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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, 2001
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
(Exact name of registrant as specified in its charter)
Delaware 56-1959623
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
5250 Greens Dairy Road
Raleigh, North Carolina 27616
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(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
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(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 25, 2002, the aggregate market value of the Common Stock held by
non-affiliates of the registrant was $122,350,294 based upon the closing price
of the Common Stock as reported on The Nasdaq Stock Market. The number of shares
of Common Stock outstanding as of that date was 13,528,248.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference into this
report: Definitive Proxy Statement in connection with the 2002 Annual Meeting of
Shareholders
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TABLE OF CONTENTS
PART I ........................................................................2
ITEM 1. BUSINESS........................................................2
ITEM 2. PROPERTIES.....................................................17
ITEM 3. LEGAL PROCEEDINGS..............................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............17
PART II.......................................................................18
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS............................................18
ITEM 6. SELECTED FINANCIAL DATA........................................19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK......24
ITEM 8. FINANCIAL STATEMENTS...........................................25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES......................................25
PART III......................................................................25
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............25
ITEM 11. EXECUTIVE COMPENSATION.........................................25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.....................................................25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................25
PART IV.......................................................................25
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K....................................................25
Closure Medical Corporation(R) is a registered trademark of the
registrant. DERMABOND is a registered trademark of ETHICON, Inc.; BAND-AID(R) is
a registered trademark of Johnson & Johnson; SOOTHE-N-SEAL(R) is a registered
trademark of Colgate Oral Pharmaceuticals, Inc.; and NEXABAND(R) is a registered
trademark of Closure Medical Corporation.
1
PART I
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ITEM 1. BUSINESS.
Forward-Looking Statements
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.
Our 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 Closure'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, we disclaim any obligation or intent to update any such
factors or forward-looking statements to reflect future events or developments.
BUSINESS OVERVIEW
We develop, manufacture and commercialize medical tissue adhesive products for
wound care and wound closure for the professional and over-the-counter, or OTC,
and veterinary markets based on our proprietary medical grade cyanoacrylate
technology. To date, we have commercialized nonabsorbable products for topical
use and our research efforts include the development of absorbable formulations
for internal use.
DERMABOND adhesive can be used professionally to rapidly close, seal and protect
wounds and incisions from infection, and to stop leakage of blood and other body
fluids from injured tissue. This product allows natural healing to proceed by
closing and sealing injured tissue without the trauma caused by suturing or
stapling. We believe that using DERMABOND adhesive results in enhanced patient
and physician benefits such as lower overall procedure costs and is easier and
quicker to use than sutures or staples.
We have other products that are marketed in the OTC adhesive bandage and the OTC
oral pain relief markets. BAND-AID(R) Brand Liquid Bandage quickly seals,
protects and stops bleeding from minor cuts and scrapes. SOOTHE-N-SEAL(R)
adhesive provides a protective barrier that shields oral ulcers and sores from
irritation caused by eating and drinking while providing immediate and long-term
pain relief.
In addition, we have two veterinary products in our NEXABAND(R) product line
that are used in cat declaw procedures as well as spay and neuter procedures.
We have entered into marketing partnerships with third parties that distribute
and market our current products to professionals and consumers. Our partners
include Ethicon, Inc., a Johnson & Johnson company, Johnson & Johnson Consumer
Products Company, Colgate Oral Pharmaceuticals, Inc., Johnson & Johnson Wound
Management and Abbott Laboratories, Inc.
TECHNOLOGY OVERVIEW
We have developed, manufactured and commercialized nonabsorbable medical tissue
adhesive products based on our 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. Our proprietary medical grade
cyanoacrylate technology allows us to customize the physical and chemical
properties of cyanoacrylates to meet specific market needs related to wound
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care and wound closure. Such properties include, but are not limited to,
viscosity, flexibility, bond strength, stability, setting time, porosity and
biodegradation.
Our technology enables us to develop nonabsorbable formulations for topical use
and may enable us 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. Results from product studies on some of our
professional and OTC topical products have shown that our cyanoacrylate
technology provides a barrier against bacteria that cause infections that does
not exist when using traditional wound care technologies. 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.
We have developed applicator and packaging technology to deliver DERMABOND
adhesive and other products to wound sites to enhance the utility of our
products. For example, the current DERMABOND 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. Our current
products perform consistently and reproducibly, do not require special
preparation or refrigeration and have shelf-lives of at least 12 to 24 months.
PRODUCTS CURRENTLY MARKETED
DERMABOND Topical Skin Adhesive
Our flagship product, DERMABOND adhesive, is a nonabsorbable, topical tissue
adhesive that can be used to close wounds from skin lacerations, incisions,
minimally invasive surgery and plastic surgery. DERMABOND adhesive is used as an
alternative for topical sutures or staples or in conjunction with subcuticular
sutures or staples. Suturing and stapling involve puncturing healthy tissue in
order to align and close the wound. These procedures may allow leakage or cause
additional scarring at the puncture sites, require anesthetics, are time
consuming in their application, and generally require return patient visits and
physician time to remove the sutures or staples. DERMABOND adhesive may be
applied quickly, may not require anesthetics, does not induce trauma to
surrounding tissues and may not require return visits to the physician for
removal. DERMABOND adhesive is not intended for use on high skin tension areas
such as the hands, feet or across joints.
Although the unit cost is greater than sutures or staples, we believe that the
use of DERMABOND adhesive results in lower overall procedure costs because it
may reduce treatment time and the need for anesthetics, simplify post-closure
wound care and eliminate suture or staple removal. The DERMABOND 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 adhesive substantially
reduced procedure time and inflammation. Moreover, we recently received approval
from the U.S. Food and Drug Administration, or FDA, to include in DERMABOND
adhesive's device labeling that it acts as a barrier to microbial penetration
and protects against the two most common bacteria that cause infection,
staphylococcus and pseudomonas. Sutures and staples have not been shown to
protect against microbial penetration.
In March 1996, we entered into an exclusive worldwide agreement with Ethicon to
market and distribute DERMABOND adhesive. On August 28, 1998, we received
premarket approval to market DERMABOND adhesive in the United States and Ethicon
launched the product in September 1998. Additionally, Ethicon has been
distributing DERMABOND adhesive outside the United States since late 1997 and is
currently marketing DERMABOND adhesive in approximately 35 foreign countries and
regions, including Japan.
BAND-AID(R) Brand Liquid Bandage
In January 2001, we received FDA clearance to market BAND-AID(R) Brand Liquid
Bandage, which is the first and only cyanoacrylate medical device approved by
the FDA for the OTC adhesive bandage market. Clinical trials demonstrated the
effectiveness of our proprietary nonabsorbable formulation as compared to
traditional adhesive bandages when applied to minor cuts and abrasions. In the
clinical trials, it was found that BAND-AID(R) Brand Liquid Bandage 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. BAND-
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AID(R) Brand Liquid Bandage utilizes the same proprietary technology as our
professional product, DERMABOND adhesive.
We have entered into an agreement providing Johnson & Johnson Consumer Products
Company, or CPC, with worldwide supply, distribution and development rights to
BAND-AID(R) Brand Liquid Bandage technology. The agreement includes rights to
BAND-AID(R) Brand Liquid Bandage and future OTC products, excluding our
SOOTHE-N-SEAL(R) adhesive technology. Distribution of BAND-AID(R) Brand Liquid
Bandage to retail outlets such as Wal-Mart and CVS by CPC is underway and a
consumer oriented marketing campaign is expected to begin in the next three to
six months.
SOOTHE-N-SEAL(R) canker sore relief
In 1999, we were granted FDA clearance to market SOOTHE-N-SEAL(R) adhesive,
which was the first cyanoacrylate adhesive approved by the FDA for the OTC
consumer market. In clinical trials, SOOTHE-N-SEAL(R) adhesive was found to
provide immediate and long-term pain relief associated with oral ulcers, as well
as providing a protective barrier that shields oral ulcers and mouth sores from
irritation due to eating and drinking. SOOTHE-N-SEAL(R) adhesive utilizes the
same proprietary technology as our professional product, DERMABOND adhesive.
In December 2000, we entered into an agreement providing Colgate Oral
Pharmaceuticals, Inc. with exclusive worldwide supply, distribution and
development rights to SOOTHE-N-SEAL(R) adhesive technology. Beginning in the
second quarter of 2001, Colgate began distributing SOOTHE-N-SEAL(R) adhesive to
national retail outlets such as Wal-Mart, Eckerd Drug, Rite-Aid and CVS.
Colgate's 2001 marketing approach to create product awareness included
distributing sample units through direct mail campaigns and its sales force to
professionals such as dentists and pharmacists. We currently expect a similar
approach to continue in 2002.
NEXABAND(R) adhesives
We have developed two topical tissue adhesive products under the NEXABAND(R)
trade name for use in veterinary wound closure and wound care. NEXABAND(R)
Liquid Topical Tissue Adhesive, designed for use in cat declaw surgeries,
reduces procedure time and provides superior results by sealing exposed nerve
endings and reducing leakage and irritation. NEXABAND(R) S/C Topical Tissue
Adhesive is specially developed for the topical closure and sealing of surgical
incisions, including those made during spay and neuter procedures. NEXABAND(R)
S/C Topical Tissue Adhesive has been shown to reduce tissue reaction, while
providing an effective barrier against water, dirt and infection.
In July 2001, we entered into an agreement providing Abbott Laboratories, Inc.
with worldwide supply, distribution and development rights to the NEXABAND(R)
product line. In accordance with that agreement, Abbott was granted immediate
worldwide distribution rights to NEXABAND(R) adhesives for all countries other
than the United States and Canada. We initiated shipments to Abbott in November
2001 for immediate distribution outside the United States and Canada and, upon
the expiration of our prior distribution arrangement in the second quarter of
2002, Abbott can begin distribution of NEXABAND(R) products in the United States
and Canada.
PRODUCTS UNDER DEVELOPMENT
We are currently developing additional nonabsorbable and absorbable tissue
adhesive products. These future products require further development and are
subject to clinical trials and regulatory clearance or approval before
commercialization.
Nonabsorbable
We are currently developing a liquid occlusive dressing, or LOD, to treat
partial thickness wounds. The LOD formulation is transparent thereby permitting
enhanced wound assessment. It is being developed to adhere directly to the wound
tissue, allowing the product to conform to various wound sizes and shapes, flex
with the skin and provide a barrier to infection. We have completed the
necessary animal research as well as a 10-patient human pilot clinical study for
pressure ulcers. We plan on conducting a second pilot clinical study in the
second quarter of 2002 to further define the LOD wear time and wound healing
rates versus leading dressings in the category. Based on the outcomes from the
completed pilot studies, we anticipate the initiation of a definitive,
multi-center clinical study within the next several months
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allowing for FDA approval through the 510(k) premarket clearance. In November
2001, distribution and development rights for the professional wound management
platform, including LOD, were granted to Johnson & Johnson Wound Management, a
division of Ethicon, through an amendment to the terms of our existing licensing
and development agreement with Ethicon.
In February 2001, we entered into a Cooperative Research and Development
Agreement with Walter Reed Army Medical Center 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 called
Endobronchial Lung Volume Reduction, or ELVR. Currently, surgeons perform the
ELVR procedure through open chest surgery. This procedure involves removing the
diseased lung and allowing healthier lung tissue to expand more easily. In
performing ELVR, our proprietary medical adhesive will be delivered using a
bronchoscope and small catheter to achieve bronchial occlusion without the need
for open chest surgery. Once occluded, dysfunctional lung tissue would collapse
and allow for healthier lung tissue to expand. We are currently conducting a
second animal study that was initiated in December 2001 and will focus on
refining the ELVR procedure and optimizing the formulation prior to entering
additional studies.
