shares common stock outstanding common equivalent shares options included diluted computation effect dilutive see note 16 stockbased compensation stockbased compensation cost accounted sfas 123 accounting stockbased compensation sfas 123 permits recognition fair value stockbased awards expense ii continued application intrinsic value method accounting principles board opinion 25 accounting stock issued employees apb 25 company accounts stockbased employee director compensation plans recognition measurement principles apb 25 intrinsic value method compensation cost represents excess quoted market price companys common stock grant date amount grantee must pay stock companys policy grant stock options exercise price equal fair market value companys common stock date grant see note 14 options granted nonemployees defined sfas 123 recorded compensation expense see note 9 options granted nonemployee outside consultants company july 2003 october 2002 company grant options nonemployees nonemployee directors fiscal year ended june 30 2002 december 2002 fasb issued sfas 148 accounting stockbased compensation transition disclosure amendment fasb statement 123 accounting stockbased compensation sfas 148 company implemented disclosure provisions sfas 148 period ended december 31 2002 accordingly compensation cost recognized companys two stock option plans compensation cost plans determined based fair market value options grant date consistent provisions sfas 123 amended sfas 148 companys fullytaxed net income earnings per share would reduced pro forma amounts derivative instruments hedging activities company recognizes derivatives either assets liabilities balance sheet depending companys rights obligations applicable derivative contract measures instruments fair value company derivative instruments fiscal years ended june 30 2004 2003 2002 new accounting pronouncements december 2003 fasb issued sfas 132 revised 2003 employers disclosures pensions postretirement benefits amendment fasb statements 87 88 106 sfas 132 revised improves financial statement disclosures defined benefit plans change replaces existing fasb disclosure requirements pensions requires additional disclosures assets obligations cash flows net periodic benefit cost defined benefit pension plans defined benefit postretirement plans project initiated fasb response concerns raised investors users financial statements need greater transparency pension information guidance effective fiscal years ending december 15 2003 first fiscal quarter year following initial application annual disclosure requirements companys adoption sfas 132 provides enhanced disclosures 401k matching contributions see note 7 impact companys financial position results operations 2 strategic alliance agreements st jude medical company strategic alliance st jude medical inc st jude medical incorporates united states foreign license agreements together license agreements collagen supply agreement see license agreements license agreements st jude medical exclusive rights manufacture market current future sizes angioseal worldwide also license agreements company receives royalty payments based upon percentage revenues generated sale angioseal collagen supply agreement pursuant agreement st jude medical company manufactures collagen plug component angioseal agreement threeyear agreement expiring november 30 2005 contains minimum purchase requirement st jude medical pricing fluctuates based product size cumulative quantities sold orthovita march 2003 company entered development manufacturing supply agreement orthovita company develops commercializes products based orthovitas proprietary vitoss bone graft substitute material combination companys proprietary biomaterials orthovita agreement orthovita agreement products codeveloped kensey nash manufactures products orthovita markets sells products worldwide also orthovita agreement kensey nash receives royalty payment based upon orthovitas total enduser sales codeveloped products july 2004 company acquired intellectual property rights third party inventor vitoss technology inventor 26 million assignment agreement inventor assignment agreement assignment agreement company receives intellectual property rights inventor previously assigned orthovita also assignment agreement company receive royalty orthovita sale orthovita products containing vitoss technology total royalty received 4035782 3 goodwill company accounts goodwill provisions sfas 142 sfas 142 goodwill longer amortized subject annual impairment tests company established annual impairment testing date june 30th fiscal year changes net carrying amount goodwill year ended june 30 2004 june 30 2003 company completed initial required goodwill impairment test sfas 142 first quarter fiscal 2002 recent tests fiscal 2004 2003 2002 indicated goodwill impaired 4 leases june 30 2004 future minimum annual rental commitments noncancelable lease obligations follows rent expense operating leases consists rent companys facilities exton pennsylvania duluth minnesota july 2003 eschborn germany rent expense fiscal years ended june 30 2004 2003 2002 approximately 811000 697000 511000 respectively 5 patent acquisition agreement november 1997 company entered agreement patent acquisition agreement acquire portfolio puncture closure patents patent applications well rights seller preexisting licensing agreement acquired patents valued share price per share companys common stock multiplied number shares issued date patent acquisition agreement plus present value cash payments legal related costs incurred acquire patents amortized average remaining useful life acquired portfolio time acquisition approximately 15 years june 30 2004 remaining period amortization approximately 9 years 6 debt acquisition obligation september 1 2000 conjunction acquisition thm biomedical company incurred note payable amount 45 million acquisition obligation acquisition obligation due equal quarterly installments 281250 beginning december 31 2000 ending september 30 2004 accordingly present value cash payments discounted based upon companys available borrowing rate 75 3833970 recorded liability companys consolidated financial statements quarter ended march 31 2003 company repaid certain debt holders thereby reducing companys remaining quarterly installments 223256 september 30 2004 remaining balance 219147 june 30 2004 entire amount current 7 retirement plan company 401k salary reduction plan trust 401k plan employees least 21 years age eligible participate contributions 401k plan made employees employee salary reduction election effective october 1 1999 company implemented 25 discretionary matching contribution 6 employees total compensation employee contributions employer contributions 401k plan 2004 2003 2002 143694 117796 87500 respectively effective july 1 2005 company revised discretionary matching contribution 50 6 employees total compensation employee contributions 8 income taxes company accounts income taxes sfas 109 generally provides deferred tax assets liabilities recognized temporary differences financial reporting basis tax basis companys assets liabilities expected benefits utilizing net operating loss nol carryforwards impact deferred taxes changes tax rates laws applied years temporary differences expected settled reflected financial statements period enactment company recorded tax credits 984817 1500000 fiscal years ended june 30 2004 june 30 2003 respectively entire tax credit recorded 2003 310000 2004 credit related qualified research development activities company period 1991 2003 earnings income taxes earned within outside united states shown provision income taxes composed following differences companys income tax expense benefit income tax expense benefit computed using us federal income tax rate follows significant components companys deferred tax assets follows portion companys deferred tax asset offset valuation allowance relating state nol carryforwards due restrictions imposed uncertainty surrounding use valuation allowance reduces deferred tax assets amount represents managements best estimate amount deferred tax assets likely realized june 30 2004 company nol carryforwards state tax purposes totaling 200 million expire though 2024 addition company foreign net operating loss 300000 june 30 2004 expire 9 consulting contracts october 2002 company granted options purchase 50000 shares common stock physician pursuant fiveyear consulting agreement related development carotid artery application triactiv july 2003 company granted options purchase 1500 shares common stock physician pursuant twoyear consulting agreement related development orthopaedic applications companys porous nonporous tissue fixation regeneration devices drug delivery devices company calculated fair value nonemployee options accordance sfas 123 375550 11378 october 2002 july 2003 grants respectively using blackscholes optionpricing model amounts recorded prepaid consulting expense increases additional paid capital quarters ended december 31 2002 september 30 2003 respectively prepaid