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, 1998
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________
Commission file number 0-28748
CLOSURE MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 56-1959623
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5250 Greens Dairy Road
Raleigh, North Carolina 27616
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (919) 876-7800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this Annual Report on Form 10-K or any amendment to
this Annual Report on Form 10-K. [ ]
As of March 18, 1999, the aggregate market value of the Common Stock held by
non-affiliates of the registrant was $210,228,776. Such aggregate market value
was computed by reference to the closing sale price of the Common Stock as
reported on the Nasdaq National Market of The Nasdaq Stock Market on such date.
For purposes of making this calculation only, the registrant has defined
affiliates as including all directors and beneficial owners of more than five
percent of the Common Stock of the Company.
As of March 18, 1999, there were 13,307,509 shares of the registrant's Common
Stock outstanding.
The following documents are incorporated by reference into Part III, Items 10,
11, 12 and 13 of this Annual Report on Form 10-K: the registrant's definitive
proxy statement for its 1999 Annual Meeting of Stockholders.
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TABLE OF CONTENTS
PART I.........................................................................1
ITEM 1. BUSINESS...........................................................1
ITEM 2. PROPERTIES........................................................14
ITEM 3. LEGAL PROCEEDINGS.................................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............14
PART II.......................................................................15
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...............................................15
ITEM 6. SELECTED FINANCIAL DATA...........................................16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.........................................17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.........21
ITEM 8. FINANCIAL STATEMENTS..............................................21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES.........................................21
PART III......................................................................22
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................22
ITEM 11. EXECUTIVE COMPENSATION............................................22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................22
PART IV.......................................................................23
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..23
UNLESS THE CONTEXT INDICATES OTHERWISE, THE TERMS "CLOSURE" AND
"COMPANY" REFER TO CLOSURE MEDICAL CORPORATION. REFERENCES IN THIS ANNUAL REPORT
ON FORM 10-K ("ANNUAL REPORT") TO CLOSURE OR THE COMPANY ALSO INCLUDE, UNLESS
THE CONTEXT INDICATES OTHERWISE, CLOSURE'S PREDECESSOR, TRI-POINT MEDICAL L.P.
EFFECTIVE JANUARY 13, 1997, THE COMPANY CHANGED ITS NAME FROM TRI-POINT MEDICAL
CORPORATION TO CLOSURE MEDICAL CORPORATION.
"OCTYLDENT" AND "NEXABAND" ARE FEDERALLY REGISTERED TRADEMARKS OF THE
COMPANY."DERMABOND" IS A TRADEMARK OF ETHICON, INC., THE COMPANY'S MARKETING
PARTNER FOR THE PRODUCT. ALL OTHER TRADE NAMES AND TRADEMARKS APPEARING IN THIS
ANNUAL REPORT ARE THE PROPERTY OF THEIR RESPECTIVE HOLDERS. PRIOR TO THE
SELECTION OF THE TRADEMARK "DERMABOND" BY ETHICON, INC., DERMABOND WAS REFERRED
TO AS TRAUMASEAL(TM) BY THE COMPANY.
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PART I
ITEM 1. BUSINESS.
FORWARD-LOOKING STATEMENTS
IN THIS ANNUAL REPORT ON FORM 10-K OR THE EXHIBITS HERETO, THE
STATEMENTS CONTAINED OR INCORPORATED BY REFERENCE HEREIN THAT ARE NOT HISTORICAL
FACTS OR STATEMENTS OF CURRENT CONDITIONS ARE FORWARD-LOOKING STATEMENTS. SUCH
FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY, AMONG OTHER THINGS, THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS," "FORECASTS,"
"ESTIMATES," "PLANS," "CONTINUES," "MAY," "WILL," "SHOULD," "ANTICIPATES" OR
"INTENDS" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE
TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY OR INTENTIONS. THESE FORWARD-LOOKING
STATEMENTS, SUCH AS STATEMENTS REGARDING PRESENT OR ANTICIPATED SCIENTIFIC
PROGRESS, DEVELOPMENT OF POTENTIAL PRODUCTS, FUTURE REVENUES, CAPITAL
EXPENDITURES AND RESEARCH AND DEVELOPMENT EXPENDITURES, FUTURE FINANCINGS AND
COLLABORATIONS, MANAGEMENT, MANUFACTURING DEVELOPMENT AND CAPABILITIES, AND
OTHER STATEMENTS REGARDING MATTERS THAT ARE NOT HISTORICAL FACTS, INVOLVE
PREDICTIONS. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD
DIFFER MATERIALLY FROM THE RESULTS EXPRESSED IN, OR IMPLIED BY, THESE
FORWARD-LOOKING STATEMENTS. POTENTIAL RISKS AND UNCERTAINTIES THAT COULD AFFECT
THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS INCLUDE, BUT ARE NOT
LIMITED TO, THE "RISK FACTORS" SET FORTH BELOW. GIVEN THESE UNCERTAINTIES,
CURRENT OR PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
ANY SUCH FORWARD-LOOKING STATEMENTS. FURTHERMORE, THE COMPANY DISCLAIMS ANY
OBLIGATION OR INTENT TO UPDATE ANY SUCH FACTORS OR FORWARD-LOOKING STATEMENTS TO
REFLECT FUTURE EVENTS OR DEVELOPMENTS.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS ANNUAL REPORT ON FORM 10-K,
THE FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED.
CONTINUING OPERATING LOSSES. The Company has incurred net losses in each
year since its inception, including net losses of approximately $4.8 million for
the year ended December 31, 1998. These losses have resulted primarily from
expenses associated with the Company's research and development activities,
including preclinical and clinical trials and general and administrative
expenses. The Company anticipates that its recurring operating expenses will
increase for the next several years, as it expects its research and development
and selling and administrative expenses to increase in order to develop new
products, manufacture in commercial quantities and fund additional clinical
trials. The Company may incur a loss in 1999 and may incur losses in subsequent
years, although the amount of future net losses and time required by the Company
to reach profitability are highly uncertain. The Company's ability to generate
significant revenue and become profitable is dependent in large part on its
success in commercializing the Company's lead product, DERMABOND, expanding its
manufacturing capacity, obtaining regulatory approvals or clearances for its
products, developing and marketing new products and entering into additional
marketing agreements where appropriate and the ability of its marketing partners
to commercialize successfully products incorporating the Company's technologies.
There can be no assurance that the Company will generate significant revenue or
become profitable on a sustained basis, if at all. See "Item 7--Management's
Discussion and Analysis of Financial Condition and Results of Operations."
EARLY COMMERCIALIZATION; DEPENDENCE ON NEW PRODUCTS AND TECHNOLOGIES;
UNCERTAINTY OF MARKET ACCEPTANCE. The Company is in the early stage of product
commercialization and has derived only limited revenues from sales of certain
products to its marketing partners. The Company received premarket approval
("PMA") from the U.S. Food and Drug Administration ("FDA") to market DERMABOND
in the United States in August 1998. The Company has several additional
potential products in development. The Company believes that its long-term
viability and growth will depend in large part on sales of DERMABOND, receiving
regulatory clearances or approvals for and the successful commercialization of
these new products resulting from its research and development activities. The
Company presently is pursuing product opportunities that will require extensive
additional capital investment, research, development, clinical testing and
regulatory clearances or approvals prior to commercialization. There can be no
assurance that the Company's development programs will be successfully completed
or that required regulatory clearances or approvals will be obtained on a timely
basis, if at all. Moreover, commercial applications of the Company's absorbable
formulations are relatively new and evolving. The successful development and
market acceptance of the Company's proposed products are subject to inherent
developmental risks, including ineffectiveness or lack of safety, unreliability,
failure to receive necessary regulatory clearances or approvals, high commercial
cost and preclusion or obsolescence resulting from third parties' proprietary
rights or superior or equivalent products, as well as general economic
conditions affecting purchasing patterns.
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There can be no assurance that the Company and its marketing partners
will be able to commercialize successfully or achieve market acceptance of the
Company's technologies or products, or that the Company's competitors will not
develop competing technologies that are less expensive or otherwise superior to
those of the Company. The failure to develop and market successfully new
products would have a material adverse effect on the Company's results of
operations and financial condition. See "Products" and "Competition and
Technological Change."
LIMITED MANUFACTURING EXPERIENCE. The Company has recently expanded
manufacturing capacity and has limited experience in manufacturing its products.
The Company's future success is dependent on its ability to manufacture its
products in commercial quantities, in compliance with regulatory requirements,
at an acceptable cost and with sufficient stability. The Company currently
manufactures all of its products in a 50,000 square foot facility in Raleigh,
North Carolina. Production of commercial-scale quantities may involve technical
challenges for the Company and will require significant scale-up expenses for
additions to facilities and personnel. There can be no assurance that the
Company will be able to achieve sufficient manufacturing capabilities to enable
it to satisfy demand or to manufacture its products in a cost-effective manner
or in quantities necessary to allow the Company to achieve profitability. If the
Company is unable to manufacture sufficiently to meet the requirements for
DERMABOND of Ethicon, Inc. ("Ethicon"), the Company's marketing partner for
DERMABOND, as set forth under their agreement, Ethicon may itself then
manufacture DERMABOND and pay the Company royalties on sales. The resulting loss
of payments from Ethicon for the purchase of DERMABOND from the Company would
have a material adverse effect on the Company's results of operations and
financial condition.
In addition, the manufacture of the Company's products will be subject
to periodic inspection by regulatory authorities and certain marketing partners,
and the Company's manufacture of its products for human use is subject to
regulation and inspection from time to time by the FDA for compliance with the
current good manufacturing practices ("GMPs"), as well as equivalent
requirements and inspections by state and foreign regulatory authorities. There
can be no assurance that the Company will continue to satisfy these requirements
for DERMABOND. In addition, there can be no assurance that the FDA or other
authorities will not, during the course of an inspection of existing or new
facilities, identify what they consider to be deficiencies in GMPs or other
requirements and request, or seek, remedial action. Failure to comply with such
regulations or delay in attaining compliance may adversely affect the Company's
manufacturing activities and could result in, among other things, FDA refusal to
grant premarket approvals or clearances for pending or future products, warning
letters, injunctions, civil penalties, fines, recalls or seizures of products,
total or partial suspensions of production and criminal prosecution.
Additionally, future modifications of the Company's manufacturing facilities and
processes may subject the Company to further FDA inspections and review prior to
implementation of such modifications. There can be no assurance that the Company
will be able to obtain necessary regulatory approvals or clearances on a timely
basis, if at all. Delays in receipt of or failure to receive such approvals or
clearances or the loss of previously received approvals or clearances would have
a material adverse effect on the Company's results of operations and financial
condition. See "--Effects of FDA and Other Government Regulation," "Ethicon and
Other Marketing Agreements" and "Manufacturing."
DEPENDENCE ON MARKETING PARTNERS. The Company has no prior experience in
sales, marketing and distribution. Therefore, the Company's strategy for
commercialization of its nonabsorbable products has included entering into
agreements with other companies to market current and certain future products
incorporating the Company's technology. The Company derived all of its fiscal
1998 revenues from the sale of products to its marketing partners. There can be
no assurance that the Company will be able to enter into additional marketing
agreements on terms favorable to the Company, if at all, or that current or
future agreements will ultimately be beneficial to the Company. The Company may
establish a sales force to market certain future products. There can be no
assurance that the Company will be able to establish marketing, distribution and
sales capabilities or make arrangements with third parties to perform such
activities on acceptable terms, if at all.
The Company is dependent for product sales revenues for its
nonabsorbable products upon the success of the Company's marketing partners in
performing their responsibilities. The amount and timing of resources which may
be devoted to the performance of their contractual responsibilities by the
Company's marketing partners are not within the control of the Company. There
can be no assurance that such marketing partners will perform their obligations
as expected or market any products under the marketing agreements, or that the
Company will derive any revenue from such arrangements. There can be no
assurance that products will be launched in the manner and on the timetable
expected by the Company as such determinations are entirely within the control
of the Company's marketing partners. Certain agreements also permit the
marketing partners to pursue existing or alternative technologies in preference
to the Company's technology. There can be no assurance that the interests of the
Company will continue to coincide with those of its marketing partners or that
the marketing partners will not develop independently or with third parties
products which could compete with the Company's products, or that disagreements
over rights or technology or other proprietary
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interests will not occur. To the extent that the Company chooses not to or is
unable to enter into future agreements, it would experience increased capital
requirements to undertake the marketing or sale of its current and future
products. There can be no assurance that the Company will be able to market or
sell its current or future products independently in the absence of such
agreements. See "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Ethicon and Other Marketing
Agreements."
DEPENDENCE ON SOLE SOURCE SUPPLIER. The Company currently purchases
cyanoacetate, the primary raw material used in manufacturing most of the
Company's products, from a single qualified source. There can be no assurance
that the Company will be able to obtain adequate commercial quantities of
cyanoacetate to manufacture its products within a reasonable period of time or
at commercially reasonable rates. Lack of adequate commercial quantities or
inability to develop alternative sources meeting regulatory requirements at
similar prices and terms within a reasonable time or any interruptions in supply
in the future could have a material adverse effect on the Company's ability to
manufacture its products, including DERMABOND, and, consequently, could have a
material adverse effect on the Company's results of operations and financial
condition. See "--Dependence on Marketing Partners," "Ethicon and Other
Marketing Agreements" and "Manufacturing."
DEPENDENCE ON PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS. The
Company's success depends in large part on whether it can obtain patents,
maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. The Company has ten U.S. patents with
expiration dates ranging from 2004 to 2014 and two foreign patents with
expiration dates ranging from 2014 to 2015, and has filed applications for 18
additional U.S. patents in addition to certain corresponding patent applications
outside the United States. There can be no assurance that any of the pending
patent applications will be approved, that the Company will develop additional
proprietary products that are patentable, that any patents issued to the Company
will provide the Company with competitive advantages or will not be challenged
by any third parties or that the patents of others will not prevent the
commercialization of products incorporating the Company's technology.
Furthermore, there can be no assurance that others will not independently
develop similar products, duplicate any of the Company's products or design
around the Company's patents. Any of the foregoing results could have a material
adverse effect on the Company's results of operations and financial condition.
The commercial success of the Company also will depend, in part, on its
ability to avoid infringing patents issued to others. If the Company were
determined to be infringing any third party patent, the Company could be
required to pay damages, alter its products or processes, obtain licenses or
cease certain activities. If the Company is required to obtain any licenses,
there can be no assurance that the Company will be able to do so on commercially
favorable terms, if at all. The Company's failure to obtain a license for any
technology that it may require to commercialize its products could have a
material adverse effect on the Company's results of operations and financial
condition.
Litigation, which could result in substantial costs to and diversion of
effort by the Company, may also be necessary to enforce any patents issued or
licensed to the Company or to determine the scope and validity of third party
proprietary rights. If competitors of the Company that claim technology also
claimed by the Company prepare and file patent applications in the United
States, the Company may have to participate in interference proceedings declared
by the U.S. Patent and Trademark Office to determine priority of invention,
which could result in substantial costs to and diversion of effort by the
Company, even if the eventual outcome is favorable to the Company. Litigation
could subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease using certain technology and, consequently, could have a material adverse
effect on the Company's results of operations and financial condition.