Absorbable
In 1998, we established our Internal Adhesives Division, or IAD, to develop our
absorbable/degradable adhesive products. The IAD is comprised of dedicated
scientists with extensive surgical device development experience who are
developing several biocompatible cyanoacrylate formulations that may potentially
be used for internal tissue bonding or sealing applications. The IAD also is
performing synthesis, formulation design, development of analytical methods and
in vitro testing to establish the characteristics of the unique biocompatible
cyanoacrylate formulations. Through collaborations with leading research
institutions, the formulations are being evaluated using various in vivo models
to assess potential surgical use in a broad range of soft and hard tissue
applications. These formulations and future absorbable products require further
development and will be subject to clinical trials and regulatory clearance or
approval prior to commercialization.
MARKETING AGREEMENTS
We do not presently employ a sales force and our strategy for current products
has been to use marketing partners to promote, sell and distribute our products.
We are dependent on our marketing partners to market and distribute these
products in accordance with the terms of their respective arrangements. However,
we may decide to establish our own sales force for the distribution of products
for which we do not currently have marketing partners, such as future absorbable
products.
Ethicon, Inc.
In 1996, we entered into an eight-year supply and distribution agreement
providing Ethicon with exclusive worldwide rights to market, distribute and sell
DERMABOND adhesive. Upon execution of the agreement, Ethicon paid us $4,500,000,
which represented a $3,500,000 non-refundable licensing fee and a $1,000,000
payment that has been and will continue to be offset against either future
product purchases or royalties to be paid by Ethicon on product sales (as
described below). At December 31, 2001, $660,000 of the $1,000,000 payment had
been offset against product purchases leaving $340,000 classified as deferred
revenue on our balance sheet to offset future product purchases. In 1996,
Ethicon advanced us an additional $1,000,000 payment related to the achievement
of a milestone pursuant to our agreement, which was fully credited against
royalties owed by Ethicon from 1998 through 2000.
The agreement requires Ethicon to make minimum purchases that increase annually
and to pay royalties based upon net sales. The agreement may be renewed after
the initial eight-year term for successive additional periods of one year by
Ethicon upon at least ninety days' notice prior to the expiration of the
contract period. The agreement is terminable upon specified events, including
material breach by either party and insolvency of either party. Upon certain
events of default by us, including failure to provide an adequate supply of
product, Ethicon may end its arrangement to purchase DERMABOND adhesive from us,
and may manufacture the product itself and pay us royalties based on sales. In
addition, the agreement allows for the joint collaboration and cost sharing of
continuing development activities.
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Johnson & Johnson Consumer Products Company
In May 2001, we entered into an agreement providing CPC with exclusive worldwide
supply, distribution and development rights to BAND-AID(R) Brand Liquid Bandage
technology. Included in the agreement are rights to future OTC products
co-developed by the parties, excluding our SOOTHE-N-SEAL(R) adhesive technology.
The agreement requires CPC to purchase annual minimum quantities during each
contract year. The agreement will automatically renew each year for a period of
one year after the initial contract term expires unless either party notifies
the other at least six months prior of its intention not to renew. The agreement
is terminable upon specified events, including material breach by either party.
In addition, the agreement allows for the joint collaboration and cost sharing
of continuing development activities. Upon execution of the agreement and
achievement of certain milestones by Closure, CPC made payments to us in
recognition of our previous research and development expenditures. These
payments have been deferred and will be recognized ratably over the life of the
agreement. In accordance with the agreement, we may receive additional milestone
payments, based on achievement of certain criteria, subsequent to the execution
of the contract.
Colgate Oral Pharmaceuticals, Inc.
In December 2000, we entered into an exclusive worldwide supply, distribution
and development rights agreement for SOOTHE-N-SEAL(R) adhesive with Colgate.
Under the agreement, Colgate acquired exclusive worldwide rights to market, sell
and distribute SOOTHE-N-SEAL(R) adhesive and future oral care products, based
upon our proprietary cyanoacrylate technology, to both professional and consumer
markets. Upon execution of the agreement, Colgate paid Closure a license fee and
consideration for all right, title and interest in the SOOTHE-N-SEAL(R) adhesive
trademark. These payments were deferred and will be recognized ratably over the
life of the agreement. The agreement requires Colgate to purchase annual minimum
quantities and, at the end of the seven-year term, may be renewed by agreement
of both parties for additional periods. The agreement is terminable upon
specified events, including material breach by either party. In addition, the
agreement allows for the joint collaboration and cost sharing of continuing
development activities.
Abbott Laboratories, Inc.
In July 2001, we entered into an agreement providing Abbott Laboratories, Inc.
with exclusive worldwide, supply, distribution and development rights to our
veterinary NEXABAND(R) product line. The agreement provides Abbott with
immediate worldwide distribution rights exclusive of the United States and
Canada. Upon expiration of a prior distribution arrangement with Farnam
Companies, Inc. in the second quarter of 2002, the agreement provides Abbott
with distribution rights in the United States and Canada. This agreement also
grants Abbott rights to future veterinary products co-developed through the
collaboration of the parties, including product improvements, line extensions
and new veterinary products based on our proprietary cyanoacrylate technology.
The agreement requires Abbott to purchase a minimum dollar amount of products
during each contract year. At the end of the contract term, the agreement may be
renewed for additional periods with the consent of both parties. In addition,
the agreement allows for the joint collaboration and cost sharing of continuing
development activities.
Johnson & Johnson Wound Management
We entered into an agreement with Johnson & Johnson Wound Management, a division
of Ethicon, in November 2001, which provides Johnson & Johnson Wound Management
with worldwide supply, distribution and development rights to our professional
wound management platform, including our liquid occlusive dressing for partial
thickness wounds. The agreement is in the form of an amendment to the terms of
our existing licensing and development agreement with Ethicon. Upon execution of
the agreement, Johnson & Johnson Wound Management paid Closure a non-refundable
fee in consideration of rights under the agreement. We may receive future
milestone payments based on achievement of certain criteria. Both non-refundable
fees and milestone payments will be deferred and recognized ratably over the
period of the agreement. In addition, the agreement allows for the joint
collaboration and cost sharing of continuing development activities.
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PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS
Our success depends in large part on our ability to obtain patents, maintain
trade secret protection and operate without infringing on the proprietary rights
of third parties. We have 27 issued United States patents with expiration dates
ranging from 2004 to 2019 and five issued foreign patents with expiration dates
ranging from 2014 to 2019. We also have filed applications for 46 additional
United States patents and 93 applications for patents outside the United States.
The issued and pending United States patents relate to our tissue products,
processes and delivery technology.
In addition to patent protection, we rely on unpatented trade secrets and
proprietary technological expertise. We rely on confidentiality agreements with
our marketing partners, employees, advisors, vendors and consultants to protect
our trade secrets and proprietary technological expertise.
GOVERNMENT REGULATIONS
Our products and operations are subject to substantial government regulation in
the United States and foreign countries.
FDA Regulation
Most medical devices, including our 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, or 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 good manufacturing practices, or 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 premarket application, or 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. Prior to making a substantial equivalence
determination, the FDA may request extensive data, including clinical trials of
the device's safety and effectiveness. It generally takes from three to nine
months from submission to obtain 510(k) premarket clearance. If our 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,
then we must file a PMA application. DERMABOND adhesive, SOOTHE-N-SEAL(R)
adhesive and BAND-AID(R) Brand Liquid Bandage 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 Investigational Device Exemption, or IDE, for the proposed
medical device. Before 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 our
7
manufacturing facilities and processes may subject us to further FDA inspections
and review before 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. Additionally, the FDA actively enforces regulations prohibiting marketing
of devices for indications or uses that have not been cleared or approved by the
FDA. 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.
In August 1998, DERMABOND adhesive received premarket approval. SOOTHE-N-SEAL(R)
adhesive and BAND-AID(R) Brand Liquid Bandage received 510(k) clearances in
September 1999 and January 2001, respectively. DERMABOND adhesive,
SOOTHE-N-SEAL(R) adhesive and BAND-AID(R) Brand Liquid Bandage are subject to
GMP, postmarket reporting and other FDA requirements.
Foreign Regulatory Matters
In order for us to market our products in Europe, Australia, Canada and certain
other foreign jurisdictions, we 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 our 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 complies with the laws of that country and
has valid marketing authorization or the equivalent from the appropriate
authority in a "listed country." The listed countries include Australia, Canada,
Israel, Japan, New Zealand, Switzerland, South Africa and any member nation in
the European Union or the European Economic Area. Generally, export of
unapproved devices (i.e., those requiring a PMA in the United States) 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, or 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. We received authorization to display the CE
mark in the European Union for DERMABOND adhesive and other topical and
ophthalmic tissue adhesive applications in August 1997. We plan to pursue the
right to display the CE mark on future products for human use that we may
develop.
Upon receipt of the CE mark, we must demonstrate every six months for two years
and annually thereafter, that our quality management system meets the
requirements of the MDD and our technical documentation for products displaying
the CE mark is accurate and reflects the current manufacturing process.
Environmental Regulations
Our activities involve the controlled use of hazardous materials and chemicals.
We are subject to federal, state and local laws and regulations governing the
use, manufacture, storage, handling and disposal of such material and certain
waste products. We believe that our safety procedures for handling and disposing
of such materials comply in all material respects with the standards prescribed
by such laws and regulations, but risk of accidental contamination or injury
from these materials cannot be completely eliminated. To help minimize these
risks, we utilize an outside professional services organization to help us
evaluate and monitor environmental regulations.
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.
8
MANUFACTURING
We have devoted considerable resources to the development of manufacturing
processes and technologies capable of providing our products with clinical
efficacy, safety, ease of use and suitable shelf-life. We have developed a
manufacturing process designed to produce a highly purified base material which
is not achievable by other known methodologies. We rely heavily on internal
trade secrets and technological expertise and expect to keep our manufacturing
process in-house and, where applicable, seek patent protection for specific
manufacturing applications.
Since 1998, we have been manufacturing our products in a 50,000 square foot
facility in Raleigh, North Carolina. This facility integrates the production of
all of our product formulations as well as the filling, labeling and packaging
capabilities for certain products. We hire filling and packaging employees as
needed on a temporary basis. In addition, third party vendors currently perform
filling, labeling and sterilization for certain products commercialized by
Closure.
Over the next several years, we plan to expand our manufacturing capabilities to
include operations associated with the filling and packaging of current
products, as well as various new products. Although the expansion should provide
for sufficient capacity, some of our manufacturing processes will continue to be
completed by outside providers.
In 1997, in connection with our application for a CE mark to market DERMABOND
adhesive in the European Union, the British Standards Institution, or BSI,
registered us to certify that our 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 our 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 primary raw material used in the manufacture of our medical adhesives is
cyanoacetate. We presently purchase cyanoacetate from one source, but if
necessary, we can manufacture it ourselves or obtain it from another supplier.
In the event that it becomes necessary for us to obtain cyanoacetate from
another supplier, we would first be required to qualify the quality assurance
systems and product of that additional supplier. The other raw materials used in
manufacturing and packaging of our products are readily available from multiple
sources, as is our process control equipment.
COMPETITION AND TECHNOLOGICAL CHANGE
We compete with domestic and foreign competitors in various rapidly evolving and
technologically advanced fields in developing our technology and products,
including medical device and pharmaceutical companies.
In the worldwide wound closure market, DERMABOND adhesive competes with the
suture products of Ethicon as well as the staple products of Ethicon
Endo-Surgery, Inc., both subsidiaries of Johnson & Johnson. We also compete 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 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 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 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.
In the domestic OTC adhesive bandage market, BAND-AID(R) Brand Liquid Bandage
competes with the Band-Aid(R) Brand Adhesive Bandages of CPC as well as 3M(R)
brand adhesive bandages and Curad(R) brand adhesive bandages marketed by
Beiersdorf AG. These three products in total comprise approximately 80% of the
adhesive bandage market. In the domestic OTC oral pain relief market,
SOOTHE-N-SEAL(R) adhesive competes with the following four major products that
comprise approximately 75% of that category: Colgate Orabase(R) Gel marketed by
Colgate, Anbesol(R) Oral Anesthetic products marketed by American Home Products
Corporation, Orajel(R) products marketed by Del Laboratories and Zilactin(R)
products marketed by Zila Consumer Pharmaceuticals.