expense amortized research development expense terms agreements accordingly 80799 recorded component research development expense period ended june 30 2004 comparable period prior year research development expense associated consulting contracts 56333 period ended june 30 2003 related first consulting agreement mentioned 10 stock repurchase program october 23 2003 company announced board directors approved program repurchase 400000 issued outstanding shares common stock six months date board approval second quarter fiscal year 2004 company repurchased retired 140500 shares common stock program cost approximately 30 million average market price 2134 per share company financed repurchases using available cash additional repurchases made quarter ended march 31 2004 remainder program expired april 23 2004 reinstatement stock repurchase program august 17 2004 company announced board directors reinstated program repurchase issued outstanding shares common stock six months date board approval current plan calls repurchase 259500 shares balance original plan mentioned september 3 2004 company repurchased retired 25000 shares common stock program cost approximately 600000 average market price 2414 per share company financing repurchases using available cash company plans continue repurchase shares cash time open market block trades otherwise repurchase program require company purchase specific dollar value number shares purchases program depend market conditions may commenced suspended time without prior notice 11 concentration credit risk financial instruments potentially subject company significant concentrations credit risk consist primarily cash equivalents investments accounts receivable company places cash equivalents investments high quality financial institutions established guidelines relative diversification maturities maintain safety high liquidity single component companys investment portfolio represented 12 11 total investments june 30 2004 june 30 2003 respectively respect trade royalty receivables primarily st jude medical 24 95 42 100 trade royalty receivables respectively june 30 2004 2003 see note 2 trade receivable two customers arthrex orthovita approximately 37 33 respectively trade receivables june 30 2004 customers receivable balances deemed uncollectible would material adverse effect companys results operations financial condition company performs ongoing credit evaluations customers financial conditions require collateral support customer receivables 12 certain compensation employment agreements company entered employment agreements certain officers provide aggregate annual base salaries 705000 june 30 2005 13 preferred stock company authorized class undesignated preferred stock consisting 100000 shares 001 par value board directors may authorize issuance preferred stock ranks senior common stock respect payment dividends distribution assets liquidation addition board directors authorized fix limitations restrictions upon payment dividends common stock effective shares preferred stock outstanding board directors without stockholder approval issue preferred stock voting conversion rights could adversely affect voting power holders common stock june 30 2004 2003 shares preferred stock outstanding company present intention issue shares preferred stock 14 stock option plans company employee incentive compensation plan employee plan flexible plan provides employee plan committee broad discretion award eligible participants stockbased performancerelated incentives committee deems appropriate persons eligible participate employee plan officers employees company opinion committee contribute growth success company compensation committee board directors oversees committee may grant nonqualified stock options incentive stock options combination thereof participants june 30 2003 total number shares authorized issuance employee plan 3200000 options purchase total 2077325 shares companys common stock weighted average exercise price 1231 outstanding options purchase total 1033982 shares companys common stock previously exercised employee plan result 88693 shares remained available new awards employee plan consequently board directors proposed stockholders subsequently approved special meeting held june 28 2004 reserve additional 850000 raising total number provided plan 4050000 shares common stock issuance employee plan options granted provide purchase common stock prices determined compensation committee event less closing price stock date grant june 30 2004 awards consist solely stock options summarized table company also nonemployee directors stock option plan directors plan directors plan grants nonqualified stock options purchase common stock directors employees directors plan total 410000 shares available option grants nonemployee director granted option purchase 5000 shares common stock directors plans effective date addition directors plan provides grant option purchase 7500 shares common stock nonemployee director date regular annual stockholder meeting participant must either continuing nonemployee director subsequent meeting elected meeting serve nonemployee director options granted directors plan must provide purchase common stock closing price stock date grant plans options exercisable maximum term ten years date grant vest periods zero four years based grant date summary stock option activity plans years ended june 30 2004 2003 2002 follows fair value option grant estimated date grant using blackscholes optionpricing model following weighted average assumptions used grants following table summarizes significant option groups outstanding june 30 2004 related weighted average exercise price remaining contractual life information follows 15 restricted stock company may provide restricted stock grants executive officers outside directors company employee plan approved companys stockholders shares awarded plan vest installments three years unvested shares forfeited upon termination employment company made following grants outside directors fiscal 2004 vesting shares contingent upon companys achievement certain earnings per share targets company common stock price targets compensation expense related restricted stock grants recorded threeyear vesting period grants year ended june 30 2004 company recognized expense 33255 related restricted share awards 16 earnings per share following table shows reconciliation numerators denominators basic diluted eps calculations income numerator weighted average number shares denominator 17 segment reporting operating segments identified components enterprise separate discrete financial information available evaluation chief operating decisionmaking group making decisions regarding allocate resources assess performance based criteria established sfas 131 disclosures segments enterprise related information sfas 131 companys operations products aggregated single reportable segment since similar economic characteristics production processes types customers distribution methods companys primary products medical devices include biomaterials embolic protection triactiv respect biomaterials products company designs andor manufactures markets various absorbable polymer collagen products use numerous applications including orthopaedic cardiology drugbiologics delivery periodontal general surgery wound care company also receives royalty revenue sale angioseal units st jude medical research development revenue certain research development contracts grants triactiv commercially launched europe fourth quarter fiscal 2002 net sales product line reconciliation total revenue follows years ended june 30 2004 2003 2002 revenues st jude medical represented following percentages total revenues company years ended june 30 2004 2003 2002 revenues arthrex represented following percentages total revenues company companys revenues external customers summarized revenues attributed country based location customer one country us represented 10 companys revenues addition companys longlived assets located us 18 quarterly financial data unaudited summarized quarterly results operations company years ended june 30 2004 june 30 2003 presented quarterly total year earnings per share calculated independently based weighted average number shares outstanding period 15a 2 financial statement schedules omitted required applicable information scheduled financial statements notes thereto 15a 3 exhibits exhibit incorporated reference exhibit number current report form 8k filed sec november 30 2000 exhibit incorporated reference exhibit number registration statement form s1 registration 3398722 exhibit incorporated reference exhibit number quarterly report form 10q quarterly period ended september 30 2001 exhibit incorporated reference exhibit 45 registration statement form s8 registration 33371050 exhibit incorporated reference exhibit number registration statement form s3 registration 33335494 exhibit incorporated reference exhibit 42 registration statement form s8 registration 333117354 exhibit incorporated reference exhibit number quarterly