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UNITED STATES 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, 2002
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. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [_]
As of June 30, 2002 the aggregate market value of the voting and non-voting
Common Stock held by non-affiliates of the registrant was $94,306,758 based upon
the closing price of the Common Stock as reported on the Nasdaq National Market.
Shares of common stock held by each officer and director and by each person who
owns five percent or more of the outstanding common stock have been excluded
from this calculation as such persons may be considered to be affiliated with
the Company.
As of March 24, 2003, the number of shares of Common Stock outstanding was
13,569,486.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference into this
report: Definitive Proxy Statement in connection with the 2003 Annual Meeting of
Shareholders
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TABLE OF CONTENTS
PART I ............................................................................................ 3
ITEM 1. BUSINESS ............................................................................... 3
ITEM 2. PROPERTIES ............................................................................. 19
ITEM 3. LEGAL PROCEEDINGS ...................................................................... 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .................................... 19
PART II ........................................................................................... 19
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS .................. 19
ITEM 6. SELECTED FINANCIAL DATA ................................................................ 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .. 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK .............................. 26
ITEM 8. FINANCIAL STATEMENTS ................................................................... 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES .. 27
PART III .......................................................................................... 27
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ..................................... 27
ITEM 11. EXECUTIVE COMPENSATION ................................................................. 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ......................... 27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ......................................... 27
ITEM 14. CONTROLS AND PROCEDURES ................................................................ 28
PART IV ........................................................................................... 28
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ....................... 28
SIGNATURES ........................................................................................ 31
CERTIFICATIONS .................................................................................... 32
INDEX TO FINANCIAL STATEMENTS ..................................................................... F-1
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.
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PART I
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.
AVAILABLE INFORMATION
Closure Medical files annual, quarterly, and current reports, proxy statements,
and other documents with the SEC under the Securities Exchange Act of 1934. The
public can obtain any documents that we file with the SEC at http://www.sec.gov.
We make available free of charge through our website, www.closuremed.com, our
Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and all amendments to those reports as soon as reasonably practicable
after such material is electronically filed with or furnished to the Securities
and Exchange Commission. We are not including the information contained on our
Web site as a part of, or incorporating it by reference into, this Annual Report
on Form 10-K.
BUSINESS OVERVIEW
We develop, manufacture and commercialize medical tissue adhesive products for
wound care and wound closure for the professional healthcare, 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 internal
adhesive products.
Our leading product, DERMABOND adhesive, is sold to healthcare professionals and
can be used instead of sutures or staples 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
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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 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 internal adhesives for use inside the body.
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 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. Internal adhesives 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 leading 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 to topical sutures or staples, including as an adjunct to
subcuticular sutures or staples which are used for internal tissue closure.
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.
In January 2003, we received approval from the U.S. Food & Drug Administration,
or FDA, to market High Viscosity DERMABOND Topical Skin Adhesive. This new
formulation of DERMABOND adhesive is thicker which provides physicians greater
precision and control of application, especially when used on curved areas of
the body such as around the eyes and nose. The approval is based in part on the
findings of an 84-patient multicenter clinical study conducted at the Orlando
Regional Medical Center and Stony Brook University Hospital, Long Island, NY.
Our marketing partner, Ethicon, has been distributing this product in Europe
since late 2002 and launched the product in the United States during the first
quarter of 2003.
In 2002, we received approval from the 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. We believe that this is a significant benefit of using DERMABOND
adhesive as opposed to sutures and staples which have not been shown to protect
against microbial penetration. The unit cost of DERMABOND adhesive is greater
than sutures or staples, however 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.
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In March 1996, we entered into an exclusive worldwide agreement with Ethicon to
market and distribute DERMABOND adhesive. In August 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 36 foreign countries and regions,
including Japan.
BAND-AID(R) Brand Liquid Bandage
In January 2001, we received FDA clearance to market our 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 our 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. Our liquid bandage utilizes the same proprietary technology as our
professional product, DERMABOND adhesive.
In May 2001, we entered into an agreement providing Johnson & Johnson Consumer
Products Company, or CPC, with worldwide supply, distribution and development
rights to our liquid bandage technology. The agreement includes rights to the
liquid bandage and certain future OTC products, excluding our SOOTHE-N-SEAL(R)
adhesive technology. During February 2002, CPC began the marketing and
distribution of our liquid bandage as BAND-AID(R) Brand Liquid Bandage and the
product is currently available in most major retail, food and drug outlets in
the United States. CPC conducted, as part of its product launch, a consumer
oriented marketing campaign that included television advertising, consumer
promotions, and trade promotions. Given the results of the initial product
launch, Closure and CPC plan to develop liquid bandage line extensions in the
future as well as broaden the distribution beyond the United States. During the
first quarter of 2003, CPC began distributing BAND-AID(R) Brand Liquid Bandage
in Canada.
SOOTHE-N-SEAL(R) canker sore relief
In 1999, we received 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
Wal-Mart and several other national drug chains.
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, seals exposed nerve endings and reduces leakage and
irritation. NEXABAND(R) S/C Topical Tissue Adhesive is indicated for the topical
closure and sealing of various surgical incisions, including those made during
spay and neuter procedures and provides an effective, flexible barrier against
fluids, dirt and contaminants.
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. Abbott distributes our veterinary products in North America,
Australia, Switzerland and the United Kingdom. Prior to our distribution
agreement with Abbott, NEXABAND(R) products were marketed and distributed only
in North America.
PRODUCTS UNDER DEVELOPMENT
We continue to pursue modifications and improvements to our existing products to
enhance their effectiveness and expand their marketability. We are also
developing additional nonabsorbable and internal adhesive products. These
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future products require further development and are subject to clinical trials
and regulatory clearance or approval before commercialization.
Internal adhesives
In 1998, we established our Internal Products Development team, or IPD, which is
comprised of dedicated scientists with extensive surgical device development
experience. The IPD is developing biocompatible cyanoacrylate formulations,
including the synthesis, formulation design, analytical methods and in vitro and
in vivo testing, that may potentially be used for internal applications.
We are primarily focused on developing formulations for a vascular sealant to be
used as an adjunct to sutures. We have completed several animal models through
collaborations with leading research institutions and have ongoing studies
involving the finalization of formulations and the completion of additional
safety studies. We are also preparing the clinical strategy prior to filing an
Investigational Device Exemption, or IDE, with the FDA. The vascular sealant
formulation as well as future internal adhesive products require further
development and could be subject to stringent clinical trials and lengthy
regulatory premarket approvals prior to their commercialization.
Liquid Occlusive Dressing
We are currently developing a liquid occlusive dressing, or LOD, to treat
partial thickness wounds such as pressure ulcers and skin tears. The LOD
formulation 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,
provide a barrier to infection and is transparent, thereby permitting enhanced
wound assessment. To date, we have completed animal research as well as a
10-patient human pilot clinical study for pressure ulcers. A second human pilot
clinical study is ongoing to define the durability and wound healing rates when
using LOD versus leading dressings in the category. Depending on the outcomes
from the pilot studies, we anticipate the initiation of a definitive,
multi-center, human clinical study allowing for FDA approval through the 510(k)
premarket clearance. In November 2001, distribution and development rights for
our professional wound management products, 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.
Endobronchial Lung Volume Reduction
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. In performing ELVR, our
proprietary medical adhesive would 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. To date, our research has demonstrated feasibility of the
device in safely creating segmental lung volume reduction in the animal model.
Future development activities include the completion of additional longer-term
safety and efficacy animal studies. Given positive results of the animal
studies, we would then seek FDA approval to enter a human pilot safety study,
followed by a pivotal effectiveness study.
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 internal
adhesive 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, 2002, $170,000 of the $1,000,000 payment
remained 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.
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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.
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 certain 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 are being recognized ratably over the life of
the agreement. In accordance with the agreement, we may receive future milestone
payments, based on achievement of certain criteria.
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 are being 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 with exclusive
worldwide, supply, distribution and development rights to our veterinary
NEXABAND(R) product line. 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 product 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 which is currently under development. 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 which was deferred and is being recognized ratably over the period
of the agreement. We may receive future milestone payments based on achievement
of certain criteria which 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 41 issued United States patents with expiration dates
ranging from 2004 to 2020 of which the average remaining life is thirteen years.
