SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1999
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to
________
Commission file number 0-28748
CLOSURE MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 56-1959623
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5250 Greens Dairy Road
Raleigh, North Carolina 27616
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (919) 876-7800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this Annual Report on Form 10-K or any amendment to
this Annual Report on Form 10-K. [ ]
As of March 20, 2000, the aggregate market value of the Common Stock held by
non-affiliates of the registrant was $151,300,206. Such aggregate market value
was computed by reference to the closing sale price of the Common Stock as
reported on the Nasdaq National Market of The Nasdaq Stock Market on such date.
For purposes of making this calculation only, the registrant has defined
affiliates as including all directors and beneficial owners of more than five
percent of the Common Stock of the Company.
As of March 20, 2000, there were 13,355,887 shares of the registrant's Common
Stock outstanding.
The following documents are incorporated by reference into Part III, Items 10,
11, 12 and 13 of this Annual Report on Form 10-K: the registrant's definitive
proxy statement for its 2000 Annual Meeting of Stockholders.
TABLE OF CONTENTS
PART I............................................................................................1
ITEM 1. BUSINESS...........................................................................1
ITEM 2. PROPERTIES........................................................................14
ITEM 3. LEGAL PROCEEDINGS.................................................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............................14
PART II..........................................................................................15
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...............................................................15
ITEM 6. SELECTED FINANCIAL DATA...........................................................16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.........................................................17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.........................21
ITEM 8. FINANCIAL STATEMENTS..............................................................21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES.........................................................21
PART III.........................................................................................22
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................22
ITEM 11. EXECUTIVE COMPENSATION............................................................22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................22
PART IV..........................................................................................23
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..................23
UNLESS THE CONTEXT INDICATES OTHERWISE, THE TERMS "CLOSURE" AND
"COMPANY" REFER TO CLOSURE MEDICAL CORPORATION. REFERENCES IN THIS ANNUAL REPORT
ON FORM 10-K ("ANNUAL REPORT") TO CLOSURE OR THE COMPANY ALSO INCLUDE, UNLESS
THE CONTEXT INDICATES OTHERWISE, CLOSURE'S PREDECESSOR, TRI-POINT MEDICAL L.P.
EFFECTIVE JANUARY 13, 1997, THE COMPANY CHANGED ITS NAME FROM TRI-POINT MEDICAL
CORPORATION TO CLOSURE MEDICAL CORPORATION.
"OCTYLDENT" AND "NEXABAND" ARE FEDERALLY REGISTERED TRADEMARKS OF THE
COMPANY."DERMABOND" IS A TRADEMARK OF ETHICON, INC., THE COMPANY'S MARKETING
PARTNER FOR THE PRODUCT. "SOOTHE-N-SEAL" AND "LIQUIDERM" ARE TRADEMARKS OF THE
COMPANY. ALL OTHER TRADE NAMES AND TRADEMARKS APPEARING IN THIS ANNUAL REPORT
ARE THE PROPERTY OF THEIR RESPECTIVE HOLDERS.
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PART I
ITEM 1. BUSINESS.
FORWARD-LOOKING STATEMENTS
IN THIS ANNUAL REPORT ON FORM 10-K OR THE EXHIBITS HERETO, THE
STATEMENTS CONTAINED OR INCORPORATED BY REFERENCE HEREIN THAT ARE NOT HISTORICAL
FACTS OR STATEMENTS OF CURRENT CONDITIONS ARE FORWARD-LOOKING STATEMENTS. SUCH
FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY, AMONG OTHER THINGS, THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS," "FORECASTS,"
"ESTIMATES," "PLANS," "CONTINUES," "MAY," "WILL," "SHOULD," "ANTICIPATES" OR
"INTENDS" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE
TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY OR INTENTIONS. THESE FORWARD-LOOKING
STATEMENTS, SUCH AS STATEMENTS REGARDING PRESENT OR ANTICIPATED SCIENTIFIC
PROGRESS, DEVELOPMENT OF POTENTIAL PRODUCTS, FUTURE REVENUES, CAPITAL
EXPENDITURES AND RESEARCH AND DEVELOPMENT EXPENDITURES, FUTURE FINANCINGS AND
COLLABORATIONS, MANAGEMENT, MANUFACTURING DEVELOPMENT AND CAPABILITIES, AND
OTHER STATEMENTS REGARDING MATTERS THAT ARE NOT HISTORICAL FACTS, INVOLVE
PREDICTIONS. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD
DIFFER MATERIALLY FROM THE RESULTS EXPRESSED IN, OR IMPLIED BY, THESE
FORWARD-LOOKING STATEMENTS. POTENTIAL RISKS AND UNCERTAINTIES THAT COULD AFFECT
THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS INCLUDE, BUT ARE NOT
LIMITED TO, THE "RISK FACTORS" SET FORTH BELOW. GIVEN THESE UNCERTAINTIES,
CURRENT OR PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
ANY SUCH FORWARD-LOOKING STATEMENTS. FURTHERMORE, THE COMPANY DISCLAIMS ANY
OBLIGATION OR INTENT TO UPDATE ANY SUCH FACTORS OR FORWARD-LOOKING STATEMENTS TO
REFLECT FUTURE EVENTS OR DEVELOPMENTS.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS ANNUAL REPORT ON FORM
10-K, THE FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED.
CONTINUING OPERATING LOSSES. The Company has incurred net losses in
each year since its inception, including net losses of approximately $2.5
million for the year ended December 31, 1999. These losses have resulted
primarily from expenses associated with the Company's research and development
activities, including preclinical and clinical trials and general and
administrative expenses. The Company anticipates that its recurring operating
expenses will increase for the next several years, as it expects its research
and development and general and administrative expenses to increase in order to
develop new products, manufacture in commercial quantities and fund additional
clinical trials. The Company may incur a loss in 2000 and may incur losses in
subsequent years, although the amount of future net losses and time required by
the Company to reach profitability are highly uncertain. The Company's ability
to generate significant revenue and become profitable is dependent in large part
on its success in commercializing the Company's lead product, DERMABOND Topical
Skin Adhesive ("DERMABOND"), expanding its manufacturing capacity, obtaining
regulatory approvals or clearances for its products, developing and marketing
new products and entering into additional marketing agreements where appropriate
and the ability of its marketing partners to commercialize successfully products
incorporating the Company's technologies. There can be no assurance that the
Company will generate significant revenue or become profitable on a sustained
basis, if at all. See "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations."
EARLY COMMERCIALIZATION; DEPENDENCE ON NEW PRODUCTS AND TECHNOLOGIES;
UNCERTAINTY OF MARKET ACCEPTANCE. The Company is in the early stage of product
commercialization and has derived only limited revenues from sales of certain
products to its marketing partners. The Company received premarket approval
("PMA") from the U.S. Food and Drug Administration ("FDA") to market DERMABOND
in the United States in August 1998. The Company has several additional
potential products in development. The Company believes that its long-term
viability and growth will depend in large part on sales of DERMABOND, receiving
regulatory clearances or approvals for and the successful commercialization of
these new products resulting from its research and development activities. The
Company presently is pursuing product opportunities that will require extensive
additional capital investment, research, development, clinical testing and
regulatory clearances or approvals prior to commercialization. There can be no
assurance that the Company's development programs will be successfully completed
or that required regulatory clearances or approvals will be obtained on a timely
basis, if at all. Moreover, commercial applications of the Company's absorbable
formulations are relatively new and evolving. The successful development and
market acceptance of the Company's proposed products are subject to inherent
developmental risks, including ineffectiveness or lack of safety, unreliability,
failure to receive necessary regulatory clearances or approvals, high commercial
cost and preclusion or obsolescence
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resulting from third parties' proprietary rights or superior or equivalent
products, as well as general economic conditions affecting purchasing patterns.
There can be no assurance that the Company and its marketing partners
will be able to commercialize successfully or achieve market acceptance of the
Company's technologies or products, or that the Company's competitors will not
develop competing technologies that are less expensive or otherwise superior to
those of the Company. The failure to develop and market successfully new
products would have a material adverse effect on the Company's results of
operations and financial condition. See "Products" and "Competition and
Technological Change."
MANUFACTURING EXPERIENCE. The Company expanded its manufacturing
capacity in August 1998. The Company's future success is dependent on its
ability to manufacture its products in commercial quantities, in compliance with
regulatory requirements, at an acceptable cost and with sufficient shelf-life.
The Company currently manufactures all of its products in a 50,000 square foot
facility in Raleigh, North Carolina. Production of commercial-scale quantities
may involve technical challenges for the Company and will require significant
scale-up expenses for additions to facilities and personnel. There can be no
assurance that the Company will be able to achieve sufficient manufacturing
capabilities to enable it to satisfy demand or to manufacture its products in a
cost-effective manner or in quantities necessary to allow the Company to achieve
profitability. If the Company is unable to manufacture sufficiently to meet the
requirements for DERMABOND of Ethicon, Inc. ("Ethicon"), a division of Johnson &
Johnson and the Company's marketing partner for DERMABOND, as set forth under
their agreement, Ethicon may itself then manufacture DERMABOND and pay the
Company royalties on sales. The resulting loss of payments from Ethicon for the
purchase of DERMABOND from the Company would have a material adverse effect on
the Company's results of operations and financial condition.
In addition, the manufacture of the Company's products will be subject
to periodic inspection by regulatory authorities and certain marketing partners,
and the Company's manufacture of its products for human use is subject to
regulation and inspection from time to time by the FDA for compliance with the
current good manufacturing practices ("GMPs"), as well as equivalent
requirements and inspections by state and foreign regulatory authorities. There
can be no assurance that the Company will continue to satisfy these requirements
for DERMABOND. In addition, there can be no assurance that the FDA or other
authorities will not, during the course of an inspection of existing or new
facilities, identify what they consider to be deficiencies in GMPs or other
requirements and request, or seek, remedial action. Failure to comply with such
regulations or delay in attaining compliance may adversely affect the Company's
manufacturing activities and could result in, among other things, FDA refusal to
grant premarket approvals or clearances for pending or future products, warning
letters, injunctions, civil penalties, fines, recalls or seizures of products,
total or partial suspensions of production and criminal prosecution.
Additionally, future modifications of the Company's manufacturing facilities and
processes may subject the Company to further FDA inspections and review prior to
implementation of such modifications. There can be no assurance that the Company
will be able to obtain necessary regulatory approvals or clearances on a timely
basis, if at all. Delays in receipt of or failure to receive such approvals or
clearances or the loss of previously received approvals or clearances would have
a material adverse effect on the Company's results of operations and financial
condition. See "--Effects of FDA and Other Government Regulation," "Ethicon and
Other Marketing Agreements" and "Manufacturing."
DEPENDENCE ON MARKETING PARTNERS. The Company has no prior experience
in sales, marketing and distribution. Therefore, the Company's strategy for
commercialization of its nonabsorbable products has included entering into
agreements with other companies to market current and certain future products
incorporating the Company's technology. The Company derived all of its fiscal
1999 revenues from the sale of products to its marketing partners. There can be
no assurance that the Company will be able to enter into additional marketing
agreements on terms favorable to the Company, if at all, or that current or
future agreements will ultimately be beneficial to the Company. The Company may
establish a sales force to market certain future products. There can be no
assurance that the Company will be able to establish marketing, distribution and
sales capabilities or make arrangements with third parties to perform such
activities on acceptable terms, if at all.
The Company is dependent on product sales revenues for its
nonabsorbable products upon the success of the Company's marketing partners in
performing their responsibilities. The amount and timing of resources which may
be devoted to the performance of their contractual responsibilities by the
Company's marketing partners are not within the control of the Company. There
can be no assurance that such marketing partners will perform their obligations
as expected or market any products under the marketing agreements, or that the
Company will derive any revenue from such arrangements. There can be no
assurance that products will be launched in the manner and on the timetable
expected by the Company as such determinations are entirely within the control
of the Company's marketing partners. Certain agreements also permit the
marketing partners to pursue existing or alternative technologies in preference
to the
2
Company's technology. There can be no assurance that the interests of the
Company will continue to coincide with those of its marketing partners or that
the marketing partners will not develop independently or with third parties
products which could compete with the Company's products, or that disagreements
over rights or technology or other proprietary interests will not occur. To the
extent that the Company chooses not to or is unable to enter into future
agreements, it would experience increased capital requirements to undertake the
marketing or sale of its current and future products or may not market such
products at all. There can be no assurance that the Company will be able to
market or sell its current or future products independently in the absence of
such agreements. See "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Ethicon and Other Marketing
Agreements."
DEPENDENCE ON SOLE SOURCE SUPPLIER. The Company currently purchases
cyanoacetate, the primary raw material used in manufacturing most of the
Company's products, from a single qualified source. There can be no assurance
that the Company will be able to obtain adequate commercial quantities of
cyanoacetate to manufacture its products within a reasonable period of time or
at commercially reasonable rates. Lack of adequate commercial quantities or
inability to develop alternative sources meeting regulatory requirements at
similar prices and terms within a reasonable time or any interruptions in supply
in the future could have a material adverse effect on the Company's ability to
manufacture its products, including DERMABOND, and, consequently, could have a
material adverse effect on the Company's results of operations and financial
condition. See "--Dependence on Marketing Partners," "Ethicon and Other
Marketing Agreements" and "Manufacturing."
DEPENDENCE ON PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS. The
Company's success depends in large part on whether it can obtain patents,
maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. The Company has thirteen issued U.S.
patents with expiration dates ranging from 2004 to 2016 and two issued foreign
patents with expiration dates ranging from 2014 to 2015, and has filed
applications for 31 additional U.S. patents in addition to certain corresponding
patent applications outside the United States. There can be no assurance that
any of the pending patent applications will be approved, that the Company will
develop additional proprietary products that are patentable, that any patents
issued to the Company will provide the Company with competitive advantages or
will not be challenged by any third parties or that the patents of others will
not prevent the commercialization of products incorporating the Company's
technology. Furthermore, there can be no assurance that others will not
independently develop similar products, duplicate any of the Company's products
or design around the Company's patents. Any of the foregoing results could have
a material adverse effect on the Company's results of operations and financial
condition.
