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, 2000
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 26, 2001, the aggregate market value of the Common Stock held by
non-affiliates of the registrant was $111,257,548. 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 26, 2001, there were 13,445,909 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 2001 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.............................................................................18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.............................................22
ITEM 8. FINANCIAL STATEMENTS..................................................................................22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES.............................................................................22
PART III.............................................................................................................23
- --------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................................23
ITEM 11. EXECUTIVE COMPENSATION................................................................................23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................................23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................................23
PART IV..............................................................................................................24
- -------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......................................24
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.
DERMABOND(R) Topical Skin Adhesive is a registered trademark of
Ethicon, Inc.; SOOTHE-N-SEAL(TM) canker sore relief is a licensed trademark of
Colgate Oral Pharmaceuticals, Inc.; LIQUIDERM(TM) liquid adhesive bandage is a
trademark of Closure Medical Corporation; and NEXABAND(R) adhesive is a
registered trademark of Closure Medical Corporation.
i
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 $3.6
million for the year ended December 31, 2000. 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'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(R) Topical Skin Adhesive ("DERMABOND(R)
adhesive"), commercializing its line of over-the-counter ("OTC") products
including SOOTHE-N-SEAL(TM) canker sore relief ("SOOTHE-N-SEAL(TM) adhesive")
and LIQUIDERM(TM) liquid adhesive bandage ("LIQUIDERM(TM) adhesive"), expanding
its manufacturing capacity, obtaining regulatory approvals or clearances for its
products, developing and marketing new products, 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(R) adhesive in the United States in August 1998. The Company was
granted 510(k) premarket notification ("510(k)") for SOOTHE-N-SEAL(TM) adhesive
and LIQUIDERM(TM) adhesive in September 1999 and January 2001, respectively. The
Company believes that its long-term viability and growth will depend in large
part on sales of DERMABOND(R) adhesive, SOOTHE-N-SEAL(TM) adhesive and
LIQUIDERM(TM) adhesive, and receiving regulatory clearances or approvals for and
the successful commercialization of any new products resulting from its research
and development activities. The Company has several additional potential
products in development that may 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. 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
resulting from third parties' proprietary rights or superior or equivalent
products, as well as general economic conditions affecting purchasing patterns.
1
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'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 its 50,000
square foot facility in Raleigh, North Carolina. Production of increased
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(R) adhesive of Ethicon, Inc.
("Ethicon"), a division of Johnson & Johnson and the Company's marketing partner
for DERMABOND(R) adhesive, as set forth under their agreement, Ethicon may
itself then manufacture DERMABOND(R) adhesive and pay the Company royalties on
sales. The resulting loss of payments from Ethicon for the purchase of
DERMABOND(R) adhesive 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(R) adhesive, SOOTHE-N-SEAL(TM) adhesive and LIQUIDERM(TM)
adhesive. 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 any 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," "Marketing Agreements" and "Manufacturing."
Dependence on Marketing Partners. The Company has no experience in
sales, marketing and distribution. Therefore, the Company's strategy for
commercialization of its 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 2000 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 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
2
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 "Marketing Agreements."
Dependence on Sole Source Supplier. The Company currently purchases
cyanoacetate, the primary raw material used in manufacturing 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(R) adhesive, and, consequently, could have a material
adverse effect on the Company's results of operations and financial condition.
See "--Dependence on Marketing Partners," "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 19 issued U.S. patents with
expiration dates ranging from 2004 to 2019 and three issued foreign patents with
expiration dates ranging from 2014 to 2017. The Company has filed applications
for 32 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 was
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 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. The Company's medical
tissue adhesives 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 adhesives must
be shown to be efficacious and safe for use in humans. The Company's current and
future medical tissue adhesives 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
3
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) process or the
lengthier PMA 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(R) adhesive 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 three other
cyanoacrylate-based topical adhesives with which DERMABOND(R) adhesive competes,
none of which are 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 Corporation, 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.
MedLogic Global Corporation markets LiquiBand(R) adhesive, primarily in the
United Kingdom, and has filed an IDE in the United States. 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 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
4
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(R) adhesive 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 "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 $11.8 million as of December 31,
2000, 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
adhesive products for the professional and OTC markets based on its proprietary
medical grade cyanoacrylate technology. The Company, to date, has commercialized
nonabsorbable products that are used topically, however research efforts also
include the development of absorbable formulations for internal use.
The Company's medical tissue adhesives can be used professionally to
close and seal wounds and incisions rapidly and stop leakage of blood and other
body fluids from injured tissue. Closure's medical tissue adhesive 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 adhesive products result in lower overall procedure costs and are
easier and quicker to use than sutures or staples. The Company's lead product,
DERMABOND(R) adhesive, is a nonabsorbable tissue adhesive that can be used to
replace sutures and staples for certain topical wound closure applications. In
1998, the Company received its PMA from the FDA to market DERMABOND(R) adhesive
in the United States and the Company's marketing partner, Ethicon, launched the
product in September 1998. Additionally, Ethicon has been distributing
DERMABOND(R) adhesive since late 1997 and is currently marketing DERMABOND(R)
adhesive in approximately 34 countries outside the United States, including
Japan.
SOOTHE-N-SEAL(TM) adhesive can be used as a protective barrier for the
treatment of canker sores and oral ulcers. In 1999, the Company was granted FDA
clearance to market its SOOTHE-N-SEAL(TM) adhesive, which was the first
cyanoacrylate adhesive approved by the FDA for the OTC consumer market. The
Company signed an exclusive worldwide supply, distribution and development
rights agreement with Colgate Oral Pharmaceuticals, Inc. ("Colgate"), a
subsidiary of Colgate-Palmolive Company, in December 2000. The Company
anticipates that SOOTHE-N-SEAL(TM) adhesive's product launch to professionals
and consumers will occur in the first half of 2001.
LIQUIDERM(TM) adhesive can be used to replace adhesive bandages and is
used for the treatment of minor cuts, scrapes, burns and minor irritations of
the skin and helps protect them from infection. LIQUIDERM(TM) adhesive is
painted on the wound, sealing it from dirt and germs, creating a healing
environment, which allows natural healing to take place. As the wound heals, the
adhesive sloughs off naturally. On January 29, 2001, the Company was granted FDA
clearance to market LIQUIDERM(TM) adhesive, which was the first cyanoacrylate
adhesive approved by the FDA for the OTC consumer bandage market. The Company is
currently in negotiations with a potential marketing partner and
5
expects to sign an agreement by mid-year 2001 for the supply, distribution and
development rights to LIQUIDERM(TM) adhesive.
The Company also has a nonabsorbable product line for veterinary uses.
NEXABAND(R) adhesives are a product line of two topical tissue adhesives
marketed by Farnam Companies, Inc. ("Farnam") and used in veterinary wound
closure and management.
The Company is currently developing additional nonabsorbable tissue
adhesive products, as well as absorbable tissue adhesive products for use inside
the body. These future products require further development, clinical trials and
regulatory clearance or approval prior to commercialization.
Technology Overview
Closure's medical tissue adhesive products are based on its proprietary
medical grade 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
may enable it to develop 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(R) adhesive and other products to wound sites in order to enhance the
utility of its products. The current DERMABOND(R) adhesive applicator contains a
catalyst that controls the rate of polymerization and allows the adhesive film
to be applied in multiple layers, which enhances bond strength.
During the years ended December 31, 1998, 1999 and 2000 the Company
spent $4,241,000, $4,169,000 and $3,737,000, respectively, on research and
development activities.
Products
The Company's medical tissue adhesive 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 adhesives may be applied quickly, may not require anesthetics, do not
induce trauma to surrounding tissues and may not require return visits to the
physician for removal.
DERMABOND(R) adhesive
The Company's lead product, DERMABOND(R) adhesive, is a topical tissue
adhesive used to close wounds from skin lacerations and incisions, minimally
invasive surgery and plastic surgery. DERMABOND(R) adhesive is used as a
replacement for topical sutures or staples or in conjunction with subcuticular
sutures or staples. DERMABOND(R) adhesive is intended to be used topically for
wound closure on low skin tension areas of the body and is not intended for use
on higher skin tension areas such as the hands, feet or across joints. Although
the purchase cost of DERMABOND(R) adhesive is expected to be greater than
sutures or staples, the Company believes that the use of DERMABOND(R) adhesive
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. The
DERMABOND(R) adhesive clinical trial demonstrated the product 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(R)
adhesive substantially reduced procedure time and inflammation.