report form 10q quarterly period ended december 31 2003 management contract compensatory plan arrangement required filed exhibit annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 13th day september 2004 kensey nash corporation wendy f dicicco cpa wendy f dicicco cpa chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 13th day september 2004 item 15 exhibits financial statement schedules 15 consolidated financial statements schedules incorporated reference item 8 report form 10k 15 b 15 c exhibits financial statement schedules financial statement schedules omitted required applicable information scheduled financial statements notes thereto exhibits  management contract compensatory plan arrangement exhibits schedules omitted pursuant item 601b2 regulation sk portions exhibit omitted filed separately securities exchange commission pursuant application confidential treatment rule 24b2 securities exchange act 1934 rule 406 securities act 1933 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 12th day september 2011 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 12th day september 2011 signature titles joseph w kaufmann joseph w kaufmann chief executive officer principal executive officer president secretary director douglas g evans pe douglas g evans pe chief operating officer assistant secretary director michael celano michael celano chief financial officer principal financial accounting officer robert j bobb robert j bobb director walter r maupay jr walter r maupay jr director c mccollister evarts md c mccollister evarts md director donald e morel jr phd donald e morel jr phd director item 15 exhibits financial statement schedules 15 1 financial statements following financial statements included report independent registered public accounting firm consolidated balance sheets june 30 2005 2004 consolidated statements income years ended june 30 2005 2004 2003 consolidated statements stockholders’ equity years ended june 30 2005 2004 2003 consolidated statements cash flows years ended june 30 2005 2004 2003 notes consolidated financial statements report independent registered public accounting firm board directors stockholders kensey nash corporation exton pennsylvania audited accompanying consolidated balance sheets kensey nash corporation subsidiaries “company” june 30 2005 2004 related consolidated statements income stockholders’ equity cash flows three years period ended june 30 2005 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position kensey nash corporation subsidiaries june 30 2005 2004 results operations cash flows three years period ended june 30 2005 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states effectiveness company’s internal control financial reporting june 30 2005 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated september 12 2005 expressed unqualified opinion management’s assessment effectiveness company’s internal control financial reporting unqualified opinion effectiveness company’s internal control financial reporting deloitte touche llp philadelphia pennsylvania september 12 2005 kensey nash corporation consolidated balance sheets see notes consolidated financial statements kensey nash corporation consolidated statements income see notes consolidated financial statements kensey nash corporation consolidated statements stockholders’ equity see notes consolidated financial statements kensey nash corporation consolidated statements cash flows see notes consolidated financial statements kensey nash corporation notes consolidated financial statements years ended june 30 2005 2004 2003 1 summary significant accounting policies business kensey nash corporation “kensey nash” “company” leading medical technology company providing innovative solutions via novel technologies wide range medical procedures company expanded well beyond beginnings arterial puncture closure today provides wide range products multiple medical markets primarily cardiovascular sports medicine spine amongst others inventor angioseal™ vascular closure device angioseal device designed seal close femoral artery punctures made diagnostic therapeutic cardiovascular catheterizations company first company place absorbable biomaterial component human vascular system pioneers field absorbable biomaterials company developed significant experience expertise competitive advantage design development manufacture processing absorbable biomaterials medical applications company developed assisted developing manufacturing absorbable biomaterials products leading companies orthopaedic cardiology drugbiologics delivery periodontal general surgery wound care markets incorporation products company also independently behalf customers designing developing various new absorbable biomaterials products markets company also developed triactiv® balloon protected flush extraction system device designed provide embolic protection treatment diseased vessels initial application diseased saphenous vein grafts triactiv device balloon embolic protection device market populated pursued balloon filter devices approaches pros cons company believes unique design triactiv device system offering three key features embolic protection balloon flush catheter active controlled extraction system offers complete effective solution embolic protection original triactiv system commercially launched europe may 2002 using direct sales force germany distributors throughout rest europe united states triactiv system launched april 2005 following march 2005 receipt fda clearance company’s first direct sales force us company’s sales team us currently includes 12 sales representatives strategically located throughout us triactiv fx improved version original device primarily enhancing easeofuse also application svg launched europe april 2005 clinical trials us company anticipates enrollment us clinical trial aspire study complete december 2005 commercial launch fourth fiscal quarter fiscal 2006 future generations triactiv device currently development address additional markets future applications potentially include treatment diseased carotid peripheral native coronary arteries well acute myocardial infarction ami heart attack removal thrombus treatment mentioned original designer developer manufacturer angioseal leading product arterial puncture closure angioseal manufactured marketed sold st jude medical inc principles consolidation basis presentation consolidated financial statements include accounts kensey nash corporation kensey nash holding company kensey nash europe gmbh intercompany transactions balances eliminated company incorporated delaware august 6 1984 kensey nash holding company incorporated delaware january 8 1992 formed hold title certain company patents operations kensey nash gmbh incorporated germany january 2002 formed purpose european sales marketing triactiv device commercially launched europe may 2002 preparation consolidated financial statements conformity accounting principles generally accepted united states america necessarily requires management make estimates assumptions estimates assumptions may differ actual results affect reported amounts assets liabilities disclosure contingent assets liabilities dates financial statements well reported amounts revenue expense periods presented certain reclassifications made prior period balances conform current period presentation cash equivalents cash equivalents represent cash banks shortterm investments original maturity less three months fair value financial instruments carrying amounts financial instruments including cash equivalents shortterm investments accounts receivable accounts payable debt approximated fair value june 30 2005 2004 fair value shortterm investments based quoted market prices investments june 30 2005 consisted primarily high quality municipal us government corporate obligations accordance statement financial accounting standards sfas 115 accounting certain investments debt equity securities sfas 115 company classified entire investment portfolio availableforsale marketable securities secondary resale markets company’s entire investment portfolio reported fair value unrealized gains losses included stockholders’ equity see comprehensive income realized gains losses income march 2004 fasb ratified emerging issues task force issue eitf 031 meaning otherthantemporary impairment application certain investments eitf 031 eitf 031 requires certain quantitative qualitative disclosures securities accounted sfas 115 impaired balance sheet date otherthantemporary impairment recognized disclosure requirements eitf 031 effective fiscal years ending december 15 2003 recognition measurement requirements effective periods beginning june 15 2004 company included required disclosures financial statements september 30 2004 fasb issued fasb staff position fsp eitf issue 0311 delayed effective dates indefinitely paragraphs 1020 eitf 031 paragraphs providing guidance evaluate recognize impairment loss temporary company’s adoption recognition measurement requirements eitf 031 material impact company’s