In addition to patent protection, the Company relies on unpatented trade
secrets and proprietary technological expertise. There can be no assurance that
others will not independently develop or otherwise acquire substantially
equivalent techniques, or otherwise gain access to the Company's trade secrets
and proprietary technological expertise or disclose such trade secrets, or that
the Company can ultimately protect its rights to such unpatented trade secrets
and proprietary technological expertise. The Company relies, in part, on
confidentiality agreements with its marketing partners, employees, advisors,
vendors and consultants to protect its trade secrets and proprietary
technological expertise. There can be no assurance that these agreements will
not be breached, that the Company will have adequate remedies for any breach or
that the Company's unpatented trade secrets and proprietary technological
expertise will not otherwise become known or be independently discovered by
competitors. Failure to obtain or maintain patent or trade secret protection,
for any reason, could have a material adverse effect on the Company's results of
operations and financial condition. See "Patents, Trade Secrets and Proprietary
Rights."
EFFECTS OF FDA AND OTHER GOVERNMENT REGULATION. As newly developed
medical devices, the Company's medical tissue cohesives must receive regulatory
clearances or approvals from the FDA and, in many instances, from
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foreign and state governments, prior to their sale. In order to obtain such
clearances or approvals, medical tissue cohesives must be shown to be
efficacious and safe for use in humans. The Company's current and future medical
tissue cohesives for humans are subject to stringent government regulation in
the United States by the FDA under the Federal Food, Drug and Cosmetic Act, as
amended (the "FDC Act"). The FDA regulates the preclinical and clinical testing,
manufacture, safety, labeling, sale, distribution and promotion of medical
devices. Included among these regulations are premarket clearance and premarket
approval requirements and GMPs. Other statutory and regulatory requirements
include, among other things, establishment registration and inspection, medical
device listing, prohibitions against misbranding and adulteration, labeling and
postmarket reporting.
The regulatory process is lengthy, expensive and uncertain. Before any
new medical device may be introduced to the market, the manufacturer frequently
must obtain FDA clearance or approval through either the 510(k) premarket
notification ("510(k)") process or the lengthier PMA approval process. It
generally takes from three to nine months from submission to obtain 510(k)
premarket clearance, although it may take longer. Approval of a PMA could take
two or more years from the date of submission of the application. In addition,
FDA approval of color additives used to color a medical device often must be
obtained through the color additive petition ("CAP") process. The 510(k), PMA
and CAP processes can be expensive, uncertain and lengthy, and there is no
guarantee of ultimate clearance or approval. It is expected that some of the
Company's future products under development will be subject to the lengthier PMA
process. There can be no assurance that the Company will obtain the necessary
clearances or approvals to market its products. Securing FDA clearances and
approvals may require the submission of extensive preclinical and clinical data
and supporting information to the FDA, and there can be no guarantee of ultimate
clearance or approval. Failure to comply with applicable requirements can result
in refusals to approve or clear new applications or notifications, withdrawals
of existing product approvals or clearances, issuances of warning letters,
application integrity proceedings, injunctions, civil penalties, fines, recalls
or seizures of products, total or partial suspensions of production and criminal
prosecution.
Medical devices also are subject to postmarket reporting requirements
for deaths or serious injuries when the device may have caused or contributed to
the death or serious injury, and for certain device malfunctions that would be
likely to cause or contribute to a death or serious injury if the malfunction
were to recur. If safety or efficacy problems occur after the product reaches
the market, the FDA may take steps to prevent or limit further marketing of the
product. Additionally, the FDA actively enforces regulations prohibiting
marketing of devices for indications or uses that have not been cleared or
approved by the FDA. See "Government Regulation."
POTENTIAL ADVERSE EFFECT OF COMPETITION AND TECHNOLOGICAL CHANGE. The
Company competes with many domestic and foreign competitors in various rapidly
evolving and technologically advanced fields in developing its technology and
products, including medical device, pharmaceutical and biopharmaceutical
companies. In the worldwide wound closure market, DERMABOND competes with the
suture products of Ethicon, the world leader in the wound closure market, and
Tyco International Ltd., as well as the staple products of Ethicon Endo-Surgery,
Inc., a subsidiary of Johnson & Johnson, and United States Surgical Corporation.
In addition, there are currently two other cyanoacrylate-based topical adhesives
with which DERMABOND competes, neither of which is approved for sale in the
United States. B. Braun GmbH markets Histoacryl(R) as a topical closure adhesive
for small lacerations and incisions in low skin tension areas of the body. Tyco
International Ltd. has test marketed a similar adhesive, Indermil, in the United
Kingdom. Loctite, the manufacturer of Indermil, has received an Investigational
Device Exemption from the FDA and has begun clinical studies in the United
States for this product. Any future products of the Company may compete with a
variety of wound closure products currently on the market or in development.
Many of the Company's competitors and potential competitors have substantially
greater financial, technological, research and development, marketing and
personnel resources than the Company. In addition to those mentioned above,
other recently developed technologies or procedures are, or may in the future
be, the basis of competitive products.
There can be no assurance that the Company's competitors will not
succeed in developing alternative technologies and products that are more
effective, easier to use or more economical than those which have been or are
being developed by the Company or that would render the Company's technology and
products obsolete and non-competitive in these fields. These competitors may
also have greater experience in developing products, conducting clinical trials,
obtaining regulatory clearances or approvals, and manufacturing and marketing
such products. Certain of these competitors may obtain patent protection,
approval or clearance by the FDA or product commercialization earlier than the
Company, any of which could have a material adverse effect on the Company.
Furthermore, the Company competes with others with respect to manufacturing
efficiency and marketing capabilities, areas in which it currently has limited
experience. Finally, under the terms of the Company's marketing agreements, the
Company's marketing partners may pursue parallel development of other
technologies or products, which may result in a marketing partner developing
additional products that will compete with the Company's products.
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EFFECTS OF INTERNATIONAL SALES. The Company and its marketing partners
intend to market the Company's current and future products outside the United
States as well as domestically. A number of risks are inherent in international
transactions. In order for the Company to market its products in Europe,
Australia, Canada and certain other foreign jurisdictions, the Company must
obtain required market authorizations and otherwise comply with extensive
regulations regarding safety, manufacturing processes and quality. These
regulations, including the requirements for authorizations to market, may differ
from the FDA regulatory scheme. There can be no assurance that the Company will
obtain market authorizations in such countries or that it will not be required
to incur significant costs in obtaining or maintaining its foreign market
authorizations. Delays in receipt of authorizations to market the Company's
products in foreign countries, failure to receive such authorizations or the
future loss of previously received authorizations could have a material adverse
effect on the Company's results of operations and financial condition.
International sales also may be limited or disrupted by political instability,
price controls, trade restrictions and changes in tariffs. The Company's
international sales and related royalties of DERMABOND are based on sales in
foreign currencies, but payable in U.S. dollars, and thus may be adversely
affected by fluctuations in currency exchange rates. Additionally, fluctuations
in currency exchange rates may adversely affect demand for the Company's
products by increasing the price of the Company's products in the currency of
the countries in which the products are sold. There can be no assurance that the
Company will be able to successfully commercialize its current or future
products in any foreign market. See "Ethicon and Other Marketing Agreements" and
"Government Regulations."
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING. The
Company has expended and expects to continue to expend substantial funds to
complete the research, development and clinical testing of its existing products
and future products in development and to establish commercial-scale
manufacturing facilities. The Company believes that existing cash and cash
equivalents and investments, which totaled $16.7 million as of December 31,
1998, will be sufficient to finance its capital requirements for at least 12
months. There can be no assurance that the Company will not be required to seek
additional capital to finance its operations in the future. Other than the
Company's equipment financing line of credit and term loan, the Company
currently has no commitments for any additional financing, and there can be no
assurance that adequate funds for the Company's operations from the Company's
revenues, financial markets, arrangements with marketing partners or from other
sources will be available when needed or on terms attractive to the Company. The
inability to obtain sufficient funds may require the Company to delay, scale
back or eliminate some or all of its research and product development programs,
manufacturing operations, clinical studies or regulatory activities or to
license third parties to commercialize products or technologies that the Company
would otherwise seek to develop itself, and could have a material adverse effect
on the Company's results of operations and financial condition. See "Item
7--Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
BUSINESS OVERVIEW
Closure develops, manufactures and commercializes medical tissue
cohesive products based on its proprietary cyanoacrylate technology. The
Company's medical tissue cohesives can be used to close and seal wounds and
incisions rapidly and stop leakage of blood and other body fluids from injured
tissue. Closure's medical tissue cohesive products align and seal injured tissue
without the trauma caused by suturing or stapling and allow natural healing to
proceed. In addition, Closure believes that its medical tissue cohesive products
result in lower overall procedure costs and are easier and quicker to use than
sutures or staples.
The Company's lead product, DERMABOND, is a nonabsorbable tissue
cohesive that can be used to replace sutures and staples for certain topical
wound closure applications. On August 28, 1998, the Company received premarket
approval from the FDA to market DERMABOND in the United States and the Company's
marketing partner, Ethicon, launched the product in September 1998.
Additionally, Ethicon has been distributing DERMABOND since late 1997 and is
currently marketing DERMABOND in approximately 24 countries outside the United
States.
The Company has another nonabsorbable product for human use and a
product line for veterinary uses. OCTYLDENT, which received 510(k) clearance
from the FDA, is a topical sealant currently used in conjunction with
Actisite(R), a site-specific drug delivery system manufactured by ALZA
Corporation ("ALZA"), to treat adult periodontal disease. OCTYLDENT is marketed
with Actisite(R) in the United States by Procter & Gamble/ALZA, Partners for
Oral Health Care (the "Procter & Gamble/ALZA Partnership") and outside the
United States by ALZA. NEXABAND is a product line of five topical tissue
cohesives marketed by Farnam Companies, Inc. ("Farnam") and used in veterinary
wound closure and management.
The Company is currently developing additional nonabsorbable tissue
cohesive products. These future products require further development, clinical
trials and regulatory clearance or approval prior to commercialization.
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Closure is also developing absorbable cyanoacrylate products for
internal applications. In 1998, Closure established its Absorbable Cohesive
Technology Division, which has separate personnel and a separate research and
development facility, in order to develop its absorbable cohesive products. Any
future absorbable products require further development, clinical trials and
regulatory clearance or approval prior to commercialization.
TECHNOLOGY OVERVIEW
Closure's medical tissue cohesive products are based on its proprietary
cyanoacrylate technology. Cyanoacrylates are a family of liquid monomers that
react under a variety of conditions to form polymer films with strong adhesive
properties. Industrial adhesives based on cyanoacrylates were first introduced
in 1958 and are widely used in the aerospace and automotive industries, as well
as in consumer products such as super glue. Closure's technology enables it to
develop NONABSORBABLE formulations for topical use and ABSORBABLE formulations
for internal use. Nonabsorbable formulations close and seal skin wounds and
incisions for the duration of healing, then slough off naturally as new skin
cells are produced and the wound bed heals. Absorbable formulations may be used
to close or seal internal wounds and degrade, in a predictable, biocompatible
manner, into components that are eliminated from the body naturally.
The Company's proprietary technology allows it to customize the physical
and chemical properties of cyanoacrylates to meet specific market needs. These
properties include viscosity, flexibility, bond strength, stability, setting
time, porosity and biodegradation. The Company's current products perform
consistently and reproducibly, do not require special preparation or
refrigeration and have shelf-lives of at least 24 months.
Closure has developed applicator and packaging technology to deliver
DERMABOND and other products to wound sites in order to enhance the utility of
its products. The current DERMABOND applicator contains a catalyst that controls
the rate of polymerization and allows the cohesive film to be applied in
multiple layers, which enhances bond strength.
During the years ended December 31, 1996, 1997 and 1998, the Company
spent $861,000, $1,639,000 and $4,241,000, respectively, on research and
development activities.
PRODUCTS
The Company's medical tissue cohesive products are an alternative to the
traditional method of closing topical wounds and incisions. Suturing and
stapling involve puncturing healthy tissue in order to align and close the
wound, may cause leakage or additional scarring at the small puncture sites,
require anesthetics, are time-consuming to apply, and generally require return
patient visits and physician time to remove the sutures or staples. Medical
tissue cohesives may be applied quickly, may not require anesthetics, do not
induce trauma to surrounding tissues and do not require return visits to the
physician for removal.
DERMABOND
The Company's lead product, DERMABOND, is a topical tissue cohesive used
to close wounds from skin lacerations and incisions, minimally invasive surgery
and plastic surgery. DERMABOND is used as a replacement for topical sutures or
staples or in conjunction with subcuticular sutures or staples. DERMABOND is
intended to be used topically for wound closure on low skin tension areas of the
body and is not intended for use on the hands, feet or across joints. Although
the purchase cost of DERMABOND is expected to be greater than sutures or
staples, the Company believes that the use of DERMABOND results in lower overall
materials and procedure costs because of reduced treatment time, elimination of
the need for anesthetics, simplification of post-closure wound care and
elimination of suture or staple removal.
In 1996, the Company completed an 818-patient controlled, randomized
clinical trial of DERMABOND at ten sites throughout the United States. The
clinical trial compared wound closure utilizing DERMABOND with wound closure
utilizing sutures or staples. The clinical trial demonstrated DERMABOND to be at
least equivalent to topical nonabsorbable U.S.P. size 5.0 or smaller diameter
sutures, staples or adhesive strips/tapes in wound closure, wound healing,
cosmetic outcome and infection rate, and also demonstrated that the use of
DERMABOND substantially reduced procedure time and inflammation.
In March 1996, the Company entered into an exclusive worldwide agreement
with Ethicon, a subsidiary of Johnson & Johnson and a world leader in wound
closure products, to market and distribute DERMABOND. On August
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28, 1998, the Company received premarket approval to market DERMABOND in the
United States and Ethicon launched the product in September 1998. Additionally,
Ethicon has been distributing DERMABOND since late 1997 and is currently
marketing DERMABOND in approximately 24 countries outside the United States.
OTHER PRODUCTS
OCTYLDENT, the Company's first product for human use, is a topical
sealant used in conjunction with site-specific sustained release antibacterial
drug therapy to treat adult periodontal disease. OCTYLDENT seals the pocket of a
diseased gum where Actisite(R), a therapeutic drug delivery system manufactured
by ALZA, has been inserted, thereby allowing the system to remain in place over
a ten-day period. OCTYLDENT is marketed with Actisite(R) by the Procter &
Gamble/ALZA Partnership in the United States and outside the United States by
ALZA. The Company has five topical tissue cohesive products sold under the
NEXABAND trade name used in veterinary wound closure and management procedures.
The NEXABAND products are distributed through Farnam, a leader in large animal
over-the-counter products and small and large animal ethical product markets.
PRODUCT IN CLINICAL TRIALS
During 1998, the Company funded a 42-patient pilot clinical study of a
proprietary nonabsorbable formulation to treat oral ulcers, which was conducted
at the University of North Carolina-Chapel Hill Hospital and School of
Dentistry. The pilot study demonstrated that the nonabsorbable formulation, when
applied to oral ulcers, reduced both short-term and longer-term pain when
compared to the pain experienced by patients in an untreated control group. The
study further demonstrated that Closure's proprietary formulation significantly
reduced the time required for the ulcer to heal completely when compared to
ulcers which were not treated by Closure's formulation. At day seven, 77% of
patients treated with the Company's proprietary formulation experienced complete
healing of their oral ulcer, compared to only 21% of patients who did not
receive treatment. As a result of this pilot study, the Company is conducting a
definitive clinical study of 155 patients to demonstrate the effectiveness of
Closure's proprietary nonabsorbable formulation when applied to oral ulcers. The
Company chose investigators at Brigham & Women's Hospital in Boston, MA, the
University of North Carolina-Chapel Hill in Chapel Hill, NC and Forsyth Dental
Center in Boston, MA to conduct the study. The patient enrollment portion of
this definitive study was completed in March 1999. The clinical results of this
study are not known yet.