6
In March 1996, the Company entered into an exclusive worldwide
agreement with Ethicon, a subsidiary of Johnson & Johnson and the world leader
in wound closure products, to market and distribute DERMABOND(R) adhesive. On
August 28, 1998, the Company received premarket approval to market DERMABOND(R)
adhesive in the United States and Ethicon launched the product in September
1998. Additionally, Ethicon has been distributing DERMABOND(R) adhesive since
late 1997 and is currently marketing DERMABOND(R) adhesive in approximately 34
countries outside the United States, including Japan.
SOOTHE-N-SEAL(TM) adhesive
In 1999, the Company was granted FDA clearance to market
SOOTHE-N-SEAL(TM) adhesive, which is the first cyanoacrylate adhesive approved
by the FDA for the OTC consumer market. In a 155-patient multi-center clinical
trial, SOOTHE-N-SEAL(TM) adhesive was found to provide immediate and long-term
pain relief associated with oral ulcers as well as providing a protective
barrier that shields the ulcer from irritation due to eating and drinking.
SOOTHE-N-SEAL(TM) adhesive utilizes the same proprietary technology as the
Company's professional product, DERMABOND(R) adhesive. In December 2000, the
Company entered into an agreement providing Colgate with exclusive worldwide
supply, distribution and development rights to the Company's SOOTHE-N-SEAL(TM)
adhesive technology. The Company anticipates that SOOTHE-N-SEAL(TM) adhesive's
product launch to professionals and consumers will occur in the first half of
2001.
LIQUIDERM(TM) adhesive
On January 29, 2001, the Company received FDA clearance to market
LIQUIDERM(TM) adhesive, which is the first and only cyanoacrylate medical device
approved by the FDA for the OTC adhesive bandage market. The approval is based
in part on the findings of a multi-center, 162-patient clinical trial which
demonstrated the effectiveness of Closure's proprietary nonabsorbable
formulation as compared to traditional adhesive bandages when applied to minor
cuts and abrasions. In the clinical trial it was found that LIQUIDERM(TM)
adhesive speeds wound healing, provides a superior barrier to bacteria that
cause infections versus traditional adhesive bandages, stops bleeding and can
help to reduce the pain associated with minor cuts and abrasions. The Company is
currently in negotiations with a potential marketing partner and expects to sign
an agreement by mid-year 2001 for the supply, distribution and development
rights to LIQUIDERM(TM) adhesive.
NEXABAND(R) adhesives
The Company has two topical tissue adhesive products sold under the
NEXABAND(R) trade name and used in veterinary wound closure and management
procedures. The NEXABAND(R) adhesives are distributed by Farnam to veterinary
professionals.
Products in Development
The Company is currently developing additional nonabsorbable and
absorbable tissue adhesive products. These future products require further
development, clinical trials and regulatory clearance or approval prior to
commercialization. See "Government Regulations."
Nonabsorbable
The Company is currently developing a liquid occlusive dressing
targeted to treat partial thickness wounds such as skin tears and pressure,
diabetic and venous ulcers. The transparent formulation permits wound assessment
and is being developed to adhere directly to the wound bed tissue, allowing the
product to conform to various wound sizes and shapes, flex with the skin and
provide a barrier to infection. The Company has completed necessary animal
research and is in the early phase of human pilot clinical studies.
In February 2001, the Company entered into a Cooperative Research and
Development Agreement ("CRADA") with Walter Reed Army Medical Center ("WRAMC")
and the Uniformed Services University of the Health Sciences to conduct animal
research related to the development of a novel, minimally invasive treatment for
emphysema ("Endobronchial LVR"). Currently, surgeons perform lung volume
reduction surgery ("LVRS") through open chest surgery which involves removing
the diseased lung and allowing healthier lung tissue to expand into the vacated
space. The Company is developing a unique and proprietary medical adhesive to be
used in the Endobronchial LVR to achieve bronchial occlusion without the need
for open chest surgery. Once occluded, dysfunctional lung tissue would collapse
7
and make room for healthier lung tissue to expand. In a recently completed
feasibility study at WRAMC, the adhesive was placed in the lungs of 10 goats
using a bronchoscope and a small catheter. All 10 goats achieved lung volume
reduction. The next phase of animal research will focus on optimizing the
Endobronchial LVR procedure prior to entering human clinical trials.
Absorbable
In 1998, Closure established its Internal Adhesives Division ("IAD"),
which has dedicated scientists with extensive device development experience and
a separate research and development facility, in order to develop its
absorbable/degradable adhesive products. The IAD has created several
biocompatible cyanoacrylate formulations that have potential to be used for
internal tissue bonding applications. The IAD is currently performing synthesis,
formulation design, development of analytical methods and in-vitro testing in
order to establish the characteristics of the unique biocompatible cyanoacrylate
formulations. Through collaborations with leading research institutions, the
formulations are being evaluated using in-vivo models to assess potential
surgical use in a broad range of soft and hard tissue applications. Any future
absorbable products require further development, clinical trials and regulatory
clearance or approval prior to commercialization.
Marketing Agreements
The Company has no sales force and its strategy for its current
products has been to utilize marketing partners to sell and distribute its
products. The Company is dependent on its marketing partners to market and
distribute these products. See "Risk Factors--Dependence on Marketing Partners."
ETHICON
In 1996, the Company entered into a renewable, eight-year supply and
distribution agreement with Ethicon, a subsidiary of Johnson & Johnson,
providing exclusive worldwide rights to market, distribute and sell DERMABOND(R)
adhesive, 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. At the end of the eight-year term, 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 by the
Company, including failure to provide an adequate supply of product, Ethicon may
terminate its arrangement to purchase DERMABOND(R) adhesive from the Company,
and Ethicon may itself then manufacture DERMABOND(R) adhesive and pay the
Company royalties based on sales. See "Risk Factors--Dependence on Marketing
Partners," "Risk Factors--Manufacturing Experience," "Products--DERMABOND(R)
adhesive" and "Manufacturing."
COLGATE
In December 2000, the Company entered into an exclusive seven-year
worldwide supply, distribution and development rights agreement for
SOOTHE-N-SEAL(TM) adhesive with Colgate. The agreement requires Colgate to
purchase annual minimum quantities and, at the end of the seven-year term, may
be renewed for additional periods. The agreement is terminable upon specified
events including (i) material breach by either party, (ii) challenges made by
Colgate to the Company's patents covering medical devices and (iii) reasonable
concerns about the safety of the device. In addition, the agreement allows for
the joint collaboration of line extension development activities. The Company
anticipates that SOOTHE-N-SEAL(TM) adhesive's product launch to professionals
and consumers will occur in the first half of 2001. See "Risk
Factors--Dependence on Marketing Partners," "Risk Factors--Manufacturing
Experience," "Products--SOOTHE-N-SEAL(TM) adhesive" and "Manufacturing."
FARNAM
In February 2000, the Company entered into a new three-year licensing
and distribution agreement with Farnam. This agreement provides Farnam exclusive
rights to market, sell and distribute the Company's veterinary products in the
United States and Canada. The agreement is renewable for successive one-year
terms upon mutual consent of the parties. However, the agreement may be
terminated upon specified events including (i) either party gives the other
party 270 days written notice of its intent to terminate with or without cause
and (ii) material breach by either party. See "Risk Factors--Dependence on
Marketing Partners," "Risk Factors--Manufacturing Experience,"
"Products--Nexaband(R) adhesives" and "Manufacturing."
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 19 issued U.S. patents with
expiration dates ranging from 2004 to 2019 and three issued foreign patents with
expiration dates ranging from 2014 to
8
2017, and has filed applications for 32 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 adhesive formulations and delivery technology.
The pending U.S. patent applications relate to the Company's products and
processes.
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.
FDA Regulation
Most medical devices, including the Company's medical tissue adhesives
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 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 process. A 510(k) premarket
notification will be granted if the submitted data establishes 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 trials
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. 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(R) adhesive, SOOTHE-N-SEAL(TM) adhesive and LIQUIDERM(TM)
adhesive are Class III, II and I medical devices, respectively. 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.