financial position results operations following summary availableforsale securities june 30 2005 2004 majority investments maturities ranging approximately 4 months 5 years addition company one security maturity approximately 11 years also certain municipal variable rate demand obligations maturities ranging 5 30 years municipal variablerate demand obligations putable weekly callable monthly basis investment securities shown currently fair values less amortized cost therefore contain unrealized losses company evaluated securities determined decline value related company industry specific event june 30 2005 approximately twentyeight fortytwo investment securities unrealized losses company anticipates full recovery amortized costs respect securities maturity sooner event favorable market interest rate environment lengths time individual securities continuous unrealized loss position aggregated investment category june 30 2005 follows comprehensive income company accounts comprehensive income provisions sfas 130 reporting comprehensive income sfas 130 accordingly accumulated comprehensive loss income shown consolidated statements stockholders’ equity june 30 2005 2004 2003 comprised net unrealized gains losses company’s availableforsale securities foreign currency translation adjustments tax effect fiscal 2005 2004 2003 comprehensive income 76038 147428 68073 respectively inventory stated lower cost determined average cost method approximates firstin firstout market inventory primarily includes cost material utilized processing company’s products follows adjustments inventory made individual part level estimated excess obsolescence impaired balances reflect inventory lower cost market factors influencing adjustments include changes demand rapid technological changes product life cycle development plans component cost trends product pricing physical deterioration quality concerns revisions adjustments would required factors differ company’s estimates property plant equipment property plant equipment consists primarily machinery equipment leasehold improvements construction progress recorded cost maintenance repairs expensed incurred machinery furniture equipment depreciated using straightline method useful life ranging one seven years leasehold improvements amortized using straightline method lesser term lease useful life asset construction new facility company’s new facility located general vicinity existing facility long term proposed building site able accommodate 220000 square foot facility thus provide company’s future growth continued expansion company’s construction plan three phases phase one construction 160000 square foot building shell fitout 90000 square feet space company’s manufacturing quality assurance operations phase one began first fiscal quarter 2005 expected completed early third quarter fiscal 2006 total estimated cost 35 million including land purchase phase two complete interior fitout 160000 square feet anticipated complete within four months phase one fourth quarter fiscal 2006 second phase would allow complete transition company’s personnel operations new facility exception model shop phase three would bring building 198000 square foot shell additional 13000 square feet fitout allow company bring entire organization new facility phase three expected complete june 30 2006 phases two three estimated additional cost 11 million including purchase additional land company’s current plan finance construction building current available cash hand liquid investments associated management’s finalization plan transition operations new facility occurred april 30 2005 company record acceleration depreciation charge related assets abandoned time transition total value assets abandoned 49 million april 30 2005 acceleration depreciation charge 813000 recorded company’s fourth quarter ended june 30 2005 remaining 41 million expected charged fiscal year 2006 addition moving costs approximately 400000 total 45 million goodwill represents excess cost fair value identifiable net assets thm biomedical inc thm company acquired september 2000 see note 3 effective july 1 2001 company adopted sfas 141 business combinations sfas 141 sfas 142 goodwill intangible assets sfas 142 sfas 141 requires purchase method accounting used business combinations subsequent june 30 2001 specifies criteria recognizing intangible assets acquired business combination sfas 142 goodwill intangible assets indefinite useful lives longer amortized subject annual impairment tests intangible assets definite useful lives continue amortized respective useful lives adoption sfas 142 result reclassification intangible assets changes amortization periods intangible assets definite lives impairment intangible assets impairment longlived assets longlived assets reviewed impairment whenever events circumstances indicate carrying amount asset may recoverable undiscounted expected future cash flows generated related asset less carrying value asset company measures amount impairment comparing carrying amount asset fair value estimation fair value generally measured discounting expected future cash flows rate company borrows accounts receivable allowance company trade receivable allowances 8697 13590 june 30 2005 2004 respectively company established trade receivable allowances 122357 21608 wrote amounts totaling 59799 1718 years ended june 30 2005 2004 respectively addition year ended june 30 2005 company reduced accounts receivable allowance established year 67451 primarily established customer negotiations disputed payment portion customer’s outstanding balance paid remaining portion written specific allowance recovered portion longer needed year ended june 30 2004 company reduced fiscal year 2003 accounts receivable allowance 137882 primarily established customer filed bankruptcy customer’s outstanding balance paid fiscal year 2004 specific allowance longer needed amounts included selling general administrative expense years ended june 30 2005 2004 patents proprietary rights costs internally developed patents expensed incurred due long development cycle patents company’s inability measure recoverability costs incurred entire cost acquired patents proprietary rights amortized remaining period economic benefit ranging 4 15 years june 30 2005 see note 6 gross carrying amount patents proprietary rights june 30 2005 6946366 accumulated amortization 2430783 amortization expense patents proprietary rights 745040 fiscal year ended june 30 2005 263026 fiscal years ended june 30 2004 2003 amortization expense company’s acquired patents proprietary rights estimated 799068 years ending june 30 2006 2007 2008 2009 321876 year ending june 30 2010 revenue recognition sales revenue company recognizes revenue provisions staff accounting bulletin sab 101 revenue recognition financial statements sab 101 accordingly sales revenue recognized related product shipped product shipped freightonboard shipping point advance payments received products services recorded deferred revenue recognized product shipped services performed company reduces sales revenue estimated customer returns allowances including discounts company manufactures medical products specifically customer specifications majority customers subject return failure meet customer specifications company sales returns allowances discounts 78172 50220 101099 years ended june 30 2005 2004 2003 respectively research development revenue research development contracts recognized related expenses incurred revenues recorded line item derived government programs us government funds research high risk enabling technologies program reflected statement operations fiscal 2003 2004 2005 award research synthetic vascular graft concluded september 2004 also included fiscal 2003 2004 statements operations award research breast cancer drug delivery technology concluded october 2003 royalty income company recognizes substantially royalty revenue end month accordance agreements st jude medical orthovita company advised respective party net total enduser product sales dollars month royalty payments parties generally received within 45 days end calendar quarter company receives 6 royalty every angioseal unit sold st jude medical licensee final contracted decrease royalty rate 9 6 occurred april 2004 four million cumulative units sold june 30 2005 approximately 59 million angioseal units sold company receives royalty codeveloped vitoss foam product sales orthovita royalty pursuant agreement entered company orthovita march 2003 first royalty earned february 2004 first codeveloped product commercially launched orthovita addition separate transaction company acquired proprietary rights third party vitoss technology acquisition entitled company certain rights including economic rights third party economic rights included royalty products containing vitoss technology first royalty transaction earned quarter ended september 30 2004 transaction completed research development research development costs charged expense incurred income taxes company accounts income taxes provisions