SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
- ------ Exchange Act of 1934
For the quarterly period ended September 30, 1999
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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
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CLOSURE MEDICAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 56-1959623
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(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation or
organization)
5250 Greens Dairy Road, Raleigh, North Carolina 27616
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(Address of principal executive offices) (Zip Code)
(919) 876-7800
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(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 9, 1999
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Common Stock, par value $0.01 per share 13,347,143
CLOSURE MEDICAL CORPORATION
INDEX
Page Number
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 1999 (unaudited) and December 31, 1998.................3
Statements of Operations (unaudited) for the three months ended September 30,
1999 and 1998 and for the nine months ended September 30, 1999 and 1998................4
Statements of Cash Flows (unaudited) for the nine months ended September 30,
1999 and 1998..........................................................................5
Condensed Notes to Financial Statements (unaudited).......................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................8
Item 3. Quantitative and Qualitative Disclosure about Market Risk...........................13
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................................14
2
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CLOSURE MEDICAL CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1999 1998
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(UNAUDITED)
ASSETS
Cash and cash equivalents $ 957 $ 824
Short-term investments 11,181 14,275
Restricted investments - 1,603
Accounts receivable 1,143 1,191
Inventories 533 1,008
Prepaid expenses and other assets 430 286
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Total current assets 14,244 19,187
Restricted investments 1,492 -
Furniture, fixtures and equipment, net 7,749 7,707
Intangible assets, net 776 526
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Total assets $ 24,261 $ 27,420
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,306 $ 1,721
Accrued expenses 1,155 1,705
Deferred revenue 620 1,245
Capital lease obligations 270 245
Current portion of long-term debt 600 2,650
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Total current liabilities 3,951 7,566
Deferred revenue 670 670
Capital lease obligations 728 934
Long-term debt less current portion 1,650 -
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Total liabilities 6,999 9,170
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Commitments and Contingencies (See note 6) - -
Preferred Stock, $.01 par value. Authorized 2,000 shares; none
issued or outstanding - -
Common Stock, $.01 par value. Authorized 35,000 shares;
issued and outstanding 13,340 and 13,290 shares, respectively 133 133
Additional paid-in capital 46,896 46,358
Accumulated deficit (29,602) (27,848)
Deferred compensation on stock options (165) (393)
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Total stockholders' equity 17,262 18,250
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Total liabilities and stockholders' equity $ 24,261 $ 27,420
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The accompanying notes are an integral part of these financial statements.
3
CLOSURE MEDICAL CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
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Product sales $ 2,732 $ 2,710 $ 10,826 $ 4,822
License and product development revenues - 1,500 - 1,500
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Total revenues 2,732 4,210 10,826 6,322
Cost of products sold 1,093 1,063 3,789 2,448
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Gross profit 1,639 3,147 7,037 3,874
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Research, development and regulatory affairs expenses 1,633 1,502 5,083 4,410
General and administrative expenses 1,341 1,339 4,099 3,889
-------------- ------------- -------------- -------------
Total operating expenses 2,974 2,841 9,182 8,299
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Income (loss) from operations (1,335) 306 (2,145) (4,425)
Interest expense (84) (100) (270) (291)
Investment and interest income 215 288 661 934
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Net income (loss) $ (1,204) $ 494 $ (1,754) $ (3,782)
============== ============= ============== =============
Shares used in computation of net income (loss)
per share:
Basic 13,333 13,278 13,317 13,264
============== ============= ============== =============
Diluted 13,333 13,656 13,317 13,264
============== ============= ============== =============
Net income (loss) per share:
Basic $ (0.09) $ 0.04 $ (0.13) $ (0.29)
============== ============= ============== =============
Diluted $ (0.09) $ 0.04 $ (0.13) $ (0.29)
============== ============= ============== =============
The accompanying notes are an integral part of these financial statements.