Also, we have eleven issued foreign patents with expiration dates ranging from
2014 to 2019 of which the average remaining life is fourteen years. We also have
filed applications for 54 additional United States patents and 83 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 generally 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 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
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manufacturing facilities and processes may subject us to further FDA inspections
and review before implementation of such modifications.
In 2002, Congress enacted the Medical Device User Fee and Modernization Act,
which authorizes the FDA to assess and collect user fees for premarket
notifications and premarket approval applications filed on or after October 1,
2002. Fees for fiscal year 2003 range from $2,187 for premarket notifications to
$154,000 for premarket approval applications, although fee reductions are
available for companies qualifying as small businesses.
Companies that manufacture devices distributed in the United States must comply
with GMP requirements governing the design, manufacture, release, packaging, and
distribution of devices. Manufacturers must continue to expend time, money, and
effort in the area of production and quality control to ensure full technical
compliance with GMPs. Medical devices also are subject to postmarket reporting
requirements for certain adverse events and device malfunctions. 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.
9
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. In addition to full-time employees, 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 manufactured 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.
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, only one of which is approved for sale in the United States. In 2002,
United States Surgical, a division of Tyco Health Group, LP received FDA
approval to market Indermil(TM) Tissue Adhesive, a butyl cyanoacrylate. Tyco has
been marketing Indermil(TM) in the United Kingdom since 1996 and it is currently
available in many other countries. B. Braun GmbH markets Histoacryl(R) as a
topical closure adhesive for small lacerations and incisions in low skin tension
areas of the body. 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.
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
10
with management when so requested. We retain their services under the terms of
consulting and confidentiality agreements.
EMPLOYEES
As of March 24, 2003, we had 101 full-time employees, up from 88 in March 2002,
of whom 82 were dedicated to research, development, manufacturing, quality
control and regulatory affairs, and 19 were dedicated to administrative
activities. Twelve members of our research, development and regulatory affairs
staff have doctoral or advanced degrees. 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 24, 2003.
Name Age Position
Daniel A. Pelak 51 President and Chief Executive Officer and Director
Joe B. Barefoot 52 Vice President of Regulatory Affairs and Quality Assurance
Jeffrey G. Clark 49 Vice President of Research and Development
William M. Cotter 52 Vice President of Manufacturing and Operations
Jerry Y. Jonn 46 Vice President of Internal Products Development
Debra L. Pawl 50 Vice President and General Counsel
Benny Ward 39 Vice President of Finance and Chief Financial Officer
Daniel A. Pelak has served as President and Chief Executive Officer of Closure
since September 2002. Prior to joining Closure Medical, Mr. Pelak spent 26 years
with Medtronic, Inc. During his career he has held positions in Sales, Sales
Management, Marketing, and General Management. Immediately prior to joining
Closure, he was the Vice President and General Manager of Medtronic's Perfusion
Systems Division. From March 2000 until January 2002, he was the Vice President
and General Manager of Medtronic's Cardiac Surgery Technologies Division. From
1992 to 2000, Mr. Pelak managed progressively larger sales and marketing
operations within the Cardiovascular areas of Medtronic, including Vice
President Cardiovascular Marketing and Vice President U.S. Cardiac Surgery
Business. Prior to 1992, he held the position of Vice President and General
Manager of Medtronic's Nortech Division. Mr. Pelak holds a B.S. degree from
Pennsylvania State University.
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 a 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.
11
Jerry Y. Jonn, Ph.D. has served as Vice President of Internal Products
Development 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.
Debra L. Pawl has served as Vice President and General Counsel since 1998.
Previously, Ms. Pawl served as Patent Manager for the J.M. Huber Corporation and
practiced in the patent law departments of The BFGoodrich Company, Owens-Corning
Fiberglas Corporation, The Standard Oil Company (Ohio) and the Washington, D.C.
law firm of Cushman, Darby and Cushman. Prior to practicing law, Ms. Pawl worked
as a research chemist for the Diamond Shamrock Corporation and taught chemistry
and anatomy and physiology at Cuyahoga Community College. Ms. Pawl holds a J.D.
degree from the University of Toledo, College of Law, and a M.S. and a B.S.
degree in biology/chemistry from John Carroll University.
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 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 viability and growth will
depend in large part on sales of DERMABOND 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 could have a material
adverse effect on our results of operations and financial condition.
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.
12
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, which could affect
our future growth and results of operations.
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, with the exception of certain processes completed by
third parties. 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, 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. If the medical or consumer community does not accept
our products, our revenues would suffer.
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 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 generally 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
up to 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
13
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 notification and PMA
requirements. Other statutory and regulatory requirements include, among other
things, compliance with establishment registration and medical device listing,
GMP labeling, and promotional requirements.
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 certain adverse events and device malfunctions, and
correction and removal reporting and recordkeeping requirements for actions
taken with respect to distributed devices to reduce a risk to health.
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 approvals or clearances or the
loss of previously received approvals or clearances will affect our ability to
timely manufacture our products.
Although we do not receive payments directly from third-party health care
payors, their reimbursement methods and policies impact demand for DERMABOND
adhesive and future products.
DERMABOND adhesive is subject to the reimbursement methods and policies used by
the government and other third-party health care payors. If physicians,
hospitals and other users of our products fail to obtain sufficient
reimbursement from healthcare payors for DERMABOND adhesive or procedures using
DERMABOND, or adverse changes occur in governmental and private third-party
payors' policies toward reimbursement for this product or these procedures, it
could negatively affect the demand for DERMABOND adhesive. If third-party payors
fail to provide appropriate levels of reimbursement for purchase and use of our
products it could have a material adverse effect on our results of operations.
Because of the uncertainty surrounding the reimbursement status of newly
approved health care products, we have no assurance that adequate or any
third-party coverage will be provided for new products introduced by Closure. If
our
14
new products do not receive adequate coverage and reimbursement, the market
acceptance of these products would be adversely affected, which would have a
material adverse effect on our results of operations.
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. To help minimize these risks,
we utilize an outside professional services organization to help us evaluate and
monitor environmental regulations.
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. Furthermore, there can be no guarantee that one of our
marketing partners will not terminate their relationship with us and begin
marketing products of their own or of third parties. 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. If we are unable to sell our products independently or identify alternative
marketing partners, our revenue and results of operations will be materially
adversely affected.
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.
15
In addition, there are a few other critical components that we obtain from a
single qualified source. We have plans to qualify a second source or establish
supply contracts which include catastrophe plans for each of these items.
If our suppliers and subcontractors cannot provide the components and services
that we require, we may be unable to manufacture our products.
We cannot be sure that our suppliers and subcontractors will furnish us with
required components when we need them. Relying on third parties exposes us to
potential interruptions in supply as well as damaged or non-conforming parts
which could affect our ability to ship our products to our customers on a timely
basis. These factors could make it more difficult to manage our inventory
effectively and manufacture our products which could have a material adverse
effect on our results of operations.
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 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
16
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, only one of which is approved for sale in the
United States. In 2002, United States Surgical, a division of Tyco Health Group,
LP received FDA approval to market Indermil(TM) Tissue Adhesive, a butyl
cyanoacrylate. Tyco has been marketing Indermil(TM) in the United Kingdom since
1996 and it is currently available in many other countries. B. Braun GmbH
markets Histoacryl(R) as a topical closure adhesive for small lacerations and
incisions in low skin tension areas of the body. 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.
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 increase our current scale of
manufacturing. We believe that existing cash and cash equivalents and
investments, which totaled $17.0 million as of December 31, 2002, will be
sufficient to finance our capital requirements for at least 12 months. There can
be no
17
assurance that we will not be required to seek additional capital to
finance our operations in the future. We currently have a $3.0 million line of
credit for working capital purposes. 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.
Our stock price is volatile and could experience substantial declines.
The market price of our common stock has historically experienced and might
continue to experience volatility. The market price of our common stock may
fluctuate due to our operating results, changes in the economy or the financial
markets and other developments affecting us or our competitors. In addition, the
stock market has experienced significant price and volume fluctuations in recent
years, as well as significant decreases in value. This volatility and the recent
market decline have affected the market prices of securities issued by many
companies and might adversely affect the price of our common stock.
Our operations might be affected if there is a natural disaster or other
catastrophic event.
We depend on our manufacturing facility for the continued operation of our
business, as well as critical information systems. We currently have in place
contingency plans for catastrophic events and natural disasters. Although we
carry limited business interruption and other insurance policies, we might
suffer losses as a result of catastrophic events and natural disasters which
could have a material negative impact on our operating results.