sfas 109 accounting income taxes sfas 109 see note 9 earnings per share earnings per share calculated accordance sfas 128 earnings per share sfas 128 requires company report basic diluted earnings per share eps basic diluted eps computed using weighted average number shares common stock outstanding common equivalent shares options included diluted computation effect dilutive see note 17 options purchase shares common stock outstanding years ended june 30 2005 2004 2003 included computation diluted eps exercise prices options exceeded average market price would antidilutive shown table stockbased compensation stockbased compensation cost accounted sfas 123 accounting stockbased compensation sfas 123 permitted recognition fair value stockbased awards expense ii continued application intrinsic value method accounting principles board opinion 25 accounting stock issued employees apb 25 company accounted stockbased employee director compensation plans recognition measurement principles apb 25 intrinsic value method compensation cost represents excess quoted market price company’s common stock grant date amount grantee must pay stock company’s policy grant employee stock options exercise price equal fair market value company’s common stock date grant therefore recording compensation expense apb 25 options granted nonemployee outside consultants defined sfas 123 r recorded compensation expense based fair market value grants restricted shares granted executive officers nonemployee members board directors recorded compensation expense using intrinsic value method apb 25 see note 10 discussion options granted nonemployee outside consultants july 2003 october 2002 see note 16 restricted stock awards granted nonemployee members board directors executive officers company december 2002 fasb issued sfas 148 accounting stockbased compensation transition disclosure amendment fasb statement 123 accounting stockbased compensation sfas 148 company implemented “disclosure only” provisions sfas 148 period ended december 31 2002 thereby recording compensation cost stock options issued employees company’s two stock option plans compensation costs plans determined based fair market value stock options restricted stock consistent provisions sfas 123 amended sfas 148 company’s net income earnings per share years ended june 30 2005 2004 2003 would reduced pro forma amounts 1 amounts represent compensation expense determined fair market value method included reported net income net related tax effect 2 amounts represent compensation expense determined intrinsic value method included reported net income net related tax effects 3 amounts represent compensation expense determined fair market value based method awards net related tax effects december 16 2004 fasb finalized sfas 123 r sharebased payment sfas 123r effective annual reporting periods beginning june 15 2005 new standard require company begin expensing stock options quarter ended september 30 2005 fasb expressed view use binomial lattice model option valuation capable fully reflecting certain characteristics employee share options approved valuation models company currently uses blackscholes valuation model begun process analyze utilization binomial lattice model could impact valuation options accelerated vesting stock options april 27 2005 board directors approved acceleration vesting certain unvested “outofmoney” stock options exercise prices equal greater 2735 per share previously awarded company’s employees including executive officers directors equity compensation plans acceleration vesting effective stock options outstanding may 4 2005 options purchase 547815 shares common stock 431000 held executive officers directors 47 outstanding unvested options subject acceleration anticipate stock options accelerated immediate dilutive effect earnings per share majority employee group historical expected option term approximately 6 years exercising options compensation expense would recorded adoption sfas 123r absent accelerated vesting approximately 52 million 37 million net related tax effects 42 million 30 million net related tax effects related stock options held executive officers directors purpose acceleration enable company decrease recognized compensation expense associated options future periods company’s consolidated statements income upon adoption sfas 123r july 2005 derivative instruments hedging activities company recognizes derivatives either assets liabilities balance sheet depending company’s rights obligations applicable derivative contract measures instruments fair value company derivative instruments fiscal years ended june 30 2005 2004 2003 new accounting pronouncements november 2004 fasb issued sfas 151 inventory costs sfas 151 sfas 151 amends accounting abnormal amounts idle facility expense freight handling costs wasted material spoilage guidance arb 43 chapter 4 inventory pricing paragraph 5 arb 43 chapter 4 previously stated “ circumstances items idle facility expense excessive spoilage double freight rehandling costs may abnormal require treatment current period charges ” sfas 151 requires items recognized currentperiod charges regardless whether meet criterion “so abnormal” addition sfas 151 requires allocation fixed production overheads costs conversion based normal capacity production facilities statement effective inventory costs incurred fiscal years beginning june 15 2005 management expect adoption sfas 151 material impact company’s financial position results operations december 2004 fasb issued sfas 153 exchanges nonmonetary assets sfas 153 amendment opinion 29 accounting nonmonetary transactions sfas 153 eliminates certain differences guidance opinion 29 compared guidance contained standards issued international accounting standards board amendment opinion 29 eliminates fair value exception nonmonetary exchanges similar productive assets replaces general exception exchanges nonmonetary assets commercial substance exchange commercial substance future cash flows entity expected change significantly result exchange sfas 153 effective nonmonetary asset exchanges occurring periods beginning june 15 2005 earlier application permitted nonmonetary asset exchanges occurring periods beginning december 16 2004 management expect adoption sfas 153 material impact company’s financial position results operations december 2004 fasb issued two fasb staff positions fsp fas 1091 application fasb statement 109 accounting income taxes tax deduction provided usbased manufacturers american jobs creation act 2004 fsp fas 1092 accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004 fsp fas 1091 clarifies tax deduction domestic manufacturers american jobs creation act 2004 act accounted special deduction accordance fasb statement 109 accounting income taxes fsp fas 1092 provides enterprises time beyond financialreporting period act took effect evaluate act’s impact enterprise’s plan reinvestment repatriation certain foreign earnings purposes applying statement 109 management expect adoption fsp 1091 1092 material impact company’s financial position results operations december 2004 fasb issued sfas 123r sfas 123r amends sfas 123 supersedes apb 25 sfas 123r requires cost sharebased payment transactions including employees nonemployees recognized financial statements sfas 123r applies sharebased payment transactions entity acquires goods services issuing offering issue shares share options equity instruments except held esop incurring liabilities 1 amounts based even part price entity’s shares equity instruments 2 require may require settlement issuance entity’s shares equity instruments statement effective company first annual reporting period beginning june 15 2005 new standard require company begin expensing stock options quarter ending september 30 2005 date company expensed sharebased payments nonemployees restricted shares granted effect statement relate company’s expensing stock options accordingly adoption statement 123r’s fair value method significant impact company’s consolidated results operations although impact company’s consolidated financial position cash flows impact adopting statement 123r future period earnings cannot predicted time depend levels sharebased payments granted future valuation methodology employed ie black scholes binomial however company adopted statement 123r prior periods using black scholes method impact standard would approximated impact statement 123 described stockbased compensation disclosure pro forma net earnings net earnings per share march 2005 us securities exchange commission sec issued staff accounting bulletin sab 107 sharebased payment expressed views sec staff regarding application statement 123r april 2005 sec issued release 338568 amendment rule 401a regulation sx regarding compliance date statement 123r among things sab 107 release 338568 provided interpretive guidance related interaction statement 123r certain sec rules regulations provided sec staff’s views regarding valuation sharebased payment arrangements public companies changed required adoption date