4
CLOSURE MEDICAL CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,754) $ (3,782)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization expense 705 374
Amortization of deferred compensation on stock options 228 227
Loss on disposals of fixed assets 303 11
Loss on disposals of intangibles - 75
Change in accounts receivable 48 484
Change in inventories 475 (279)
Change in prepaid expenses and other assets (144) 157
Change in accounts payable and accrued expenses (965) (524)
Change in deferred revenue (625) 321
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Net cash used by operating activities (1,729) (2,936)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture, fixtures and equipment (1,042) (3,405)
Investment in intangible assets (258) (192)
Purchases of investments (4,495) (12,046)
Proceeds from the sale of investments 7,700 13,619
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Net cash provided (used) by investing activities 1,905 (2,024)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings - 1,500
Repayment of debt (400) (200)
Net proceeds from sales of common stock 538 232
Payments under capital lease obligations (181) (167)
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Net cash (used) provided by financing activities (43) 1,365
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Increase (decrease) in cash and cash equivalents 133 (3,595)
Cash and cash equivalents at beginning of period 824 7,277
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Cash and cash equivalents at end of period $ 957 $ 3,682
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The accompanying notes are an integral part of these financial statements.
5
CLOSURE MEDICAL CORPORATION
CONDENSED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Operations
Closure Medical Corporation ("Closure" or the "Company"), formerly named
Tri-Point Medical Corporation, develops, manufactures and commercializes medical
tissue cohesive products based on its proprietary cyanoacrylate technology for
use in wound closure in humans and animals.
On September 30, 1996, the Company sold 2,550,000 shares of Common Stock in its
initial public offering ("IPO"). On April 2, 1997, the Company completed a
follow-on public offering selling 1,025,000 shares of Common Stock. The net
proceeds from the IPO and follow-on public offering of approximately $17.9
million and $12.0 million, respectively, have been and will continue to be used
primarily for capital expenditures related to office space and manufacturing
facilities, laboratories, research and development, including clinical trials,
working capital and general corporate purposes.
2. Significant Accounting Policies
The significant accounting policies followed by the Company for interim
financial reporting are consistent with the accounting policies followed for
annual financial reporting. These unaudited financial statements have been
prepared in accordance with Rule 10-01 of Regulation S-X, and in management's
opinion, all adjustments of a normal recurring nature necessary for a fair
presentation have been included. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and should be read in conjunction with the
financial statements and notes thereto for the year ended December 31, 1998
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
The results of operations for the three and nine month periods ended September
30, 1999 are not necessarily indicative of the results to be expected for the
full year ending December 31, 1999.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), was issued in June 1998. SFAS
133 is effective for financial statements for fiscal years beginning after June
15, 2000. The Company will adopt SFAS 133 on or before the effective date. It is
not anticipated that this standard will have a material impact on the results of
operations or financial position of the Company.
3. Taxes
No federal or state income tax provision has been provided for income tax
purposes, as the Company does not expect to have a tax liability for the year
ending December 31, 1999. Additionally, the deferred tax asset that might be
recorded as a result of net operating losses under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," has been offset by
a related valuation allowance because realization of the asset is not likely.
Accordingly, no benefit has been recorded.
4. Inventories
Inventories included the following (in thousands):
September 30, December 31,
1999 1998
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Packaging $ 157 $ 86
Raw materials 62 106
Work-in-process 102 616
Finished goods 212 200
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$ 533 $ 1,008
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6
CLOSURE MEDICAL CORPORATION
CONDENSED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
5. Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted average number
of common and common equivalent shares outstanding during the periods.
Diluted net income (loss) per share is computed using the weighted average
number of common and common equivalent shares outstanding during the periods.
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 anti-dilutive.
6. Commitments and Contingencies
In December 1998, a former employee of the Company filed a discrimination claim
with the Raleigh Area Office of the Equal Employment Opportunity Commission. The
Company has retained counsel in this matter and management believes that the
outcome will not have a material adverse effect on the Company.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION ACT OF 1995
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included in Part I--Item 1 of this Form
10-Q and the audited financial statements and notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
year ended December 31, 1998 contained in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
This report and the documents incorporated by reference herein contain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended. When used in this report and the documents incorporated herein by
reference, the words "anticipate," "believe," "estimate," and similar
expressions are generally intended to identify forward-looking statements. These
forward-looking statements include, among others, the statements in Management's
Discussion and Analysis about the following:
o the Company's expectations with respect to increases in operating expenses;
o expectations with respect to increases in research and development and general
and administrative expenses in order to develop new products, manufacture
commercial quantities of products and fund additional clinical trials;
o expectations with respect to the development, manufacturing and approval of
new products;
o expectations with respect to incurring additional capital expenditures to
expand its manufacturing capabilities;
o expectations with respect to generating revenue or becoming profitable on a
sustained basis;
o the Company's ability to enter into additional marketing agreements and the
ability of its existing marketing partners to successfully commercialize
products incorporating the Company's technologies;
o expectations that revenues from product sales will not continue the sequential
growth experienced for several quarters beginning with the quarter ended June
30, 1998;
o the sufficiency of the Company's existing cash and cash equivalents and
investments to finance its capital requirements for 12 months;
o expected losses in 1999 and subsequent years;
o expectations with respect to future capital requirements;
o the Company's identification and resolution of Year 2000 issues; and
o the impact on the Company of the failure of critical suppliers and customers
to achieve Year 2000 compliance.