The commercial success of the Company also will depend, in part, on its
ability to avoid infringing patents issued to others. If the Company were
determined to be infringing any third party patent, the Company could be
required to pay damages, alter its products or processes, obtain licenses or
cease certain activities. If the Company is required to obtain any licenses,
there can be no assurance that the Company will be able to do so on commercially
favorable terms, if at all. The Company's failure to obtain a license for any
technology that it may require to commercialize its products could have a
material adverse effect on the Company's results of operations and financial
condition.
Litigation, which could result in substantial costs to and diversion of
effort by the Company, may also be necessary to enforce any patents issued or
licensed to the Company or to determine the scope and validity of third party
proprietary rights. If competitors of the Company that claim technology also
claimed by the Company prepare and file patent applications in the United
States, the Company may have to participate in interference proceedings declared
by the U.S. Patent and Trademark Office to determine priority of invention,
which could result in substantial costs to and diversion of effort by the
Company, even if the eventual outcome is favorable to the Company. Litigation
could subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease using certain technology and, consequently, could have a material adverse
effect on the Company's results of operations and financial condition.
In addition to patent protection, the Company relies on unpatented
trade secrets and proprietary technological expertise. There can be no assurance
that others will not independently develop or otherwise acquire substantially
equivalent techniques, or otherwise gain access to the Company's trade secrets
and proprietary technological expertise or disclose such trade secrets, or that
the Company can ultimately protect its rights to such unpatented trade secrets
and proprietary technological expertise. The Company relies, in part, on
confidentiality agreements with its marketing partners, employees, advisors,
vendors and consultants to protect its trade secrets and proprietary
technological expertise. There can be no assurance that these agreements will
not be breached, that the Company will have adequate remedies for any breach or
that the Company's unpatented trade secrets and proprietary technological
expertise will not otherwise become known or be independently discovered by
competitors. Failure to obtain or maintain patent or trade
3
secret protection, for any reason, could have a material adverse effect on the
Company's results of operations and financial condition. See "Patents, Trade
Secrets and Proprietary Rights."
EFFECTS OF FDA AND OTHER GOVERNMENT REGULATION. As newly developed
medical devices, the Company's medical tissue cohesives must receive regulatory
clearances or approvals from the FDA and, in many instances, from foreign and
state governments, prior to their sale. In order to obtain such clearances or
approvals, medical tissue cohesives must be shown to be efficacious and safe for
use in humans. The Company's current and future medical tissue cohesives for
humans are subject to stringent government regulation in the United States by
the FDA under the Federal Food, Drug and Cosmetic Act, as amended (the "FDC
Act"). The FDA regulates the preclinical and clinical testing, manufacture,
safety, labeling, sale, distribution and promotion of medical devices. Included
among these regulations are premarket clearance and PMA requirements and GMPs.
Other statutory and regulatory requirements include, among other things,
establishment registration and inspection, medical device listing, prohibitions
against misbranding and adulteration, labeling and postmarket reporting.
The regulatory process is lengthy, expensive and uncertain. Before any
new medical device may be introduced to the market, the manufacturer frequently
must obtain FDA clearance or approval through either the 510(k) premarket
notification ("510(k)") process or the lengthier PMA approval process. It
generally takes from three to nine months from submission to obtain 510(k)
premarket clearance, although it may take longer. Approval of a PMA could take
two or more years from the date of submission of the application. The 510(k) and
PMA processes can be expensive, uncertain and lengthy, and there is no guarantee
of ultimate clearance or approval. It is expected that some of the Company's
future products under development will be subject to the lengthier PMA process.
There can be no assurance that the Company will obtain the necessary clearances
or approvals to market its products. Securing FDA clearances and approvals may
require the submission of extensive preclinical and clinical data and supporting
information to the FDA, and there can be no guarantee of ultimate clearance or
approval. Failure to comply with applicable requirements can result in refusals
to approve or clear new applications or notifications, withdrawals of existing
product approvals or clearances, issuances of warning letters, application
integrity proceedings, injunctions, civil penalties, fines, recalls or seizures
of products, total or partial suspensions of production and criminal
prosecution.
Medical devices also are subject to postmarket reporting requirements
for deaths or serious injuries when the device may have caused or contributed to
the death or serious injury, and for certain device malfunctions that would be
likely to cause or contribute to a death or serious injury if the malfunction
were to recur. If safety or efficacy problems occur after the product reaches
the market, the FDA may take steps to prevent or limit further marketing of the
product. Additionally, the FDA actively enforces regulations prohibiting
marketing of devices for indications or uses that have not been cleared or
approved by the FDA. See "Government Regulations."
POTENTIAL ADVERSE EFFECT OF COMPETITION AND TECHNOLOGICAL CHANGE. The
Company competes with many domestic and foreign competitors in various rapidly
evolving and technologically advanced fields in developing its technology and
products, including medical device, pharmaceutical and biopharmaceutical
companies. In the worldwide wound closure market, DERMABOND competes with the
suture products of Ethicon as well as the staple products of Ethicon
Endo-Surgery, Inc., both subsidiaries of Johnson & Johnson, the world leader in
the wound closure market. The Company also competes with the suture and staple
products of United States Surgical Corporation, a subsidiary of Tyco
International Ltd. In addition, there are currently two other
cyanoacrylate-based topical adhesives with which DERMABOND competes, neither of
which is approved for sale in the United States. B. Braun GmbH markets
Histoacryl(R) as a topical closure adhesive for small lacerations and incisions
in low skin tension areas of the body. Tyco International Ltd. is marketing a
similar adhesive, Indermil(TM), in several countries outside of the United
States. Loctite, the manufacturer of Indermil(TM) adhesive, received an
Investigational Device Exemption ("IDE") from the FDA and Tyco International
Ltd. has conducted clinical studies in the United States for this product. Any
future products of the Company may compete with a variety of wound closure
products currently on the market or in development. Many of the Company's
competitors and potential competitors have substantially greater financial,
technological, research and development, marketing and personnel resources than
the Company. In addition to those mentioned above, other recently developed
technologies or procedures are, or may in the future be, the basis of
competitive products.
There can be no assurance that the Company's competitors will not
succeed in developing alternative technologies and products that are more
effective, easier to use or more economical than those which have been or are
being developed by the Company or that would render the Company's technology and
products obsolete and non-competitive in these fields. These competitors may
also have greater experience in developing products, conducting clinical trials,
obtaining regulatory clearances or approvals, and manufacturing and marketing
such products. Certain of these competitors may obtain patent protection,
approval or clearance by the FDA or product commercialization earlier
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than the Company, any of which could have a material adverse effect on the
Company. Furthermore, the Company competes with others with respect to
manufacturing efficiency and marketing capabilities. Finally, under the terms of
the Company's marketing agreements, the Company's marketing partners may pursue
parallel development of other technologies or products, which may result in a
marketing partner developing additional products that will compete with the
Company's products.
EFFECTS OF INTERNATIONAL SALES. The Company and its marketing partners
intend to market the Company's current and future products outside the United
States as well as domestically. A number of risks are inherent in international
transactions. In order for the Company to market its products in Europe,
Australia, Canada and certain other foreign jurisdictions, the Company must
obtain required market authorizations and otherwise comply with extensive
regulations regarding safety, manufacturing processes and quality. These
regulations, including the requirements for authorizations to market, may differ
from the FDA regulatory scheme. There can be no assurance that the Company will
obtain market authorizations in such countries or that it will not be required
to incur significant costs in obtaining or maintaining its foreign market
authorizations. Delays in receipt of authorizations to market the Company's
products in foreign countries, failure to receive such authorizations or the
future loss of previously received authorizations could have a material adverse
effect on the Company's results of operations and financial condition.
International sales also may be limited or disrupted by political instability,
price controls, trade restrictions and changes in tariffs. The Company's
international sales and related royalties of DERMABOND are based on sales in
foreign currencies, but payable in U.S. dollars, and thus may be adversely
affected by fluctuations in currency exchange rates. Additionally, fluctuations
in currency exchange rates may adversely affect demand for the Company's
products by increasing the price of the Company's products in the currency of
the countries in which the products are sold. There can be no assurance that the
Company will be able to successfully commercialize its current or future
products in any foreign market. See "Ethicon and Other Marketing Agreements" and
"Government Regulations."
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING. The
Company has expended and expects to continue to expend substantial funds to
complete the research, development and clinical testing of its existing products
and future products in development and to establish commercial-scale
manufacturing facilities. The Company believes that existing cash and cash
equivalents and investments, which totaled $12.6 million as of December 31,
1999, will be sufficient to finance its capital requirements for at least 12
months. There can be no assurance that the Company will not be required to seek
additional capital to finance its operations in the future. The Company
currently has a line of credit for working capital purposes, equipment financing
and a term loan. The Company currently has no commitments for any additional
financing, and there can be no assurance that adequate funds for the Company's
operations from the Company's revenues, financial markets, arrangements with
marketing partners or from other sources will be available when needed or on
terms attractive to the Company. The inability to obtain sufficient funds may
require the Company to delay, scale back or eliminate some or all of its
research and product development programs, manufacturing operations, clinical
studies or regulatory activities or to license third parties to commercialize
products or technologies that the Company would otherwise seek to develop
itself, and could have a material adverse effect on the Company's results of
operations and financial condition. See "Item 7--Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
BUSINESS OVERVIEW
Closure develops, manufactures and commercializes medical tissue
cohesive products based on its proprietary cyanoacrylate technology. The
Company's medical tissue cohesives can be used to close and seal wounds and
incisions rapidly and stop leakage of blood and other body fluids from injured
tissue. Closure's medical tissue cohesive products align and seal injured tissue
without the trauma caused by suturing or stapling and allow natural healing to
proceed. In addition, Closure believes that its medical tissue cohesive products
result in lower overall procedure costs and are easier and quicker to use than
sutures or staples.
The Company's lead product, DERMABOND, is a nonabsorbable tissue
cohesive that can be used to replace sutures and staples for certain topical
wound closure applications. On August 28, 1998, the Company received premarket
approval from the FDA to market DERMABOND in the United States and the Company's
marketing partner, Ethicon, launched the product in September 1998.
Additionally, Ethicon has been distributing DERMABOND since late 1997 and is
currently marketing DERMABOND in approximately 31 countries outside the United
States.
The Company has two additional nonabsorbable products for human use and
a product line for veterinary uses. OCTYLDENT, which received 510(k) clearance
from the FDA, is a topical sealant used in conjunction with Actisite(R), a
site-specific drug delivery system manufactured by ALZA Corporation ("ALZA"), to
treat adult periodontal
5
disease. OCTYLDENT was marketed in the United States by Procter & Gamble/ALZA,
Partners for Oral Health Care (the "Procter & Gamble/ALZA Partnership") from
March 1991 to March 2000 and outside the United States by ALZA from March 1993
to March 2000. Effective March 2000, both companies declined renewal of their
non-exclusive supply agreements for OCTYLDENT with the Company, thereby
divesting their combined worldwide distribution rights to the product. On
September 2, 1999, the Company was granted FDA clearance to market SOOTHE-N-SEAL
canker sore relief product. SOOTHE-N-SEAL is the first cyanoacrylate adhesive
approved by the FDA for the over-the-counter consumer market. The Company is
currently in discussions with potential partners for a supply and distribution
rights agreement for SOOTHE-N-SEAL. NEXABAND is a product line of five topical
tissue cohesives marketed by Farnam Companies, Inc. ("Farnam") and used in
veterinary wound closure and management.
The Company is currently developing additional nonabsorbable tissue
cohesive products. These future products require further development, clinical
trials and regulatory clearance or approval prior to commercialization.
Closure is also developing absorbable cyanoacrylate products for
internal applications. In 1998, Closure established its Absorbable Cohesive
Technology Division, which has dedicated personnel and a separate research and
development facility, in order to develop its internal cohesive products. Any
future absorbable products require further development, clinical trials and
regulatory clearance or approval prior to commercialization.
TECHNOLOGY OVERVIEW
Closure's medical tissue cohesive products are based on its proprietary
cyanoacrylate technology. Cyanoacrylates are a family of liquid monomers that
react under a variety of conditions to form polymer films with strong adhesive
properties. Industrial adhesives based on cyanoacrylates were first introduced
in 1958 and are widely used in the aerospace and automotive industries, as well
as in consumer products such as super glue. Closure's technology enables it to
develop NONABSORBABLE formulations for topical use and ABSORBABLE formulations
for internal use. Nonabsorbable formulations close and seal skin wounds and
incisions for the duration of healing, then slough off naturally as new skin
cells are produced and the wound bed heals. Absorbable formulations may be used
to close or seal internal wounds and degrade, in a predictable, biocompatible
manner, into components that are eliminated from the body naturally.
The Company's proprietary technology allows it to customize the
physical and chemical properties of cyanoacrylates to meet specific market
needs. These properties include viscosity, flexibility, bond strength,
stability, setting time, porosity and biodegradation. The Company's current
products perform consistently and reproducibly, do not require special
preparation or refrigeration and have shelf-lives of at least 12 to 24 months.
Closure has developed applicator and packaging technology to deliver
DERMABOND and other products to wound sites in order to enhance the utility of
its products. The current DERMABOND applicator contains a catalyst that controls
the rate of polymerization and allows the cohesive film to be applied in
multiple layers, which enhances bond strength.
During the years ended December 31, 1997, 1998 and 1999 the Company
spent $1,639,000, $4,241,000 and $4,169,000, respectively, on research and
development activities.
PRODUCTS
The Company's medical tissue cohesive products are an alternative to
the traditional method of closing topical wounds and incisions. Suturing and
stapling involve puncturing healthy tissue in order to align and close the
wound, may cause leakage or additional scarring at the small puncture sites,
require anesthetics, are time-consuming to apply, and generally require return
patient visits and physician time to remove the sutures or staples. Medical
tissue cohesives may be applied quickly, may not require anesthetics, do not
induce trauma to surrounding tissues and do not require return visits to the
physician for removal.
DERMABOND
The Company's lead product, DERMABOND, is a topical tissue cohesive
used to close wounds from skin lacerations and incisions, minimally invasive
surgery and plastic surgery. DERMABOND is used as a replacement for topical
sutures or staples or in conjunction with subcuticular sutures or staples.
