SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to ________________
Commission File Number: 0-28748
CLOSURE MEDICAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 56-1959623
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(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
5250 Greens Dairy Road, Raleigh, North Carolina 27616
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(Address of principal executive offices) (Zip Code)
(919) 876-7800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 10, 2000
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Common Stock, par value $0.01 per share 13,388,005
CLOSURE MEDICAL CORPORATION
INDEX
Page Number
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of March 31, 2000 (unaudited) and December 31, 1999............ 3
Statements of Operations (unaudited) for the three months ended March 31,
2000 and 1999.................................................................. 4
Statements of Cash Flows (unaudited) for the three months ended March 31,
2000 and 1999.................................................................. 5
Condensed Notes to Financial Statements (unaudited).............................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... 8
Item 3. Quantitative and Qualitative Disclosure about Market Risk.................. 12
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................... 13
2
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CLOSURE MEDICAL CORPORATION
BALANCE SHEETS
(In thousands, except per share data)
MARCH 31, DECEMBER 31,
2000 1999
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ASSETS (Unaudited)
Cash and cash equivalents $ 173 $ 508
Short-term investments 8,466 9,299
Restricted investments 1,536 1,515
Accounts receivable 956 732
Inventories 736 591
Prepaid expenses 234 326
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Total current assets 12,101 12,971
Restricted investments 1,298 1,292
Furniture, fixtures and equipment, net 7,170 7,351
Intangible assets, net 976 897
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Total assets $ 21,545 $ 22,511
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,039 $ 1,110
Accrued expenses 721 794
Deferred revenue 221 443
Capital lease obligations 290 279
Current portion of long-term debt 600 600
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Total current liabilities 2,871 3,226
Deferred revenue 505 505
Capital lease obligations less current portion 578 655
Long-term debt less current portion 1,336 1,500
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Total liabilities 5,290 5,886
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Commitments and Contingencies - -
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 13,362 and 13,347 shares, respectively 134 133
Additional paid-in capital 47,114 46,940
Accumulated deficit (30,993) (30,375)
Deferred compensation on stock options - (73)
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Total stockholders' equity 16,255 16,625
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Total liabilities and stockholders' equity $ 21,545 $ 22,511
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The accompanying notes are an integral part of these financial statements.
3
CLOSURE MEDICAL CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999
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Product sales $ 2,666 $ 3,817
Cost of products sold 816 1,176
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Gross profit 1,850 2,641
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Research, development and regulatory affairs expenses 1,466 1,862
General and administrative expenses 1,124 1,489
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Total operating expenses 2,590 3,351
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Income (loss) from operations (740) (710)
Interest expense (58) (91)
Investment and interest income 180 236
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Net income (loss) $ (618) $ (565)
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Shares used in computation of net income (loss)
per common share- basic and diluted 13,353 13,304
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Net income (loss) per common share- basic
and diluted $ (0.05) $ (0.04)
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The accompanying notes are an integral part of these financial statements.
4
CLOSURE MEDICAL CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (618) $ (565)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization expense 225 227
Amortization of deferred compensation on stock options 73 76
Net loss on disposals of fixed assets 12 3
Change in accounts receivable (224) (608)
Change in inventories (145) (45)
Change in prepaid expenses 92 29
Change in accounts payable and accrued expenses (144) (1,017)
Change in deferred revenue (222) (166)
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Net cash provided (used) by operating activities (951) (2,066)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture, fixtures and equipment (52) (851)
Investment in intangible assets (83) (47)
Purchases of investments (1,937) (1,104)
Proceeds from the sale of investments 2,743 3,732
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Net cash provided (used) by investing activities 671 1,730
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (164) (150)
Net proceeds from sales of common stock 175 230
Payments under capital lease obligations (66) (60)
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Net cash provided (used) by financing activities (55) 20
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Increase (decrease) in cash and cash equivalents (335) (316)
Cash and cash equivalents at beginning of period 508 824
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Cash and cash equivalents at end of period $ 173 $ 508
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The accompanying notes are an integral part of these financial statements.
5
CLOSURE MEDICAL CORPORATION
CONDENSED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Operations
Closure Medical Corporation ("Closure" or the "Company") develops, manufactures
and commercializes medical tissue adhesive products based on its proprietary
cyanoacrylate technology for use in wound closure in humans and animals.