There are important factors that could cause actual results to differ materially
from those expressed or implied by such forward-looking statements including,
but not limited to, the following:
o a decline in the level of demand for the Company's products;
o developments by competitors;
o the Company's inability to obtain regulatory clearances;
8
o general economic conditions and specifically, conditions in the health care
industry;
o the Company's ability to protect its proprietary products, know-how and
manufacturing processes;
o the Company's inability to obtain adequate supply of raw materials;
o the failure to enter into definitive marketing agreements;
o unanticipated cash requirements to support current operations or research and
development;
o unanticipated costs of Year 2000 compliance; and
o the Company's ability to attract and retain key personnel.
These and other risks and uncertainties affecting the Company are discussed in
greater detail in this report and in other filings by the Company with the
Securities and Exchange Commission.
OVERVIEW
Since its inception in May 1990, the Company has been developing, manufacturing
and commercializing medical tissue cohesive products for use in wound closure in
humans and animals. The Company's products are based on its proprietary
cyanoacrylate technology, and a substantial portion of the Company's historical
expenses have consisted of research and development and clinical trial expenses.
Through September 25, 1996, the effective date of the Company's initial public
offering, the Company had funded its operations with cash borrowed from
Sharpoint Development Corporation ("Sharpoint"), sales of Octyldent(R) and
Nexaband(R) products, and license and product development revenues from
marketing partners. On September 30, 1996, the Company completed its initial
public offering, issuing 2,550,000 shares of Common Stock and generating net
proceeds of approximately $17.9 million. On April 2, 1997, the Company completed
a follow-on public offering, issuing 1,025,000 shares of Common Stock and
generating net proceeds of approximately $12.0 million. The Company has also
funded its operations through sales of DERMABOND(R) Topical Skin Adhesive
("DERMABOND(R) adhesive") after the product received its CE Mark and FDA
approval in August 1997 and August 1998, respectively.
The Company has been unprofitable since its inception and has incurred net
losses in each year, including a net loss of approximately $4.8 million for the
year ended December 31, 1998. 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 commercial quantities of products and
fund additional clinical trials. The Company also expects to incur additional
capital expenditures to expand its manufacturing capabilities. The Company
expects to incur a loss in 1999 and may incur losses in subsequent years,
although the amount of future net losses and time required by the Company to
reach profitability are highly uncertain. The Company's ability to generate
significant revenue and become profitable will depend on its success in
commercializing DERMABOND(R) adhesive, expanding its manufacturing capabilities,
developing new products, entering into additional marketing agreements and on
the ability of its marketing partners to successfully commercialize products
incorporating the Company's technologies. The Company may never generate
significant revenue or become profitable on a sustained basis, if at all.
On August 28, 1998, the Company was granted approval from the U.S. Food and Drug
Administration ("FDA") of its premarket approval application to market
DERMABOND(R) adhesive in the United States. 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 U.S. market. In March 1996, Closure licensed exclusive worldwide
marketing and distribution rights for DERMABOND(R) adhesive to Ethicon, Inc.
("Ethicon"), a subsidiary of Johnson & Johnson. In August 1997, Closure received
CE Mark approval allowing the Company to ship DERMABOND(R) adhesive to Ethicon
to support its launch in European Union countries. DERMABOND(R) adhesive is
currently
9
marketed by Ethicon in the U.S. and approximately 26 countries outside the U.S.
On July 27, 1999, the Company was awarded its first United States Patent
relevant to DERMABOND(R) adhesive. The invention covered in this patent
capitalizes on the ability of the Company's adhesive technology to be
manipulated in a manner that enhances product performance by controlling the
setting time and extending the shelf life of the material. The award of the
patent will increase royalty revenue on sales of DERMABOND(R) adhesive in the
United States under the supply and distribution agreement with Ethicon.
