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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NO. 0-20096
GLIATECH INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 34-1587242
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
23420 COMMERCE PARK ROAD, CLEVELAND, OHIO 44122
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (216) 831-3200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
Indicate by checkmark whether the registrant (1) has filed all reports
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
requirement for the past 90 days. Yes X No
---
Indicate by checkmark 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 definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K Annual Report
or any amendment to this Form 10-K. [ ]
Aggregate market value of Common Stock held by non-affiliates as of
March 20, 1998 at a closing price of $10.25 per share as reported by the Nasdaq
National Market was approximately $67,589,197. Shares of Common Stock held by
each officer and director, their respective spouses, and by each person who owns
or may be deemed to own 10% or more of the outstanding Common Stock have been
excluded since such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
Number of shares of Common Stock outstanding as of March 20, 1998 was 7,601,273.
DOCUMENTS INCORPORATED BY REFERENCE
Part of the following document is incorporated by reference to Part III
of this Annual Report on Form 10-K: the Proxy Statement for the Registrant's
1998 Annual Meeting of Stockholders (the "Proxy Statement").
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GLIATECH INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
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PART I
Item 1. Business..........................................................................................1
Item 2. Properties.......................................................................................13
Item 3. Legal Proceedings................................................................................14
Item 4. Submission of Matters to a Vote of Securityholders...............................................14
Item 4A. Executive Officers of the Company................................................................14
PART II
Item 5. Market for Company'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..............................................................16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................................20
Item 8. Financial Statements and Supplementary Data......................................................20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..............................................................41
PART III
Item 10. Directors and Executive Officers of the Company..................................................41
Item 11. Executive Compensation...........................................................................41
Item 12. Security Ownership of Certain Beneficial Owners and
Management.......................................................................................41
Item 13. Certain Relationships and Related Transactions...................................................41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K......................................................................................41
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PART I
ITEM 1. BUSINESS.
GENERAL
Gliatech is engaged in the research, development and commercialization
of a family of proprietary, resorbable, carbohydrate polymer medical devices
designed to inhibit surgical scarring and adhesions. Surgical scarring is a
medical problem often resulting in adhesions at the surgical site, thereby
binding together tissues, nerves and organs following either open incision or
minimally invasive surgery. Scarring and adhesions may lead to many significant
postsurgical complications, including recurrent pain and impairment of function
following lumbar surgery, infertility following pelvic surgery and limited range
of motion following tendon and peripheral nerve surgery of the hand. Excessive
scarring also can obstruct access to the surgical site when reoperation is
necessary, making additional surgery difficult. Because it is not possible to
predict prior to surgery which patients are likely to develop adhesion-related
problems, the Company's ADCON family of medical devices is designed to be used
prophylactically as a physical barrier between tissues to inhibit scarring and
adhesions in all patients undergoing applicable surgical procedures. Due to the
differences in the body environments in which each of these products would be
used, each ADCON product is designed to be adapted for use at the appropriate
surgical site. In addition to the ADCON family of medical devices, the Company
is pursuing the development of small molecule drug candidates for the treatment
of several central nervous system disorders, including Attention Deficit
Hyperactive Disorder ("ADHD"), sleep disorders, anxiety and Alzheimer's Disease
("AD"). The Company is pursuing its AD program through its strategic alliance
with Janssen Pharmaceutica, N.V. of Belgium ("Janssen"), a wholly-owned
subsidiary of Johnson & Johnson.
GLIAL CELL-DERIVED TECHNOLOGIES
The human central nervous system is composed of two interrelated
networks of cells, neurons and glial cells. Neurons transfer and process
information from within and around the body. Glial cells outnumber neurons by
approximately nine to one and are the major cellular component of the brain.
Glial cells support, protect and repair the neurons and maintain the environment
necessary for proper neuronal activity and neurotransmitter transfer.
Additionally, glial cells release biological mediators which regulate the
inflammatory and immune response processes.
The Company's ADCON family of products and the Company's two
therapeutic programs, Cognition Modulation and AD, are based on the Company's
research of glial cells. The ADCON family of products is based on research
relating to the manner in which glial cells respond to scarring following damage
to the central nervous system. The Company identified glial cell-derived
substances which act as barriers to neuronal scarring. The Company utilized this
technology to develop carbohydrate polymers which mimic such actions. These
carbohydrate polymers are the basis for the Company's family of ADCON products.
The Cognition Modulation program is based on controlling the levels of the
neurotransmitter, histamine within the brain. The Company identified that the
level of histamine can be modulated by the neuronal histamine H3 receptor, which
controls the release of histamine, and glial cells, which are responsible for
removal of histamine. The Company is conducting research to discover and develop
small molecule drug candidates which interact with these neuronal histamine H3
receptors to modulate the levels of histamine in the brain. For the AD program,
the Company identified that, in the AD affected brain, glial cells release pro-
inflammatory molecules which cause neuronal death. The Company is also engaged
in the discovery and development of small molecule drug candidates which are
designed to inhibit the release of these pro-inflammatory molecules. The Company
believes that research into the function of glial cells will continue to provide
opportunities for the development of products to fulfill critical, unmet medical
needs.
ADCON FAMILY OF PRODUCTS
ADCON-L
ADCON-L is formulated as a proprietary, resorbable, carbohydrate
polymer gel which is applied directly to the surgical site during lumbar
surgery. ADCON-L is designed to provide a physical barrier between the membranes
covering the spinal cord and the back muscles, and between the spinal nerve
roots and the inner surface of the vertebral body. This physical barrier
inhibits excess scarring and adhesions at the surgical site. Because it is not
possible to predict prior to surgery which patients are likely to develop
adhesion-related problems, ADCON-L is designed to be used prophylactically as a
physical barrier between tissues
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to inhibit scarring and adhesions in all patients undergoing lumbar surgeries.
To date, ADCON-L has been used in approximately 10,000 surgeries.
Clinical Results. To date, the Company has conducted clinical trials in
the U.S. and in Europe. The Company's European pivotal multi-center double-blind
clinical trial of ADCON-L was designed to test its safety and effectiveness in
inhibiting excessive scarring and adhesions, as well as associated pain and
other symptoms, following lumbar disc surgery. The study was conducted at nine
academic neurosurgical centers in Switzerland, The Netherlands and Belgium and
enrolled 298 patients. The parameters used to evaluate patients at one, three
and six months following surgery were: (i) recurrence of postoperative pain,
(ii) pain associated with the performance of activities of daily living, such as
lifting objects, riding in or driving a car and sitting; (iii) sensory and motor
function and (iv) safety. At six months following surgery, patients were also
evaluated as to the amount of extensive scarring as assessed by Magnetic
Resonance Imaging ("MRI") and as to the association between scarring and the
recurrence of postoperative pain.
The results of this study indicated that ADCON-L statistically reduced
the incidence of extensive scarring, and that there is a statistically
significant correlation between the presence of scarring and the recurrence of
postoperative pain. In addition, this study revealed that a statistically
significant fewer number of ADCON-L treated patients, as compared to control
patients, experienced increased pain associated with the performance of
activities of daily living. The reduction of scarring in patients treated with
ADCON-L was also observed by surgeons who performed second surgical procedures
necessitated by reherniation of the disc. The Company also conducted a poststudy
surveillance that evaluated these same patients at approximately 12 months after
surgery. The results of such surveillance supported the conclusion of the
pivotal clinical study that ADCON-L reduced scarring at 12 months after surgery.
The Company also is conducting a multi-center double-blind clinical
trial of ADCON-L in the U.S. at 16 centers. The Company has enrolled 371
patients in this trial. Interim results on 165 patients indicated that ADCON-L
reduced scarring. The Company is analyzing the data for the remaining evaluable
patients enrolled in the study.
Development and Regulatory Status. In August 1995, the Company obtained
regulatory clearances to affix CE Marking for ADCON-L. The CE Marking for
ADCON-L allows the Company to market ADCON-L for lumbar surgery patients in 19
countries, which include (i) the European Union countries (Austria, Belgium,
Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The
Netherlands, Portugal, Spain, Sweden and the United Kingdom); (ii) Switzerland
and (iii) the three European Economic Area ("EEA") countries (Iceland,
Liechtenstein and Norway). The Company has also satisfied all the necessary
regulatory requirements to market ADCON-L in Argentina, Australia, Canada and
Israel. The Company is also able to market ADCON-L in New Zealand and the
Republic of South Africa. In addition, the Company signed a development and
exclusive license agreement in December 1996 with Chugai Pharmaceutical Co. Ltd.
("Chugai") for the sale of ADCON-L and ADCON-T/N in Japan. Chugai recently filed
an application requesting regulatory approval to market ADCON-L in Japan.
In December 1996, the Company submitted a premarket approval
application ("PMA") to the Food and Drug Administration (the "FDA") for
ADCON-L. In February 1997, this PMA was granted expedited review by the FDA.
Based on the results of the European pivotal clinical trials for ADCON-L and
other data submitted by the Company, the Orthopaedic and Rehabilitation Devices
Advisory Panel (the "Advisory Panel") of the FDA recommended on December 12,
1997 that ADCON-L be approved by the FDA for marketing in the U.S. subject to
certain specific conditions and labeling requirements that will be determined
by the FDA following review of the transcript from the Advisory Panel meeting.
The Advisory Panel did not request a postmarket surveillance program. After a
review of the Advisory Panel's recommendation and an independent review of the
data submitted, the FDA will make a final decision concerning the approval of
ADCON-L for marketing in the U.S. Interim results of the Company's U.S.
clinical trial were supplementally presented to the FDA in connection with
the FDA's review of the PMA.
Marketing and Sales. The Company currently markets ADCON-L in 29
countries outside the U.S. through independent medical device distributors. The
Company has entered into distribution agreements for the sale of ADCON-L in
certain countries, including, without limitation, in: Argentina, Australia,
Austria, Belgium, Canada, Denmark, Egypt, Finland, France, Germany, Greece,
Iceland, Israel, Italy, Korea, Luxemburg, Mexico, The Netherlands, New Zealand,
Norway, the Republic of South Africa, Slovakia, Spain, Sweden, Switzerland,
Taiwan and the United Kingdom (collectively, the "Distributing Countries"). In
the U.S., the Company intends to market ADCON-L after receiving FDA approval
through a network of independent manufacturer's agents which serve the
orthopaedic and neurosurgical markets. The Company plans to utilize 25-30 of
such independent organizations in order to market ADCON-L in the U.S. The sales
representatives of these organizations will be trained and managed by the sales
personnel of the Company, which the Company expects will include a National
Sales Manager who will be assisted by regional
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sales managers. In the U.S., the Company will establish the price of its
products for sale to hospitals and the independent manufacturers' agents will be
reimbursed on a commissioned basis.
In order to support its distribution network, the Company provides
ongoing technical and marketing support through its Area Sales Managers,
Marketing and Medical departments. In 1997, the Company provided initial product
training for all distributor representatives and subsequent field training for
individual sales representatives. The Company also participated in 12 surgeons'
meetings in 1997 and provided support for distributors at key meetings with
various surgeons in the distributor's territory. In addition, distributors were
provided with a package of sales tools, videos, brochures and clinical papers
supporting the introduction and use of ADCON-L. During 1997, the Company
exhibited at several major surgeons' meetings which were attended by orthopaedic
and neurosurgeons whose practices involve spinal surgery, including the American
Association of Orthopaedic Surgeons, the American Association of Neurological
Surgeons, the North American Spine Society and the International Congress of
Neurosurgery.
ADCON-P
ADCON-P is formulated as a proprietary, resorbable, carbohydrate
polymer solution which is applied directly into the pelvic cavity during pelvic
and gynecologic surgeries, such as reoperations to remove adhesions and uterine
tumor surgeries. ADCON-P is designed to provide a physical barrier to inhibit
scarring and adhesions which may bind the uterus, fallopian tubes or ovaries to
the surrounding pelvic cavity.
Scarring and adhesions following pelvic and gynecological surgeries may
form on the ovaries, fallopian tubes and uterus thereby causing infertility or
difficulty in conceiving. In preclinical studies conducted by the Company, it
was demonstrated that ADCON-P: (i) significantly inhibited the incidence and
extent of uterine adhesions, (ii) was resorbable and (iii) was safe. ADCON-P is
designed for use in both open incision surgeries and minimally invasive
surgeries using a laparoscope. In addition, the Company's proprietary,
resorbable, carbohydrate polymer solutions are applied directly to the surgical
site, which minimizes the handling of the product during surgery.
Development and Regulatory Status. In September 1997, the Company
received approval from the FDA to initiate a pilot clinical trial for ADCON-P in
the U.S. The double-blind clinical trial will be conducted at six centers. The
Company expects to enroll approximately 40 patients; approximately 20 patients
for evaluation of ADCON-P in reoperations to remove adhesions and approximately
20 patients for evaluation of ADCON-P in uterine tumor surgeries. This study
will evaluate patients between one to three months after surgery to assess the
incidence and extent of postsurgical scarring and adhesions.
ADCON-T/N
ADCON-T/N is formulated as a proprietary, resorbable, carbohydrate
polymer gel which is applied directly to the surgical site following tendon and
peripheral nerve surgeries such as primary tendon repair and reoperations to
remove adhesions on tendons or peripheral nerves. ADCON-T/N is designed to act
as a physical barrier between the peripheral nerve and the surrounding tissue.
The formation of adhesions may bind the tendon to surrounding tissues,
which results in a reduction of the tendon's ability to glide, thus limiting the
range of motion of the affected joint. In the peripheral nervous system,
adhesions may tether nerves to surrounding tissues and may cause compression of
nerves, which results in pain or numbness due to loss of nerve function in the
hand.
Clinical Results. In November 1995, the Company completed open label
clinical trials involving 68 patients in Switzerland and France to evaluate the
use of ADCON-T/N in inhibiting postsurgical scarring and adhesions following
various surgical procedures involving tendons and nerves. These trials evaluated
range of motion as well as safety. The results of these trials showed that
ADCON-T/N was safe and enabled improved range of motion of the affected joint.
Development and Regulatory Status. In January 1996, the Company
obtained regulatory clearances to affix CE Marking for ADCON-T/N. The CE Marking
allows the Company to market ADCON-T/N for use in tendon and peripheral nerve
surgeries in the 19 European countries that recognize CE Marking. The Company
has also obtained all the necessary regulatory requirements to market ADCON-T/N
in the same countries it has approval to market ADCON-L. In February 1995, the
Company received approval to conduct a U.S. pilot clinical trial for ADCON-T/N.
The Company is conducting a multi-center double-blind clinical trial to test the
safety and effectiveness of ADCON-T/N in inhibiting excessive scarring and
adhesions following peripheral
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nerve surgery of the hand. The study has been approved for commencement at 16
clinical centers and will enroll up to 230 patients. The patients are monitored
for 6 months to evaluate pain severity and function of the affected joint.
Because the trial is directed toward a specific patient population, the period
of enrollment for conducting such a trial is lengthened. To date, the Company
has enrolled approximately one third of the patients necessary to conduct this
trial. In addition, Chugai recently filed an application requesting regulatory
approval to market ADCON-T/N in Japan.
Marketing and Sales. The Company is currently marketing its ADCON-T/N
medical device in the 29 Distributing Countries. The Company provides ongoing
technical and marketing support through its Area Sales Managers, Marketing and
Medical departments. In 1997, the Company provided initial product training for
all distributor representatives and subsequent field training for individual
sales representatives. The Company also participated in eight surgeons' meetings
in 1997 and provided support for distributors at key meetings with various
surgeons in the distributor's territory. In addition, distributors were provided
with a package of sales tools, videos, brochures and clinical papers supporting
the introduction and use of ADCON-T/N. During 1997, the Company exhibited at
several major surgeons meetings, including American Society for Surgery of the
Hand and Federation of European Societies of Surgeries of the Hand.
Other ADCON Products
The Company is also developing certain additional proprietary,
resorbable, carbohydrate polymer medical devices and is currently conducting
preclinical studies relating to applications of such ADCON technology in
inhibiting scarring and adhesions in certain other surgical procedures. Due to
the differences in the body environments in which each of the products would be
used, each of the Company's ADCON products is being designed to be adapted for
use at the specific surgical site. Examples of other types of surgery where
adhesions are common and are known to create troublesome postsurgical
complications include (i) abdominal surgery, where peritoneal adhesions between
organs and/or the abdominal wall may impair gastrointestinal function; (ii)
implant/prosthetic surgery, where adhesions may compromise the effective
performance of the implanted medical device; and (iii) cardiac surgery, where
adhesions may increase the risk of injury during reoperation. The Company is
developing ADCON-A for use in abdominal surgery, ADCON-I for use in
implant/prosthetic surgery, and ADCON-C for use in cardiac surgery.
Neurologic Drug Development Programs
The Company is also engaged in the research and development of small
molecule compounds for the treatment of central nervous system disorders. The
Company is focusing its therapeutic research and development efforts on the
discovery and development of small molecules for the treatment of ADHD, sleep
disorders, anxiety and AD. The Company's AD research and development efforts are
being pursued through its strategic alliance with Janssen.
Cognition Modulation
The Company is conducting research to discover and develop a class of
small molecules designed to act on the histamine H3 receptor in the brain.
Histamine is a chemical messenger released from certain neurons in the brain
which regulates sleep/wake states and modulates levels of arousal and alertness
in the conscious state. The histamine H(3) receptor is predominantly found in
the brain and regulates the synthesis and release of histamine in the brain. An
antagonist to this receptor would lead to enhanced states of arousal and
alertness. The histamine (H3) receptor antagonists may be useful in treating
disorders in which central nervous system arousal is desirable, such as ADHD or
narcolepsy. An agonist to the receptor may prove useful in treating disorders in
which suppression of the central nervous system is desirable, such as anxiety
and insomnia.
H(3) Receptor Antagonists. The Company believes histamine H3 receptor
antagonists could provide a therapeutic approach for enhancing cognition and
positive behavior in patients with disorders characterized by memory and
learning deficiencies such as AD and ADHD. Such an agent could also be useful in
arousing patients with various forms of depressed activity of the central
nervous system, such as narcolepsy. The Company has discovered and developed
highly selective histamine H(3) receptor antagonists, which have been shown in
in vivo studies to (i) penetrate the blood-brain-barrier after oral
administration, (ii) selectively block the histamine H(3) receptor in the brain
and (iii) modulate levels of arousal and alertness. The Company has demonstrated
in preclinical studies that the histamine H(3) antagonists improve learning and
memory and have potential advantages in both safety and abuse potential and have
a prolonged duration of action.
H(3) Receptor Agonists. The Company has also begun research and
development of histamine H3 receptor agonists to reduce levels of wakefulness
and arousal for use in the treatment of anxiety and insomnia. To date, the
Company has developed several compounds which have high affinity for the
histamine H(3) receptor and in animal models have been shown to penetrate
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the blood-brain-barrier and occupy histamine H(3) receptors. The Company
continues to synthesize and screen new compounds as potential selective
agonists of the histamine H(3) receptor.