9
SCIENTIFIC ADVISORS
We have established a team of recognized scientific advisors who advise us about
present and long-term scientific planning, research and development. The
Scientific Advisors have recognized expertise in relevant sciences or clinical
medicine. These scientific advisors consist of independent professionals who
meet on an individual basis with management when so requested. We retain their
services under the terms of consulting and confidentiality agreements.
EMPLOYEES
As of March 25, 2002, we had 88 full-time employees, of whom 70 were dedicated
to research, development, manufacturing, quality control and regulatory affairs,
and 18 were dedicated to administrative activities. Fifteen members of our
research, development and regulatory affairs staff have doctoral or advanced
degrees. We intend to recruit additional personnel in connection with the
research, development and manufacturing of our products. Our employees are not
represented by a union, and we believe relationships with our employees are
good.
EXECUTIVE OFFICERS
The table below sets forth the names, ages and positions of the persons who are
the executive officers as of March 25, 2002.
Name Age Position
Robert V. Toni 61 President and Chief Executive Officer and
Director
Joe B. Barefoot 51 Vice President of Regulatory Affairs and Quality
Assurance
Jeffrey G. Clark 48 Vice President of Research and Development
William M. Cotter 51 Vice President of Manufacturing and Operations
Jerry Y. Jonn 45 Vice President, Internal Products Development
Anthony J. Sherbondy 48 Vice President of New Business Generation
Benny Ward 38 Vice President of Finance and Chief Financial
Officer
Robert V. Toni has served as President and Chief Executive Officer of Closure
since June 1994 and as a Director of Closure 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. In January
2002, Mr. Toni informed Closure's Board of Directors of his intention to retire
but plans to remain with the Company until his successor is hired.
Joe B. Barefoot has served as Vice President of Regulatory Affairs and Quality
Assurance of Closure 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. Before 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.
Jeffrey G. Clark has served as Vice President of Research and Development of
Closure 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 Closure 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. Before 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.
19
Jerry Y. Jonn, Ph.D. has served as Vice President, Internal Adhesives Division
since July 2001. Prior to that time Dr. Jonn served as Director, Absorbable
Products Research of the Company from May 1999. Prior to employment with Closure
Medical, Dr. Jonn spent seven years with U. S. Surgical in North Haven, CT where
he last served as the Director of U.S. Surgical's Research and Development
efforts. Dr. Jonn earned his M.S. and Ph.D. degrees in Polymer Chemistry from
Cornell University.
Anthony J. Sherbondy has served as Vice President of New Business Generation of
Closure since January 1998. Before that time, Mr. Sherbondy served as Director
of Marketing of Closure from October 1996. From 1995 to 1996, he was the
principal executive and founder of MedNet Market Research, LLC, a healthcare
market research company. From 1992 to 1995, Mr. Sherbondy served as Director of
Sales and Marketing Operations for 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 Closure since April 2000. From 1996 until 2000, Mr. Ward served as Closure'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.
RISK FACTORS
In addition to the other information in this Annual Report on Form 10-K, the
following risk factors should be carefully considered. The risks and
uncertainties described below are not the only ones facing us. Additional risks
and uncertainties not presently known to us or that we currently deem immaterial
may also impair our business, operating results and financial condition. The
occurrence of any of the following risks could adversely affect our business,
operating results and financial condition, as well as adversely affect the value
of an investment in our common stock.
Our operating results may fluctuate significantly and we may not be able to
maintain our existing growth rate.
Although we have experienced revenue and earnings growth in recent quarters, we
may not be able to sustain these growth rates and we may face significant
fluctuations in our revenue and earnings in the future. If future operating
results are below the expectations of stock market analysts or our investors,
our stock price may decline.
Our products are in the early stage of product commercialization and if they are
not successful, our operating results and business may be substantially
impaired.
We received premarket approval from the FDA to market DERMABOND adhesive in the
United States in August 1998. We were granted 510(k) premarket clearance for
SOOTHE-N-SEAL(R) adhesive and BAND-AID(R) Brand Liquid Bandage in September 1999
and January 2001, respectively. We believe that our long-term viability and
growth will depend in large part on sales of DERMABOND adhesive,
SOOTHE-N-SEAL(R) adhesive and BAND-AID(R) Brand Liquid Bandage. There can be no
assurance that we and our marketing partners will be able to commercialize
successfully or achieve market acceptance of our technologies or products, or
that our competitors will not develop technologies that are less expensive or
otherwise superior. The failure to develop and market successfully our existing
products as well as new products would have a material adverse effect on our
results of operations and financial condition.
11
If we are unable to develop new products based on our proprietary cyanoacrylate
technology, our future operating results may suffer.
In addition to the commercialization of our current products, our future success
depends on our ability to develop new products based on our core technology
which could be expensive and time consuming. The successful development of new
products depends on a number of factors, including the following:
. obtaining regulatory clearances or approvals;
. acceptance of new products by the market;
. inherent developmental risks, including ineffectiveness or lack
of safety and unreliability;
. high commercial cost and preclusion or obsolescence resulting
from third parties' proprietary rights or superior or equivalent
products;
. our ability to enter into favorable marketing agreements;
. our ability to develop repeatable processes to manufacture new
products in sufficient quantities for commercial sales; and
. general economic conditions.
If any of these factors cannot be overcome, we may not be able to develop and
introduce new products in a timely or cost-effective manner.
If we are unable to produce adequate quantities of our products, our operating
results may suffer.
Our future success is dependent on our ability to manufacture our products:
. in commercial quantities;
. in compliance with regulatory requirements; and
. at an acceptable cost.
We currently manufacture all of our products in a 50,000 square foot facility in
Raleigh, North Carolina. Production of increased quantities may involve
technical challenges for us and may require significant scale-up expenses for
additions to facilities and personnel. There can be no assurance that we will be
able to achieve sufficient manufacturing capabilities to satisfy demand in a
cost-effective manner or to produce the quantities necessary for us to achieve
profitability.
If we are unable to meet our marketing partner's manufacturing requirements for
DERMABOND adhesive, revenues generated from DERMABOND adhesive will decrease.
If we are unable to meet the manufacturing requirements for DERMABOND adhesive
imposed by Ethicon, Inc., a division of Johnson & Johnson and our marketing
partner for DERMABOND adhesive, then Ethicon may itself manufacture DERMABOND
adhesive and pay us royalties on sales. The royalty payments we would receive
would be substantially less than the revenues currently generated by selling
DERMABOND adhesive to Ethicon.
If our products are not accepted by the medical community and consumers, the
commercial opportunities for our products would be limited.
The success of our existing products and products we develop in the future will
depend on continued and initial acceptance of these products by the medical
community as well as consumers. We cannot predict how quickly, if at all, the
medical community or consumers will accept our products or the extent to which
our products will be used.
We may face product liability claims that could result in costly litigation and
significant liabilities for which we may not have adequate insurance protection.
The manufacture and sale of medical products exposes us to an inherent risk of
product liability claims. The medical device industry in general has been
subject to significant product liability litigation. Any claims, with or without
merit, could result in costly litigation, reduced sales, significant liabilities
and diversion of our management's time, attention and resources. Based on our
experience, we believe that we maintain adequate product liability insurance to
cover any such litigation. However, we cannot be sure that our product liability
insurance coverage is adequate or
12
that it will continue to be available to us on acceptable terms, if at all. A
successful product liability claim or series of claims brought against us could
require us to pay substantial amounts that would decrease our profitability, if
any.
Our products are subject to costly and extensive premarket clearances and
approvals. Any unanticipated costs or delays in these processes, or any failure
to obtain the necessary clearances or approvals, will affect our ability to
introduce and market new products.
The regulatory process is lengthy, expensive and uncertain and there can be no
assurance that we will obtain the necessary clearances or approvals to market
our products. 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, or premarket application, 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. We expect that
some of our future products under development will be subject to the lengthier
PMA process. 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.
Our medical tissue adhesives must receive regulatory clearances or approvals
from the FDA and, in many instances, from foreign and state governments, before
their sale. To obtain such clearances or approvals, medical tissue adhesives
must be shown to be efficacious and safe for use in humans. Our 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. The FDA regulates the preclinical and clinical testing,
manufacture, safety, labeling, sale, distribution and promotion of medical
devices. Included among these regulations are premarket clearance and PMA
requirements. Other statutory and regulatory requirements include, among other
things, establishment registration and inspection, medical device listing,
prohibitions against misbranding and adulteration and labeling.
Our products are subject to postmarket reporting requirements. If safety
problems occur after one of our products reaches the market, the FDA may take
steps to prevent or limit the further marketing of the product.
Our medical devices and medical tissue adhesives are also 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. Additionally, the FDA actively enforces
regulations prohibiting marketing of devices for indications or uses that have
not been cleared or approved by the FDA. 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.
Our products are subject to extensive governmental regulation that could make it
more expensive and time consuming for us to manufacture our products.
The manufacture of our products is subject to periodic inspection by regulatory
authorities and certain marketing partners, while manufacture of our products
for human use is subject to regulation and inspection from time to time by the
FDA for compliance with good manufacturing practices, or GMPs, as well as
equivalent requirements and inspections by state and foreign regulatory
authorities. There can be no assurance that we will continue to satisfy these
requirements for DERMABOND adhesive, SOOTHE-N-SEAL(R) adhesive and BAND-AID(R)
Brand Liquid Bandage. 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 our
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 our manufacturing facilities and processes
may subject us to further FDA inspections and review before implementation of
such modifications. There can be no assurance that we 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
13
approvals or clearances or the loss of previously received approvals or
clearances will affect our ability to timely manufacture our products.
If we do not comply with laws and regulations relating to our use of hazardous
materials, we may incur substantial liabilities.
We use hazardous materials and chemicals in our research and development
programs and in our manufacturing operations. We are required to comply with
increasingly rigorous laws and regulations governing environmental protection
and workplace safety, including requirements governing the handling, storage and
disposal of hazardous substances. Although, we believe that we handle, store and
dispose of these materials in a manner that complies with state and federal
regulations, the risk of accidental contamination or injury exists. In the event
of an accident, we could be held liable for decontamination costs, other
clean-up costs and related damages or liabilities.
If we are unable to maintain our current arrangements with our marketing
partners, we may not be able to market or sell our current or future products
independently.
We have no experience in sales, marketing and distribution. Therefore, our
strategy for commercialization of our products has included entering into
agreements with other companies to market current and certain future products
incorporating our technology. There can be no assurance that we will be able to
enter into additional marketing agreements on terms favorable to us, if at all,
or that current or future agreements will ultimately be beneficial to us.
Certain agreements also permit our marketing partners to pursue existing or
alternative technologies in preference to our technology. There can be no
assurance that our interests will continue to coincide with those of our
marketing partners or that the marketing partners will not develop,
independently or with third parties, products which could compete with our
products, or that disagreements over rights or technology or other proprietary
interests will not occur. If we choose not to, or are unable to, enter into
future agreements with marketing partners, we would be forced to commit
increased capital to undertake the marketing and sale of our current and future
products, or we may not be able to market such products at all. While we may
ultimately establish a sales force to market certain future products, we do not
presently have a sales and marketing force. We may not be able to establish and
maintain an internal sales and marketing force, distribution and sales
capabilities or make arrangements with third parties to perform such activities
on acceptable terms, if at all. There can be no assurance that we will be able
to market or sell our current or future products independently in the absence of
collaborations with marketing partners.
Our product sales for our nonabsorbable products are dependent upon the success
of our marketing partners in performing their responsibilities. If our marketing
partners fail to successfully perform their responsibilities, our products will
suffer.
We have no control over the amount and timing of resources which may be devoted
to our marketing partners' performances of their contractual responsibilities.
There can be no assurance that our marketing partners will perform their
obligations as expected or market any products under the marketing agreements,
or that we 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 us as such determinations are entirely within the control of our
marketing partners. If our marketing partners do not successfully perform their
responsibilities, the revenues we derive from our relationships with them will
suffer.