On September 2, 1999, the Company was granted FDA clearance to market
SOOTHE-N-SEAL (TM) canker sore relief product ("SOOTHE-N-SEAL"). SOOTHE-N-SEAL
is the first cyanoacrylate adhesive approved by the FDA for the over-the-counter
consumer market. The Company is currently in discussions with potential partners
for a marketing distribution agreement for SOOTHE-N-SEAL.
Revenues from product sales increased sequentially for several quarters
beginning with the quarter ended June 30, 1998, the quarter prior to Ethicon's
U.S. sales launch of DERMABOND(R) adhesive, through the quarter ended June 30,
1999. This growth did not continue in the quarter ended September 30, 1999, and
the Company does not expect this sequential growth to continue over the next
several quarters. Ethicon has notified the Company that its orders for
DERMABOND(R) adhesive will be reduced due to excess inventory on-hand. The
Company has reduced certain operating expenses, primarily salary expenses, given
this expected decrease in revenues and related earnings. Salaries expense has
decreased as the Company has reduced its headcount by approximately fifteen
percent. These reductions are not expected to affect new product development.
RESULTS OF OPERATIONS
Total revenues were $2.7 million for the three months ended September 30, 1999,
compared to $4.2 million for the three months ended September 30, 1998. Product
sales were $2.7 million for the three months ended September 30, 1999 and 1998.
Additionally, the 1998 period included $1.5 million of license and product
development revenues. For the nine months ended September 30, 1999, total
revenues were $10.8 million, consisting of product sales only, compared to $6.3
million for the same period of 1998. The 1998 period included product sales of
$4.8 million and license and product development revenues of $1.5 million. The
increase in 1999 product sales was primarily a result of increased sales volume
of DERMABOND(R) adhesive. License and product development revenues represent the
milestone payment from Ethicon for the approval from the FDA, in August 1998, of
the premarket approval application to market DERMABOND(R) adhesive in the United
States.
Cost of products sold was $1.1 million for the three months ended September 30,
1999 and 1998. For the nine months ended September 30, 1999, cost of products
sold was $3.8 million compared to $2.4 million for the same period of 1998. Cost
of products sold as a percentage of product sales decreased to 35% in the nine
months ended September 30, 1999, compared to 51% during the same period of 1998.
The 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 volume.
Operating expenses were $3.0 million for the three months ended September 30,
1999, compared to $2.8 million for the three months ended September 30, 1998.
For the nine months ended September 30, 1999 and September 30, 1998, operating
expenses were $9.2 million and $8.3 million, respectively. The increases were
primarily attributable to increased research and development and regulatory
affairs expenses, the addition of personnel, and expansion of the Company's
facilities. The increase in research development and regulatory affairs expenses
was primarily due to costs associated with its ongoing research and development
programs. The Company expects these expenses will increase as the Company
expands its pipeline and related development efforts and clinical trials for
potential new products. In March 1998, the Company relocated its corporate
offices into a 50,000 square foot facility and in August 1998, the Company also
relocated its manufacturing operations to such facility. Prior to the move, the
Company occupied approximately 20,000 square feet.
10
Interest expense was $84,000 for the three months ended September 30, 1999,
compared to $100,000 for the three months ended September 30, 1998. For the nine
months ended September 30, 1999 and September 30, 1998, interest expense was
$270,000 and $291,000, respectively. 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 was $215,000 for the three months ended September
30, 1999, compared to $288,000 for the same period of 1998. For the nine months
ended September 30, 1999 and September 30, 1998, investment and interest income
was $661,000 and $934,000, respectively. This decrease was primarily attributed
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 revenues. Through September 30,
1999, the Company has raised approximately $30.0 million in equity financing.
The Company has received approximately $4.5 million from a lease line and term
loan since March 1997. In addition, the Company has received approximately $7.0
million related to the supply and distribution agreement for DERMABOND(R)
adhesive entered into with Ethicon in March 1996, of which $2.0 million was
classified as deferred revenue and will be credited against future royalties and
product purchases expected to be paid by Ethicon. The supply and distribution
agreement for DERMABOND(R) adhesive does not provide for any additional future
milestone payments from Ethicon.