Our failure to detect and prevent viruses and other malicious acts targeted at
our management information systems and controls could expose us to a breach in
security, rendering proprietary information available to outsiders and data
unreliable.
Unauthorized access, computer viruses, accidental or intentional actions and
other disruptions could occur with regard to our information systems. As a
result of accidental as well as intentional actions of Internet users or
"hackers", we may experience delays or interruptions in business due to a breach
in the security of confidential information. The costs required to mitigate the
risks from computer viruses and alleviate other security problems could be
significant and the efforts to address such problems could result in
interruptions and delays in our business, which could have a material adverse
effect on our results of operations. Furthermore, a breach in the security of
our management information systems could cause our trade secrets and other
proprietary information to enter the public domain, which could adversely effect
our competitive position in the market.
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.
Effective control by principal stockholders could allow for control of most
matters submitted to our stockholders.
Two principal stockholders, in the aggregate, beneficially own approximately 42%
of the outstanding common stock as of March 24, 2003. Currently, there are no
voting trusts or other agreements between these individuals to vote in concert,
however, such persons, acting together, could have the ability to control most
matters submitted to stockholders of Closure.
18
ITEM 2. PROPERTIES.
We lease a 50,000 square foot facility that houses manufacturing, research and
development and our executive offices in Raleigh, North Carolina. The lease
expires in July 2007 and includes an option to lease additional space adjacent
to our current facility if needed. We have the option to renew the lease upon
termination.
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 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
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 2001 and 2002.
Market Price Per Share
------------------------------------------
2001 2002
------------------- -------------------
High Low High Low
-------- ------- -------- -------
First Quarter ................... $34.88 $14.69 $24.30 $18.00
Second Quarter .................. 26.25 14.51 19.60 13.20
Third Quarter ................... 25.85 15.30 15.90 11.01
Fourth Quarter .................. 24.14 16.07 14.18 8.00
HOLDERS
As of March 24, 2002, there were approximately 259 holders of record of our
Common Stock. We have no preferred stock outstanding.
DIVIDEND INFORMATION
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.
19
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below for each year in the five year
period ended December 31, 2002 have been derived from financial statements
audited by PricewaterhouseCoopers LLP, independent accountants. The balance
sheets as of December 31, 2001 and 2002 and the related statements of
operations, cash flows and stockholders' equity for the years ended December 31,
2000, 2001 and 2002 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. Certain prior year balances have been
reclassified to conform to the current year presentation.
Years ended December 31,
----------------------------------------------------------------------
1998 1999 2000 2001 2002
------------- ------------- -------------- ------------- -------------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Product sales $ 8,079 $ 13,370 $ 13,076 $ 18,405 $ 22,711
License and product development revenues (1) 1,500 -- 625 768 1,020
------------- ------------- -------------- ------------- -------------
Total revenues 9,579 13,370 13,701 19,173 23,731
Cost of products sold 3,480 4,722 3,841 5,450 6,496
------------- ------------- -------------- ------------- -------------
Gross profit 6,099 8,648 9,860 13,723 17,235
------------- ------------- -------------- ------------- -------------
Research, development and regulatory affairs expenses 6,297 6,296 5,853 5,622 6,436
General and administrative expenses 5,338 5,266 5,400 5,504 6,855
Special charge- voluntary packaging recall (2) -- -- -- 430 --
------------- ------------- -------------- ------------- -------------
Total operating expenses 11,635 11,562 11,253 11,556 13,291
------------- ------------- -------------- ------------- -------------
Income (loss) from operations (5,536) (2,914) (1,393) 2,167 3,944
Interest income, net 763 387 481 388 315
------------- ------------- -------------- ------------- -------------
Income (loss) before taxes (4,773) (2,527) (912) 2,555 4,259
Provision (benefit) for income taxes -- -- -- 21 (5,864)
------------- ------------- -------------- ------------- -------------
Net income (loss) before cumulative
effect of accounting change (4,773) (2,527) (912) 2,534 10,123
Cumulative effect of accounting change (1) -- -- (2,656) -- --
------------- ------------- -------------- ------------- -------------
Net income (loss) $ (4,773) $ (2,527) $ (3,568) $ 2,534 $ 10,123
============= ============= ============== ============= =============
Net income (loss) per common share before cumulative
effect of accounting change:
Basic $ (0.36) $ (0.19) $ (0.07) $ 0.19 $ 0.75
============= ============= ============== ============= =============
Diluted $ (0.36) $ (0.19) $ (0.07) $ 0.18 $ 0.73
============= ============= ============== ============= =============
Cumulative effect of accounting change per common
share-basic and diluted $ -- $ -- $ (0.20) $ -- $ --
============= ============= ============== ============= =============
Net income (loss) per common share:
Basic $ (0.36) $ (0.19) $ (0.27) $ 0.19 $ 0.75
============= ============= ============== ============= =============
Diluted $ (0.36) $ (0.19) $ (0.27) $ 0.18 $ 0.73
============= ============= ============== ============= =============
Shares used in computation of net income (loss) per
common share:
Basic 13,270 13,324 13,390 13,468 13,535
============= ============= ============== ============= =============
Diluted 13,270 13,324 13,390 13,852 13,783
============= ============= ============== ============= =============
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) $ (5,320) $ (1,902) $ (912)
============= ============= ==============
Pro forma- Net income (loss) per common share:
Basic $ (0.40) $ (0.14) $ (0.07)
============= ============= ==============
Diluted $ (0.40) $ (0.14) $ (0.07)
============= ============= ==============
20
As of December 31,
----------------------------------------------------------------------
1998 1999 2000 2001 2002
------------- ------------- ---------------------------- -------------
(In thousands)
BALANCE SHEET DATA:
Cash and cash equivalents and investments $ 16,702 $ 11,322 $ 11,832 $ 12,958 $ 17,042
Working capital (3) 11,621 9,745 8,462 9,321 16,815
Total assets 27,420 22,511 22,139 25,340 36,747
Long-term debt and capital lease obligations, less
current portion 934 2,155 332 -- 336
Total stockholders' equity 18,250 16,625 13,907 17,247 29,190
___________
(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.
(3) Working capital is calculated as current assets minus current liabilities.
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. In addition, our research efforts include
the development of internal adhesive products.
During 2002, DERMABOND adhesive continued to be our leading product. Early in
2002, we received FDA approval to include in our device labeling that DERMABOND
adhesive acts as a barrier to microbial penetration. Clinically, this provides
for the potential reduction of infection rates, as long as the adhesive remains
intact, when closing incisions and lacerations with DERMABOND adhesive versus
the traditional use of sutures and staples which have not been shown to protect
against microbial penetration. We believe that this claim has supported the
21
increased penetration of DERMABOND adhesive, particularly in the operating room.
In addition, we completed the enrollment and follow-up of an 84-patient
definitive clinical trial for a high-viscosity, or thicker, version of DERMABOND
adhesive. This version is our second product line extension and will allow for
more precise application without the "rundown" experienced with the less viscous
versions. We received approval from the U.S. Food & Drug Administration to
market the High Viscosity DERMABOND Topical Skin Adhesive in January 2003 as a
result of the effort during 2002. Also, during the summer of 2002, Ethicon
initiated a direct-to-consumer television and print campaign, the first time
ever for any of its products, to increase awareness and preference for DERMABOND
adhesive among consumers.
Also, our marketing partner, CPC, launched our liquid bandage under the name
BAND-AID(R) Brand Liquid Bandage during the spring of 2002. CPC executed a print
and television advertising campaign during the summer months to increase
consumer awareness of the liquid bandage. We believe the efforts of CPC were
effective in establishing BAND-AID(R) Brand Liquid Bandage in the consumer
bandage market. In addition, BAND-AID(R) Brand Liquid Bandage was one of only
seven products to receive a Good Housekeeping "Good Buy" Award for best new
household products introduced during 2002, and was the only personal healthcare
product to win the award.
During 2002, we continued the development of our internal adhesive and wound
management projects. Our vascular sealant product is based on our core
cyanoacrylate technology and is intended for use inside the human body. We plan
to file an Investigational Device Exemption with the FDA in 2003, with human
clinical trials to follow. We are continuing to evaluate other opportunities,
such as our ELVR product, to use our cyanoacrylate technology inside the body.