We depend on a single qualified source supplier. If we are unable to obtain
adequate commercial quantities or develop alternative source suppliers meeting
regulatory, price and timing requirements, our ability to manufacture our
products, including DERMABOND adhesive, may be impaired.
We currently purchase cyanoacetate, the primary raw material used in
manufacturing our products, from a single qualified source. There can be no
assurance that we will be able to obtain adequate commercial quantities of
cyanoacetate to manufacture our products within a reasonable period of time or
at commercially reasonable rates. We may manufacture cyanoacetate ourselves,
however it may be more costly and we may not be able to produce commercial
quantities as needed. A lack of adequate commercial quantities of cyanoacetate,
or our 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 our ability to
manufacture our products, including DERMABOND adhesive, and, consequently, could
have a material adverse effect on our results of operations and financial
condition.
14
If we are unable to obtain new patents and maintain patent and trade secret
protection, our reputation and competitiveness in the marketplace may be
adversely affected.
The medical device industry places considerable importance on obtaining patent
and trade secret protection for technologies, products and processes. Our
success depends, in part, on whether we can obtain patents and maintain trade
secret protection. There can be no assurance that any pending patent
applications will be approved, that we will develop additional proprietary
products that are patentable or that any patents issued to us will provide us
with competitive advantages. Furthermore, there can be no assurance that others
will not independently develop similar products, duplicate any of our products
or design around our patents.
In addition to patent protection, we rely on unpatented trade secrets and
proprietary technological expertise. There can be no assurance that others will
not independently develop or otherwise acquire equivalent techniques, or
otherwise gain access to our trade secrets and proprietary technological
expertise or disclose such trade secrets. We rely, in part, on confidentiality
agreements with our marketing partners, employees, advisors, vendors and
consultants to protect our trade secrets and proprietary technological
expertise. There can be no assurance that these agreements will not be breached,
that we will have adequate remedies for any breach or that our 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 adversely effect our
competitiveness in the marketplace.
If we are accused of infringing upon the patents or proprietary rights of
others, we may be required to obtain commercially favorable licenses or be
forced to engage in costly and time consuming litigation.
Our commercial success will depend, in part, on our ability to operate without
infringing on patents and other proprietary rights of third parties. Our patents
may be challenged by third parties and the patents of others may prevent the
commercialization of our products. If it is determined that we have been
infringing upon any third party's patent rights, we could be required to pay
damages, alter our products or processes, obtain licenses or cease certain
activities. If we are required to obtain any licenses, there can be no assurance
that we will be able to do so on commercially favorable terms, if at all. Our
failure to obtain a license to any necessary technology may result in our being
barred from manufacturing and selling our products.
We may also be forced to engage in litigation to enforce any patents issued or
licensed to us, or to determine the scope and validity of third party
proprietary rights. Moreover, if our competitors prepare and file patent
applications in the United States to claim technology that is also claimed by
us, we may be forced to participate in interference proceedings declared by the
U.S. Patent and Trademark Office to determine priority of invention. Such
litigation and participation in proceedings could result in substantial costs
and diversion of our efforts, even if the eventual outcome is favorable to us.
Litigation could also subject us to significant liabilities to third parties,
require disputed rights to be licensed from third parties or require us to cease
using certain technology.
If our competitors are successful in developing alternative technologies and
products that are more effective, easier to use or more economical, our
technology and products may be rendered obsolete and noncompetitive.
We compete with many domestic and foreign competitors in various rapidly
evolving and technologically advanced fields in developing our technology and
products, including medical device and pharmaceutical companies. In the
worldwide wound closure market, DERMABOND adhesive competes with the suture
products of Ethicon as well as the staple products of Ethicon Endo-Surgery,
Inc., both subsidiaries of Johnson & Johnson. We also compete 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 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 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, also known as IDE, from the FDA and Tyco 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. In the domestic OTC adhesive
bandage market, BAND-AID(R) Brand Liquid Bandage competes with the Band-Aid(R)
Brand Adhesive Bandages of CPC as well as 3M(R) brand adhesive bandages and
Curad(R) brand adhesive bandages marketed by Beiersdorf AG. These three products
in total comprise approximately 80% of the adhesive bandage market. In the
domestic OTC oral pain relief market, SOOTHE-N-SEAL(R) adhesive competes with
the following four major
15
products that comprise approximately 75% of that category: Colgate Orabase(R)
Gel marketed by Colgate, Anbesol(R) Oral Anesthetic products marketed by
American Home Products Corporation, Orajel(R) products marketed by Del
Laboratories and Zilactin(R) products marketed by Zila Consumer Pharmaceuticals.
Any of our future products may compete with a variety of wound closure products
currently on the market or in development. Many of our competitors and potential
competitors have substantially greater financial, technological, research and
development, marketing and personnel resources. 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 our 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 us or that
would render our technology and products obsolete and noncompetitive 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 competitors
may obtain patent protection, approval or clearance by the FDA or product
commercialization earlier than us. Finally, under the terms of our marketing
agreements, our 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 our products.
Our plans to market current and future products internationally are subject to
several risks and as a result, we may not be able to successfully commercialize
our current or future products in any foreign market.
We and our marketing partners intend to market current and future products in
Europe, Australia, Canada and certain other foreign jurisdictions outside of the
United States as well as domestically. A number of risks are inherent in
international transactions, including the following:
. our ability to obtain required market authorizations;
. our compliance with extensive safety, manufacturing and quality
regulations;
. differences from the FDA regulatory scheme;
. the influence of political instability, price controls, trade
restrictions and tariff modifications on our international sales;
and
. fluctuations in currency exchange rates.
There can be no assurance that we will obtain market authorizations in such
countries or that we will not be required to incur significant costs in
obtaining or maintaining our foreign market authorizations. Delays in receipt of
authorizations to market our products in foreign countries, failure to receive
such authorizations or the future loss of previously received authorizations
would delay or bar sales of our products in any such foreign country. Our
international sales and related royalties of DERMABOND 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 our
products by increasing the price of our products in the currency of the
countries in which the products are sold. There can be no assurance that we will
be able to successfully commercialize our current or future products in any
foreign market.
We may need additional funding and may not have access to capital. If we are
unable to raise capital when needed, we may need to delay, reduce, eliminate or
license our product development and commercialization effort.
We have expended and expect to continue to expend substantial funds to complete
the research, development and clinical testing of our existing products and
future products in development and to establish commercial scale manufacturing
facilities. We believe that existing cash and cash equivalents and investments,
which totaled $13.0 million as of December 31, 2001, will be sufficient to
finance our capital requirements for at least 12 months. There can be no
assurance that we will not be required to seek additional capital to finance our
operations in the future. We currently have a line of credit for working capital
purposes, equipment financing and a term loan. We currently have no commitments
for any additional financing, and there can be no assurance that adequate funds
for our operations from our revenues, financial markets, arrangements with
marketing partners or from other sources will be available when needed or on
terms attractive to us. The inability to obtain sufficient funds may require us
to delay, scale back or eliminate some or all of our research and product
development programs, manufacturing operations, clinical studies or regulatory
activities or to license third parties to commercialize products or technologies
that we would otherwise seek to develop ourselves.
16
Our success depends on key personnel, the loss of whom could impair our research
and development efforts.
Our success partially depends upon the efforts and talents of our senior
management and scientific personnel. We have entered into employment agreements
with each member of our senior management. The loss of the services of one or
more of these key employees could adversely affect our ability to meet our
business objectives. In addition, our success depends on our ability to attract
and retain skilled personnel, especially in the areas of research and product
development. There is intense competition for such skilled personnel and we may
be unable to attract and retain these individuals. Our failure to do so would
have an adverse effect on our business.
In January 2002, Mr. Robert V. Toni, our President and Chief Executive Officer
since 1994, informed our Board of Directors of his intention to retire. Mr. Toni
plans to continue in his current position until a replacement is identified.
However, we may not be able to find a replacement that will provide the
leadership or performance that Mr. Toni has provided during his tenure with
Closure. The Board of Directors has commissioned a professional services firm,
which is currently searching for a qualified candidate based on criteria set
forth by the Board of Directors.
ITEM 2. PROPERTIES.
In 1997, we 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 and the expansion of
manufacturing capacity. The term of this lease expires in July 2007, subject to
a five-year extension at our election. During 1998, we relocated our corporate
offices and manufacturing operations to this new facility. Our manufacturing
operations in the new facility were validated and became fully operational in
the third quarter of 1998. We also lease a 5,800 square foot facility in Raleigh
in which our Internal Adhesives Division conducted its research and development
activities and other operations prior to moving into the corporate headquarters
building in early 2002. The term of this lease extends through March 2004,
therefore we plan to sublease the space.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did not submit any matters to a vote of security holders during the fourth
quarter of fiscal year 2001.
17
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Our 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 2000 and 2001.
High Low
---- ---
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
2001
First Quarter........................................$34.88 $14.69
Second Quarter........................................26.25 14.51
Third Quarter.........................................25.85 15.30
Fourth Quarter........................................24.14 16.07
As of March 25, 2002, there were approximately 248 holders of record of our
Common Stock. We have never declared or paid cash dividends on our Common Stock
and do not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings, if any, to fund the development and
growth of our business. Any future determination to pay cash dividends will be
at the discretion of the Board of Directors and will be dependent upon our
financial condition, operating results, capital requirements and such other
factors as the Board of Directors deems relevant.
18
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below for each year in the five year
period ended December 31, 2001 have been derived from financial statements
audited by PricewaterhouseCoopers LLP, independent accountants. The balance
sheets as of December 31, 2000 and 2001 and the related statements of operations
and of cash flows for the years ended December 31, 1999, 2000 and 2001 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 our financial statements, including the
notes thereto, and the other financial information included elsewhere in this
Annual Report.
Years ended December 31,
------------------------
1997 1998 1999 2000 2001
---------- ---------- ---------- ---------- -------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Product sales $ 1,551 $ 8,079 $ 13,370 $ 13,076 $18,405
License and product development revenue (1) - 1,500 - 625 768
---------- ---------- ---------- ---------- -------
Total revenues 1,551 9,579 13,370 13,701 19,173
Cost of products sold 1,398 3,480 4,722 3,841 5,450
---------- ---------- ---------- ---------- -------
Gross profit 153 6,099 8,648 9,860 13,723
---------- ---------- ---------- ---------- -------
Research, development and regulatory affairs expenses 3,594 6,297 6,296 5,853 5,622
General and administrative expenses 4,752 5,407 5,404 5,415 5,575
Special charge- voluntary packaging recall (2) - - - - 430
---------- ---------- ---------- ---------- -------
Total operating expenses 8,346 11,704 11,700 11,268 11,627
---------- ---------- ---------- ---------- -------
Income (loss) from operations (8,193) (5,605) (3,052) (1,408) 2,096
Interest income, net 1,364 832 525 496 459
---------- ---------- ---------- ---------- -------
Income (loss) before taxes (6,829) (4,773) (2,527) (912) 2,555
Provision for income taxes - - - - 21
---------- ---------- ---------- ---------- -------
Net income (loss) before cumulative effect of accounting
change (6,829) (4,773) (2,527) (912) 2,534
Cumulative effect of accounting change (1) - - - (2,656) -
---------- ---------- ---------- ---------- -------
Net income (loss) $ (6,829) $ (4,773) $ (2,527) $ (3,568) $ 2,534
========== ========== ========== ========== =======
Net income (loss) per common share before cumulative
effect of accounting change:
Basic $ (0.53) $ (0.36) $ (0.19) $ (0.07) $ 0.19
========== ========== ========== ========== =======
Diluted $ (0.53) $ (0.36) $ (0.19) $ (0.07) $ 0.18
========== ========== ========== ========== =======
Net loss per common share-basic and diluted-
cumulative effect of accounting change $ - $ - $ - $ (0.20) $ -
========== ========== ========== ========== =======
Net income (loss) per common share
Basic $ (0.53) $ (0.36) $ (0.19) $ (0.27) $ 0.19
========== ========== ========== ========== =======
Diluted $ (0.53) $ (0.36) $ (0.19) $ (0.27) $ 0.18
========== ========== ========== ========== =======
Shares used in computation of net income (loss)
per common share:
Basic 12,966 13,270 13,324 13,390 13,468
========== ========== ========== ========== =======
Diluted 12,966 13,270 13,324 13,390 13,852
========== ========== ========== ========== =======
Pro forma amounts are presented below assuming the
change in accounting principle adopted in fiscal
2000 is applied retroactively (1):
Pro forma- Net income (loss) $ (6,391) $ (5,320) $ (1,902) $ (912) $ 2,534
========== ========== ========== ========== =======
Pro forma- Net income (loss) per common share
Basic $ (0.49) $ (0.40) $ (0.14) $ (0.07) $ 0.19
========== ========== ========== ========== =======
Diluted $ (0.49) $ (0.40) $ (0.14) $ (0.07) $ 0.18
========== ========== ========== ========== =======
19
As of December 31,
------------------
1997 1998 1999 2000 2001
---------- ---------- ---------- ---------- -------
(In thousands)
BALANCE SHEET DATA:
Cash and cash equivalents and investments $ 21,694 $ 16,702 $ 11,322 $ 11,832 $ 12,958
Working capital 19,704 11,621 9,745 8,462 9,321
Total assets 30,419 27,420 22,511 22,139 25,340
Long-term debt and capital lease obligations, less
current portion 2,400 934 2,155 332 -
Total stockholders' equity 22,419 18,250 16,625 13,907 17,247
- ----------------------
(1) In fiscal 2000, we adopted SEC Staff Accounting Bulletin No. 101 which
changed our method of accounting for revenue from license and product
development agreements. See note 3 of notes to financial statements for
further discussion.