PRODUCTS IN DEVELOPMENT
The Company is currently developing additional nonabsorbable tissue
cohesive products. The Company is in the pre-clinical stage of product
development for a liquid bandage for minor cuts, scrapes and abrasions. These
future products require further development, clinical trials and regulatory
clearance or approval prior to commercialization. See "Government Regulations."
In 1998, Closure established its Absorbable Cohesive Technology
Division, which has separate personnel and a separate research and development
facility, in order to develop its absorbable cohesive products. The Division is
responsible for developing absorbable cyanoacrylate products for internal
applications. The Company presently has two products in development, a surgical
tissue cohesive to be used to close internal surgical incisions and traumatic
wounds and a surgical sealant to be used to control post-surgical leakage at
suture closure sites. Any future absorbable products require further
development, clinical trials and regulatory clearance or approval prior to
commercialization. See "Government Regulations."
ETHICON AND OTHER MARKETING AGREEMENTS
The Company's strategy for its current nonabsorbable products has been
to enter into marketing agreements with marketing partners to sell its products.
The Company is dependent on its marketing partners to market and distribute
these products. Although the Company believes that its marketing partners have
an economic motivation to succeed in performing their contractual
responsibilities, the amount and timing of resources to be devoted to these
activities are not within the control of the Company. Any future products of the
Company may be sold through marketing partners or a direct sales force. See
"Risk Factors--Dependence on Marketing Partners."
In March 1996, the Company entered into a renewable, eight-year supply
and distribution agreement with Ethicon, a subsidiary of Johnson & Johnson,
which provides Ethicon with exclusive worldwide rights to market, distribute and
sell DERMABOND, the Company's lead nonabsorbable product. The agreement requires
Ethicon to make minimum purchases that escalate annually and requires Ethicon to
pay royalties based upon net sales. Ethicon may renew
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the agreement for additional one-year periods. The agreement is terminable upon
specified events, including (i) material breach by either party and (ii)
insolvency of either party. Upon certain events of default, including failure to
provide an adequate supply of product, Ethicon may terminate its arrangement to
purchase DERMABOND from the Company, and Ethicon may itself then manufacture
DERMABOND and pay the Company royalties based on sales. See "Risk
Factors--Dependence on Marketing Partners," "Risk Factors--Limited Manufacturing
Experience," "Products--DERMABOND" and "Manufacturing."
The Company entered into a supply agreement with the Procter &
Gamble/ALZA Partnership which grants it non-exclusive worldwide rights to market
and distribute Octyldent with Actisite(R), a product manufactured by ALZA. The
Company entered into a supply agreement with ALZA, which grants ALZA
non-exclusive rights to market OCTYLDENT worldwide, except in the United States,
Canada, Mexico and Venezuela, where the Procter & Gamble/ALZA Partnership has
marketing rights. The agreements guarantee the Company minimum purchases
annually and provide for specified prices per unit. The agreements have
automatic renewals for additional one-year periods and are terminable upon
specified events, including among other, certain breaches and revocation or
suspension of the Company's 510(k) clearance for OCTYLDENT.
In December 1992, the Company entered into a renewable, seven-year
development and distribution agreement with Farnam. The Company granted Farnam
the exclusive rights to market, sell and distribute its NEXABAND line of
veterinary products to the ethical veterinary market in North America. In
addition to the existing nonabsorbable NEXABAND products covered by this
agreement, Farnam has exclusive rights in North America to any absorbable
veterinary cohesive products developed by the Company. The agreement provides
for minimum purchases which increase annually and is terminable upon specified
events, including material breach by either party. The agreement will
automatically renew for successive one-year periods contingent on Farnam meeting
required levels of purchases.
PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS
The Company's success depends in large part on its ability to obtain
patents, maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. The Company has ten U.S. patents with
expiration dates ranging from 2004 to 2014 and two foreign patents with
expiration dates ranging from 2014 to 2015, and has filed applications for 18
additional U.S. patents in addition to certain patent applications outside the
United States. The issued U.S. patents relate to the Company's tissue cohesive
formulations and delivery technology. The pending U.S. patent applications
relate to the Company's products and processes.
In addition to patent protection, the Company relies on unpatented trade
secrets and proprietary technological expertise. The Company relies, in part, on
confidentiality agreements with its marketing partners, employees, advisors,
vendors and consultants to protect its trade secrets and proprietary
technological expertise. See "Risk Factors--Dependence on Patents, Trade Secrets
and Proprietary Rights."
GOVERNMENT REGULATIONS
The Company's products and operations are subject to substantial
government regulation in the United States and foreign countries.
FDA REGULATION
Most medical devices, including the Company's medical tissue cohesives
for humans, are subject to stringent government regulation in the United States
by the FDA under the FDC Act, and, in many instances, by foreign and state
governments. The FDA regulates the preclinical and clinical testing,
manufacture, safety, labeling, sale, distribution and promotion of medical
devices. Included among these regulations are premarket clearance and premarket
approval requirements and GMPs. Other statutory and regulatory requirements
include, among other things, establishment registration and inspection, medical
device listing, prohibitions against misbranding and adulteration, labeling and
postmarket reporting. The regulatory process is lengthy, expensive and
uncertain. Securing FDA approvals and clearances may require the submission of
extensive preclinical and clinical data and supporting information to the FDA.
Failure to comply with applicable requirements can result in refusal to approve
or clear new applications or notifications, withdrawals of existing product
approvals or clearances, issuances of warning letters, application integrity
proceedings, injunctions, civil penalties, fines, recalls or seizures of
products, total or partial suspensions of production and criminal prosecution.
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Under the FDC Act, medical devices are classified into one of three
classes (Class I, II or III) on the basis of the controls necessary to
reasonably ensure their safety and effectiveness. Before any new medical device
may be introduced to the market, the manufacturer frequently must obtain either
premarket clearance through the 510(k) premarket notification process or
premarket approval through the lengthier PMA approval process. If a color
additive is used to color the medical device, the manufacturer may be required
to submit a CAP and obtain FDA approval for use of the color additive in
production of the device. A 510(k) premarket notification will be granted if the
submitted data establish that the proposed device is "substantially equivalent"
to a legally marketed Class I or Class II medical device, or to a Class III
medical device for which the FDA has not called for PMAs. The FDA may request
extensive data, including clinical studies of the device's safety and
effectiveness, before a substantial equivalence determination can be made. It
generally takes from three to nine months from submission to obtain 510(k)
premarket clearance, although it may take longer. A PMA application must be
filed if a product is found to be not substantially equivalent to a legally
marketed Class I or II device or if it is a Class III device for which the FDA
has called for PMAs. DERMABOND is a Class III medical device. A PMA application
must be supported by extensive data, including laboratory, preclinical and
clinical trial data, to demonstrate the safety and efficacy of the device, as
well as extensive manufacturing information. Similarly, a CAP must be supported
with extensive data and information demonstrating the safety of the color
additive under the conditions of intended use in the device. Before initiating
human clinical trials, the manufacturer often must first obtain an
Investigational Device Exemption ("IDE") for the proposed medical device. Prior
to granting a PMA, the FDA will generally conduct an inspection of the
manufacturer's facilities to ensure compliance with GMPs and the FDA must
approve final labeling. Approval of a PMA or a CAP could take two or more years
from the date of submission of the application or petition. The PMA and CAP
processes can be expensive, uncertain and lengthy, and there is no guarantee of
ultimate approval.
Modifications or enhancements to products that are either cleared
through the 510(k) process or approved through the PMA process that could affect
safety or effectiveness or effect a major change in the intended use of the
device may require further FDA review through new 510(k) or PMA submissions.
Additionally, future modifications of the Company's manufacturing facilities and
processes may subject the Company to further FDA inspections and review prior to
implementation of such modifications.
Medical devices also are subject to postmarket reporting requirements
for deaths or serious injuries when the device may have caused or contributed to
the death or serious injury, and for certain device malfunctions that would be
likely to cause or contribute to a death or serious injury if the malfunction
were to recur. If safety or efficacy problems occur after the product reaches
the market, the FDA may take steps to prevent or limit further marketing of the
product. Additionally, the FDA actively enforces regulations prohibiting
marketing of devices for indications or uses that have not been cleared or
approved by the FDA.
On August 28, 1998, DERMABOND received PMA approval. OCTYLDENT, the
Company's product sold in conjunction with Actisite(R), received 510(k)
clearance in 1990. BotH DERMABOND and OCTYLDENT are subject to GMP, postmarket
reporting and other FDA requirements.
There can be no assurance that the Company will be able to obtain
necessary 510(k) clearances or PMA and CAP approvals to market its future
products in the United States for their intended use on a timely basis, if at
all, and delays in receipt of or failure to receive such clearances or
approvals, the loss of previously received clearances or approvals, or failure
to comply with existing or future regulatory requirements could have a material
adverse effect on the Company's results of operations and financial condition.
See "Risk Factors--Limited Manufacturing Experience" and "Risk Factors--Effects
of FDA and Other Government Regulation."
FOREIGN REGULATORY MATTERS
In order for the Company to market its products in Europe, Australia,
Canada and certain other foreign jurisdictions, the Company must obtain required
market authorizations and otherwise comply with extensive regulations regarding
safety, manufacturing processes and quality. These regulations, including the
requirements for authorizations to market, may differ from the FDA regulatory
scheme. The time required to obtain authorization for marketing of the Company's
products in foreign countries may be longer or shorter than that required for
FDA clearance or approval, and the requirements may differ. In addition, there
may be foreign regulatory barriers other than market authorizations.
Pursuant to the FDC Act, a non-FDA approved medical device may be
exported to any country, provided that the device (i) complies with the laws of
that country and (ii) has valid marketing authorization or the equivalent from
the appropriate authority in a "listed country." The listed countries are
Australia, Canada, Israel, Japan, New Zealand, Switzerland, South Africa and
countries in the European Union and the European Economic Area. Generally,
export of
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unapproved devices (i.e., those requiring a PMA in the U.S.) that do not have
marketing authorization in a listed country will continue to require prior FDA
export authorization.
Medical devices that are marketed or put into service within the
European Union are required to comply with Council Directive 93/42/EEC, the
medical devices directive ("MDD"). As of June 14, 1998, compliance with the MDD
requires that manufacturers of devices covered by the MDD must obtain the right
to display the CE mark, which allows the device to be marketed, put into service
and circulated freely within the European Union. The Company received
authorization to display the CE mark in the European Union for DERMABOND and
other topical and ophthalmic tissue cohesive applications in August 1997 and for
OCTYLDENT in August 1995. The Company plans to pursue the right to display the
CE mark on future products for human use that the Company may develop. There can
be no assurance that the Company will be successful in obtaining the right to
display the CE mark on any additional medical devices. Failure to obtain the
right to display the CE mark on its medical devices could have a material
adverse effect on the Company's results of operations and financial condition.
See "Risk Factors--Effects of FDA and Other Government Regulation."
Upon receipt of the CE mark, every six months for two years and annually
thereafter, the Company must demonstrate that its quality management system
meets the requirements of the MDD and its technical documentation for products
displaying the CE mark is accurate and reflects the current manufacturing
process. See "Manufacturing."
ENVIRONMENTAL REGULATIONS
The Company's activities involve the controlled use of hazardous
materials and chemicals. The Company is subject to federal, state and local laws
and regulations governing the use, manufacture, storage, handling and disposal
of such material and certain waste products. Although the Company believes that
its safety procedures for handling and disposing of such materials comply in all
material respects with the standards prescribed by such laws and regulations,
risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result and such liability could have a material
adverse effect on the Company's results of operations and financial condition
and potentially could exceed the resources of the Company. Environmental
protection has been an area of substantial concern in recent years, and
regulation of activities involving the use and disposal of potentially hazardous
materials has increased. There can be no assurance that such regulation will not
increase in the future or that the Company will not be required to incur
significant costs to comply with environmental laws and regulations in the
future.
MANUFACTURING
The Company has devoted considerable resources to the development of
manufacturing processes and technologies capable of providing its products with
clinical efficacy, safety, ease of use and suitable shelf life. The Company has
developed a manufacturing process designed to produce a highly purified base
material which is not achievable by other existing methodologies. The Company
relies heavily on internal trade secrets and technological expertise and expects
to keep its manufacturing process in-house and, where applicable, seek patent
protection for specific manufacturing applications.
Since August 1998, the Company has been manufacturing all of its
products in a 50,000 square foot facility in Raleigh, North Carolina. This
facility integrates production, bottling, labeling and packaging capabilities
for products currently being marketed. The Company believes that this facility
will be sufficient to meet Ethicon's worldwide market demand for DERMABOND. See
"Item 2--Properties."
The Company is implementing a multiphase plan for additional expansion
of its manufacturing capabilities. Part of this expansion is the integration of
all the operations associated with the filling and packaging of DERMABOND, which
currently are completed by outside providers. Such expansion and scale-up is
expected to occur over the next three years and will provide for sufficient
capacity for all current products, including DERMABOND, as well as various new
products. Production of commercial-scale quantities may involve technical
challenges for the Company and will require significant scale-up expenses for
additions to facilities and personnel. There can be no assurance that the
Company will be able to achieve large-scale manufacturing capabilities or to
manufacture its products in a cost-effective manner or in quantities necessary
to allow the Company to achieve profitability. If the Company is unable to
expand sufficiently its manufacturing capacity to meet Ethicon's requirements
for DERMABOND as set forth under their agreement, Ethicon may itself then
manufacture DERMABOND and pay the Company royalties based on sales. See "Risk
Factors--Limited Manufacturing Experience" and "Ethicon and Other Marketing
Agreements."
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In June 1997, in connection with the Company's application for its CE
mark to market DERMABOND in the European Union, the Company was registered by
its notified body, British Standards Institution ("BSI"), to certify that the
Company's quality management system complies with the requirements of the ISO
9002 international quality assurance standard issued by the International
Organization of Standardization of Geneva, Switzerland. In January 1998, BSI
expanded the scope of the Company's quality system certification to include
compliance with ISO 9001, a comprehensive international standard for
manufacturing and servicing firms for quality assurance in design, development,
production, installation and servicing.
The Company presently purchases cyanoacetate, the primary raw material
used in the manufacture of the Company's medical cohesives, from one source. The
Company has the capability of manufacturing cyanoacetate if necessary, and
cyanoacetate may be available from a second supplier. The Company would be
required to qualify the quality assurance systems of an additional supplier
prior to its use as a source of supply. The other raw materials used in
manufacturing and packaging the Company's products are readily available from
multiple sources, as is its process control equipment. See "Risk
Factors--Dependence on Sole Source Supplier."
The Company hires filling and packaging employees as needed on a
temporary basis, and the Company expects that a portion of the Company's future
packaging requirements will be completed by outside providers.