On September 30, 1996, the Company sold 2,550,000 shares of Common Stock in its
initial public offering ("IPO"). On April 2, 1997, the Company completed a
follow-on public offering selling 1,025,000 shares of Common Stock. The net
proceeds from the IPO and follow-on public offering of approximately $17.9
million and $12.0 million, respectively, have been and will continue to be used
primarily for capital expenditures related to office space and manufacturing
facilities, laboratories, research and development, including clinical trials,
working capital and general corporate purposes.
2. Significant Accounting Policies
The significant accounting policies followed by the Company for interim
financial reporting are consistent with the accounting policies followed for
annual financial reporting. These unaudited financial statements have been
prepared in accordance with Rule 10-01 of Regulation S-X, and in management's
opinion, all adjustments of a normal recurring nature necessary for a fair
presentation have been included. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and should be read in conjunction with the
financial statements and notes thereto for the year ended December 31, 1999
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
The results of operations for the three month period ended March 31, 2000 are
not necessarily indicative of the results to be expected for the full year
ending December 31, 2000.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), was issued in June 1998. SFAS
133, as amended by SFAS 137, is effective for financial statements for fiscal
years beginning after June 15, 2000. The Company will adopt SFAS 133 on or
before the effective date. It is not anticipated that this standard will have a
material impact on the results of operations or financial position of the
Company.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements,"("SAB 101"),
which provides guidance on the recognition, presentation, and disclosures of
revenue in financial statements filed with the SEC. SAB 101, as amended by SAB
101A, outlines the basic criteria that must be met to recognize revenue and
provides guidance for disclosures related to revenue recognition policies. SAB
101 is not expected to have a significant impact on the Company's revenue
recognition policies.
3. Taxes
No federal or state income tax provision has been provided for income tax
purposes, as the Company does not expect to have a tax liability for the year
ending December 31, 2000. Additionally, the deferred tax asset that might be
recorded as a result of net operating losses under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," has been offset by
a related valuation allowance because realization of the asset is not likely.
Accordingly, no benefit has been recorded.
6
4. Inventories
Inventories included the following (in thousands):
March 31, December 31,
2000 1999
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Packaging $171 $148
Raw materials 31 45
Work-in-process 124 283
Finished goods 410 115
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$736 $591
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5. Net Income (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 and are excluded from the computation if their effect is antidilutive.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION ACT OF 1995
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included in Part I--Item 1 of this Form
10-Q and the audited financial statements and notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
year ended December 31, 1999 contained in the Company's Annual Report on Form
10-K for the year ended December 31, 1999.
This report and the documents incorporated by reference herein contain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended. When used in this report and the documents incorporated herein by
reference, the words "anticipate," "believe," "estimate," and similar
expressions are generally intended to identify forward-looking statements. These
forward-looking statements include, among others, the statements in Management's
Discussion and Analysis about the following:
o the Company's expectations with respect to increases in operating expenses;
o expectations with respect to increases in research and development and
general and administrative expenses in order to develop new products,
manufacture commercial quantities of products and fund additional clinical
trials;
o expectations with respect to the development, manufacturing and approval of
new products;
o expectations with respect to incurring additional capital expenditures to
expand its manufacturing capabilities;
o expectations with respect to generating revenue or becoming profitable on a
sustained basis;
o the Company's ability to enter into additional marketing agreements and the
ability of its existing marketing partners to successfully commercialize
products incorporating the Company's technologies;
o expectations that revenues from product sales may not continue the
sequential growth experienced from the quarter ended June 30, 1998 through
the quarter ended June 30, 1999;
o the sufficiency of the Company's existing cash and cash equivalents and
investments to finance its capital requirements for 12 months;
o expected losses in 2000 and subsequent years; and
o expectations with respect to future capital requirements.
There are important factors that could cause actual results to differ materially
from those expressed or implied by such forward-looking statements including,
but not limited to, the following:
o a decline in the level of demand for the Company's products;
o developments by competitors;
o the Company's inability to obtain regulatory clearances;
8
o general economic conditions and specifically, conditions in the health care
industry;
o the Company's ability to protect its proprietary products, know-how and
manufacturing processes;
o the Company's inability to obtain adequate supply of raw materials;
o the failure to enter into definitive marketing agreements;
o unanticipated cash requirements to support current operations or research
and development; and
o the Company's ability to attract and retain key personnel.