(2) In fiscal 2001, we recalled three production lots of DERMABOND adhesive due
to a mechanized packaging problem. See note 4 of notes to financial
statements for further discussion.
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.
Closure'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 Closure'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, we disclaim 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 our financial
statements, including the notes thereto, included elsewhere in this Annual
Report.
OVERVIEW
Since our inception in 1990, we have focused our efforts on developing,
manufacturing and commercializing medical tissue adhesive products for use in
wound closure in humans and animals. During 2001, DERMABOND adhesive continued
to be our flagship product and our first DERMABOND adhesive line extension was
launched by Ethicon. We also entered new markets as our first OTC product,
SOOTHE-N-SEAL(R) adhesive, was launched by Colgate. Closure's second OTC product
was introduced into the OTC adhesive bandage market in the first quarter of 2002
when CPC began its consumer launch of BAND-AID(R) Brand Liquid Bandage. Also
during 2001, we strengthened our marketing and distribution channels by signing
three new worldwide, exclusive, marketing, distribution and product development
agreements with world-class health care companies, including CPC, Abbott and
Johnson & Johnson Wound Management.
20
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Revenue recognition. Except for DERMABOND adhesive, revenues from product sales
are recognized upon shipment which is when title is transferred. The sales price
of DERMABOND adhesive is ultimately determined by the sales price of the product
to the ultimate customer. Initially, we recognize revenue at an agreed-upon
amount per unit at the time the product is shipped. Ethicon provides a summary
of its sales of DERMABOND adhesive on a quarterly basis, and at that time, we
recognize additional revenue in an amount equal to the difference between the
previously recognized amount and the actual sales price received by Ethicon, as
well as royalties. Advance payments received by us that relate to future sales
of product or future royalties due on these sales are deferred and recorded as
revenue as they are earned over future periods.
Non-refundable fees received upon the execution of marketing and distribution
agreements for which Closure has an ongoing commitment to provide product are
deferred and recognized ratably over the period of the related agreement
pursuant to SEC Staff Accounting Bulletin No. 101. Under these marketing and
distribution agreements, we may receive additional milestone payments after the
execution of the contract. Because these payments are based on events or
achievements that may be outside of our control, we are unable to reasonably
estimate the amount of revenue, if any, that we might receive in the future
under our agreements. Potential payments under existing contracts could total
$3.6 million over the next two years assuming that all criteria are achieved.
The revenue related to these payments would be deferred and recognized ratably
over the period of the related agreement, which could extend as far out as 2011
for certain agreements.
Intangible assets. Intangible assets consist primarily of patents and licenses.
Costs incurred to secure patents and obtain licenses are capitalized until
either the related patent or license is issued or obtained, in which case they
are amortized over the shorter of their remaining economic or useful lives,
generally fifteen years for patents, or they are rejected or abandoned, in which
case they are written off. On an ongoing basis, Closure evaluates the adequacy
of its patent and license carrying values.
Inventories. Inventories are stated at the lower of cost (first-in, first-out)
or market. Closure evaluates its inventory for obsolete or unmarketable
inventory on an ongoing basis.
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 our
financial statements or tax returns. In estimating future tax consequences, we
generally consider 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. On a quarterly
basis, we consider all positive and negative evidence, including our earnings
history and existing contracts and partnerships, to determine whether it is more
likely than not that certain deferred tax assets will be recovered in the
future. Despite achieving profitability in fiscal 2001, we believe a full
valuation allowance is necessary at December 31, 2001 due to the limited
earnings history coupled with uncertainties surrounding future market
conditions.
Related parties. On January 1, 1998, we entered into an agreement with Innocoll
GmbH, of Saal-Donau, Germany, pursuant to which we pay Innocoll $180,000 per
year for five years. During 2000 and 2001, $180,000 and $135,000, respectively,
were paid to Innocoll and $45,000 was included in accrued expenses at December
31, 2001. Innocoll acts as Closure's authorized representative in Europe under
the Medical Device Directive and will provide alternative manufacturing space as
needed. Two members of the Company's Board of Directors own 99% of the equity of
Innocoll.
RESULTS OF OPERATIONS
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenues. Total revenues for 2001 were $19,173,000 compared to $13,701,000 for
2000. Product revenues increased by 41% which is primarily due to increased
shipments of DERMABOND adhesive. Also contributing to this increase was the
launch of SOOTHE-N-SEAL(R) adhesive, including a significant amount of samples,
into the consumer market in the second quarter of 2001 by Colgate. License and
product development revenues increased
21
during 2001 to $768,000 from $625,000 in 2000 as revenue previously deferred was
recognized ratably over the lives of various contracts with our marketing
partners, including those entered into during 2001.
Cost of products sold. Cost of products sold for 2001 was $5,450,000 compared to
$3,841,000 for 2000. Cost of products sold as a percentage of product sales
remained fairly constant at approximately 29% for 2001 and 2000. Although 2001
sales volume increased, this percentage remained steady due to the mix of the
products during 2001 which included the lower margin SOOTHE-N-SEAL(R) adhesive
and related samples. We expect that future gross margins on product sales will
fluctuate based on production volumes and the relative proportion of
professional and OTC products.
Operating expenses. Operating expenses were approximately $11,627,000 and
$11,268,000 for 2001 and 2000, respectively. Operating expenses primarily
consist of research, development and regulatory affairs expenses and general and
administrative expenses and, in 2001, expenses related to a voluntary packaging
recall. During 2001, research, development and regulatory affairs expenses were
primarily focused on the development of DERMABOND adhesive line extensions, the
development of a liquid occlusive dressing, other product development and basic
research. During 2001, we were not involved in any clinical trials. During 2000,
research, development and regulatory affairs expenses were primarily focused on
clinical trials for BAND-AID(R) Brand Liquid Bandage, the development of
DERMABOND adhesive line extensions, other product development and basic
research. We expect these expenses will increase as we expand our product
pipeline and related development efforts and clinical trials for potential new
products, in particular our absorbable products. Overall, general and
administrative expenses remained fairly consistent with the exception of salary
expenses which increased during the 2001 period due to increased headcount.
Also in 2001, we recorded a special charge related to the voluntary packaging
recall of three production lots of DERMABOND adhesive due to blister packaging
seals that may have been compromised due to a mechanized packaging problem. The
related costs of this recall were estimated to be approximately $430,000 and
consist primarily of costs to notify customers, cost of replacement product and
shipping expenses.
Interest income, net. Interest income for 2001 decreased to $459,000 from
$496,000 for 2000. Total interest income decreased primarily due to lower
investment yields as a result of market interest rate changes during 2001.
Interest expense also declined due to the continued reduction of our term loan
balance and capital lease obligations through monthly principal payments coupled
with a decline in interest rates associated with those obligations.
Income taxes. During 2001, tax expense was recorded for the first time by
Closure in the amount of $21,000. This amount represents alternative minimum
taxes that cannot be eliminated through the use of net operating loss
carryforwards.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues. 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 adhesive. During
2000, Ethicon continued to reduce its DERMABOND adhesive inventory levels that
were built-up during 1999.
Cost of products sold. 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.
Operating expenses. Operating expenses were approximately $11,268,000 and
$11,700,000 for 2000 and 1999, respectively. Operating expenses primarily
consist of research, 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 BAND-AID(R) Brand
Liquid Bandage, the development of DERMABOND adhesive line extensions and other
product development and basic research. During 1999, such efforts were focused
primarily on the development of DERMABOND adhesive line extensions and
BAND-AID(R) Brand Liquid Bandage, as well as clinical trials for
SOOTHE-N-SEAL(R) adhesive.
22
Interest income, net. Interest income for 2000 decreased to $496,000 from
$525,000 for 1999. Total interest income decreased primarily due to interest
earned from lower average cash and investment balances. Interest expense also
decreased due to continued reduction of our term loan balance and capital lease
obligations through monthly principal payments.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations to date primarily through the sale of equity
securities, borrowings from lenders, license and product development revenues
and product sales. Our principal sources of liquidity include cash, cash
equivalents and marketable investments, which totaled $13.0 million at December
31, 2001.
Closure has a $3.0 million line of credit, of which there were no borrowings
against at December 31, 2001, that extends through May 2002. In addition, we
have an equipment term loan of which the balance was $936,000 at December 31,
2001. In May 2002 when the term loan matures, the balance will be approximately
$690,000. At that time, the lender may allow us to renew the loan under terms
similar to the existing agreement. If we are unable to renew, the entire balance
of $690,000 will be immediately due and payable. The term loan and line of
credit agreements, which previously required us to maintain no less than fifty
percent of the outstanding or committed loan balance in an investment account
with the lender, were modified in December 2001 to eliminate such requirement.
Our capital lease obligation at December 31, 2001 was $333,000 and is classified
as a current liability. Upon expiration of the leases in 2002, we are required
to purchase primarily all of the equipment for the fair market value. The fair
market value, which we expect to be approximately $130,000, 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 operating leases are approximately $3.1
million over the next six years.
Capital Expenditures
There are no individually material capital expenditure commitments outstanding
as of December 31, 2001. We estimate that capital investments for 2002 will
approximate $1.0 million. We believe that our balances of cash, cash
equivalents, and investments together with funds generated from operations and
existing borrowing facilities will be sufficient to meet our operating cash
requirements and fund required capital expenditures for the foreseeable future.
Research and Development
During 2001, Closure spent approximately $5.6 million in research, development
and regulatory affairs expenses compared to $5.9 million in 2000. The decrease
was primarily due to the fact that Closure was not involved in any clinical
trials during 2001. We continued to increase our research and development
activities to maintain a competitive advantage and we anticipate that research
and development expenses will increase for the next several years as we develop
new products and line extensions for existing products. We also expect that
clinical trials related to new products and line extensions will be costly and
represent a significant part of future expenses. Research, development and
regulatory affairs expenses consist of items related to personnel, costs of
supplies, clinical trials, facility costs and fees paid to consultants and
outside contractors and providers and are expensed as incurred. We are
reimbursed for a fixed percentage of research and development expenses related
to projects approved under cost sharing arrangements with marketing partners.