DERMABOND is intended to be used topically for wound closure on low skin tension
areas of the body and is not intended for use on the hands, feet or across
joints. Although the purchase cost of DERMABOND is expected to be greater than
sutures or staples, the Company
6
believes that the use of DERMABOND results in lower overall materials and
procedure costs because of reduced treatment time, elimination of the need for
anesthetics, simplification of post-closure wound care and elimination of suture
or staple removal.
In 1996, the Company completed an 818-patient controlled, randomized
clinical trial of DERMABOND at ten sites throughout the United States. The
clinical trial compared wound closure utilizing DERMABOND with wound closure
utilizing sutures or staples. The clinical trial demonstrated DERMABOND to be at
least equivalent to topical nonabsorbable U.S.P. size 5.0 or smaller diameter
sutures, staples or adhesive strips/tapes in wound closure, wound healing,
cosmetic outcome and infection rate, and also demonstrated that the use of
DERMABOND substantially reduced procedure time and inflammation.
In March 1996, the Company entered into an exclusive worldwide
agreement with Ethicon, a subsidiary of Johnson & Johnson and a world leader in
wound closure products, to market and distribute DERMABOND. On August 28, 1998,
the Company received premarket approval to market DERMABOND in the United States
and Ethicon launched the product in September 1998. Additionally, Ethicon has
been distributing DERMABOND since late 1997 and is currently marketing DERMABOND
in approximately 31 countries outside the United States.
OTHER PRODUCTS
OCTYLDENT, the Company's first product for human use, is a topical
sealant used in conjunction with site-specific sustained release antibacterial
drug therapy to treat adult periodontal disease. OCTYLDENT seals the pocket of a
diseased gum where Actisite(R), a therapeutic drug delivery system manufactured
by ALZA, has been inserted, thereby allowing the system to remain in place over
a ten-day period. OCTYLDENT was marketed by the Procter & Gamble/ALZA
Partnership in the United States from March 1991 to March 2000 and outside the
United States by ALZA from March 1993 to March 2000. Effective March 2000, both
companies declined the renewal of their non-exclusive supply agreements for
OCTYLDENT with the Company, thereby divesting their combined worldwide
distribution rights to the product. On September 2, 1999, the Company was
granted FDA clearance to market SOOTHE-N-SEAL canker sore relief product.
SOOTHE-N-SEAL is the first cyanoacrylate adhesive approved by the FDA for the
over-the-counter consumer market. In a multi-center patient study, SOOTHE-N-SEAL
was found to provide relief of pain associated with oral ulcers as well as
providing a protective barrier that reduced the pain associated with irritation
from eating and drinking. The Company is currently in discussions with potential
partners for a marketing distribution agreement for SOOTHE-N-SEAL. The Company
has five topical tissue cohesive products sold under the NEXABAND trade name
used in veterinary wound closure and management procedures. The NEXABAND
products are distributed through Farnam, a leader in large animal
over-the-counter products and other small and large animal product markets.
PRODUCT IN CLINICAL TRIALS
The Company has developed a liquid adhesive bandage for minor cuts and
abrasions. The results of the preclinical studies, performed in July and August
1999, for the liquid adhesive bandage indicated that the product compared
favorably to air-dried wounds and wounds covered with commercial adhesive
bandages. As a result of this preclinical study, the Company is currently
conducting a definitive multi-center, 160-patient study to demonstrate the
effectiveness of Closure's proprietary nonabsorbable formulation when applied to
minor cuts and abrasions. Once the data is assembled, the Company will seek
marketing clearance for the product through submission of a 510(k). See
"Government Regulations."
PRODUCTS IN DEVELOPMENT
The Company is currently developing additional nonabsorbable tissue
cohesive products. These future products require further development, clinical
trials and regulatory clearance or approval prior to commercialization. See
"Government Regulations."
In 1998, Closure established its Absorbable Cohesive Technology
Division, which has dedicated personnel and a separate research and development
facility, in order to develop its internal cohesive products. The Division is
responsible for developing absorbable cyanoacrylate products for internal
surgical tissue bonding applications. The Company presently has several
absorbable formulations in development, which potentially could be used to close
soft and hard tissue incisions from surgical or traumatic wounds. Any future
internal surgical products require further development, clinical trials and
regulatory clearance or approval prior to commercialization. See "Government
Regulations."
7
ETHICON AND OTHER MARKETING AGREEMENTS
The Company's strategy for its current nonabsorbable products has been
to enter into marketing agreements with marketing partners to sell its products.
The Company is dependent on its marketing partners to market and distribute
these products. Although the Company believes that its marketing partners have
an economic motivation to succeed in performing their contractual
responsibilities, the amount and timing of resources to be devoted to these
activities are not within the control of the Company. Any future products of the
Company may be sold through marketing partners or a direct sales force. See
"Risk Factors--Dependence on Marketing Partners."
In March 1996, the Company entered into a renewable, eight-year supply
and distribution agreement with Ethicon, a subsidiary of Johnson & Johnson,
which provides Ethicon with exclusive worldwide rights to market, distribute and
sell DERMABOND, the Company's lead nonabsorbable product. The agreement requires
Ethicon to make minimum purchases that escalate annually and requires Ethicon to
pay royalties based upon net sales. Ethicon may renew the agreement for
additional one-year periods. The agreement is terminable upon specified events,
including (i) material breach by either party and (ii) insolvency of either
party. Upon certain events of default, including failure to provide an adequate
supply of product, Ethicon may terminate its arrangement to purchase DERMABOND
from the Company, and Ethicon may itself then manufacture DERMABOND and pay the
Company royalties based on sales. See "Risk Factors--Dependence on Marketing
Partners," "Risk Factors--Manufacturing Experience," "PRODUCTS--DERMABOND" and
"Manufacturing."
Effective March 2000, the Procter & Gamble/ALZA Partnership and ALZA
declined the renewal of their non-exclusive supply agreements for OCTYLDENT, an
adhesive used in conjunction with a periodontal drug delivery product, with the
Company. As a result, the Proctor & Gamble Partnership and ALZA divested their
combined worldwide distribution rights to the product. The Company believes that
the termination of this agreement will not have a material adverse effect on the
Company's results of operations and financial condition.
In February 2000, the Company entered into a new three-year licensing
and distribution agreement with Farnam Companies, Inc. ("Farnam".) This
agreement provides Farnam exclusive rights to market, sell and distribute the
Company's veterinary products in the United States and Canada.
PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS
The Company's success depends in large part on its ability to obtain
patents, maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. The Company has thirteen issued U.S.
patents with expiration dates ranging from 2004 to 2016 and two issued foreign
patents with expiration dates ranging from 2014 to 2015, and has filed
applications for 31 additional U.S. patents in addition to certain patent
applications outside the United States. The issued U.S. patents relate to the
Company's tissue cohesive formulations and delivery technology. The pending U.S.
patent applications relate to the Company's products and processes.
On July 27, 1999, the Company was awarded its first United States
Patent relevant to its lead product, DERMABOND. The invention covered in this
patent capitalizes on the ability of the Company's adhesive technology to be
manipulated in a manner that enhances product performance by controlling the
setting time and extending the shelf-life of the material. The award of the
patent increased royalty revenue on sales of DERMABOND in the United States
under the supply and distribution agreement with Ethicon.
In addition to patent protection, the Company relies on unpatented
trade secrets and proprietary technological expertise. The Company relies, in
part, on confidentiality agreements with its marketing partners, employees,
advisors, vendors and consultants to protect its trade secrets and proprietary
technological expertise. See "Risk Factors--Dependence on Patents, Trade Secrets
and Proprietary Rights."
GOVERNMENT REGULATIONS
The Company's products and operations are subject to substantial
government regulation in the United States and foreign countries.
8
FDA REGULATION
Most medical devices, including the Company's medical tissue cohesives
for humans, are subject to stringent government regulation in the United States
by the FDA under the FDC Act, and, in many instances, by foreign and state
governments. The FDA regulates the preclinical and clinical testing,
manufacture, safety, labeling, sale, distribution and promotion of medical
devices. Included among these regulations are premarket clearance and premarket
approval requirements and GMPs. Other statutory and regulatory requirements
include, among other things, establishment registration and inspection, medical
device listing, prohibitions against misbranding and adulteration, labeling and
postmarket reporting. The regulatory process is lengthy, expensive and
uncertain. Securing FDA approvals and clearances may require the submission of
extensive preclinical and clinical data and supporting information to the FDA.
Failure to comply with applicable requirements can result in refusal to approve
or clear new applications or notifications, withdrawals of existing product
approvals or clearances, issuances of warning letters, application integrity
proceedings, injunctions, civil penalties, fines, recalls or seizures of
products, total or partial suspensions of production and criminal prosecution.
Under the FDC Act, medical devices are classified into one of three
classes (Class I, II or III) on the basis of the controls necessary to
reasonably ensure their safety and effectiveness. Before any new medical device
may be introduced to the market, the manufacturer frequently must obtain either
premarket clearance through the 510(k) premarket notification process or
premarket approval through the lengthier PMA approval process. A 510(k)
premarket notification will be granted if the submitted data establish that the
proposed device is "substantially equivalent" to a legally marketed Class I or
Class II medical device, or to a Class III medical device for which the FDA has
not called for PMAs. The FDA may request extensive data, including clinical
studies of the device's safety and effectiveness, before a substantial
equivalence determination can be made. It generally takes from three to nine
months from submission to obtain 510(k) premarket clearance, although it may
take longer. A PMA application must be filed if a product is found to be not
substantially equivalent to a legally marketed Class I or II device or if it is
a Class III device for which the FDA has called for PMAs. DERMABOND is a Class
III medical device. A PMA application must be supported by extensive data,
including laboratory, preclinical and clinical trial data, to demonstrate the
safety and efficacy of the device, as well as extensive manufacturing
information. Before initiating human clinical trials, the manufacturer often
must first obtain an IDE for the proposed medical device. Prior to granting a
PMA, the FDA will generally conduct an inspection of the manufacturer's
facilities to ensure compliance with GMPs and the FDA must approve final
labeling. Approval of a PMA could take two or more years from the date of
submission of the application or petition. The PMA process can be expensive,
uncertain and lengthy, and there is no guarantee of ultimate approval.
Modifications or enhancements to products that are either cleared
through the 510(k) process or approved through the PMA process that could affect
safety or effectiveness or effect a major change in the intended use of the
device may require further FDA review through new 510(k) or PMA submissions.
Additionally, future modifications of the Company's manufacturing facilities and
processes may subject the Company to further FDA inspections and review prior to
implementation of such modifications.
Medical devices also are subject to postmarket reporting requirements
for deaths or serious injuries when the device may have caused or contributed to
the death or serious injury, and for certain device malfunctions that would be
likely to cause or contribute to a death or serious injury if the malfunction
were to recur. If safety or efficacy problems occur after the product reaches
the market, the FDA may take steps to prevent or limit further marketing of the
product. Additionally, the FDA actively enforces regulations prohibiting
marketing of devices for indications or uses that have not been cleared or
approved by the FDA.
On August 28, 1998, DERMABOND received PMA approval. SOOTHE-N-SEAL
received 510(k) clearance on September 2, 1999. OCTYLDENT, the Company's product
sold in conjunction with Actisite(R), received 510(k) clearance in 1990.
DERMABOND, SOOTHE-N-SEAL AND OCTYLDENT are subject to GMP, postmarket reporting
and other FDA requirements.
There can be no assurance that the Company will be able to obtain
necessary 510(k) clearances or PMA approvals to market its future products in
the United States for their intended use on a timely basis, if at all, and
delays in receipt of or failure to receive such clearances or approvals, the
loss of previously received clearances or approvals, or failure to comply with
existing or future regulatory requirements could have a material adverse effect
on the Company's results of operations and financial condition. See "Risk
Factors--Manufacturing Experience" and "Risk Factors--Effects of FDA and Other
Government Regulation."
9
FOREIGN REGULATORY MATTERS
In order for the Company to market its products in Europe, Australia,
Canada and certain other foreign jurisdictions, the Company must obtain required
market authorizations and otherwise comply with extensive regulations regarding
safety, manufacturing processes and quality. These regulations, including the
requirements for authorizations to market, may differ from the FDA regulatory
scheme. The time required to obtain authorization for marketing of the Company's
products in foreign countries may be longer or shorter than that required for
FDA clearance or approval, and the requirements may differ. In addition, there
may be foreign regulatory barriers other than market authorizations.
Pursuant to the FDC Act, a non-FDA approved medical device may be
exported to any country, provided that the device (i) complies with the laws of
that country and (ii) has valid marketing authorization or the equivalent from
the appropriate authority in a "listed country." The listed countries are
Australia, Canada, Israel, Japan, New Zealand, Switzerland, South Africa and
countries in the European Union and the European Economic Area. Generally,
export of unapproved devices (i.e., those requiring a PMA in the U.S.) that do
not have marketing authorization in a listed country will continue to require
prior FDA export authorization.
Medical devices that are marketed or put into service within the
European Union are required to comply with Council Directive 93/42/EEC, the
medical devices directive ("MDD"). As of June 14, 1998, compliance with the MDD
requires that manufacturers of devices covered by the MDD must obtain the right
to display the CE mark, which allows the device to be marketed, put into service
and circulated freely within the European Union. The Company received
authorization to display the CE mark in the European Union for DERMABOND and
other topical and ophthalmic tissue cohesive applications in August 1997 and for
OCTYLDENT in August 1995. The Company plans to pursue the right to display the
CE mark on future products for human use that the Company may develop. There can
be no assurance that the Company will be successful in obtaining the right to
display the CE mark on any additional medical devices. Failure to obtain the
right to display the CE mark on its medical devices could have a material
adverse effect on the Company's results of operations and financial condition.
See "Risk Factors--Effects of FDA and Other Government Regulation."
Upon receipt of the CE mark, every six months for two years and
annually thereafter, the Company must demonstrate that its quality management
system meets the requirements of the MDD and its technical documentation for
products displaying the CE mark is accurate and reflects the current
manufacturing process. See "Manufacturing."