These and other risks and uncertainties affecting the Company are discussed in
greater detail in this report and in other filings by the Company with the
Securities and Exchange Commission.
OVERVIEW
Since its inception in May 1990, the Company has been developing, manufacturing
and commercializing medical tissue adhesive products for use in wound closure in
humans and animals. The Company's products are based on its proprietary
cyanoacrylate technology, and a substantial portion of the Company's historical
expenses have consisted of research and development and clinical trial expenses.
Through September 25, 1996, the effective date of the Company's initial public
offering, the Company had funded its operations with cash borrowed from
Sharpoint Development Corporation ("Sharpoint"), sales of Octyldent(R) and
Nexaband(R) products, and license and product development revenues from
marketing partners. On September 30, 1996, the Company completed its initial
public offering, issuing 2,550,000 shares of Common Stock and generating net
proceeds of approximately $17.9 million. On April 2, 1997, the Company completed
a follow-on public offering, issuing 1,025,000 shares of Common Stock and
generating net proceeds of approximately $12.0 million. The Company has also
funded its operations through sales of DERMABOND(R) Topical Skin Adhesive
("DERMABOND(R) adhesive") after the product received its CE Mark and FDA
approval in August 1997 and August 1998, respectively.
The Company has been unprofitable since its inception and has incurred net
losses in each year, including a net loss of approximately $2.5 million for the
year ended December 31, 1999. The Company anticipates that its recurring
operating expenses will increase for the next several years, as it expects its
research and development and general and administrative expenses to increase in
order to develop new products, manufacture commercial quantities of products and
fund additional clinical trials. The Company also expects to incur additional
capital expenditures to expand its manufacturing capabilities. The Company
expects to incur a loss in 2000 and may incur losses in subsequent years,
although the amount of future net losses and time required by the Company to
reach profitability are highly uncertain. The Company's ability to generate
significant revenue and become profitable will depend on its success in
commercializing DERMABOND(R) adhesive, expanding its manufacturing capabilities,
developing new products, entering into additional marketing agreements and on
the ability of its marketing partners to successfully commercialize products
incorporating the Company's technologies. The Company may never generate
significant revenue or become profitable on a sustained basis, if at all.
On August 28, 1998, the Company was granted approval from the U.S. Food and Drug
Administration ("FDA") of its premarket approval application to market
DERMABOND(R) adhesive in the United States. DERMABOND(R) adhesive, which is used
to replace sutures, staples and adhesive strips for closing certain topical
incisions and lacerations, is the first such product to be approved by the FDA
for the U.S. market. In March 1996, Closure licensed exclusive worldwide
marketing and distribution rights for DERMABOND(R) adhesive to Ethicon, Inc.
("Ethicon"), a subsidiary of Johnson & Johnson. In August 1997, Closure received
CE Mark approval allowing the Company to ship DERMABOND(R) adhesive to Ethicon
to support its launch in European Union countries. DERMABOND(R) adhesive is
currently
9
marketed by Ethicon in the U.S. and approximately 33 countries outside the U.S.
In addition, DERMABOND(R) adhesive received clearance from the Japanese Ministry
of Health and Welfare for marketing in Japan in February 2000.
On July 27, 1999, the Company was awarded its first United States Patent
relevant to DERMABOND(R) adhesive. The invention covered in this patent
capitalizes on the ability of the Company's adhesive technology to be
manipulated in a manner that enhances product performance by controlling the
setting time and extending the shelf-life of the material. The award of the
patent will increase royalty revenue on sales of DERMABOND(R) adhesive in the
United States under the supply and distribution agreement with Ethicon.
On September 2, 1999, the Company received clearance from the FDA to market
SOOTHE-N-SEAL(TM) in the United States. SOOTHE-N-SEAL(TM), which is used to
provide relief of pain associated with oral ulcers, is the first such product to
be approved by the FDA for the over-the-counter United States consumer market.
The Company is currently in discussions for a marketing distribution agreement
for SOOTHE-N-SEAL(TM).