COMPETITION AND TECHNOLOGICAL CHANGE
The Company competes with many domestic and foreign competitors in
various rapidly evolving and technologically advanced fields in developing its
technology and products, including medical device, pharmaceutical and
biopharmaceutical companies. In the worldwide wound closure market, DERMABOND
competes with the suture products of Ethicon, the world leader in the wound
closure market, and Tyco International Ltd., as well as the staple products of
Ethicon Endo-Surgery, Inc., a subsidiary of Johnson & Johnson, and United States
Surgical Corporation. In addition, there are currently two other
cyanoacrylate-based topical adhesives with which DERMABOND competes, neither of
which is approved for sale in the United States. B. Braun GmbH markets
Histoacryl(R) as a topical closure adhesive for small lacerations and incisions
in low skin tension areas of the body. Tyco International Ltd. has test marketed
a similar adhesive, Indermil, in the United Kingdom. Loctite, the manufacturer
of Indermil, has received an IDE and subsequently began clinical studies in the
United States for this product. Any future products of the Company may compete
with a variety of wound closure products currently on the market or in
development. Many of the Company's competitors and potential competitors have
substantially greater financial, technological, research and development,
marketing and personnel resources than the Company. In addition to those
mentioned above, other recently developed technologies or procedures are, or may
in the future be, the basis of competitive products. See "Risk
Factors--Potential Adverse Effect of Competition and Technological Change."
SCIENTIFIC ADVISORS
The Company has established a team of scientific advisors (the
"Scientific Advisors") who provide consulting services to the Company. The
Scientific Advisors consist of independent professionals who meet on an
individual basis with management when so requested. The Scientific Advisors have
recognized expertise in relevant sciences or clinical medicine and advise the
Company about present and long-term scientific planning, research and
development.
There is no fixed term of service for the Scientific Advisors. Current
members may resign or be removed at any time, and additional members may be
appointed. Members do not serve on an exclusive basis with the Company, are not
under contract (other than with respect to confidentiality obligations) and are
not obligated to present corporate opportunities to the Company. To management's
knowledge, none of the members are working on the development of competitive
products. Inventions or products developed by a Scientific Advisor who is not
otherwise affiliated with the Company will not become the Company's property,
but will remain the Scientific Advisor's property.
EMPLOYEES
As of March 8, 1999, the Company had 96 full-time employees, of whom 82
were dedicated to research, development, manufacturing, quality control and
regulatory affairs, and 14 were dedicated to administrative activities. Thirteen
members of the Company's research and development staff have doctoral or
advanced degrees. The Company intends to recruit additional personnel in
connection with the research, development and manufacturing of its products.
None of the Company's employees is represented by a union, and the Company
believes relationships with its employees are good.
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EXECUTIVE OFFICERS OF THE COMPANY
The table below sets forth the names, ages and positions of the persons
who are the executive officers of the Company as of March 8, 1999.
<TABLE>
<CAPTION>
<S> <C>
NAME AGE POSITION
Robert V. Toni 58 President and Chief Executive Officer and Director
Joe B. Barefoot 48 Vice President of Regulatory Affairs and Quality Assurance
Dennis D. Burns 53 Vice President/General Manager, Absorbable Cohesive Technology Division
Jeffrey G. Clark 45 Vice President of Research and Development
William M. Cotter 48 Vice President of Manufacturing and Operations
Anthony J. Sherbondy 45 Vice President of New Business Generation
J. Blount Swain 42 Vice President of Finance and Chief Financial Officer
</TABLE>
ROBERT V. TONI has served as President and Chief Executive Officer of
the Company since June 1994 and as a director of the Company since February
1996. From 1989 to 1994, Mr. Toni was General Manager and Vice President of
Sales and Marketing for IOLAB Corporation, a Johnson & Johnson company that
marketed and manufactured surgical devices, equipment and pharmaceuticals for
the ophthalmic market. From 1987 to 1989, he served as President of Cooper
Vision-CILCO, and also served as its Executive Vice President of Operations and
Chief Financial Officer from 1984 to 1987. Mr. Toni holds a B.S. degree in
Finance from Iona College.
JOE B. BAREFOOT has served as Vice President of Regulatory Affairs and
Quality Assurance of the Company since 1990. From 1986 to 1990, Mr. Barefoot
managed the quality assurance program and regulatory submissions for Sharpoint,
Inc. and its successor. From 1982 to 1986, he was a member of the quality
assurance staff at C.R. Bard Inc. Prior to that time, he was a member of the
quality assurance staff at Becton, Dickinson & Co. Mr. Barefoot holds a B.S.
degree in Microbiology from Emporia State University.
DENNIS D. BURNS has served as Vice President/General Manager of the
Company's Absorbable Cohesive Technology Division since February 1998. From 1994
to 1997, Mr. Burns was a principal of The Delta Group, a healthcare consulting
company he founded in 1994, through which he functioned as President of
EpiGenesis Pharmaceuticals. From 1992 to 1994, he was President and Chief
Executive Officer of Macronex, Inc., an immunotherapy company. From 1979 to
1992, Mr. Burns held various executive positions at Johnson & Johnson, most
recently from 1988 to 1992 as Vice President, Business Development of Ortho
Biotech, Inc. Mr. Burns holds a B.S. degree in Biology from Manhattan College.
JEFFREY G. CLARK has served as Vice President of Research and
Development of the Company since 1990. Prior to that time, Mr. Clark spent seven
years at Sharpoint, Inc. and its successor where he developed bioabsorbable and
polypropylene suture technology. From 1977 to 1983, Mr. Clark worked at
Extracorporeal Inc., a division of Johnson & Johnson. Mr. Clark holds an M.S.
degree in Organic Chemistry from Drexel University.
WILLIAM M. COTTER has served as Vice President of Manufacturing and
Operations of the Company since June 1997. From 1989 to 1997, Mr. Cotter was
Vice President of Operations (North America) of Sanofi Diagnostics Pasteur,
Inc., a company involved in the design, manufacturing and marketing of IN VITRO
diagnostics instrumentation and biological reagents. From 1984 to 1988, he
worked at Genetic Systems Corporation, a subsidiary of Bristol Myers Company,
where he was involved in the commercialization of one of the first diagnostic
test kits for the HIV virus. Prior to that time, Mr. Cotter worked at Advanced
Technology Laboratories, Inc., a division of E.R. Squibb Company. Mr. Cotter
holds a B.A. degree from Ohio University.
ANTHONY J. SHERBONDY has served as Vice President of New Business
Generation of the Company since January 1998. Prior to that time, Mr. Sherbondy
served as Director of Marketing of the Company from October 1996. From 1995 to
1996, he was the principal executive and founder of MedNet Market Research, LLC,
a healthcare market research company. From 1992 to 1995, Mr. Sherbondy served as
Director of Sales and Marketing Operations for Pasteur-Merieux-Connaught, a
Rhone-Poulenc company. From 1983 to 1992, he held various positions at IOLAB
Corporation, a Johnson & Johnson company. Mr. Sherbondy holds a B.A. degree from
California State University and an M.B.A. from The Claremont Graduate School.
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J. BLOUNT SWAIN has served as Vice President of Finance and Chief
Financial Officer of the Company since September 1992. From 1983 until 1992, Mr.
Swain was Chief Financial Officer and Treasurer of The Record Bar, Inc., a
national music retailing entity. Prior to 1983, Mr. Swain served as a Senior
Accountant with Price Waterhouse in Raleigh, North Carolina. Mr. Swain holds a
B.S. degree from the University of North Carolina at Chapel Hill and is a
certified public accountant.
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ITEM 2. PROPERTIES.
In February 1997, the Company entered into a ten-year lease for
approximately 50,000 square feet of office, laboratory and manufacturing space
in Raleigh, North Carolina for, among other things, the corporate headquarters
of the Company and the expansion of manufacturing capacity. The term of this
lease began in September 1997. During 1998, the Company relocated its corporate
offices and manufacturing operations to this new facility. The Company's
manufacturing operations in the new facility were validated and became fully
operational in the third quarter of 1998. The Company also leases a 5,800 square
foot facility in Raleigh in which the Company's Absorbable Cohesive Technology
Division conducts its research and development activities and other operations.
The term of this lease extends through March 2001.
ITEM 3. LEGAL PROCEEDINGS.
In December 1998, a former employee of the Company filed a
discrimination claim with the Raleigh Area Office of the Equal Employment
Opportunity Commission. The Company has retained counsel in this matter and
settlement negotiations are ongoing. Management believes that the outcome of
this matter will not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders
during the fourth quarter of fiscal year 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "CLSR." Prior to the change of the Company's name on January 13,
1997, the Common Stock was traded under the symbol "TPMC." 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 1997 and
1998.
HIGH LOW
---- ---
1997
First Quarter........................................$21.50 $12.50
Second Quarter........................................23.75 14.25
Third Quarter.........................................38.75 18.00
Fourth Quarter........................................35.13 21.88
1998
First Quarter........................................$30.88 $18.50
Second Quarter........................................29.88 19.06
Third Quarter.........................................30.00 19.88
Fourth Quarter........................................30.88 14.25
As of March 18, 1999, there were approximately 307 holders of record
of the Company's Common Stock. The Company has never declared or paid cash
dividends on its Common Stock and does not anticipate paying any cash dividends
in the foreseeable future. The Company currently intends to retain future
earnings, if any, to fund the development and growth of its business. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition,
operating results, capital requirements and such other factors as the Board of
Directors deems relevant.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below for each year in the five
year period ended December 31, 1998 have been derived from financial statements
audited by PricewaterhouseCoopers LLP, independent accountants. The balance
sheets as of December 31, 1997 and 1998 and the related statements of operations
and of cash flows for the years ended December 31, 1996, 1997 and 1998 and notes
thereto appear elsewhere in this Annual Report. This data should be read in
conjunction with "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's financial statements,
including the notes thereto, and the other financial information included
elsewhere in this Annual Report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Product sales $ 1,478 $ 1,380 $ 496 $ 1,551 $ 8,079
License and product development revenues 25 -- 3,500 -- 1,500
-------- -------- -------- -------- --------
Total revenues 1,503 1,380 3,996 1,551 9,579
Cost of products sold 528 531 460 1,398 3,480
-------- -------- -------- -------- --------
Gross profit and license and product development revenues 975 849 3,536 153 6,099
-------- -------- -------- -------- --------
Research, development and regulatory affairs expenses 1,231 1,637 3,167 3,594 6,297
Selling and administrative expenses 1,366 1,589 2,879 4,752 5,407
Charges related to partnership capital changes (1) -- 3,500 14,210 -- --
Payments to CRX Medical, Inc. and Caratec, L.L.C 150 250 293 -- --
-------- -------- -------- -------- --------
Total operating expenses 2,747 6,976 20,549 8,346 11,704
-------- -------- -------- -------- --------
Loss from operations (1,772) (6,127) (17,013) (8,193) (5,605)
Interest expense -- -- -- (72) (383)
Investment and interest income 2 2 337 1,436 1,215
Interest expense to Sharpoint Development Corporation (445) (847) (138) -- --
-------- -------- -------- -------- --------
Net loss $ (2,215) $ (6,972) $(16,814) $ (6,829) $ (4,773)
======== ======== ======== ======== ========
Pro forma net loss per common share-basic and diluted (2) $ (0.23) $ (0.73) $ (1.63) $ (0.53) $ (0.36)
======== ======== ======== ======== ========
Shares used in computation of pro forma net loss per
common share--basic and diluted (2) 9,600 9,600 10,285 12,966 13,270
======== ======== ======== ======== ========
AS OF DECEMBER 31,
----------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments $ 30 $ 20 $ 17,651 $ 21,694 $ 16,702
Working capital (deficit) (10) (395) 15,175 19,704 11,621
Total assets 784 908 19,512 30,419 27,420
Long-term debt and capital lease obligations, less
current portion 7,851 10,088 14 2,400 934
Total partners' capital (deficit) and stockholders' equity (7,378) (10,850) 16,455 22,419 18,250
</TABLE>
- ----------
(1) Includes for 1995 a one-time non-cash charge of $3,500,000 which
represented the estimated fair value of the limited partnership interests
of certain employee limited partners admitted to Tri-Point Medical L.P.,
the Company's predecessor (the "Partnership"), on December 31, 1995.
Immediately prior to the Company's initial public offering, on September
25, 1996, the Company consummated an exchange of obligations of and
interests in the Partnership for 9,600,000 shares of Common Stock. In
connection with this exchange, Caratec, L.L.C. exchanged its right to
receive various payments from the Partnership and its limited partnership
interest for 1,776,250 shares of Common Stock. This transaction resulted in
a non-cash expense for 1996 of $14,210,000 which equaled the difference
between the value of the Common Stock issued to Caratec, L.L.C. and its
basis in the Partnership. The resulting charge to accumulated deficit was
offset by a credit to additional paid-in capital. See Note 1 to Notes to
Financial Statements.
(2) See Note 2 to Notes to Financial Statements for a discussion of the basis
for reported pro forma net loss per share.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE STATEMENTS SET FORTH BELOW THAT ARE NOT HISTORICAL FACTS OR
STATEMENTS OF CURRENT CONDITIONS ARE FORWARD-LOOKING STATEMENTS. SUCH
FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY, AMONG OTHER THINGS, THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS," "FORECASTS,"
"ESTIMATES," "PLANS," "CONTINUES," "MAY," "WILL," "SHOULD," "ANTICIPATES" OR
"INTENDS" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE
TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY OR INTENTIONS. THESE FORWARD-LOOKING
STATEMENTS, SUCH AS STATEMENTS REGARDING PRESENT OR ANTICIPATED SCIENTIFIC
PROGRESS, DEVELOPMENT OF POTENTIAL PRODUCTS, FUTURE REVENUES, CAPITAL
EXPENDITURES AND RESEARCH AND DEVELOPMENT EXPENDITURES, FUTURE FINANCINGS AND
COLLABORATIONS, MANAGEMENT, MANUFACTURING DEVELOPMENT AND CAPABILITIES,
REGULATORY CLEARANCES AND APPROVALS, AND OTHER STATEMENTS REGARDING MATTERS THAT
ARE NOT HISTORICAL FACTS, INVOLVE PREDICTIONS. THE COMPANY'S ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THE RESULTS EXPRESSED
IN, OR IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS. POTENTIAL RISKS AND
UNCERTAINTIES THAT COULD AFFECT THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THE "RISK FACTORS" SET FORTH IN
ITEM 1 OF THIS ANNUAL REPORT. GIVEN THESE UNCERTAINTIES, CURRENT OR PROSPECTIVE
INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING
STATEMENTS. FURTHERMORE, THE COMPANY DISCLAIMS ANY OBLIGATION OR INTENT TO
UPDATE ANY SUCH FACTORS OR FORWARD-LOOKING STATEMENTS TO REFLECT FUTURE EVENTS
OR DEVELOPMENTS.
The following discussion should be read in conjunction with the
Company's financial statements, including the notes thereto, included elsewhere
in this Annual Report.