standard may 2005 fasb issued fasb statement 154 accounting changes error corrections statement 154 supersedes apb opinion 20 accounting changes fasb statement 3 reporting accounting changes interim financial statements generally provisions statement 154 similar provisions opinion 20 statement 3 however statement 154 requires retrospective application prior periods’ financial statements voluntary change accounting principle recognition cumulative effect voluntary change accounting principle net earnings period change would permitted retrospective application prior periods’ financial statements impracticable statement 154 effective fiscal years beginning december 15 2005 management expect adoption sfas 154 material impact company’s financial position results operations march 2005 fasb issued interpretation 47 “fin 47” “accounting conditional asset retirement obligations interpretation fasb statement 143” fin 47 requires entity recognize liability fair value conditional asset retirement obligation fair value reasonably estimated fin 47 states conditional asset retirement obligation legal obligation perform asset retirement activity timing method settlement conditional upon future event may within control entity fin 47 effective later end fiscal years ending december 15 2005 retrospective application interim financial information permitted required early adoption fin 47 encouraged management expect adoption fin 47 material impact company’s financial position results operations 2 strategic alliance agreements st jude medical inc company strategic alliance st jude medical inc st jude medical incorporates united states foreign license agreements together license agreements collagen supply agreement angioseal vascular closure device component supply contract see license agreements license agreements st jude medical exclusive rights manufacture market current future sizes angioseal worldwide also license agreements company receives royalty payments based upon percentage revenues generated sale angioseal collagen supply agreement pursuant agreement st jude medical company manufactures collagen plug component angioseal original agreement threeyear agreement scheduled expire november 30 2005 contained minimum purchase requirement st jude medical pricing fluctuated based product size cumulative quantities sold angioseal vascular closure device component supply contract june 15 2005 company executed new angioseal vascular closure device component supply contract “contract” licensee st jude medical inc contract effective june 30 2005 expire december 2010 provides company exclusively supply 100 st jude medical’s requirements collagen component current future versions angioseal device well 30 st jude medical’s bioresorbable polymer anchor requirements term agreement although st jude medical historically purchased 100 collagen requirements company contractual obligation 50 requirements addition two companies informal verbal agreement company provided st jude medical approximately 20 annual anchor component requirements new contract adds 100 collagen component exclusivity formal increased commitment supply anchor component 30 total annual requirements provides five half year term compared existing contract threeyear term addition future revenue derived component sales company received 1 million origination fee upon signing consideration company’s required investment including development efforts provide collagen components specified contract agreement company commercialize new proprietary collagen technologies incorporation angioseal device contract also provides st jude medical access company’s new closed herd collagen sources orthovita march 2003 company entered development manufacturing supply agreement orthovita company develops commercializes products based orthovita’s proprietary vitoss bone graft substitute material combination company’s proprietary biomaterials orthovita agreement orthovita agreement products codeveloped kensey nash manufactures products orthovita markets sells products worldwide also orthovita agreement kensey nash receives royalty payment based upon orthovita’s total enduser sales codeveloped products july 2004 company acquired intellectual property rights third party inventor vitoss technology inventor 26 million assignment agreement inventor assignment agreement assignment agreement company receives intellectual property rights inventor previously assigned orthovita also assignment agreement company receive royalty orthovita sale orthovita products containing vitoss technology total royalty received 4035782 3 goodwill company accounts goodwill provisions sfas 142 sfas 142 goodwill longer amortized subject annual impairment tests company established annual impairment testing date june 30th fiscal year changes net carrying amount goodwill year ended june 30 2005 june 30 2004 company completed initial required goodwill impairment test sfas 142 first quarter fiscal 2002 recent tests fiscal 2005 2004 2003 indicated goodwill impaired 4 accrued expenses june 30 2005 june 30 2004 accrued expenses consisted following 5 leases june 30 2005 future minimum annual rental commitments noncancelable lease obligations follows rent expense operating leases consists rent company’s facilities exton pennsylvania eschborn germany rent expense fiscal years ended june 30 2005 2004 2003 approximately 986000 811000 697000 respectively 6 patent proprietary rights agreements patent acquisition agreement november 1997 company entered agreement patent acquisition agreement acquire portfolio puncture closure patents patent applications well rights seller preexisting licensing agreement addition september 2000 conjunction acquisition thm company acquired separate portfolio patents related biomaterials business costs patent acquisition agreement patents acquired part thm acquisition amortized remaining periods economic benefit ranging 4 11 years june 30 2005 gross carrying amount patents june 30 2005 4096366 accumulated amortization 1948769 amortization expense patents 263026 year ended june 30 2005 included within research development expense amortization expense company’s acquired patents estimated 263026 years ending june 30 2006 2007 2008 2009 262500 fiscal year ending june 30 2010 assignment agreement august 2004 company acquired intellectual property rights third party inventor vitoss technology inventor 2600000 assignment agreement inventor assignment agreement assignment agreement company receives intellectual property rights inventor previously assigned orthovita also assignment agreement company receives royalty orthovita sale orthovita products containing vitoss technology total royalty received 4035782 june 30 2005 company recognized royalty income 585963 assignment agreement 3449819 yet received entire cost proprietary rights amortized 60month period company anticipates receiving economic benefit relation proprietary rights amortization expense proprietary rights 476667 year ended june 30 2005 included within selling general administrative expense amortization expense proprietary rights estimated 520000 fiscal years ending june 30 2006 fiscal 2009 43334 year ending june 30 2010 technology purchase agreement march 2005 company entered agreement acquire patents proprietary rights pair inventors technology purchase agreement intellectual property processing information acquired technology purchase agreement complimentary broadens company’s existing biomaterials intellectual property materials processing knowledge platform technology purchase agreement company paid 250000 patents upon execution agreement obligated pay certain milestone payments royalties upon achievement certain product development commercial launch goals products incorporate acquired patent technology company anticipates patents proprietary rights acquired enhance existing biomaterials platform alternative future uses expand platform initial 250000 purchase price patents amortized remaining period economic benefit patents currently estimated approximately 16 years june 30 2005 gross carrying amount acquired technology june 30 2005 250000 amortization expense acquired technology 5348 fiscal year ending june 30 2005 included within research development expense amortization expense acquired technology currently estimated 16043 fiscal years ending june 30 2006 2007 2008 2009 2010 7 debt acquisition obligation september 1 2000 conjunction acquisition thm biomedical company incurred note payable amount 45 million acquisition obligation acquisition obligation due equal quarterly installments 281250 beginning december 31 2000 ending september 30 2004 accordingly present value cash payments discounted based upon company’s available borrowing rate 75 3833970 recorded liability company’s consolidated financial statements quarter ended march 31 2003 company repaid certain debt holders thereby reducing company’s remaining quarterly installments 223256 september 30 2004 september 30 2004 company repaid entire acquisition obligation remaining debt 8 retirement plan company 401k salary reduction plan trust 