We have continued the development of our liquid occlusive dressing, or LOD, to
treat partial thickness wounds such as pressure ulcers and skin tears. To date,
we have completed animal research as well as a 10-patient human pilot clinical
study for pressure ulcers. A second pilot clinical study is ongoing to further
define the LOD wear time and wound healing rates versus leading dressings in the
category. Based on the outcomes from the pilot studies, we anticipate the
initiation of a definitive, multi-center, human clinical study allowing for FDA
approval through the 510(k) premarket clearance.
RESULTS OF OPERATIONS
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Revenues. Total revenues for 2002 were $23,731,000 compared to $19,173,000 for
2001. Product revenues increased by 23% which is primarily due to sales of
BAND-AID(R) Brand Liquid Bandage, launched in April by CPC as well as increased
shipments of DERMABOND adhesive. In 2002, DERMABOND adhesive continued to
represent the majority of total revenues, approximately 75%. License and product
development revenues increased during 2002 to $1,020,000 from $768,000 in 2001
as revenue previously deferred was recognized ratably over the lives of various
contracts with our marketing partners. In 2002 and 2001, 94% and 83% of product
sales were to one customer, respectively.
Cost of products sold. Cost of products sold for 2002 was $6,496,000 compared to
$5,450,000 for 2001. Cost of products sold as a percentage of revenues was
approximately 27% for 2002 and 29% for 2001. The decrease is attributable to
increased production volumes and cost containment. Also, our product sales mix
continues to be heavily weighted with the DERMABOND product, which has
significantly higher margins than our over-the-counter products. 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 $13,291,000 and
$11,556,000 for 2002 and 2001, respectively. Operating expenses consist of
research, development and regulatory affairs expenses and general and
administrative expenses. During 2002, research, development and regulatory
affairs expenses were primarily focused on the development of DERMABOND adhesive
line extensions, including the High-Viscosity clinical study, the development of
an internal vascular sealant and wound management products 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 internal adhesives. Overall, general and administrative expenses
increased in 2002 primarily due to a charge of approximately $800,000 related to
the transition of the CEO position. The charge included approximately $600,000
related to transition services provided by our former CEO and his entering
22
into a non-competition agreement. The remainder primarily related to the taxes
and benefits on the transition services and recruitment costs associated with
the selection of a new CEO. In addition, general and administrative costs for
2002 increased due to additional outside professional services and personnel
costs over the 2001 period.
Interest income, net. Net interest income for 2002 decreased to $315,000 from
$388,000 for 2001. Total interest income decreased primarily due to lower
investment yields as a result of market interest rate changes during 2002.
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. All capital
lease obligations were retired during 2002.
Income taxes. Prior to 2002, no deferred provision or benefit for income taxes
was recorded because we were in a net deferred tax asset position and a full
valuation allowance had been recorded. During the fourth quarter of 2002, we
re-evaluated the amount of valuation allowance required in light of numerous
factors including the profitability achieved in recent years and expected in
future years. As a result, we reduced the valuation allowance on deferred tax
assets to an amount that we believe is more likely than not of being realized
based on our assessment of the likelihood of near term operating income coupled
with uncertainties with respect to the impact of future market conditions. At
December 31, 2002, the valuation allowance primarily reflects uncertainties
involving the realization of state tax credits and loss carryforwards. The
valuation allowance was reduced by $8,419,000 during 2002, including $1,210,000
related to net operating losses generated by the exercise of stock options prior
to 2002. This portion of the reduction in the valuation allowance, along with
$48,000 in similar tax benefits from stock option exercises during 2002, was
credited to additional paid-in-capital. We estimate that we would need to
generate future taxable income of approximately $19.0 million to fully utilize
our federal net operating loss and tax credit carryforwards existing as of
December 31, 2002.
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 40% 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 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 $11,556,000 and
$11,253,000 for 2001 and 2000, respectively. Operating expenses primarily
consist of research, development and regulatory affairs expenses and general and
administrative expenses and, in 2001, included 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 internal adhesive 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.
23
Interest income, net. Net interest income for 2001 decreased to $388,000 from
$481,000 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.
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 $17.0 million at December
31, 2002.
In May 2002, our equipment term loan and line of credit matured and the
outstanding balance of approximately $690,000 was refinanced as a borrowing
within our $3.0 million line of credit, which was simultaneously renewed for a
two-year period. The renewed agreement contains certain restrictive covenants
including, but not limited to, maintenance of certain levels of unencumbered
liquid assets and a minimum tangible net worth requirement. The agreement is
secured by certain trade accounts receivable, inventory and equipment. The
December 31, 2002 outstanding balance of $336,000 was classified as long-term
debt as the agreement does not require principal payments within the next 12
months. Although our current payment pattern will allow for extinguishment of
debt by June 30, 2003, we are not required to pay all outstanding principal plus
accrued and unpaid interest until maturity at May 31, 2004.
Future minimum lease payments under noncancellable operating leases are
approximately $2.5 million over the next five years. The majority of operating
lease obligations relate to our facility lease.
Capital Expenditures
There are no individually material capital expenditure commitments outstanding
as of December 31, 2002. However, we estimate that capital investments for 2003
could be at least $2.5 million to support manufacturing scale-up initiatives. 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 2002, Closure spent approximately $6.4 million in research, development
and regulatory affairs expenses compared to $5.6 million in 2001. The increase
was primarily due to development and regulatory expenses surrounding the
High-Viscosity DERMABOND clinical and regulatory approval process as well as
ongoing research related to the internal adhesive and liquid occlusive dressing
products. 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 have arrangements
with certain marketing partners in which we share certain research, development
and regulatory affairs expenses related to approved projects. During 2002, 2001
and 2000 we were reimbursed $905,000, $576,000 and $355,000, respectively, in
accordance with these cost sharing arrangements. 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.
24
Cash Flows
Net cash provided by operating activities was $5,713,000 for 2002 compared to
$3,219,000 for 2001. The increase in cash provided by operations was primarily
due to the increase in net income during the 2002 period offset by the change in
deferred taxes.
Net cash used by investing activities was $7,590,000 during 2002 and $1,621,000
during the 2001 period. The increase in net cash used during 2002 primarily
related to the increased net investment in marketable securities whereas net
cash used in 2001 primarily related to purchases of fixed assets and the
investment in intangible assets.
Net cash used by financing activities was $371,000 during 2002 compared to
$66,000 for 2001. Our primary financing activities during both years were the
repayment of debt and capital lease obligations, offset by the proceeds from the
sale of stock under our stock option and other benefit plans.
Based on our current plans, we believe that existing cash, cash equivalents and
investments, which totaled $17.0 million at December 31, 2002, 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
affairs 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 existing
products, including DERMABOND adhesive and liquid bandage;
. the progress of our research and product development programs for
future nonabsorbable and internal adhesive 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 as well as 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 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This is not a comprehensive list of all of our accounting policies. Our
significant accounting policies are described in Note 2 to the consolidated
financial statements included in Item 8 of this Form 10-K. The preparation of
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues, expenses and related
disclosures. On an ongoing basis, our management re-evaluates its estimates and
judgments. We believe the following policies require the most significant
judgment and estimates used in the preparation of the consolidated financial
statements.
Revenue recognition. The sales price of DERMABOND adhesive and NEXABAND
adhesives is ultimately determined by the sales price of the product to the
ultimate customer. For these products, we recognize revenue at an
25
agreed-upon amount per unit at the time these products are shipped. Our
marketing partners subsequently provide a summary of their quarterly sales, and
at that time, we recognize additional revenue in an amount derived from the
difference between the previously recognized amount at shipment and the average
sales price received by the marketing partners. In addition, we recognize
royalty revenue for DERMABOND adhesive. Revenues from our other products are
recognized upon shipment which is when title is transferred. 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. However, potential payments under existing contracts could
total $2.7 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 remaining 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, we evaluate the adequacy of our
patents and licenses carrying values.
Inventories. Inventories are stated at the lower of cost (first-in, first-out)
or market. Closure evaluates its inventory for obsolescence 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 when based on available
evidence, it is more likely than not that some portion of a deferred tax asset
will not be realized. 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 realized in the future. At December 31, 2002,
Closure had $7,254,000 recorded as deferred tax assets, primarily related to net
operating loss and tax credit carryforwards.
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,
corporate bonds and other investments 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, 2002, our
total portfolio consisted of approximately $17.0 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.