9
In 1998, DERMABOND(R) adhesive received PMA approval. SOOTHE-N-SEAL(TM)
adhesive and LIQUIDERM(TM) adhesive received 510(k) clearance on September 2,
1999 and January 29, 2001, respectively. DERMABOND(R) adhesive,
SOOTHE-N-SEAL(TM) adhesive and LIQUIDERM(TM) adhesive are subject to GMP,
postmarket reporting and other FDA requirements. See "Risk
Factors--Manufacturing Experience" and "Risk Factors--Effects of FDA and Other
Government Regulation."
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(R)
adhesive and other topical and ophthalmic tissue adhesive applications in August
1997. 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.
10
Since 1998, the Company has been manufacturing 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(R) adhesive and other
products. See "Item 2--Properties."
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(R)
adhesive, 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(R) adhesive,
as well as various new products. See "Risk Factors--Manufacturing Experience"
and "Marketing Agreements."
In 1997, in connection with the Company's application for its CE mark
to market DERMABOND(R) adhesive 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
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 adhesives, 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(R)
adhesive 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 three other
cyanoacrylate-based topical adhesives with which DERMABOND(R) adhesive competes,
none of which are 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 Corporation, 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. MedLogic Global Corporation markets
LiquiBand(R) adhesive, primarily in the United Kingdom, and has filed an IDE in
the United States. 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.
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.
11
Employees
As of March 26, 2001, the Company had 80 full-time employees, of whom
62 were dedicated to research, development, manufacturing, quality control and
regulatory affairs, and 18 were dedicated to administrative activities. Eighteen
members of the Company's research and development and regulatory affairs 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 are 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 26, 2001.
Name Age Position
Robert V. Toni 60 President and Chief Executive Officer and Director
Joe B. Barefoot 50 Vice President of Regulatory Affairs and Quality Assurance
Dennis D. Burns 55 Vice President/General Manager, Internal Adhesives Division
Jeffrey G. Clark 47 Vice President of Research and Development
William M. Cotter 50 Vice President of Manufacturing and Operations
Anthony J. Sherbondy 47 Vice President of New Business Generation
Benny Ward 37 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 Internal Adhesives Division since February 1998. From 1994 to 1997,
Mr. Burns was a principal and founder of The Delta Group, a healthcare
consulting firm, through which he functioned as the first 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 in pharmaceutical and consumer
product development 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. Mr. Burns is currently Vice
President of the North Carolina Biosciences Industry Organization.
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. 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.
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
12
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 Connaught Laboratories,
Inc., 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 Long Beach and an M.B.A. from The
Claremont Graduate School.
Benny Ward has served as Vice President of Finance and Chief Financial
Officer of the Company since April 2000. From 1996 until 2000, Mr. Ward served
as the Company's Controller. From 1993 to 1996, Mr. Ward served as a Senior
Accountant with Price Waterhouse LLP in Raleigh, North Carolina. From 1990 to
1993, he worked for Alcatel Network Systems, N. A. Mr. Ward holds bachelor
degrees in Accounting and Political Science from East Carolina University and is
a certified public accountant.
13
ITEM 2. PROPERTIES.
In 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
expires in July 2007, subject to a five-year extension at the Company's
election. 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 Internal Adhesives Division conducts its
research and development activities and other operations. The term of this lease
extends through March 2004.
ITEM 3. LEGAL PROCEEDINGS.
None.
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 2000.
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 1999 and 2000.
High Low
---- ---
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
2000
First Quarter....................................................$26.25 $13.25
Second Quarter....................................................24.13 15.38
Third Quarter.....................................................25.19 18.75
Fourth Quarter....................................................36.63 20.63
As of March 26, 2001, there were approximately 254 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, 2000 have been derived from financial statements
audited by PricewaterhouseCoopers LLP, independent accountants. The balance
sheets as of December 31, 1999 and 2000 and the related statements of operations
and of cash flows for the years ended December 31, 1998, 1999 and 2000 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,
------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Product sales $ 496 $ 1,551 $ 8,079 $ 13,370 $ 13,076
License and product development revenues (2) 3,500 -- 1,500 -- 625
---------- ---------- ---------- ---------- ----------
Total revenues 3,996 1,551 9,579 13,370 13,701
Cost of products sold 460 1,398 3,480 4,722 3,841
---------- ---------- ---------- ---------- ----------
Gross profit 3,536 153 6,099 8,648 9,860
---------- ---------- ---------- ---------- ----------
Research, development and regulatory affairs expenses 3,167 3,594 6,297 6,296 5,853
General and administrative expenses 2,879 4,752 5,407 5,404 5,415
Charges related to partnership capital changes (1) 14,210 -- -- -- --
Payments to CRX Medical, Inc. and Caratec, L.L.C. 293 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total operating expenses 20,549 8,346 11,704 11,700 11,268
---------- ---------- ---------- ---------- ----------
Loss from operations (17,013) (8,193) (5,605) (3,052) (1,408)
Interest income, net 199 1,364 832 525 496
---------- ---------- ---------- ---------- ----------
Net loss before cumulative effect of accounting change (16,814) (6,829) (4,773) (2,527) (912)
Cumulative effect of accounting change (2) -- -- -- -- (2,656)
---------- ---------- ---------- ---------- ----------
Net loss $ (16,814) $ (6,829) $ (4,773) $ (2,527) $ (3,568)
========== ========== ========== ========== ==========
Net loss per common share-basic and diluted before
cumulative effect of accounting change $ (1.63) $ (0.53) $ (0.36) $ (0.19) $ (0.07)
========== ========== ========== ========== ==========
Net loss per common share- basic and diluted- cumulative
effect of accounting change $ -- $ -- $ -- $ -- $ (0.20)
========== ========== ========== ========== ==========
Net loss per common share- basic and diluted $ (1.63) $ (0.53) $ (0.36) $ (0.19) $ (0.27)
========== ========== ========== ========== ==========
Shares used in computation of net loss per
common share--basic and diluted 10,285 12,966 13,270 13,324 13,390
========== ========== ========== ========== ==========
Pro forma amounts are presented below assuming the change in accounting
principle adopted in fiscal 2000 is applied retroactively (2):
Pro forma- Net loss $ (19,986) $ (6,391) $ (5,320) $ (1,902) $ (912)
========== ========== ========== ========== ==========
Pro forma- Net loss per common share- basic and diluted $ (1.94) $ (0.49) $ (0.40) $ (0.14) $ (0.07)
========== ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
As of December 31,
------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(In thousands)
BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments $ 17,651 $ 21,694 $ 16,702 $ 11,322 $ 11,832
Working capital 15,175 19,704 11,621 9,745 8,462
Total assets 19,512 30,419 27,420 22,511 22,139
Long-term debt and capital lease obligations, less
current portion 14 2,400 934 2,155 332
Total stockholders' equity 16,455 22,419 18,250 16,625 13,907
16
- -------------
(1) Immediately prior to the Company's initial public offering, on September
25, 1996, the Company consummated an exchange of obligations of and
interests in Tri-Point Medical L.P. ("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) In fiscal 2000, the Company adopted SEC Staff Accounting Bulletin No. 101
which changed its method of accounting for revenue from license and product
development agreements. See note 3 of notes to financial statements for
further discussion.
17
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 1990, the Company has been developing,
manufacturing and commercializing medical tissue adhesive products for use in
wound closure in humans and animals. The Company's products are based on its
proprietary medical grade 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(R) adhesive, NEXABAND(R) 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 $3,568,000 for
the year ended December 31, 2000. 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 ability to
generate significant revenue and become profitable will depend on its success in
commercializing DERMABOND(R) adhesive, commercializing its line of OTC products
including SOOTHE-N-SEAL(TM) adhesive and LIQUIDERM(TM) adhesive, expanding its
manufacturing capabilities, developing new products, 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.
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 in the
partners' 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. Substantially
18
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.
DERMABOND(R) adhesive, 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
1996, Closure licensed exclusive worldwide marketing and distribution rights for
DERMABOND(R) adhesive to Ethicon, a subsidiary of Johnson & Johnson. In 1997,
Closure received CE Mark approval allowing the Company to ship DERMABOND(R)
adhesive to Ethicon to support its launch in European Union countries.