401k plan employees least 21 years age eligible participate contributions 401k plan made employees employee salary reduction election effective october 1 1999 company implemented 25 discretionary matching contribution 6 employee’s total compensation employee contributions effective july 1 2004 company revised discretionary matching contribution 50 6 employee’s total compensation employee contributions employer contributions 401k plan 2005 2004 2003 348538 143694 117796 respectively 9 income taxes company accounts income taxes sfas 109 generally provides deferred tax assets liabilities recognized temporary differences financial reporting basis tax basis company’s assets liabilities expected benefits utilizing net operating loss nol carryforwards impact deferred taxes changes tax rates laws applied years temporary differences expected settled reflected financial statements period enactment company recorded tax credits 493536 984817 1500000 fiscal years ended june 30 2005 2004 2003 respectively entire tax credit recorded 2003 310000 2004 credit related qualified research development activities company period 1991 2003 earnings income taxes earned within outside united states shown provision income taxes composed following differences company’s income tax expense benefit income tax expense benefit computed using us federal income tax rate follows significant components company’s deferred tax assets follows portion company’s deferred tax asset offset valuation allowance relating state nol carryforwards due restrictions imposed uncertainty surrounding use valuation allowance reduces deferred tax assets amount represents management’s best estimate amount deferred tax assets likely realized june 30 2005 company nol carryforwards state tax purposes totaling 200 million expire 2024 addition company foreign net operating loss 316390 june 30 2005 expire 10 consulting contracts october 2002 company granted options purchase 50000 shares common stock physician pursuant fiveyear consulting agreement related development carotid artery application triactiv system july 2003 company granted options purchase 1500 shares common stock physician pursuant twoyear consulting agreement related development orthopaedic applications company’s porous nonporous tissue fixation regeneration devices drug delivery devices company calculated fair value nonemployee options accordance sfas no123 375550 11378 october 2002 july 2003 grants respectively using blackscholes optionpricing model amounts recorded prepaid consulting expense increases additional paid capital quarters ended december 31 2002 september 30 2003 respectively prepaid expense amortized research development expense terms agreements accordingly 80799 recorded component research development expense periods ended june 30 2005 2004 11 stock repurchase program august 17 2004 company announced board directors reinstated program repurchase issued outstanding shares company’s common stock six months date board reinstatement reinstated plan called repurchase 259500 shares balance original plan approved october 2003 year ended june 30 2005 company repurchased retired 199867 shares common stock reinstated program cost approximately 51 million average market price 2568 per share program expired february 2005 march 16 2005 company announced new stock repurchase program additional 400000 issued outstanding shares company’s common stock approved board directors plan expires september 30 2005 first stock repurchase program company plans continue repurchase shares cash time open market block trades otherwise repurchase program require company purchase specific dollar value number shares purchases program depend market conditions may commenced suspended time without prior notice june 30 2005 company repurchased retired 103133 shares common stock new program cost approximately 27 million average market price 2658 per share using available cash june 30 2005 296867 shares remaining repurchase program following table contains information company’s purchases equity securities april may june 2005 12 concentration credit risk financial instruments potentially subject company significant concentrations credit risk consist primarily cash equivalents investments accounts receivable company places cash equivalents investments high quality financial institutions established guidelines relative diversification maturities maintain safety high liquidity single component company’s investment portfolio represented 15 12 total investments june 30 2005 june 30 2004 respectively respect trade royalty receivables primarily st jude medical 32 89 24 95 trade royalty receivables respectively june 30 2005 2004 see note 2 trade receivables two customers arthrex orthovita approximately 38 14 respectively trade receivables june 30 2005 customers’ receivable balances deemed uncollectible would material adverse effect company’s results operations financial condition company performs ongoing credit evaluations customers’ financial conditions require collateral support customer receivables 13 certain compensation employment agreements company entered employment agreements certain officers provided aggregate annual base salaries 705000 june 30 2005 14 preferred stock company authorized class undesignated preferred stock consisting 100000 shares 001 par value board directors may authorize issuance preferred stock ranks senior common stock respect payment dividends distribution assets liquidation addition board directors authorized fix limitations restrictions upon payment dividends common stock effective shares preferred stock outstanding board directors without stockholder approval issue preferred stock voting conversion rights could adversely affect voting power holders common stock june 30 2005 2004 shares preferred stock outstanding company present intention issue shares preferred stock 15 stock option plans company employee incentive compensation plan employee plan flexible plan provides employee plan committee broad discretion award eligible participants stockbased performancerelated incentives committee deems appropriate persons eligible participate employee plan officers nonemployee directors’ employees company opinion committee contribute growth success company compensation committee board directors oversees committee may grant nonqualified stock options incentive stock options restricted stock see note 16 combination thereof participants june 30 2003 total number shares authorized issuance employee plan 3200000 options purchase total 2077325 shares company’s common stock weighted average exercise price 1231 outstanding options purchase total 1033982 shares company’s common stock previously exercised employee plan result 88693 shares remained available new awards employee plan consequently board directors proposed stockholders subsequently approved special meeting held june 28 2004 reserve additional 850000 raising total number provided plan 4050000 shares common stock issuance employee plan options granted provide purchase common stock prices determined compensation committee event less closing price stock date grant june 30 2004 2005 awards consisted stock options restricted stock summarized table june 30 2003 awards consisted solely stock options summarized table company also nonemployee directors’ stock option plan directors’ plan directors’ plan grants nonqualified stock options purchase common stock directors employees june 30 2005 total 410000 shares authorized issuance directors’ plan options purchase total 341000 shares company’s common stock weighted average exercise price 1950 outstanding options purchase total 49500 shares company’s common stock previously exercised directors’ plan result 19500 shares remain available new awards directors’ plan nonemployee director granted option purchase 5000 shares common stock directors’ plan’s effective date addition director’s plan provides grant option purchase 7500 shares common stock nonemployee director date regular annual stockholder meeting participant must either continuing nonemployee director subsequent meeting elected meeting serve nonemployee director options granted directors’ plan must provide purchase common stock closing price stock date grant plans options exercisable maximum term ten years date grant vest periods zero four years based grant date summary stock option see note 16 restricted stock activity plans years ended june 30 2005 2004 2003 follows fair value option grant estimated date grant using blackscholes optionpricing model following weighted average assumptions used grants following table summarizes significant option groups outstanding june 30 2005 related weighted average exercise price remaining contractual life information follows 16 restricted stock company may provide restricted stock grants employee incentive compensation plan approved company’s stockholders fiscal years 2004 2005 company granted shares restricted common stock nonemployee members board directors executive officers company shares granted nonemployee members board directors vest three equal annual installments