<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 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 0-20096
GLIATECH INC.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1587242
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
23420 COMMERCE PARK ROAD
CLEVELAND, OHIO 44122
(Address of principal executive offices) (Zip Code)
(216) 831-3200
(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
------ ------
The number of shares outstanding of the registrant's Common Stock, $0.01 par
value per share, as of April 28, 1998 was 7,611,273 shares.
<PAGE> 2
GLIATECH INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1 Financial Statements:
Consolidated Balance Sheets - 1
December 31, 1997 and March 31, 1998 (unaudited)
Consolidated Statements of Operations -
for the three months ended March 31, 1997 and 1998 (unaudited)
and for the period from inception of operations
(August 31, 1988) through March 31, 1998 (unaudited) 2
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1998 (unaudited) and for the period from
inception of operations (August 31, 1988) through
March 31, 1998 (unaudited) 3
Notes to Consolidated Financial Statements 4
Item 2 Management's Discussion and Analysis of Financial Condition 5-9
and Results of Operations
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 10
Item 2 Changes in Securities and Use of Proceeds 11
Item 6 Exhibits and Reports on Form 8-K 12
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GLIATECH INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 March 31,
1997 1998
------------ ------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,601,398 $ 2,697,037
Short-term investments 5,940,476 5,345,077
Accounts receivable 544,051 489,801
Government grants receivable 207,080 206,574
Inventories 164,078 560,486
Prepaid expenses and other 278,714 248,122
------------ ------------
Total current assets 12,735,797 9,547,097
Property and equipment, net 1,277,519 1,293,814
Other assets, net 792,072 817,925
------------ ------------
TOTAL ASSETS $ 14,805,388 $ 11,658,836
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts payable and other accrued expenses 1,686,356 1,440,673
Accrued compensation 179,018 89,815
Accrued clinical trial costs 690,885 810,144
Deferred research contract revenue 809,359 70,860
------------ ------------
Total current liabilities 3,365,618 2,411,492
Stockholders' equity:
Common stock 74,013 76,013
Additional paid-in capital 53,379,810 53,377,810
Deficit accumulated during the development stage (42,014,053) (44,206,479)
------------ ------------
Total stockholders' equity 11,439,770 9,247,344
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 14,805,388 $ 11,658,836
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 4
GLIATECH INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Period from
Inception of
Operations
(August 31, 1988)
Three Months Ended through
March 31 March 31
---------------------------- ------------
1997 1998 1998
------------ ------------ ------------
REVENUES
<S> <C> <C> <C>
Research contracts and licensing fees 738,500 738,500 9,681,719
Product sales $ 344,656 $ 511,500 $ 3,217,445
Government grants 50,340 150,335 1,651,050
------------ ------------ ------------
Total revenues 1,133,496 1,400,335 14,550,214
OPERATING COSTS AND EXPENSES
Research and development 1,854,929 2,253,014 36,251,333
Selling, general and administrative 1,069,905 1,232,873 19,812,503
Depreciation and amortization 64,913 86,848 1,824,383
Cost of product sales 124,741 166,834 1,303,229
------------ ------------ ------------
Total operating cost and expenses 3,114,488 3,739,569 59,191,448
------------ ------------ ------------
Loss from operations (1,980,992) (2,339,234) (44,641,234)
Interest Income, net 236,812 146,808 3,398,777
Settlement of Claim 0 0 (2,025,000)
------------ ------------ ------------
NET LOSS $ (1,744,180) $ (2,192,426) $(43,267,457)
============ ============ ============
Basic and diluted net loss per common share $ (0.24) $ (0.29)
============ ============
Shares used for purposes of computing
basic and diluted net loss per common share 7,333,162 7,451,273
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
GLIATECH INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Period from
Inception of
Operations
(August 31, 1988)
through
Three Months Ended March 31,
---------------------------- ------------
1997 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,744,180) $ (2,192,426) $(43,267,457)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 64,913 86,848 1,824,383
Patent Cost Write-off 50,000 24,998 532,740
Loss on disposal of equipment 0 0 102,000
Compensation from issuance of stock and stock options 0 0 286,609
Settlement of claim 0 0 2,025,000
Changes in operating assets and liabilities:
Accounts receivable (27,658) 54,250 (489,801)
Inventory 9,685 (396,408) (560,486)
Government grants receivable and other assets (71,138) 31,098 (464,695)
Accounts payable and other accrued expenses 302,412 (334,886) 1,344,799
Deferred contract research revenue (738,500) (738,499) 70,860
Other liabilities 88,273 119,259 1,432,593
------------ ------------ ------------
Net cash used in operating activities (2,066,193) (3,345,766) (37,163,455)
INVESTING ACTIVITIES
Sale (purchase) of investments, net 2,857,461 595,399 (5,345,077)
Payment for patent rights and trademarks (49,002) (56,926) (1,429,483)
Payment of organization costs 0 0 (139,779)
Purchase of property and equipment (69,471) (97,068) (2,496,631)
------------ ------------ ------------
Net cash provided by (used in) investing activities 2,738,988 441,405 (9,410,970)
FINANCING ACTIVITIES
Principal payments on capital lease obligations 0 0 (565,601)
Proceeds from sale and leaseback 0 0 75,131
Proceeds from issuance of Preferred Stock, net 0 0 28,976,554
Proceeds from issuance of Common Stock, net 0 0 19,817,280
Proceeds from exercise of stock options 157,750 0 468,097
Proceeds from exercise of warrants 0 0 500,001
------------ ------------ ------------
Net cash provided by financing activities 157,750 0 49,271,462
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 830,545 (2,904,361) 2,697,037
Cash and cash equivalents at beginning of period 9,120,547 5,601,398 0
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,951,092 $ 2,697,037 $ 2,697,037
============ ============ ============
</TABLE>
See notes to consolidated financial statements
<PAGE> 6
GLIATECH INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. These financial statements should be read in conjunction with
the consolidated financial statements and footnotes thereto included in the
Annual Report on Form 10-K of Gliatech Inc. for the fiscal year ended December
31, 1997 filed with the Securities and Exchange Commission.