These reimbursements are recorded as a reduction in research, development and
regulatory affairs expenses on a quarterly basis. We cannot estimate the costs
to complete our internal research and development projects due to uncertainties
regarding successful completion of projects, clinical trial outcomes, regulatory
approvals and cost sharing arrangements with partners. We believe that funds for
future research and development needs can be obtained from existing cash and
investment balances and from cash generated from operations. However, no
assurance can be given that we may not require additional funds to support the
completion of new product development, conduct clinical trials and obtain
regulatory approvals.
Cash Flows
Net cash provided by operating activities was $3.2 million for 2001 compared to
$432,000 for 2000. The increase in cash provided by operations was primarily due
to the increase in net income during the 2001 period.
23
Net cash used by investing activities was $1.6 million during 2001 compared to
cash provided by investment activities of $558,000 during the 2000 period. The
net cash used during 2001 primarily related to the purchase of fixed assets and
the investment in intangible assets of approximately $2.0 million offset by
proceeds from investments of approximately $406,000.
Net cash used by financing activities was $66,000 during 2001 compared to
$116,000 for 2000. Our primary financing activities during both years were the
repayment of debt and capital lease obligations, approximately $872,000, offset
by the proceeds from the sale of stock under our stock option and other benefit
plans.
Based on our current plans, we believe that existing cash, cash equivalents and
investments, which totaled $13.0 million as of December 31, 2001, will be
sufficient to finance our operating and capital requirements for at least 12
months. We anticipate that our recurring operating expenses will increase for
the next several years, as we expect research, development and regulatory and
general and administrative expenses to increase in order to develop new
products, manufacture in commercial quantities and fund additional clinical
trials. We also may invest in long-term assets such as intangible assets and
capital expenditures to expand our manufacturing capabilities.
Our future capital requirements, however, will depend on numerous factors,
including but not limited to the following:
. our ability to manufacture and commercialize successfully our lead
product, DERMABOND adhesive;
. the progress of our research and product development programs for future
nonabsorbable and absorbable products, including clinical studies;
. the effectiveness of product commercialization activities and marketing
agreements for our future products, including the scale-up of
manufacturing capabilities for increased capacity in anticipation of
product commercialization and development and progress of sales and
marketing efforts;
. our ability to maintain existing marketing agreements, including our
agreement with Ethicon for DERMABOND adhesive, and establish and maintain
new marketing agreements;
. our ability to achieve product development milestones;
. the costs involved in preparing, filing, prosecuting, defending and
enforcing intellectual property rights and complying with regulatory
requirements;
. the effect of competing technological and market developments;
. timely receipt of regulatory clearances and approvals;
. general acceptance of our products by the medical community and consumers;
and
. general economic conditions.
We may be required to seek additional capital to finance our operations in the
future. If our currently available funds and internally generated cash flow are
not sufficient to satisfy our financing and operating needs, we will be required
to seek additional funding through bank borrowings, additional public or private
sales of our securities, including equity securities, or through other
arrangements with marketing partners. Other than our capital lease obligations,
term loan and working capital line of credit, we have no credit facility or
other committed sources of capital. There can be no assurance that additional
funds, if required, will be available to us on favorable terms, if at all.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
INTEREST RATE SENSITIVITY
We are subject to interest rate risk on our 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. We mitigate
default risk by investing in what we believe are safe and high credit quality
securities and by monitoring the credit rating of investment issuers. 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, 2001, our total portfolio
consisted of approximately $13.0 million of cash, cash equivalents and
investments, the majority of which had average maturities within one year.
Additionally, we generally have the ability to hold fixed income investments to
maturity. Therefore, we do not expect our results of operations or cash flows to
be materially affected due to a sudden change in interest rates.
24
FOREIGN CURRENCY EXCHANGE RISK
Our international sales and related royalties of DERMABOND adhesive are based on
sales in foreign currencies. However, all of our sales to customers are payable
in U.S. dollars and we may be adversely affected by fluctuations in currency
exchange rates. Additionally, fluctuations in currency exchange rates may
adversely affect demand for our products by increasing the price of our products
in the currency of the countries in which the products are sold.
ITEM 8. FINANCIAL STATEMENTS.
Our financial statements 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.
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 our definitive 2002 Proxy Statement to be
filed with the Commission not later than 120 days after the end of the fiscal
year ended December 31, 2001. 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 our
definitive 2002 Proxy Statement to be filed with the Commission not later than
120 days after the end of the fiscal year ended December 31, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated herein by reference to our
definitive 2002 Proxy Statement to be filed with the Commission not later than
120 days after the end of the fiscal year ended December 31, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein by reference to our
definitive 2002 Proxy Statement to be filed with the Commission not later than
120 days after the end of the fiscal year ended December 31, 2001.
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.
25
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.
-------------------
A Form 8-K was filed on November 15, 2001 disclosing the schedules to
the Licensing, Distribution and Supply Agreement dated as of May 23,
2001 between Closure Medical Corporation and Johnson & Johnson Consumer
Companies, Inc.
(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
(Exhibit 10.1) (8)
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)
26
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
10.24+ Licensing, Distribution and Supply Agreement between Johnson &
Johnson Consumer Products Company and the Company dated as of May
23, 2001 (Exhibit 10.1)(6)
10.25#* Amendment, dated September 15, 1998, to Supply and Distribution
Rights Agreement, dated as of March 20, 1996, between Ethicon,
Inc. and the Company
10.26#* Amendment, dated September 30, 1998, to Supply and Distribution
Rights Agreement, dated as of March 20, 1996, between Ethicon,
Inc. and the Company
10.27#* Amendment, dated November 6, 2001, to Supply and Distribution
Rights Agreement, dated as of March 20, 1996, between Ethicon,
Inc. and the Company
10.28 Rights Agreement, dated as of July 30, 2001 between the Company
and American Stock Transfer & Trust Company, as Rights Agent
(Exhibit 4)(7)
10.29++* Employment Agreement, dated as of July 9, 2001, between Jerry Y.
Jonn and the Company
10.30++* Amendment to Employment Agreement, dated as of March 27, 2002,
between Robert V. Toni 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.
(6) Filed as an exhibit to the Company's Current Reports on Form 8-K filed June
22, 2001 and November 15, 2001.
(7) Filed as an exhibit to the Company's Current Report on Form 8-K filed July
30, 2001.
(8) Filed as an exhibit to the Company's Registration Statement on Form S-8
(Registration No. 333-58456) filed with the Commission on April 6, 2001.
(d) Financial Statement Schedules.
-----------------------------
None.
27
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.
Date: March 28, 2002 CLOSURE MEDICAL CORPORATION
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.
Signature Capacity Date
--------- -------- ----
/S/ ROBERT V. TONI
-------------------------- President and Chief Executive March 28, 2002
Robert V. Toni Officer (principal executive
officer) and Director
/S/ BENNY WARD
-------------------------- Vice President and Chief Financial March 28, 2002
Benny Ward Officer (principal financial
and accounting officer)
/S/ RONALD A. AHRENS
-------------------------- Chairman of the Board of Directors March 28, 2002
Ronald A. Ahrens
/S/ DENNIS C. CAREY
-------------------------- Director March 28, 2002
Dennis C. Carey
/S/ RICHARD W. MILLER
-------------------------- Director March 28, 2002
Richard W. Miller
/S/ JAMES E. NIEDEL
-------------------------- Director March 28, 2002
James E. Niedel
/S/ F. WILLIAM SCHMIDT
-------------------------- Director March 28, 2002
F. William Schmidt
/S/ ROLF D. SCHMIDT
-------------------------- Director March 28, 2002
Rolf D. Schmidt
/S/ RANDY H. THURMAN
-------------------------- Director March 28, 2002
Randy H. Thurman
28
CLOSURE MEDICAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants F-2
Financial Statements:
Balance Sheets as of December 31, 2000 and 2001 F-3
Statements of Operations for the years ended December 31, 1999,
2000 and 2001 F-4
Statements of Cash Flows for the years ended December 31, 1999,
2000 and 2001 F-5
Statements of Stockholders' Equity for the years ended
December 31, 1999, 2000 and 2001 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 2001, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2001 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 8, 2002
F-2
CLOSURE MEDICAL CORPORATION
BALANCE SHEETS
(In thousands, except per share data)
December 31,
--------------------
2000 2001
-------- --------
Assets
Cash and cash equivalents $ 1,382 $ 2,914
Short-term investments 7,544 8,925
Restricted investments 2,906 -
Accounts receivable 1,322 1,985
Inventories 596 1,246
Prepaid expenses 308 263
-------- --------
Total current assets 14,058 15,333
Furniture, fixtures and equipment, net 6,598 6,181
Intangible assets, net 1,483 2,707
Long-term investments - 1,119
-------- --------
Total assets $ 22,139 $ 25,340
======== ========
Liabilities and Stockholders' Equity
Accounts payable $ 1,160 $ 1,206
Accrued expenses 1,525 2,355
Deferred revenue 1,102 1,182
Capital lease obligations 322 333
Debt obligations 1,487 936
-------- --------
Total current liabilities 5,596 6,012
Other accrued liabilities - 100
Deferred revenue 2,304 1,981
Capital lease obligations less current portion 332 -
-------- --------
Total liabilities 8,232 8,093
-------- --------
Commitments and contingencies (See notes 9, 10, 11 and 14) - -
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 13,428 and 13,508 shares, respectively 134 135
Additional paid-in capital 47,716 48,521
Accumulated deficit (33,943) (31,409)
-------- --------
Total stockholders' equity 13,907 17,247
-------- --------
Total liabilities and stockholders' equity $ 22,139 $ 25,340
======== ========
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,
-----------------------------------
1999 2000 2001
---------- -------- ----------
Product sales $ 13,370 $ 13,076 $ 18,405
License and product development revenues - 625 768
---------- -------- ----------
Total revenues 13,370 13,701 19,173
Cost of products sold 4,722 3,841 5,450
---------- -------- ----------
Gross profit 8,648 9,860 13,723
---------- -------- ----------
Research, development and regulatory affairs expenses 6,296 5,853 5,622
General and administrative expenses 5,404 5,415 5,575
Special charge- voluntary packaging recall (See note 4) - - 430
---------- -------- ----------
Total operating expenses 11,700 11,268 11,627
---------- -------- ----------
Income (loss) from operations (3,052) (1,408) 2,096
Interest expense (344) (235) (134)
Interest income 869 731 593
---------- -------- ----------
Income (loss) before taxes (2,527) (912) 2,555
Provision for income taxes - - 21
---------- -------- ----------
Net income (loss) before cumulative effect of accounting change (2,527) (912) 2,534
Cumulative effect of accounting change (See note 3) - (2,656) -
---------- -------- ----------
Net income (loss) $ (2,527) $ (3,568) $ 2,534
========== ======== ==========
Shares used in computation of net income (loss) per common share:
Basic 13,324 13,390 13,468
========== ======== ==========
Diluted 13,324 13,390 13,852
========== ======== ==========
Net loss per common share- cumulative effect of accounting change:
Basic $ - $ (0.20) $ -
========== ======== ==========
Diluted $ - $ (0.20) $ -
========== ======== ==========
Net income (loss) per common share:
Basic $ (0.19) $ (0.27) $ 0.19
========== ======== ==========
Diluted $ (0.19) $ (0.27) $ 0.18
========== ======== ==========
Pro forma amounts assuming the change in accounting principle is applied
retroactively (See note 3):
Net income (loss) $ (1,902) $ (912) $ 2,534
========== ======== ==========
Net income (loss) per common share:
Basic $ (0.14) $ (0.07) $ 0.19
========== ======== ==========
Diluted $ (0.14) $ (0.07) $ 0.18
========== ======== ==========
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,
----------------------------------
1999 2000 2001
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $ (2,527) $ (3,568) $ 2,534
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Cumulative effect of accounting change (See note 3) - 2,656 -
Depreciation and amortization expense 948 961 1,027
Amortization of deferred compensation on stock options 320 73 -
Loss on disposals of fixed assets 594 244 58
Loss on disposals of intangible assets 100 60 135
Change in accounts receivable 459 (590) (663)
Change in inventories 417 (5) (650)
Change in prepaid expenses (40) 18 45
Change in accounts payable and accrued expenses (1,522) 781 976
Change in deferred revenue (967) (198) (243)
-------- -------- --------
Net cash provided (used) by operating activities (2,218) 432 3,219
-------- -------- --------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (1,174) (437) (623)
Investment in intangible assets (483) (661) (1,404)
Purchases of investments (6,629) (6,877) (7,497)
Proceeds from the sale of investments 10,401 8,533 7,903
-------- -------- --------
Net cash provided (used) by investing activities 2,115 558 (1,621)
-------- -------- --------
Cash flows from financing activities:
Repayment of debt (550) (613) (551)
Net proceeds from sale of common stock 582 777 806
Payments under capital lease obligations (245) (280) (321)
-------- -------- --------
Net cash used by financing activities (213) (116) (66)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (316) 874 1,532
Cash and cash equivalents, beginning of year 824 508 1,382
-------- -------- --------
Cash and cash equivalents, end of year $ 508 $ 1,382 $ 2,914
======== ======== ========
Supplemental cash flow information:
Cash payments for interest during 1999, 2000 and 2001 were approximately $317,
$260 and $151, respectively. Cash payments for income taxes were $0, $0 and
$17 during 1999, 2000 and 2001, 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, 1999, 2000 and 2001
(In thousands)
Deferred
Common Stock Additional Compensation Total
----------------------- Paid-in Accumulated on Stock Stockholders'
Shares Amount Capital Deficit Options Equity
---------- ---------- ---------- ---------- ---------- ------------
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
Exercise of stock options, 401(k)
match and sale of common
stock under ESPP 80 1 805 - - 806
Net income - - - 2,534 - 2,534
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2001 13,508 $ 135 $ 48,521 $ (31,409) $ - $ 17,247
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-6
Closure Medical Corporation
Years Ended December 31, 1999, 2000 and 2001
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. Prior 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
Topical Skin Adhesive ("DERMABOND adhesive") is a nonabsorbable tissue
adhesive that can be used to replace sutures and staples for certain
topical wound closure applications. DERMABOND adhesive was approved for
marketing by the United States Food and Drug Administration ("FDA") in
August 1998. The Company's marketing partner, Ethicon, Inc.