Subsequently in 1998, the Company was granted approval from the FDA of its PMA
to market DERMABOND(R) adhesive in the United States. Currently DERMABOND(R)
adhesive is marketed by Ethicon in the United States and approximately 34
countries outside the United States, including Japan.
In 1999, the Company received FDA clearance to market SOOTHE-N-SEAL(TM)
adhesive, which is the first cyanoacrylate adhesive approved by the FDA for the
OTC consumer market. SOOTHE-N-SEAL(TM) adhesive can be used as a protective
barrier for the treatment of canker sores and oral ulcers. The Company signed an
exclusive worldwide supply, distribution and development rights agreement for
its SOOTHE-N-SEAL(TM) adhesive technology in December 2000 with Colgate. The
Company anticipates that SOOTHE-N-SEAL(TM) adhesive's product launch to
professionals and consumers will occur in the first half of 2001.
On January 29, 2001, the Company received FDA clearance to market
LIQUIDERM(TM) adhesive which is the first and only cyanoacrylate medical device
approved by the FDA for the OTC adhesive bandage market. LIQUIDERM(TM) adhesive
speeds wound healing, provides a superior barrier to bacteria that cause
infections versus traditional adhesive bandages, stops bleeding and can help to
reduce the pain associated with minor cuts and abrasions. The Company is
currently in negotiations with a potential marketing partner and expects to sign
an agreement by mid-year 2001 for the supply, distribution and development
rights to LIQUIDERM(TM) adhesive.
Recently Issued Accounting Standards
In 2000, the Company adopted SEC Staff Accounting Bulletin No. 101
("SAB 101"). The effect of applying this change in accounting principle is a
cumulative charge of $2,656,000, or $0.20 per share. This cumulative change in
accounting principle reflects the reversal of license fees and milestone
payments that had been recognized in prior years. Under the new method of
accounting, these prior year payments are recorded as deferred revenue and will
be recognized over the remaining term of the related agreement. For the year
ended December 31, 2000, the Company recognized $625,000 of revenue that was
included in the cumulative effect adjustment as of January 1, 2000.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, ("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation-an Interpretation of APB No. 25." This
interpretation clarifies the definition of employee for purposes of applying APB
No. 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 was
effective and the Company adopted the interpretation on July 1, 2000. The
adoption did not have a material impact on the Company's results of
operations.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), was issued in June
1998. SFAS 133, as amended by SFAS 137, is effective for financial statements
for fiscal years beginning after June 15, 2000. The Company will adopt SFAS 133
on January 1, 2001. It is not anticipated that this standard will have a
material impact on the results of operations or financial position of the
Company.
Results of Operations
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Total revenues for 2000 were $13,701,000, including $625,000 of license
and product development revenues, compared to $13,370,000 for 1999. Product
sales decreased by $294,000 from the 1999 period. Product revenues for the full
year 2000 were comparable to 1999 levels but were not representative of actual
market demand, nor of Ethicon's sales, of DERMABOND(R) adhesive. During 2000,
Ethicon continued to reduce its DERMABOND(R) adhesive inventory levels that were
built-up during 1999. With these inventory reductions and continued market
penetration of the
19
DERMABOND(R) product in the emergency and operating rooms, the Company expects
2001 revenues from DERMABOND(R) adhesive to be more reflective of actual market
demand.
Cost of products sold for 2000 decreased to $3,841,000 from $4,722,000
for 1999. Cost of products sold as a percentage of product sales decreased to
29% for 2000 from 35% for 1999. This decrease in cost of products sold as a
percentage of product sales was primarily the result of increased product yields
and reduction of manufacturing costs. However, the Company expects that gross
margins on product sales will fluctuate based on production volumes and the
relative proportion of professional and OTC products.
Operating expenses were approximately $11,268,000 and $11,700,000 for
2000 and 1999, respectively. Operating expenses primarily consist of research
and development and regulatory affairs expenses and general and administrative
expenses. During 2000, research, development and regulatory affairs efforts were
primarily focused on clinical trials for LIQUIDERM(TM) adhesive, the development
of DERMABOND(R) adhesive line extensions and other product development and basic
research. During 1999, such efforts were focused primarily on the development of
DERMABOND(R) adhesive line extensions and LIQUIDERM(TM) adhesive, as well as
clinical trials for SOOTHE-N-SEAL(TM) adhesive. The Company expects these
expenses will increase as the Company expands its product pipeline and related
development efforts and clinical trials for potential new products, in
particular its absorbable products.
Interest expense for 2000 decreased to $235,000 from $344,000 for 1999.
This decrease was primarily the result of continued reduction of the Company's
term loan balance and capital lease obligations through monthly principal
payments.
Investment and interest income for 2000 decreased to $731,000 from
$869,000 for 1999. This decrease was primarily attributable to interest earned
from lower average cash and investment balances.
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(R) adhesive. DERMABOND(R) adhesive 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(R) adhesive, resulting in the fixed portion of cost of products
sold being allocated over higher sales.
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(R) adhesive line extensions
and LIQUIDERM(TM) adhesive as well as clinical trials for SOOTHE-N-SEAL(TM)
adhesive. During 1998, such efforts were focused primarily on the development of
and clinical trials for SOOTHE-N-SEAL(TM) adhesive as well as the clinical
trials follow-up related to DERMABOND(R) adhesive.
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.
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.
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, 2000,
the Company has 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 2001, the
20
remaining term loan balance of approximately $1.3 million and the Company's $3.0
million line of credit will mature. The Company expects to refinance the term
loan and renew the line of credit under similar terms of the original
agreements. As of December 31, 2000, there were no borrowings against the line
of credit.
At December 31, 2000, net working capital was approximately $8.5
million, a decrease of $1.2 million from net working capital of $9.7 million at
December 31, 1999. This decrease was primarily attributable to funding
operations, maturities of long-term debt and investments in equipment and
intangible assets, partially offset by sales of stock under the Company's stock
option and employee stock purchase programs. At December 31, 2000, the Company's
primary working capital consisted of $11.8 million of cash and cash equivalents
and investments, a decrease of $800,000 from $12.6 million at December 31, 1999.
Cash provided by operating activities was $432,000 for 2000, whereas
cash used by operating activities was $2.2 million for 1999. The increase in
cash provided by operations was primarily due to the decrease in the 2000 net
loss before cumulative effect of accounting change as well as license fees
received.
Cash provided by investing activities was $558,000 and $2.1 million
during 2000 and 1999, respectively, which primarily related to net receipts of
investment proceeds offset by the purchase of fixed assets and the investment in
intangible assets.
Cash used by financing activities was $116,000 during 2000 compared to
$213,000 for 1999. The Company's primary financing activities during both years
were the repayment of debt and capital lease obligations offset by the proceeds
from the sale of stock under the Company's stock option and other benefit plans.
The Company believes that existing cash and cash equivalents and
investments, which totaled $11.8 million as of December 31, 2000, will be
sufficient to finance its operating and capital requirements for at least 12
months. 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(R) adhesive, (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(R)
adhesive, 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 operating 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."
21
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, 2000, the Company's total portfolio consisted of approximately $11.8 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(R)
adhesive 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.
22
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 2001
Proxy Statement to be filed with the Commission not later than 120 days after
the end of the fiscal year ended December 31, 2000. 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 2001 Proxy Statement to be filed with the
Commission not later than 120 days after the end of the fiscal year ended
December 31, 2000.
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 2001 Proxy Statement to be filed with the
Commission not later than 120 days after the end of the fiscal year ended
December 31, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein by
reference to the Company's definitive 2001 Proxy Statement to be filed with the
Commission not later than 120 days after the end of the fiscal year ended
December 31, 2000.
23
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, 2000.
(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+ Supply and Distribution Rights Agreement, dated as of March
20, 1996, between Ethicon, Inc. and the Company. (Exhibit
10.8)(1)
10.2++* Amended and Restated 1996 Equity Compensation Plan of the
Company.
10.3++ Employment Agreement, dated as of May 31, 1996, between Robert
V. Toni and the Company. (Exhibit 10.10)(1)
10.4++ Employment Agreement, dated as of May 31, 1996, between
Jeffrey G. Clark and the Company. (Exhibit 10.12)(1)
10.5++ Employment Agreement, dated as of May 31, 1996, between Joe B.