Note 2. Basic and Diluted Net Loss per Common Share
Diluted net loss per common share excludes the effect of anti-dilutive options
and warrants. For the three months ended March 31, 1997 and 1998, basic net loss
per common share equals diluted net loss per common share as both are based on
the weighted average number of common shares outstanding.
Note 3. Inventories
Inventories are stated at the lower of cost or market and are valued using the
first-in, first-out method. Inventories at December 31, 1997 and March 31, 1998
consist of:
December 31, March 31,
1997 1998
----------- ---------
Raw materials $ 36,755 $ 448,129
Work in process 71,572 39,755
Finished goods 55,751 72,602
-------- ---------
$164,078 $ 560,486
======== =========
Note 4. Legal Matters
In 1995, a dispute regarding inventorship of the ADCON products and the rights
of Case Western Reserve University ("CWRU") to receive royalties from sales of
ADCON Products arose between the Company and CWRU. After extensive discussions
between the Company and CWRU, a complaint was filed by the Company on September
8, 1997 in the United States District Court Northern District of Ohio, Eastern
Division ("Court") against CWRU and one of its employees, requesting the Court
to confirm that there was no error in the omission of the employee as a named
inventor of the Company's patents. The complaint was filed in response to
repeated statements to the Company and the general public made by the employee
and CWRU alleging that the inventorship of the patent was in error because the
employee was not named. The complaint did not seek monetary damages. In March
1998, the suit was dismissed pursuant to the terms and conditions of a
Settlement Agreement between the Company and CWRU. As part of the Settlement
Agreement, the Company issued a total of 200,000 shares of common stock
to CWRU and the employee in March 1998.
As an agreement in principle was reached between the Company and CWRU in 1997,
the Company recorded a charge of $2,025,000 in 1977 based on the fair value of
the Company's common stock at that time. Since the dispute was settled with
shares, the Company recorded the offset to the charge as a component of
stockholders' equity.
The Company may from time to time be subject to various legal actions, including
patent and product liability related matters, arising in the normal course of
business. These matters are subject to various uncertainties, and it is always
possible that some of these matters may be decided unfavorably to the Company.
4
<PAGE> 7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since commencing operations in 1988, the Company has been a development stage
company. The Company is engaged in the research, development and
commercialization of its ADCON family of products, which are proprietary,
resorbable, carbohydrate polymer medical devices designed to inhibit surgical
scarring and adhesions. Based on European pivotal clinical studies and other
compliance efforts and submission of data, the Company obtained regulatory
clearance to affix CE Marking on ADCON(R)-L and ADCON(R)-T/N in August 1995 and
January 1996, respectively, thereby allowing ADCON(R)-L and ADCON(R)-T/N to be
marketed in the 19 European countries which recognize CE Marking. ADCON-L and
ADCON-T/N are currently being marketed in 29 countries outside the U.S. through
independent medical device distributors for lumbar disc surgery and tendon and
peripheral nerve surgeries respectively. The Company is currently marketing
ADCON(R)-L and ADCON(R)-T/N. In addition, the Company signed a development and
exclusive license agreement in December 1996 with Chugai for the sale of
ADCON(R)-L and ADCON(R)-T/N in Japan. Further, the Company is pursuing the
development of small molecule drug candidates for the treatment of several
nervous system disorders, including Attention Deficit Hyperactive Disorder
("ADHD") sleep disorders, anxiety and Alzheimer's disease ("AD"). In October
1994, the Company entered into a strategic alliance with Janssen Pharmaceutica,
N.V. of Belgium ("Janssen") to collaborate on the discovery and development of
therapeutic products to treat AD. In September 1995, the scope of the alliance
was expanded and the current arrangement extends through October 1998. Since
inception, the Company's revenues have been primarily from contract research
payments relating to its strategic alliance with Janssen. The Company has also
received revenues from product sales of ADCON(R)-L and ADCON(R)-T/N outside the
U.S. as well as from various government grants awarded to the Company. The
Company anticipates that a significant portion of revenue from product sales
will be derived from its ADCON(R) family of products, primarily ADCON(R)-L. The
Company is a development stage company that has not generated any material
revenues from operations. As a result, the Company has had net operating losses
since its inception and expects such losses to continue unless and until such
time as revenues are sufficient to fund its current operations. The Company has
accumulated a deficit of $44.2 million for the period from inception of
operations (August 31, 1988) through March 31, 1998. The Company expects to
continue to incur a loss over at least the next several years and the amount of
future net losses and time required by the Company to reach profitability are
uncertain.