26
FOREIGN CURRENCY EXCHANGE RISK
Our international sales and related royalties of DERMABOND adhesive and
international sales of NEXABAND(R) adhesives 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 2003 Proxy Statement to be
filed with the Commission not later than 120 days after the end of the fiscal
year ended December 31, 2002. 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 2003 Proxy Statement to be filed with the Commission not later than
120 days after the end of the fiscal year ended December 31, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated herein by reference to our
definitive 2003 Proxy Statement to be filed with the Commission not later than
120 days after the end of the fiscal year ended December 31, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein by reference to our
definitive 2003 Proxy Statement to be filed with the Commission not later than
120 days after the end of the fiscal year ended December 31, 2002.
27
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's President
and Chief Executive Officer along with the Company's Vice President of Finance
and Chief Financial Officer evaluated the Company's disclosure controls and
procedures within 90 days of the filing date of this Annual Report. Based upon
this evaluation, the Company's President and Chief Executive Officer along with
the Company's Vice President of Finance and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective in ensuring
that material information required to be disclosed is included in the reports
that it files with the Securities and Exchange Commission.
(b) Changes in Internal Controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
The financial statements listed in the accompanying Index to Financial
Statements at page F-1 are filed as part of this Annual Report.
2. Financial Statement Schedules.
All financial statement schedules have been omitted because they are
not applicable, or not required, or the information is shown in the
financial statements or notes thereto.
3. Exhibits. (See (c) below)
(b) Reports on Form 8-K.
None.
(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)
28
Exhibit
Number Description
- ------ -----------
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)
10.12 Loan Agreement, dated November 14, 1997, between NationsBank,
N.A. and the Company (Exhibit 10.15)(4)
10.13 Promissory Note, dated November 14, 1997, issued by the Company
to NationsBank, N.A. (Exhibit 10.16)(4)
10.14 Security Agreement dated November 14, 1997, between the Company
and NationsBank, N.A. (Exhibit 10.17)(4)
10.15 Pledge Agreement, dated November 14, 1997, between the Company
and NationsBank N.A. (Exhibit 10.18)(4)
10.16++ Employment Agreement, dated as of June 9, 1997, between William
M. Cotter and the Company (Exhibit 10.19)(4)
10.17++ Employment Agreement, dated as of January 1, 1998, between
Anthony J. Sherbondy and the Company (Exhibit 10.20)(4)
10.18++ Employment Agreement, dated as of February 18, 1998, between
Dennis D. Burns and the Company (Exhibit 10.21)(4)
10.19 Amendment, dated August 15, 1997, to Lease, dated February 14,
1997, between AP Southeast Portfolio Partners, L.P. and the
Company (Exhibit 10.22)(4)
10.21++ 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 (Exhibit 10.22)(9)
10.23+ Distribution, Supply and Development Agreement, dated as of
December 21, 2000, between Colgate Oral Pharmaceuticals, Inc.
and the Company (Exhibit 10.23)(9)
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 (Exhibit 10.25)(10)
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 (Exhibit 10.26)(10)
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 (Exhibit 10.27)(10)
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 (Exhibit 10.29)(10)
10.30++ Amendment to Employment Agreement, dated as of March, 27, 2002,
between Robert V. Toni and the Company (Exhibit 10.30)(10)
10.31++ Employment Agreement, dated as of August 29, 2002, between
Daniel A. Pelak and the Company (Exhibit 10.1)(11)
29
Exhibit
Number Description
- ------ -----------
10.32++ Defense Agreement, dated as of August 29, 2002, between Daniel
A. Pelak and the Company (Exhibit 10.2)(11)
10.33++* Severance and Release Agreement, dated as of February 18, 2002,
between Dennis Burns and the Company
10.34++* Amended and Restated Employment Agreement, dated as of February
13, 2003, between Anthony J. Sherbondy and the Company
23.1* Consent of PricewaterhouseCoopers LLP
24.1* Power of Attorney (included on signature page to this Annual
Report)
99.1* Certification of Chief Executive Officer
99.2* Certification of Chief Financial Officer
_____________
* Filed herewith.
+ Portions of this exhibit were omitted and filed separately with the
Secretary of the Securities and Exchange Commission (the "Commission")
pursuant to an order of the Commission granting the Company's application
for confidential treatment filed pursuant to Rule 406 under the
Securities Act of 1933, as amended.
++ Compensation plans and arrangements for executives and others.
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-5425) filed with the Commission on June 7, 1996, as
amended.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-22981) filed with the Commission on March 7, 1997.
(3) Filed as an exhibit to the Company's Registration Statement on Form S-8
(Registration No. 333-72953) filed with the Commission on February 25,
1999.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
(5) Filed as an exhibit to the Company's Registration Statement on Form S-8
(Registration No. 333-72339) filed with the Commission on February 12,
1999.
(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.
(9) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000.
(10) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 2001.
(11) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the period ended September 30, 2002.
(d) Financial Statement Schedules.
None.
30
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 31, 2003 CLOSURE MEDICAL CORPORATION
By: /s/ Daniel A. Pelak
----------------------------
Daniel A. Pelak
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 Daniel A.
Pelak, 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/ Daniel A. Pelak President and Chief Executive March 31, 2003
- ---------------------------------------- Officer (principal executive
Daniel A. Pelak officer) and Director
/s/ Benny Ward Vice President and Chief Financial March 31, 2003
- ---------------------------------------- Officer (principal financial and
Benny Ward accounting officer)
/s/ Ronald A. Ahrens Chairman of the Board of Directors March 31, 2003
- ----------------------------------------
Ronald A. Ahrens
/s/ Dennis C. Carey Director March 31, 2003
- ----------------------------------------
Dennis C. Carey
/s/ Richard W. Miller Director March 31, 2003
- ----------------------------------------
Richard W. Miller
/s/ James E. Niedel Director March 31, 2003
- ----------------------------------------
James E. Niedel
/s/ F. William Schmidt Director March 31, 2003
- ----------------------------------------
F. William Schmidt
/s/ Rolf D. Schmidt Director March 31, 2003
- ----------------------------------------
Rolf D. Schmidt
/s/ Randy H. Thurman Director March 31, 2003
---------------------------------------
Randy H. Thurman
31
CERTIFICATIONS
I, Daniel A. Pelak, certify that:
1. I have reviewed this Annual Report on Form 10-K of Closure Medical
Corporation;
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Annual Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this Annual
Report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries*, is made known to us by others within
those entities, particularly during the period in which this Annual
Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this Annual Report (the "Evaluation Date"); and
c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
Annual Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
* The reference is only to Closure Medical Corporation, which has no
subsidiaries.
Date: March 31, 2003 By: /s/ Daniel A. Pelak
--------------------------
Daniel A. Pelak
President and Chief Executive Officer
32
I, Benny Ward, certify that:
1. I have reviewed this Annual Report on Form 10-K of Closure Medical
Corporation;
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Annual Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this Annual
Report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries*, is made known to us by others within
those entities, particularly during the period in which this Annual
Report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this Annual Report (the "Evaluation Date"); and
c. presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
Annual Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
* The reference is only to Closure Medical Corporation, which has no
subsidiaries.