Barefoot and the Company. (Exhibit 10.13)(1)
10.6++ Consulting Agreement, dated as of May 31, 1996, between Steven
A. Kriegsman and the Company. (Exhibit 10.14)(1)
10.7 Registration Rights Agreement, dated as of May 31, 1996,
between Caratec, L.L.C. and the Company. (Exhibit 10.15)(1)
10.8 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, Jeffrey G. Clark, Joe B. Barefoot and the Company.
(Exhibit 10.16)(1)
10.9 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, Jeffrey G. Clark, Joe B. Barefoot,
Jeffery C. Basham, Jeffrey C. Leung, Anthony V. Seaber and the
Company. (Exhibit 10.17)(1)
10.10 Lease, dated February 14, 1997, between AP Southeast Portfolio
Partners, L.P. and the Company. (Exhibit 10.19)(2)
10.11 Master Lease Agreement, dated as of January 29, 1997, between
Transamerica Business Credit Corporation and the Company.
(Exhibit 10.20)(2)
10.12 Loan Agreement, dated November 14, 1997, between NationsBank,
N.A. and the Company. (Exhibit 10.15)(4)
10.13 Promissory Note, dated November 14, 1997, issued by the
Company to NationsBank, N.A. (Exhibit 10.16)(4)
24
10.14 Security Agreement, dated November 14, 1997, between the
Company and NationsBank, N.A. (Exhibit 10.17)(4)
10.15 Pledge Agreement, dated November 14, 1997, between the Company
and NationsBank N.A. (Exhibit 10.18)(4)
10.16++ Employment Agreement, dated as of June 9, 1997, between
William M. Cotter and the Company. (Exhibit 10.19)(4)
10.17++ Employment Agreement, dated as of January 1, 1998, between
Anthony J. Sherbondy and the Company. (Exhibit 10.20)(4)
10.18++ Employment Agreement, dated as of February 18, 1998, between
Dennis D. Burns and the Company. (Exhibit 10.21)(4)
10.19 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)
10.20 Representative and Manufacturing Facility Agreement, dated
January 1, 1998, between Innocoll GmbH and the Company.
(Exhibit 10.23)(4)
10.21++ 1999 Employee Stock Purchase Plan of the Company. (Exhibit
10.1)(5)
10.22++* Employment Agreement, dated as of May 3, 2000, between Benny
Ward and the Company.
10.23#* Distribution, Supply and Development Agreement, dated as of
December 21, 2000, between Colgate Oral Pharmaceuticals, Inc.
and the Company.
23.1* Consent of PricewaterhouseCoopers LLP.
24.1* Power of Attorney (included on signature page to this Annual
Report).
- -----------
* 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.
# Portions of this exhibit were omitted and filed separately with the
Secretary of the Commission with the Company's application for
confidential treatment filed pursuant to Rule 406 under the Securities Act
of 1933, as amended.
(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.
25
CLOSURE MEDICAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants F-2
Financial Statements:
Balance Sheets as of December 31, 1999 and 2000 F-3
Statements of Operations for the years ended December 31, 1998, 1999 and 2000 F-4
Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000 F-5
Statements of Stockholders' Equity for the years ended
December 31, 1998, 1999 and 2000 F-6
Notes to Financial Statements F-7
F-1
Report of Independent Accountants
To 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 stockholders' equity present fairly, in all
material respects, the financial position of Closure Medical Corporation at
December 31, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000 in conformity
with accounting principles generally accepted in the United States of America.
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 of America, 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 our opinion.
As discussed in Note 3 to the financial statements, the Company adopted Staff
Accounting Bulletin No. 101 in fiscal 2000, which resulted in a change in the
method of accounting for revenue from license and product development
agreements.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 9, 2001
F-2
CLOSURE MEDICAL CORPORATION
BALANCE SHEETS
(In thousands, except per share data)
December 31,
--------------------------
1999 2000
---------- -----------
Assets
Cash and cash equivalents $ 508 $ 1,382
Short-term investments 9,299 7,544
Restricted investments 1,515 2,906
Accounts receivable 732 1,322
Inventories 591 596
Prepaid expenses 326 308
---------- -----------
Total current assets 12,971 14,058
Furniture, fixtures and equipment, net 7,351 6,598
Restricted investments 1,292 -
Intangible assets, net of $368 and $384 of
accumulated amortization, respectively 897 1,483
---------- -----------
Total assets $ 22,511 $ 22,139
========== ===========
Liabilities and Stockholders' Equity
Accounts payable $ 1,110 $ 1,160
Accrued expenses 794 1,525
Deferred revenue 443 1,102
Capital lease obligations 279 322
Current portion of long-term debt 600 1,487
---------- -----------
Total current liabilities 3,226 5,596
Deferred revenue 505 2,304
Capital lease obligations less current portion 655 332
Long-term debt less current portion 1,500 -
---------- -----------
Total liabilities 5,886 8,232
---------- -----------
Commitments and contingencies (See notes 6, 7, 8 and 11) - -
Preferred stock, $0.01 par value. Authorized 2,000 shares; none issued
or outstanding - -
Common stock, $0.01 par value. Authorized 35,000 shares; issued and
outstanding 13,347 and 13,428 shares, respectively 133 134
Additional paid-in capital 46,940 47,716
Accumulated deficit (30,375) (33,943)
Deferred compensation on stock options (73) -
---------- -----------
Total stockholders' equity 16,625 13,907
---------- -----------
Total liabilities and stockholders' equity $ 22,511 $ 22,139
========== ===========
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,
------------------------
1998 1999 2000
--------- --------- ---------
Product sales $ 8,079 $ 13,370 $ 13,076
License and product development revenues 1,500 - 625
--------- --------- ---------
Total revenues 9,579 13,370 13,701
Cost of products sold 3,480 4,722 3,841
--------- --------- ---------
Gross profit 6,099 8,648 9,860
--------- --------- ---------
Research, development and regulatory affairs expenses 6,297 6,296 5,853
General and administrative expenses 5,407 5,404 5,415
--------- --------- ---------
Total operating expenses 11,704 11,700 11,268
--------- --------- ---------
Loss from operations (5,605) (3,052) (1,408)
Interest expense (383) (344) (235)
Investment and interest income 1,215 869 731
--------- --------- ---------
Loss before cumulative effect of accounting change (4,773) (2,527) (912)
Cumulative effect of accounting change (See note 3) - - (2,656)
--------- --------- ---------
Net loss $ (4,773) $ (2,527) $ (3,568)
========= ========= =========
Shares used in computation of net loss per common share- basic and diluted 13,270 13,324 13,390
========= ========= =========
Net loss per common share- basic and diluted $ (0.36) $ (0.19) $ (0.27)
========= ========= =========
Pro forma amounts assuming the change in accounting principal
is applied retroactively (See note 3):
Net loss $ (5,320) $ (1,902) $ (912)
========= ========= =========
Basic and diluted net loss per common share $ (0.40) $ (0.14) $ (0.07)
========= ========= =========
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,
-------------------------------------
1998 1999 2000
-------- -------- --------
Cash flows from operating activities:
Net loss $ (4,773) $ (2,527) $ (3,568)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Cumulative effect of accounting change (See note 3) - - 2,656
Depreciation and amortization expense 615 948 961
Amortization of deferred compensation on stock options 303 320 73
Loss on disposals of fixed assets 34 594 244
Loss on disposals of intangible assets 110 100 60
Change in accounts receivable 35 459 (590)
Change in inventories (661) 417 (5)
Change in prepaid expenses 81 (40) 18
Change in accounts payable and accrued expenses 350 (1,522) 781
Change in deferred revenue (104) (967) (198)
-------- -------- --------
Net cash provided (used) by operating activities (4,010) (2,218) 432
-------- -------- --------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (4,651) (1,174) (437)
Investment in intangible assets (371) (483) (661)
Purchases of investments (12,396) (6,629) (6,877)
Proceeds from the sale of investments 13,750 10,401 8,533
-------- -------- --------
Net cash provided (used) by investing activities (3,668) 2,115 558
-------- -------- --------
Cash flows from financing activities:
Proceeds from borrowings 1,500 - -
Repayment of debt (350) (550) (613)
Net proceeds from sale of common stock 301 582 777
Payments under capital lease obligations (226) (245) (280)
-------- -------- --------
Net cash provided (used) by financing activities 1,225 (213) (116)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (6,453) (316) 874
Cash and cash equivalents, beginning of year 7,277 824 508
-------- -------- --------
Cash and cash equivalents, end of year $ 824 $ 508 $ 1,382
======== ======== ========
Supplemental cash flow information:
Cash payments for interest during 1998, 1999 and 2000 were approximately $370, $317 and $260, 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, 1998, 1999 and 2000
(In thousands)
Deferred
Common Stock Additional Compensation Total
------------------ Paid-in Accumulated on Stock Stockholders'
Shares Amount Capital Deficit Options Equity
------ ------ ------- ------- ------ ------
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 and 401(k) match 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, 401(k) match
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
Amortization of deferred compen-
sation on stock options - - - - 73 73
Exercise of stock options, 401(k) match
and sale of common stock under ESPP 81 1 776 - - 777
Net loss - - - (3,568) - (3,568)
------ ---- ------- --------- ------- ---------
Balance at December 31, 2000 13,428 $134 $47,716 $(33,943) $ - $ 13,907
====== ==== ======= ========= ======= =========
The accompanying notes are an integral part of these financial statements.