Alzheimer's Disease
The human central nervous system is composed of two interrelated
networks of cells, neurons and glial cells. Neurons transfer and process
information from within and around the body. Glial cells outnumber neurons by
approximately nine to one and glial cells are the major cellular component of
the brain. Glial cells support, protect and repair the neurons and maintain the
environment necessary for proper neuronal activity and neurotransmitter
transfer. Additionally, glial cells release biological mediators which regulate
the inflammatory and immune response processes. AD is characterized by
progressive dementia due to degeneration and death of neuronal cells. The cause
of AD is unknown, and there are no proven means of prevention or cure. The
Company believes that research in AD has been directed primarily at providing
replacement therapy for neurotransmitter deficiencies in order to alleviate the
symptoms.
Recent research into AD has focused on the role of beta-amyloid, which
is the major component of the brain deposits called senile plaques that
accumulate in the brain of a patient with AD. The Company has demonstrated that
the presence of beta-amyloid plaques results in the release of pro-inflammatory
molecules which can result in neuronal death. The Company believes glial cells
play a causative role in neuronal death associated with AD. The Company is
developing small molecular weight compounds to block the release of these
pro-inflammatory molecules.
The Company's Alzheimer's Disease Program
Utilizing its core glial cell technology, the Company has demonstrated
that glial cells are involved in the neuronal death associated with AD. The
Company is engaged in two programs for the discovery and development of
compounds to inhibit these unwanted glial cell associated events. These two
programs, which the Company is pursuing through its strategic alliance with
Janssen, are as follows:
Inhibitors of Beta-Amyloid Induced Inflammation. The Company has
discovered that the presence of beta-amyloid plaques results in a specific
metabolic consequence in glial cells, including the release of pro-inflammatory
molecules, which has been reported to occur in the brain of patients with AD.
These pro-inflammatory molecules are believed to cause neuronal death. The
Company is working with Janssen on the development of compounds that would block
the affects of beta-amyloid plaques on glial cells and thus block or reduce the
release of inflammatory agents, thereby reducing the incidence of neuronal
death. The Company has developed a number of high throughput in vitro assay
systems that have been used to screen Janssen's pharmaceutical library for
inhibitors of these beta-amyloid-induced actions. As a result of the Company's
efforts, several lead compounds that block or reduce the release of inflammatory
agents have been identified.
Inhibitors of Complement Activation. The Company is also pursuing
research relating to activated proteins of an immune response system known as
the complement cascade. Activated complement proteins are associated with
beta-amyloid in AD senile plaques. The complement cascade is part of the immune
response typically invoked to fight systemic infections, resulting in the death
of pathogenic cells, but is not usually found in the brain. The Company has
discovered that beta-amyloid can bind one of the complement proteins and
activate the entire complement cascade, providing an explanation for the
presence of activated complement in patients with AD. The activation of the
complement cascade may result in neuronal death. The Company is working with
Janssen on the development of compounds that would block the complement
activation. The Company has developed a number of high throughput in vitro assay
systems that have been used to screen Janssen's pharmaceutical library for
inhibitors of beta-amyloid induced activation of the complement cascade. As a
result of the Company's efforts, several lead compounds that block beta-amyloid
induced activation of the complement cascade have been identified.
Development Status. Janssen is currently utilizing chemistry to advance
the development of the lead compounds identified for both the beta-amyloid
induced inflammatory molecule and the inhibitors of complement activation
programs. In addition, Janssen is funding the development by the Company of in
vivo animal models to further evaluate the efficacy of selected lead compounds
for each of these programs.
The Janssen Agreement
In October 1994, under the terms of the Janssen Agreement, Johnson &
Johnson Development Corporation, a subsidiary of Johnson & Johnson, made an
equity investment in the Company and Janssen, a wholly-owned subsidiary of
Johnson & Johnson,
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paid the Company an initial licensing fee. The initial Janssen Agreement
provided funding by Janssen to the Company for AD research through October 1997.
In September 1995, the Company entered into an addendum to the Janssen Agreement
in order to expand the scope of the collaboration on AD to include research
relating to inhibitors of complement activation. In October 1997, Janssen
exercised its option to extend the Janssen Agreement for a period of one year
through October 1998 and has retained the right to extend it for an additional
period of one year. As of December 1997, the Company has received approximately
$10.4 million under the Janssen Agreement. Janssen is required to make
additional payments to the Company upon the attainment of certain clinical and
developmental milestones. Janssen is also responsible for all development costs,
including the cost associated with clinical trials and obtaining regulatory
approval. Janssen's parent, Johnson & Johnson, has worldwide distribution rights
for all products developed as a result of this collaboration. The Company will
receive a royalty from Janssen on any sales of such products.
MARKETING AND SALES
The Company is marketing its ADCON products outside the U.S. through
independent medical device distributors. The Company has entered into agreements
with independent distributors regarding country specific sales and distribution
rights for ADCON-L and ADCON-T/N in the 29 Distributing Countries. The
distributors in Europe are managed by the Company's European sales organization,
which consists of four Area Sales Managers, located in The Netherlands, Germany,
France and Italy. The non-European distributors are managed by an international
sales manager located at the Company's executive offices in Cleveland, Ohio. In
addition, the Company signed a development and exclusive license agreement in
December 1996 with Chugai for the exclusive sale of ADCON-L and ADCON-T/N in
Japan; such license shall terminate upon the expiration of the last Japanese
patent issued with respect to such agreement. Chugai recently filed applications
requesting regulatory approval to market ADCON-L and ADCON-T/N, respectively, in
Japan.
These distributor agreements provide the distributors with exclusive
distribution rights in their assigned territory. The agreements require the
distributors to meet specified minimum annual purchase targets and to provide
the Company with periodic reports on their sales to hospitals. In the event such
targets are not achieved, the Company may, upon the expiration of applicable
notice periods, terminate the exclusivity of such arrangement. The Company
currently establishes the price of its products for sale to distributors and
each distributor then sets the price, including any discounts at which the
product is sold to the hospital. The Company's distributors are independent
third parties, are not employees of the Company, and are not under the direct
control or supervision of the Company, except that they are subject to the terms
and conditions of their respective distribution agreements.
In the U.S., the Company intends to market ADCON-L after receiving FDA
approval through a network of independent manufacturer's agents which serve the
orthopaedic and neurosurgical markets. The Company plans to utilize 25-30 of
such independent organizations in order to market ADCON-L in the U.S. The sales
representatives of these organizations will be trained and managed by the sales
personnel of the Company, which the Company expects will include a National
Sales Manager who will be assisted by regional sales managers. In the U.S., the
Company will establish the price of its products for sale to hospitals and the
independent manufacturers' agents will be reimbursed on a commissioned basis.
MANUFACTURING AND SUPPLIERS
The Company does not have any manufacturing facilities and presently
utilizes a sole third party manufacturer, European Medical Contract
Manufacturing, located in Nijmegen, The Netherlands, for the manufacture of its
commercial and clinical requirements of ADCON-L, ADCON-P and ADCON-T/N. The
Company believes that the manufacturer has the ability to supply sufficient
products to satisfy the Company's existing and future requirements for the
development and commercialization of its ADCON products. The Company currently
purchases the key components for ADCON-L, ADCON-P and ADCON-T/N from suppliers
and provides such components to the contract manufacturer who formulates these
components into ADCON-L, ADCON-P and ADCON-T/N. The contract manufacturer is
registered as a subcontractor for the manufacture of pharmaceutical products by
The Netherlands designated agency and is certified to International Organization
of Standardization ("ISO") requirements for manufacture of such products. ISO
Certification is an internationally recognized standard of quality
manufacturing. The manufacture of the Company's products is subject to FDA
Quality Standards Regulations ("QSR") or other requirements prescribed by the
appropriate regulatory agency in the country of use. There can be no assurance
that the Company's current manufacturer will continue to comply with all
applicable regulatory requirements or that such manufacturer will be able to
supply the Company with such products or that the Company will be able to
identify additional manufacturers of its products on terms acceptable to the
Company.
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The Company currently obtains one of the key components for its ADCON
products from a single supplier. The Company also has developed its own
proprietary process to manufacture this key component and is currently
manufacturing it on a pilot basis through a contract manufacturer according to
QSR standards. The Company intends to have this proprietary process qualified
under applicable regulatory requirements in order to have an alternate source of
supply. In addition, the Company is pursuing qualification of additional
suppliers. There can be no assurance that such proprietary process will be
qualified or alternative sources will be located or that the current supply of
raw materials will continue to be provided on terms and conditions acceptable to
the Company.
COMPETITION
The Company competes with both biotechnology and pharmaceutical
companies in all of its product development programs. Furthermore, academic
institutions, governmental agencies, and other public and private research
organizations also continue to conduct research, seek patent protection, and
establish collaborative arrangements with commercial entities for product
development and marketing. Products resulting from these activities may compete
directly with any products developed by the Company. These companies and
institutions also compete with the Company in recruiting and retaining highly
qualified scientific personnel.
Although the Company is not aware of any products on the market that
would directly compete with ADCON-L or ADCON-T/N, there are products on the
market which would compete with ADCON-P. These products include, Interceed(TM),
a film comprised of oxidized regenerated cellulose, which has been marketed for
several years by Johnson & Johnson to prevent surgical adhesions following
pelvic surgeries and Seprafilm(TM), a film comprised of sodium hyaluronic acid
and carboxymethyl cellulose, which is marketed by Genzyme Corporation to inhibit
surgical adhesions following both pelvic and abdominal surgeries. There are
significant efforts by others, including many large pharmaceutical companies and
academic institutions, to develop products which may compete with products that
are developed by the Company relating to its ADCON family of products, the
Cognition Modulation program and the AD program. Some of these products may be
at a more advanced stage of development than the Company's products. In
addition, there may be substantial competition in the biopharmaceutical and
medical industries, both from specialized firms and from major pharmaceutical,
chemical, medical device and surgical supply companies. Many of the Company's
potential competitors have product development capabilities and financial and
human resources greater than the Company, and have manufacturing, marketing,
sales and distribution capabilities that the Company does not have. Universities
and other research institutions may develop similar technologies and processes
which, in some instances, may be utilized by others to compete with the
Company's products.
The Company expects to encounter significant competition for each of
its product candidates. To compete successfully, the Company will be required to
develop and maintain scientifically advanced technology, develop proprietary
products, attract and retain highly qualified personnel, obtain patent or other
protection for its products, obtain required regulatory approvals and
manufacture and successfully market its products, either alone or through
collaboration with third parties.
GOVERNMENT REGULATION
The manufacture and sale of the Company's products are subject to
regulation by numerous authorities, principally the FDA, and corresponding state
and foreign authorities. The regulatory process is lengthy, expensive and
uncertain. Prior to commercial sale in the United States, most medical devices
and new drugs, including the Company's products under development, must be
cleared or approved by the FDA. In addition, certain material changes or
modifications to medical devices and drugs also are subject to FDA review and
approval. Securing the FDA clearances and approvals may require the submission
of extensive clinical data and supporting information to the FDA. Product
clearances and approvals can be withdrawn for failure to comply with regulatory
standards or the occurrence of unforeseen problems following initial marketing.
The FDA and other agency requirements for manufacturing, product testing, and
marketing also can vary depending upon whether the product is a medical device
or drug. Failure to comply with applicable FDA regulatory requirements could
result in sanctions being imposed on the Company or the manufacturer of its
products, including warning letters, fines, injunctions, civil penalties,
failure of the FDA to grant premarket clearance or premarket approval of medical
devices and drugs, operating restrictions and criminal prosecution. Sales of the
Company's products outside of the United States are subject to foreign
regulatory requirements that may vary widely from country to country. The time
required to obtain clearance from a foreign country may be longer or shorter
than that required by the FDA or other such agencies, and clearance or approval
or other product requirements may differ. There can be no assurance that the
Company will be able to obtain necessary regulatory clearances or approvals on a
timely basis, if at all, for any
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of its products under development, and delays in receipt 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 business, financial
condition and results of operations.
There is no certainty that the clinical studies involving ADCON-T/N and
ADCON-P will be completed in a timely manner or that the data and information
obtained will be sufficient to support the filing of a premarket approval
application. There can be no assurance that the Company will be able to obtain
necessary approvals to market ADCON-L, ADCON-T/N OR ADCON-P or any other
products under development on a timely basis, if at all, and delays in receipt
or failure to receive such approvals, the loss of previously received approvals,
or failure to comply with existing or future regulatory requirements could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Any products manufactured or distributed pursuant to clearance of a
premarket notification submission or an approved premarket approval application
are subject to pervasive and continuing regulation by the FDA, including
recordkeeping requirements and reporting of adverse experience with the use of
the device. The Federal Food, Drug, and Cosmetic Act (the "FDC Act") requires
that medical devices be manufactured in registered establishments and in
accordance with the Good Manufacturing Practices requirements ("GMP") for
medical devices. Such manufacturing facilities are subject to periodic
inspections by the FDA.
Regulation of Medical Devices - United States. The FDC Act requires
premarket clearance or premarket approval by the FDA prior to commercialization
of medical devices. Pursuant to the FDC Act, the FDA regulates the manufacture,
distribution and production of medical devices in the United States. Medical
devices are classified into class I, II or III on the basis of the controls
deemed by the FDA to be reasonably necessary to ensure their safety and
effectiveness. Class I devices are subject to general controls (e.g., labeling
and adherence to QSR) and class II devices are subject to premarket clearance
and special controls (e.g., performance standards, postmarket surveillance,
patient registries and FDA guidelines). Generally, class III devices are those
which require premarket approval by the FDA to ensure their safety and
effectiveness (e.g., life-sustaining, life-supporting and implantable devices
which have been found not to be substantially equivalent to legally marketed
devices). The FDA regulates the Company's ADCON-L, ADCON-P and ADCON-T/N
products as Class III medical devices.
Before a new device can be introduced into the market, the manufacturer
or distributor generally must obtain FDA clearance or approval through either a
510(k) premarket notification or a PMA. A 510(k) clearance will be granted if
the submitted data establish that the proposed device is "substantially
equivalent" to a legally marketed class I or II medical device, or to a
preamendment class III medical device (i.e., one that has been marketed since a
date prior to May 28, 1976) for which the FDA has not called for premarket
approvals. A PMA must be filed if the proposed device is not substantially
equivalent to a legally marketed device or if it is a preamendment Class III
device for which the FDA has called for premarket approvals. A PMA must be
supported by extensive data, including preclinical and clinical trial data to
demonstrate the safety and efficacy of the device. If human clinical trials of a
device are required and if the device presents a "significant risk," the
manufacturer or the distributor of the device is required to file an IDE
application prior to commencing human clinical trials.
The IDE application must be supported by data, typically including the
results of animal and, possibly, mechanical testing. If the IDE application is
approved by the FDA, human clinical trials may begin at a specific number of
investigational sites with a maximum specific number of patients, as approved by
the agency. The clinical trials must be conducted under the auspices of an
independent institutional review board ("IRB") established pursuant to FDA
regulations.
Following receipt of the premarket approval application, if the FDA
determines that the premarket approval application is sufficiently complete to
permit a substantive review, the FDA will "file" the application. Once the
submission is filed, the FDA begins a review of the premarket approval
application. The premarket approval application process can be expensive,
uncertain and lengthy, frequently requiring one to several years from the date
the premarket approval application is accepted for filing. A number of devices
for which premarket approval has been sought by other companies have never been
approved for marketing. The review time is often significantly extended by the
FDA, which may require more information or clarification of information already
provided in the submission. During the review period, an advisory committee
likely will be convened to review and evaluate the application and provide
recommendations to the FDA as to whether the device should be approved. In
addition, the FDA will inspect the manufacturing facility to ensure compliance
with QSR requirements prior to approval of a premarket approval application. If
granted, the premarket approval may include significant limitations on the
indicated uses for which a product may be marketed. The FDA prohibits promoting
products for unapproved or "off-label" uses.
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There is no certainty that the clinical studies involving ADCON-L,
ADCON-P and ADCON-T/N will be completed in a timely manner or that the data and
information obtained will be sufficient to support the filing of a PMA. There
can be no assurance that the Company will be able to obtain necessary approvals
to market ADCON-L, ADCON-P or ADCON-T/N or any other products under development
on a timely basis, if at all, and delays in receipt or failure to receive such
approvals, the loss of previously received approvals, or failure to comply with
existing or future regulatory requirements could have a material adverse effect
on the Company's business, financial condition and results of operations.
Modifications to a device that is the subject of an approved PMA, its
labeling, or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs. Supplements to a PMA often require the submission of
the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered by the original PMA.
Any products manufactured or distributed pursuant to clearance of a
premarket notification submission or an approved premarket approval application
are subject to pervasive and continuing regulation by the FDA, including
recordkeeping requirements and reporting of adverse experience with the use of
the device. The FDC Act requires that medical devices be manufactured in
registered establishments and in accordance with the QSR requirements for
medical devices. Such manufacturing facilities are subject to periodic
inspections by the FDA. The manufacturing facility utilized by European Medical
Contract Manufacturing ("EMCM") in manufacturing the Company's ADCON family of
products must undergo a review and inspection by the FDA for QSR standards
before ADCON-L is approved by the FDA for marketing in the U.S. There can be no
assurance as to the timing or extent of such review by the FDA. Further, there
can be no assurance that the FDA will declare such facility to be in compliance
with QSR requirements.
The President recently signed into law the Food and Drug Administration
Act of 1997 ("FDMA"). This legislation makes changes in the provisions of the
FDC Act affecting the regulation of devices, drugs and biological products. With
respect to devices, the changes will affect the IDE, 510(k) and PMA processes,
and also will affect device standards and data requirements, procedures relating
to humanitarian and breakthrough devices, tracking and postmarket surveillance,
accredited third party review, and the dissemination of off-label information.
The Company cannot predict how or when these changes will be implemented or what
effect the changes will have on the regulation of the Company's products.
Regulations of Drugs - United States. Drugs are a category of products
that can include biologics, such as vaccines, and prescription or
over-the-counter medications. Each of these classes of products is often
regulated differently and, therefore, approval requirements, if any, can vary
significantly. Before a new drug may be commercially sold in the United States,
clinical trials and other tests on the product must be conducted and the results
submitted to the appropriate regulatory agencies as part of the approval
process. Drug products that the Company may develop are subject to FDA
regulation under the FDC Act. Drug products also would be subject to regulation
under the Public Health Service Act if they are classified as biologics. The
Company believes that its AD and other nervous system disorder products would be
regulated as new drugs.
The steps required before a new drug product may be marketed in the
United States include (i) preclinical laboratory and animal tests conducted in
accordance with Good Laboratory Practices, (ii) submission to the FDA of an
application for an investigational new drug ("IND"), which must become effective
before human clinical trials may commence, (iii) well-controlled human clinical
trials to establish the safety and efficacy of the new drug product, (iv)
submission of a new drug application ("NDA") to the FDA for nonbiological drugs,
and (v) FDA approval of the NDA prior to any commercial sale or shipment of the
drug. Approval by the FDA must be obtained for each product and for each
indication to be treated with each product. The filing of an NDA and the
marketing of approved prescription drugs also requires the payment of certain
user fees to the FDA.