ENVIRONMENTAL REGULATIONS
The Company's activities involve the controlled use of hazardous
materials and chemicals. The Company is subject to federal, state and local laws
and regulations governing the use, manufacture, storage, handling and disposal
of such material and certain waste products. Although the Company believes that
its safety procedures for handling and disposing of such materials comply in all
material respects with the standards prescribed by such laws and regulations,
risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result and such liability could have a material
adverse effect on the Company's results of operations and financial condition
and potentially could exceed the resources of the Company. Environmental
protection has been an area of substantial concern in recent years, and
regulation of activities involving the use and disposal of potentially hazardous
materials has increased. There can be no assurance that such regulation will not
increase in the future or that the Company will not be required to incur
significant costs to comply with environmental laws and regulations in the
future.
MANUFACTURING
The Company has devoted considerable resources to the development of
manufacturing processes and technologies capable of providing its products with
clinical efficacy, safety, ease of use and suitable shelf-life. The Company has
developed a manufacturing process designed to produce a highly purified base
material which is not achievable by other known existing methodologies. The
Company relies heavily on internal trade secrets and technological expertise and
expects to keep its manufacturing process in-house and, where applicable, seek
patent protection for specific manufacturing applications.
Since August 1998, the Company has been manufacturing all of its
products in a 50,000 square foot facility in Raleigh, North Carolina. This
facility integrates production, bottling, labeling and packaging capabilities
for products currently being marketed. The Company believes that this facility
will be sufficient to meet Ethicon's worldwide market demand for DERMABOND and
other products. See "Item 2--Properties."
10
The Company is implementing a multiphase plan for additional expansion
of its manufacturing capabilities. Part of this expansion is the integration of
all the operations associated with the filling and packaging of DERMABOND, which
currently are completed by outside providers. Such expansion and scale-up is
expected to occur over the next three years and will provide for sufficient
capacity for all current products, including DERMABOND, as well as various new
products. Production of commercial-scale quantities may involve technical
challenges for the Company and will require significant scale-up expenses for
additions to facilities and personnel. There can be no assurance that the
Company will be able to achieve large-scale manufacturing capabilities or to
manufacture its products in a cost-effective manner or in quantities necessary
to allow the Company to achieve profitability. If the Company is unable to
expand sufficiently its manufacturing capacity to meet Ethicon's requirements
for DERMABOND as set forth under their agreement, Ethicon may itself then
manufacture DERMABOND and pay the Company royalties based on sales. See "Risk
Factors--Manufacturing Experience" and "Ethicon and Other Marketing Agreements."
In June 1997, in connection with the Company's application for its CE
mark to market DERMABOND in the European Union, the Company was registered by
its notified body, British Standards Institution ("BSI"), to certify that the
Company's quality management system complies with the requirements of the ISO
9002 international quality assurance standard issued by the International
Organization of Standardization of Geneva, Switzerland. In January 1998, BSI
expanded the scope of the Company's quality system certification to include
compliance with ISO 9001, a comprehensive international standard for
manufacturing and servicing firms for quality assurance in design, development,
production, installation and servicing.
The Company presently purchases cyanoacetate, the primary raw material
used in the manufacture of the Company's medical cohesives, from one source. The
Company has the capability of manufacturing cyanoacetate if necessary, and
cyanoacetate may be available from a second supplier. The Company would be
required to qualify the quality assurance systems of an additional supplier
prior to its use as a source of supply. The other raw materials used in
manufacturing and packaging the Company's products are readily available from
multiple sources, as is its process control equipment. See "Risk
Factors--Dependence on Sole Source Supplier."
The Company hires filling and packaging employees as needed on a
temporary basis, and the Company expects that a portion of the Company's future
packaging requirements will be completed by outside providers.
COMPETITION AND TECHNOLOGICAL CHANGE
The Company competes with many domestic and foreign competitors in
various rapidly evolving and technologically advanced fields in developing its
technology and products, including medical device, pharmaceutical and
biopharmaceutical companies. In the worldwide wound closure market, DERMABOND
competes with the suture products of Ethicon as well as the staple products of
Ethicon Endo-Surgery, Inc., both subsidiaries of Johnson & Johnson, the world
leader in the wound closure market. The Company also competes with the suture
and staple products of United States Surgical Corporation, a subsidiary of Tyco
International Ltd. In addition, there are currently two other
cyanoacrylate-based topical adhesives with which DERMABOND competes, neither of
which is approved for sale in the United States. B. Braun GmbH markets
Histoacryl(R) as a topical closure adhesive for small lacerations and incisions
in low skin tension areas of the body. Tyco International Ltd. is marketing a
similar adhesive, Indermil(TM), in several countries outside of the United
States. Loctite, the manufacturer of Indermil(TM) adhesive, received an IDE from
the FDA and Tyco International Ltd. has conducted clinical studies in the United
States for this product. Any future products of the Company may compete with a
variety of wound closure products currently on the market or in development.
Many of the Company's competitors and potential competitors have substantially
greater financial, technological, research and development, marketing and
personnel resources than the Company. In addition to those mentioned above,
other recently developed technologies or procedures are, or may in the future
be, the basis of competitive products. See "Risk Factors--Potential Adverse
Effect of Competition and Technological Change."
SCIENTIFIC ADVISORS
The Company has established a team of scientific advisors (the
"Scientific Advisors") who provide consulting services to the Company. The
Scientific Advisors consist of independent professionals who meet on an
individual basis with management when so requested. The Scientific Advisors have
recognized expertise in relevant sciences or clinical medicine and advise the
Company about present and long-term scientific planning, research and
development.
11
There is no fixed term of service for the Scientific Advisors. Current
members may resign or be removed at any time, and additional members may be
appointed. Members do not serve on an exclusive basis with the Company, are not
under contract (other than with respect to confidentiality obligations) and are
not obligated to present corporate opportunities to the Company. Pursuant to
confidentiality agreements, the members are not permitted to work on the
development of competitive products. Inventions or products developed by a
Scientific Advisor who is not otherwise affiliated with the Company will not
become the Company's property, but will remain the Scientific Advisor's
property.
EMPLOYEES
As of March 20, 2000, the Company had 75 full-time employees, of whom
62 were dedicated to research, development, manufacturing, quality control and
regulatory affairs, and 13 were dedicated to administrative activities. Fourteen
members of the Company's research and development staff have doctoral or
advanced degrees. The Company intends to recruit additional personnel in
connection with the research, development and manufacturing of its products.
None of the Company's employees is represented by a union, and the Company
believes relationships with its employees are good.
EXECUTIVE OFFICERS OF THE COMPANY
The table below sets forth the names, ages and positions of the persons
who are the executive officers of the Company as of March 10, 2000.
NAME AGE POSITION
Robert V. Toni 59 President and Chief Executive Officer and Director
Joe B. Barefoot 49 Vice President of Regulatory Affairs and Quality Assurance
Dennis D. Burns 54 Vice President/General Manager, Absorbable Cohesive Technology Division
Jeffrey G. Clark 46 Vice President of Research and Development
William M. Cotter 49 Vice President of Manufacturing and Operations
Anthony J. Sherbondy 46 Vice President of New Business Generation
J. Blount Swain 43 Vice President of Finance and Chief Financial Officer
ROBERT V. TONI has served as President and Chief Executive Officer of
the Company since June 1994 and as a director of the Company since February
1996. From 1989 to 1994, Mr. Toni was General Manager and Vice President of
Sales and Marketing for IOLAB Corporation, a Johnson & Johnson company that
marketed and manufactured surgical devices, equipment and pharmaceuticals for
the ophthalmic market. From 1987 to 1989, he served as President of Cooper
Vision-CILCO, and also served as its Executive Vice President of Operations and
Chief Financial Officer from 1984 to 1987. Mr. Toni holds a B.S. degree in
Finance from Iona College.
JOE B. BAREFOOT has served as Vice President of Regulatory Affairs and
Quality Assurance of the Company since 1990. From 1986 to 1990, Mr. Barefoot
managed the quality assurance program and regulatory submissions for Sharpoint,
Inc. and its successor. From 1982 to 1986, he was a member of the quality
assurance staff at C.R. Bard Inc. Prior to that time, he was a member of the
quality assurance staff at Becton, Dickinson & Co. Mr. Barefoot holds a B.S.
degree in Microbiology from Emporia State University.
DENNIS D. BURNS has served as Vice President/General Manager of the
Company's Absorbable Cohesive Technology Division since February 1998. From 1994
to 1997, Mr. Burns was a principal of The Delta Group, a healthcare consulting
company he founded in 1994, through which he functioned as President of
EpiGenesis Pharmaceuticals. From 1992 to 1994, he was President and Chief
Executive Officer of Macronex, Inc., an immunotherapy company. From 1979 to
1992, Mr. Burns held various executive positions at Johnson & Johnson, most
recently from 1988 to 1992 as Vice President, Business Development of Ortho
Biotech, Inc. Mr. Burns holds a B.S. degree in Biology from Manhattan College.
JEFFREY G. CLARK has served as Vice President of Research and
Development of the Company since 1990. Prior to that time, Mr. Clark spent seven
years at Sharpoint, Inc. and its successor where he developed bioabsorbable and
polypropylene suture technology. From 1977 to 1983, Mr. Clark worked at
Extracorporeal Inc., a division of Johnson & Johnson. Mr. Clark holds an M.S.
degree in Organic Chemistry from Drexel University.
12
WILLIAM M. COTTER has served as Vice President of Manufacturing and
Operations of the Company since June 1997. From 1989 to 1997, Mr. Cotter was
Vice President of Operations (North America) of Sanofi Diagnostics Pasteur,
Inc., a company involved in the design, manufacturing and marketing of IN VITRO
diagnostics instrumentation and biological reagents. From 1984 to 1988, he
worked at Genetic Systems Corporation, a subsidiary of Bristol Myers Company,
where he was involved in the commercialization of one of the first diagnostic
test kits for the HIV virus. Prior to that time, Mr. Cotter worked at Advanced
Technology Laboratories, Inc., a division of E.R. Squibb Company. Mr. Cotter
holds a B.A. degree from Ohio University.
ANTHONY J. SHERBONDY has served as Vice President of New Business
Generation of the Company since January 1998. Prior to that time, Mr. Sherbondy
served as Director of Marketing of the Company from October 1996. From 1995 to
1996, he was the principal executive and founder of MedNet Market Research, LLC,
a healthcare market research company. From 1992 to 1995, Mr. Sherbondy served as
Director of Sales and Marketing Operations for Pasteur-Merieux-Connaught, a
Rhone-Poulenc company. From 1983 to 1992, he held various positions at IOLAB
Corporation, a Johnson & Johnson company. Mr. Sherbondy holds a B.A. degree from
California State University and an M.B.A. from The Claremont Graduate School.
J. BLOUNT SWAIN has served as Vice President of Finance and Chief
Financial Officer of the Company since September 1992. From 1983 until 1992, Mr.
Swain was Chief Financial Officer and Treasurer of The Record Bar, Inc., a
national music retailing entity. Prior to 1983, Mr. Swain served as a Senior
Accountant with Price Waterhouse in Raleigh, North Carolina. Mr. Swain holds a
B.S. degree from the University of North Carolina at Chapel Hill and is a
certified public accountant.
13
ITEM 2. PROPERTIES.
In February 1997, the Company entered into a ten-year lease for
approximately 50,000 square feet of office, laboratory and manufacturing space
in Raleigh, North Carolina for, among other things, the corporate headquarters
of the Company and the expansion of manufacturing capacity. The term of this
lease began in September 1997. During 1998, the Company relocated its corporate
offices and manufacturing operations to this new facility. The Company's
manufacturing operations in the new facility were validated and became fully
operational in the third quarter of 1998. The Company also leases a 5,800 square
foot facility in Raleigh in which the Company's Absorbable Cohesive Technology
Division conducts its research and development activities and other operations.
The term of this lease extends through March 2001.
ITEM 3. LEGAL PROCEEDINGS.
In December 1998, a former employee of the Company filed a
discrimination claim with the Raleigh Area Office of the Equal Employment
Opportunity Commission. In January 2000, the Company reached a settlement which
did not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders
during the fourth quarter of fiscal year 1999.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol "CLSR." The following table sets forth, for the periods
indicated, the high and low closing sale price per share of Common Stock, as
reported on the Nasdaq National Market, for 1998 and 1999.
HIGH LOW
---- ---
1998
First Quarter.......................................$30.88 $18.50
Second Quarter.......................................29.88 19.06
Third Quarter........................................30.00 19.88
Fourth Quarter.......................................30.88 14.25
1999
First Quarter.......................................$47.50 $27.81
Second Quarter.......................................38.13 24.81
Third Quarter........................................29.81 11.88
Fourth Quarter.......................................17.63 11.50
As of March 20, 2000, there were approximately 288 holders of record of
the Company's Common Stock. The Company has never declared or paid cash
dividends on its Common Stock and does not anticipate paying any cash dividends
in the foreseeable future. The Company currently intends to retain future
earnings, if any, to fund the development and growth of its business. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition,
operating results, capital requirements and such other factors as the Board of
Directors deems relevant.
15
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below for each year in the five
year period ended December 31, 1999 have been derived from financial statements
audited by PricewaterhouseCoopers, LLP, independent accountants. The balance
sheets as of December 31, 1998 and 1999 and the related statements of operations
and of cash flows for the years ended December 31, 1997, 1998 and 1999 and notes
thereto appear elsewhere in this Annual Report. This data should be read in
conjunction with "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's financial statements,
including the notes thereto, and the other financial information included
elsewhere in this Annual Report.