Date: March 31, 2003 By: /s/ Benny Ward
----------------------------------
Benny Ward
Vice President of Finance and Chief
Financial Officer
33
CLOSURE MEDICAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants F-2
Financial Statements:
Balance Sheets as of December 31, 2001 and 2002 F-3
Statements of Operations for the years ended
December 31, 2000, 2001 and 2002 F-4
Statements of Cash Flows for the years ended
December 31, 2000, 2001 and 2002 F-5
Statements of Stockholders' Equity for the years ended
December 31, 2000, 2001 and 2002 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, 2001 and 2002, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2002 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 7, 2003
F-2
CLOSURE MEDICAL CORPORATION
BALANCE SHEETS
(In thousands, except per share data)
December 31,
-------------------
2001 2002
-------- --------
Assets
Cash and cash equivalents $ 2,914 $ 666
Short-term investments 8,925 14,060
Accounts receivable 1,985 2,473
Inventories 1,246 1,184
Prepaid expenses 263 407
Deferred income taxes -- 3,387
-------- --------
Total current assets 15,333 22,177
Furniture, fixtures and equipment, net 6,181 5,388
Intangible assets, net 2,707 2,999
Long-term investments 1,119 2,316
Deferred income taxes -- 3,867
-------- --------
Total assets $ 25,340 $ 36,747
======== ========
Liabilities and Stockholders' Equity
Accounts payable $ 1,206 $ 1,236
Accrued expenses 2,355 2,648
Deferred revenue 1,182 1,478
Capital lease obligations 333 --
Debt obligations 936 --
-------- --------
Total current liabilities 6,012 5,362
Other accrued liabilities 100 399
Deferred revenue 1,981 1,460
Long-term debt -- 336
-------- --------
Total liabilities 8,093 7,557
-------- --------
Commitments and contingencies (See notes 9, 10 and 11) -- --
Preferred stock, $0.01 par value. Authorized 2,000 shares; none issued
or outstanding -- --
Common stock, $0.01 par value. Authorized 35,000 shares; issued and
outstanding 13,508 and 13,549 shares, respectively 135 135
Additional paid-in capital 48,521 50,341
Accumulated deficit (31,409) (21,286)
-------- --------
Total stockholders' equity 17,247 29,190
-------- --------
Total liabilities and stockholders' equity $ 25,340 $ 36,747
======== ========
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,
---------------------------
2000 2001 2002
------- ------- -------
Product sales $13,076 $18,405 $22,711
License and product development revenues 625 768 1,020
------- ------- -------
Total revenues 13,701 19,173 23,731
Cost of products sold 3,841 5,450 6,496
------- ------- -------
Gross profit 9,860 13,723 17,235
------- ------- -------
Research, development and regulatory affairs expenses 5,853 5,622 6,436
General and administrative expenses 5,400 5,504 6,855
Special charge- voluntary packaging recall (See note 4) -- 430 --
------- ------- -------
Total operating expenses 11,253 11,556 13,291
------- ------- -------
Income (loss) from operations (1,393) 2,167 3,944
Interest expense (250) (205) (45)
Interest income 731 593 360
------- ------- -------
Income (loss) before taxes (912) 2,555 4,259
Provision (benefit) for income taxes -- 21 (5,864)
------- ------- -------
Income (loss) before cumulative effect of accounting change (912) 2,534 10,123
Cumulative effect of accounting change (See note 3) (2,656) -- --
------- ------- -------
Net income (loss) $(3,568) $ 2,534 $10,123
======= ======= =======
Shares used in computation of net income (loss) per common share:
Basic 13,390 13,468 13,535
======= ======= =======
Diluted 13,390 13,852 13,783
======= ======= =======
Cumulative effect of accounting change:
Basic $ (0.20) $ -- $ --
======= ======= =======
Diluted $ (0.20) $ -- $ --
======= ======= =======
Net income (loss) per common share:
Basic $ (0.27) $ 0.19 $ 0.75
======= ======= =======
Diluted $ (0.27) $ 0.18 $ 0.73
======= ======= =======
Pro forma amounts assuming the change in accounting principle is applied
retroactively (See note 3):
Net income (loss) $ (912)
=======
Net income (loss) per common share:
Basic $ (0.07)
=======
Diluted $ (0.07)
=======
The accompanying notes are an integral part of these financial statements.
F-4
CLOSURE MEDICAL CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
------------------------------
2000 2001 2002
------- ------- --------
Cash flows from operating activities:
Net income (loss) $(3,568) $ 2,534 $ 10,123
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of accounting change (See note 3) 2,656 -- --
Depreciation and amortization expense 961 1,027 1,294
Amortization of deferred compensation on stock options 73 -- --
Loss on disposals of fixed assets 244 58 125
Loss on disposals of intangible assets 60 135 340
Change in accounts receivable (590) (663) (488)
Change in inventories (5) (650) 62
Change in prepaid expenses 18 45 (144)
Change in accounts payable and accrued expenses 781 976 622
Change in deferred revenue (198) (243) (225)
Change in deferred taxes -- -- (7,254)
Tax benefits associated with stock options -- -- 1,258
------- ------- --------
Net cash provided by operating activities 432 3,219 5,713
------- ------- --------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (437) (623) (510)
Investment in intangible assets (661) (1,404) (748)
Purchases of investments (6,877) (7,497) (10,734)
Proceeds from the sale of investments 8,533 7,903 4,402
------- ------- --------
Net cash provided (used) by investing activities 558 (1,621) (7,590)
------- ------- --------
Cash flows from financing activities:
Repayment of debt (613) (551) (600)
Net proceeds from sale of common stock 777 806 562
Payments under capital lease obligations (280) (321) (333)
------- ------- --------
Net cash used by financing activities (116) (66) (371)
------- ------- --------
Increase (decrease) in cash and cash equivalents 874 1,532 (2,248)
Cash and cash equivalents, beginning of year 508 1,382 2,914
------- ------- --------
Cash and cash equivalents, end of year $ 1,382 $ 2,914 $ 666
======= ======= ========
Supplemental cash flow information:
Cash payments for interest during 2000, 2001 and 2002 were approximately $260,
$151 and $45, respectively. Cash payments for income taxes were $0, $17 and $80
during 2000, 2001 and 2002, 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, 2000, 2001 and 2002
(In thousands)
Deferred
Common Stock Additional Compensation Total
--------------- Paid-in Accumulated on Stock Stockholders'
Shares Amount Capital Deficit Options Equity
------ ------ ---------- ----------- ------------ -------------
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
Exercise of stock options, 401(k)
match and sale of common
stock under ESPP 41 -- 562 -- -- 562
Income tax benefits from stock
option exercises 1,258 1,258
Net income -- -- -- 10,123 -- 10,123
------ ---- ------- -------- ---- -------
Balance at December 31, 2002 13,549 $135 $50,341 $(21,286) $ -- $29,190
====== ==== ======= ======== ==== =======
The accompanying notes are an integral part of these financial statements.
F-6
Closure Medical Corporation
Years Ended December 31, 2000, 2001 and 2002
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.
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 certain future OTC products, except for SOOTHE-N-SEAL(R)
canker sore relief ("SOOTHE-N-SEAL(R) adhesive").
The Company entered into an agreement in December 2000 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 for the treatment of canker sores of
the mouth. 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 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. Currently, Abbott is distributing the NEXABAND(R)
adhesive line in North America, Australia, Switzerland and the United
Kingdom.
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. The fair
market value, based on quoted market prices, of all investments
approximates amortized cost. Investments are made in accordance with the
Company's Investment Policy as established by the Board of Directors.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. The Company evaluates its inventory for obsolescence on an ongoing
basis.
F-7
Closure Medical Corporation
Years Ended December 31, 2000, 2001 and 2002
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
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
Effective January 1, 2002, the Company evaluates the net realizable value
of its property and equipment and other assets in accordance with Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets"("SFAS 144"), relying on a number of
factors including operating results, business plans, economic projections
and anticipated future cash flows. SFAS 144 requires the 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. Prior
to the adoption of this standard, impairments were accounted for using SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" which was superceded by SFAS 144.
There were no impairments of long-lived assets recorded in 2000, 2001 or
2002.
Revenue Recognition
The sales price of DERMABOND adhesive and NEXABAND adhesives is ultimately
determined by the sales price of the product to the ultimate customer. For
these products, the Company recognizes revenue at an agreed-upon amount per
unit at the time these products are shipped. The Company's marketing
partners subsequently provide a summary of their sales on a quarterly
basis, and at that time, additional revenue is recognized in an amount
derived from the difference between the previously recognized amount at
shipment and the average sales price received by the marketing partners. In
addition, the Company recognizes royalty revenue for DERMABOND adhesive.
Revenues from other products are recognized upon shipment which is when
title is transferred. 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.
During fiscal 2000, 2001 and 2002, one customer accounted for 90%, 83% and
94% of total product sales, respectively. One customer accounted for 65%
and 98% of trade accounts receivable at December 31, 2001 and 2002,
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, 2001 and 2002 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 and include items
related to personnel, costs of supplies, clinical trials, facility costs
and fees paid to consultants and outside contractors and providers. The
Company has arrangements with certain marketing partners in which it shares
certain research, development and regulatory affairs expenses related to
approved projects. During 2002, 2001 and 2000 the Company was reimbursed
$905,000, $576,000 and $355,000, respectively, in accordance with these
cost sharing arrangements.
F-8
Closure Medical Corporation
Years Ended December 31, 2000, 2001 and 2002
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
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 when based on available evidence, it is more likely than not
that some portion of a deferred tax asset will not be realized.