Preclinical tests include formulation development, laboratory
evaluation of product chemistry and animal studies to assess the potential
safety and efficacy of a product formulation. Preclinical tests are submitted to
the FDA as part of the IND. Unless the FDA issues a clinical hold, the IND will
become effective 30 days following its receipt by the FDA. There is no certainty
that submission of an IND will result in the ability to conduct one phase of a
clinical trial or that the lack of the issuance of a clinical hold on one phase
of a clinical trial will result in other phases or that the completion of
clinical trials will result in FDA approval. Clinical trials may be placed on
hold by the FDA at any time for a variety of reasons, particularly if safety
concerns exist.
Clinical trials involving the administration of the investigational
drug product to humans typically are conducted in three phases and are subject
to specific protocols that are particularly detailed in Phases II and III. Each
protocol indicating how the clinical trial will be conducted must be submitted
for review to the FDA as part of the IND. Further, each clinical study must be
conducted under the auspices of an IRB and in accordance with informed consent
requirement. The IRB considers, among other
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factors, ethical concerns, informed consent requirements and protection of human
subjects. The IRB or the FDA may require changes in a protocol both prior to and
after commencement of a trial. There is no assurance that the IRB or the FDA
will permit a study to go forward or, once started, to be completed. The FDA's
review of a study protocol does not necessarily mean that if the study is
successful it will constitute proof of safety or efficacy.
The three phases of clinical trials are generally conducted
sequentially, but they may overlap. Phase I testing generally involves the
initial introduction of the drug into humans for testing the safety, side
effects, dosage tolerance, metabolism and clinical pharmacology of the drug. In
the case of drugs for life-threatening diseases, the initial human testing is
generally done in patients rather than in healthy volunteers. Because these
patients are already afflicted with the target disease, it is possible that such
studies may provide results traditionally obtained in Phase II trials. These
trials are referred to as Phase I/II trials. Phase II testing generally involves
well-controlled tests in a larger but still limited patient population to
determine the efficacy of the drug for specific indications, to determine
optimal dosage and to identify possible side effects and safety risks. If a drug
is found to be effective in Phase II evaluations, expanded Phase III trials are
undertaken to evaluate the overall risks and benefits of the drug in relation to
the treated disease in light of other available therapies. Phase III studies can
include significant numbers of patients. Phase III clinical studies may be
avoided under certain circumstances. For example, under the FDA's expedited
approval interim regulations, the FDA may determine that the study is not
necessary, especially where no adequate alternative therapy exists, and if the
disease under examination is life-threatening or seriously debilitating. The FDA
may suspend clinical trials at any time if the patients are believed to be
exposed to a significant health risk.
Reports of results of preclinical studies and clinical trials for
nonbiological drugs, such as those likely to be developed by the Company, are
submitted to the FDA in the form of an NDA for approval for marketing and
commercial shipment. The NDA also includes information pertaining to the
preparation of drug substances, analytical methods, drug product formulation,
details on the manufacture of finished product as well as proposed product
packaging and labeling. Submission of an NDA does not assure FDA approval for
marketing. The application review process generally takes one to three years to
complete, although reviews of treatments for cancer and other severely
debilitating or life-threatening diseases may be accelerated. However, the
process may take substantially longer if, among other things, the FDA has
questions or concerns about the safety and/or efficacy of a product. No
assurance exists that the Company's drug products will qualify for expedited or
accelerated review procedures.
In general, the FDA traditionally has required at least two adequate
and well-controlled clinical studies demonstrating efficacy with sufficient
levels of statistical assurance. The recently enacted FDMA now allows the
consideration of one such study. However, additional information may be
required. For example, the FDA also may require long-term toxicity studies or
other studies relating to product safety or efficacy. Notwithstanding the
submission of such data, the FDA ultimately may decide that the application does
not satisfy its regulatory criteria for approval. Finally, the FDA may require
additional clinical tests following NDA approval to confirm safety and efficacy
(Phase IV clinical tests). Less extensive approval requirements can apply to
generic and other types of drugs, but no assurance exists that the Company's AD
and other nervous system disorder products, or any other drug products which the
Company may develop, will qualify for such abbreviated requirements.
Prospective manufacturers must also conform to the GMP requirements,
permit FDA inspection, and register and list drug products with the FDA. In
complying with GMP, manufacturers must continue to expend time, money and effort
in production, recordkeeping and quality assurance to ensure that the product
meets applicable specifications and other requirements. Failure to comply
subjects the manufacturer to possible FDA action, such as the suspension of
manufacturing, seizure of the product or voluntary recall of the product.
The product testing and approval process is likely to take a
substantial number of years and involves the expenditure of substantial
resources. The FDA also may require postmarket testing and surveillance to
monitor the use of the product and continued compliance with regulatory
requirements. Upon approval, a drug only may be marketed for the approved
indications in the approved dosage forms and at the approved dosages. Adverse
experiences with the product must be reported to the FDA. Product approvals may
be withdrawn if compliance with regulatory standards is not maintained or if
problems concerning safety or efficacy of the product occur following approval.
Foreign manufacturers of drug products intended for importation into
the United States also must comply with the GMP and are subject to periodic
inspection by the FDA or by local authorities under agreement with the FDA.
Other Regulation. The advertising of FDA-regulated products may be
subject to Federal Trade Commission jurisdiction. The Company also is subject to
regulations by the Occupational Safety and Health Administration and by the U.S.
Environmental
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Protection Agency under such statutes as the Toxic Substances Control Act, the
Resource Conservation and Recovery Act and other laws. Various states and other
foreign governments often have comparable health and environmental laws.
Foreign Regulation. The Company is subject in many countries to
regulatory requirements concerning drugs and devices and relating to human
clinical trials, marketing approvals and product testing.
For medical devices, from January 1, 1995, member countries of the
European Union are required to put in effect the Medical Devices Directive
("MDD"). This new legislation includes, among others, requirements with respect
to the design, safety, performance and manufacture of products. Under the system
established by the MDD, all medical devices other than active implants and in
vitro diagnostic products must qualify for CE Marking by June 14, 1998. During
the transitional period (from January 1, 1995 to June 14, 1998) medical devices
can be placed on the market and put into service if they comply with the
requirements of the MDD or national requirements that were in force on December
31, 1994.
In order to qualify for CE Marking, the manufacturer must comply with
the Essential Requirements of the MDD. These relate to safety and performance.
In order to demonstrate compliance with these requirements of the MDD, the
manufacturer must undergo conformity assessment which depends on the class of
the product. The Company has chosen as its conformity assessment EC
type-examination of the product by a Notified Body and assessment of the
manufacturer's quality system used in production by a Notified Body. The
Notified Body chosen by the Company is a Dutch non-governmental entity which,
after an accreditation proceeding, has been notified by the Dutch Competent
Authority to the European Commission that it may carry out conformity assessment
tasks under the MDD. Once all the necessary conformity assessment tasks have
been completed to the satisfaction of the Notified Body and the manufacturer is
convinced that it is in full compliance with the MDD, CE Marking may be affixed
on the products concerned.
Although member countries must accept for marketing medical devices
bearing a CE Marking without imposing further requirements related to product
safety and performance, each country may require the use of its own language on
labels and instructions for use. National Competent Authorities, who are
required to enforce compliance with the requirements of the MDD, can restrict,
prohibit and recall CE Marked products if they are considered to be unsafe. Such
a decision must be confirmed by the European Commission in order to be valid.
Member countries can impose additional requirements as long as they do not
violate the MDD or constitute technical barriers to trade. There can be no
assurances, however, that member countries will continue to recognize the
restrictions on such countries to impose additional requirements for CE Marked
products.
Within the European Union, premarket compliance for devices must be
supported by clinical data of a type and extent set out by European Union
directives, standards as interpreted by Competent Authorities and Notified
Bodies. The regulatory
compliance process for the commencement of clinical trials varies currently from
country to country. To the extent possible, the Company's clinical trials are
designed to develop a regulatory package sufficient for multi-country European
Union approval without the need to duplicate clinical trials for individual
country approvals.
The new post-1994 regimes for medical devices are based on directives.
Devices will be subject to, in addition to other future European Union or other
countries legislation, continued national regulation on pricing and
reimbursement, which may vary from country to country. Certain other
requirements such as clinical investigations and post marketing surveillance,
will probably be subject to significant variation among countries. The
regulation of drugs in the European Union is subject to a separate and different
regulatory framework which requires, among other things, premarket approval by
the applicable regulatory agencies before sale of such products.
PATENTS, TRADEMARKS AND TRADE SECRETS
Proprietary protection for the Company's product candidates, processes
and know-how is important to the Company's business. The Company's policy is to
file patent applications to protect technology, inventions and improvements that
are considered important to the development of its business. The Company also
relies upon trade secrets, know-how and continuing technological innovation to
develop and maintain its competitive position. The Company plans to aggressively
prosecute and defend its patents and proprietary technology.
The Company owns three issued U.S. patents, three pending U.S. patent
applications, and corresponding foreign patent applications relating to its
ADCON products. The three U.S. patents cover compositions included in the ADCON
products and
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the methods for their use. The Company is pursuing claims covering compositions
and methods related to those covered in the above-mentioned three issued patents
in its three pending U.S. patent applications.
The Company has been approached by a company regarding two issued
patents which are exclusively licensed to such company by a university, which
the company has alleged are infringed by the ADCON family of products. There can
be no assurance that such allegations will not result in the filing of a lawsuit
charging the Company with infringement. The Company could incur substantial
costs and diversion of management resources with respect to the defense of any
such lawsuit, which costs and diversion could have a material adverse effect on
the Company's business, prospects, financial condition and results of
operations. Further, there can be no assurance that infringement of these two
patents will not be found to exist, that the Company will not be enjoined from
making, using and selling its ADCON products, or that the Company will not be
ordered to pay damages that would have a material adverse effect on the
Company's ability to conduct its business. Moreover, there can be no assurance
that the sublicense under the patents, if necessary, will be available on
reasonable terms, if at all.
As a result of allegations made by Dr. Jerry Silver, an employee of
Case Western Reserve University ("CWRU"), and CWRU, that Dr. Silver is a
co-inventor of the Company's issued U.S. Patent No. 5,605,938, which is one of
the Company's three issued patents relating to its ADCON technology, and which
covers certain of the Company's ADCON products, the Company filed a civil action
in the United States District Court for the Northern District of Ohio, Eastern
Division, entitled Gliatech Inc. v. Dr. Jerry Silver and Case Western Reserve
University, Civil Action No. 1:97CV 2306, requesting, inter alia, a declaration
that Dr. Silver is not a co-inventor of the patent. On March 17, 1998, the suit
was dismissed pursuant to the terms and conditions of a Settlement Agreement,
effective as of February 20, 1998 by and among the Company, Jerry Silver and
CWRU.
A U.S. patent application, filed solely by the Company, has been issued
covering the composition of a matter for a different series of synthetic H3
receptor antagonist compounds. Several additional U.S. patent applications and
their corresponding foreign applications for an additional series of H3 receptor
antagonist and one series of H3 receptor antagonist compounds, their methods of
medical use and pharmaceutical compositions, are pending. No assurance can be
given that any claims relating to these products and methods will be issued.
The Company is prosecuting its patent applications with the U.S. Patent
and Trademark Office but the Company does not know whether any of its
applications will result in the issuance of any patents or, if any patents are
issued, whether any issued patent will provide significant proprietary
protection or will be circumvented or invalidated. During the course of patent
prosecution, patent applications are evaluated, inter alia, for utility,
novelty, nonobviousness and enablement. The U.S. Patent and Trademark Office may
require that the claims of an initially filed patent application be amended if
it is determined that the scope of the claims includes subject matter that is
not useful, novel, nonobvious or enabled. Furthermore, in certain instances, the
practice of a patentable invention may require a license from the holder of
dominant patent rights. In cases where one party believes that it has a claim to
an invention covered by a patent application or patent of a second party, the
first party may institute an interference proceeding in the U.S. Patent and
Trademark Office or such a proceeding may otherwise be declared by the Patent
and Trademark Office. In general, in an interference proceeding, the Patent and
Trademark Office would review the competing patents and/or patent applications
to determine the validity of the competing claims, including but not limited to
determining priority of invention. Any such determination would be subject to
appeal in the appropriate U.S. federal courts.
There can be no assurance that additional patents will be obtained by
the Company or that issued patents will provide substantial protection or be of
commercial benefit to the Company. The issuance of a patent is not conclusive as
to its validity or enforceability, nor does it provide the patent holder with
freedom to operate without infringing the patent rights of others. A patent
could be challenged by litigation and, if the outcome of such litigation were
adverse to the patent holder, competitors could be free to use the subject
matter covered by the patent, or the patent holder may license the technology to
others in settlement of such litigation. The invalidation of key patents owned
by or licensed to the Company or non-approval of pending patent applications
could create increased competition, with potential adverse effects on the
Company and its business prospects. In addition, there can be no assurance that
any patents on, or applications of, the Company's technology will not infringe
patents or proprietary rights of others or that licenses that might be required
as a result of such infringement for the Company's processes or products would
be available on commercially reasonable terms, if at all.
The Company cannot predict whether its or its competitors' patent
applications will result in valid patents being issued. Litigation, which could
result in substantial cost to the Company, may also be necessary to enforce the
Company's patent and proprietary rights and/or to determine the scope and
validity of others' proprietary rights. The Company may participate in
interference proceedings that may in the future be declared by the U.S. Patent
and Trademark Office to determine priority of invention, which could result in
substantial cost to the Company. There can be no assurance that the outcome of
any such litigation
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or interference proceedings will be favorable to the Company or that the Company
will be able to obtain licenses to technology that it may require or that, if
obtainable, such technology can be licensed at a reasonable cost.
The patent position of biotechnology and biopharmaceutical firms
generally is highly uncertain and involves complex legal and factual questions.
To date, no consistent policy has emerged regarding the breadth of claims
allowed in biotechnology and biopharmaceutical patents. Accordingly, there can
be no assurance that patent applications owned or licensed by the Company will
result in patents being issued or that the patents will afford protection
against competitors with similar technology.
The Company also attempts to protect its proprietary compounds,
products and processes by relying on trade secret laws, and on non-disclosure
and confidentiality agreements. The Company requires its employees,
consultants, outside scientific collaborators and sponsored researchers, and
other advisors to execute confidentiality agreements upon the commencement of
employment or consulting relationships with the Company. These agreements
generally provide that all confidential information developed or made known to
the individual during the course of the relationships is to be kept
confidential and not disclosed to third parties except in specific
circumstances. In the case of employees, the agreements provide that any
inventions conceived by the individual within the scope of his employment shall
be the exclusive property of the Company. There can be no assurance, however,
that these agreements will provide meaningful protection for any of the
Company's trade secrets in the event of unauthorized use or disclosure of such
information.
The medical device and healthcare industries have been characterized by
extensive litigation regarding patents and other intellectual property rights,
and companies in the medical device industry have employed intellectual property
litigation to gain a competitive advantage. There can be no assurance that the
Company will not become subject to patent infringement claims or litigation or
interference proceedings declared by the United States Patent and Trademark
Office ("USPTO") to determine the priority of invention. The defense and
prosecution of intellectual property suits, USPTO interference proceedings and
related legal and administrative proceedings are both costly and time-consuming.
Litigation may be necessary to enforce patents issued to the Company, to protect
trade secrets or know-how owned by the Company or to determine the
enforceability, scope and validity of the proprietary rights of others. Any
litigation or interference proceedings will result in substantial expense to the
Company and significant diversion of effort by the Company's technical and
management personnel. An adverse determination in litigation or interference
proceedings to which the Company may become a party, including any litigation
that may arise against the Company as described in "Item 3: Legal Proceedings"
below, could subject the Company to significant liabilities to third parties or
require the Company to seek licenses from third parties or prevent the Company
from marketing its products in certain areas, or at all. Although patent and
intellectual property disputes regarding medical devices have often been settled
through licensing or similar arrangements, such settlements may be substantial
and could include ongoing royalties. Furthermore, there can be no assurance that
the necessary licenses would be available to the Company on satisfactory terms,
if at all. Adverse determinations in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent the Company from marketing
its products, which would have a material adverse effect on the Company's
business, prospects, financial condition and results of operation.
EMPLOYEES
As of December 31, 1997, the Company had 62 full-time employees, 21 of
whom hold a Ph.D. or M.D. degree; 40 employees are engaged in, or directly
support, research and development; 11 employees are engaged in the sales and
marketing of the ADCON family of products and the remaining employees perform
executive or administrative functions.
ITEM 2. PROPERTIES.
The Company's personnel conduct the Company's operations at a 50,925
square foot leased facility in Beachwood, Ohio, a suburb of Cleveland which
expires on December 31, 2001. The Company currently subleases a 4,600 square
foot portion of this space. Although the Company believes its current facilities
are adequate for its existing product development programs, it is exploring
possible alternative sites for its operations; however, no definitive plans have
been made as of the date hereof.
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ITEM 3. LEGAL PROCEEDINGS.
The Company is currently subject to the following claims:
A complaint was filed by Patti Palazola, a participant in a clinical
trial for ADCON-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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of fiscal 1997.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.
The information under this Item 4A is furnished pursuant to Instruction
3 to Item 401(b) of Regulation S-K.
THOMAS O. OESTERLING, PH.D. Dr. Oesterling has served as President,
Chief Executive Officer and a Director of the Company since June 1989. From 1984
to 1986, he was Senior Vice President Research and Development of Collaborative
Research, Inc., a manufacturer of diagnostic reagents for genetic research and
testing, and from 1986 to 1989, he was President. Prior to 1984, Dr. Oesterling
had 18 years of experience in pharmaceutical and medical management and research
and development for the Upjohn Company, Johnson & Johnson, and Mallinckrodt Inc.
Dr. Oesterling received his Ph.D. in Pharmaceutical Chemistry from The Ohio
State University. Dr. Oesterling is 60 years old.
RODNEY E. DAUSCH. Rodney E. Dausch joined the Company as Vice President
and Chief Financial Officer in March 1995. In August 1995, Mr. Dausch was
elected Secretary of the Company. Prior to joining the Company and since
February 1994, Mr. Dausch was Vice President of Finance and Administration of
Oncologix, Inc., a biopharmaceutical company. From May 1987 to January 1994, he
was Vice President of Finance and Administration of Oncor, Inc., a manufacturer
of diagnostic products for detection of cancer diseases. Prior to 1987 he held
the position of Vice President of Finance and Administration with CPM Group,
Inc. and Bethesda Research Laboratories, Inc. Mr. Dausch holds a B.S. in
Accounting from Loyola College and is a Certified Public Accountant in the State
of Maryland. Mr. Dausch is 53 years old.
JON D. SCHOELER. Jon D. Schoeler has served as Vice President,
Worldwide Sales and Marketing since July 1996. Prior to joining the Company, and
since August 1995, Mr. Schoeler was Director, Worldwide Sales and Marketing at
St. Jude Medical, a biopharmaceutical company. From January 1991 to January
1995, he was Vice President of Sales and Marketing of American Cyanamid, a
manufacturer of medical devices. Mr. Schoeler is 48 years old.