5
<PAGE> 8
RESULTS OF OPERATIONS
For the three months ended March 31, 1998 and 1997.
REVENUES
Total revenues increased approximately 23.5% to $1.4 million in the first
quarter of 1998 from $1.1 million in the first quarter of 1997. The increase in
total revenues was primarily a result of a 48.4% increase in product sales to
$512,000 in the first quarter of 1998 from $345,000 in the first quarter of
1997. This increase in product sales primarily resulted from increased sales of
the Company's ADCON(R)-L product, and to a lesser extent, the Company's
ADCON(R)-T/N products in certain European countries, as well as other countries
outside the U.S.
The Company's government-funded grant revenues increased to $150,000 in the
first quarter of 1998 from $50,000 in the first quarter of 1997. This increase
was primarily due to the award in February 1997 of a Phase II Small Business
Innovation Research ("SBIR") Program two year grant from the National Institute
of Neurological Disorders and Stroke ("NINDS") for research to evaluate the use
of histamine H3 receptor antagonists in treating ADHD. The increase also
resulted from an award in the fourth quarter of 1997 of two $100,000 Phase I
SBIR Program grants: (i) from NINDS for research to evaluate the molecular
characterization of the histamine receptor subtype and (ii) from the National
Institute of Nursing Research ("NINR") for research to evaluate the inhibition
of postoperative gynecological adhesions.
OPERATING COSTS AND EXPENSES
Total operating expenses increased by approximately 20.1% to $3.7 million in the
first quarter of 1998, compared to $3.1 million in the first quarter of 1997.
Cost of products sold increased to $167,000 in the first quarter of 1998
compared to $125,000 in the first quarter of 1997, but decreased as a percentage
of product sales in the first quarter of 1998 to 32.6% from 36.2% in the first
quarter of 1997. This decrease as a percentage of sales was primarily due to
improved efficiencies and the absorption of manufacturing overhead costs as a
result of increased production volumes.
Research and development expenses increased by approximately 21.5 % to $2.3
million in the first quarter of 1998 from $1.9 million in the first quarter of
1997. This increase was primarily due to: (i) increased research contract
expenses and purchases of materials for animal toxicology and other preclinical
studies for the lead compound which is being developed by the Company for its
Cognition Modulation program; and (ii) increased staffing and clinical research
costs associated with preclinical and clinical development of ADCON(R)-P.
Selling, general and administrative expenses increased 15.2% to $1.2 million in
the first quarter of 1998 compared to $1.1 million in the first quarter of 1997.
This increase was primarily due to an increase in sales and marketing expenses
resulting from the Company's preparations in anticipation of final approval by
the FDA for ADCON(R)-L.
6
<PAGE> 9
Depreciation and amortization expense was $87,000 in the first quarter of 1998
compared to $65,000 in the first quarter of 1997. The increase was primarily due
to increased amortization resulting from leasehold improvements made in 1997 and
1996.
INTEREST INCOME
Net interest income decreased to $147,000 in the first quarter of 1998 from
$237,000 in the first quarter of 1997. This decrease was due to lower cash and
cash equivalents and short-term investment balances during the first quarter of
1998 as compared to the first quarter of 1997.