("Ethicon"), a Johnson & Johnson company, markets and distributes
DERMABOND adhesive.
On January 29, 2001, the Company received FDA clearance to market
BAND-AID(R) Brand Liquid Bandage ("Liquid Bandage"), which is the first
and only cyanoacrylate medical device approved by the FDA for the
over-the-counter ("OTC") adhesive bandage market. In May 2001, the
Company entered into an agreement providing Johnson & Johnson Consumer
Products Company ("CPC") with worldwide supply, distribution and
development rights to Liquid Bandage technology. The agreement includes
rights to Closure's Liquid Bandage and future OTC products, except for
SOOTHE-N-SEAL(R) canker sore relief ("SOOTHE-N-SEAL(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(R) adhesive technology in December 2000. The
Company received FDA clearance to market SOOTHE-N-SEAL(R) adhesive in
September 1999. SOOTHE-N-SEAL(R) adhesive was the first cyanoacrylate
adhesive approved by the FDA for the OTC consumer market.
In July 2001, the Company entered into an agreement providing Abbott
Laboratories, Inc. ("Abbott") with worldwide supply, distribution and
development rights to the NEXABAND(R) product line. The agreement
granted Abbott immediate worldwide distribution rights of NEXABAND(R)
adhesives excluding the United States and Canada. Upon the expiration
of the Company's prior distribution arrangement in the second quarter
of 2002, Abbott can begin the distribution of NEXABAND(R) products in
the United States and Canada. The NEXABAND(R) adhesive line consists of
two products used in veterinary wound closure and wound care. The
adhesives are used in cat declaw procedures as well as spay and neuter
procedures.
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. In
2000, restricted investments served 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. Closure evaluates its inventory for obsolete or unmarketable
inventory on an ongoing basis.
F-7
Closure Medical Corporation
Years Ended December 31, 1999, 2000 and 2001
Notes to Financial Statements
- --------------------------------------------------------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
2. 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 and obtain licenses are capitalized
until either the related patent or license is issued or obtained, in
which case they are amortized over the shorter of its remaining
economic or useful life, generally fifteen years for patents, or it is
rejected or abandoned, in which case they are written off. On an
ongoing basis, Closure evaluates the adequacy of the patent and license
carrying values.
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
Except for DERMABOND adhesive, revenues from product sales are
recognized upon shipment which is when risk of loss and title is
transferred. The sales price of DERMABOND adhesive is ultimately
determined by the sales price of the product to the ultimate customer.
Initially, the Company recognizes revenue at an agreed-upon amount per
unit at the time the product is shipped. Ethicon provides a summary of
its sales of DERMABOND adhesive on a quarterly basis, and at that time,
the Company recognizes additional revenue in an amount equal to the
difference between the previously recognized amount and the actual
sales price received by Ethicon, as well as royalties. Advance payments
received by the Company that relate to future sales of product or
future royalties due on these sales are deferred and recorded as
revenue as they are earned over future periods. Non-refundable fees or
payments received upon milestone achievements or the execution of
marketing and distribution agreements for which Closure has an ongoing
commitment to provide product are deferred and recognized ratably over
the period of the related agreements.
During fiscal 1999, 2000 and 2001, one customer accounted for 93%, 90%
and 83% of total product sales, respectively. One customer accounted
for 92% and 65% of trade accounts receivable at December 31, 2000 and
2001, respectively. Each of the Company's marketing partners are based
in the United States, and accordingly, less than one percent of the
Company's revenues during 2000 and 2001 were from outside of North
America. However, the majority of the Company's products are marketed
on a global basis by its marketing partners.
Research and Development Expenses
Research and development costs are expensed as incurred. The Company
is reimbursed for a fixed percentage of research and development
expenses related to projects approved under cost sharing arrangements
with marketing partners. These reimbursements are recorded as a
reduction in research, development and regulatory affairs expenses on
a quarterly basis.
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.
F-8
Closure Medical Corporation
Years Ended December 31, 1999, 2000 and 2001
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
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
GmbH, of Saal-Donau, Germany, which provides for fees to be paid to
Innocoll of $180,000 per year for five years. During 2000 and 2001,
$180,000 and $135,000, respectively, were paid to Innocoll and $45,000
was included in accrued expenses at December 31, 2001. Innocoll acts as
Closure's authorized representative in Europe under the Medical Device
Directive and will provide alternative manufacturing space as needed.
Two members of the Company's Board of Directors own 99% of the equity
of Innocoll.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses at December 31, 2000 and 2001
approximated their fair value due to the short-term nature of these
items.
The fair value of the Company's investments at December 31, 2000 and
2001 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, 2000 and 2001 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") 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 income (loss) and net income (loss) per common share have been
provided in note 13 as if the fair value method had been applied.
Segment Reporting
The Company has determined that it did not have any separately
reportable operating segments as of December 31, 2001.
Recently Issued Accounting Standards
In June 2001, the FASB issued Statements Nos. 141 ("SFAS 141"),
"Business Combinations" and 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets." SFAS 141, which applies to all business
combinations initiated after June 30, 2001, eliminates
pooling-of-interests accounting prospectively and provides guidance on
purchase accounting related to the recognition of intangible assets and
accounting for negative goodwill. The Company has adopted SFAS No. 141
without any financial impact on the Company's financial position or
results of operations. SFAS 142 changes the accounting for goodwill
from an amortization method to an impairment only approach and is
effective for fiscal years beginning after December 15, 2001. The
Company will adopt SFAS 142 as of January 1, 2002 and does not expect
that it will have a material impact on the Company's financial position
or results of operations.
F-9
Closure Medical Corporation
Years Ended December 31, 1999, 2000 and 2001
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). The objectives of SFAS 143 are to
establish accounting standards for the recognition and measurement of
an asset retirement obligation and its associated asset retirement
cost. SFAS 143 is effective for fiscal years beginning after June 15,
2002. At the present time, the adoption of this standard is not
expected to have a material impact on the Company's financial position
or results of operations.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). The
statement supersedes Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121") and APB 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The provisions of SFAS 144 are required to be applied to
fiscal years beginning after December 15, 2001. The Company will adopt
SFAS 144 as of January 1, 2002 and does not expect that it will have a
material impact on the Company's financial position or results of
operations.
Net Income (Loss) Per Share
Basic net income (loss) per common share is computed using the weighted
average number of shares of common stock outstanding during the period.
Diluted net income (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.
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. SPECIAL CHARGE
In November 2001, the Company initiated a voluntary recall of DERMABOND
product due to concern that the packaging seals of three production
lots may have been compromised and the product sterility could not be
assured. Distribution of the recalled lots was limited to the United
States. The related costs consist primarily of costs to notify
customers, cost of replacement product and shipping expenses.
F-10
Closure Medical Corporation
Years Ended December 31, 1999, 2000 and 2001
Notes to Financial Statements
- --------------------------------------------------------------------------------
5. INVENTORIES
Inventories included the following (in thousands):
December 31,
----------------------
2000 2001
-------- --------
Packaging $ 195 $ 451
Raw materials 46 61
Work-in-process 301 309
Finished goods 54 425
-------- --------
$ 596 $ 1,246
======== ========
6. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment included the following (in
thousands):
December 31,
--------------------- Estimated
2000 2001 Useful Lives
-------- -------- ------------
Furniture and computers $ 1,218 $ 1,248 3-10 years
Machinery and equipment 3,455 5,161 5-10 years
Leasehold improvements 2,955 2,955 10 years
Construction-in-progress 1,735 537
-------- --------
9,363 9,901
Accumulated depreciation (2,765) (3,720)
-------- --------
$ 6,598 $ 6,181
======== ========
7. INTANGIBLE ASSETS
Intangible assets included the following (in thousands):
December 31,
--------------------- Estimated
2000 2001 Useful Lives
-------- -------- ------------
Trademarks $ 57 $ 57 5 years
Patents:
Approved 333 505 5-17 years
Unapproved 1,280 1,827 *
License -- 550 15 years
Other 197 197 5 years
-------- --------
1,867 3,136
Accumulated amortization (384) (429)
-------- --------
$ 1,483 $ 2,707
======== ========
* Patents are not amortized until approved.
8. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
December 31,
---------------------
2000 2001
-------- --------
Accrued payroll $ 1,126 $ 1,436
Voluntary packaging recall -- 430
Other 399 489
-------- --------
$ 1,525 $ 2,355
======== ========
F-11
Closure Medical Corporation
Years Ended December 31, 1999, 2000 and 2001
Notes to Financial Statements
- --------------------------------------------------------------------------------
9. 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. In June 2001, the
remaining loan balance amount of approximately $1,200,000 was
refinanced under terms similar to the original agreement. At December
31, 2001, the balance was $936,000. Borrowings are payable monthly in
principal and interest, with one final payment of all remaining
principal and accrued interest due May 31, 2002. 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.
The interest rate was approximately 3.7% at December 31, 2001.
In June 2001, 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 is cross-collateralized with the
equipment term loan. 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, 2001, there were no borrowings
against the line of credit.
Both the line of credit and equipment term loan require 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, 2001.
10. 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 $549,000,
$559,000 and $569,000 for 1999, 2000 and 2001, respectively.