MICHAEL A. ZUPON, PH.D. Dr. Zupon has served as Vice President, Product
Development and Operations since June 1993. Prior to joining the Company, Dr.
Zupon had 12 years of experience in a variety of product development positions
at Schering-Plough Corporation, a pharmaceutical company, most recently as
Director, Drug Delivery and Technology Assessment from January 1991 to June 1993
and as Director, Pharmaceutical Process Development from April 1988 to January
1991. Dr. Zupon received his Bachelor of Science and Ph.D. degrees from the
University of Utah College of Pharmacy and also received a Master of Business
Administration degree from the University of Utah Graduate School of Business.
Dr. Zupon is 43 years old.
14
<PAGE> 17
PART II
ITEM 5(a) MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
DIVIDEND POLICY
The Company has never paid any cash dividends on its capital stock and
does not anticipate paying any in the foreseeable future. The payment of future
dividends, if any, will be at the discretion of the Company's Board of Directors
after taking into account various factors, including the Company's financial
condition, operating results, current and anticipated cash needs and plans for
expansion.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock commenced trading on the Nasdaq National
Market under the symbol "GLIA" on October 17, 1995. The table below sets forth
for the quarterly periods indicated the high and low bid prices for the
Company's Common Stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1997
Fourth Quarter....................... $14 $7 5/8
Third Quarter........................ $12 1/8 $7 3/4
Second Quarter....................... $10 1/4 $7 5/8
First Quarter........................ $14 3/8 $7 11/16
FISCAL 1996
Fourth Quarter....................... $10 1/8 $7 3/4
Third Quarter........................ $10 3/4 $7 1/2
Second Quarter....................... $15 1/8 $10
First Quarter........................ $16 5/8 $8
</TABLE>
As of the close of business on March 20, 1998, the price of the Common
Stock of the Company was $10.25 per share and there were approximately 267
stockholders of record for the Common Stock of the Company.
ITEM 5(b) CHANGE IN 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 Annual Report on Form 10-Q. All such
proceeds were directly or indirectly paid to others pursuant to Rule
701(f)(4)(vii):
<TABLE>
<CAPTION>
<S> <C>
Construction..................................................0
Machinery and Equipment.......................................0
Real Estate...................................................0
Acquisition...................................................0
Repayment of debt.............................................0
Working Capital...............................................0
Temporary Investments (specify):
Commercial Paper.......................6,024,000
Corporate Bonds........................4,658,000
Other Short-Term Investments.............860,000
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
Other:
<S> <C>
Clinical Trials........................1,916,600
Research and Development...............4,204,600
Sales and Marketing....................1,983,800
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except share and per share data)
The following selected consolidated financial data of the Company for
the years ended December 31, 1993 through 1997 are derived from the consolidated
financial statements of the Company. The information presented below should be
read in conjunction with the Company's Consolidated Financial Statements and
related Notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Annual Report on
Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, INCEPTION TO
----------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES
Research contracts and licensing fees $ 0 $ 918 $ 2,217 $ 2,855 $ 2,954 $ 8,943
Product sales 0 86 182 901 1,536 2,706
Government grants 302 141 255 122 410 1,501
------- ------- -------- -------- -------- ---------
Total revenues 302 1,145 2,654 3,878 $4,900 $13,150
OPERATING COSTS AND EXPENSES
Research and development 4,441 4,600 5,107 6,120 6,952 33,998
Selling, general and administrative 1,674 2,365 2,599 4,070 4,401 18,580
Depreciation and amortization 312 272 170 166 293 1,738
Cost of product sales --- 58 123 342 614 1,136
------- ------- -------- -------- -------- ---------
Total operating costs and
expenses 6,427 7,295 7,999 10,698 12,260 55,452
------- ------- -------- -------- -------- ---------
Loss from operations (6,125) (6,150) (5,345) (6,820) (7,360) (42,302)
Settlement of claim (2,025) (2,025)
Interest income, net 211 98 360 1,120 824 3,252
------- ------- -------- -------- -------- ---------
NET LOSS $(5,914) $(6,052) $ (4,985) $ (5,700) $ (8,561) $ (41,075)
======= ======= ======== ======== ========= =========
Basic and diluted net loss per common share $(35.14) $ (3.28) $ (0.78) $ (1.16)
======== ======== ======== =========
Shares used for purposes of computing basic
and diluted net loss per common share 172,244 1,518,955 7,313,230 7,354,124
========== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments $ 4,321 $ 4,671 $ 23,023 $ 17,996 $ 11,542
Working capital 2,860 1,511 21,762 15,821 9,370
Total assets 6,148 6,716 25,346 20,804 14,805
Deficit accumulated during the
development stage (16,716) (22,768) (27,754) (33,454) (42,014)
Total stockholders' equity $ 4,177 $ 3,122 $ 23,182 $ 17,627 $ 11,440
</TABLE>
ITEM 7. 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 research, development and
commercialization of the 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-L and ADCON-T/N in August 1995 and
January 1996, respectively, thereby allowing ADCON-L and ADCON-T/N to be
marketed in the 19 European Union countries
16
<PAGE> 19
which recognize CE Marking for lumbar disc surgery and tendon and peripheral
nerve surgeries, respectively. The Company is currently marketing ADCON-L and
ADCON-T/N through independent medical device distributors in 29 countries
outside the U.S., including the major countries in the European Union pursuant
to its CE Marking. In addition, the Company signed a development and exclusive
license agreement in December 1996 with Chugai for the sale of ADCON-L and
ADCON-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 ADHD, sleep disorders, anxiety and AD. In October 1994, the Company
entered into a strategic alliance with Janssen to collaborate on the discovery
and development of therapeutic models 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 derived primarily from
contract research payments relating to its strategic alliance with Janssen. The
Company has also received revenues from product sales of ADCON-L and ADCON-T/N
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 family of products, primarily ADCON-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 $42.0 million for the period from
inception of operations (August 31, 1988) through December 31, 1997. 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.
RESULTS OF OPERATIONS
Years ended December 31, 1997 and 1996
Revenues. Total revenues increased approximately 26.4% to $4.9 million
in 1997 from $3.9 million in 1996. The increase in total revenues is primarily a
result of a 70.5% increase in product sales to $1.5 million in 1997 from
$901,000 in 1996. This increase in product sales primarily resulted from
increased sales of the Company's ADCON-L and ADCON-T/N products in certain
European countries, as well as other countries outside the U.S. In addition,
research contract revenues increased slightly to $3.0 million in 1997 from $2.9
million in 1996. These research contract revenues were from the Company's
research contract with Janssen.
The Company's government-funded grant revenues increased to $410,000 in
1997 from $122,000 in 1996. This increase was the result of a higher level of
government funded revenues 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 histamine H3 receptor antagonists to treat ADHD. In
addition, in the fourth quarter of 1997, the Company was awarded 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 14.6%, to $12.3 million in 1997 compared to $10.7 million in 1996.
Cost of products sold increased to $614,000 in 1997 compared to $342,000 in 1996
and increased as a percentage of product sales in 1997 to 40.0% from 37.9% in
1996. This increase was primarily due to slightly increased manufacturing
overhead costs which were added in anticipation of larger planned production
volumes which were not obtained in 1997.
Research and development expenses increased by approximately 13.6% to
$7.0 million in 1997 from $6.1 million in 1996. This increase was primarily due
to: (i) increased research contract expenses and purchases of materials for
preclinical and animal toxicology studies for the lead compound which is being
developed by the Company for the treatment of ADHD; (ii) increased staffing and
clinical consulting costs associated with the Premarket Approval Application
filed with the FDA for ADCON-L; (iii) increased costs associated with the
development of a new delivery system for ADCON-L and (iv) increased staffing and
clinical research costs associated with preclinical and clinical development of
ADCON-P.
Selling, general and administrative expenses increased 8.1% to $4.4
million in 1997, compared to $4.1 million in 1996. The increase was primarily
due to increases in expenses resulting from Gliatech's sales and marketing
efforts for ADCON-L and ADCON-T/N in certain European markets and other selected
countries outside of the U.S.
Depreciation and amortization expense was $293,000 in 1997 compared to
$166,000 in 1996. The increase was primarily due to increased amortization
resulting from leasehold improvements made in 1997 and 1996.
17
<PAGE> 20
Other Income and Expenses. Net interest income decreased 26.4% to
$824,000 in 1997 from $1.1 million in 1996. This decrease was due to lower cash
and cash equivalents and short-term investment balances throughout 1997 as
compared to 1996.
In the fourth quarter of 1997, the Company incurred a one-time non-cash
charge of $2.0 million relating to the Company's settlement of a claim
involving the Company. See "Item 3: Legal Proceedings" and Note K to the Notes
to Consolidated Financial Statements included herein.
Net Loss. Gliatech's net loss increased 50.2% to $8.6 million in 1997,
compared to $5.7 million in 1996. The net loss, excluding a one-time non-cash
charge of $2.0 million for settlement of the litigation, increased 14.7% to $6.5
million in 1997 from $5.7 million in 1996. The increase in net loss is a result
of increased total expenses, which were slightly offset by increased revenues as
discussed above. The net loss per share was $1.16 in 1997, compared to $0.78 in
1996 and, excluding the one-time non-cash charge for settlement of the
litigation, $0.89 in 1997, compared to $0.78 in 1996.
Years ended December 31, 1996 and 1995
Revenues. Total revenues increased approximately 46.1% to $3.9 million
in 1996 from $2.7 million in 1995. The increase in total revenues is primarily
an increase in product sales to $901,000 in 1996 from $182,000 in 1995. The
increase in product sales in 1996 resulted from sales of the Company's ADCON-L
and ADCON-T/N products in certain European countries, as well as Australia and
New Zealand.
The Company had research contract revenues in 1996 of $2.9 million from
its research contract with Janssen compared to research revenues of $2.2 million
in 1995. In September 1995, the Company entered into an addendum to the Janssen
Agreement in order to expand the scope of the collaboration with Janssen on AD
to include research and development relating to inhibitors of complement
activation. This addendum to the Janssen Agreement added approximately $875,000
to research contract revenues in 1996 and $290,000 to research contract revenues
in 1995. Under the terms of the expanded agreement, Janssen increased its
research funding and milestone payments by 50% beginning in September 1995.
The Company's government-funded research grant revenues were $122,000
in 1996 and $255,000 in 1995. The level of grant revenues was a direct result
of the number of government-funded research grants awarded the Company in each
year.
Operating Costs and Expenses. Total operating expenses were $10.7
million in 1996 compared to $8.0 million in 1995. Cost of products sold
increased 178.6% to $342,000 in 1996 from $123,000 in 1995. The increase in cost
of products sold was due primarily to the increases in product sales for the
corresponding period. However, cost of products sold decreased as a percentage
of product sales in 1996 to 37.9% from 67.3% in 1995. This decrease was
primarily due to improved absorption of manufacturing overhead costs as a result
of increased production volumes in 1996. In both periods, cost of products sold
included costs associated with the start-up of manufacturing processes with
European Medical Contract Manufacturing ("EMCM"), a third party manufacturer of
ADCON-L and ADCON-T/N.
Expenses for research and development increased 19.8% to $6.1 million
in 1996 from $5.1 million in 1995. This increase was due primarily to increased
staffing and clinical contract expenses resulting from the initiation of pivotal
clinical trials in the U.S. for both ADCON-L and ADCON-T/N beginning in the
fourth quarter of 1995 and continuing throughout 1996. Additionally, the
increase is a result of additions in staffing and purchases of laboratory
supplies and services relating to increased research activities beginning in the
first quarter of 1996 with respect to AD and Cognition Modulation programs as
well as write-offs of costs associated with patents which were abandoned due to
changes in the technology pursuits of the Company. Increased expenses associated
with the Company's AD program are funded under the Company's research agreement
with Janssen.
Selling, general and administrative expenses increased 56.6% to $4.1
million in 1996 from $2.6 million in 1995. This increase was primarily due to an
increase in sales and marketing expenses as the Company continued to expand its
sales and marketing efforts for its ADCON-L and ADCON-T/N products in Europe and
in other countries outside the U.S. Additionally, the Company incurred increased
general and administrative expenses of $230,000 in 1996 associated with the
filing of a registration statement with the U.S. Securities and Exchange
Commission for an offering of Common Stock which was subsequently withdrawn due
to unfavorable market conditions. The Company also incurred increased general
and administrative expenses in 1996 associated with its first full year of
reporting as a publicly traded company.
Depreciation and amortization expense was $166,000 in 1996 compared to
$170,000 in 1995. This expense decreased because several Company assets had
become fully depreciated.
18
<PAGE> 21
Other Income and Expenses. Net interest income increased 211.2% to $1.1
million in 1996 from $360,000 in 1995. The increase in 1996 was due primarily to
the interest earned on the cash received on the October 1995 initial public
offering of Common Stock. In addition, interest expense decreased in both
periods as the Company paid down its line of credit and fully repaid its capital
leases.
Net Loss. The Company's net loss increased 14.3% to $5.7 million in
1996, compared to $5.0 million in 1995. The increase in net loss is a result of
increased total expenses, which were slightly offset by increased revenues as
discussed above. The net loss per share was $0.78 in 1996, compared to $3.28 in
1995.
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 December 31, 1997, the Company has recognized revenue of
$8.9 million from its research agreement with Janssen, $2.7 million from product
sales and $1.5 million from several federally-sponsored research grants. The
Company has also established a $1.5 million line of credit with a bank, secured
by certain assets of the Company. As of December 31, 1997, 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
December 31, 1997 and December 31, 1996, the Company's cash and cash equivalents
and short-term investments totaled $11.5 million and $18.0 million,
respectively. 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-L, the commercial success of its ADCON 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 the Company's
product candidates, the status of competitive products and the establishment of
additional manufacturing capacity.
In 1996 and 1995, the Company received revenues from two Phase I SBIR
grants for up to $100,000 each from the NINDS division of the National Institute
of Health relating to the development of histamine H3 receptor agents. In
February 1997, the Company was awarded a Phase II SBIR Program grant from the
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 from the NINDS and the 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 costs for commercialization
of its ADCON family of products, additional research and development costs for
ADCON-A, ADCON-I and ADCON-C 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 shareholders 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.
Net Operating Loss Carryforwards. As of December 31, 1997, the Company
has available for federal income tax purposes net operating loss carryforwards
of approximately $17.5 million and research and development credit carryforwards
of approximately $2.2 million. These carryforwards expire at various dates
between 2003 and 2012. The Company has offset the tax benefit of the net
19
<PAGE> 22
operating loss and tax credit carryforwards with a valuation allowance as
realization of the benefit is not assured. Pursuant to the Tax Reform Act of
1986, the utilization of net operating loss and research and development tax
credit carryforwards for tax purposes may be subject to an annual limitation if
a cumulative change in ownership of more than 50% occurs over a three- year
period. The future issuance of securities by the Company and/or sales of
securities by the Company's principal stockholders could result in such a change
in ownership. See Note F of Notes to Consolidated Financial Statements included
herein.
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 date information beyond the year 1999, the Company is unable to
determine the extent to which year 2000 issues will affect its independent
distributors or EMCM in tracking sales, orders or 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 Annual Report on
Form 10-K 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
forward-looking statements. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results of the Company to be different from expectations expressed or implied by
such forward-looking statements. Such factors include, but are not limited to,
the uncertainty of final regulatory approvals of the PMA application for
ADCON-L, including the timing and content of decisions made by the FDA,
commercial uncertainty of market acceptance of the Company's ADCON family of
products, delays in product development of other ADCON products, uncertainty due
to 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 products, the ability to renew research collaborations, the productivity
of distributors of the ADCON products, shortages of supply of ADCON 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 to the Company's proprietary rights in its products, the loss of key
management 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
guaranteed of future performance and that actual results or developments may
differ materially from those projected in the forward-looking statements. The
accompanying information contained in this Annual Report on Form 10-K,
including, without limitation, the information set forth in this section and
under "Item 1: Business," identifies important factors that could cause such
differences.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements
Report of Independent Auditors.
Consolidated Balance Sheets at December 31, 1996 and 1997.
Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997 and for the period from inception of operations
(August 31, 1988) through December 31, 1997.
Consolidated Statements of Changes in Stockholders' Equity for the
period from inception of operations (August 31, 1988) through December
31, 1988 and for the years ended December 31, 1989, 1990, 1991, 1992,
1993, 1994, 1995, 1996 and 1997.
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997 and for the period from inception of operations
(August 31, 1988) through December 31, 1997.
Notes to Consolidated Financial Statements.
Financial Statement Schedules. All schedules for which provision is
made in the applicable accounting regulation of the Securities and
Exchange Commission are not required under the related instructions or
are inapplicable and therefore are omitted.
20
<PAGE> 23
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Gliatech Inc.
We have audited the accompanying consolidated balance sheets of Gliatech Inc.
and Subsidiaries (a development stage enterprise) as of December 31, 1996 and
1997, and the consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997, and for the period from inception of operations (August 31, 1988)
through December 31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Gliatech Inc. and Subsidiaries at December 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, and for the period from
inception of operations (August 31, 1988) through December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 10, 1998
21
<PAGE> 24
Gliatech Inc. and Subsidiaries
(A Development Stage Enterprise)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1996 1997
--------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,120,547 $ 5,601,398
Short-term investments 8,875,222 5,940,476
Accounts receivable 331,157 544,051
Government grants receivable 7,290 207,080
Inventories 387,118 164,078
Prepaid expenses and other 277,276 278,714
--------------------------------
Total current assets 18,998,610 12,735,797
Property and equipment, net 1,129,671 1,277,519
Other assets, net 675,959 792,072
--------------------------------
TOTAL ASSETS $20,804,240 $14,805,388
=================================
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
DECEMBER 31
1996 1997
-----------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES:
Accounts payable and other accrued expenses $ 1,369,583 $ 1,686,356
Accrued compensation 204,328 179,018
Accrued clinical trial costs 796,861 690,885
Deferred research contract revenue 806,359 809,359
-----------------------------------
Total current liabilities 3,177,131 3,365,618
Stockholders' equity:
Common Stock, $.01 par value:
Authorized shares--30,000,000 at December 31, 1996 and 1997;
Issued and outstanding shares--7,320,089 at December 31,
1996 and 7,401,273 at December 31, 1997
73,201 74,013
Additional paid-in capital 51,007,673 53,379,810
Deficit accumulated during the development stage (33,453,765) (42,014,053)
-----------------------------------
Total stockholders' equity 17,627,109 11,439,770
-----------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,804,240 $ 14,805,388
===================================
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 26
Gliatech Inc. and Subsidiaries
(A Development Stage Enterprise)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION OF
OPERATIONS
(AUGUST 31, 1988)
THROUGH
YEAR ENDED DECEMBER 31 DECEMBER 31,
1995 1996 1997 1997
----------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Research contracts and licensing fees $ 2,216,668 $ 2,854,860 $ 2,954,000 $ 8,943,219
Product sales 182,233 900,932 1,536,440 2,705,945
Government grants 254,705 122,183 410,333 1,500,715
----------------------------------------------------------------
Total revenues 2,653,606 3,877,975 4,900,773 13,149,879
OPERATING COSTS AND EXPENSES
Research and development 5,107,154 6,119,533 6,952,247 33,998,319
Selling, general and administrative 2,599,290 4,070,173 4,400,535 18,579,630
Depreciation and amortization 170,395 166,411 292,746 1,737,535
Cost of product sales 122,589 341,534 614,424 1,136,395
----------------------------------------------------------------
Total operating costs and expenses 7,999,428 10,697,651 12,259,952 55,451,879
----------------------------------------------------------------
Loss from operations (5,345,822) (6,819,676) (7,359,179) (42,302,000)
Settlement of claim (2,025,000) (2,025,000)
Interest income, net 359,961 1,120,121 823,891 3,251,969
----------------------------------------------------------------
NET LOSS $ (4,985,861) $ (5,699,555) $ (8,560,288) $(41,075,031)
================================================================
Basic and diluted net loss per common share $ (3.28) $ (0.78) $ (1.16)
=================================================
Shares used for purposes of computing basic
and diluted net loss per common share 1,518,955 7,313,230 7,354,124
=================================================
</TABLE>
See notes to consolidated financial statements.