At September 30, 1999, net working capital was approximately $10.3 million
versus net working capital of $11.6 million available at December 31, 1998. This
decrease was primarily attributable to cash used to fund the Company's
operations as well as the reduction in short-term debt due to the refinancing of
the term loan. At September 30, 1999, the Company's primary working capital
consisted of $13.6 million of cash and cash equivalents and investments compared
to $16.7 million at December 31, 1998. The Company had $3.2 million in debt and
capital lease obligations at September 30, 1999, reflecting a $581,000 decrease
over the December 31, 1998 debt and capital lease obligations. These decreases
represent monthly principal payments on these obligations.
Net cash provided by investing activities was $1.9 million for the nine months
ended September 30, 1999 compared to net cash used by investing activities of
$2.0 million for the same period in 1998. During the 1999 period, cash was
provided by the sale of investments. During the nine months ended September 30,
1998, the Company added leasehold improvements related to its new 50,000 square
foot facility and acquired capital equipment.
Net cash used by financing activities was $43,000 for the nine months ended
September 30, 1999 versus net cash provided by financing activities of $1.4
million for the same period during 1998. The Company's primary financing
activities during the nine months ended September 30, 1999 were proceeds from
employee stock options and repayments of its term loan and capital lease
obligations. The Company's primary financing activity during the nine months
ended September 30, 1998 was the Company's additional borrowings of $1.5 million
under its term loan.
The Company believes that existing cash and cash equivalents and investments,
which totaled approximately $13.6 million at September 30, 1999, will be
sufficient to finance its capital requirements for 12 months. In October 1999,
the Company secured a $3.0 million line of credit for working capital
purposes. The Company expects to incur a loss in 1999 and may incur losses in
subsequent years, although the amount of future net losses and time required by
the Company to reach profitability are highly uncertain. The Company 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 commercial
quantities of products and fund additional clinical trials. The Company also
expects to incur additional capital expenditures to expand its manufacturing
capabilities.
11
The Company's future capital requirements, however, will depend on numerous
factors, including (i) the Company's ability to manufacture and successfully
commercialize 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 the Company's
future products, including additional 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. The
Company may be required to seek additional capital to finance its operations in
the future. If the Company's currently available funds and internally generated
cash flow are not sufficient to satisfy its financing needs, the Company will be
required to seek additional funding through bank borrowings and additional
public or private sales of its securities, including equity securities, or
through other arrangements with marketing partners. Other than the Company's
equipment financing line of credit, term loan, and working capital line of
credit, 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.
YEAR 2000 UPDATE
The Company's Year 2000 Project ("Project") is addressing the issue of computer
programs with date-sensitive software that may be unable to distinguish between
the year 1900 and the year 2000. Failure to correct the Year 2000 Issue could
result in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. The Company
believes it has identified the significant internal issues and has resolved
these Year 2000 Issues. The Project continues to assess external customers and
suppliers and their Year 2000 compliance.
The Company has identified and prioritized critical suppliers and customers, and
communicated with them about their plans and progress in addressing the Year
2000 Issue. All critical suppliers and customers are reporting significant
progress toward completion or completion of projects designed to address their
own Year 2000 Issues. All have reported plans to mitigate any Year 2000 related
disruption by the end of 1999. Based on presently available information, there
is no guarantee that the systems of other companies on which the Company's
systems rely will be converted, or if so, in a timely manner. Such companies'
failure to achieve Year 2000 compliance could have a material adverse effect on
the Company.
The Company has and will continue to utilize both internal and external
resources to mitigate the Year 2000 Issue. The Company has modified or replaced
necessary portions of its software so that its computer systems will properly
utilize dates beyond December 31, 1999 and mitigate the Year 2000 Issue. To date
the Company has incurred and expensed approximately $60,000 related to the
assessment of, and efforts in connection with,the Project.
12
ITEM 3. 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 corporate bonds and Eurodollar bonds with an
average maturity of less than one year. The Company mitigates default risk by
investing in what it believes are the safest and highest 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 September 30, 1999, the Company's total
portfolio consisted of approximately $12.7 million of investments, all of which
had 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.
13
PART II- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
11 Computation of Net Income (Loss) Per Share (see Note 5 to
Condensed Notes to Financial Statements in Item 1 of Part I
of this Form 10-Q).
27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLOSURE MEDICAL CORPORATION
Date: November 12, 1999 By: \s\ Robert V. Toni
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Robert V. Toni
President and Chief Executive Officer
Date: November 12, 1999 By: \s\ J. Blount Swain
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J. Blount Swain
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
11 Computation of Net Income (Loss) Per Share.
27 Financial Data Schedule.