YEARS ENDED DECEMBER 31,
------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Product sales $ 1,380 $ 496 $ 1,551 $ 8,079 $ 13,370
License and product development revenues -- 3,500 -- 1,500 --
-------- -------- -------- -------- --------
Total revenues 1,380 3,996 1,551 9,579 13,370
Cost of products sold 531 460 1,398 3,480 4,722
-------- -------- -------- -------- --------
Gross profit 849 3,536 153 6,099 8,648
-------- -------- -------- -------- --------
Research, development and regulatory affairs expenses 1,637 3,167 3,594 6,297 6,296
General and administrative expenses 1,589 2,879 4,752 5,407 5,404
Charges related to partnership capital changes (1) 3,500 14,210 -- -- --
Payments to CRX Medical, Inc. and Caratec, L.L.C 250 293 -- -- --
-------- -------- -------- -------- --------
Total operating expenses 6,976 20,549 8,346 11,704 11,700
-------- -------- -------- -------- --------
Loss from operations (6,127) (17,013) (8,193) (5,605) (3,052)
Interest expense -- -- (72) (383) (344)
Investment and interest income 2 337 1,436 1,215 869
Interest expense to Sharpoint Development Corporation (847) (138) -- -- --
-------- -------- -------- -------- --------
Net loss $ (6,972) $(16,814) $ (6,829) $ (4,773) $ (2,527)
======== ======== ======== ======== ========
Net loss per common share-basic and diluted (2) $ (0.73) $ (1.63) $ (0.53) $ (0.36) $ (0.19)
======== ======== ======== ======== ========
Shares used in computation of net loss per
common share--basic and diluted (2) 9,600 10,285 12,966 13,270 13,324
-------- -------- -------- -------- --------
AS OF DECEMBER 31,
------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments $ 20 $ 17,651 $ 21,694 $ 16,702 $ 11,322
Working capital (deficit) (395) 15,175 19,704 11,621 9,745
Total assets 908 19,512 30,419 27,420 22,511
Long-term debt and capital lease obligations, less
current portion 10,088 14 2,400 934 2,155
Total partners' capital (deficit) and stockholders' equity (10,850) 16,455 22,419 18,250 16,625
____________
(1) Includes for 1995 a one-time non-cash charge of $3,500,000 which
represented the estimated fair value of the limited partnership interests
of certain employee limited partners admitted to Tri-Point Medical L.P.,
the Company's predecessor (the "Partnership"), on December 31, 1995.
Immediately prior to the Company's initial public offering, on September
25, 1996, the Company consummated an exchange of obligations of and
interests in the Partnership for 9,600,000 shares of Common Stock. In
connection with this exchange, Caratec, L.L.C. exchanged its right to
receive various payments from the Partnership and its limited partnership
interest for 1,776,250 shares of Common Stock. This transaction resulted in
a non-cash expense for 1996 of $14,210,000 which equaled the difference
between the value of the Common Stock issued to Caratec, L.L.C. and its
basis in the Partnership. The resulting charge to accumulated deficit was
offset by a credit to additional paid-in capital.
(2) See Note 2 to Notes to Financial Statements for a discussion of the basis
for reported net loss per common share.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE STATEMENTS SET FORTH BELOW THAT ARE NOT HISTORICAL FACTS OR
STATEMENTS OF CURRENT CONDITIONS ARE FORWARD-LOOKING STATEMENTS. SUCH
FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY, AMONG OTHER THINGS, THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS," "FORECASTS,"
"ESTIMATES," "PLANS," "CONTINUES," "MAY," "WILL," "SHOULD," "ANTICIPATES" OR
"INTENDS" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE
TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY OR INTENTIONS. THESE FORWARD-LOOKING
STATEMENTS, SUCH AS STATEMENTS REGARDING PRESENT OR ANTICIPATED SCIENTIFIC
PROGRESS, DEVELOPMENT OF POTENTIAL PRODUCTS, FUTURE REVENUES, CAPITAL
EXPENDITURES AND RESEARCH AND DEVELOPMENT EXPENDITURES, FUTURE FINANCINGS AND
COLLABORATIONS, MANAGEMENT, MANUFACTURING DEVELOPMENT AND CAPABILITIES,
REGULATORY CLEARANCES AND APPROVALS, AND OTHER STATEMENTS REGARDING MATTERS THAT
ARE NOT HISTORICAL FACTS, INVOLVE PREDICTIONS. THE COMPANY'S ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THE RESULTS EXPRESSED
IN, OR IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS. POTENTIAL RISKS AND
UNCERTAINTIES THAT COULD AFFECT THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THE "RISK FACTORS" SET FORTH IN
ITEM 1 OF THIS ANNUAL REPORT. GIVEN THESE UNCERTAINTIES, CURRENT OR PROSPECTIVE
INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING
STATEMENTS. FURTHERMORE, THE COMPANY DISCLAIMS ANY OBLIGATION OR INTENT TO
UPDATE ANY SUCH FACTORS OR FORWARD-LOOKING STATEMENTS TO REFLECT FUTURE EVENTS
OR DEVELOPMENTS.
The following discussion should be read in conjunction with the
Company's financial statements, including the notes thereto, included elsewhere
in this Annual Report.
OVERVIEW
Since its inception in May 1990, the Company has been developing,
manufacturing and commercializing medical tissue cohesive products for use in
wound closure in humans and animals. The Company's products are based on its
proprietary cyanoacrylate technology, and a substantial portion of the Company's
historical expenses have consisted of research and development and clinical
trial expenses. To date, the Company has funded its operations with proceeds
from the sale of its stock through public offerings of approximately $30.0
million, cash borrowed from Sharpoint Development Corporation ("Sharpoint"),
sales of DERMABOND, OCTYLDENT and NEXABAND products, and license and product
development revenues from marketing partners.
The Company has been unprofitable since its inception and has incurred
net losses in each year, including a net loss of approximately $2,527,000 for
the year ended December 31, 1999. The Company anticipates that its recurring
operating expenses will increase for the next several years, as it expects its
research and development and general and administrative expenses to increase in
order to develop new products, manufacture in commercial quantities and fund
additional clinical trials. The Company also expects to incur additional capital
expenditures to expand its manufacturing capabilities. The Company may incur a
loss in 2000 and subsequent years, although the amount of future net losses and
time required by the Company to reach profitability are highly uncertain. The
Company's ability to generate significant revenue and become profitable will
depend on its success in commercializing DERMABOND, expanding its manufacturing
capabilities, developing new products and entering into additional marketing
agreements and on the ability of its marketing partners to commercialize
successfully products incorporating the Company's technologies. No assurance can
be given that the Company will generate significant revenue or become profitable
on a sustained basis, if at all.
Immediately prior to the Company's initial public offering, on
September 25, 1996, the Company consummated an exchange of obligations of and
interests in the Partnership for an aggregate of 9,600,000 shares of Common
Stock (the "Exchange"). As of March 29, 1996, the long-term debt of the
Partnership held by Sharpoint, including accrued interest, was contributed to
the Partnership as $11,483,000 of partners' capital. During the period from May
1990 through the consummation of the Exchange on September 25, 1996, CRX
Medical, Inc. ("CRX") and its successor, Caratec, L.L.C. ("Caratec"), as limited
partners of the Partnership, received payments of approximately $993,000 based
on net revenues pursuant to the partnership agreement. These payment obligations
ceased upon the consummation of the Exchange. As part of the Exchange, Caratec
exchanged its right to receive payments based on net revenues and its right to
receive, as a limited partner in the Partnership, a percentage of the proceeds
of a sale of all or substantially all of the assets of the Partnership for
1,776,250 shares of Common Stock. This transaction resulted in a one-time
non-cash charge of $14,210,000 which equaled the difference between the value of
the Common Stock issued to Caratec and its basis in the Partnership. The
resulting charge to accumulated deficit was offset by a credit to additional
paid-in capital.
17
Historically, there was no provision for federal or state income taxes
in the financial statements of the Company's predecessor, Tri-Point Medical
L.P., because income or loss generated by the Partnership was included by the
partners in their personal income tax returns. Since the Company's incorporation
on February 20, 1996, the Company has been subject to federal and state
corporate income taxes, but none have been paid due to losses generated.
The Company was formed on February 20, 1996 and substantially all of
the assets of the Partnership were transferred to the Company as of March 1,
1996. The net operating losses from inception through March 1, 1996 will not be
available to the Company to offset any future taxable income for federal income
tax purposes because it was a partnership for that period.
The Company incurred compensation expense of $303,000 and $320,000 for
the years ended December 31, 1998 and 1999, respectively, in connection with
options for Common Stock granted to employees, consultants and directors because
such options had a weighted average exercise price of $2.73 per share below the
fair market value of the Common Stock. Such expense will be approximately
$73,000 in 2000 as the options vest.
On August 28, 1998, the Company was granted approval from the FDA of
its premarket approval application to market DERMABOND in the United States.
DERMABOND, which is used to replace sutures, staples and adhesive strips for
closing certain topical incisions and lacerations, is the first such product to
be approved by the FDA for the United States market. In March 1996, Closure
licensed exclusive worldwide marketing and distribution rights for DERMABOND to
Ethicon, a subsidiary of Johnson & Johnson. In August 1997, Closure received CE
Mark approval allowing the Company to ship DERMABOND to Ethicon to support its
launch in European Union countries. DERMABOND is currently marketed by Ethicon
in the United States and approximately 31 countries outside the United States.
On September 2, 1999, the Company received clearance from the FDA to
market SOOTHE-N-SEAL in the United States. SOOTHE-N-SEAL , which is used to
provide relief of pain associated with oral ulcers, is the first such product to
be approved by the FDA for the over-the-counter United States consumer market.
The Company is currently in discussions for a marketing distribution agreement
for SOOTHE-N-SEAL.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Total revenues for 1999 increased 40% to $13,370,000 from $9,579,000
for 1998 which included $1,500,000 of license and product development revenues.
Product sales increased 65% during the same period primarily as a result of
increased domestic sales of DERMABOND. DERMABOND was marketed in the United
States during the entire 1999 fiscal year as opposed to approximately four
months during 1998.
Cost of products sold for 1999 increased to $4,722,000 from $3,480,000
for 1998. Cost of products sold as a percentage of product sales decreased to
35% for 1999 from 43% for 1998. This decrease in cost of products sold as a
percentage of product sales was primarily a result of the increased sales volume
of DERMABOND, resulting in the fixed portion of cost of products sold being
allocated over higher sales. The Company expects that gross margins on product
sales will fluctuate based on sales volume.
Operating expenses were approximately $11,700,000 and $11,704,000 for
1999 and 1998, respectively. Operating expenses primarily consist of research
and development and regulatory affairs expenses and general and administrative
expenses. During 1999, research, development and regulatory affairs efforts were
primarily focused on the development of DERMABOND line extensions and a liquid
adhesive bandage as well as clinical trials for SOOTHE-N-SEAL. During 1998, such
efforts were focused primarily on the development of and clinical trials for
SOOTHE-N-SEAL as well as the clinical trials follow-up related to DERMABOND. The
Company expects these expenses will increase as the Company expands its pipeline
and related development efforts and clinical trials for potential new products.
Interest expense for 1999 decreased to $344,000 from $383,000 for 1998.
This decrease was primarily the result of the continued reduction of the
Company's term loan balance and capital lease obligations through monthly
principal payments.
18
Investment and interest income for 1999 decreased to $869,000 from
$1,215,000 for 1998. This decrease was primarily attributable to interest earned
from lower average cash and investment balances.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Total revenues for 1998 increased 518% to $9,579,000 from $1,551,000
for 1997. The increase in revenues was primarily a result of increased sales
volume of DERMABOND. In addition, the Company received $1,500,000 of license and
product development revenues during 1998, which represented the milestone
payment from Ethicon for the approval from the FDA of the premarket approval
application to market DERMABOND in the United States. Product sales increased to
$8,079,000 for 1998 from $1,551,000 for 1997.
Cost of products sold for 1998 increased to $3,480,000 from $1,398,000
for 1997. Cost of products sold as a percentage of product sales decreased to
43% for 1998 from 90% for 1997. This decrease in cost of products sold as a
percentage of product sales was primarily a result of the increased sales volume
of DERMABOND, resulting in the fixed portion of cost of products sold being
allocated over higher sales. The Company expects that gross margins on product
sales will fluctuate based on sales volume.
Operating expenses for 1998 increased to $11,704,000 from $8,346,000
for 1997. This increase was primarily attributable to the addition of personnel,
expansion of the Company's facilities and increased research and development and
regulatory affairs expenses. At December 31, 1998, the Company had approximately
94 employees compared to approximately 57 at December 31, 1997. In March 1998,
the Company relocated its corporate offices into a 50,000 square foot facility
and its manufacturing operations to the same facility in August 1998. Prior to
the move, the Company occupied approximately 20,000 square feet. The increase in
research and development and regulatory affairs expenses was primarily due to
costs associated with the Company's development efforts related to its ongoing
research and development programs. The Company expects these expenses will
increase as the Company expands its pipeline and related development efforts and
clinical trials for potential new products.
Interest expense for 1998 increased to $383,000 from $72,000 for 1997.
This increase was a result of the Company entering into a new lease line and
term loan during March 1997 and November 1997, respectively. Additionally, the
Company increased its borrowings under the term loan in February 1998.
Investment and interest income for 1998 decreased to $1,215,000 from
$1,436,000 for 1997. This decrease was attributable to lower interest earned
from lower average cash and investment balances.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily through the
sale of equity securities, borrowings from Sharpoint and other lenders, license
and product development revenues and product sales. Through December 31, 1999,
the Company had raised approximately $30.0 million from equity financings.
During 1997 and 1998, the Company entered into and received approximately $4.5
million from a new lease line and term loan. In May 1999, the term loan
principal balance of $2.45 million was refinanced under similar terms of the
original agreement for an additional 24 months. In October 1999, the Company
secured a $3.0 million line of credit for working capital purposes. As of
December 31, 1999, there were no borrowings against the line of credit.
At December 31, 1999, net working capital was approximately $9.7
million, a decrease of $1.9 million from net working capital of $11.6 million at
December 31, 1998. This decrease was primarily attributable to cash used to fund
the Company's operations and the reduction in short-term debt. At December 31,
1999, the Company's primary working capital consisted of $12.6 million of cash
and cash equivalents and investments, a decrease of $4.1 million from $16.7
million at December 31, 1998. The Company had $3.0 million in debt and capital
lease obligations at December 31, 1999, reflecting a $795,000 decrease over the
December 31, 1998 debt and capital lease obligations. These decreases represent
monthly principal payments on these obligations.
Cash used by operating activities was $2.2 million and $4.0 million for
1999 and 1998, respectively. The decrease in cash used by operations was due to
the lower net loss incurred in 1999 as compared to 1998 due to increased sales
of DERMABOND.
Cash provided by investing activities was $2.1 million during 1999
which primarily related to receipts of investment proceeds and the purchases of
investments. During 1998, investing activities used $3.7 million of cash and
19
were primarily related to leasehold improvements for the Company's new 50,000
square foot facility and acquisition of capital equipment.