24
<PAGE> 27
Gliatech Inc. and Subsidiaries
(A Development Stage Enterprise)
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Convertible Preferred Convertible Class A
Stock Common Stock Common Stock
--------------------------- ------------------------------------------------------------
Number of Number of Contra Number of
Shares Par Value Shares Par Value Account Shares Par Value
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1988 0 $ 0 0 $ 0 $ 0 0 $ 0
Issuance of Redeemable Convertible
Series A Preferred Stock at $1.44
per share 1,806,667 18,067
Stock award of Convertible Class A
Common Stock 450,000 4,500 (1,683)
Accretion of Redeemable Convertible
Series A Preferred Stock
Amortization of contra account 140
Net loss--1988
-----------------------------------------------------------------------------------------
Balance at December 31, 1988 1,806,667 18,067 450,000 4,500 (1,543) 0 0
Accretion of Redeemable Convertible
Series A Preferred Stock
Amortization of contra account 561
Net loss--1989
-----------------------------------------------------------------------------------------
Balance at December 31, 1989 1,806,667 18,067 450,000 4,500 (982) 0 0
Issuance of Redeemable Convertible
Series B Preferred Stock at $2.16
per share 1,467,593 14,676
Accretion of Redeemable Convertible
Series A Preferred Stock
Amortization of contra account 561
Net loss--1990
-----------------------------------------------------------------------------------------
Balance at December 31, 1990 3,274,260 32,743 450,000 4,500 (421) 0 0
Issuance of Convertible Series B
Preferred Stock at $2.16 per 615,741 6,157
share, net of expense
Exercise of stock options 12,700 127
Amortization of contra account 421
Compensation related to grant of
stock options
Net loss--1991
-----------------------------------------------------------------------------------------
Balance at December 31, 1991 3,890,001 38,900 450,000 4,500 0 12,700 127
<CAPTION>
Deficit
Accumulated
Additional during the Total
Paid-in Deferred Development Stockholders'
Capital Compensation Stage Equity
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at August 31, 1988 $ 0 $ 0 $ 0 $ 0
Issuance of Redeemable Convertible
Series A Preferred Stock at $1.44
per share 2,583,535 2,601,602
Stock award of Convertible Class A
Common Stock 2,817
Accretion of Redeemable Convertible
Series A Preferred Stock 111,200 (111,200) 0
Amortization of contra account 140
Net loss--1988 (294,123) (294,123)
-----------------------------------------------------------
Balance at December 31, 1988 2,694,735 0 (405,323) 2,310,436
Accretion of Redeemable Convertible
Series A Preferred Stock 448,422 (448,422) 0
Amortization of contra account 561
Net loss--1989 (802,926) (802,926)
-----------------------------------------------------------
Balance at December 31, 1989 3,143,157 0 (1,656,671) 1,508,071
Issuance of Redeemable Convertible
Series B Preferred Stock at $2.16
per share 3,155,324 3,170,000
Accretion of Redeemable Convertible
Series A Preferred Stock 379,400 (379,400) 0
Amortization of contra account 561
Net loss--1990 (1,855,903) (1,855,903)
-----------------------------------------------------------
Balance at December 31, 1990 6,677,881 0 (3,891,974) 2,822,729
Issuance of Convertible Series B
Preferred Stock at $2.16 per 1,309,630 1,315,787
share, net of expense
Exercise of stock options 4,318 4,445
Amortization of contra account 421
Compensation related to grant of 130,250 (81,250) 49,000
stock options
Net loss--1991 (2,829,868) (2,829,868)
-----------------------------------------------------------
Balance at December 31, 1991 8,122,079 (81,250) (6,721,842) 1,362,514
</TABLE>
25
<PAGE> 28
Gliatech Inc. and Subsidiaries
(A Development Stage Enterprise)
Consolidated Statements of Changes in Stockholders' Equity--Continued
<TABLE>
<CAPTION>
Convertible Preferred Convertible Class A
Stock Common Stock Common Stock
--------------------------- ------------------------------------------------------------
Number of Number of Contra Number of
Shares Par Value Shares Par Value Account Shares Par Value
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Convertible Series C
Preferred Stock at $1.50 per 8,245,784 82,459
share, net of expense
Exercise of stock options 2,000 20
Issuance of stock bonus 18,000 180
Compensation related to grant of
stock options
Net loss--1992
-----------------------------------------------------------------------------------------
Balance at December 31, 1992 12,135,785 121,359 450,000 4,500 0 32,700 327
Exercise of stock options 2,630 26
Issuance of stock bonus 18,200 182
Issuance of Common Stock 22,000 220
Compensation related to grant of
stock options
Net loss--1993
-----------------------------------------------------------------------------------------
Balance at December 31, 1993 12,135,785 121,359 450,000 4,500 0 75,530 755
Exercise of stock options 135 1
Issuance of Convertible Series D
Preferred Stock and warrants at
$1.50 per share, net of expense 2,420,001 24,200
Issuance of stock bonus 6,598 66
Issuance of Common Stock 680 7
Issuance of Convertible Series E
Preferred Stock and warrants at
$1.50 per share, net of expense 1,000,000 10,000
Compensation related to grant of
stock options
Net loss--1994
-----------------------------------------------------------------------------------------
Balance at December 31, 1994 15,555,786 155,559 450,000 4,500 0 82,943 829
<CAPTION>
Deficit
Accumulated
Additional during the Total
Paid-in Deferred Development Stockholders'
Capital Compensation Stage Equity
------------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of Convertible Series C
Preferred Stock at $1.50 per 12,237,689 12,320,148
share, net of expense
Exercise of stock options 680 700
Issuance of stock bonus 67,320 67,500
Compensation related to grant of
stock options 116,740 (29,413) 87,327
Net loss--1992 (4,080,101) (4,080,101)
------------------------------------------------------------
Balance at December 31, 1992 20,544,508 (110,663) (10,801,943) 9,758,088
Exercise of stock options 3,295 3,321
Issuance of stock bonus 136,318 136,500
Issuance of Common Stock 164,780 165,000
Compensation related to grant of
stock options (3,987) 31,961 27,974
Net loss--1993 (5,913,836) (5,913,836)
------------------------------------------------------------
Balance at December 31, 1993 20,844,914 (78,702) (16,715,779) 4,177,047
Exercise of stock options 289 290
Issuance of Convertible Series D
Preferred Stock and warrants at
$1.50 per share, net of expense 3,402,228 3,426,428
Issuance of stock bonus 49,434 49,500
Issuance of Common Stock 5,093 5,100
Issuance of Convertible Series E
Preferred Stock and warrants at
$1.50 per share, net of expense 1,479,500 1,489,500
Compensation related to grant of
stock options (805) 27,699 26,894
Net loss--1994 (6,052,570) (6,052,570)
------------------------------------------------------------
Balance at December 31, 1994 25,780,653 (51,003) (22,768,349) 3,122,189
</TABLE>
26
<PAGE> 29
Gliatech Inc. and Subsidiaries
(A Development Stage Enterprise)
Consolidated Statements of Changes in Stockholders' Equity--Continued
<TABLE>
<CAPTION>
Convertible Preferred Convertible Class A
Stock Common Stock Common Stock
--------------------------- ------------------------------------------------------------
Number of Number of Contra Number of
Shares Par Value Shares Par Value Account Shares Par Value
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Exercise of stock options 13,850 139
Redemption of Common Stock (4,040) (40)
Issuance of Convertible Series F
Preferred Stock at $1.85 per 2,702,703 27,027
share, net of expense
Issuance of stock bonus 12,092 120
Issuance of Common Stock 12,061 121
Issuance of Common Stock in initial
public offering, net of expense 2,300,000 23,000
Conversion of Preferred Stock and
Class A Common Stock (18,258,489) (182,586) (450,000) (4,500) 4,718,015 47,180
Exercise of stock warrants 162,944 1,629
Compensation related to grant of
stock options
Net loss -- 1995
-----------------------------------------------------------------------------------------
Balance at December 31, 1995 0 0 0 0 0 7,297,865 72,978
Exercise of stock options 12,175 122
Issuance of stock bonus 6,088 61
Expenses of issuance of common stock
Exercise of stock warrants 3,961 40
Compensation related to grant of
stock options
Net loss -- 1996
-----------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 0 0 0 0 0 7,320,089 73,201
Exercise of stock options 76,000 760
Issuance of stock bonus 5,184 52
Settlement of claim
Net loss -- 1997
-----------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 0 $ 0 0 $ 0 $ 0 7,401,273 $ 74,013
=========================================================================================
<CAPTION>
Accumulated
Additional during the Total
Paid-in Deferred Development Stockholders'
Capital Compensation Stage Equity
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Exercise of stock options 34,499 34,638
Redemption of Common Stock (30,295) (30,335)
Issuance of Convertible Series F
Preferred Stock at $1.85 per 4,626,062 4,653,089
share, net of expense
Issuance of stock bonus 90,567 90,687
Issuance of Common Stock 102,390 102,511
Issuance of Common Stock in initial
public offering, net of expense 19,646,134 19,669,134
Conversion of Preferred Stock and
Class A Common Stock 139,906 0
Exercise of stock warrants 498,372 500,001
Compensation related to grant of (1,500) 27,892 26,392
stock options
Net loss -- 1995 (4,985,861) (4,985,861)
-----------------------------------------------------------
Balance at December 31, 1995 50,886,788 (23,111) (27,754,210) 23,182,445
Exercise of stock options 91,191 91,313
Issuance of stock bonus 51,688 51,749
Expenses of issuance of common stock (21,954) (21,954)
Exercise of stock warrants (40) 0
Compensation related to grant of
stock options 23,111 23,111
Net loss -- 1996 (5,699,555) (5,699,555)
-----------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 51,007,673 0 (33,453,765) 17,627,109
Exercise of stock options 306,365 307,125
Issuance of stock bonus 40,772 40,824
Settlement of claim 2,025,000 2,025,000
Net loss -- 1997 (8,560,288) (8,560,288)
-----------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ 53,379,810 $ 0 $(42,014,053) $ 11,439,770
===========================================================
</TABLE>
See notes to consolidated financial statements.
27
<PAGE> 30
Gliatech Inc. and Subsidiaries
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Period from Inception
of Operations
(August 31, 1988)
Year Ended December 31 through
1995 1996 1997 December 31, 1997
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities
Net loss $ (4,985,861) $ (5,699,555) $ (8,560,288) $ (41,075,031)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 170,395 166,411 292,746 1,737,535
Patent cost write-off 27,000 277,889 48,668 507,742
Loss on disposal of equipment 102,000
Compensation from issuance of stock and stock options 72,303 23,111 286,609
Settlement of claim 2,025,000 2,025,000
Changes in operating assets and liabilities:
Accounts receivable (52,088) (192,729) (212,894) (544,051)
Inventory 22,596 30,541 223,040 (164,078)
Government grants receivable and other assets (148,809) 61,834 (201,228) (495,793)
Accounts payable and other accrued expenses 152,491 327,822 316,773 1,679,685
Deferred contract research revenue (1,235,414) 527,264 3,000 809,359
Other liabilities (213,808) 610,303 (90,462) 1,313,334
---------------------------------------------------------------
Net cash used in operating activities (6,191,195) (3,867,109) (6,155,645) (33,817,689)
Investing activities
Sale (purchase) of short-term investments, net 1,708,221 (6,632,281) 2,934,746 (5,940,476)
Payment for patent rights and trademarks (144,622) (114,629) (186,812) (1,372,557)
Payment of organization costs (139,779)
Purchase of property and equipment (151,609) (715,153) (418,563) (2,399,563)
---------------------------------------------------------------
Net cash provided by (used in) investing activities 1,411,990 (7,462,063) 2,329,371 (9,852,375)
Financing activities
Payment of demand note from bank (400,000)
Principal payments on capital lease obligations (43,228) (565,601)
Proceeds from sale and leaseback 75,131
Proceeds from issuance of Preferred Stock, net 4,653,089 28,976,554
Proceeds from issuance of Common Stock, net 19,669,134 (21,954) 19,817,280
Proceeds from exercise of stock options 60,903 91,313 307,125 468,097
Proceeds from exercise of warrants 500,001 500,001
---------------------------------------------------------------
Net cash provided by (used in) financing activities 24,839,899 (330,641) 307,125 49,271,462
---------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 20,060,694 (11,659,813) (3,519,149) 5,601,398
Cash and cash equivalents at beginning of year/period 719,666 20,780,360 9,120,547
---------------------------------------------------------------
Cash and cash equivalents at end of year/period $ 20,780,360 $ 9,120,547 $ 5,601,398 $ 5,601,398
===============================================================
</TABLE>
See notes to consolidated financial statements.
28
<PAGE> 31
Gliatech Inc. and Subsidiaries
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
Years Ended December 31, 1995, 1996 and 1997
A. BACKGROUND AND ACCOUNTING POLICIES
BACKGROUND
Gliatech Inc. is engaged in the development and commercialization of medical
devices designed to inhibit excess postsurgical scarring and adhesion following
surgery. In addition, Gliatech Inc. is pursuing the development of small
molecule drug products for the treatment of certain central nervous system
disorders, including cognitive disorders and Alzheimer's disease. Gliatech Inc.
began operations on August 31, 1988 and is currently in the development stage,
as operations consist primarily of research and development expenditures, and
significant revenues from planned principal operations have not yet been
realized. Product sales consist of sales of Gliatech Inc.'s first two medical
device products, ADCON-L and ADCON-T/N, primarily to independent distributors
in Europe, Australia and New Zealand. The Company recognizes revenue from
product sales upon shipment.
The consolidated financial statements reflect the financial position and results
of operations of Gliatech Inc. and its wholly-owned subsidiaries (the
"Company"). Intercompany balances and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The carrying amount of the
Company's cash equivalents approximates fair value due to the short maturity of
those investments. Cash equivalents are primarily in commercial paper.
SHORT-TERM INVESTMENTS
The Company's short-term investments, all of which are classified as
available-for-sale, consist primarily of corporate bonds. Such investments are
stated at cost, which approximates fair value due to the short-term maturities
of these securities.
INVENTORIES
Inventories are stated at the lower of cost or market and are valued using the
first-in, first-out method.
29
<PAGE> 32
Gliatech Inc. and Subsidiaries
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements--Continued
A. BACKGROUND AND ACCOUNTING POLICIES--CONTINUED
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Laboratory and office equipment and
leasehold improvements are depreciated on the straight-line basis over the
shorter of the lease period or the estimated useful lives (5 to 10 years).
PATENT RIGHTS AND TRADEMARKS
Patent rights are amortized on the straight-line basis over the shorter of the
estimated useful life of the patented technology or the useful life of the
patent, beginning at the time the patent is granted. Costs associated with
patents that are abandoned are expensed at the date of abandonment. Trademark
costs are amortized on the straight-line basis over the estimated useful life of
the trademark, beginning at the time the trademark is granted.
GOVERNMENT GRANTS
Revenues from government grants are recognized ratably over the period of the
grant.
RESEARCH CONTRACTS AND LICENSING FEE REVENUE
Revenue from the research collaboration agreements are recorded when earned as
defined under the terms of the agreements. Periodic research funding payments
received which are related to future performance are deferred and recognized as
income when earned. Licensing fees and other milestone payments are recognized
as income when earned.
INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS No. 109, the
liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the currently enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Prior to the adoption of SFAS No. 109,
income tax expense was determined using the deferred method prescribed by
Accounting Principles Board Opinion (APBO) No. 11, Accounting for Income Taxes.
30
<PAGE> 33
Gliatech Inc. and Subsidiaries
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements--Continued
A. BACKGROUND AND ACCOUNTING POLICIES--CONTINUED
BASIC AND DILUTED NET LOSS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128,
Earnings per Share. SFAS No. 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options and warrants. Diluted earnings per share is very similar to
the previously reported fully diluted earnings per share. On February 3, 1998,
the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB)
No. 98 which, among other things, supersedes SAB No. 83 regarding the
computation of earnings per share in connection with a company's initial public
offering (IPO) of common stock and requires conformity with SFAS No. 128. SAB
No. 83 was used by the Company in computing its pro forma net loss per share
prior to its IPO that occurred in October 1995, whereby common and common
equivalent shares, including preferred stock (all of which converted upon the
completion of the IPO) issued by the Company prior to the IPO were included in
the calculation of the shares used in computing pro forma net loss per share,
even if they were anti-dilutive, which differs from the requirement of SFAS No.
128.
Basic and diluted net loss per common share for 1995 and 1996 has been restated
to conform to SFAS No. 128 and SAB No. 98 requirements. Basic and diluted net
loss per common share is based on the weighted average number of common shares
outstanding. For 1995, 90,000 common equivalent shares relating to convertible
Class A common stock were assumed to be outstanding for the entire year since
such shares were issued for a nominal amount. Outstanding common equivalent
shares relating to stock options and warrants and convertible preferred stock
outstanding prior to the IPO are excluded as their effect is anti-dilutive.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with APBO No.
25, Accounting for Stock Issued to Employees.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
31
<PAGE> 34
Gliatech Inc. and Subsidiaries
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements--Continued
A. BACKGROUND AND ACCOUNTING POLICIES--CONTINUED
NEW PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This statement establishes standards for
reporting financial and descriptive information about operating segments. Under
SFAS No. 131, information pertaining to the Company's operating segments will be
reported on the basis that is used internally for evaluating segment performance
and making resource allocation determinations. Management is currently studying
the potential effects of adoption of this statement, which is required in 1998.
B. INVENTORIES
Inventories consist of:
DECEMBER 31
1996 1997
-----------------------------------
Raw materials $ 129,095 $ 36,755
Work in process 196,502 71,572
Finished goods 61,521 55,751
-----------------------------------
$ 387,118 $ 164,078
===================================
As of December 31, 1997, the Company had purchase commitments of $387,000 for
inventory.