NET LOSS
The Company's net loss increased 25.7% to $2.2 million in the first quarter of
1998, compared to $1.7 million in the first quarter of 1997. The increase in net
loss was a result of increased total expenses, which were slightly offset by
increased revenues as discussed above. The basic and diluted net loss per common
share was $0.29 in the first quarter of 1998, compared to $0.24 in the first
quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through the
private placement and public offering of its equity securities, research
contract licensing fees, and, to a lesser extent, through federally- sponsored
research grants. Since its inception, the Company has received $49.3 million in
net proceeds from equity financings. In addition, from its inception through
March 31, 1998, the Company has recognized revenue of $9.7 million from its
research collaboration agreement with Janssen, $3.2 million from product sales
and $1.7 million from several federally sponsored research grants. The Company
also has established a $1.5 million line of credit with a bank. As of March 31,
1998, the Company had no borrowings against the line of credit.
In order to preserve principal and maintain liquidity, the Company's funds are
invested in commercial paper and other short-term investments. As of March 31,
1998 and December 31, 1997, the Company's cash and cash equivalents and
short-term investments totaled $8.0 million and $11.5 million, respectively.
The Company is currently evaluating possible alternative sites in Ohio,
Massachusetts and North Carolina for its operations; however no definitive
plans have been made as of the date hereof. The Company expects that its
existing capital resources and interest earned thereon will enable the Company
to maintain its current and planned operations at least through mid-1999. The
Company may need to raise substantial additional capital to fund its operations
prior to such time. The Company's future capital requirements will depend on,
and could increase as a result of many factors, including, but not limited to,
the costs for commercialization of ADCON(R)-L, the commercial success of its
ADCON(R) family of products, the progress of the Company's research and
development, including the costs related to its Cognition Modulation and AD
programs, the scope, timing and results of preclinical studies and clinical
trials, the cost and timing of obtaining regulatory approvals, its success in
obtaining the strategic alliances required to fund certain of its programs, the
rate of technological advances, determinations as to the commercial potential
of certain of
7
<PAGE> 10
the Company's product candidates, the status of competitive products, the
establishment of additional manufacturing capacity and the possible relocation
of the Company's facilities.
In February 1997, the Company was awarded a Phase II SBIR Program grant, from
NINDS for research evaluating histamine H3 receptor antagonists to treat ADHD.
The grant has a two-year term and may provide as much as $750,000 in funding. If
the Company is successful in other Phase I research, additional Phase II awards
may be sought for funding to aid in further development of pharmaceutical
compounds, however, there is no assurance that such Phase I research will be
successful or that additional funding will be obtained. In addition, in the
fourth quarter of 1997, the Company was awarded two Phase I SBIR grants for up
to $100,000 each for NINDS and NINR divisions of the National Institute of
Health.
The Company does not expect to generate a positive cash flow from operations for
several years due to the substantial cost for commercialization of its ADCON(R)
family of products, additional research and development cost for ADCON(R)-A
(abdominal surgery), ADCON(R)-I (implant surgery) and ADCON(R)-C (cardiac
surgery) and for costs related to its Cognition Modulation and AD programs,
preclinical testing, clinical trials and operating expenses associated with
supporting such activities.
The Company may raise additional funds through additional equity or debt
financing, government grants, further corporate alliances, collaborative
relationships, or otherwise. The Company may engage in these capital raising
activities even if it does not have an immediate need for additional capital at
that time. There can be no assurance that any such additional funding will be
available to the Company or, if available, that it will be on acceptable terms.
If additional funds are raised by issuing equity securities, further dilution to
existing stockholders may result. If adequate funds are not available, the
Company may be required to delay, reduce the scope of, or eliminate one or more
of its research, development or clinical trials. If the Company seeks to obtain
funds through arrangements with collaborative partners or others, such partners
may require the Company to relinquish rights to certain of its technologies,
product candidates or products that the Company would otherwise seek to develop
or commercialize itself.
YEAR 2000. The Company has conducted a review of its information systems to
identify any issues that could be affected by the year 2000. Although the
Company believes that its information systems are able to process year and data
information beyond the year 1999, the Company is unable to determine the extent
to which year 2000 issues will affect its independent distributors or its
contract manufacturer in tracking sales, orders of shipments of the Company's
devices or drugs, as the case may be. Any interruption in the manufacturing or
marketing of the Company's products could have a material adverse effect on the
Company's business, prospects, financial condition or results of operations.