The Company has developed a liquid adhesive bandage for minor cuts and
abrasions. The results of the preclinical studies, performed in July and August
1999, for the liquid adhesive bandage indicated that the product compared
favorably to air-dried wounds and wounds covered with commercial adhesive
bandages. As a result of this preclinical study, the Company is currently
conducting a definitive multi-center, 160-patient study to demonstrate the
effectiveness of Closure's proprietary nonabsorbable formulation when applied to
minor cuts and abrasions. Once the data is assembled, the Company will seek
marketing clearance for the product through submission of a 510(k).
Revenues from product sales increased sequentially for several quarters
beginning with the quarter ended June 30, 1998, the quarter prior to Ethicon's
U.S. sales launch of DERMABOND(R) adhesive, through the quarter ended June 30,
1999. This sequential growth has not continued in the quarters subsequent to
June 30, 1999, and may not continue over the next several quarters. The Company
has reduced certain operating expenses, primarily salary expenses, given this
expected decrease in revenues and related earnings. Salaries expense has
decreased as the Company has reduced its headcount by approximately fifteen
percent. These reductions are not expected to affect new product development.
RESULTS OF OPERATIONS
Total revenues were $2.7 million for the three months ended March 31, 2000,
compared to $3.8 million for the three months ended March 31, 1999. The decrease
in 2000 product sales was primarily a result of reduced sales of DERMABOND(R)
adhesive.
Cost of products sold was $816,000 for the three months ended March 31, 2000
compared to $1.2 million for the same period of 1999. This decrease is primarily
related to a reduction in DERMABOND(R) adhesive units sold from the 1999 period
as well as reduced manufacturing expenses during 2000. Cost of products sold as
a percentage of product sales was 31% for the three months ended March 31, 2000
and March 31, 1999, respectively. Although DERMABOND(R) adhesive unit sales
decreased during the period ended March 31, 2000, compared to the same period in
1999, a consistent gross margin percentage for the 2000 period was achieved
primarily as a result of the significant reductions in manufacturing expenses
and consistent production volumes.
Operating expenses were $2.6 million for the three months ended March 31, 2000,
compared to $3.4 million for the three months ended March 31, 1999. The decrease
was primarily attributable to decreased outside professional services for
research and development, the reduction of personnel and the reduction of
general and administrative overhead expenses. Although the Company experienced
decreased expenses related to research and development, it expects these
expenses will increase in the future as the Company expands its pipeline and
related development efforts and clinical trials for potential new products.
10
Interest expense was $58,000 for the three months ended March 31, 2000, compared
to $91,000 for the three months ended March 31, 1999. This decrease was
primarily the result of the continued reduction of the Company's term loan
balance and capital lease obligations through monthly principal payments.
Investment and interest income was $180,000 for the three months ended March 31,
2000, compared to $236,000 for the same period of 1999. This decrease was
primarily attributed to interest earned from lower average cash and investment
balances.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily through the sale of
equity securities, borrowings from Sharpoint and other lenders, license and
product development revenues and product sales. Through March 31, 2000, the
Company has raised approximately $30.0 million from equity financings. During
1997 and 1998, the Company entered into and received approximately $4.5 million
from a new lease line and term loan. In May 1999, the term loan principal
balance of $2.45 million was refinanced under similar terms of the original
agreement for an additional 24 months. In October 1999, the Company secured a
$3.0 million line of credit for working capital purposes. As of March 31, 2000,
there were no borrowings against the line of credit.
At March 31, 2000, net working capital was approximately $9.2 million versus net
working capital of $9.7 million available at December 31, 1999. This decrease
was primarily attributable to cash used to fund the Company's operations. At
March 31, 2000, the Company's primary working capital consisted of $11.5 million
of cash and cash equivalents and investments compared to $12.6 million at
December 31, 1999. The Company had $2.8 million in debt and capital lease
obligations at March 31, 2000, reflecting a $230,000 decrease over the December
31, 1999 debt and capital lease obligations. These decreases represent monthly
principal payments on these obligations.
Net cash provided by investing activities was $671,000 for the three months
ended March 31, 2000 compared to $1.7 million for the same period in 1999.
During the three months ended March 31, 2000 and March 31,1999 cash was provided
by the sale of investments offset by purchases of investments and other assets.