OVERVIEW
Since its inception in May 1990, the Company has been developing,
manufacturing and commercializing medical tissue cohesive products for use in
wound closure in humans and animals. The Company's products are based on its
proprietary cyanoacrylate technology, and a substantial portion of the Company's
historical expenses have consisted of research and development and clinical
trial expenses. Through September 25, 1996, the effective date of the Company's
initial public offering, the Company had funded its operations with cash
borrowed from Sharpoint Development Corporation ("Sharpoint"), sales of
OCTYLDENT and NEXABAND products, and license and product development revenues
from marketing partners. On September 30, 1996, the Company completed its
initial public offering, issuing 2,550,000 shares of Common Stock and generating
net proceeds of approximately $17,926,000. On April 2, 1997, the Company
completed a follow-on public offering, issuing 1,025,000 shares of Common Stock
and generating net proceeds of approximately $12,020,000.
The Company has been unprofitable since its inception and has incurred
net losses in each year, including a net loss of approximately $4,773,000 for
the year ended December 31, 1998. The Company anticipates that its recurring
operating expenses will increase for the next several years, as it expects its
research and development and selling and administrative expenses to increase in
order to develop new products, manufacture in commercial quantities and fund
additional clinical trials. The Company also expects to incur additional capital
expenditures to expand its manufacturing capabilities. The Company may incur a
loss in 1999 and subsequent years, although the amount of future net losses and
time required by the Company to reach profitability are highly uncertain. The
Company's ability to generate significant revenue and become profitable will
depend on its success in commercializing DERMABOND, expanding its manufacturing
capabilities, developing new products and entering into additional marketing
agreements and on the ability of its marketing partners to commercialize
successfully products incorporating the Company's technologies. No assurance can
be given that the Company will generate significant revenue or become profitable
on a sustained basis, if at all.
Immediately prior to the Company's initial public offering, on September
25, 1996, the Company consummated an exchange of obligations of and interests in
the Partnership for an aggregate of 9,600,000 shares of Common Stock (the
"Exchange"). As of March 29, 1996, the long-term debt of the Partnership held by
Sharpoint, including accrued interest, was contributed to the Partnership as
$11,483,000 of partners' capital. During the period from May 1990 through the
consummation of the Exchange on September 25, 1996, CRX Medical, Inc. ("CRX")
and its successor, Caratec, L.L.C. ("Caratec"), as limited partners of the
Partnership, received payments of approximately $993,000 based on net revenues
pursuant to the partnership agreement. These payment obligations ceased upon the
consummation of the Exchange. As part of the Exchange, Caratec exchanged its
right to receive payments based on net revenues and its right to receive, as a
limited partner in the Partnership, a percentage of the proceeds of a sale of
all or substantially all of the assets of the Partnership for 1,776,250 shares
of Common Stock. This transaction resulted in a one-time non-cash charge of
$14,210,000 which equaled the difference between the value of the Common Stock
issued to Caratec and its basis in the Partnership. The resulting charge to
accumulated deficit was offset by a credit to additional paid-in capital.
17
<PAGE>
Historically, there was no provision for federal or state income taxes
in the financial statements of the Company's predecessor, Tri-Point Medical
L.P., because income or loss generated by the Partnership was included by the
partners in their personal income tax returns. Since the Company's incorporation
on February 20, 1996, the Company has been subject to federal and state
corporate income taxes, but none have been paid due to losses generated.
The Company was formed on February 20, 1996 and substantially all of the
assets of the Partnership were transferred to the Company as of March 1, 1996.
The net operating losses from inception through March 1, 1996 will not be
available to the Company to offset any future taxable income for federal income
tax purposes because it was a partnership for that period.
The Company incurred compensation expense of $304,000 and $303,000 for
the years ended December 31, 1997 and 1998, respectively, in connection with
options for Common Stock granted to employees, consultants and directors because
such options had a weighted average exercise price of $2.73 per share below the
fair market value of the Common Stock. Such expense will be approximately
$304,000 in 1999 and $89,000 in 2000 as the options vest. Such expense could
increase during a given year if the vesting of options were to accelerate upon
the occurrence of certain events.
On August 28, 1998, the Company was granted approval from the FDA of its
premarket approval application to market DERMABOND in the United States.
DERMABOND, which is used to replace sutures, staples and adhesive strips for
closing certain topical incisions and lacerations, is the first such product to
be approved by the FDA for the United States market. In March 1996, Closure
licensed exclusive worldwide marketing and distribution rights for DERMABOND to
Ethicon, a subsidiary of Johnson & Johnson. In August 1997, Closure received CE
Mark approval allowing the Company to ship DERMABOND to Ethicon to support its
launch in European Union countries. DERMABOND is currently marketed by Ethicon
in the United States and approximately 24 countries outside the United States.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Total revenues for 1998 increased 518% to $9,579,000 from $1,551,000 for
1997. The increase in revenues was primarily a result of increased sales volume
of DERMABOND. In addition, the Company received $1,500,000 of license and
product development revenues during 1998, which represented the milestone
payment from Ethicon for the approval from the FDA of the premarket approval
application to market DERMABOND in the United States. Product sales increased to
$8,079,000 for 1998 from $1,551,000 for 1997.
Cost of products sold for 1998 increased to $3,480,000 from $1,398,000
for 1997. Cost of products sold as a percentage of product sales decreased to
43% for 1998 from 90% for 1997. This decrease in cost of products sold as a
percentage of product sales was primarily a result of the increased sales volume
of DERMABOND, resulting in the fixed portion of cost of products sold being
allocated over higher sales. The Company expects that gross margins on product
sales will fluctuate based on sales volume.
Operating expenses for 1998 increased to $11,704,000 from $8,346,000 for
1997. This increase was primarily attributable to the addition of personnel,
expansion of the Company's facilities and increased research and development and
regulatory affairs expenses. At December 31, 1998, the Company had approximately
94 employees compared to approximately 57 at December 31, 1997. In March 1998,
the Company relocated its corporate offices into a 50,000 square foot facility
and its manufacturing operations to the same facility in August 1998. Prior to
the move, the Company occupied approximately 20,000 square feet. The increase in
research and development and regulatory affairs expenses was primarily due to
costs associated with the Company's development efforts related to its ongoing
research and development programs. The Company expects these expenses will
increase as the Company expands its pipeline and related development efforts and
clinical trials for potential new products.
Interest expense for 1998 increased to $383,000 from $72,000 for 1997.
This increase was a result of the Company entering into a new lease line and
term loan during March 1997 and November 1997, respectively. Additionally, the
Company increased its borrowings under the term loan in February 1998.
Investment and interest income for 1998 decreased to $1,215,000 from
$1,436,000 in 1997. This decrease was attributable to lower interest earned from
lower average cash and investment balances.
18
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Total revenues for 1997 decreased 61% to $1,551,000 from $3,996,000 for
1996. This decrease was primarily the result of the receipt of $3,500,000 in
March 1996 in license and product development revenues under the supply and
distribution agreement for DERMABOND. Product sales increased to $1,551,000 for
1997 from $496,000 for 1996.
Cost of products sold for 1997 increased to $1,398,000 from $496,000 for
1996. Cost of products sold as a percentage of product sales decreased to 90%
for 1997 from 93% for 1996. This decrease in cost of products sold as a
percentage of product sales was primarily a result of the increased sales volume
of DERMABOND, NEXABAND and OCTYLDENT, resulting in the fixed portion of cost of
products sold being allocated over higher sales.
Operating expenses for 1997 decreased to $8,346,000 from $20,549,000 for
1996. Included in operating expenses for 1996 was a one-time non-cash charge of
$14,210,000 related to the exchange by Caratec, a former limited partner of the
Company's predecessor, Tri-Point Medical L.P., of its right to receive various
payments from the Partnership and its limited partnership interest for Common
Stock of the Company. Excluding this non-cash charge, total operating expenses
for 1996 were $6,339,000 compared to $8,346,000 for 1997, representing a 32%
increase for 1997. This increase was primarily attributable to the addition of
personnel in research and development, new business generation and
administrative departments reflecting the growth of the Company. In addition,
the Company, in 1997, incurred additional administrative costs associated with
supporting a public company, such as directors' and officers' liability
insurance, investor relations and other professional fees. These increases were
offset by decreases in costs associated with the conduct of clinical trials for
DERMABOND.
Interest expense for 1997 was $72,000 as a result of higher debt
balances outstanding during the year, associated with a new lease line and a
term loan entered into during March 1997 and November 1997, respectively.
Investment and interest income for 1997 increased to $1,436,000 from
$337,000 in 1996. This increase was a result of interest earned from higher
average cash and investment balances resulting from the proceeds of the
Company's public offerings in September 1996 and April 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily through the
sale of equity securities, borrowings from Sharpoint and other lenders, license
and product development revenues and product sales. Through December 31, 1998,
the Company had raised approximately $30.0 million from equity financings.
Through March 29, 1996, the Partnership had borrowed approximately $9,571,000
from Sharpoint, which excludes accrued interest of $931,000 converted to
long-term debt on December 31, 1994. As of March 29, 1996, all such long-term
debt, including accrued interest, was contributed as partners' capital to the
Partnership. During 1997, the Company entered into and received approximately
$3.0 million from a new lease line and term loan. An additional $1.5 million was
borrowed under the term loan in 1998. The term loan matures in May 1999, upon
which the Company may be required to pay the approximately $2.4 million
principal balance or extend the principal payments. In addition, the Company has
received $7.0 million related to the supply and distribution agreement for
DERMABOND entered into with Ethicon in March 1996, of which $2.0 million was
classified as deferred revenue and will be credited against future royalties and
product purchases expected to be paid by Ethicon. The supply and distribution
agreement for DERMABOND does not provide for any additional future milestone
payments from Ethicon.
Cash used by operating activities was $4,010,000 and $5,585,000 for 1998
and 1997, respectively. The decrease in cash used by operations was due to the
lower net loss incurred in 1998 as compared to 1997 due to increased sales of
DERMABOND.
Cash used for investing activities was $3,668,000 during 1998, down from
$14,052,000 for 1997. Investing activities during 1998 were primarily related to
leasehold improvements for the Company's new 50,000 square foot facility and
acquisition of capital equipment. During 1997, cash was used primarily to
purchase investments and acquire capital equipment.
Cash provided by financing activities was $1,225,000 and $13,890,000 for
1998 and 1997, respectively. The Company's primary financing activity during
1998 was additional borrowings of $1.5 million under its term loan. As of
December 31, 1998 and 1997, the Company had borrowed approximately $3.0 million
and $1.5 million, respectively. The Company's primary financing activity during
1997 was the Company's follow-on public offering.
19
<PAGE>
The Company believes that existing cash and cash equivalents and
investments, which totaled $16.7 million as of December 31, 1998, will be
sufficient to finance its capital requirements for at least 12 months. The
Company may incur a loss in 1999 and subsequent years, although the amount of
future net losses and time required by the Company to reach profitability are
highly uncertain. The Company anticipates that its recurring operating expenses
will increase for the next several years, as it expects its research and
development and selling and administrative expenses to increase in order to
develop new products, manufacture in commercial quantities and fund additional
clinical trials. The Company also expects to incur additional capital
expenditures to expand its manufacturing capabilities.
The Company's future capital requirements, however, will depend on
numerous factors, including (i) the Company's ability to manufacture and
commercialize successfully its lead product, DERMABOND, (ii) the progress of its
research and product development programs for future nonabsorbable and
absorbable products, including clinical studies, (iii) the effectiveness of
product commercialization activities and marketing agreements for its future
products, including the scale-up of manufacturing capability in anticipation of
product commercialization and development and progress of sales and marketing
efforts, (iv) the ability of the Company to maintain existing marketing
agreements, including its agreement with Ethicon for DERMABOND, and establish
and maintain new marketing agreements, (v) the costs involved in preparing,
filing, prosecuting, defending and enforcing intellectual property rights and
complying with regulatory requirements, (vi) the effect of competing
technological and market developments, (vii) timely receipt of regulatory
clearances and approvals and (viii) general economic conditions. There can be no
assurance that the Company will not be required to seek additional capital to
finance its operations in the future. If the Company's currently available funds
and internally generated cash flow are not sufficient to satisfy its financing
needs, the Company will be required to seek additional funding through bank
borrowings and additional public or private sales of its securities, including
equity securities, or through other arrangements with marketing partners. Other
than the Company's equipment financing line of credit and term loan, the Company
has no credit facility or other committed sources of capital. There can be no
assurance that additional funds, if required, will be available to the Company
on favorable terms, if at all. See "Item 1--Risk Factors."
YEAR 2000
The Company's Year 2000 Project (the "Project") is addressing the issue
of computer programs with date-sensitive software that may be unable to
distinguish between the year 1900 and the year 2000. Failure to correct the Year
2000 issue could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities. The Company believes it has identified the significant Year 2000
internal issues and has developed a plan to resolve them. The Project continues
to assess external customers and suppliers and their Year 2000 compliance.
Based on a recent third party assessment, it appears the Company will be
required to modify or replace insignificant portions of its software so that its
computer systems will properly utilize dates beyond December 31, 1999 and
mitigate the Year 2000 issue. However, if such modifications and conversions are
not made, or are not completed timely, the Year 2000 issue could have a material
impact on the operations of the Company.
The Company is in the process of identifying and prioritizing critical
suppliers and customers, and communicating with them about their plans and
progress in addressing the Year 2000 issue. Therefore, based on presently
available information, there can be no guarantee that the systems of other
companies on which the Company relies will be converted to address Year 2000
issues in a timely manner, and that such companies' failure to achieve Year 2000
compliance would not have a material adverse effect on the Company.
The Company will utilize both internal and external resources to
mitigate the Year 2000 issue. The Project is planned to be completed by no later
than the end of first quarter of 1999. The total cost associated with mitigating
the Year 2000 issue is not expected to be material to the Company's financial
position, results of operations or liquidity. To date, the Company has incurred
and expensed approximately $50,000 related to the assessment of, and preliminary
efforts in connection with, the Project. The total remaining cost of the Project
is estimated to be approximately $25,000 and will be expensed as incurred.
The costs of and the date on which the Company plans to complete the
Project are based on management's best estimates, which were derived utilizing
numerous assumptions and factors, including those of external sources.
Therefore, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from current plans.
20
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
INTEREST RATE SENSITIVITY
The Company is subject to interest rate risk on its investment portfolio
which consists primarily of high quality U.S. government securities, corporate
bonds and Eurodollar bonds with an average maturity of less than one year. The
Company mitigates default risk by investing in what it believes are the safest
and highest credit quality securities and by monitoring the credit rating of
investment issuers. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity and there are
limitations regarding average and individual duration of investments. These
available-for-sale securities are subject to interest rate risk and will
decrease in value if market interest rates increase. At December 31, 1998, the
Company's total portfolio consisted of approximately $16.7 million of
investments, all of which had maturities within one year. Additionally, the
Company generally has the ability to hold fixed income investments to maturity.
Therefore, the Company does not expect its results of operations or cash flows
to be materially affected due to a sudden change in interest rates.
FOREIGN CURRENCY EXCHANGE RISK
The Company's international sales and related royalties of DERMABOND are
based on sales in foreign currencies, but payable in U.S. dollars, and thus may
be adversely affected by fluctuations in currency exchange rates. Additionally,
fluctuations in currency exchange rates may adversely affect demand for the
Company's products by increasing the price of the Company's products in the
currency of the countries in which the products are sold.
ITEM 8. FINANCIAL STATEMENTS.