32
<PAGE> 35
Gliatech Inc. and Subsidiaries
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements--Continued
C. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1997
------------------------------------
<S> <C> <C>
Laboratory equipment $ 1,138,398 $ 1,213,267
Office equipment 410,583 485,674
Leasehold improvements 782,782 1,051,385
------------------------------------
2,331,763 2,750,326
Accumulated depreciation and amortization (1,202,092) (1,472,807)
------------------------------------
PROPERTY AND EQUIPMENT, NET $ 1,129,671 $ 1,277,519
====================================
D. OTHER ASSETS
Other assets consist of:
DECEMBER 31
1996 1997
--------------------------------
Patent rights, net of accumulated
amortization of $60,712 at December 31, 1996 and
$82,744 at December 31, 1997 $ 605,385 $ 718,973
Trademark costs, net 56,810 59,503
Other 13,764 13,596
--------------------------------
$ 675,959 $ 792,072
================================
</TABLE>
E. FINANCING ARRANGEMENTS
The Company has an unsecured line of credit that provides for borrowings up to
$1,500,000 at an interest rate of 1% above the bank's insured money market
savings account rate. No borrowings were outstanding at December 31, 1996 and
1997.
33
<PAGE> 36
Gliatech Inc. and Subsidiaries
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements--Continued
E. Financing Arrangements--Continued
Rent expense relating to the operating lease of office space was approximately
$234,000, $297,000 and $318,000 in 1995, 1996 and 1997, respectively. Future
annual minimum lease commitments at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 385,239
1999 416,498
2000 416,498
2001 416,498
------------
Total $1,634,733
============
</TABLE>
F. INCOME TAXES
At December 31, 1997, the Company has net operating loss carryforwards of
approximately $17.5 million for income tax purposes. In addition, the Company
has approximately $2.2 million in research and development tax credit
carryforwards. Such losses and credit carryforwards may be used to reduce future
tax liabilities and expire at various dates between 2003 and 2012. The Company
has offset the tax benefit of the net operating loss and tax credit
carryforwards and other deferred tax assets with a valuation allowance as
realization of the benefits is not assured.
34
<PAGE> 37
Gliatech Inc. and Subsidiaries
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements--Continued
F. INCOME TAXES--CONTINUED
The Company's net deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
1996 1997
-----------------------------
<S> <C> <C>
Deferred tax liabilities $ (217,000) $ (232,000)
Deferred tax assets:
Amortization of capitalized research
and development expenses for tax 5,100,000 6,256,000
Research and development tax credit
carryforwards 1,883,000 2,170,000
Net operating tax loss carryforwards 5,038,000 5,966,000
Other 271,000 1,003,000
-----------------------------
Total deferred tax assets 12,292,000 15,395,000
Valuation allowance (12,075,000) (15,163,000)
-----------------------------
NET DEFERRED TAXES $ 0 $ 0
=============================
</TABLE>
Pursuant to the Tax Reform Act of 1986, the utilization of net operating loss
and research and development tax credit carryforwards for tax purposes may be
subject to an annual limitation if a cumulative change in ownership of more than
50% occurs over a three-year period.
G. CAPITALIZATION
On October 24, 1995, the Company consummated an initial public offering of
2,300,000 shares of common stock at an initial public offering price of $9.50
per share (the "Offering"). The Company received net proceeds from the Offering
of approximately $19,669,000. In connection with the Offering, an amendment to
the Company's Certificate of Incorporation was filed to effect a five-for-one
reverse stock split of each share of common stock. All share and per share
information in the accompanying financial statements and conversion ratios of
all series of Preferred Stock and Class A Common Stock were adjusted to reflect
the reverse split. Immediately prior to the consummation of the Offering, all
shares of Class A Common Stock and all series of Preferred Stock automatically
converted pursuant to the Company's Certificate of
35
<PAGE> 38
Gliatech Inc. and Subsidiaries
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements--Continued
Incorporation at applicable conversion rates into a total of 4,718,015 shares of
common stock.
G. CAPITALIZATION--CONTINUED
After the conversion and immediately prior to the consummation of the Offering,
the Company filed a Restated Certificate of Incorporation which authorized the
issuance of 30,000,000 shares of common stock and 5,000,000 shares of Preferred
Stock at $.01 par value.
At December 31, 1997, 1,340,510 shares of common stock are reserved for issuance
under the stock option plans and 20,000 shares are reserved for issuance under
common stock warrants outstanding for $7.50 per share.
Prior to April 1991 certain preferred stock issuances were mandatorily
redeemable, and accordingly, periodic accretion to the redemption price was
charged to the deficit accumulated during the development stage.
H. STOCK OPTION PLANS
The Company has three stock-based compensation plans. The Company applies APBO
No. 25, Accounting for Stock Issued to Employees and related Interpretations in
accounting for its plans, which requires that for certain options granted, the
Company recognize as compensation expense the excess of the deemed fair value
for accounting purposes of the common stock over the exercise price of the
options. For the majority of options, no compensation cost has been recognized.
Had compensation cost for the Company's three stock-based compensation plans
been determined based on the fair value at the grant dates for awards under
those plans consistent with the method of SFAS No. 123, Accounting for
Stock-Based Compensation, the Company's net loss and net loss per share would
have increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
--------------------------------------------
<S> <C> <C> <C> <C>
Net loss As reported $(4,985,861) $(5,699,555) $(8,560,288)
Pro forma $(5,124,584) $(6,351,247) $(9,166,993)
Basic and diluted
net loss per common share As reported $ (3.28) $ (.78) $ (1.16)
Pro forma $ (3.37) $ (.87) $ (1.25)
</TABLE>
36
<PAGE> 39
Gliatech Inc. and Subsidiaries
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements--Continued
H. STOCK OPTION PLANS--CONTINUED
The Company has a 1989 Stock Option Plan for employees and 1992 and 1996 Stock
Option Plans for members of the Company's Board of Directors. These plans
provide for 1,270,000 shares to be issued to employees and 190,000 shares to be
issued to Directors. These options generally vest over a three or four year
period and become exercisable in part one year after date of grant and expire at
the end of ten years.
For pro forma calculations, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
------------------------------------------------------
<S> <C> <C> <C>
Expected volatility 67% 67% 75%
Risk-free interest rates 5.27-5.32% 5.32-6.49% 5.71-6.48%
Average expected life 4 or 5 years 4 or 5 years 4 or 5 years
</TABLE>
At December 31, 1997 there were 230,335 options available for future grant.
A summary of the status of the Company's three stock option plans as of December
31, 1995, 1996, 1997 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1995 1996 1997
------------------------- ------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 326,700 $ 3.43 765,700 $ 6.34 978,375 $ 6.85
Granted 464,700 8.22 247,800 8.53 225,300 9.46
Exercised (13,850) 2.50 (12,175) 7.50 (76,000) 4.04
Canceled (11,850) 3.87 (22,950) 7.75 (17,500) 8.14
------------- ------------- --------------
Outstanding at end of year 765,700 6.34 978,375 6.85 1,110,175 7.56
============= ============= ==============
Options exercisable
at year-end 227,205 362,650 491,692
Weighted-average fair
</TABLE>
37
<PAGE> 40
<TABLE>
<CAPTION>
<S> <C> <C> <C>
value of options granted
during the year $ 4.92 $ 5.15 $ 6.12
</TABLE>
H. STOCK OPTION PLANS--CONTINUED
The following table summarizes information about options outstanding at December
31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- ------------------------------
Weighted-
Average Weighted-
Range of Number Remaining Average Number Weighted-
Exercise Outstanding Contractual Exercise Exercisable Average
Prices at 12/31/97 Life (Yrs) Price at 12/31/97 Exercise Price
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0-5 146,500 2.14 $ 1.00 146,500 $ 1.00
5-10 804,475 8.05 8.10 334,672 8.05
10-15 159,200 9.58 10.82 10,520 13.13
-------------- --------------
1,110,175 491,692
============== ==============
</TABLE>
In May 1991, all previously issued options with an exercise price of $.70 were
canceled and reissued at an exercise price of $.35.
I. RESEARCH COLLABORATION AGREEMENTS
In October 1994, the Company established a research and development
collaboration with Janssen Pharmaceutica, N.V. ("Janssen"), a wholly owned
subsidiary of Johnson & Johnson, for the discovery and development of compounds
suitable for the treatment of Alzheimer's disease and other neurodegenerative
diseases. Under the terms of the agreements, the Company received an initial
licensing fee and Janssen will provide research funding over a three-year
research period, renewable for a fourth and fifth year. In addition, Janssen
will make milestone payments to the Company upon the achievement of development
and clinical benchmarks. The Company will receive a royalty on sales of marketed
products and Janssen will be responsible for all development costs, including
clinical trials and obtaining regulatory approval. Deferred revenue related to
these agreements was $806,359 and $809,359 at December 31, 1996 and 1997,
respectively. In October 1994, Johnson & Johnson Development Corporation made an
equity investment in the Company.
38
<PAGE> 41
Gliatech Inc. and Subsidiaries
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements--Continued
RESEARCH, CLINICAL TRIAL, CONSULTING AND LICENSE AGREEMENTS
Since beginning operations, the Company has entered into research agreements and
clinical trial agreements with universities and third parties and consulting
agreements with scientific advisors. The research agreements require the Company
to fund certain research activities, and are generally renewable on an annual
basis. In return, the Company has rights to obtain and use exclusive licenses
for the results of the research. Under license agreements with various
universities, ownership of all patents resulting from research agreements will
remain with the universities or researchers. The Company is required to incur
all costs associated with applying for and maintaining the patents. The Company
generally will obtain exclusive worldwide licensing rights and is required to
remit fixed percentages, as defined, of the net selling price of licensed
products and royalties received from sublicensees to the universities and
researchers. The clinical trial agreements require the Company to fund the
performance of specific clinical procedures and the cost of administering the
clinical trials.
As of December 31, 1997, minimum commitments under research, clinical trial and
consulting agreements are $453,703 for 1998 ($1,162,827 at December 31, 1996).
K. SETTLEMENT OF CLAIM
In 1995, a dispute regarding inventorship of the ADCON(R) products and the
rights of Case Western Reserve University(CWRU) to receive royalties from sales
of ADCON(R) 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 agreed to issue a total of 200,000 shares of common stock
to CWRU and the employee.
As an agreement in principle had been reached between the Company and CWRU in
1997, the Company recorded a charge of $2,025,000 based on the fair value of the
Company's common stock at that time. Since the dispute will be settled with
shares
39
<PAGE> 42
Gliatech Inc. and Subsidiaries
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements--Continued
(issued in 1998), the Company has recorded the offset to the charge as a
component of stockholders' equity.
40
<PAGE> 43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
Information with respect to Directors of the Company is set forth in
the Proxy Statement on pages 2 through 4 under the heading "Election of
Directors," which information is incorporated herein by reference. Information
regarding the executive officers of the Company is included as Item 4A of Part I
of this Annual Report on Form 10-K as permitted by Instruction 3 to Item 401(b)
of Regulation S-K. Information required by Item 405 of Regulation S-K is set
forth in the Proxy Statement on page 4 under the heading "Section 16(a)
Beneficial Ownership Reporting Compliance," which information is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to executive compensation is set forth in the
Proxy Statement on page 2 under the heading "Election of Directors" and on pages
6 through 7 under the heading "Compensation of Executive Officers," which
information is incorporated herein by reference (except for the Compensation
Committee Report on Executive Compensation and the Comparative Stock Performance
Graph).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to security ownership of certain beneficial
owners and management is set forth in the Proxy Statement on pages 4 through 5
under the heading "Beneficial Ownership of Common Stock," which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
No disclosure is responsive to the disclosure requirements for this
Item, and, accordingly, no disclosure is set forth herein or in the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Annual Report
on Form 10-K.
1. Financial Statements.
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1996 and
1997.
Consolidated Statements of Operations for the years
ended December 31, 1995, 1996 and 1997 and for the
period inception of operations (August 3, 1988)
through December 31, 1997.
Consolidated Statements of Changes in Stockholders'
Equity for the period from inception of operations
(August 31, 1998) through December 31, 1988 and for
the years ended December 31, 1989, 1990, 1991, 1992,
1993, 1994, 1995, 1996 and 1997.
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1996, and 1997 and for the
period from inception of operations (August 31,
1998) through December 31, 1997.
41
<PAGE> 44
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules. All schedules for
which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission
are not required under the related instructions or
are inapplicable and therefore are omitted.
3. Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -----------------------------------------
3.1(i) Second Restated Certificate of Incorporation of the Company is
incorporated hereby by reference to Exhibit 4(a) of the
Company's Form S-8 Registration Statement with respect to the
1995 Nonemployee Directors Stock Option Plan filed January 18,
1996 (Registration No. 333-00408).
3.1(ii) Amended and Restated By-Laws of the Company are incorporated
herein by reference to Exhibit 4(b) of the Company's Form S-8
Registration Statement with respect to the 1995 Nonemployee
Directors Stock Option Plan filed January 18, 1996
(Registration Statement No. 333-00408).
4.1 Rights Agreement, dated as of July 1, 1997, by and between the
Company and American Stock Transfer & Trust Company, as rights
agent, is incorporated by reference to Exhibit 1 of the
Company's Current Report on Form 8-K as filed on July 2, 1997
(File No. 0-20096).
10.1 Lease Agreements, as amended, between Gliatech R&D, Inc. and
Commerce Corner Associates (facility lease) which is
guaranteed by the Company is incorporated by reference to
Exhibit 10.1 of the Company's Form S-1 Registration Statement
filed September 1, 1995 (Registration No. 33- 96460).
10.2 Master Lease and Warrant Agreement between the Company and
Pacificorp Credit, Inc. d/b/a Pacific Venture Finance, Inc.,
dated October 15, 1990, and Amendment No. 1, dated October 15,
1991 (equipment lease line) is incorporated by reference to
Exhibit 10.2 of the Company's Form S-1 Registration Statement
filed September 1, 1995 (Registration No. 33-96460).
10.3 Sublease between Gliatech R&D, Inc. and Spectrum Surgical
Instruments Corporation, dated November 7, 1994 is
incorporated by reference to Exhibit 10.3 of the Company's
Form S-1 Registration Statement filed September 1, 1995
(Registration No. 33-96460).
10.4 Master Commercial Demand Note of the Company to National City
Bank, dated September 11, 1996 is incorporated by reference to
Exhibit 10.4 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (File No. 0-20096).
*10.5 Employment letter between the Company and Thomas O.
Oesterling, Ph.D., dated May 19, 1989 is incorporated by
reference to Exhibit 10.7 of the Company's Form S-1
Registration Statement filed September 1, 1995 (Registration
No. 33-96460).
*10.6 Employment letter between the Company and Mr. Rodney E.
Dausch, dated February 7, 1995 is incorporated by reference to
Exhibit 10.9 of the Company's Form S-1 Registration Statement
filed September 1, 1995 (Registration No.
33-96460).
*10.7 The Company's Amended and Restated 1989 Stock Option Plan is
incorporated by reference to Exhibit A of the Company's Proxy
Statement on Schedule 14A for the fiscal year ended December
31, 1996 (File No. 0-20096).
*10.8 The Company's 1992 Directors Stock Option Plan is incorporated
by reference to Exhibit 10.11 of the Company's Form S-1
Registration Statement filed September 1, 1995 (Registration
No. 33- 96460).
*10.9 The Company's Amended and Restated 1995 Nonemployee Directors
Stock Option Plan.
42
<PAGE> 45
10.10 Manufacturing Agreement between the Company and European
Medical Contract Manufacturing, dated October 10, 1994
(certain portions of this exhibit have been omitted and filed
separately with the Securities and Exchange Commission
pursuant to a grant of confidential treatment) is incorporated
by reference to Exhibit 10.12 of the Company's Amendment No. 2
to Form S-1 Registration Statement filed October 10, 1995
(Registration No. 33-96460).
10.11 Form of Distribution Agreement between the Company and various
of its distributors is incorporated by reference to Exhibit
10.13 of the Company's Amendment No. 1 to Form S-1
Registration Statement filed September 22, 1995 (Registration
No. 33-96460).
10.12 Agreement between the Company and Janssen Pharmaceutica, N.V.,
dated October 14, 1994 (certain portions of this exhibit have
been omitted and filed separately with the Securities and
Exchange Commission pursuant to a grant of confidential
treatment) is incorporated by reference to Exhibit 10.14 of
the Company's Amendment No. 2 to Form S-1 Registration
Statement filed October 10, 1995 (Registration No. 33-96460).
10.13 First Addendum to Agreement between the Company and Janssen
Pharmaceutica, N.V., dated September 1, 1995 (certain portions
of this exhibit have been omitted and filed separately with
the Securities and Exchange Commission pursuant to a grant of
confidential treatment) is incorporated by reference to
Exhibit 10.16 of the Company's Amendment No. 2 to Form S-1
Registration Statement filed October 10, 1995 (Registration
No. 33-96460).
10.14 Warrant to purchase Common Stock issued to Montgomery
Securities is incorporated by reference to Exhibit 4.5 of the
Company's Form S-1 Registration Statement filed September 1,
1995 (Registration No. 33-96460).
10.15 Warrant to purchase Common Stock issued to Vector Securities
International, Inc. is incorporated by reference to Exhibit
4.6 of the Company's Form S-1 Registration Statement filed
September 1, 1995 (Registration No. 33-96460).
10.16 Seventh Amended and Restated Rights of First Refusal, Co-Sale
and Registration Rights Agreement is incorporated by reference
to Exhibit 4.8 of the Company's Amendment No. 2 to Form S-1
Registration Statement filed October 10, 1995 (Registration
No. 33-96460).
10.17 Amended Form of Distribution Agreement between the Company and
various of its distributors is incorporated by reference to
Exhibit 10.19 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (File No. 0-20096).
*10.18 Employment letter between the Company and Michael A. Zupon,
Ph.D., dated April 19, 1993 is incorporated by reference to
Exhibit 10.21 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (File No. 0-20096).
*10.19 Employment letter between the Company and Mr. Jon D. Schoeler
dated June 27, 1996 is incorporated by reference to Exhibit
10.20 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (File No. 0-20096).
10.20 Development and Exclusive License Agreement, dated December
10, 1996, between the Company and Chugai Pharmaceutical
Company, Ltd.
10.21 Form of Indemnification Agreement.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
24.1 Powers of Attorney.
27.1 Financial Data Schedules restated for period ending December
31, 1995 and December 31, 1996.
27.2 Financial Data Schedule for period ending December 31, 1997
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1997.
* Reflects management contract or other compensatory arrangement
required to be filed as an exhibit pursuant to Item 14(c) of this
Form 10-K.
43
<PAGE> 46
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1997.
* Reflects management contract or other compensatory arrangement required
to be filed as an exhibit pursuant to Item 14(c) of this Form 10-K.
44
<PAGE> 47
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 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.
GLIATECH INC.