F-6
Closure Medical Corporation
Years Ended December 31, 1998, 1999 and 2000
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. ORGANIZATION AND OPERATIONS
Closure Medical Corporation (the "Company" or "Closure") develops,
manufactures, and commercializes medical tissue adhesive 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 adhesives 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(R) adhesive") is a
nonabsorbable tissue adhesive that can be used to replace sutures and
staples for certain topical wound closure applications. DERMABOND(R)
adhesive 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(R) adhesive.
The Company entered into an agreement providing Colgate Oral
Pharmaceuticals, Inc. ("Colgate"), a subsidiary of Colgate-Palmolive
Company, with supply, distribution and development rights to the
Company's SOOTHE-N-SEAL(TM) canker sore relief ("SOOTHE-N-SEAL(TM)
adhesive") technology in December 2000. The Company received FDA
clearance to market SOOTHE-N-SEAL(TM) adhesive in September 1999.
SOOTHE-N-SEAL(TM) adhesive was the first cyanoacrylate adhesive
approved by the FDA for the over-the-counter (OTC) consumer market.
On January 29, 2001, the Company received FDA clearance to market
LIQUIDERM(TM) liquid adhesive bandage ("LIQUIDERM(TM) adhesive"), which
is the first and only cyanoacrylate medical device approved by the FDA
for the OTC adhesive bandage market. The Company is currently in
negotiations with a potential marketing partner for the supply,
distribution and development rights to LIQUIDERM(TM) adhesive.
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
Short-term investments consist primarily 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 term
loan 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 or
abandoned, in which case they are written off.
F-7
Closure Medical Corporation
Years Ended December 31, 1998, 1999 and 2000
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
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 121"), relying on a number
of factors including operating results, business plans, economic
projections and anticipated future cash flows. SFAS 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.
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. Non-refundable fees received at the
initiation of marketing and distribution agreements for which the
Company has an ongoing commitment to provide product are deferred and
recognized ratably over the period of the related agreement (See
note 3).
The sales price of DERMABOND(R) adhesive to its marketing partner,
Ethicon, is ultimately determined by the sales price of the product to
the ultimate customer. The Company recognizes revenue at an agreed-upon
amount per unit at the time the products are shipped. Ethicon provides
a summary of its sales of DERMABOND(R) adhesive on a quarterly basis,
and at that time, the Company recognizes additional purchase price, as
well as royalties.
During fiscal 1998, 1999 and 2000, sales to one customer accounted for
92%, 93% and 90% of total revenues, respectively. One customer
accounted for 84%, 92% and 92% of trade accounts receivable at December
31, 1998, 1999 and 2000, respectively. Each of the Company's major
marketing partners are based in the United States, and accordingly,
less than two percent of the Company's revenues during 2000 were from
outside of North America. However, the Company's products are marketed
on a global basis by its marketing partners.
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. A valuation
allowance is recorded if realization of some portion or all of a
deferred asset cannot be reasonably assured.
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 1999 and 2000,
$135,000 and $180,000, respectively, was paid to Innocoll and $45,000
was included in accrued expenses at December 31, 1999 and 2000.
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.
F-8
Closure Medical Corporation
Years Ended December 31, 1998, 1999 and 2000
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses at December 31, 1999 and 2000
approximated their fair value due to the short-term nature of these
items.
The fair value of the Company's short-term investments at December 31,
1999 and 2000 approximate their carrying values as these investments
are primarily in short-term interest-bearing investment-grade
securities.
The carrying value of the Company's notes payable and capital lease
obligations at December 31, 1999 and 2000 approximate their fair value
as the interest rates on these obligations approximate rates available
in the financial market at such dates.
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 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 method as outlined under Accounting
Principles Board Opinion No. 25 ("APB 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
common share have been provided in note 10 as if the fair value method
had been applied.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, ("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation-an Interpretation of APB No. 25." This
interpretation clarifies the definition of employee for purposes of
applying APB No. 25, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequence of
various modifications to the terms of a previously fixed stock option
or award, and the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 was effective and the Company
adopted the interpretation on July 1, 2000. The adoption did not have a
material impact on the Company's results of operations.
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, as amended by SFAS 137, is effective for
financial statements for fiscal years beginning after June 15, 2000.
The Company will adopt SFAS 133 on January 1, 2001. It is not
anticipated that this standard will have a material impact on the
results of operations or financial position of the Company.
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. Had such potential common shares not been antidilutive,
the effect would be to increase the number of shares used in computing
diluted net loss per common shares by 261,844 to 13,651,611 at
December 31, 2000.
F-9
Closure Medical Corporation
Years Ended December 31, 1998, 1999 and 2000
Notes to Financial Statements
- --------------------------------------------------------------------------------
3. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
During 2000, the Company adopted SEC Staff Accounting Bulletin No. 101
("SAB 101"). The effect of applying this change in accounting principle
as of January 1, 2000 was a cumulative charge of $2,656,000. The effect
of the change in accounting principle reflects the reversal of license
fees and milestone payments that had been recognized in prior years.
Under the new method of accounting, such payments are initially
recorded as deferred revenue to be recognized ratably over the
remaining term of the related agreement. For the year ended December
31, 2000, the Company recognized $625,000 of revenue that was included
in the cumulative effect adjustment as of January 1, 2000.
4. INVENTORIES
Inventories included the following (in thousands):
December 31,
------------
1999 2000
------ ------
Packaging $ 148 $ 195
Raw materials 45 46
Work-in-process 283 301
Finished goods 115 54
------ ------
$ 591 $ 596
====== ======
5. FURNITURE, FIXTURES, AND EQUIPMENT
Furniture, fixtures and equipment included the following (in
thousands):
December 31,
------------ Estimated
1999 2000 Useful Lives
---- ---- ------------
Furniture and computers $ 1,123 $ 1,218 3-10 years
Machinery and equipment 3,167 3,455 10 years
Leasehold improvements 2,918 2,955 10 years
Construction-in-progress 1,975 1,735
---------- ---------
9,183 9,363
Accumulated depreciation (1,832) (2,765)
---------- ---------
$ 7,351 $ 6,598
========== =========
6. DEBT AND RELATED ACCRUED INTEREST
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 short-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, 2000.
F-10
Closure Medical Corporation
Years Ended December 31, 1998, 1999 and 2000
Notes to Financial Statements
- --------------------------------------------------------------------------------
6. DEBT AND RELATED ACCRUED INTEREST--Continued
In May 2000, the Company renewed for a period of one year its
$3,000,000 line of credit for working capital purposes which was
originally entered into in October 1999. The agreement is secured by
certain trade accounts receivable and 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 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,
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, 2000, there were no borrowings against the line of credit.
7. 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 $534,000,
$549,000 and $559,000 for 1998, 1999 and 2000, respectively.
The Company leases equipment under capital leases with original lease
terms of four to five years. At the expiration of the leases in 2002,
the Company is required to purchase primarily all of the equipment for
the fair market value. The fair market value is to be equal to no less
than 5% and no more than 10% of the original equipment cost.