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 provided for fees to be paid to
Innocoll of $180,000 per year for five years. During 2001 and 2002,
$135,000 and $225,000, respectively, were paid to Innocoll and $45,000 was
included in accrued expenses at December 31, 2002. Innocoll acted as
Closure's authorized representative in Europe under the Medical Device
Directive and provided alternative manufacturing space if needed. Two
members of the Company's Board of Directors own 99% of the equity of
Innocoll. This agreement expired at December 31, 2002 and was not
renewed.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses at December 31, 2001 and 2002
approximated their fair value due to the short-term nature of these items.
The fair value of the Company's investments at December 31, 2001 and 2002
approximated their carrying values as these investments were 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, 2001 and the notes payable at December 31, 2002
approximated their fair value as the interest rates on these obligations
approximated rates available in the financial market at such dates.
Accounting for Stock-Based Compensation
The Company accounts for stock-based compensation based on the provision of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). In December 2002, the Financial Accounting
Standards Board ("FASB") issued Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123" ("SFAS 148"). This statement amends Statement No. 123,
"Accounting for Stock-Based Compensations" ("SFAS 123") to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
Company has adopted the disclosure requirements of SFAS 123 and SFAS 148.
F-9
Closure Medical Corporation
Years Ended December 31, 2000, 2001 and 2002
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
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 18, 2002. The Plan
provides that a maximum of 6,000,000 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, 2000, 2001 and 2002 generally vest within three to five years.
During 2000, 2001 and 2002, the Company recognized approximately $73,000,
$0 and $0, respectively, of compensation expense related to the Plan. Had
compensation expense, 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:
2000 2001 2002
-------- -------- --------
Net income (loss)-as reported $ (3,568) $ 2,534 $ 10,123
Add: Compensation expense recognized 73 -- --
Less: Pro forma adjustment for stock-based
compensation (8,623) (10,628) (10,829)
-------- -------- --------
Net loss-pro forma $(12,118) $ (8,094) $ (706)
======== ======== ========
Basic net income (loss) per common share:
As reported $ (0.27) $ 0.19 $ 0.75
Effect of pro forma adjustment (0.64) (0.79) (0.80)
-------- -------- --------
Pro forma $ (0.91) $ (0.60) $ (0.05)
======== ======== ========
Diluted net income (loss) per common share:
As reported $ (0.27) $ 0.18 $ 0.73
Effect of pro forma adjustment (0.64) (0.78) (0.79)
-------- -------- --------
Pro forma $ (0.91) $ (0.60) $ (0.06)
======== ======== ========
The pro forma amounts discussed above were derived using the Black-Scholes
option-pricing model with the assumptions indicated below:
2000 2001 2002
------- ------- -------
Average expected life (years) 7.4 7.0 7.4
Average interest rate 5.3-6.7% 4.4-5.3% 3.7-5.4%
Volatility 84.0% 84.3% 80.8%
Dividend yield 0.0% 0.0% 0.0%
F-10
Closure Medical Corporation
Years Ended December 31, 2000, 2001 and 2002
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Segment Reporting
The Company has determined that it did not have any separately reportable
operating segments as of December 31, 2002.
Recently Issued Accounting Standards
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. The
Company will adopt SFAS 143 as of January 1, 2003 and does not expect that
it will have a material impact on the Company's financial position or
results of operations.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). SFAS 146 addresses accounting and reporting for costs
associated with exit or disposal activities. SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity be
recognized and measured initially at fair value when the liability is
incurred. SFAS 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company will adopt SFAS 146 as of
January 1, 2003 and does not expect that it will have a material impact on
the Company's financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others", an interpretation
of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation
No. 34. FIN 45 clarifies the requirements of FASB Statement No. 5,
"Accounting for Contingencies", relating to the guarantor's accounting for,
and disclosure of, the issuance of certain types of guarantees. FIN 45
requires that upon issuance of a guarantee, the guarantor must recognize a
liability for the fair value of the obligation it assumes under that
guarantee. The Interpretation's provisions for initial recognition and
measurement should be applied on a prospective basis to guarantees issued
or modified after December 31, 2002, and the disclosure requirements are
effective for financial statements of both interim and annual periods that
end after December 15, 2002. The Company will adopt FIN 45 as of January 1,
2003 and does not expect that it will have a material impact on the
Company's financial position or results of operations.
Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
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.
F-11
Closure Medical Corporation
Years Ended December 31, 2000, 2001 and 2002
Notes to Financial Statements
- --------------------------------------------------------------------------------
3. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
During 2000, the Company adopted SEC Staff Accounting Bulletin No. 101
("SAB 101"). The effect of applying this change in accounting principle as
of January 1, 2000 was a cumulative charge of $2,656,000. The effect of the
change in accounting principle reflects the reversal of license fees and
milestone payments that had been recognized in prior years. Under the new
method of accounting, such payments are initially recorded as deferred
revenue to be recognized ratably over the remaining term of the related
agreement. For the year ended December 31, 2000, the Company recognized
$625,000 of revenue that was included in the cumulative effect adjustment
as of January 1, 2000.
4. SPECIAL CHARGE
In November 2001, the Company initiated a voluntary recall of DERMABOND
adhesive 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, approximately $430,000, consisted primarily of costs to
notify customers, cost of replacement product and shipping expenses.
5. INVENTORIES
Inventories included the following (in thousands):
December 31,
---------------
2001 2002
------ ------
Packaging $ 451 $ 433
Raw materials 61 171
Work-in-process 309 372
Finished goods 425 208
------ ------
$1,246 $1,184
====== ======
6. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment included the following (in thousands):
December 31,
----------------- Estimated
2001 2002 Useful Lives
------- ------- ------------
Furniture and computers $ 1,248 $ 1,336 3-10 years
Machinery and equipment 5,161 5,765 5-10 years
Leasehold improvements 2,955 3,096 10 years
Construction-in-progress 537 83
------- -------
9,901 10,280
Accumulated depreciation (3,720) (4,892)
------- -------
$ 6,181 $ 5,388
======= =======
F-12
Closure Medical Corporation
Years Ended December 31, 2000, 2001 and 2002
Notes to Financial Statements
- --------------------------------------------------------------------------------
7. INTANGIBLE ASSETS
Intangible assets included the following (in thousands):
December 31,
--------------- Estimated
2001 2002 Useful Lives
------ ------ ------------
Trademarks $ 57 $ 57 5 years
Patents:
Approved 505 1,092 5-17 years
Unapproved 1,827 1,648 *
License 550 550 15 years
Other 197 197 5 years
------ ------
3,136 3,544
Accumulated amortization (429) (545)
------ ------
$2,707 $2,999
====== ======
* Patents are not amortized until approved.
8. ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
December 31,
---------------
2001 2002
------ ------
Accrued payroll and benefits $1,436 $1,654
Voluntary packaging recall 430 --
CEO transition costs -- 328
Other 489 666
------ ------
$2,355 $2,648
====== ======
In September 2002, the Company recorded a charge of approximately $800,000
related to the transition of the CEO position. The charge included
approximately $600,000 related to transition services provided by the
Company's former CEO and his entering into a non-competition agreement,
which will paid to the former CEO over a three year period. The remainder
primarily related to taxes and benefits on the transition services and
recruitment costs associated with the selection of a new CEO. At December
31, 2002, $328,000 was included in short term accrued expenses and $399,000
remained in long-term other accrued liabilities.
9. DEBT AND RELATED ACCRUED INTEREST
In May 2002, the Company's equipment term loan and line of credit matured
and the outstanding balance of approximately $690,000 was refinanced as a
borrowing within its $3.0 million line of credit, which was simultaneously
renewed for a two-year period. Borrowings under this agreement bear
interest based on the 30-day LIBOR rate. The interest rate was
approximately 3.9% at December 31, 2002. The agreement is secured by
certain trade accounts receivable, inventory and equipment. At December 31,
2002, the outstanding balance was $336,000 and $2,664,000 remained
available for future borrowings.
The renewed agreement contains certain restrictive covenants including, but
not limited to, the maintenance of certain levels of unencumbered liquid
assets and a minimum tangible net worth requirement of which the Company
was in compliance with at December 31, 2002. The outstanding balance on the
line of credit is classified as long-term debt as the agreement does not
require principal payments within the next 12 months. Although the
Company's current payment pattern will allow for extinguishment of debt by
June 30, 2003, it is not required to pay all outstanding principal plus
accrued and unpaid interest until maturity at May 31, 2004.