Cash used by financing activities was $213,000 during 1999 as opposed
to cash provided by financing activities of $1.2 million during 1998. The
Company's primary financing activities during 1999 were the repayment of debt
and capital lease obligations offset by the proceeds from the exercise of
employee stock options. During 1998, the Company's primary financing activity
was the addition of $1.5 million under its term loan.
The Company believes that existing cash and cash equivalents and
investments, which totaled $12.6 million as of December 31, 1999, will be
sufficient to finance its capital requirements for at least 12 months. The
Company may incur a loss in 2000 and subsequent years, although the amount of
future net losses and time required by the Company to reach profitability are
highly uncertain. The Company anticipates that its recurring operating expenses
will increase for the next several years, as it expects its research and
development and general and administrative expenses to increase in order to
develop new products, manufacture in commercial quantities and fund additional
clinical trials. The Company also expects to incur additional capital
expenditures to expand its manufacturing capabilities.
The Company's future capital requirements, however, will depend on
numerous factors, including (i) the Company's ability to manufacture and
commercialize successfully its lead product, DERMABOND, (ii) the progress of its
research and product development programs for future nonabsorbable and
absorbable products, including clinical studies, (iii) the effectiveness of
product commercialization activities and marketing agreements for its future
products, including the scale-up of manufacturing capability in anticipation of
product commercialization and development and progress of sales and marketing
efforts, (iv) the ability of the Company to maintain existing marketing
agreements, including its agreement with Ethicon for DERMABOND, and establish
and maintain new marketing agreements, (v) the costs involved in preparing,
filing, prosecuting, defending and enforcing intellectual property rights and
complying with regulatory requirements, (vi) the effect of competing
technological and market developments, (vii) timely receipt of regulatory
clearances and approvals and (viii) general economic conditions. There can be no
assurance that the Company will not be required to seek additional capital to
finance its operations in the future. If the Company's currently available funds
and internally generated cash flow are not sufficient to satisfy its financing
needs, the Company will be required to seek additional funding through bank
borrowings and additional public or private sales of its securities, including
equity securities, or through other arrangements with marketing partners. Other
than the Company's line of credit for working capital purposes, equipment
financing and term loan, the Company has no credit facility or other committed
sources of capital. There can be no assurance that additional funds, if
required, will be available to the Company on favorable terms, if at all. See
"Item 1--Risk Factors."
YEAR 2000
The Company's Year 2000 Project (the "Project") addressed the issue of
computer programs with date-sensitive software that may be unable to distinguish
between the year 1900 and the year 2000. The Company has modified or replaced
necessary portions of its software so that its computer systems properly utilize
dates beyond December 31, 1999 and mitigate the Year 2000 Issue. To date the
Company has incurred and expensed approximately $60,000 related to the
assessment of, and efforts in connection with, the Project.
At year end, all systems were backed up and verified to be operational
prior to the resumption of business after the new year. The Company has not
experienced any third party supplier issues. The Company remains alert to
potential Year 2000 related issues that may occur in the future, but believes
that there will be no material impact on operations, liquidity or financial
condition.
20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
INTEREST RATE SENSITIVITY
The Company is subject to interest rate risk on its investment
portfolio which consists primarily of high quality short-term money market
funds, commercial paper and corporate bonds with an average maturity of less
than one year. The Company mitigates default risk by investing in what it
believes are safe and high credit quality securities and by monitoring the
credit rating of investment issuers. The portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio liquidity
and there are limitations regarding average and individual duration of
investments. These available-for-sale securities are subject to interest rate
risk and will decrease in value if market interest rates increase. At December
31, 1999, the Company's total portfolio consisted of approximately $12.6 million
of investments, the majority of which had average maturities within one year.
Additionally, the Company generally has the ability to hold fixed income
investments to maturity. Therefore, the Company does not expect its results of
operations or cash flows to be materially affected due to a sudden change in
interest rates.
FOREIGN CURRENCY EXCHANGE RISK
The Company's international sales and related royalties of DERMABOND
are based on sales in foreign currencies, but payable in U.S. dollars, and thus
may be adversely affected by fluctuations in currency exchange rates.
Additionally, fluctuations in currency exchange rates may adversely affect
demand for the Company's products by increasing the price of the Company's
products in the currency of the countries in which the products are sold.
ITEM 8. FINANCIAL STATEMENTS.
The financial statements of the Company required by this item are
attached to this Annual Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item concerning directors and
compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, is incorporated herein by reference to the Company's definitive 2000
Proxy Statement to be filed with the Commission not later than 120 days after
the end of the fiscal year ended December 31, 1999. The required information as
to executive officers is set forth in Part I hereof and incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by
reference to the Company's definitive 2000 Proxy Statement to be filed with the
Commission not later than 120 days after the end of the fiscal year ended
December 31, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated herein by
reference to the Company's definitive 2000 Proxy Statement to be filed with the
Commission not later than 120 days after the end of the fiscal year ended
December 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein by
reference to the Company's definitive 2000 Proxy Statement to be filed with the
Commission not later than 120 days after the end of the fiscal year ended
December 31, 1999.
22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
The financial statements listed in the accompanying Index to Financial
Statements at page F-1 are filed as part of this Annual Report.
2. Financial Statement Schedules.
All financial statement schedules have been omitted because they are
not applicable, or not required, or the information is shown in the financial
statements or notes thereto.
3. Exhibits. (See (c) below)
(b) Reports on Form 8-K.
The Company did not file a report on Form 8-K during the quarter ended
December 31, 1999.
(c) Exhibits.
The following is a list of exhibits filed as part of this Annual
Report. Where so indicated by footnote, exhibits which were previously filed are
incorporated by reference. For exhibits incorporated by reference, the location
of the exhibit in the previous filing is indicated in parentheses.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Restated Certificate of Incorporation. (Exhibit 3.1)(1)
3.2 Amendment to Restated Certificate of Incorporation. (Exhibit 3.2)(2)
3.3 By-Laws. (Exhibit 3.2)(1)
10.1 Office-Warehouse Lease Agreement, dated as of November 7, 1995, between AP Southeast Portfolio
Partners, L.P. and the Company. (Exhibit 10.1)(1)
10.2+ Supply and Distribution Rights Agreement, dated as of March 20, 1996, between Ethicon, Inc. and
the Company. (Exhibit 10.8)(1)
10.3++ Amended and Restated 1996 Equity Compensation Plan of the Company. (Exhibit 10.1)(3)
10.4++ Employment Agreement, dated as of May 31, 1996, between Robert V. Toni and the Company.
(Exhibit 10.10)(1)
10.5++ Employment Agreement, dated as of May 31, 1996, between J. Blount Swain and the Company.
(Exhibit 10.11)(1)
10.6++ Employment Agreement, dated as of May 31, 1996, between Jeffrey G. Clark and the Company.
(Exhibit 10.12)(1)
10.7++ Employment Agreement, dated as of May 31, 1996, between Joe B. Barefoot and the Company.
(Exhibit 10.13)(1)
10.8++ Consulting Agreement, dated as of May 31, 1996, between Steven A. Kriegsman and the Company.
(Exhibit 10.14)(1)
10.9 Registration Rights Agreement, dated as of May 31, 1996, between Caratec, L.L.C. and the
Company. (Exhibit 10.15)(1)
10.10 Registration Rights Agreement, dated as of May 31, 1996, among Cacoosing Partners, L.P., OMI
Partners, L.P., Triangle Partners, L.P., F. William Schmidt, Rolf D. Schmidt, Robert V. Toni,
J. Blount Swain, Jeffrey G. Clark, Joe B. Barefoot and the Company. (Exhibit 10.16)(1)
10.11 Contribution and Exchange Agreement, dated as of May 31, 1996, among Cacoosing Partners, L.P.,
OMI Partners, L.P., Triangle Partners, L.P., F. William Schmidt, Rolf D. Schmidt, Caratec,
L.L.C., Robert V. Toni, J. Blount Swain, Jeffrey G. Clark, Joe B. Barefoot, Jeffery C. Basham,
Jeffrey C. Leung, Anthony V. Seaber and the Company. (Exhibit 10.17)(1)
10.12 Amendment, dated June 18, 1996, to Office-Warehouse Lease Agreement, dated as of November 7,
1995, between AP Southeast Portfolio Partners, L.P. and the Company. (Exhibit 10.18)(1)
23
10.13 Lease, dated February 14, 1997, between AP Southeast Portfolio Partners, L.P. and the Company.
(Exhibit 10.19)(2)
10.14 Master Lease Agreement, dated as of January 29, 1997, between Transamerica Business Credit
Corporation and the Company. (Exhibit 10.20)(2)
10.15 Loan Agreement, dated November 14, 1997, between NationsBank, N.A. and the Company. (Exhibit
10.15)(4)
10.16 Promissory Note, dated November 14, 1997, issued by the Company to NationsBank, N.A. (Exhibit
10.16)(4)
10.17 Security Agreement, dated November 14, 1997, between the Company and NationsBank, N.A.
(Exhibit 10.17)(4)
10.18 Pledge Agreement, dated November 14, 1997, between the Company and NationsBank N.A. (Exhibit
10.18)(4)
10.19++ Employment Agreement, dated as of June 9, 1997, between William M. Cotter and the Company.
(Exhibit 10.19)(4)
10.20++ Employment Agreement, dated as of January 1, 1998, between Anthony J. Sherbondy and the
Company. (Exhibit 10.20)(4)
10.21++ Employment Agreement, dated as of February 18, 1998, between Dennis D. Burns and the Company.
(Exhibit 10.21)(4)
10.22 Amendment, dated August 15, 1997, to Lease, dated February 14, 1997, between AP Southeast
Portfolio Partners, L.P. and the Company. (Exhibit 10.22)(4)
10.23 Representative and Manufacturing Facility Agreement, dated January 1, 1998, between Innocoll
GmbH and the Company. (Exhibit 10.23)(4)
10.24++ 1999 Employee Stock Purchase Plan of the Company. (Exhibit 10.1)(5)
23.1* Consent of PricewaterhouseCoopers LLP.
24.1* Power of Attorney (included on signature page to this Annual Report).
27* Financial Data Schedule.
- -----------
* Filed herewith.
+ Portions of this exhibit were omitted and filed separately with the
Secretary of the Securities and Exchange Commission (the "Commission")
pursuant to an order of the Commission granting the Company's application
for confidential treatment filed pursuant to Rule 406 under the Securities
Act of 1933, as amended.
++ Compensation plans and arrangements for executives and others.
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-5425) filed with the Commission on June 7, 1996, as
amended.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-22981) filed with the Commission on March 7, 1997.
(3) Filed as an exhibit to the Company's Registration Statement on Form S-8
(Registration No. 333-72953) filed with the Commission on February 25,
1999.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
(5) Filed as an exhibit to the Company's Registration Statement on Form S-8
(Registration No. 333-72339) filed with the Commission on February 12,
1999.
(d) Financial Statement Schedules.
None.
24
CLOSURE MEDICAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants F-2
Financial Statements:
Balance Sheets as of December 31, 1998 and 1999 F-3
Statements of Operations for the years ended
December 31, 1997, 1998 and 1999 F-4
Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 F-5
Statements of Stockholders' Equity for the years ended
December 31, 1997, 1998 and 1999 F-6
Notes to Financial Statements F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
of Closure Medical Corporation
In our opinion, the accompanying balance sheets and the related
statements of operations, of cash flows and of stockholders' equity present
fairly, in all material respects, the financial position of Closure Medical
Corporation at December 31, 1999 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers, LLP
Raleigh, North Carolina
February 16, 2000
F-2
CLOSURE MEDICAL CORPORATION
BALANCE SHEETS
(In thousands, except per share data)
DECEMBER 31,
--------------------------
1998 1999
---------- -----------
ASSETS
Cash and cash equivalents $ 824 $ 508
Short-term investments 14,275 9,299
Restricted investments 1,603 1,515
Accounts receivable 1,191 732
Inventories 1,008 591
Prepaid expenses 286 326
---------- -----------
Total current assets 19,187 12,971
Furniture, fixtures and equipment, net 7,707 7,351
Restricted investments - 1,292
Intangible assets, net of $356 and $368
accumulated amortization, respectively 526 897
---------- -----------
Total assets $ 27,420 $ 22,511
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,721 $ 1,110
Accrued expenses 1,705 794
Deferred revenue 1,245 443
Capital lease obligations 245 279
Current portion of long-term debt 2,650 600
---------- -----------
Total current liabilities 7,566 3,226
Deferred revenue 670 505
Capital lease obligations less current portion 934 655
Long-term debt less current portion - 1,500
---------- -----------
Total liabilities 9,170 5,886
---------- -----------
Commitments and Contingencies (See notes 5, 6, 7 and 10) - -
Preferred Stock, $.01 par value. Authorized 2,000 shares; none issued
or outstanding - -
Common Stock, $.01 par value. Authorized 35,000 shares; issued and
outstanding 13,290 and 13,347 shares, respectively 133 133
Additional paid-in capital 46,358 46,940
Accumulated deficit (27,848) (30,375)
Deferred compensation on stock options (393) (73)
---------- -----------
Total stockholders' equity 18,250 16,625
---------- -----------
Total liabilities and stockholders' equity $ 27,420 $ 22,511
========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
CLOSURE MEDICAL CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
----------- ----------- ----------
Product sales $ 1,551 $ 8,079 $ 13,370
License and product development revenues - 1,500 -
----------- ----------- ----------
Total revenues 1,551 9,579 13,370
Cost of products sold 1,398 3,480 4,722
----------- ----------- ----------
Gross profit 153 6,099 8,648
----------- ----------- ----------
Research, development and regulatory affairs expenses 3,594 6,297 6,296
General and administrative expenses 4,752 5,407 5,404
----------- ----------- ----------
Total operating expenses 8,346 11,704 11,700
----------- ----------- ----------
Loss from operations (8,193) (5,605) (3,052)
Interest expense (72) (383) (344)
Investment and interest income 1,436 1,215 869
----------- ----------- ----------
Net loss $ (6,829) $ (4,773) $ (2,527)
=========== =========== ==========
Shares used in computation of net loss per common share- basic and diluted 12,966 13,270 13,324
=========== =========== ==========
Net loss per common share- basic and diluted $ (0.53) $ (0.36) $ (0.19)
=========== =========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
CLOSURE MEDICAL CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,829) $(4,773) $(2,527)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization expense 195 615 948
Amortization of deferred compensation on stock options 304 303 320
Net loss on disposals of fixed assets 4 34 594
Net loss on disposals of intangibles 50 110 100
Change in accounts receivable (1,159) 35 459
Change in inventories (235) (661) 417
Change in prepaid expenses 21 81 (40)
Change in accounts payable and accrued expenses 2,114 350 (1,522)
Change in deferred revenue (50) (104) (967)
-------- ------- -------
Net cash used by operating activities (5,585) (4,010) (2,218)
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture, fixtures and equipment (1,732) (4,651) (1,174)
Investment in intangible assets (124) (371) (483)
Purchases of investments (33,369) (12,396) (6,629)
Proceeds from the sale of investments 21,173 13,750 10,401
-------- ------- -------
Net cash provided (used) by investing activities (14,052) (3,668) 2,115
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 1,500 1,500 -
Repayment of debt - (350) (550)
Net proceeds from sale of common stock 12,489 301 582
Payments under capital lease obligations (99) (226) (245)
-------- ------- -------
Net cash provided (used) by financing activities 13,890 1,225 (213)
-------- ------- -------
Decrease in cash and cash equivalents (5,747) (6,453) (316)
Cash and cash equivalents, beginning of year 13,024 7,277 824
-------- ------- -------
Cash and cash equivalents, end of year $ 7,277 $ 824 $ 508
======== ======= =======
NON-CASH TRANSACTIONS:
Cash payments for interest during 1997, 1998 and 1999 were approximately $68,
$370 and $317, respectively.