BY: /s/ Rodney E. Dausch
----------------------------
Rodney E. Dausch
Vice President and Chief Financial Officer
DATE: MARCH 30, 1998
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------------------------------------------------
<S> <C> <C>
*
Thomas O. Oesterling, Ph.D. President and Chief Executive
Officer (Principal Executive
Officer) and Director March 30, 1998
/s/ Rodney E. Dausch
- ------------------------------
Rodney E. Dausch Vice President and Chief
Financial Officer
(Principal Financial Officer and
Principal Accounting Officer) March 30, 1998
*
Robert P. Pinkas Chairman of the Board March 30, 1998
*
Allen H. Ford Director March 30, 1998
Theodore E. Haigler, Jr. Director March 30, 1998
*
Ronald D. Henriksen Director March 30, 1998
*
Irving S. Shapiro Director March 30, 1998
*
John L. Ufheil Director March 30, 1998
<FN>
* The undersigned, by signing his name hereto, does sign and execute this
Annual Report on Form 10-K pursuant to the Powers of Attorney executed
by the above-named officers and Directors of the Company and filed with
the Securities and Exchange Commission on behalf of such officers and
Directors.
</TABLE>
By: /s/ Rodney E. Dausch
-----------------------------------
RODNEY E. DAUSCH, ATTORNEY-IN-FACT
45
<PAGE> 48
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------------------------------------------------------------------
3.1(i) Second Restated Certificate of Incorporation of the Company is
incorporated hereby by reference to Exhibit 4(a) of the Company's
Form S-8 Registration Statement with respect to the 1995
Nonemployee Directors Stock Option Plan filed January 18, 1996
(Registration No. 333-00408).
3.1(ii) Amended and Restated By-Laws of the Company are incorporated
herein by reference to Exhibit 4(b) of the Company's Form S-8
Registration Statement with respect to the 1995 Nonemployee
Directors Stock Option Plan filed January 18, 1996 (Registration
Statement No. 333-00408).
4.1 Rights Agreement, dated as of July 1, 1997, by and between the
Company and American Stock Transfer & Trust Company, as rights
agent, is incorporated by reference to Exhibit 1 of the Company's
Current Report on Form 8-K as filed on July 2, 1997 (File No.
0-20096).
10.1 Lease Agreements, as amended, between Gliatech R&D, Inc. and
Commerce Corner Associates (facility lease) which is guaranteed
by the Company is incorporated by reference to Exhibit 10.1 of
the Company's Form S-1 Registration Statement filed September 1,
1995 (Registration No. 33- 96460).
10.2 Master Lease and Warrant Agreement between the Company and
Pacificorp Credit, Inc. d/b/a Pacific Venture Finance, Inc.,
dated October 15, 1990, and Amendment No. 1, dated October 15,
1991 (equipment lease line) is incorporated by reference to
Exhibit 10.2 of the Company's Form S-1 Registration Statement
filed September 1, 1995 (Registration No. 33-96460).
10.3 Sublease between Gliatech R&D, Inc. and Spectrum Surgical
Instruments Corporation, dated November 7, 1994 is incorporated
by reference to Exhibit 10.3 of the Company's Form S-1
Registration Statement filed September 1, 1995 (Registration No.
33-96460).
10.4 Master Commercial Demand Note of the Company to National City
Bank, dated September 11, 1996 is incorporated by reference to
Exhibit 10.4 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (File No. 0-20096).
*10.5 Employment letter between the Company and Thomas O. Oesterling,
Ph.D., dated May 19, 1989 is incorporated by reference to Exhibit
10.7 of the Company's Form S-1 Registration Statement filed
September 1, 1995 (Registration No. 33-96460).
*10.6 Employment letter between the Company and Mr. Rodney E. Dausch,
dated February 7, 1995 is incorporated by reference to Exhibit
10.9 of the Company's Form S-1 Registration Statement filed
September 1, 1995 (Registration No. 33-96460).
*10.7 The Company's Amended and Restated 1989 Stock Option Plan is
incorporated by reference to Exhibit A of the Company's Proxy
Statement on Schedule 14A for the fiscal year ended December 31,
1996 (File No. 0-20096).
*10.8 The Company's 1992 Directors Stock Option Plan is incorporated by
reference to Exhibit 10.11 of the Company's Form S-1 Registration
Statement filed September 1, 1995 (Registration No. 33- 96460).
*10.9 The Company's Amended and Restated 1995 Nonemployee Directors
Stock Option Plan.
10.10 Manufacturing Agreement between the Company and European Medical
Contract Manufacturing, dated October 10, 1994 (certain portions
of this exhibit have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a grant of
confidential treatment) is incorporated by reference to Exhibit
10.12 of the Company's Amendment No. 2 to Form S-1 Registration
Statement filed October 10, 1995 (Registration No. 33-96460).
10.11 Form of Distribution Agreement between the Company and various of
its distributors is incorporated by reference to Exhibit 10.13 of
the Company's Amendment No. 1 to Form S-1 Registration Statement
filed September 22, 1995 (Registration No. 33-96460).
10.12 Agreement between the Company and Janssen Pharmaceutica, N.V.,
dated October 14, 1994 (certain portions of this exhibit have
been omitted and filed separately with the Securities and
Exchange Commission pursuant to a grant of confidential
X-1
<PAGE> 49
treatment) is incorporated by reference to Exhibit 10.14 of the
Company's Amendment No. 2 to Form S-1 Registration Statement
filed October 10, 1995 (Registration No. 33-96460).
10.13 First Addendum to Agreement between the Company and Janssen
Pharmaceutica, N.V., dated September 1, 1995 (certain portions of
this exhibit have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a grant of
confidential treatment) is incorporated by reference to Exhibit
10.16 of the Company's Amendment No. 2 to Form S-1 Registration
Statement filed October 10, 1995 (Registration No. 33-96460).
10.14 Warrant to purchase Common Stock issued to Montgomery Securities
is incorporated by reference to Exhibit 4.5 of the Company's Form
S-1 Registration Statement filed September 1, 1995 (Registration
No. 33-96460).
10.15 Warrant to purchase Common Stock issued to Vector Securities
International, Inc. is incorporated by reference to Exhibit 4.6
of the Company's Form S-1 Registration Statement filed September
1, 1995 (Registration No. 33-96460).
10.16 Seventh Amended and Restated Rights of First Refusal, Co-Sale and
Registration Rights Agreement is incorporated by reference to
Exhibit 4.8 of the Company's Amendment No. 2 to Form S-1
Registration Statement filed October 10, 1995 (Registration No.
33-96460).
10.17 Amended Form of Distribution Agreement between the Company and
various of its distributors is incorporated by reference to
Exhibit 10.19 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (File No. 0- 20096).
*10.18 Employment letter between the Company and Michael A. Zupon,
Ph.D., dated April 19, 1993 is incorporated by reference to
Exhibit 10.21 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (File No. 0- 20096).
*10.19 Employment letter between the Company and Mr. Jon D. Schoeler
dated June 27, 1996 is incorporated by reference to Exhibit 10.20
of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 (File No. 0- 20096).
10.20 Development and Exclusive License Agreement, dated December 10,
1996, between the Company and Chugai Pharmaceutical Company, Ltd.
10.21 Form of Indemnification Agreement.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
24.1 Powers of Attorney.
27.1 Financial Data Schedules restated for period ending December 31,
1995 and December 31, 1996
27.2 Financial Data Schedule for period ending December 31, 1997
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1997.
* Reflects management contract or other compensatory arrangement required
to be filed as an exhibit pursuant to Item 14(c) of this Form 10-K.
X-2
<PAGE> 1
Exhibit 10.9
GLIATECH INC.
Amended and Restated
1995 Nonemployee Directors Stock Option Plan
SECTION 1. PURPOSE.
The purpose of the Gliatech Inc. Nonemployee Directors 1995
Stock Option Plan (the "Plan") is to attract, retain and compensate highly
qualified individuals to serve as members of the Board of Directors who are not
current employees of Gliatech Inc. (the "Company") and to enable them to
increase their ownership of shares of Common Stock, $0.01 par value per share,
of the Company ("Common Stock"). The Plan will be beneficial to the Company and
its stockholders since it will allow these directors to have a greater personal
financial stake in the Company through the ownership of Common Stock, in
addition to underscoring their common interest and identification with
stockholders in increasing the value of Common Stock.
SECTION 2. SHARES SUBJECT TO PLAN.
The total number of shares of Common Stock with respect to
which options may be granted under the Plan shall not exceed 150,000 (as
adjusted pursuant to Section 7 hereof). Shares issued upon exercise of options
granted under the Plan may be either authorized and previously unissued shares,
issued shares which have been reacquired by the Company, or any combination
thereof. In the event that any option granted under the Plan shall terminate,
expire or, with the consent of the optionee, be cancelled as to any shares of
Common Stock, without having been exercised in full, new options may be granted
with respect to such shares without again being charged against the maximum
share limitations set forth above in this Section 2.
SECTION 3. ADMINISTRATION.
The plan shall be administered by a committee consisting of
all directors who are not eligible to participate in the Plan and the Chief
Financial Officer of the Company (the "Committee"). Subject to the provisions of
the Plan, the Committee shall be authorized to interpret the Plan, to establish,
amend and rescind any rules and regulations relating to the Plan, and to make
all other determinations necessary or advisable for the administration of the
Plan. The Committee shall have no discretion with respect to the eligibility or
selection of directors to receive options under the Plan, the times at which
options shall be granted or shall become exercisable, the number of shares
subject to any such options or the Plan, or the purchase price thereunder,
except for adjustments as described in Section 7. The Committee shall not have
the authority to take any action or make any determination that would materially
increase the benefits accruing to participants under the Plan. The determination
of the Committee
<PAGE> 2
2
in the administration of the Plan, as described herein, shall be final and
conclusive and binding upon all persons, including, without limitation, the
Company, its shareholders and persons granted options under the Plan. The
Secretary of the Company shall be authorized to implement the Plan in accordance
with its terms and to take such actions of a ministerial nature as shall be
necessary to effectuate the intent and purposes hereof. The validity,
construction, and effect of the Plan and any rules and regulations relating to
the Plan shall be determined in accordance with the internal substantive laws of
the State of Delaware.
SECTION 4. ELIGIBILITY.
All members of the Company's Board of Directors who are not
current employees of the Company or any of its subsidiaries at the time of
option award ("Nonemployee Directors") are eligible to participate in the Plan.
SECTION 5. OPTION AWARDS.
(a) Initial Awards After the IPO. Each Nonemployee Director
who was in office prior to the IPO Date and remains in office as of the
IPO Date shall be granted options to purchase 4,000 shares of Common
Stock. Such options shall be granted on the IPO Date. For purposes of
this Plan, "IPO Date" means the date of the closing of the initial
public offering of the Company's Common Stock pursuant to the
Registration Statement on Form S-1 (Registration No. 33- 96460) of the
Company filed with the Securities and Exchange Commission pursuant to
the Securities Act of 1933 (the "IPO").
(b) Future Awards. (i) Each Nonemployee Director who first
becomes a member of the Board after the IPO shall be granted an option
to purchase 8,000 shares of Common Stock (as adjusted pursuant to
Section 7 hereof) automatically upon election to the Board of
Directors.
(ii) Each Nonemployee Director shall be granted an
option to purchase 8,000 shares of Common Stock (as adjusted pursuant
to Section 7 hereof) automatically each year on the first Friday
following the Company's Annual Meeting of Stockholders.
(c) Non-Statutory Stock Options. All options granted under the
Plan shall be non-statutory options not intended to qualify under
Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"). Each option granted under the Plan shall provide that such
option shall not be treated as an "incentive stock option," as that
term is defined in Section 422(b) of the Code.
SECTION 6. TERMS AND CONDITIONS OF OPTIONS.
<PAGE> 3
3
All options granted under the Plan shall be evidenced by stock
option agreements in writing (hereinafter referenced to as "option agreements"),
in such form as the Committee may from time to time approve, executed on behalf
of the Company by the Chairman of the Board or President of the Company. Each
option agreement shall be subject to the Plan, and, in addition to such other
terms and conditions as the Committee may deem desirable, shall provide in
substance as follows:
(a) Purchase Price. The purchase price per share of Common
Stock for which each option is exercisable shall be equal to 100% of
the Fair Market Value of a share of Common Stock as of the date such
option is granted ("Fair Market Value"). Such Fair Market Value shall
be the average of the "bid" and "asked" prices of Common Stock on the
date next preceding such date as reported by the Nasdaq National
Market, or in the event that no "bid" and "asked" prices shall be
reported by the Nasdaq National Market on such next preceding day, the
average of the "bid" and "asked" prices reported by the Nasdaq National
Market on the next preceding day, or if the Common Stock is no longer
listed on the Nasdaq National Market, the fair market value on such
date as determined by the Committee in accordance with applicable law
and regulations. The option price shall be subject to adjustment as
provided in Section 7 hereof.
(b) Exercisability and Terms of Options. Subject to Section
6(c) hereof, each option granted under the Plan shall be exercisable
331/3 percent after 1 year from date of grant, 662/3 percent after 2
years from date of grant and 100 percent after 3 years from date of
grant. Each option granted under the Plan shall expire 10 years from
the date of grant and shall be subject to earlier termination as
hereinafter provided. If a Nonemployee Director subsequently becomes an
employee of the Company while remaining a member of the Board of
Directors, any options held under the Plan by such individual at the
time of such commencement of employment shall not be affected thereby.
(c) Cessation of Service. Except as hereinafter set forth, no
option shall be exercisable after the date of cessation of an
optionee's service as a director of the Company. Upon the death of an
optionee at any time or upon cessation of service six months or more
after the date of grant, all of the then outstanding options of such
optionee shall be come immediately exercisable. If an optionee's
service ceases for any reason, such exercisable options may be
exercised by the optionee within three months after such cessation of
service. If an optionee shall die within such three-month period, or if
cessation of his or her service shall have been due to such optionee's
death, such options may be exercised at any time within one year after
such death by the optionee's executor or administrator or by his or her
distributee to whom such options may have been transferred by will or
by the laws of descent and
<PAGE> 4
4
distribution. The foregoing provisions shall not extend the period
during which an option may be exercised beyond the date it expires by
its terms.
(d) Manner of Exercise. Each option agreement shall provide
that any option therein granted shall be exercisable only by giving in
each case written notice of exercise, accompanied by full payment of
the purchase price either (i) in cash (including check, bank draft, or
money order, or wire or other transfer of funds, or advice of credit to
the Company), or (ii) in shares of Common Stock with a fair market
value equal to the purchase price or a combination of cash and shares
of Common Stock which in the aggregate are equal in value to such
purchase price. At the discretion of the Committee, the option
agreement may provide that shares of Common Stock may be issued in the
name of the optionee and another person jointly with the right of
survivorship.
(e) Nontransferability. Each option agreement shall provide
that any option therein granted is not transferable by the optionee
other than by will or by the laws of descent and distribution and that,
during the lifetime of the optionee, such option may be exercised only
by the optionee or such optionee's legal representative.
SECTION 7. ADJUSTMENT UPON CHANGES IN STOCK.
The Board of Directors shall make or provide for such
adjustments in the option price and in the number or kind of shares or other
securities covered by outstanding options as the Board of Directors in its sole
discretion, exercised in good faith, shall determine is equitably required to
prevent dilution or enlargement of rights of optionees that would otherwise
result from (a) any stock dividend, stock split, combination of shares, issuance
of rights or warrants to purchase stock, spin-off, recapitalization or other
changes in the capital structure of the Company, (b) any merger, consolidation,
reorganization or partial or complete liquidations, or (c) any other corporate
transaction or event having an effect similar to any of the foregoing. The Board
of Directors also shall make or provide for such adjustment in the number or
kind of shares of the Company's capital stock or other securities which may be
acquired pursuant to options granted under the Plan and the number of such
securities to be awarded to each optionee as the Board of Directors in its sole
discretion, exercised in good faith, shall determine is appropriate to reflect
any transaction or event described in the preceding sentence. The determination
of the Board of Directors as to what adjustments shall be made, and the extent
thereof, shall be final, binding and conclusive.
SECTION 8. FRACTIONAL SHARES.
No fractional shares shall be issued pursuant to options
granted hereunder and any fractional share resulting from an adjustment pursuant
to Section 7 hereof shall be eliminated.
<PAGE> 5
5
SECTION 9. GOVERNMENT REGULATIONS.
The Plan, the grant and exercise of options hereunder, and the
Company's obligation to sell and deliver shares of stock pursuant to any such
exercise, shall be subject to all applicable federal and state laws, rules and
regulations and to such approvals by any regulatory or government agency as
shall be required. The Company shall not be required to issue or deliver any
certificate or certificates for shares of its Common Stock prior to (a) the
inclusion of such shares for quotation on the Nasdaq National Market and (b) the
completion of any registration or other qualification of such shares under any
state or federal law or rulings or regulations of any government body, which the
Company shall, in its sole discretion, determine to be necessary or advisable.
SECTION 10. TERM OF THE PLAN.
The plan shall become effective immediately upon the closing
of the IPO (the "Effective Date"). The Plan shall terminate at such time as all
of the shares of Common Stock authorized under Section 2 of this Plan have been
granted. In the event that at any future grant date as determined under Section
5 hereof, the aggregate number of options to be granted at such time exceed the
remaining options available under the Plan as determined in accordance with
Section 2 hereof, the remaining options available shall be granted on a pro-rata
basis among each Nonemployee Director. Termination of the Plan, however, shall
not affect outstanding options which have been granted prior to such
termination, and all unexpired options shall continue in full force and
operation after termination of the Plan, except as they shall lapse or terminate
by their own terms and conditions, and the terms of the Plan shall continue to
apply to such options.
SECTION 11. AMENDMENT, SUSPENSION OR TERMINATION OF
THE PLAN.
The Board of Directors at any time and from time to time may,
amend, suspend or terminate the Plan; provided, however, that (a) no amendment
which requires stockholder approval in order for the exemptions available under
Rule 16b-3 to continue to be applicable shall be effective unless the same shall
be approved by the stockholders of the Company entitled to vote thereon, and (b)
amendments revising the amount, price or timing of option awards shall not be
made more frequently than once every six months unless necessary to comply with
the Code, the Employee Retirement Income Security Act, or the rules thereunder.
Without the written consent of the optionee, no amendment, suspension or
termination of the Plan shall adversely affect any option previously granted
under the Plan, but it shall
<PAGE> 6
6
be conclusively presumed that any adjustment or change as provided in Section 7
does not adversely affect any such right.
SECTION 12. NO RIGHT TO CONTINUE AS DIRECTOR.
Neither the Plan, nor the granting of an option nor any other
action taken pursuant to the Plan, shall constitute or be evidence of any
agreement or understanding, express or implied, that a director has a right to
continue as a director for any period of time, or at any particular rate of
compensation.
<PAGE> 1
Exhibit 10.20
DEVELOPMENT AND EXCLUSIVE LICENSE AGREEMENT
This DEVELOPMENT AND EXCLUSIVE LICENSE AGREEMENT, effective
this 10th day of December 1996 (hereinafter "Agreement"), is by and between
Chugai Pharmaceutical Co., Ltd., a Japanese corporation (hereinafter "Chugai"),
with its principal offices located at 1-9 Kyobashi 2-Chome, Chuo-ku, Tokyo,
Japan 104, and Gliatech Inc., a Delaware corporation (hereinafter "Gliatech"),
with its principal offices located at 23420 Commerce Park Road, Cleveland, Ohio
44122.