FORWARD-LOOKING STATEMENTS. Certain statements in this Quarterly Report on Form
10-Q constitute "forward-looking statements." When used in this Report, the
words "believes," "anticipates," "expects," "intends" and other predictive,
interpretive and similar expressions are intended to identify such
forwardlooking statements. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual results
of the Company to be different from expectations expressed or implied by such
forward-looking statements. Such factors included, but are not limited to, the
uncertainty of final regulatory approvals of the premarket approval application
for ADCON(R)-L, including the timing and content of decisions made by the FDA,
commercial uncertainty of market acceptance of the Company's ADCON(R) family of
products, delays in product development of other ADCON(R) products, uncertainly
due to
8
<PAGE> 11
the early stage of development for the therapeutic programs, the possible need
for additional funding, the ability of the Company to establish and maintain
collaborative arrangements with others, the potential market size for ADCON(R)
products, the ability to renew research collaborations, the productivity of
distributors of the ADCON(R) products, shortages of supply of ADCON(R) products
from the Company's sole manufacturer, the lack of supply of raw materials for
the Company's products, uncertainty of future profitability, uncertainties
related the to the Company's proprietary rights in its products, particularly
from the sole source supplier of certain key components for its ADCON products,
the loss of key management, and personnel and technological change. These
statements are based on certain assumptions and analysis made by the Company in
light of its experience and its perception of historical trends, current
conditions, expected future developments and other factors it believes are
appropriate in the circumstances. Such statements are subject to a number of
other assumptions, risks, uncertainties, general economic and business
conditions, and the business opportunities (or lack thereof) that may be
presented to and pursued by the Company. Prospective investors are cautioned
that any such statements are not indicative of future performance and that
actual results or developments may differ materially from those projected in the
forward-looking statements.
9
<PAGE> 12
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
A complaint was filed by Patti Palazola, a participant in a clinical trial for
ADCON(R)-L, and her husband, Walter James Palazola, against Semmes-Murphy Clinic
and the Company on March 14, 1997 in the Circuit Court of Tennessee for the
Thirtieth Judicial District at Memphis alleging, among other things, negligence
and loss of consortium. The complaint sought damages in the amount of $2.5
million. The complaint alleged that the participant in the clinical trial
underwent back surgery and subsequently developed an infection. On March 19,
1998, the suit was dismissed pursuant to the terms of the Full, Final and
Complete Release, Settlement, Confidentiality and Indemnity Agreement, effective
as of March 11, 1998 by and among the Company, Patti and Walter Palazola and
certain other released parties.
A complaint was filed by the Company on September 8, 1997 in the United States
District Court Northern District of Ohio, Eastern Division ("Court") against Dr.
Jerry Silver and CWRU, requesting the Court to confirm that there was no error
in the omission of Dr. Silver as a named inventor of the Company's United States
Patent No. 5,605,938. The complaint was filed in response to repeated statements
to the Company and the general public made by Dr. Silver and CWRU alleging that
the inventorship of the patent was in error because Dr. Silver was not named.
The complaint did not seek monetary damages. On March 17, 1998, the suit was
dismissed pursuant to the terms and conditions of the Settlement Agreement,
effective as of February 20, 1998, by and among the Company, CWRU and Dr. Silver
10
<PAGE> 13
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company registered 2,300,000 shares of Common Stock in connection with its
initial public offering on a Registration Statement on Form S-1, which went
effective on October 18, 1995. The data below reflects the use of proceeds from
such offering to the date of this Quarterly Report on Form 10-Q. All such
proceeds were directly or indirectly paid to others pursuant to Rule
701(f)(4)(vii):
<TABLE>
<S> <C>
Construction 0
Machinery and Equipment 0
Real Estate 0
Acquisition 0
Repayment of Debt 0
Working Capital 1,265,000
Temporary Investments (specify)
Commercial paper 5,508,000
Corporate Bonds 2,534,000
Other Short-Term Investments 0
Other:
Clinical Trials 2,222,000
Research and Development 5,455,000
Sales and Marketing 2,590,000
General Corporate Purposes 73,000
</TABLE>
11
<PAGE> 14
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Form of U.S. Manufacture Agents Agreement
27.1 Financial data schedule
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K for the period
covered by this Quarterly Report on Form 10-Q.
12
<PAGE> 15
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.
Date: May 15, 1998 GLIATECH INC.