The accompanying notes are an integral part of these financial statements.
F-5
CLOSURE MEDICAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1998 and 1999
(In thousands)
Deferred
Common Stock Additional Compensation Total
---------------------- Paid-in Accumulated on Stock Stockholders'
Shares Amount Capital Deficit Option Equity
--------- -------- ---------- ------------- ----------- -------------
Balance at December 31, 1996 12,150 $122 $ 33,579 $ (16,246) $ (1,000) $ 16,455
Issuance of common stock, net of
issuance costs of $1,737 1,025 10 12,010 - - 12,020
Amortization of deferred compen-
sation on stock options - - - - 304 304
Exercise of stock options 67 - 469 - - 469
Net loss - - - (6,829) - (6,829)
--------- ------- ------------- ----------- ---------- ----------
Balance at December 31, 1997 13,242 132 46,058 (23,075) (696) 22,419
Amortization of deferred compen-
sation on stock options - - - - 303 303
Exercise of stock options 48 1 300 - - 301
Net loss - - - (4,773) - (4,773)
--------- ------- ------------- ----------- ---------- ----------
Balance at December 31, 1998 13,290 133 46,358 (27,848) (393) 18,250
Amortization of deferred compen-
sation on stock options - - - - 320 320
Exercise of stock options and sale of
common stock under ESPP 57 - 582 - - 582
Net loss - - - (2,527) - (2,527)
--------- ------- ------------- ----------- ---------- ----------
Balance at December 31, 1999 13,347 $133 $ 46,940 $ (30,375) $ (73) $ 16,625
========= ======= ============= =========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-6
CLOSURE MEDICAL CORPORATION
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND OPERATIONS
Closure Medical Corporation (the "Company" or "Closure") develops,
manufactures, and commercializes medical tissue cohesive products based
on its proprietary cyanoacrylate technology to be used for human and
veterinary wound closure. From May 10, 1990 to February 29, 1996, the
business of the Company was conducted by its predecessor, Tri-Point
Medical L.P. The Company was incorporated in Delaware on February 20,
1996.
The Company's medical tissue cohesives can be used to close and seal
wounds and incisions rapidly as well as stop leakage of blood and other
bodily fluids from injured tissue. The Company's lead product
DERMABOND(R) Topical Skin Adhesive ("DERMABOND") is a nonabsorbable
tissue cohesive that can be used to replace sutures and staples for
certain topical wound closure applications. DERMABOND was cleared for
marketing by the United States Food and Drug Administration ("FDA") in
August 1998. The Company's marketing partner, Ethicon Inc.("Ethicon"),
a subsidiary of Johnson & Johnson, markets and distributes DERMABOND.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent cash in banks and short-term
investments having an original maturity of less than three months.
INVESTMENTS
Investments consist of short-term money market funds, commercial paper
and corporate bonds having maturities as of the purchase date greater
than three months but less than or equal to one year. Long-term
investments have maturities greater than one year. All investments have
been classified as available-for-sale securities. Restricted
investments serve as collateral securing the Company's outstanding debt
and line of credit. The fair market value, based on quoted market
prices, of all investments approximates amortized cost.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market.
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are stated at cost. Depreciation
expense is computed using the straight-line method over estimated
useful lives ranging between three and ten years. Expenditures for
repairs and maintenance are charged to expense as incurred.
INTANGIBLE ASSETS
Costs incurred to secure patents are capitalized until either the
related patent is issued, in which case they are amortized over the
shorter of its remaining economic or useful life, or it is rejected, in
which case they are written off.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the net realizable value of its property and
equipment and other assets in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed of" (SFAS No. 121), relying on a
number of factors including operating results, business plans, economic
projections and anticipated future cash flows. SFAS No. 121 requires
recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the estimated future undiscounted
cash flows attributable to such assets or the business to which such
intangible assets relate.
F-7
CLOSURE MEDICAL CORPORATION
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
REVENUE RECOGNITION
Revenues from product sales are recognized upon shipment. Advance
payments related to future sales of product or future royalties due on
these sales are deferred and will be recorded as revenue as they are
earned over future periods.
The Company recognizes revenue for sales of DERMABOND to its marketing
partner, Ethicon, at an agreed-upon amount per unit at the time the
products are shipped. Ethicon provides a summary of its sales of
DERMABOND on a quarterly basis and the Company recognizes royalties due
and any purchase price adjustment as sales revenue. During 1999, the
Company was awarded its first United States Patent relevant to
DERMABOND which increases the royalty revenue rate on sales of
DERMABOND under the supply and distribution agreement with Ethicon.
Revenues from customers representing 10% or more of total revenue
during fiscal 1997, 1998 and 1999 were as follows (See Note 7):
Customer 1997 1998 1999
-------- ---- ---- ----
A 13% 0% 0%
B 53% 92% 93%
C 34% 0% 0%
During 1999, less than one percent of the Company's revenues were from
outside of North America.
INCOME TAXES
Income taxes are computed using the asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. In estimating future
tax consequences, the Company generally considers all expected future
events other than enactment of changes in tax law or rates. If it is
"more likely than not" that some portion or all of a deferred asset
will not be realized, a valuation allowance is recorded.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
RELATED PARTIES
On January 1, 1998, the Company entered into an agreement with
Innocoll, of Saal-Donau, Germany, which provides for fees to be paid to
Innocoll of $180,000 per year for five years. During 1998 and 1999,
$180,000 and $135,000, respectively, was paid to Innocoll and $45,000
was included in accrued expenses at December 31, 1999. Innocoll acts as
Closure's authorized representative in Europe under the Medical Device
Directive and will provide alternative manufacturing space as needed.
Two of the Company's members of the Board of Directors are owners of
Innocoll.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments approximates the
financial statement carrying value at December 31, 1998 and 1999.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), was issued in October 1995.
SFAS 123, as amended by SFAS 137, gives companies the option to adopt
the fair value method for expense recognition of employee stock options
and stock-based awards or, as the Company has elected, to continue to
account for such items using the intrinsic value
F-8
CLOSURE MEDICAL CORPORATION
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
method as outlined under Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees." Consequently, the
adoption of SFAS 123 does not have any impact on the financial position
or results of operations of the Company but pro forma disclosures of
net loss and net loss per share have been provided in Note 9 as if the
fair value method had been applied.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), was issued
in June 1998. SFAS 133 is effective for financial statements for fiscal
years beginning after June 15, 2000. The Company will adopt SFAS 133 on
or before the effective date. It is not anticipated that this standard
will have a material impact on the results of operations or financial
position of the Company.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the
current year presentation.
NET LOSS PER SHARE
Basic net loss per common share is computed using the weighted average
number of shares of common stock outstanding during the period.
Diluted net loss per common share is computed using the weighted
average number of shares of common and common equivalent shares
outstanding during the period. Common equivalent shares consist of
stock options using the treasury stock method. Common equivalent shares
from stock options are excluded from the computation if their effect is
antidilutive.
3. INVENTORIES
Inventories included the following (in thousands):
December 31,
-----------
1998 1999
---- ----
Packaging $ 86 $ 148
Raw materials 106 45
Work-in-process 616 283
Finished goods 200 115
----- ----
$1,008 $ 591
===== ====
F-9
CLOSURE MEDICAL CORPORATION
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. FURNITURE, FIXTURES, AND EQUIPMENT
Furniture, fixtures and equipment included the following (in
thousands):
December 31,
------------ Estimated
1998 1999 Useful Lives
---- ---- ------------
Furniture and computers $ 1,007 $ 1,123 3-10 years
Machinery and equipment 2,806 3,167 10 years
Leasehold improvements 2,913 2,918 10 years
Construction-in-progress 1,877 1,975
------ ------
8,603 9,183
Accumulated depreciation and amortization (896) (1,832)
---------- ----------
$ 7,707 $ 7,351
========== =========
5. DEBT
On November 14, 1997, the Company entered into a financing arrangement
to borrow up to $3,000,000 to finance leasehold improvements and
equipment related to the Company's expansion into a 50,000 square foot
manufacturing, research and administration facility. The agreement
matured May 31, 1999 and the loan balance amount of $2,450,000 was
refinanced under terms similar to the original agreement. Borrowings
are payable monthly in principal and interest, with one final payment
of all remaining principal and accrued interest due May 31, 2001.
Borrowings under this agreement bear interest at the 30-day LIBOR rate
plus 167 basis points and are secured by the related equipment and
leasehold improvements. In addition, the lender is required to hold as
collateral an amount equal to fifty percent of the outstanding loan
balance which is classified as a long-term restricted investment as
borrowings are due on May 31, 2001. The agreement requires the Company
to comply with certain financial covenants including minimum liquidity
and tangible net worth, which the Company was in compliance with at
December 31, 1999.
In October 1999, the Company secured a $3,000,000 line of credit for
working capital purposes. The agreement requires the Company to secure
fifty percent of the available balance in an investment account. The
investment is classified as short-term restricted as the agreement
expires in May 2000. In addition, there is an annual financing fee
equal to one eighth of one percent of the undrawn portion of the
commitment amount. As of December 31, 1999, there were no borrowings
against the line of credit.
6. LEASES
The Company leases office and manufacturing space and equipment under
operating leases which expire at various dates through 2007. Rent
expense related to operating leases was approximately $316,000,
$534,000 and $549,000 for 1997, 1998 and 1999, respectively.
The Company leases equipment under capital leases with original lease
terms of four to five years. At the expiration of the lease term in
2002, the Company is required to purchase primarily all of the
equipment for the fair market value of the equipment and related taxes.
The fair market value is to be equal to no less than 5% or no more than
10% of the equipment cost.
F-10
CLOSURE MEDICAL CORPORATION
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. LEASES--CONTINUED
Future minimum lease payments under noncancellable capital leases and
operating leases with initial or remaining terms of one year or more
are as follows at December 31, 1999 (in thousands):
Capital Operating
Leases Leases
------ ------
2000 $ 392 $ 559
2001 392 524
2002 321 504
2003 -- 510
2004 -- 521
Thereafter -- 1,398
------------- -----------
Total minimum lease payments 1,105 $ 4,016
Less: amount representing interest (171) ===========
-------------
Present value of minimum lease payments 934
Less: current portion (279)
-------------
Long-term portion $ 655
=============
7. MAJOR CUSTOMERS
On March 20, 1996, the Company entered into an eight-year exclusive
supply and distribution rights agreement with Ethicon whereby Closure
supplies Ethicon with DERMABOND, a product for human topical wound
closure. In consideration, Ethicon paid Closure $4,500,000 of which
$3,500,000 was a non-refundable licensing fee and $1,000,000 has been
and will continue to be offset against either future product purchases
or royalties to be paid by Ethicon on product sales and has been
classified as deferred revenue on the accompanying balance sheet. In
addition, Ethicon has advanced the Company $1,000,000 for direct costs
incurred in connection with clinical studies of the product, which has
been classified as deferred revenue and has been and will continue to
be offset against royalties to be paid by Ethicon. With the United
States and European Community approval of DERMABOND in August 1998 and
1997, respectively, Ethicon is obligated to purchase certain minimum
quantities annually at a predetermined price based on average selling
prices.
In February 2000, the Company entered into a new three-year licensing
and distribution agreement with Farnam Companies, Inc. ("Farnam".) This
agreement provides Farnam exclusive rights to market, sell and
distribute the Company's veterinary products in the United States and
Canada.
Effective March 2000, Procter & Gamble/ALZA, Partners for Oral Health
Care (the "Proctor & Gamble/ALZA Partnership"), and ALZA Corporation
("ALZA") declined the renewal of their non-exclusive supply agreements
for OCTYLDENT, an adhesive used in conjunction with a periodontal drug
delivery product, with the Company. As a result, the Proctor &
Gamble/ALZA Partnership and ALZA divested their combined worldwide
distribution rights to the product.
F-11
CLOSURE MEDICAL CORPORATION
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. INCOME TAXES
There is no current provision or benefit for income taxes recorded for
the years ended December 31, 1997, 1998, and 1999 as the Company has
generated net operating losses for income tax purposes for which there
is no carryback potential. There is no deferred provision or benefit
for income taxes recorded for the years ended December 31, 1997, 1998,
and 1999 as the Company is in a net deferred tax asset position for
which a full valuation allowance has been recorded due to uncertainty
of realization. Due to the Company's history of losses, it is
considered more likely than not that such deferred tax assets will not
ultimately be realized.