The financial statements of the Company required by this item are
attached to this Annual Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
21
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item concerning directors and
compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, is incorporated herein by reference to the Company's definitive 1999
Proxy Statement to be filed with the Commission not later than 120 days after
the end of the fiscal year ended December 31, 1998. The required information as
to executive officers is set forth in Part I hereof and incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by
reference to the Company's definitive 1999 Proxy Statement to be filed with the
Commission not later than 120 days after the end of the fiscal year ended
December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated herein by
reference to the Company's definitive 1999 Proxy Statement to be filed with the
Commission not later than 120 days after the end of the fiscal year ended
December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein by
reference to the Company's definitive 1999 Proxy Statement to be filed with the
Commission not later than 120 days after the end of the fiscal year ended
December 31, 1998.
22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
The financial statements listed in the accompanying Index to Financial
Statements at page F-1 are filed as part of this Annual Report.
2. Financial Statement Schedules.
All financial statement schedules have been omitted because they are not
applicable, or not required, or the information is shown in the financial
statements or notes thereto.
3. Exhibits. (See (c) below)
(b) Reports on Form 8-K.
The Company did not file a report on Form 8-K during the quarter ended
December 31, 1998.
(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.
<TABLE>
<CAPTION>
<S> <C>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Restated Certificate of Incorporation. (Exhibit 3.1)(1)
3.2 Amendment to Restated Certificate of Incorporation. (Exhibit 3.2)(2)
3.3 By-Laws. (Exhibit 3.2)(1)
10.1 Office-Warehouse Lease Agreement, dated as of November 7, 1995, between AP
Southeast Portfolio Partners, L.P. and the Company. (Exhibit 10.1)(1)
10.2+ Supply and Distribution Rights Agreement, dated as of March 20, 1996, between
Ethicon, Inc. and the Company. (Exhibit 10.8)(1)
10.3++ Amended and Restated 1996 Equity Compensation Plan of the Company. (Exhibit
10.1)(3)
10.4++ Employment Agreement, dated as of May 31, 1996, between Robert V. Toni and the
Company. (Exhibit 10.10)(1)
10.5++ Employment Agreement, dated as of May 31, 1996, between J. Blount Swain and
the Company. (Exhibit 10.11)(1)
10.6++ Employment Agreement, dated as of May 31, 1996, between Jeffrey G. Clark and
the Company. (Exhibit 10.12)(1)
10.7++ Employment Agreement, dated as of May 31, 1996, between Joe B. Barefoot and
the Company. (Exhibit 10.13)(1)
10.8++ Consulting Agreement, dated as of May 31, 1996, between Steven A. Kriegsman
and the Company. (Exhibit 10.14)(1)
10.9 Registration Rights Agreement, dated as of May 31, 1996, between Caratec,
L.L.C. and the Company. (Exhibit 10.15)(1)
10.10 Registration Rights Agreement, dated as of May 31, 1996, among Cacoosing
Partners, L.P., OMI Partners, L.P., Triangle Partners, L.P., F. William
Schmidt, Rolf D. Schmidt, Robert V. Toni, J. Blount Swain, Jeffrey G. Clark,
Joe B. Barefoot and the Company. (Exhibit 10.16)(1)
10.11 Contribution and Exchange Agreement, dated as of May 31, 1996, among Cacoosing
Partners, L.P., OMI Partners, L.P., Triangle Partners, L.P., F. William
Schmidt, Rolf D. Schmidt, Caratec, L.L.C., Robert V. Toni, J. Blount Swain,
Jeffrey G. Clark, Joe B. Barefoot, Jeffery C. Basham, Jeffrey C. Leung,
Anthony V. Seaber and the Company. (Exhibit 10.17)(1)
10.12 Amendment, dated June 18, 1996, to Office-Warehouse Lease Agreement, dated as
of November 7, 1995, between AP Southeast Portfolio Partners, L.P. and the
Company. (Exhibit 10.18)(1)
23
<PAGE>
10.13 Lease, dated February 14, 1997, between AP Southeast Portfolio Partners, L.P.
and the Company. (Exhibit 10.19)(2)
10.14 Master Lease Agreement, dated as of January 29, 1997, between Transamerica
Business Credit Corporation and the Company. (Exhibit 10.20)(2)
10.15 Loan Agreement, dated November 14, 1997, between NationsBank, N.A. and the
Company. (Exhibit 10.15)(4)
10.16 Promissory Note, dated November 14, 1997, issued by the Company to
NationsBank, N.A. (Exhibit 10.16)(4)
10.17 Security Agreement, dated November 14, 1997, between the Company and
NationsBank, N.A. (Exhibit 10.17)(4)
10.18 Pledge Agreement, dated November 14, 1997, between the Company and NationsBank
N.A. (Exhibit 10.18)(4)
10.19++ Employment Agreement, dated as of June 9, 1997, between William M. Cotter and
the Company. (Exhibit 10.19)(4)
10.20++ Employment Agreement, dated as of January 1, 1998, between Anthony J.
Sherbondy and the Company. (Exhibit 10.20)(4)
10.21++ Employment Agreement, dated as of February 18, 1998, between Dennis D. Burns
and the Company. (Exhibit 10.21)(4)
10.22 Amendment, dated August 15, 1997, to Lease, dated February 14, 1997, between
AP Southeast Portfolio Partners, L.P. and the Company. (Exhibit 10.22)(4)
10.23 Representative and Manufacturing Facility Agreement, dated January 1, 1998,
between Innocoll GmbH and the Company. (Exhibit 10.23)(4)
10.24++ 1999 Employee Stock Purchase Plan of the Company. (Exhibit 10.1)(5)
11* Computation of Per Share Loss.
23.1* Consent of PricewaterhouseCoopers LLP.
24.1* Power of Attorney (included on signature page to this Annual Report).
27* Financial Data Schedule.
</TABLE>
- -----------
* Filed herewith.
+ Portions of this exhibit were omitted and filed separately with the
Secretary of the Securities and Exchange Commission (the "Commission")
pursuant to an order of the Commission granting the Company's application
for confidential treatment filed pursuant to Rule 406 under the Securities
Act of 1933, as amended.
++ Compensation plans and arrangements for executives and others.
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-5425) filed with the Commission on June 7, 1996, as
amended.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-22981) filed with the Commission on March 7, 1997.
(3) Filed as an exhibit to the Company's Registration Statement on Form S-8
(Registration No. 333-72953) filed with the Commission on February 25,
1999.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
(5) Filed as an exhibit to the Company's Registration Statement on Form S-8
(Registration No. 333-72339) filed with the Commission on February 12,
1999.
(d) Financial Statement Schedules.
None.
24
<PAGE>
CLOSURE MEDICAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants F-2
Financial Statements:
Balance Sheets as of December 31, 1997 and 1998 F-3
Statements of Operations for the years ended
December 31, 1996, 1997 and 1998 F-4
Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998 F-5
Statements of Partners' Deficit and Stockholders' Equity
for the years ended December 31, 1996, 1997 and 1998 F-6
Notes to Financial Statements F-7
</TABLE>
F-1
<PAGE>
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 of partners' deficit and stockholders' equity
present fairly, in all material respects, the financial position of Closure
Medical Corporation (the "Company") at December 31, 1997 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. 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 generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 9, 1999
F-2
<PAGE>
CLOSURE MEDICAL CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 7,277 $ 824
Short-term investments 14,417 14,275
Restricted investments - 1,603
Accounts receivable 1,226 1,191
Inventories 347 1,008
Prepaid expenses 367 286
---------- ----------
Total current assets 23,634 19,187
Furniture, fixtures and equipment, net 3,694 7,707
Restricted investments 1,517 -
Long-term investments 1,298 -
Intangible assets, net 276 526
---------- ----------
Total assets $ 30,419 $ 27,420
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 478 $ 1,721
Accrued expenses 2,598 1,705
Deferred revenue 349 1,245
Capital lease obligations 155 245
Current portion of long-term debt 350 2,650
---------- ----------
Total current liabilities 3,930 7,566
Deferred revenue 1,670 670
Capital lease obligations 1,250 934
Long-term debt less current portion 1,150 -
---------- ----------
Total liabilities 8,000 9,170
---------- ----------
Commitments and Contingencies (See notes 4, 5, 6, 7 and 10) - -
Preferred Stock, $.01 par value. Authorized 2,000 shares; none issued
or outstanding - -
Common Stock, $.01 par value. Authorized 35,000 shares; issued and
outstanding 13,242 and 13,290 shares, respectively 132 133
Additional paid-in capital 46,058 46,358
Accumulated deficit (23,075) (27,848)
Deferred compensation on stock options (696) (393)
---------- ----------
Total stockholders' equity 22,419 18,250
---------- ----------
Total liabilities and stockholders' equity $ 30,419 $ 27,420
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CLOSURE MEDICAL CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Product sales $ 496 $ 1,551 $ 8,079
License and product development revenues 3,500 - 1,500
----- ----- -----
Total revenues 3,996 1,551 9,579
Cost of products sold 460 1,398 3,480
----- ----- -----
Gross profit and license and product development revenues 3,536 153 6,099
----- ----- -----
Research, development and regulatory affairs expenses 3,167 3,594 6,297
Selling and administrative expenses 2,879 4,752 5,407
Charges related to Partnership capital changes 14,210 - -
Payments to Caratec, L.L.C. 293 - -
----- ----- -----
Total operating expenses 20,549 8,346 11,704
----- ----- -----
Loss from operations (17,013) (8,193) (5,605)
Interest expense - (72) (383)
Investment and interest income 337 1,436 1,215
Interest expense to Sharpoint Development Corporation (138) - -
----- ----- -----
Net loss $(16,814) $(6,829) $(4,773)
======= ======= =======
Shares used in computation of net loss per common share-
basic and diluted 10,285 12,966 13,270
======= ======= =======
Net loss per common share- basic and diluted $ (1.63) $ (0.53) $ (0.36)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CLOSURE MEDICAL CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (16,814) $ (6,829) $ (4,773)
Adjustments to reconcile net loss to net cash provided (used) by operating
activities:
Depreciation and amortization expense 96 195 615
Changes related to Partnership capital changes 14,210 - -
Amortization of deferred compensation on stock options 500 304 303
Net loss on disposals of fixed assets 38 4 34
Net loss on disposals of intangibles 58 50 110
Change in accounts receivable 199 (1,159) 35
Change in inventories 7 (235) (661)
Change in prepaid expenses (361) 21 81
Change in accounts payable and accrued expenses 420 2,114 350
Change in deferred revenue 1,991 (50) (104)
Change in accrued payable to Caratec, L.L.C. (195) - -
Change in accrued interest due to Sharpoint Development Corporation 138 - -
------ ------- ------
Net cash provided (used) by operating activities 287 (5,585) (4,010)
------ ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture, fixtures and equipment (519) (1,732) (4,651)
Investment in intangible assets (82) (124) (371)
Purchases of investments (5,494) (33,369) (12,396)
Proceeds from the sale of investments 458 21,173 13,750
------ ------- ------
Net cash used by investing activities (5,637) (14,052) (3,668)
------ ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to Sharpoint Development Corporation 440 - -
Proceeds from borrowings - 1,500 1,500
Repayment of debt - - (350)
Net proceeds from sale of common stock 17,926 12,489 301
Payments under capital lease obligations (12) (99) (226)
------ ------- ------
Net cash provided by financing activities 18,354 13,890 1,225
------ ------- ------
Increase (decrease) in cash and cash equivalents 13,004 (5,747) (6,453)
Cash and cash equivalents, beginning of year 20 13,024 7,277
------ ------- ------
Cash and cash equivalents, end of year $ 13,024 $ 7,277 $ 824
========= ========= =========
</TABLE>
NON-CASH TRANSACTIONS:
On March 29, 1996, notes payable of $10,502 and related accrued interest of $981
was converted to partners' capital.
Cash payments for interest expense during 1997 and 1998 were approximately $68
and $370, respectively.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CLOSURE MEDICAL CORPORATION
STATEMENTS OF PARTNERS' DEFICIT AND STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1997 and 1998
(In thousands)
<TABLE>
<CAPTION>
Deferred
Partners' Common Stock Additional Compensation Total
Capital --------------- Paid-in Accumulated on Stock Stockholders'
(Deficit) Shares Amount Capital Deficit Option Equity
--------- ------ ------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ (10,850) $ (10,850)
Conversion of debt and accrued
interest to partners' capital 11,483 11,483
Net loss for January 1, 1996
through September 25,1996 (568) (568)
Conversion of partners' capital to
common stock (65) 9,600 $ 96 $ 14,179 14,210
Issuance of common stock, net of
issuance costs of $1,046 2,550 26 17,900 17,926
Grant of compensatory stock options 1,500 $ (1,500)
Amortization of deferred compen-
sation on stock options 500 500
Net loss for the period September
26,1996 through December 31,
1996 $ (16,246) (16,246)
-------- ------ ----- -------- --------- ------ --------
Balance at December 31, 1996 12,150 122 33,579 (16,246) (1,000) 16,455
Issuance of common stock, net of
issuance costs of $1,737 1,025 10 12,010 12,020
Amortization of deferred compen-
sation on stock options 304 304
Exercise of stock options 67 469 469
Net loss (6,829) (6,829)
-------- ------ ----- -------- --------- ------ --------
Balance at December 31, 1997 13,242 132 46,058 (23,075) (696) 22,419
Amortization of deferred compen-
sation on stock options 303 303
Exercise of stock options 48 1 300 301
Net loss (4,773) (4,773)
-------- ------ ----- -------- --------- ------ --------
Balance at December 31, 1998 $ - 13,290 $ 133 $ 46,358 $ (27,848) $ (393) $ 18,250
======== ====== ===== ======== ========= ====== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CLOSURE MEDICAL CORPORATION
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
Closure Medical Corporation (the "Company" or "Closure"), formerly named
Tri-Point Medical Corporation, develops, commercializes and manufactures
medical tissue cohesive products based on its proprietary cyanoacrylate
technology to be used for human and veterinary wound closure. The
Company was incorporated in Delaware on February 20, 1996. From May 10,
1990 to February 29, 1996, the business of the Company was conducted by
its predecessor, Tri-Point Medical L.P. (the "Partnership"). Unless the
context otherwise requires, references herein to the Company or Closure
also include the Partnership. The Partnership purchased the assets and
product technology of Caratec, L.L.C. ("Caratec"), formerly CRX Medical,
Inc., in 1990 for $700,000 and a limited partnership interest. Sharpoint
Development Corporation ("Sharpoint"), the general partner, contributed
$350,000 in cash for its general partner interest. Caratec contributed
$1,000 for its limited partnership interest. The partnership agreement
required that a percentage of the proceeds received by the Partnership
or its successors upon the sale of all or substantially all of the net
assets of the Partnership or its successors be paid to Caratec. The
partnership agreement also stipulated that Caratec receive payments
based on net sales volume and gross margin, subject to annual minimum
amounts.
On December 31, 1995, the partnership agreement was amended to admit
certain employee limited partners as a new class of limited partners who
were entitled to receive 28.5% of partnership income after payments to
Caratec. The general partner received the remainder of the income and
all losses of the Partnership. For financial statement purposes,
compensation expense and contributed capital in the amount of $3,500,000
were recognized as of December 31, 1995 representing the estimated fair
value of the partnership interest granted to the employee limited
partners.