By: /s/Rodney E. Dausch
--------------------------
Rodney E. Dausch
Vice President, Chief Financial Officer
and Secretary
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
13
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Page Number
- ----------- ---------------------- -----------
<S> <C> <C>
10.1 Form of U.S. Manufacture's Representative Agreement 15
27.1 Financial Data Schedule 16
</TABLE>
14
<PAGE> 1
Exhibit 10.1
AGREEMENT
---------
This agreement is effective May 1, 1998 and is by and between Gliatech R&D,
Inc., an Ohio corporation, having offices at 23420 Commerce Park Road,
Cleveland, Ohio 44122, (hereinafter "Gliatech"), and __________________, a
corporation, having offices at ____________________, _________ __________,
_________(hereinafter "Manufacturers Representative").
WHEREAS, Gliatech markets and sells a medical device, ADCON(R)-L Anti-Adhesion
Barrier Gel (hereinafter, "Product") to the medical trade; and
WHEREAS, Manufacturers' Representative promotes and sells products, including
medical devices such as instruments, implants and supplies, to the medical
trade; and
WHEREAS, Gliatech desires to appoint Manufacturers Representative as an
independent representative for the promoting sales of the Product manufactured
and distributed by Gliatech, and Manufacturer's Representative desires to be an
appointed independent representative for promoting sales of the Product;
NOW, THEREFORE, in consideration of the premises and covenants herein contained,
the parties hereto agree as follows:
1. APPOINTMENT OF MANUFACTURER'S REPRESENTATIVE
--------------------------------------------
Gliatech hereby appoints and Manufacturer's Representative hereby
accepts the appointment as the exclusive, independent representative of
Gliatech for the promotion of sales of Product for the territory
designated. Manufacturer's Representative shall not sell or solicit
sales of products or otherwise represent companies selling or otherwise
distributing products competitive to Gliatech's products without prior
written approval from Gliatech. Gliatech shall have the sole right to
make the determination of those products which are competitive to
Gliatech's products. Subject to the terms of this Agreement,
Distributor is free to engage in any other activities it wishes.
2. TERRITORY
---------
The territory specified hereunder within which the Manufacturer's
Representative shall solicit sales of Products shall be the
geographical area shown in Appendix 2 attached hereto (hereinafter
"Territory").
3. MANUFACTURER'S REPRESENTATIVE'S DUTIES AND OBLIGATIONS
------------------------------------------------------
1
<PAGE> 2
A. Manufacturer's Representative shall promote the Product and
solicit orders for sales of the Product within the Territory.
Promotional activity shall include but not be limited to
Product display advertising and promotion at medical doctor or
hospital meetings and exhibitions such as conventions and
trade shows, state or regional medical or hospital meetings.
Manufacturer's Representative shall appoint employee sales
representatives (either hereinafter "Sales Representatives")
to assist in the promotion and sale of the Product. The Sales
Representative shall be the sole responsibility of
Manufacturer's Representative which shall ensure the filing of
all appropriate business registrations, and compliance with
the requirements of tax withholding and reporting occasioned
by the engagement of such Sales Representatives and compliance
by such Sales Representatives with all obligations of
Manufacturer's Representative hereunder.
B. Manufacturers' Representative shall be responsible for
assuring its Sales Representatives are thoroughly trained to
promote and sell the Product consistent with the training
guidelines provided by Gliatech.
C. Manufacturers' Representative receives compensation for
services performed as a commission on the sale of Product in
the Territory and not on any other basis.
D. In order to comply with applicable law and in order to protect
Gliatech from claims and liabilities, Manufacturer's
Representative's communications and representations to
customers shall be true, accurate, complete and consistent
with the labeling of the Product. Manufacturer's
Representative shall in no circumstances modify, repackage,
adulterate, misbrand, alter or add labels to or remove labels
from any of the Product.
E. All advertising and all participation by Manufacturer's
Representative in public exhibitions, relating to the Product
and the use of Gliatech's name and trademarks, shall be
subject to prior written consent of Gliatech, which consent
shall not be unreasonably withheld.
F. Manufacturer's Representative's sales quota for the year of
1998 is as stated in Appendix 1 attached hereto.
Manufacturer's Representative shall receive its proposed sales
quota for any subsequent year no later than December 1.
Achievement of the annual and quarterly sales quotas is a
material obligation of this Agreement.
G. Except as otherwise agreed, Manufacturer's Representative
shall be responsible for providing its own equipment, offices,
working facilities, and such other facilities and services as
may be required at its own expense. Manufacturers'
Representative shall maintain an inventory of
2
<PAGE> 3
demonstration equipment, and deliverable Product (hereinafter
"Inventory") to promote and solicit orders for Product.
Manufacturer's Representative shall be responsible for the
risk of loss or damage of such Inventory owned by Gliatech
whether or not held at Manufacturer's Representative's
business location. Upon termination of this Agreement,
Inventory shall be returned to Gliatech.
H. Manufacturer's Representative shall submit an annual
comprehensive Business Plan and quarterly update reports.
I. The Manufacturers' Representative's principal owner and
officer executing this agreement shall be personally, as an
individual, liable to see that such corporation meets all of
the Manufacturers' Representative's obligations herein.
J. Manufacturers' Representative shall not make any
representation or statement, written or otherwise, concerning
prices, terms of delivery, terms of payment or conditions of
sale except and to the extent that the same is specifically
authorized by Gliatech. Manufacturers' Representative shall
have no right or authority to make any price guarantees, offer
or agree to any discounts and/or accept any orders on
Gliatech's behalf or return any products to Gliatech without
prior written authorization by Gliatech.