The Company leases equipment under capital leases with original lease
terms of four to five years. At December 31, 2001, the balance was
$333,000, which was classified as a current liability. 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, which the Company expects to be approximately $130,000,
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 operating leases
with initial or remaining terms of one year or more are as follows at
December 31, 2001 (in thousands):
Operating
Leases
------------
2002 $ 572
2003 580
2004 538
2005 534
2006 544
Thereafter 322
------------
Total minimum lease payments $ 3,090
============
F-12
Closure Medical Corporation
Years Ended December 31, 1999, 2000 and 2001
Notes to Financial Statements
- --------------------------------------------------------------------------------
11. MAJOR CUSTOMERS
In 1996, the Company entered into an eight-year supply and distribution
agreement providing Ethicon with exclusive worldwide rights to market,
distribute and sell DERMABOND adhesive. Upon execution of the
agreement, Ethicon paid Closure $4,500,000, which represented a
$3,500,000 non-refundable licensing fee and a $1,000,000 payment that
has been and will continue to be offset against either future product
purchases or royalties to be paid by Ethicon on product sales (as
described below). At December 31, 2001, $660,000 of the $1,000,000
payment had been offset against product purchases leaving $340,000
classified as deferred revenue on the Company's balance sheet to offset
future product purchases. In 1996, Ethicon advanced Closure an
additional $1,000,000 payment related to the achievement of a milestone
pursuant to the agreement, which was fully credited against royalties
owed by Ethicon from 1998 through 2000.
The agreement requires Ethicon to make minimum purchases that increase
annually and to pay royalties based upon net sales. The agreement may
be renewed after the initial eight-year term for successive additional
periods of one year by Ethicon upon at least ninety days' prior notice
to the expiration of the contract period. The agreement is terminable
upon specified events, including material breach by either party and
insolvency of either party. Upon certain events of default by the
Company, including failure to provide an adequate supply of product,
Ethicon may end its arrangement to purchase DERMABOND adhesive from the
Company, and may manufacture the product itself and pay the Company
royalties based on sales. In addition, the agreement allows for the
joint collaboration and cost sharing of continuing development
activities.
In May 2001, the Company entered into an agreement providing CPC with
exclusive worldwide supply, distribution and development rights to
BAND-AID(R) Brand Liquid Bandage technology. Included in the agreement
are rights to future OTC products co-developed by the parties,
excluding our SOOTHE-N-SEAL(R) adhesive technology. The agreement
requires CPC to purchase annual minimum quantities during each contract
year. The agreement will automatically renew each year for a period of
one year after the initial contract term expires unless either party
notifies the other at least six months prior of its intention not to
renew. The agreement is terminable upon specified events, including
material breach by either party. In addition, the agreement allows for
the joint collaboration and cost sharing of continuing development
activities. Upon execution of the agreement and certain milestones
achieved by Closure, CPC made payments to the Company in recognition of
its previous research and development expenditures. These payments have
been deferred and will be recognized ratably over the life of the
agreement. In accordance with the agreement, the Company may receive
additional milestone payments, based on achievement of certain
criteria, subsequent to the execution of the contract.
In December 2000, the Company entered into an exclusive worldwide
supply, distribution and development rights agreement for
SOOTHE-N-SEAL(R) adhesive with Colgate. Under the agreement, Colgate
acquired exclusive worldwide rights to market, sell and distribute
SOOTHE-N-SEAL(R) 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
Closure a license fee in consideration for all right, title and
interest in the SOOTHE-N-SEAL(R) adhesive trademark. These payments
were deferred and will be recognized ratably over the life of the
agreement. The agreement requires Colgate to purchase annual minimum
quantities and, at the end of the seven-year term, may be renewed by
agreement of both parties for additional periods. The agreement is
terminable upon specified events, including material breach by either
party. In addition, the agreement allows for the joint collaboration
and cost sharing of continuing development activities.
F-13
Closure Medical Corporation
Years Ended December 31, 1999, 2000 and 2001
Notes to Financial Statements
- --------------------------------------------------------------------------------
11. MAJOR CUSTOMERS--Continued
In July 2001, the Company entered into an agreement providing Abbott
with exclusive worldwide, supply, distribution and development rights
to its veterinary NEXABAND(R) product line. The agreement provides
Abbott with immediate worldwide distribution rights exclusive of the
United States and Canada. Upon expiration of a prior distribution
arrangement with Farnam Companies, Inc. in the second quarter of 2002,
the agreement provides Abbott with distribution rights in the United
States and Canada. This agreement also grants Abbott rights to future
veterinary products co-developed through the collaboration of the
parties, including product improvements, line extensions and new
veterinary products based on the Company's cyanoacrylate technology.
The agreement requires Abbott to purchase a minimum dollar amount of
products during each contract year. At the end of the contract term,
the agreement may be renewed for additional periods with the consent of
both parties. In addition, the agreement allows for the joint
collaboration and cost sharing of continuing development activities.
The Company entered into an agreement with Johnson and Johnson Wound
Management ("J&J"), a division of Ethicon, in November 2001, which
provides J&J with worldwide supply, distribution and development rights
to its professional wound management platform, including the Company's
liquid occlusive dressing for partial thickness wounds. The agreement
is in the form of an amendment to the terms of the Company's existing
licensing and development agreement with Ethicon. Upon execution of the
agreement, J&J paid Closure a non-refundable fee in consideration of
rights under the agreement. The Company may receive future milestone
payments based on achievement of certain criteria. Both non-refundable
and milestone payments will be deferred and recognized ratably over the
period of the agreement. In addition, the agreement allows for the
joint collaboration and cost sharing of continuing development
activities.
F-14
Closure Medical Corporation
Years Ended December 31, 1999, 2000 and 2001
Notes to Financial Statements
- --------------------------------------------------------------------------------
12. INCOME TAXES
There is no current provision or benefit for income taxes recorded for
the years ended December 31, 1999 and 2000 as the Company generated net
operating losses for income tax purposes for which there is no
carryback potential. In 2001, the Company recorded a current provision
for income taxes of $21,000, which represents alternative minimum
taxes. There is no deferred provision or benefit for income taxes
recorded for the years ended December 31, 1999, 2000 and 2001 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,
---------------------
2000 2001
--------- ---------
Net operating loss carryforwards $ 7,041 $ 6,672
Research and development credit carryforwards 1,237 1,597
Temporary differences:
Accruals, reserves and other 308 321
Deferred revenue 1,161 1,072
Fixed assets and depreciation (118) (189)
Intangible assets and amortization (499) (856)
--------- ---------
9,130 8,617
Valuation allowance (9,130) (8,617)
--------- ---------
Net deferred tax asset $ - $ -
========= =========
At December 31, 2001, the Company had net operating loss carryforwards
for income tax reporting purposes of approximately $17,195,000 which
expire beginning in the year 2011. The Company also has research and
development tax credit carryforwards of approximately $1,597,000 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 decreased by $513,000 during 2001 as net
operating loss carryforwards were utilized. At December 31, 2001, the
valuation allowance included $1,210,000 to offset net operating losses
generated by the exercise of stock options. When this portion of the
valuation allowance is reduced, the resulting benefit will be credited
to additional paid-in-capital.
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, 1999, 2000 and 2001 as follows (in thousands):
December 31,
----------------------------------
1999 2000 2001
-------- -------- --------
U.S. federal tax (benefit) at statutory rate $ (859) $ (1,213) $ 868
State taxes (net of federal benefit) (117) (171) 123
Change in valuation allowance 1,773 1,844 (513)
Deductions related to stock options not
applicable for financial reporting (505) (281) (268)
Research and development credit (442) (352) (360)
Other 150 173 150
Alternative minimum taxes - - 21
-------- -------- --------
Provision for income taxes $ - $ - $ 21
======== ======== ========
F-15
Closure Medical Corporation
Years Ended December 31, 1999, 2000 and 2001
Notes to Financial Statements
- --------------------------------------------------------------------------------
13. 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, 1999, 2000 and 2001
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, 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
Granted 308,200 20.07 15.62
Exercised (53,165) 10.10 -
Canceled (51,400) 24.46 -
--------- ------------
Options outstanding at December 31, 2001 3,139,054 20.51
=========
F-16
Closure Medical Corporation
Years Ended December 31, 1999, 2000 and 2001
Notes to Financial Statements
- --------------------------------------------------------------------------------
13. EMPLOYEE BENEFIT PLANS--Continued
The following table summarizes information about stock options at
December 31, 2001:
Options Outstanding Options Exercisable
---------------------------------------------------- ---------------------------
Weighted- Weighted-
Weighted- Average Average
Range of Number Average Remaining Number Exercise
Exercise Price Outstanding Exercise Price Contractual Life Exercisable Price
----------------- ---------------- -------------- ----------------- -------------- -----------
$5.00-$14.56 712,999 $ 10.54 6.30 472,619 $ 8.51
$14.75-$24.75 1,679,595 20.41 7.97 979,807 20.74
$25.25-$29.81 294,253 28.79 6.98 149,883 28.69
$30.63-$35.00 452,207 31.19 7.24 254,016 31.07
---------------- --------------
Total 3,139,054 1,856,325
================ ==============
Options available for grant at December 31, 2001 totaled 1,084,787.
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 2000 and
2001, 16,649 and 23,744 shares were issued under the ESPP,
respectively. At December 31, 2001, 1,454,759 shares were available for
issuance.
During 1999, 2000 and 2001, the Company recognized approximately
$320,000, $73,000 and $0, respectively, of compensation expense related
to the Plan. Had compensation expense for 1999, 2000 and 2001, 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 123, the Company's results
of operations would have been reduced to the pro forma amounts
indicated below:
1999 2000 2001
------- ------- ------
Net income (loss)-as reported $(2,527) $(3,568) $2,534
Net loss-pro forma (8,633) (12,118) (8,094)
Net income (loss) per common share:
Basic -as reported (0.19) (0.27) 0.19
Diluted-as reported (0.19) (0.27) 0.18
Net loss per common share--basic and diluted-
pro forma (0.65) (0.91) (0.60)
The pro forma amounts discussed above were derived using the
Black-Scholes option-pricing model with the assumptions indicated
below:
1999 2000 2001
------- ------- ------
Average expected life (years) 5.5 7.4 7.0
Average interest rate 5.6% 5.3-6.7% 4.4-5.3%
Volatility 85.0% 84.0% 84.3%
Dividend yield 0.0% 0.0% 0.0%
F-17
Closure Medical Corporation
Years Ended December 31, 1999, 2000 and 2001
Notes to Financial Statements
- --------------------------------------------------------------------------------
13. 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. Effective January 1, 2000, the Company amended the
401(k) Plan in order to change the contribution 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, 2000 and 2001, the 401(k) Plan had a
receivable from the Company of 364 and 592 shares, respectively, based
on a closing stock price of $36.00 and $23.36, respectively. Cash
amounts contributed to the 401(k) Plan during 2000 and 2001 were
approximately $63,000 and $68,000, respectively.
14. COMMITMENTS AND CONTINGENCIES
In 1996, the Company entered into a five-year agreement with a
consultant which provided for annual compensation of $120,000. The
agreement expired in October 2001.
15. QUARTERLY FINANCIAL DATA - UNAUDITED
The following tables provide quarterly data for fiscal years ended
December 31, 2000 and 2001.
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
=========== =========== =========== ============
* to reflect cumulative effect of accounting change (See note 3).
F-18
Closure Medical Corporation
Years Ended December 31, 1999, 2000 and 2001
Notes to Financial Statements
- --------------------------------------------------------------------------------
15. QUARTERLY AND PRO FORMA FINANCIAL DATA - UNAUDITED- Continued
Fiscal 2001 Quarters Ended
(In thousands, except per share data)
----------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
------------ ------------ ------------ ------------
Revenues $ 3,917 $ 4,408 $ 4,873 $ 5,975
Cost of products sold (1,167) (1,166) (1,466) (1,652)
------------ ------------ ------------ ------------
Gross profit 2,750 3,242 3,407 4,323
Research, development and regulatory
affairs expenses 1,280 1,455 1,443 1,444
General and administrative
expenses 1,330 1,444 1,383 1,418
Special charge- voluntary packaging
recall - - - 430
------------ ------------ ------------ ------------
Income from continuing operations 140 343 581 1,031
Interest income, net 129 108 114 109
Provision for income taxes - 10 11 -
------------ ------------ ------------ ------------
Net income $ 269 $ 441 $ 684 $ 1,140
============ ============ ============ ============
Basic and diluted net income
per common share $ 0.02 $ 0.03 $ 0.05 $ 0.08
============ ============ ============ ============
F-19