contingent upon company’s achievement certain earnings per share targets company common stock price targets continued service board member anniversary date grant shares granted executive officers vest three equal annual installments based solely continued employment company unvested shares forfeited upon termination service board directors employment applicable company made following grants nonemployee directors executive officers fiscal years ended june 30 2005 2004 intrinsic value disclosed based upon closing price company’s common stock date grant compensation expense related restricted stock grants recorded threeyear vesting period grants compensation expense related board directors shares recorded component selling general administrative expense compensation expense related executive officer shares recorded component either selling general administrative research development expense dependent executive officer receiving shares fiscal years ended june 30 2005 2004 company recognized expense 764627 33255 respectively related restricted stock awards following summary restricted stock transactions fiscal years ended june 30 2005 2004 2003 17 earnings per share following table shows reconciliation numerators denominators basic diluted eps calculations income numerator weighted average number shares denominator 18 segment reporting operating segments identified components enterprise separate discrete financial information available evaluation chief operating decisionmaking group making decisions regarding allocate resources assess performance based criteria established sfas 131 disclosures segments enterprise related information sfas 131 company’s operations products aggregated single reportable segment since similar economic characteristics production processes types customers distribution methods company’s primary products medical devices include biomaterials embolic protection triactiv system respect biomaterials products company designs andor manufactures markets various absorbable polymer collagen products use numerous applications including orthopaedic cardiology drugbiologics delivery periodontal general surgery wound care company also receives royalty revenue sale angioseal units st jude medical research development revenue certain research development contracts grants triactiv system commercially launched europe fourth quarter fiscal 2002 commercially launched united states fourth quarter fiscal 2005 net sales product line reconciliation total revenue follows years ended june 30 2005 2004 2003 revenues st jude medical represented following percentages total revenues company years ended june 30 2005 2004 2003 revenues arthrex represented following percentages total revenues company years ended june 30 2005 2004 2003 revenues orthovita represented following percentages total revenues company’s revenues external customers summarized revenues attributed country based location customer one country us represented 10 company’s revenues addition company’s longlived assets located us 19 quarterly financial data unaudited summarized quarterly results operations company years ended june 30 2005 june 30 2004 presented quarterly total year earnings per share calculated independently based weighted average number shares outstanding period 20 opportunity grant november 2004 company awarded 500000 grant opportunity grant program department community economic development commonwealth pennsylvania grant awarded company potential jobcreating economic development opportunities created company’s construction new facility within state pennsylvania grant conditioned upon meeting following 1 company create 238 fulltime jobs within 5 years beginning april 1 2003 date company’s request grant 2 company invest least 54250000 total project costs including limited personnel land building construction within three years beginning july 19 2004 date company’s facility groundbreaking 3 company operate new facility minimum 5 years company received cash payment 500000 third fiscal quarter 2005 revenue recognized earned longest period contained within grant commitment term five years date occupancy company’s new facility date satisfaction last grant commitment expected december 2010 assuming original expectation transition new facility january 2006 june 30 2005 approximately 54054 revenue recognized related grant component income revenue opportunity grant estimated 81081 years ending june 30 2006 2010 15 2 financial statement schedules omitted required applicable information scheduled financial statements notes thereto 15 3 exhibits 1 exhibit incorporated reference exhibit number current report form 8k filed sec november 20 2000 2 exhibit incorporated reference exhibit number registration statement form s1 registration 3398722 3 exhibit incorporated reference exhibit number quarterly report form 10q quarterly period ended september 30 2001 4 exhibit incorporated reference exhibit 45 registration statement form s8 registration 33371050 5 exhibit incorporated reference exhibit number registration statement form s3 registration 33335494 6 exhibit incorporated reference exhibit 42 registration statement form s8 registration 333117354 7 exhibit incorporated reference exhibit number quarterly report form 10q quarterly period ended december 31 2003 8 exhibit incorporated reference exhibit number quarterly report form 10q quarterly period ended march 31 2005 9 exhibit incorporated reference exhibit number 10 current report form 8k filed sec june 21 2005 10 exhibit incorporated reference exhibit number annual report form 10k annual period ended june 30 2004  management contract compensatory plan arrangement required filed exhibit annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 13th day september 2005 kensey nash corporation wendy f dicicco cpa wendy f dicicco cpa chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 13th day september 2005 signature titles joseph w kaufmann joseph w kaufmann chief executive officer principal executive officer president secretary director john e nash pe john e nash pe vice president new technologies director douglas g evans pe chief operating officer assistant secretary director wendy f dicicco cpa wendy f dicicco cpa chief financial officer principal financial accounting officer robert j bobb robert j bobb director harold n chefitz harold n chefitz director walter r maupay jr walter r maupay jr director c mccollister evarts md c mccollister evarts md director steven j lee steven j lee director kim rosenberg kim rosenberg director item 15 exhibits financial statement schedules 15a consolidated financial statements schedules incorporated reference item 8 report form 10k 15b financial statement schedules omitted required applicable information scheduled financial statements notes thereto 15c exhibits 1 exhibit incorporated reference exhibit number registration statement form s1 registration 3398722 2 exhibit incorporated reference exhibit number current report form 8k filed sec december 6 2006 3 exhibit incorporated reference exhibit 45 registration statement form s8 registration 33371050 4 exhibit incorporated reference exhibit number registration statement form s3 registration 33335494 5 exhibit incorporated reference exhibit numbers 101 102 current report form 8k filed sec december 5 2007 6 exhibit incorporated reference exhibit number quarterly report form 10q quarterly period ended march 31 2005 7 exhibit incorporated reference exhibit number 10 current report form 8k filed sec june 21 2005 8 exhibit incorporated reference exhibit number annual report form 10k annual period ended june 30 2006 9 exhibit incorporated reference exhibit number current report form 8k filed sec june 1 2006 10 exhibit incorporated reference exhibit number current report form 8k filed sec july 3 2007 11 exhibit incorporated reference exhibit number 32 current report form 8k filed sec december 21 2007 12 exhibit incorporated reference exhibit number 101 current report form 8k filed sec october 24 2007 13 exhibit incorporated reference exhibit number 102 current report form 8k filed sec october 24 2007 14 exhibit incorporated reference exhibit number 101 current report form 8k filed sec may 16 2008  management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 15th day september 2008 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 15th day september 2008 signature titles joseph w kaufmann joseph w kaufmann chief executive officer principal executive officer president secretary director john e nash pe john e nash pe vice president new technologies director emeritus douglas g evans pe douglas g evans pe chief operating officer assistant secretary director wendy f dicicco cpa wendy f dicicco cpa chief financial officer principal financial accounting officer robert j bobb robert j bobb director harold n chefitz harold n chefitz director walter r maupay jr walter r maupay jr director c mccollister evarts md c mccollister evarts md director steven j lee steven j lee director ceasar n anquillare ceasar n anquillare director jeffrey c smith jeffrey c smith director