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, 2000 (in thousands):
Capital Operating
Leases Leases
------- ---------
2001 $ 392 $ 569
2002 321 569
2003 -- 578
2004 -- 536
2005 -- 532
Thereafter -- 866
------- --------
Total minimum lease payments 713 $ 3,650
========
Less: amount representing interest (59)
-------
Present value of minimum lease payments 654
Less: current portion (322)
-------
Long-term portion $ 332
=======
F-11
Closure Medical Corporation
Years Ended December 31, 1998, 1999 and 2000
Notes to Financial Statements
- --------------------------------------------------------------------------------
8. MAJOR CUSTOMERS
In 1996, the Company entered into a renewable eight-year exclusive
supply and distribution rights agreement with Ethicon whereby Closure
supplies Ethicon with DERMABOND(R) adhesive, 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 (See note 3). In addition, Ethicon advanced the Company
$1,000,000 for direct costs incurred in connection with clinical
studies of the product, which was classified as deferred revenue to be
offset against royalties to be paid by Ethicon. This amount was fully
credited during fiscal 2000. With the United States and European
Community approval of DERMABOND(R) adhesive 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 December 2000, the Company entered into a definitive agreement
providing Colgate with supply, distribution and development rights to
the Company's SOOTHE-N-SEAL(TM) adhesive technology. Under the
agreement, Colgate acquired exclusive worldwide rights to market, sell
and distribute SOOTHE-N-SEAL(TM) adhesive and future oral care
products, based upon the Company's proprietary cyanoacrylate
technology, to both professional and consumer markets. Upon execution
of the agreement, Colgate paid the Company a license fee and
consideration for all right, title and interest in the
SOOTHE-N-SEAL(TM) adhesive trademark. This amount has been deferred and
will be recognized ratably over the life of the agreement in accordance
with SAB 101.
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. The agreement is renewable for successive one-year
terms upon mutual consent of the parties. However, the agreement may be
terminated upon specified events including: (i) either party provides
270 days written notice of its intent to terminate and (ii) material
breach by either party.
F-12
Closure Medical Corporation
Years Ended December 31, 1998, 1999 and 2000
Notes to Financial Statements
- --------------------------------------------------------------------------------
9. INCOME TAXES
There is no current provision or benefit for income taxes recorded for
the years ended December 31, 1998, 1999 and 2000 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, 1998, 1999
and 2000 as the Company is in a net deferred tax asset position for
which a full valuation allowance has been recorded since realization of
these benefits could not be reasonably assured.
Deferred tax assets are comprised of the following (in thousands):
December 31,
1999 2000
---- ----
Net operating loss carryforwards $ 6,772 $ 7,041
Research and development credit carryforwards 885 1,237
Temporary differences:
Accruals, reserves and other (46) 308
Deferred revenue (227) 1,161
Fixed assets and depreciation 378 (118)
Intangible assets and amortization 291 (499)
-------- --------
8,053 9,130
Valuation allowance (8,053) (9,130)
-------- --------
Net deferred tax asset $ -- $ --
======== ========
At December 31, 2000, the Company had net operating loss carryforwards
for income tax reporting purposes of approximately $18,146,000 which
expire beginning in the year 2011. The Company also has research and
development tax credit carryforwards of approximately $1,237,000 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.
The valuation allowance increased by $1,077,000 during 2000 primarily
due to generation of net operating loss carryforwards and unused
research and development credits.
Income taxes computed at the statutory federal income tax rate of 34%
are reconciled to the provision for income taxes for the years ended
December 31, 1998, 1999 and 2000 as follows (in thousands):
December 31,
-----------------------------------------------------
1998 1999 2000
------------ ------------ ------------
U.S. federal tax benefit at statutory rate $ (1,623) $ (859) $ (1,213)
State taxes (net of federal benefit) (228) (117) (171)
Change in valuation allowance 1,962 1,773 1,844
Deductions related to stock options not
applicable for financial reporting 44 (505) (281)
Research and development credit (281) (442) (352)
Other 126 150 173
------------ ------------ ------------
Provision for income taxes $ -- $ -- $ --
============ ============ ============
F-13
Closure Medical Corporation
Years Ended December 31, 1998, 1999 and 2000
Notes to Financial Statements
- --------------------------------------------------------------------------------
10. 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 13, 2000. The
Plan provides that a maximum of 4,500,000 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 of the Board of
Directors (the "Committee"). 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 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 may not exceed five years from the
date of grant. Options outstanding at December 31, 1998, 1999 and 2000
generally vest within three to five years.
The following table summarizes stock option activity under the Plan:
Weighted- Weighted-
Average Average
Price Fair
Shares Per Share Value
------ --------- ---------
Options outstanding at December 31, 1997 719,537 $ 11.55
Granted
With market exercise price 500,042 23.20 $ 16.86
With premium exercise price 52,155 24.56 1.84
Exercised (47,046) 5.92 --
Canceled (23,449) 21.31 --
----------- ---------
Options outstanding at December 31, 1998 1,201,239 16.99
Granted 1,106,028 23.63 17.30
Exercised (50,908) 9.54 --
Canceled (125,009) 25.72 --
----------- ---------
Options outstanding at December 31, 1999 2,131,350 20.19
Granted 930,699 20.29 16.23
Exercised (57,510) 8.42 --
Canceled (69,120) 21.23 --
----------- ---------
Options outstanding at December 31, 2000 2,935,419 20.43
===========
F-14
Closure Medical Corporation
Years Ended December 31, 1998, 1999 and 2000
Notes to Financial Statements
- --------------------------------------------------------------------------------
10. EMPLOYEE BENEFIT PLANS--Continued
Options Outstanding Options Exercisable
---------------------------------------------------- --------------------------------------
Weighted-Average
Range of Number Weighted-Average Remaining Number Weighted-Average
Exercise Price Outstanding Exercise Price Contractual Life Exercisable Exercise Price
-------------- ----------- -------------- ---------------- ----------- --------------
$5.00-$14.56 775,314 $10.54 7.29 432,160 $ 7.41
$14.75-$24.75 1,426,895 20.76 8.62 722,884 20.87
$25.25-$29.81 545,503 29.26 7.99 178,761 29.11
$30.63-$35.00 187,707 33.06 8.26 85,909 32.42
--------- ---------
Total 2,935,419 1,419,714
========= =========
Options available for grant at December 31, 2000 totaled 1,341,587.
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 and
2000, 4,848 and 16,649 shares were issued under the ESPP, respectively.
At December 31, 2000, 1,478,503 shares were available for issuance.
During 1998, 1999 and 2000, the Company recognized approximately
$303,000, $320,000 and $73,000, respectively, of compensation expense
related to the Plan. Had compensation expense for 1998, 1999 and 2000,
assuming it was recognized on a straight-line basis over the vesting
period for awards under the Plan 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:
1998 1999 2000
---- ---- ----
Net loss-as reported $(4,773) $(2,527) $(3,568)
Net loss-pro forma (7,865) (8,633) (12,118)
Loss per common share--basic and
diluted-as reported (0.36) (0.19) (0.27)
Loss per common share--basic and
diluted-pro forma (0.59) (0.65) (0.91)
The pro forma amounts discussed above were derived using the
Black-Scholes option-pricing model with the assumptions indicated
below:
1998 1999 2000
---- ---- ----
Average expected life (years) 6.0 5.5 7.4
Average interest rate 5.0% 5.6% 5.3-6.7%
Volatility 81.5% 85.0% 84.0%
Dividend yield 0.0% 0.0% 0.0%
F-15
Closure Medical Corporation
Years Ended December 31, 1998, 1999 and 2000
Notes to Financial Statements
- --------------------------------------------------------------------------------
10. EMPLOYEE BENEFIT PLANS--Continued
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"). Effective January 1, 2000, the
Company amended the 401(k) Plan in order to change the allocation of
the stock match to a quarterly basis instead of an annual basis. Shares
are issued based on the closing stock price of the Common Stock at the
end of each fiscal quarter, with fractional match amounts carried over
to subsequent quarters. At December 31, 1999 and 2000, the 401(k) Plan
had a receivable from the Company of 4,559 and 364 shares,
respectively, based on a closing stock price of $12.88 and $36.00,
respectively. Cash amounts contributed to the 401(k) Plan during 1999
and 2000 were approximately $60,000 and $63,000, respectively.
11. COMMITMENTS AND CONTINGENCIES
In 1996, the Company entered into a five-year agreement with a
consultant which provides for annual compensation of $120,000.