4. GLIATECH DUTIES AND OBLIGATIONS
-------------------------------
A. Gliatech shall sell the Product on orders solicited by
Manufacturer's Representative in accordance with published
price lists in effect. Gliatech may accept or refuse any order
for the Product and will not be bound by any order until it is
finally accepted by Gliatech. Gliatech shall not be liable for
any loss or damage caused by non-acceptance of orders or
delays in making shipments.
B. Gliatech shall pay a commission to Manufacturer's
Representative on orders solicited within and delivered to the
Territory according to the schedule attached as Appendix 3
(which may be from time to time amended). Commissions shall be
deemed earned by Manufacturer's Representative upon invoicing
of Product sales by Gliatech to customers. Commissions earned
by Manufacturer's Representative shall be computed on the net
amount of the invoices rendered (less credit memos) in
accordance with published price lists for each order or part
of an order, exclusive of all freight and transportation costs
(including insurance), normal and recurring bona fide trade
discounts having Gliatech's prior approval and any applicable
sales or similar taxes.
Commissions earned by the Manufacturers' Representative shall
be due and payable on or before the 25th day of the month
immediately following
3
<PAGE> 4
the month during which the product sale is recorded and
invoiced by Gliatech.
C. Gliatech shall forward to Manufacturer's Representative those
inquiries for the Product which are reasonably identifiable as
having been generated through the advertising or sales
promotion efforts of Manufacturer's Representative or any of
the Manufacturer's Representative's Sales Representatives.
D. Subject to reasonable charges as determined by Gliatech,
Gliatech shall supply Manufacturer's Representative with
reasonable quantities of descriptive literature, promotional
materials and catalogs describing and listing the Product.
E. Gliatech shall indemnify Manufacturer's Representative, its
employees and Sales Representatives against any and all third
party claims and demands for losses, damages and injuries,
including legal expenses and attorneys fees, arising out of
any claim of a defect in the manufacture or design of a
Product or written representation or omission in Gliatech's
promotional literature concerning the Product. This indemnity
shall not extend to any malfeasance or nonfeasance of
Manufacturer's Representative, its employees or Sales
Representatives in connection with any acts related to the
Manufacturer's Representative's activity hereunder. Except as
otherwise expressly provided, Manufacturer's Representative is
liable for all its own expenses and all claims made against
it.
F. Gliatech shall make a good faith effort to collect monies owed
on invoices from orders solicited by Manufacturer's
Representative and shall provide Manufacturer's Representative
with a monthly statement of past due accounts in the
Territory. In the event that Gliatech has not received payment
from any customer account upon which a commission was paid
within one hundred twenty (120) days from the date on which
any payment was due, Gliatech reserves the right to charge
back to the Manufacturers' Representative the full amount of
the commission paid on such sale. Upon eventual payment of the
outstanding monies, Gliatech will pay the original commission
amount.
5. CONFIDENTIALITY, IMPROVEMENTS, PATENTS AND TRADEMARKS
-----------------------------------------------------
A. Manufacturer's Representative shall take all reasonable steps
to do those things reasonably necessary to ensure that
confidential information relating to the Product and to the
technology and business of Gliatech is not disclosed or made
use of outside the business of Manufacturer's Representative
and Gliatech; provided, however, that the foregoing shall
4
<PAGE> 5
not apply to information (a) which be can shown to be in
writing and known to Manufacturer's Representative prior to
disclosure by Gliatech; (b) which is or becomes public
knowledge through no fault of Manufacturer's Representative;
or (c) which is disclosed to Manufacturer's Representative
by a third party with the lawful right to make such
disclosure. Manufacturers' Representative's obligation of
confidentiality shall survive the termination of this
Agreement for three years until and unless such confidential
information shall have become, through no fault of the
Manufacturers' Representative, generally in the public
domain.
B. Gliatech hereby grants Manufacturer's Representative a
royalty-free right to use Gliatech's trademarks and
identification on and in connection with the solicitation of
orders for the Product during the term of this Agreement. It
is the obligation of the Manufacturers' Representative to
notify Gliatech of any infringement of its trademarks and
identification. Manufacturer's Representative shall
discontinue the use of all such trademarks upon the
termination of this Agreement. All goodwill generated
hereunder in the use of such trademarks shall accrue to the
benefit of Gliatech. The Manufacturer's Representative hereby
disclaims any rights in Gliatech's trademarks and
identification other than the aforementioned license.
6. TERMS AND TERMINATION
---------------------
A. This Agreement shall continue in full force and effect
beginning on May 1, 1998 and continuing through December 31,
1999. This Agreement shall thereafter be renewable for
additional yearly periods.
B. Gliatech shall have the right to terminate this Manufacturers'
Representative if the sales quota as determined by Gliatech
and specified in Appendix 1 is not achieved. In this case,
Gliatech will provide Manufacturers' Representative 30 days
notice to termination.