Net cash used by financing activities was $55,000 for the three months ended
March 31, 2000 versus net cash provided by financing activities of $20,000 for
the same period during 1999. The Company's primary financing activities during
the three months ended March 31, 2000 were the repayments of its term loan and
capital lease obligations offset by employee stock option exercises. The
Company's primary financing activity during the three months ended March 31,
1999 were the proceeds from a more significant number of employee stock options
exercised compared to same period during 2000, offset by repayments of its term
loan and capital lease obligations.
The Company believes that existing cash and cash equivalents and investments,
which totaled approximately $11.5 million at March 31, 2000, will be sufficient
to finance its capital requirements for 12 months. In October 1999, the Company
secured a $3.0 million line of credit for working capital purposes. The Company
expects to incur a loss in 2000 and may incur losses in subsequent years,
although the amount of future net losses and time required by the Company to
reach profitability are highly uncertain. The Company anticipates that its
recurring operating expenses will increase for the next several years, as it
expects its research and development and general and administrative expenses to
increase in order to develop new products, manufacture commercial quantities of
products and fund additional clinical trials. The Company also expects to incur
additional capital expenditures to expand its manufacturing capabilities.
The Company's future capital requirements, however, will depend on numerous
factors, including (i) the Company's ability to manufacture and successfully
commercialize its lead product, DERMABOND(R) adhesive, (ii) the progress of its
research and product development programs for future nonabsorbable and
absorbable products, including clinical studies, (iii) the effectiveness of
product commercialization
11
activities and marketing agreements for the Company's future products, including
additional scale-up of manufacturing capability in anticipation of product
commercialization and development and progress of sales and marketing efforts,
(iv) the ability of the Company to maintain existing marketing agreements,
including its agreement with Ethicon for DERMABOND(R) adhesive, and establish
and maintain new marketing agreements, (v) the costs involved in preparing,
filing, prosecuting, defending and enforcing intellectual property rights and
complying with regulatory requirements, (vi) the effect of competing
technological and market developments, (vii) timely receipt of regulatory
clearances and approvals and (viii) general economic conditions. The Company may
be required to seek additional capital to finance its operations in the future.
If the Company's currently available funds and internally generated cash flow
are not sufficient to satisfy its financing needs, the Company will be required
to seek additional funding through bank borrowings and additional public or
private sales of its securities, including equity securities, or through other
arrangements with marketing partners. Other than the Company's equipment
financing line of credit, term loan, and working capital line of credit, the
Company has no credit facility or other committed sources of capital. There can
be no assurance that additional funds, if required, will be available to the
Company on favorable terms, if at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The Company is subject to interest rate risk on its investment portfolio which
consists primarily of high quality short-term money market funds, commercial
paper and corporate bonds with an average maturity of less than one year. The
Company mitigates default risk by investing in what it believes are safe and
high credit quality securities and by monitoring the credit rating of investment
issuers. The portfolio includes only marketable securities with active secondary
or resale markets to ensure portfolio liquidity and there are limitations
regarding average and individual duration of investments. These
available-for-sale securities are subject to interest rate risk and will
decrease in value if market interest rates increase. At March 31, 2000, the
Company's total portfolio consisted of approximately $11.5 million of
investments, the majority of which had average maturities within one year.
Additionally, the Company generally has the ability to hold fixed income
investments to maturity. Therefore, the Company does not expect its results of
operations or cash flows to be materially affected due to a sudden change in
interest rates.
FOREIGN CURRENCY EXCHANGE RISK
The Company's international sales and related royalties of DERMABOND(R) adhesive
are based on sales in foreign currencies, but payable in U.S. dollars, and thus
may be adversely affected by fluctuations in currency exchange rates.
Additionally, fluctuations in currency exchange rates may adversely affect
demand for the Company's products by increasing the price of the Company's
products in the currency of the countries in which the products are sold.
12
PART II- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27 Financial Data Schedule.
(b) Reports on Form 8-K. None.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLOSURE MEDICAL CORPORATION
Date: May 15, 2000 By: \s\ Robert V. Toni
----------------------------------------
Robert V. Toni
President and Chief Executive Officer
Date: May 15, 2000 By: \s\ Benny Ward
---------------------------------------
Benny Ward
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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27 Financial Data Schedule.