12. QUARTERLY AND PRO FORMA FINANCIAL DATA - UNAUDITED
The following table provides quarterly data for fiscal 2000 as
previously reported on Form 10-Q (See note 3):
Fiscal 2000 Quarters Ended
(as previously filed in Form 10-Q)
(In thousands, except per share data)
------------------------------------------------
March 31 June 30 Sept. 30
------------- ------------- --------------
Revenues $ 2,666 $ 3,072 $ 3,565
Cost of products sold (816) (981) (950)
------------- ------------- --------------
Gross profit 1,850 2,091 2,615
Research, development and regulatory
affairs expenses 1,466 1,600 1,439
General and administrative expenses 1,124 1,257 1,544
------------- ------------- --------------
Loss from continuing operations (740) (766) (368)
Interest income, net 122 122 125
------------- ------------- --------------
Net loss $ (618) $ (644) $ (243)
============= ============= ==============
Basic and diluted net loss per common share $ (0.05) $ (0.05) $ (0.02)
============= ============= ==============
F-16
Closure Medical Corporation
Years Ended December 31, 1998, 1999 and 2000
Notes to Financial Statements
- --------------------------------------------------------------------------------
12. QUARTERLY FINANCIAL DATA - UNAUDITED --Continued
The following table provides quarterly data for fiscal 2000 assuming
the change in accounting principle, SAB 101, had been recorded on
January 1, 2000 (See note 3):
Fiscal 2000 Quarters Ended
(as amended)
(In thousands, except per share data)
-----------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
------------- ------------- ------------- -------------
Revenues $ 2,822 $ 3,228 $ 3,721 $ 3,930
Cost of products sold (816) (981) (950) (1,094)
------------- ------------- ------------- -------------
Gross profit 2,006 2,247 2,771 2,836
Research, development and regulatory
affairs expenses 1,466 1,600 1,439 1,348
General and administrative expenses 1,124 1,257 1,544 1,490
------------- ------------- ------------- -------------
Loss from continuing operations (584) (610) (212) (2)
Interest income, net 122 122 125 127
------------- ------------- ------------- -------------
Income (loss) before cumulative effect
of accounting change (462) (488) (87) 125
Cumulative effect of accounting change
(See note 3) (2,656) -- -- --
------------- ------------- ------------- -------------
Net income (loss) $ (3,118) $ (488) $ (87) $ 125
============= ============= ============= =============
Basic and diluted net income (loss)
per common share $ (0.23) $ (0.04) $ (0.01) $ 0.01
============= ============= ============= =============
The following table provides quarterly data for fiscal 1999 as well as
pro forma amounts assuming the change in accounting principle, SAB 101,
adopted in fiscal 2000 is applied retroactively (See note 3):
Fiscal 1999 Quarters Ended
(In thousands, except per share data)
-----------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
------------- -------------- ------------- -------------
Revenues $ 3,817 $ 4,277 $ 2,732 $ 2,544
Cost of products sold (1,176) (1,520) (1,093) (932)
------------- -------------- ------------- -------------
Gross profit 2,641 2,757 1,639 1,612
Research, development and regulatory
affairs expenses 1,862 1,588 1,633 1,214
General and administrative expenses 1,489 1,270 1,341 1,304
------------- -------------- ------------- -------------
Loss from continuing operations (710) (101) (1,335) (906)
Interest income, net 145 116 131 133
------------- -------------- ------------- -------------
Net income (loss) $ (565) $ 15 $ (1,204) $ (773)
============= ============== ============= =============
Basic and diluted net income (loss)
per common share $ (0.04) $ 0.00 $ (0.09) $ (0.06)
============= ============== ============= =============
Pro forma amounts assuming the change in
accounting principle is applied
retroactively:
Net income (loss) $ (409) $ 171 $ (1,048) $ (616)
============= ============== ============= =============
Basic and diluted net income (loss)
per common share $ (0.03) $ 0.01 $ (0.08) $ (0.05)
============= ============== ============= =============
F-17
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: April 2, 2001 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 BENNY WARD, 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 April 2, 2001
---------------------------- Officer (principal executive
Robert V. Toni officer) and Director
/S/ BENNY WARD Vice President and Chief Financial April 2, 2001
---------------------------- Officer (principal financial and
Benny Ward accounting officer)
/S/ RONALD A. AHRENS Chairman of the Board of Directors April 2, 2001
----------------------------
Ronald A. Ahrens
/S/ DENNIS C. CAREY Director April 2, 2001
----------------------------
Dennis C. Carey
/S/ RICHARD W. MILLER Director April 2, 2001
----------------------------
Richard W. Miller
/S/ F. WILLIAM SCHMIDT Director April 2, 2001
----------------------------
F. William Schmidt
/S/ ROLF D. SCHMIDT Director April 2, 2001
----------------------------
Rolf D. Schmidt
/S/ RANDY H. THURMAN Director April 2, 2001
----------------------------
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+ Supply and Distribution Rights Agreement, dated as of March
20, 1996, between Ethicon, Inc. and the Company. (Exhibit
10.8)(1)
10.2++* Amended and Restated 1996 Equity Compensation Plan of the
Company.
10.3++ Employment Agreement, dated as of May 31, 1996, between Robert
V. Toni and the Company. (Exhibit 10.10)(1)
10.4++ Employment Agreement, dated as of May 31, 1996, between
Jeffrey G. Clark and the Company. (Exhibit 10.12)(1)
10.5++ Employment Agreement, dated as of May 31, 1996, between Joe B.
Barefoot and the Company. (Exhibit 10.13)(1)
10.6++ Consulting Agreement, dated as of May 31, 1996, between Steven
A. Kriegsman and the Company. (Exhibit 10.14)(1)
10.7 Registration Rights Agreement, dated as of May 31, 1996,
between Caratec, L.L.C. and the Company. (Exhibit 10.15)(1)
10.8 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, Jeffrey G. Clark, Joe B. Barefoot and the Company.
(Exhibit 10.16)(1)
10.9 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, Jeffrey G. Clark, Joe B. Barefoot,
Jeffery C. Basham, Jeffrey C. Leung, Anthony V. Seaber and the
Company. (Exhibit 10.17)(1)
10.10 Lease, dated February 14, 1997, between AP Southeast Portfolio
Partners, L.P. and the Company. (Exhibit 10.19)(2)
10.11 Master Lease Agreement, dated as of January 29, 1997, between
Transamerica Business Credit Corporation and the Company.
(Exhibit 10.20)(2)
10.12 Loan Agreement, dated November 14, 1997, between NationsBank,
N.A. and the Company. (Exhibit 10.15)(4)
10.13 Promissory Note, dated November 14, 1997, issued by the
Company to NationsBank, N.A. (Exhibit 10.16)(4)
10.14 Security Agreement, dated November 14, 1997, between the
Company and NationsBank, N.A. (Exhibit 10.17)(4)
10.15 Pledge Agreement, dated November 14, 1997, between the Company
and NationsBank N.A. (Exhibit 10.18)(4)
10.16++ Employment Agreement, dated as of June 9, 1997, between
William M. Cotter and the Company. (Exhibit 10.19)(4)
10.17++ Employment Agreement, dated as of January 1, 1998, between
Anthony J. Sherbondy and the Company. (Exhibit 10.20)(4)
10.18++ Employment Agreement, dated as of February 18, 1998, between
Dennis D. Burns and the Company. (Exhibit 10.21)(4)
10.19 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)
10.20 Representative and Manufacturing Facility Agreement, dated
January 1, 1998, between Innocoll GmbH and the Company.
(Exhibit 10.23)(4)
10.21++ 1999 Employee Stock Purchase Plan of the Company. (Exhibit
10.1)(5)
10.22++* Employment Agreement, dated as of May 3, 2000, between Benny
Ward and the Company.
10.23#* Distribution, Supply and Development Agreement, dated as of
December 21, 2000, between Colgate Oral Pharmaceuticals, Inc.
and the Company.
23.1* Consent of PricewaterhouseCoopers LLP.
24.1* Power of Attorney (included on signature page to this Annual
Report).
- -----------
* 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.
# Portions of this exhibit were omitted and filed separately with the
Secretary of the Commission with the Company's application for
confidential treatment filed pursuant to Rule 406 under the Securities Act
of 1933, as amended.
(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.