Deferred taxes are comprised of the following (in thousands):
December 31,
------------
1998 1999
-------- -------
Net operating loss carryforwards $ 5,327 $ 6,772
Research and development credit carryforwards 462 885
Temporary differences, net 184 396
-------- -------
5,973 8,053
Valuation allowance (5,973) (8,053)
-------- -------
Net deferred tax asset $ - $ -
======== =======
At December 31, 1999, the Company had net operating loss carryforwards
for income tax reporting purposes of approximately $16,341,000 which
expire beginning in the year 2011. The Company also has research and
development tax credit carryforwards of approximately $885,000 which
will begin to expire in the year 2011. The federal net operating loss
carryforwards may be subject to limitation under the rules regarding a
change in stock ownership as determined by the Internal Revenue Code.
9. EMPLOYEE BENEFIT PLANS
The Company maintains the Amended and Restated 1996 Equity Compensation
Plan (the "Plan"), adopted by the Board of Directors on May 28, 1996
and which was most recently amended and restated on June 8, 1999. The
Plan provides that a maximum of 2,500,000 stock options may be granted
to officers, employees, independent contractors and consultants, and
non-employee directors of the Company. In addition, the Plan provides
for grants of restricted stock and stock appreciation rights to
participants other than non-employee directors of the Company. The Plan
is administered and interpreted by a committee (the "Committee") of the
Board of Directors. Grants under the Plan may consist of (i) options
intended to qualify as incentive stock options ("ISOs") within the
meaning of section 422 of the Internal Revenue Code or (ii) so-called
"nonqualified stock options" ("NQSOs") that are not intended to so
qualify. Independent contractors or consultants to the Company are not
eligible to receive ISOs under the Plan. The option price of any ISO
granted under the Plan will not be less than the fair market value of
the underlying shares of Common Stock on the date of grant, except that
the option price of an ISO granted to an employee who owns more than
10% of the total combined voting power of all classes of stock of the
Company or its subsidiaries may not be less than 110% of the fair
market value of the underlying shares of Common Stock on the date of
grant. The option price of a NQSO may be greater than, equal to or less
than the fair market value of the underlying shares of Common Stock on
the date of grant. The Committee will determine the term of each
option; provided, however, that the exercise period may not exceed ten
years from the date of grant, and the exercise period of an ISO granted
to an employee who owns more than 10% of the total combined voting
power of all classes of stock of the Company or its subsidiaries may
not exceed five years from the date of grant. Options outstanding at
December 31, 1997, 1998 and 1999 generally vest within three to five
years.
F-12
CLOSURE MEDICAL CORPORATION
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS--CONTINUED
The following table summarizes stock option activity under the Plan:
Weighted-
Average
Price
Shares Per Share
------ ---------
Options outstanding at December 31, 1996 572,606
Granted 245,600 $ 24.33
Exercised (67,530) 6.94
Canceled (31,139) 9.63
---------
Options outstanding at December 31, 1997 719,537
Granted
With market exercise price 500,042 23.20
With premium exercise price 52,155 24.56
Exercised (47,046) 5.92
Canceled (23,449) 21.31
---------
Options outstanding at December 31, 1998 1,201,239
Granted 1,106,028 23.63
Exercised (50,908) 9.54
Canceled (125,009) 25.72
---------
Options outstanding at December 31, 1999 2,131,350
=========
Options Outstanding Options Exercisable
----------------------------------------- -------------------
Weighted-
Average
Weighted- Remaining Weighted-
Range of Number Average Contractual Number Average
Exercise Price Outstanding Exercise Price Life Exercisable Exercise Price
-------------- ----------- -------------- ---- ----------- --------------
$5.00-$14.56 847,904 $10.31 8.22 316,036 $ 5.77
$14.75-$24.75 579,785 22.32 8.15 190,397 22.25
$25.25-$29.81 536,590 29.45 8.90 128,273 29.03
$30.63-$35.00 167,071 33.11 8.96 45,726 32.08
Available for grant at December 31, 1999 203,166
Effective February 1, 1999, the Company established the 1999 Employee
Stock Purchase Plan (the "ESPP") to allow eligible employees of the
Company to purchase shares of Common Stock, at semi-annual intervals,
through periodic payroll deductions. The Company has reserved 1,500,000
shares of Common Stock for issuance under the ESPP. Under the ESPP,
employees, subject to certain restrictions, may purchase shares of
Common Stock at 85 percent of the lesser of the fair market value at
either the date of enrollment or the date of purchase. During 1999,
4,848 shares were issued under the ESPP, and at December 31, 1999,
1,495,152 shares were available for issuance. The ESPP had an
insignificant impact on the Company's 1999 pro forma fair value
disclosure as required under SAFS 123.
During 1997, 1998 and 1999, the Company recognized approximately
$304,000, $303,000 and $320,000, respectively, of compensation cost
related to the Plan. Had compensation expense for 1997, 1998 and 1999,
assuming it was recognized on a straight-line basis over the vesting
period for awards under the Plan
F-13
CLOSURE MEDICAL CORPORATION
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS--CONTINUED
and in the year of purchase for benefits received under the ESPP, been
determined based on the fair value at the grant date, consistent with
the provisions of SFAS No. 123, the Company's results of operations
would have been reduced to the pro forma amounts indicated below:
1997 1998 1999
---- ---- ----
Net loss-as reported $(6,829) $(4,773) $(2,527)
Net loss-pro forma (8,244) (7,865) (8,633)
Loss per share--basic and
diluted-as reported (0.53) (0.36) (0.19)
Loss per share--basic and
diluted-pro forma (0.64) (0.59) (0.65)
The pro forma amounts discussed above were derived using the
Black-Scholes option-pricing model with the assumptions indicated
below:
Assumptions 1997 1998 1999
----------- ---- ---- ----
Average expected life (years) 5 6 5.5
Average interest rate 6.5% 5.0% 5.6%
Volatility 73.1% 81.5% 85.0%
Dividend yield 0.0% 0.0% 0.0%
The Company maintains a 401(k) Retirement Plan and Trust (the "401(k)
Plan") available to all full-time, eligible employees. Employee
contributions are voluntary and are limited to the maximum amount
allowable under federal tax regulations. Effective January 1, 1997, the
401(k) Plan was amended to make one-half of the matching contribution
in the form of cash and one-half in the form of shares of Common Stock
of the Company ("participant shares"). Participant shares are issued at
year-end based on the closing stock price of the Common Stock on
December 31, with fractional shares paid in cash. At December 31, 1998
and 1999, the 401(k) Plan had a receivable from the Company in the
amount of 1,162 and 4,559 shares, respectively, based on a closing
stock price of $29.81 and $12.88, respectively. Cash amounts
contributed to the 401(k) Plan during 1998 and 1999 were approximately
$35,000 and $60,000, respectively.
10. COMMITMENTS AND CONTINGENCIES
In May 1996, the Company entered into a five-year agreement with a
consultant which provides for annual compensation of $120,000.
F-14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CLOSURE MEDICAL CORPORATION
Date: March 30, 2000 By /s/ ROBERT V. TONI
-------------------------------
Robert V. Toni
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
EACH PERSON IN SO SIGNING ALSO MAKES, CONSTITUTES AND APPOINTS ROBERT
V. TONI, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF CLOSURE MEDICAL CORPORATION,
AND J. BLOUNT SWAIN, VICE PRESIDENT OF FINANCE AND CHIEF FINANCIAL OFFICER OF
CLOSURE MEDICAL CORPORATION, AND EACH OF THEM ACTING ALONE, HIS TRUE AND LAWFUL
ATTORNEYS-IN-FACT, WITH FULL POWER OF SUBSTITUTION, IN HIS NAME, PLACE AND
STEAD, TO EXECUTE AND CAUSE TO BE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ANY OR ALL AMENDMENTS TO THIS REPORT, AND HEREBY RATIFIES AND
CONFIRMS ALL THAT SAID ATTORNEY-IN-FACT OR HIS SUBSTITUTE OR SUBSTITUTES MAY DO
OR CAUSE TO BE DONE BY VIRTUE HEREOF.
Name Capacity Date
---- -------- ----
/S/ ROBERT V. TONI President and Chief Executive March 30, 2000
- ------------------------------------- Officer (principal executive
ROBERT V. TONI officer) and Director
/S/ J. BLOUNT SWAIN Vice President and Chief Financial March 30, 2000
- ------------------------------------- Officer (principal financial and
J. BLOUNT SWAIN accounting officer)
/S/ RONALD A. AHRENS Chairman of the Board of Directors March 30, 2000
- --------------------------------------
RONALD A. AHRENS
/S/ DENNIS C. CAREY Director March 30, 2000
- -------------------------------------
DENNIS C. CAREY
/S/ RICHARD W. MILLER Director March 30, 2000
- -------------------------------------
RICHARD W. MILLER
/S/ F. WILLIAM SCHMIDT Director March 30, 2000
- -------------------------------------
F. WILLIAM SCHMIDT
/S/ ROLF D. SCHMIDT Director March 30, 2000
- -------------------------------------
ROLF D. SCHMIDT
/S/ RANDY H. THURMAN Director March 30, 2000
- -------------------------------------
RANDY H. THURMAN
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Restated Certificate of Incorporation. (Exhibit 3.1)(1)
3.2 Amendment to Restated Certificate of Incorporation. (Exhibit 3.2)(2)
3.3 By-Laws. (Exhibit 3.2)(1)
10.1 Office-Warehouse Lease Agreement, dated as of November 7, 1995, between AP
Southeast Portfolio Partners, L.P. and the Company. (Exhibit 10.1)(1)
10.2+ Supply and Distribution Rights Agreement, dated as of March 20, 1996, between
Ethicon, Inc. and the Company. (Exhibit 10.8)(1)
10.3++ Amended and Restated 1996 Equity Compensation Plan of the Company. (Exhibit
10.1)(3)
10.4++ Employment Agreement, dated as of May 31, 1996, between Robert V. Toni and the
Company. (Exhibit 10.10)(1)
10.5++ Employment Agreement, dated as of May 31, 1996, between J. Blount Swain and
the Company. (Exhibit 10.11)(1)
10.6++ Employment Agreement, dated as of May 31, 1996, between Jeffrey G. Clark and
the Company. (Exhibit 10.12)(1)
10.7++ Employment Agreement, dated as of May 31, 1996, between Joe B. Barefoot and
the Company. (Exhibit 10.13)(1)
10.8++ Consulting Agreement, dated as of May 31, 1996, between Steven A. Kriegsman
and the Company. (Exhibit 10.14)(1)
10.9 Registration Rights Agreement, dated as of May 31, 1996, between Caratec,
L.L.C. and the Company. (Exhibit 10.15)(1)
10.10 Registration Rights Agreement, dated as of May 31, 1996, among Cacoosing
Partners, L.P., OMI Partners, L.P., Triangle Partners, L.P., F. William
Schmidt, Rolf D. Schmidt, Robert V. Toni, J. Blount Swain, Jeffrey G. Clark,
Joe B. Barefoot and the Company. (Exhibit 10.16)(1)
10.11 Contribution and Exchange Agreement, dated as of May 31, 1996, among Cacoosing
Partners, L.P., OMI Partners, L.P., Triangle Partners, L.P., F. William
Schmidt, Rolf D. Schmidt, Caratec, L.L.C., Robert V. Toni, J. Blount Swain,
Jeffrey G. Clark, Joe B. Barefoot, Jeffery C. Basham, Jeffrey C. Leung,
Anthony V. Seaber and the Company. (Exhibit 10.17)(1)
10.12 Amendment, dated June 18, 1996, to Office-Warehouse Lease Agreement, dated as
of November 7, 1995, between AP Southeast Portfolio Partners, L.P. and the
Company. (Exhibit 10.18)(1)
10.13 Lease, dated February 14, 1997, between AP Southeast Portfolio Partners, L.P.
and the Company. (Exhibit 10.19)(2)
10.14 Master Lease Agreement, dated as of January 29, 1997, between Transamerica
Business Credit Corporation and the Company. (Exhibit 10.20)(2)
10.15 Loan Agreement, dated November 14, 1997, between NationsBank, N.A. and the
Company. (Exhibit 10.15)(4)
10.16 Promissory Note, dated November 14, 1997, issued by the Company to
NationsBank, N.A. (Exhibit 10.16)(4)
10.17 Security Agreement, dated November 14, 1997, between the Company and
NationsBank, N.A. (Exhibit 10.17)(4)
10.18 Pledge Agreement, dated November 14, 1997, between the Company and NationsBank
N.A. (Exhibit 10.18)(4)
10.19++ Employment Agreement, dated as of June 9, 1997, between William M. Cotter and
the Company. (Exhibit 10.19)(4)
10.20++ Employment Agreement, dated as of January 1, 1998, between Anthony J.
Sherbondy and the Company. (Exhibit 10.20)(4)
10.21++ Employment Agreement, dated as of February 18, 1998, between Dennis D. Burns
and the Company. (Exhibit 10.21)(4)
10.22 Amendment, dated August 15, 1997, to Lease, dated February 14, 1997, between
AP Southeast Portfolio Partners, L.P. and the Company. (Exhibit 10.22)(4)
10.23 Representative and Manufacturing Facility Agreement, dated January 1, 1998,
between Innocoll GmbH and the Company. (Exhibit 10.23)(4)
10.24++ 1999 Employee Stock Purchase Plan of the Company. (Exhibit 10.1)(5)
23.1* Consent of PricewaterhouseCoopers LLP.
24.1* Power of Attorney (included on signature page to this Annual Report).
27* Financial Data Schedule.
- -----------
* Filed herewith.
+ Portions of this exhibit were omitted and filed separately with the
Secretary of the Securities and Exchange Commission (the "Commission")
pursuant to an order of the Commission granting the Company's application
for confidential treatment filed pursuant to Rule 406 under the Securities
Act of 1933, as amended.
++ Compensation plans and arrangements for executives and others.
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-5425) filed with the Commission on June 7, 1996, as
amended.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-22981) filed with the Commission on March 7, 1997.
(3) Filed as an exhibit to the Company's Registration Statement on Form S-8
(Registration No. 333-72953) filed with the Commission on February 25,
1999.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
(5) Filed as an exhibit to the Company's Registration Statement on Form S-8
(Registration No. 333-72339) filed with the Commission on February 12,
1999.