As of March 1, 1996, substantially all of the assets and liabilities of
the Partnership, except for the indebtedness to Sharpoint, were
transferred to the Company in exchange for its sole share of Common
Stock. Subsequently, on March 29, 1996, notes payable and related
accrued interest to Sharpoint in the amounts of $10,502,000 and
$981,000, respectively, were contributed to partners' capital.
On May 31, 1996, a contribution and exchange agreement was executed
whereby Sharpoint, assignees of Sharpoint's economic interest in the
Partnership, Caratec and the employee limited partners agreed to
exchange their Partnership interests for 5,453,750, 1,776,250 and
2,370,000 shares of Common Stock of the Company, respectively, upon the
completion of the initial public offering by the Company. The exchange
(the "Exchange") was consummated on September 25, 1996, the effective
date of the registration statement filed in connection with the
Company's initial public offering of Common Stock (the "IPO"). In
conjunction with the issuance to Caratec of Common Stock of the Company
in the Exchange, Caratec surrendered its rights to receive a percentage
of sales-based payments and a percentage of capital transaction
proceeds. The Company recorded a non-cash expense related to this
issuance of $14,210,000 which was offset by a credit to additional
paid-in-capital.
On September 30, 1996, the Company sold 2,550,000 shares of Common Stock
in its IPO. On April 2, 1997, the Company completed a follow-on public
offering selling 1,025,000 shares of Common Stock. The net proceeds from
the IPO and follow-on public offering of approximately $17.9 and $12.0
million, respectively, have been and will continue to be used primarily
for capital expenditures related to laboratories, office space and
manufacturing facilities, research and development, including clinical
trials, working capital and general corporate purposes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent cash in banks and short-term
investments having an original maturity of less than three months.
INVESTMENTS
Investments consist of short-term money market funds, commercial paper
and U.S. government securities having maturities as of the purchase date
greater than three months but less than or equal to one year. Long-
F-7
<PAGE>
CLOSURE MEDICAL CORPORATION
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-- CONTINUED
term investments have maturities greater than one year. All investments
have been classified as available-for-sale securities. Restricted
investments serve as collateral securing the Company's outstanding debt.
The fair market value, based on quoted market prices, of all investments
approximates amortized cost.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market.
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are stated at cost. Depreciation
expense is computed using the straight-line method over estimated useful
lives ranging between three and ten years. Expenditures for repairs and
maintenance are charged to expense as incurred.
INTANGIBLE ASSETS
Costs incurred to secure patents are capitalized until either the
related patent is issued, in which case they are amortized over the
shorter of its remaining economic or useful life, or it is rejected, in
which case they are written off.
REVENUE RECOGNITION
Revenues from product sales are recognized upon shipment. Advance
payments related to future sales of product or future royalties due on
these sales are deferred and will be recorded as revenue as they are
earned over future periods.
The Company recognizes revenue for sales of DERMABOND to its marketing
partner, Ethicon Inc. ("Ethicon"), at an agreed-upon amount per unit at
the time the products are shipped. Thirty days after the end of each
calendar quarter (ninety days for foreign sales) Ethicon provides a
summary of its sales of DERMABOND, and at that time the Company
recognizes the effect of both an additional royalty and any purchase
price adjustment to its previously recognized sales revenue.
Revenues from customers representing 10% or more of total revenue during
fiscal 1996, 1997 and 1998 were as follows:
Customer 1996 1997 1998
-------- ---- ---- ----
A 0% 13% 0%
B 0% 53% 92%
C 10% 34% 0%
During 1998, approximately 99 percent of the Company's revenues were
from domestic sales; the remaining 1 percent was earned from the Western
European market.
INCOME TAXES
Income taxes are computed using the asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. In estimating future
tax consequences, the Company generally considers all expected future
events other than enactment of changes in tax law or rates. If it is
"more likely than not" that some portion or all of a deferred asset will
not be realized, a valuation allowance is recorded.
No provision for federal or state income taxes was necessary in the
financial statements of the Partnership for the two months ended
February 29, 1996 because, as a partnership, it is not subject to
federal or state income taxes and the tax effect of its activities
accrued to the partners.
The tax returns of the Partnership are subject to examination by federal
and state tax authorities. If such examinations occur and result in
changes with respect to the Partnership's qualification or to
distributable Partnership income or loss, the tax liability of the
respective partners would be changed accordingly.
F-8
<PAGE>
CLOSURE MEDICAL CORPORATION
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-- CONTINUED
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
RELATED PARTIES
The Partnership had notes payable to its general partner, Sharpoint,
until March 29, 1996. Details of the debt agreements are summarized in
Note 5.
Beginning in 1992 until the Partnership ceased to exist on September 25,
1996, Caratec, a limited partner, received payments of 4% of adjusted
net sales of veterinary products. Caratec also received a minimum of 2%
and a maximum of 8% of adjusted net sales of human products depending on
the gross margin on those sales. For 1996, such payments to Caratec were
not to be less than $250,000. Upon the effectiveness of the Company's
IPO on September 25, 1996, Caratec surrendered its rights to receive
these sales-based payments and a percentage of capital transaction
proceeds in accordance with the contribution and exchange agreement
entered into on May 31, 1996, whereby Caratec agreed to exchange its
Partnership interests for 1,776,250 shares of Common Stock of the
Company.
For tax purposes, Caratec was allocated net income up to the amount of
payments received as described above. The general partner and employee
limited partners were allocated the remainder of any net income after
allocation to Caratec. The general partner was allocated 100% of all
losses.
On January 1, 1998, the Company entered into an agreement with Innocoll,
of Saal-Donau, Germany, which provides for fees of $180,000 per year for
five years. During 1998, $180,000 was paid to Innocoll. Innocoll acts as
Closure's authorized representative in Europe under the Medical Device
Directive and will provide alternative manufacturing space as needed.
The Chairman of the Company and another board member are owners of
Innocoll.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments approximates the
financial statement carrying value at December 31, 1997 and 1998.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), was issued in October 1995. SFAS
123 gives companies the option to adopt the fair value method for
expense recognition of employee stock options and stock-based awards or,
as the Company has elected, to continue to account for such items using
the intrinsic value method as outlined under Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Consequently, the adoption of SFAS 123 does not have any impact on the
financial position or results of operations of the Company but pro forma
disclosures of net loss and net loss per share have been provided in
Note 9 as if the fair value method had been applied.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), was issued in June 1997. SFAS 130
establishes standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial
statements. The Company adopted SFAS 130 effective January 1, 1998; the
adoption of this statement did not have a material impact on the
Company's financial position or results of operations.
Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS 131"), was
issued in June 1997. SFAS 131 specifies revised guidelines for
determining an entity's operating segments and the type and level of
financial information to be disclosed.
F-9
<PAGE>
CLOSURE MEDICAL CORPORATION
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-- CONTINUED
The Company adopted SFAS 131 effective January 1, 1998; the adoption of
this statement did not have a material impact on the Company's financial
position or results of operations.
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures About Pension and Other Postretirement Benefits" ("SFAS
132"), was issued during February 1998. SFAS 132 standardizes the
disclosure requirements for pensions and other postretirement benefits.
The Company adopted SFAS 132 effective January 1, 1998; the adoption of
this statement did not have a material impact on the Company's financial
position or results of operations.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), was issued
during June 1998. SFAS 133 establishes standards for reporting and
disclosure of derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. The
Company will adopt SFAS 133 in 1999 and believes it will not 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 LOSS PER SHARE
Basic net loss per common share is computed using the weighted average
number of shares of common stock outstanding during the period.
Diluted net loss per common share is computed using the weighted average
number of shares of common and common equivalent shares outstanding
during the period. Common equivalent shares consist of stock options
using the treasury stock method. Common equivalent shares from stock
options are excluded from the computation if their effect is
antidilutive.
Pursuant to the requirements of SFAS 128, the effect of the exchange of
Partnership interests for 9,600,000 shares of Common Stock of the
Company has been included in net loss per common share computations from
January 1, 1995 through the effective date of the Company's IPO on
September 25, 1996.
3. ACCOUNTS RECEIVABLE
Accounts receivable included the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1997 1998
---- ----
<S> <C> <C>
Trade $ 341 $ 1,191
Other - Tenant Allowance Reimbursement 885 -
-------- --------
$ 1,226 $ 1,191
======== ========
</TABLE>
F-10
<PAGE>
CLOSURE MEDICAL CORPORATION
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
NOTES TO FINANCIAL STATEMENTS
4. FURNITURE, FIXTURES, AND EQUIPMENT
Furniture, fixtures and equipment included the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------- Estimated
1997 1998 Useful Lives
---- ---- ------------
<S> <C> <C> <C>
Furniture and equipment $ 348 $ 1,007 3-10 years
Machinery and equipment 1,218 2,806 10 years
Leasehold improvements 47 2,913 10 years
Construction-in-progress 2,442 1,877
---------- ---------
4,055 8,603
Accumulated depreciation and amortization (361) (896)
---------- --------
$ 3,694 $ 7,707
========== ========
</TABLE>
5. DEBT AND RELATED ACCRUED INTEREST
On November 14, 1997, the Company entered into a financing arrangement
to borrow up to $3,000,000 to finance leasehold improvements and
equipment related to the Company's expansion into a 50,000 square foot
manufacturing, research and administration facility. As of December 31,
1998 and 1997, $3,000,000 and $1,500,000 had been borrowed under this
agreement, respectively. Borrowings are payable monthly in principal and
interest for the next five months, with one final payment of all
remaining principal and accrued interest due May 31, 1999. Borrowings
under this agreement bear interest at the 30-day LIBOR rate plus 167
basis points and are secured by the related equipment and leasehold
improvements plus an assignment, equal to 50 percent of the outstanding
balance, in an investment account of the lender. The investment is
classified as short term restricted as the borrowings are due on May 31,
1999. The agreement requires the Company to comply with certain
financial covenants including minimum liquidity and tangible net worth,
which the Company was in compliance with at December 31, 1998.
The Partnership had notes payable to Sharpoint which bore interest at
various rates ranging from 9.5% to 9.75%. These notes were secured by
substantially all the Partnership assets. On March 29, 1996, notes
payable of $10,502,000 and accrued interest of $981,000 were converted
to partners' capital by Sharpoint. On May 31, 1996, a contribution and
exchange agreement was executed whereby Sharpoint agreed to exchange its
partners' capital for 5,453,750 shares of Common Stock upon the
effectiveness of the Company's IPO on September 25, 1996.
6. LEASES
The Company leases office and manufacturing space and equipment under
operating leases which expire at various dates through 2007. Rent
expense related to these leases was approximately $136,000, $316,000 and
$534,000 for 1996, 1997 and 1998, respectively.
The Company leases equipment under capital leases with lease terms of
four to five years. At the expiration of the lease term, the Company is
required to purchase primarily all of the equipment for the fair market
value of the equipment and related taxes. The fair market value is to be
equal to no less than 5% or no more than 10% of the equipment cost.
F-11
<PAGE>
CLOSURE MEDICAL CORPORATION
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
NOTES TO FINANCIAL STATEMENTS
6. LEASES--CONTINUED
Future minimum lease payments under noncancellable capital leases and
operating leases with initial or remaining terms of one year or more are
as follows at December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------ ------
<S> <C> <C>
1999 $ 394 $ 476
2000 392 484
2001 392 490
2002 321 500
2003 - 510
Thereafter - 1,920
-------- --------
Total minimum lease payments 1,499 $ 4,380
========
Less: amount representing interest (320)
Present value of minimum lease payments 1,179
Less: current portion (245)
--------
Long-term portion $ 934
========
</TABLE>
7. MAJOR CUSTOMERS
On March 20, 1996, the Company entered into an eight-year exclusive
supply and distribution rights agreement with Ethicon, Inc., a
subsidiary of Johnson & Johnson, whereby Closure supplies Ethicon with
DERMABOND, a product for human topical wound closure. In consideration,
Ethicon paid Closure $4,500,000 of which $3,500,000 is a non-refundable
licensing fee and $1,000,000 has been and will continue to be offset
against either future product purchases or royalties to be paid by
Ethicon on product sales and has been classified as deferred revenue on
the accompanying balance sheet. In addition, Ethicon has advanced the
Company $1,000,000 for direct costs incurred in connection with clinical
studies of the product, which has been classified as deferred revenue
and has been and will continue to be offset against royalties to be paid
by Ethicon. With the United States and European Community approval of
DERMABOND in August 1998 and 1997, respectively, Ethicon is obligated to
purchase certain minimum quantities annually at a predetermined price
based on average selling prices.
The Company entered into a seven-year marketing agreement with Farnam
Companies, Inc. in December 1992. This agreement gives Farnam exclusive
rights to market, sell and distribute the Company's veterinary products
in North America. Beginning in December 1999, the agreement will
automatically renew for successive one-year periods contingent on Farnam
meeting required levels of purchases.
The Company has a non-exclusive supply agreement with Procter &
Gamble/ALZA, Partners for Oral Health Care for an adhesive used in
conjunction with a periodontal drug delivery product. In March 1994, the
Company entered into an agreement with On-Site Therapeutics, Inc. for
exclusive services to identify potential purchasers of OCTYLDENT. Under
this agreement, On-Site receives a 5% royalty on net sales of OCTYLDENT
up to a cumulative maximum royalty amount of $1,500,000. Amounts paid
during 1996, 1997 and 1998 were $5,000, $12,000 and $9,000,
respectively.
F-12
<PAGE>
CLOSURE MEDICAL CORPORATION
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
NOTES TO FINANCIAL STATEMENTS
8. INCOME TAXES
There is no provision or benefit for current or deferred income taxes
during the two months ended February 29, 1996 because, as a partnership,
the Company's predecessor was not subject to income taxes and the tax
effect of the Partnership's activities accrued to the partners. There is
no current provision or benefit for income taxes recorded for the ten
months ended December 31, 1996 or the years ended December 31, 1997 and
1998 as the Company has generated net operating losses for income tax
purposes for which there is no carryback potential. There is no deferred
provision or benefit for income taxes recorded for the ten months ended
December 31, 1996 or the years ended December 31, 1997 and 1998 as the
Company is in a net deferred tax asset position for which a full
valuation allowance has been recorded due to uncertainty of realization.
Due to the Company's history of losses, it is considered more likely
than not that such deferred tax assets will not ultimately be realized.
The tax effects of significant items comprising the Company's deferred
taxes are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1997 1998
---- ----
<S> <C> <C>
Net operating loss carryforwards $ 3,291 $ 5,327
Research and development credit carryforwards 237 462
Temporary differences, net 24 184
------- -------
3,552 5,973
Valuation allowance (3,552) (5,973)
------ -------
Net deferred tax asset $ - $ -
====== =======
</TABLE>
At December 31, 1998, the Company had net operating loss carryforwards
for income tax reporting purposes of approximately $12,806,000 which
expire beginning in the year 2011. The Company also has research and
development tax credit carryforwards of approximately $462,000 which
will begin to expire in the year 2011.