F-13
Closure Medical Corporation
Years Ended December 31, 2000, 2001 and 2002
Notes to Financial Statements
- --------------------------------------------------------------------------------
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 $559,000, $569,000 and
$572,000 for 2000, 2001 and 2002, respectively.
The Company leased 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. Upon expiration of the leases
in 2002, the Company purchased the equipment for $114,000 approximating the
fair market value.
Future minimum lease payments under noncancellable operating leases,
primarily for facilities rental, with initial terms of one year or more are
as follows at December 31, 2002 (in thousands):
Operating
Leases
---------
2003 $ 580
2004 538
2005 534
2006 544
2007 322
Thereafter --
------
Total minimum lease payments $2,518
======
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, 2002, $170,000 of the $1,000,000 payment remained 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.
F-14
Closure Medical Corporation
Years Ended December 31, 2000, 2001 and 2002
Notes to Financial Statements
- --------------------------------------------------------------------------------
11. MAJOR CUSTOMERS--Continued
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 certain 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 are being recognized
ratably over the life of the agreement. In accordance with the agreement,
the Company may receive future milestone payments, based on achievement of
certain criteria.
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 are being 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.
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. This agreement also grants Abbott
rights to future veterinary products based on the Company's cyanoacrylate
technology and co-developed through the collaboration of the parties. The
agreement requires Abbott to purchase a minimum dollar amount of product
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 which is currently in
development. 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 which was deferred and is being
recognized ratably over the period of the agreement. The Company may
receive future milestone payments based on achievement of certain criteria
which 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-15
Closure Medical Corporation
Years Ended December 31, 2000, 2001 and 2002
Notes to Financial Statements
- --------------------------------------------------------------------------------
12. INCOME TAXES
Significant components of the Company's income tax expense (benefit) for
the years ended December 31, 2000, 2001 and 2002 were as follows (in
thousands):
December 31,
---------------------
2000 2001 2002
---- ---- -------
Current
Federal $-- $21 $ (21)
State -- -- 154
Deferred
Federal -- -- (5,517)
State -- -- (480)
--- --- -------
Total tax expense (benefit) $-- $21 $(5,864)
=== === =======
Income taxes computed at the statutory federal income tax rate of 34% were
reconciled to the provision for income taxes for the years ended December
31, 2000, 2001 and 2002 as follows (in thousands):
December 31,
---------------------------
2000 2001 2002
------- ----- -------
U.S. federal tax (benefit) at statutory rate $(1,213) $ 868 $ 1,448
State taxes (net of federal benefit) (171) 123 204
Change in valuation allowance 1,844 (513) (7,209)
Deductions related to stock options not
applicable for financial reporting (281) (268) --
Tax credits (352) (360) (442)
Other 173 150 156
Alternative minimum taxes -- 21 (21)
------- ----- -------
Provision for income taxes $ -- $ 21 $(5,864)
======= ===== =======
Deferred tax assets were comprised of the following (in thousands):
December 31,
----------------
2001 2002
------- ------
Net operating loss carryforwards $ 6,672 $5,276
Tax credit carryforwards:
Federal research and development credits 1,597 1,987
State credits 272 324
Temporary differences:
Accruals, reserves and other 321 398
Deferred revenue 1,072 860
Fixed assets and depreciation (189) (168)
Intangible assets and amortization (856) (953)
------- ------
8,889 7,724
Valuation allowance (8,889) (470)
------- ------
Net deferred tax asset $ -- $7,254
======= ======
F-16
Closure Medical Corporation
Years Ended December 31, 2000, 2001 and 2002
Notes to Financial Statements
- --------------------------------------------------------------------------------
12. INCOME TAXES--Continued
At December 31, 2002, the Company had net operating loss carryforwards for
income tax reporting purposes of approximately $13,200,000 which expire
beginning in the year 2012. The Company also has federal research and
development tax credit carryforwards of approximately $1,987,000 which will
begin to expire in the year 2011 and state tax credits of approximately
$324,000 which begin to expire in 2003. 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
majority of the Company's state tax credit carryforwards may be designated
for use against either the franchise or state income tax. To conform to the
current year presentation, state tax credit carryforwards and related
valuation allowances existing in prior years have been reclassified.
Prior to 2002, no deferred provision or benefit for income taxes was
recorded because the Company was in a net deferred tax asset position and a
full valuation allowance had been recorded. During the fourth quarter of
2002, the Company re-evaluated the amount of valuation allowance required
in light of profitability achieved in recent years and expected in future
years. As a result, the Company reduced the valuation allowance on deferred
tax assets to an amount that it believes is more likely than not of being
realized based on the Company's assessment of the likelihood of near term
operating income coupled with uncertainties with respect to the impact of
future market conditions. At December 31, 2002, the valuation allowance
primarily reflected uncertainties involving the realization of state tax
credits and loss carryforwards. The valuation allowance was reduced by
$8,419,000 during 2002, including $1,210,000 related to net operating
losses generated by the exercise of stock options prior to December 31,
2001. This portion of the reduction in the valuation allowance, along with
$48,000 in similar tax benefits from stock option exercises during 2002,
was credited to additional paid-in-capital.
13. EMPLOYEE BENEFIT PLANS
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, 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
Granted 1,003,650 17.37 13.43
Exercised (9,975) 6.64 --
Canceled (170,650) 19.80 --
--------- ------
Options outstanding at December 31, 2002 3,962,079 $19.78
=========
F-17
Closure Medical Corporation
Years Ended December 31, 2000, 2001 and 2002
Notes to Financial Statements
- --------------------------------------------------------------------------------
13. EMPLOYEE BENEFIT PLANS--Continued
The following table summarizes information about stock options at December
31, 2002:
Options Outstanding Options Exercisable
----------------------------------------------- ----------------------------
Weighted-
Weighted- Average Weighted-
Range of Number Average Remaining Number Average
Exercise Price Outstanding Exercise Price Contractual Life Exercisable Exercise Price
-------------- ----------- -------------- ---------------- ----------- --------------
$ 5.00-$14.56 721,924 $10.56 5.57 530,404 $ 9.31
$14.75-$24.75 2,503,145 19.35 7.89 1,177,679 20.58
$25.25-$29.81 535,003 29.25 5.99 375,856 29.24
$30.63-$35.00 202,007 32.90 6.53 149,957 32.71
--------- ---------
Total 3,962,079 2,233,896
========= =========
Options available for grant at December 31, 2002 totaled 1,751,787.
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 2001 and 2002, 23,744 and 26,578 shares were
issued under the ESPP, respectively. At December 31, 2002, 1,428,181 shares
were available for issuance.
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 share
amounts carried over to subsequent quarters. At December 31, 2001 and 2002,
the 401(k) Plan had a receivable from the Company of 592 and 1,447 shares,
respectively, based on a closing stock price of $23.36 and $10.48,
respectively. Employer cash match amounts contributed to the 401(k) Plan
during 2001 and 2002 were approximately $68,000 and $73,000, respectively.
F-18
Closure Medical Corporation
Years Ended December 31, 2000, 2001 and 2002
Notes to Financial Statements
- --------------------------------------------------------------------------------
14. QUARTERLY FINANCIAL DATA - UNAUDITED
The following tables provide quarterly data for fiscal years ended December
31, 2001 and 2002.
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 1,328 1,435 1,356 1,384
Special charge- voluntary packaging
recall -- -- -- 430
------- ------- ------- -------
Income from continuing operations 142 352 608 1,065
Interest income, net 127 99 87 75
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
======= ======= ======= =======
Fiscal 2001 Quarters Ended
(In thousands, except per share data)
---------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Revenues $ 5,400 $ 5,657 $ 5,901 $ 6,773
Cost of products sold (1,663) (1,614) (1,472) (1,747)
------- ------- ------- -------
Gross profit 3,737 4,043 4,429 5,026
Research, development and regulatory
affairs expenses 1,600 1,743 1,574 1,519
General and administrative
expenses 1,338 1,459 2,259 1,799
------- ------- ------- -------
Income from continuing operations 799 841 596 1,708
Interest income, net 63 81 82 90
Provision (benefit) for income
taxes 15 (36) 98 (5,941)
------- ------- ------- -------
Net income $ 847 $ 958 $ 580 $ 7,739
======= ======= ======= =======
Net income per common share:
Basic $ 0.06 $ 0.07 $ 0.04 $ 0.57
======= ======= ======= =======
Diluted $ 0.06 $ 0.07 $ 0.04 $ 0.56
======= ======= ======= =======
F-19