C. Gliatech shall have the right to terminate this Manufacturers'
Representative upon notice of Manufacturers' Representative's
(i) commission or suffering of any act of bankruptcy or
insolvency, (ii) failing to cure any material breach in the
provisions of this agreement within thirty (30) days after
written notice of such breach, (iii) conviction in any court
of a felony under applicable city, state, or federal laws.
D. If this agreement shall terminate for any reason whatsoever,
the Manufacturers' Representative shall be entitled to receive
commissions as determined in accordance with the above
provisions with respect to orders solicited prior to the
effective date of such termination, regardless of when
5
<PAGE> 6
such orders were accepted by Gliatech (provided such orders
can be demonstrated to be orders that were solicited prior to
the effective date of such termination) and regardless of when
such shipments are made and invoices rendered. Goods returned
according to Gliatech's Customer Returns Policy shall be
charged against Manufacturers' Representative commission
payable. Ninety days (90) after termination of this agreement,
the commission account shall be closed and all proceeds over
the uncollected accounts receivable shall be paid to the
Manufacturers' Representative.
7. FORCE MAJEURE
-------------
Obligations of either party to perform under this Agreement shall be
excused and, in Manufacturer's Representative's case, sales quotas
addressed in paragraph 3 F and 6 B will be reduced proportionately
during such period of delay caused by matters such as strikes,
shortages of power or raw materials, government orders, or Acts of God,
which are reasonably beyond the control of the party obligated to
perform.
8. NOTICES
-------
Any notice required by this Agreement shall be deemed sufficient if
sent by certified mail, postage prepaid, to the party to be notified at
the address set forth below, until a different address is supplied in
writing.
A. In the case of Gliatech, such notice shall be sent to:
Gliatech Inc.
23420 Commerce Park Road
Cleveland, Ohio 44122
Attn: Thomas O. Oesterling, Ph.D.
In the case of Manufacturer's Representative, such notice shall be sent
to:
____ _________ ______________
_____________________________
_____________________________
__________ __________ _______
9. ENTIRE AGREEMENT
----------------
This document and the incorporated references represent the entire
agreement between the parties hereto, and supersede all prior
agreements regardless of their terms or cancellation provisions, and
this Agreement shall be modified only by a written agreement signed by
Gliatech and the Manufacturer's Representative.
6
<PAGE> 7
10. APPLICABLE LAW
--------------
This Agreement shall be governed by the laws of the State of Ohio as
applicable to contracts made and to be performed in that state.
11. ASSIGNABILITY
-------------
This agreement shall not be assigned either by the parties or by
operation of law without prior written consent of the other party;
however, in the case of Gliatech, Gliatech may, without obtaining the
consent of the Manufacturer's Representative, assign its rights and
obligations under this Agreement to any corporation with which Gliatech
may merge or consolidate or to which Gliatech may transfer
substantially all of its assets.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as
of the 1st day of Month, Year.
GLIATECH INC. __________________________________
By: By:
----------------------------------- --------------------------------
Thomas O. Oesterling, Ph.D. _________________ _________________
President and Chief Executive ___________________________________
Date: Date:
--------------------------------- ------------------------------
Appendices:
1. Products/1998-1990 Sales Quota
2. Territory
3. Commission Schedule
8
<PAGE> 9
APPENDIX 1
ADCON(R)-L Sales Quota for _________________________
Units
1998 Q3 Q3
--
Q4 Q4
--
Agreed upon this day
(Date)
- -------------------------------------------
(Signature of Manufacturer's Representative)
* 1999 Quotas to be established by mutual agreement no later than December 1,
1998.
9
<PAGE> 10
APPENDIX 2
Territory designation for : _____________________
By zip code ______
______
______
______
______
______
______
______
Agreed upon this day
(Date)
- --------------------------------------------
(Signature of Manufacturer's Representative)
10
<PAGE> 11
APPENDIX 3
COMMISSION SCHEDULE
ADCON(R)-L-__% of net invoice price to hospital
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GLIATECH
INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,697
<SECURITIES> 5,345
<RECEIVABLES> 537
<ALLOWANCES> 47
<INVENTORY> 560
<CURRENT-ASSETS> 9,547
<PP&E> 2,847
<DEPRECIATION> 1,554
<TOTAL-ASSETS> 11,659
<CURRENT-LIABILITIES> 2,473
<BONDS> 0
0
0
<COMMON> 76
<OTHER-SE> 9,171
<TOTAL-LIABILITY-AND-EQUITY> 11,659
<SALES> 512
<TOTAL-REVENUES> 1,400
<CGS> 167
<TOTAL-COSTS> 167
<OTHER-EXPENSES> 3,573
<LOSS-PROVISION> 5
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,192)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,192)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,192)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