F-13
<PAGE>
CLOSURE MEDICAL CORPORATION
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
NOTES TO FINANCIAL STATEMENTS
9. EMPLOYEE BENEFIT PLANS
The Company maintains the Amended and Restated 1996 Equity Compensation
Plan (the "Plan"), adopted by the Board of Directors on May 28, 1996 and
which was most recently amended and restated on June 3, 1998. The Plan
provides that a maximum of 2,500,000 stock options may be granted to
officers, employees, independent contractors and consultants, and
non-employee directors of the Company. In addition, the Plan provides
for grants of restricted stock and stock appreciation rights to
participants other than non-employee directors of the Company. The Plan
is administered and interpreted by a committee (the "Committee") of the
Board of Directors. Grants under the Plan may consist of (i) options
intended to qualify as incentive stock options ("ISOs") within the
meaning of section 422 of the Internal Revenue Code or (ii) so-called
"nonqualified stock options" that are not intended to so qualify
("NQSOs"). Independent contractors or consultants to the Company are not
eligible to receive ISOs under the Plan. The option price of any ISO
granted under the Plan will not be less than the fair market value of
the underlying shares of Common Stock on the date of grant, except that
the option price of an ISO granted to an employee who owns more than 10%
of the total combined voting power of all classes of stock of the
Company or its subsidiaries may not be less than 110% of the fair market
value of the underlying shares of Common Stock on the date of grant. The
option price of a NQSO may be greater than, equal to or less than the
fair market value of the underlying shares of Common Stock on the date
of grant. The Committee will determine the term of each option;
provided, however, that the exercise period may not exceed ten years
from the date of grant, and the exercise period of an ISO granted to an
employee who owns more than 10% of the total combined voting power of
all classes of stock of the Company or its subsidiaries may not exceed
five years from the date of grant. Options outstanding at December 31,
1996, 1997 and 1998 generally vest within two to five years.
The following table summarizes stock option activity under the Plan:
<TABLE>
<CAPTION>
Weighted- Weighted-
Average Average
Price Remaining
Shares Per Share Contractual Life
------ --------- ----------------
<S> <C> <C> <C>
Options outstanding at January 1, 1996 -- --
Granted
With discount exercise price 550,000 5.27 8.41
With market exercise price 29,602 8.00 8.75
Exercised -- --
Expired or Canceled
With discount exercise price (6,996) 5.27
---------
Options outstanding at December 31, 1996 572,606
Granted 245,600 24.33 9.51
Exercised (67,530) 6.94
Canceled (31,139) 9.63
---------
Options outstanding at December 31, 1997 719,537
Granted
With market exercise price 492,042 23.22 9.36
With premium exercise price 52,155 24.56 9.42
Exercised (47,046) 5.92
Canceled (23,449) 21.31
---------
Options outstanding at December 31, 1998 1,193,239
</TABLE>
F-14
<PAGE>
CLOSURE MEDICAL CORPORATION
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
NOTES TO FINANCIAL STATEMENTS
9. EMPLOYEE BENEFIT PLANS-- CONTINUED
<TABLE>
<CAPTION>
Weighted-
Average
Weighted- Remaining Weighted-
Range of Number Average Contractual Number Average
Exercise Price Outstanding Exercise Price Life Exercisable Exercise Price
-------------- ----------- -------------- ---- ----------- --------------
<S> <C> <C> <C> <C> <C>
$5.00-$8.00 435,964 $5.42 7.43 255,004 $5.57
$14.75-$22.00 315,888 20.18 9.02 42,491 20.55
$27.00-$34.50 441,387 26.05 9.20 59,710 27.59
</TABLE>
Available for grant at December 31, 1998 1,192,185
During 1996, 1997 and 1998, the Company recognized approximately
$500,000, $304,000 and $303,000, respectively, of compensation cost
related to the Plan. Had compensation expense for 1996, 1997 and 1998
awards, assuming it was recognized on a straight-line basis over the
vesting period, been determined based on the fair value at the grant
date, consistent with the provisions of SFAS No. 123, the Company's
results of operations would have been reduced to the pro forma amounts
indicated below:
1996 1997 1998
---- ---- ----
Net loss-as reported $(16,814) $(6,829) $(4,773)
Net loss-pro forma (17,414) (8,244) (7,865)
Loss per share--basic and
diluted-as reported (1.63) (0.53) (0.36)
Loss per share--basic and
diluted-pro forma (1.69) (0.64) (0.59)
The pro forma amounts discussed above were derived using the
Black-Scholes option-pricing model with the assumptions indicated below:
Assumptions 1996 1997 1998
----------- ---- ---- ----
Average expected life (years) 6 5 6
Average interest rate 6.5% 6.5% 5.0%
Volatility 70.0% 73.1% 81.5%
Dividend yield 0.0% 0.0% 0.0%
The Company maintains a 401(k) Retirement Plan and Trust (the "401(k)
Plan") available to all full-time, eligible employees. Employee
contributions are voluntary and are limited to the maximum amount
allowable under federal tax regulations. Effective January 1, 1997, the
401(k) Plan was amended to make one-half of the matching contribution in
the form of cash and one-half in the form of shares of Common Stock of
the Company ("participant shares"). Participant shares are issued at
year-end based on the closing stock price of the Common Stock on
December 31, with fractional shares paid in cash. At December 31, 1997
and 1998, the 401(k) Plan had a receivable from the Company in the
amount of 873 and 1,162 shares, respectively, based on a closing stock
price of $25.88 and $29.81, respectively. Amounts contributed to the
401(k) Plan during 1997 and 1998 were immaterial.
F-15
<PAGE>
CLOSURE MEDICAL CORPORATION
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
NOTES TO FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGINCIES
In December 1998, a former employee of the Company filed a
discrimination claim with the Raleigh Area Office of the Equal
Employment Opportunity Commission. The Company has retained counsel in
this matter and settlement negotiations are ongoing. The Company
believes that the outcome of this matter will not have a material
adverse effect on the Company.
In May 1996, the Company entered into a five-year agreement with a
consultant which provides for annual compensation of $120,000.
11. SUBSEQUENT EVENTS
Effective February 1, 1999, the Company established the 1999 Employee
Stock Purchase Plan (the "ESPP") which was adopted by the Board of
Directors in December 1998 and is subject to shareholder approval at the
Company's 1999 annual meeting of shareholders. The ESPP is designed 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 this
purpose.
F-16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CLOSURE MEDICAL CORPORATION
Date: March 22, 1999 By /s/ ROBERT V. TONI
-------------------------------------
Robert V. Toni
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
EACH PERSON IN SO SIGNING ALSO MAKES, CONSTITUTES AND APPOINTS ROBERT V.
TONI, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF CLOSURE MEDICAL CORPORATION, AND
J. BLOUNT SWAIN, VICE PRESIDENT OF FINANCE AND CHIEF FINANCIAL OFFICER OF
CLOSURE MEDICAL CORPORATION, AND EACH OF THEM ACTING ALONE, HIS TRUE AND LAWFUL
ATTORNEYS-IN-FACT, WITH FULL POWER OF SUBSTITUTION, IN HIS NAME, PLACE AND
STEAD, TO EXECUTE AND CAUSE TO BE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ANY OR ALL AMENDMENTS TO THIS REPORT, AND HEREBY RATIFIES AND
CONFIRMS ALL THAT SAID ATTORNEY-IN-FACT OR HIS SUBSTITUTE OR SUBSTITUTES MAY DO
OR CAUSE TO BE DONE BY VIRTUE HEREOF.
<TABLE>
<CAPTION>
<S> <C>
Name Capacity Date
---- -------- ----
/S/ ROBERT V. TONI
- ------------------------------ President and Chief Executive March 22, 1999
ROBERT V. TONI Officer (principal executive
officer) and Director
/S/ J. BLOUNT SWAIN
- ------------------------------ Vice President and Chief Financial March 22, 1999
J. BLOUNT SWAIN Officer (principal financial and
accounting officer)
/S/ ROLF D. SCHMIDT
- ------------------------------ Chairman of the Board of Directors March 22, 1999
ROLF D. SCHMIDT
/S/ RONALD A. AHRENS
- ------------------------------ Director March 22, 1999
RONALD A. AHRENS
/S/ DENNIS C. CAREY
- ------------------------------ Director March 22, 1999
DENNIS C. CAREY
/S/ RICHARD W. MILLER
- ------------------------------ Director March 22, 1999
RICHARD W. MILLER
/S/ F. WILLIAM SCHMIDT
- ------------------------------ Director March 22, 1999
F. WILLIAM SCHMIDT
/S/ RANDY H. THURMAN
- ------------------------------ Director March 22, 1999
RANDY H. THURMAN
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Restated Certificate of Incorporation. (Exhibit 3.1)(1)
3.2 Amendment to Restated Certificate of Incorporation. (Exhibit 3.2)(2)
3.3 By-Laws. (Exhibit 3.2)(1)
10.1 Office-Warehouse Lease Agreement, dated as of November 7, 1995, between AP
Southeast Portfolio Partners, L.P. and the Company. (Exhibit 10.1)(1)
10.2+ Supply and Distribution Rights Agreement, dated as of March 20, 1996, between
Ethicon, Inc. and the Company. (Exhibit 10.8)(1)
10.3++ Amended and Restated 1996 Equity Compensation Plan of the Company. (Exhibit
10.1)(3)
10.4++ Employment Agreement, dated as of May 31, 1996, between Robert V. Toni and the
Company. (Exhibit 10.10)(1)
10.5++ Employment Agreement, dated as of May 31, 1996, between J. Blount Swain and
the Company. (Exhibit 10.11)(1)
10.6++ Employment Agreement, dated as of May 31, 1996, between Jeffrey G. Clark and
the Company. (Exhibit 10.12)(1)
10.7++ Employment Agreement, dated as of May 31, 1996, between Joe B. Barefoot and
the Company. (Exhibit 10.13)(1)
10.8++ Consulting Agreement, dated as of May 31, 1996, between Steven A. Kriegsman
and the Company. (Exhibit 10.14)(1)
10.9 Registration Rights Agreement, dated as of May 31, 1996, between Caratec,
L.L.C. and the Company. (Exhibit 10.15)(1)
10.10 Registration Rights Agreement, dated as of May 31, 1996, among Cacoosing
Partners, L.P., OMI Partners, L.P., Triangle Partners, L.P., F. William
Schmidt, Rolf D. Schmidt, Robert V. Toni, J. Blount Swain, Jeffrey G. Clark,
Joe B. Barefoot and the Company. (Exhibit 10.16)(1)
10.11 Contribution and Exchange Agreement, dated as of May 31, 1996, among Cacoosing
Partners, L.P., OMI Partners, L.P., Triangle Partners, L.P., F. William
Schmidt, Rolf D. Schmidt, Caratec, L.L.C., Robert V. Toni, J. Blount Swain,
Jeffrey G. Clark, Joe B. Barefoot, Jeffery C. Basham, Jeffrey C. Leung,
Anthony V. Seaber and the Company. (Exhibit 10.17)(1)
10.12 Amendment, dated June 18, 1996, to Office-Warehouse Lease Agreement, dated as
of November 7, 1995, between AP Southeast Portfolio Partners, L.P. and the
Company. (Exhibit 10.18)(1)
<PAGE>
10.13 Lease, dated February 14, 1997, between AP Southeast Portfolio Partners, L.P.
and the Company. (Exhibit 10.19)(2)
10.14 Master Lease Agreement, dated as of January 29, 1997, between Transamerica
Business Credit Corporation and the Company. (Exhibit 10.20)(2)
10.15 Loan Agreement, dated November 14, 1997, between NationsBank, N.A. and the
Company. (Exhibit 10.15)(4)
10.16 Promissory Note, dated November 14, 1997, issued by the Company to
NationsBank, N.A. (Exhibit 10.16)(4)
10.17 Security Agreement, dated November 14, 1997, between the Company and
NationsBank, N.A. (Exhibit 10.17)(4)
10.18 Pledge Agreement, dated November 14, 1997, between the Company and NationsBank
N.A. (Exhibit 10.18)(4)
10.19++ Employment Agreement, dated as of June 9, 1997, between William M. Cotter and
the Company. (Exhibit 10.19)(4)
10.20++ Employment Agreement, dated as of January 1, 1998, between Anthony J.
Sherbondy and the Company. (Exhibit 10.20)(4)
10.21++ Employment Agreement, dated as of February 18, 1998, between Dennis D. Burns
and the Company. (Exhibit 10.21)(4)
10.22 Amendment, dated August 15, 1997, to Lease, dated February 14, 1997, between
AP Southeast Portfolio Partners, L.P. and the Company. (Exhibit 10.22)(4)
10.23 Representative and Manufacturing Facility Agreement, dated January 1, 1998,
between Innocoll GmbH and the Company. (Exhibit 10.23)(4)
10.24++ 1999 Employee Stock Purchase Plan of the Company. (Exhibit 10.1)(5)
11* Computation of Per Share Loss.
23.1* Consent of PricewaterhouseCoopers LLP.
24.1* Power of Attorney (included on signature page to this Annual Report).
27* Financial Data Schedule.
</TABLE>
- -----------
* 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.
EXHIBIT 11
CLOSURE MEDICAL CORPORATION
COMPUTATION OF PRO FORMA NET INCOME (LOSS) PER SHARE
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Weighted average common shares
outstanding for the period - basic EPS 10,285 12,966 13,270
-------- ------- -------
Effect of dilutive stock options (a) - - -
-------- ------- -------
Weighted average common shares
outstanding for the period - diluted EPS (a) 10,285 12,966 13,270
-------- ------- -------
Net income (loss) $(16,814) $(6,829) $(4,773)
======== ======= =======
Net income (loss) per share - basic $ (1.63) $ (0.53) $ (0.36)
======== ======= =======
Net income (loss) per share - diluted $ (1.63) $ (0.53) $ (0.36)
======== ======= =======
</TABLE>
(a) Diluted net loss per common share is computed using the weighted-average
number of shares of common and common equivalent shares of stock options using
the treasury stock method. 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.
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Nos. 333-17721, 333-72953 and 333-72339) of Closure
Medical Corporation of our report dated February 9, 1999, which appears on page
F-2 of the Closure Medical Corporation Annual Report on Form 10-K for the year
ended December 31, 1998.
PricewaterhouseCoopers LLP
Raleigh, North Carolina
March 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001016006
<NAME> CLOSURE MEDICAL CORPORATION
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 824,064 7,277,029
<SECURITIES> 15,878,220 17,232,585
<RECEIVABLES> 1,190,847 1,226,416
<ALLOWANCES> 0 0
<INVENTORY> 1,008,451 346,563
<CURRENT-ASSETS> 19,187,938 23,633,846
<PP&E> 8,602,954 4,055,267
<DEPRECIATION> (896,171) (361,401)
<TOTAL-ASSETS> 27,420,487 30,419,720
<CURRENT-LIABILITIES> 7,565,900 3,930,208
<BONDS> 0 0
0 0
0 0
<COMMON> 132,904 132,425
<OTHER-SE> 18,117,436 22,286,491
<TOTAL-LIABILITY-AND-EQUITY> 27,420,487 30,419,720
<SALES> 8,078,781 1,551,470
<TOTAL-REVENUES> 9,578,781 1,551,470
<CGS> 3,479,765 1,397,960
<TOTAL-COSTS> 3,479,765 1,397,960
<OTHER-EXPENSES> 11,703,872 8,347,203
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 383,212 71,736
<INCOME-PRETAX> (4,773,366) (6,828,712)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,773,366) (6,828,712)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,773,366) (6,828,712)
<EPS-PRIMARY> (0.36) (0.53)
<EPS-DILUTED> (0.36) (0.53)
</TABLE>