W I T N E S S E T H:
WHEREAS, Gliatech has developed certain products (hereinafter
"Products" as defined below) which utilize certain Gliatech proprietary
technology (hereinafter "Technology" as defined below):
WHEREAS, Chugai desires to license the Technology and the
Products from Gliatech for its field of use (hereinafter "Field of Use" as
defined below); and
WHEREAS, Gliatech desires to license the Technology and the
Products to Chugai for such Field of Use.
NOW THEREFORE, in consideration of the mutual covenants and
promises contained herein, and other good and valuable consideration, and
subject to the terms and conditions hereof, Chugai and Gliatech agree as
follows.
1. DEFINITIONS.
1.1 EFFECTIVE DATE. Effective Date shall mean December 10, 1996.
1.2. PRODUCTS. Products shall mean Gliatech's ADCON(R)-L and ADCON(R)-T/N
medical devices.
1.3 TECHNOLOGY. Technology shall mean any Patent Rights (as defined
below) and any other information and data which relate to the
development, design, manufacture, use or sale of the Products, which
Gliatech owns and has heretofore developed, created or acquired,
through license or otherwise, or which Gliatech develops, creates or
acquires after the Effective Date as improvements to the Technology
(that which is developed, created or acquired after the Effective
Date being hereinafter referred to as "Improvements"). The Technology
as of the Effective Date is listed on EXHIBIT A.
1.4 TERRITORY. Territory shall mean Japan.
<PAGE> 2
1.5 DEVELOPMENT PLAN. Development Plan shall mean a detailed outline
prepared by Chugai and agreed to by Gliatech, which shall include,
without limitation, target dates on which Chugai intends to file for
and receive the Importation Approval and any other government and
third party approvals, health or product registrations, licenses,
visas or other permits (hereinafter referred to as "Authorizations")
required to commercialize, sell, distribute, promote and handle,
including, without limitation, any import requirements relating to,
the Products in the Territory and/or to fulfill all its obligations
under this Agreement. The Development Plan, shall be reviewed and
updated periodically as needed, setting forth the development
activities (hereinafter "Development Activities") intended to be
undertaken by Chugai in order to fully develop and commercialize the
Products as expeditiously as possible.
1.6 FIELD OF USE. Field of Use shall mean any use of the Technology and
the Products for the inhibition of surgical adhesions in the fields
of neurologic, spinal or orthopedic surgical procedures.
1.7 IMPORTATION APPROVAL. Importation Approval shall mean any and all
necessary approvals for the importation of the Products as Medical
Devices that may be required to be issued by any parties, including,
without limitation, the Ministry of Health and Welfare of Japan, in
accordance with any applicable law, statute, ordinance, regulation or
other applicable authority, including, without limitation, the
Pharmaceutical Affairs Law (Yakuji-Hou) of Japan.
1.8 MEDICAL DEVICES. Medical Devices shall mean medical devices as
defined as "Iryo-Yogu" under the Pharmaceutical Affairs Law
(Yakuji-Hou) of Japan.
1.9 PATENT RIGHTS. Patent Rights shall mean any Japanese patents, patent
applications, utility models, and any claims thereof, and any rights
to file the same, and shall also mean any divisions, patents of
addition, continuations, continuations-in-part, extensions, reissues
and reexaminations of the same.
1.10 PERSON. Person shall mean any individual, corporation, partnership,
association or entity.
1.11 DEVELOPMENT ACTIVITIES. Development Activities shall mean those
activities set forth in the timetable on the Development Plan, as
established in accordance herewith, upon which the parties agreed
regarding the commercial marketing and sales of the Products within
the Field of Use. Development Activities shall not include marketing
and sales activities.
2. DEVELOPMENT EFFORTS; MARKETING AND SALES EFFORTS; AUTHORIZATIONS AND
REGULATORY EFFORTS; AND USE OF RESULTS.
2.1 DEVELOPMENT EFFORTS. (a) Gliatech shall disclose to Chugai
information and materials related to the Products and the Technology,
as listed on Exhibit A.
(b) Within ninety (90) days from the date of the disclosure
of information and materials related to the Products and the
Technology as set forth herein Section 2.1(a),
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<PAGE> 3
Chugai shall deliver to Gliatech the Development Plan. Gliatech shall
then have thirty (30) days to review and approve the Development
Plan.
(c) Chugai shall complete the Development Activities so that
Chugai can commercially market and sell the Products within the Field
of Use. In this effort, Chugai shall concentrate and use its best
efforts to develop the Products and Chugai shall devote its utmost
corporate resources to accomplish the same under the Development
Plan.
(d) Gliatech shall consult with Chugai regarding any
Improvements to the Products and Gliatech shall periodically advise
and notify Chugai in writing of the existence and status of
subsequent development activities undertaken by Gliatech with respect
to any Improvements to the Products.
(e) Within ninety (90) days from the date of receipt of any
such notice specified in Section 2.1(d) from Gliatech requesting
modification to the Development Plan, Chugai shall deliver to
Gliatech a revised and amended Development Plan. Gliatech shall then
have thirty (30) days to review and approve the revised and amended
Development Plan.
2.2 MARKETING AND SALES EFFORTS. (a) Within ninety (90) days from the
date of disclosure related to the Products and the Technology set
forth in Section 2.1(a), Chugai shall provide Gliatech with an
initial five year annual forecast, substantially in the form of
EXHIBIT B attached hereto, commencing with the initial target receipt
date of all of the Authorizations, as set forth in the initial
Development Plan. It is acknowledged that such initial five year
annual forecast may be amended from time to time based on the mutual
agreement of the parties hereto.
(b) Chugai shall concentrate and use its best efforts to
promote, market and sell the Products that become available for
commercial sale in the Territory and Chugai shall devote its utmost
corporate resources to accomplish the same. As part of its best
efforts, Chugai agrees to make available, on an annual basis, to
Gliatech, for its review and comment, Chugai's strategic business
plan, operating plan, marketing plan and communications plan for the
Products licensed to Chugai under this Agreement, it being understood
that Chugai shall have the sole responsibility for the finalization
and implementation of the strategic business plan, operating plan,
marketing plan and communications plan for the Products.
2.3 AUTHORIZATIONS AND REGULATORY EFFORTS. (a) Chugai shall obtain and
maintain at its expense all necessary Authorizations required to
commercialize, sell, distribute, promote and handle, including,
without limitation, any import requirements relating to, the Products
in the Territory and/or to fulfill all its obligations under this
Agreement. Gliatech shall provide Chugai with the information set
forth on EXHIBIT A with respect to the Technology or the Products.
(b) Upon termination of this Agreement for any reason except
for termination by Chugai pursuant to Section 10.1 or Section 10.5(a)
hereof, Chugai shall cooperate fully
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<PAGE> 4
with Gliatech and take all steps to transfer and assign, immediately
and gratuitously, without any expense to, or payment by, Gliatech,
other than reasonable filing fees and transfer fees of Chugai, which
shall be reimbursed by Gliatech, any Authorizations which may be held
in its name, except as provided for in this Section 2.3(b), to
Gliatech or its designee(s) to the extent permitted by law. Chugai
agrees further to cooperate in the case of nonassignable
Authorizations held in its name by not taking and not omitting any
action which may cause such Authorizations to lapse or be cancelled,
and shall cooperate with and assist Gliatech or its designee(s) in
obtaining an orderly transition and issuance of new Authorizations
for the Products on behalf of Gliatech or its designee(s) without
delay.
(c) Chugai will immediately notify Gliatech of any formal
contact with regulatory authorities with respect to material issues
relating to the Products. Chugai will provide copies of all
correspondence and other documents from regulatory authorities
involving the Products to Gliatech.
(d) Chugai shall implement and maintain, in accordance with
any and all governmental, regulatory or other requirements or
Authorizations, quality control systems (the "Quality System")
relating to the commercialization, promotion, marketing, distribution
or sale of the Products, which Quality System shall be subject to
prior review and approval by Gliatech. Chugai will permit regular
audits, at reasonable intervals and during business hours, of its
Quality System as they relate to Gliatech's Products. Such audits
will be conducted, upon reasonable prior notice to Chugai and at the
expense of Gliatech, by either Gliatech's staff or representative,
or, if required, other regulatory authorities. Chugai acknowledges
that failure to submit to such audit or a finding of major deviations
within their Quality System is a breach of this Agreement. Chugai
shall use its best efforts to perform any corrective actions related
to the Products that are identified in these audits in a timely
manner. Chugai accepts that failure to address such corrective
actions in a timely manner is a breach of this Agreement.
(e) Gliatech, on an annual basis, shall reasonably request
and Chugai shall furnish information regarding current customers, as
well as available information on prospective customers in order for
Gliatech to conduct and gather information for market research
relating to Product quality and Improvements; PROVIDED, that in the
event this Agreement is not terminated Gliatech shall not contact or
sell the Products to such current or prospective customers directly.
Except to the extent permitted by applicable law, Gliatech shall not
provide Chugai with written instructions with respect to selection of
customers.
2.4 USE OF RESULTS. The results of the Development Activities may be used
by the parties pursuant to the terms of this Agreement. Chugai and
Gliatech shall not use the results of the Development Activities
under the Development Plan for any purpose outside this Agreement,
except with the prior notice to and written approval from the other
party before proceeding with such use and except as required by law,
statute or a regulation or directive of a government agency and then
only with notice to the other party. This approval shall not be
unreasonably withheld; PROVIDED, HOWEVER, that the other party may be
entitled to some payment or other consideration from the requesting
party based upon
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<PAGE> 5
the value of the results, the amount of which will be negotiated in
good faith by the parties at that time.
3. LICENSE AND RELATED RIGHTS.
3.1 GRANT OF LICENSE. Gliatech hereby grants to Chugai, and Chugai hereby
accepts, subject to the terms and conditions set forth herein, the
exclusive, non-transferable and royalty-free license to use and
practice the Technology in the Territory and to use and sell the
Products in the Field of Use, and the right to extend (or pass-on)
immunity from suit to Chugai's end use customers who shall purchase
the Products from Chugai for applications in the Field of Use.
3.2 SCOPE OF LICENSE. The license and rights granted to Chugai in this
Agreement also include and automatically cover the Improvements to
the Technology and the Products, subject to the Field of Use, which
Gliatech shall promptly communicate to Chugai in writing.
3.3 MARKETING. All Product-related packaging, labeling, advertising and
related materials shall identify Gliatech as the developer and
manufacturer of the Products to the extent permitted by law or
regulation. Chugai shall mark all labels, advertising materials,
product literature and packaging for the Products sold to customers
for use in the Field of Use with appropriate legends for any Patent
Rights that exist under the Technology and also with the appropriate
ADCON(R)-L or ADCON(R)-T/N trademark owned by Gliatech, unless a
substitute mark is adopted by Gliatech and approved in writing by
Gliatech. This requirement shall not prevent Chugai from also marking
any medical implant, device or system which it sells incorporating or
including the Products with its own patent legend or trademark used
by Chugai for that purpose. Any new advertising or marketing
materials, which is proposed by Chugai and which includes the
ADCON(R)-L or ADCON(R)-T/N trademark, as the case may be, shall be
submitted in advance to Gliatech for approval.
3.4 OWNERSHIP OF PROPRIETARY RIGHTS. Chugai and Gliatech agree that
Gliatech is and shall be the sole owner of the Technology (including
Patent Rights therein) and the Products in existence as of the
Effective Date and any Improvements thereto.
3.5 OTHER PRODUCTS. (a) Gliatech shall periodically advise Chugai in
writing of the existence and status of development activities by
Gliatech with respect to ADCON(R) products based on the Technology,
which are outside the definition of the Products, Technology or the
Field of Use as set forth in this Agreement. If Chugai desires to
explore obtaining a license or other rights with respect to this new
disclosure, Chugai shall notify Gliatech in writing within twenty
(20) days of receiving such notice, and Gliatech shall negotiate with
Chugai in good faith for an exclusive period of ninety (90) days
after Gliatech has disclosed the same to Chugai, during which time
Gliatech and Chugai shall discuss the terms of a possible license or
other agreement between them. Gliatech shall not negotiate with any
other Person during such ninety (90) day period.
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<PAGE> 6
(b) Nothing in Section 3.5(a) shall require Chugai to
negotiate with Gliatech on any new disclosure or require Gliatech to
grant any additional license or other rights to Chugai with respect
to the same, or otherwise prevent Gliatech from licensing such other
rights outside this Agreement to any other Person; PROVIDED, HOWEVER,
that any such agreement Gliatech shall enter into with another Person
shall not conflict in any way with the exclusive license and rights
granted to Chugai in this Agreement.
3.6 LIMITATION OF RIGHTS TO CHUGAI AND RESERVATION BY GLIATECH. Chugai
and Gliatech agree that the license and rights granted to Chugai in
the Technology and the Products in the Field of Use are limited as
set forth in this Agreement.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF GLIATECH. Gliatech
represents, warrants and covenants to Chugai as follows:
4.1 POWER AND AUTHORITY. Gliatech has all requisite legal and corporate
power and authority to execute and deliver this Agreement, to license
the Technology and the Products to Chugai as done hereby, and to
carry out and perform its obligations under this Agreement. This
Agreement constitutes the valid and binding obligation of Gliatech,
specifically enforceable against Gliatech in accordance with its
terms, except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or the laws of general application
relating to or affecting creditors' rights or as may be limited by
the availability of equitable remedies.
4.2 DISCLOSURE TO CHUGAI. No representation, warranty or covenant of
Gliatech contained in this Agreement knowingly contains any untrue
statement of a fact or omits to state a fact necessary in order to
make the statements, representations and warranties contained herein
not misleading in light of the circumstances under which they were
made.
4.3 NON-CONTRAVENTION; MATERIAL CONSENTS. Neither the execution and
delivery of this Agreement, nor the consummation of the transactions
contemplated hereby will, with respect to Gliatech, violate any
provision of its Certificate of Incorporation or By-Laws or will
violate, breach or result in the acceleration of or entitle any
Person to accelerate (whether after the giving of notice or lapse of
time or both) any obligation under, or entitle any Person to
terminate any or all of the provisions of any agreement or contract
to which Gliatech is a party. All Authorizations, permits, consents,
waivers, orders, reissuance or approvals of, or filings with any
public body or authority or any third party, if any, which are
necessary to the license granted in this Agreement will have been
obtained prior to the Effective Date, except for Authorizations,
permits, consents, waivers, orders, reissuance, approvals or filings,
the failure of which to obtain will not prevent the grant of such
license.
4.4 PRODUCTS. Gliatech represents that the Products shall be free from
defect in materials and workmanship.
5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF CHUGAI.
Chugai represents, warrants and covenants to Gliatech as follows:
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<PAGE> 7
5.1 POWER AND AUTHORITY. Chugai has all requisite legal and corporate
power and authority to execute and deliver this Agreement, to accept
the license of the Technology and the Products and such other rights
as done hereby, and to carry out and perform its obligations under
this Agreement. This Agreement constitutes the valid and binding
obligation of Chugai, specifically enforceable against Chugai in
accordance with its terms, except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, or other laws of
general application relating to or affecting enforcement of
creditors' rights or as may be limited by the availability of
equitable remedies.
5.2 DISCLOSURE TO GLIATECH. No representation, warranty or covenant of
Chugai contained in this Agreement knowingly contains any untrue
statement of a fact or omits to state a fact necessary in order to
make the statements, representations and warranties contained herein
not misleading in light of the circumstances under which they were
made.
5.3 NON-CONTRAVENTION; MATERIAL CONSENTS. Neither the execution and
delivery of this Agreement, nor the consummation of the transactions
contemplated hereby, will, with respect to Chugai, violate any
provision of its organizational documents, will violate, breach or
result in the acceleration of or entitle any Person to accelerate
(whether after the giving of notice or lapse of time or both) any
obligation under, or entitle any Person to terminate any or all of
the provisions of, any agreement or contract to which Chugai is a
party. All Authorizations, permits, consents, waivers, orders,
reissuance or approvals of, or filings with, any public body or
authority or any third party which are necessary to the license
granted in this Agreement will have been obtained prior to the
Effective Date, except for the Importation Approval and other
Authorizations, permits, consents, waivers, orders, reissuance,
approvals or filings, the failure of which to obtain will not prevent
the grant of such license.
5.4 FIELD OF USE LIMITATION. Chugai shall not knowingly use the Products
for or on behalf of any Person, or otherwise knowingly sell the
Products to any Person who is known by Chugai to use or intending to
use the same, for any purpose outside the Field of Use.
6. FEES AND PAYMENTS. (a) In consideration of the rights granted to
Chugai hereunder, Chugai shall pay Gliatech in accordance with the
following terms and conditions:
(1) In the event that Chugai has not filed for all
necessary Authorizations in accordance with the terms of the
initial Development Plan, which may be amended based on the
mutual agreement of the parties, then Chugai shall pay to
Gliatech a commitment fee of $100,000, payable in U.S.
dollars. In the event that the Ministry of Health and
Welfare does not grant Chugai all necessary Authorizations,
then Chugai shall not be obliged to pay the commitment fee
of $100,000; PROVIDED, THAT, Chugai has complied with the
terms of the initial Development Plan in seeking such
Authorizations.
(2) In the event that within thirty (30) days after
receipt of the Authorizations, Chugai has not submitted its
initial order for delivery of Products ninety (90) days
thereafter in accordance with the terms and conditions of
the
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<PAGE> 8
Manufacturing Agreement, dated December 10, 1996, by and
between Gliatech and Chugai (the "Manufacturing Agreement),
then Chugai shall pay to Gliatech a commitment fee payable
in U.S. dollars equivalent to Chugai's forecasted purchases
for the corresponding year of sales as set forth on EXHIBIT
B attached hereto.
(3) Each year thereafter, if Gliatech has not
received a purchase order from Chugai by September 30, then
Chugai shall pay Gliatech a commitment fee, equivalent to
the forecasted purchases for the following twelve month
period as set forth on EXHIBIT B attached hereto.
(b) Chugai and Gliatech agree that as of the Effective Date,
the royalty-free nature of the license and rights granted to Chugai
in this Agreement is based on the intention of the parties that a
further relationship will exist as of the Effective Date under which
Gliatech or its designee will manufacture the Products and Chugai
will purchase the Products from Gliatech for resale to its customers
in accord with the Manufacturing Agreement by and between Chugai and
Gliatech.
7. PATENT RIGHTS: PROSECUTION, MAINTENANCE AND ENFORCEMENT.
7.1 PROSECUTION AND MAINTENANCE. (a) Chugai and Gliatech shall make all
reasonable and diligent efforts to protect all proprietary rights in
the Territory in the Technology and the Products licensed in this
Agreement. This shall include Chugai and Gliatech cooperating in
taking all reasonable steps to seek, prosecute and maintain all
available Patent Rights in the Technology and the Products. Gliatech
shall be primarily responsible for making decisions regarding scope,
content and prosecution of applications included in the Patent Rights
in the Technology, and Chugai shall have the full and adequate
opportunity to advise Gliatech with regard thereto. Gliatech shall
promptly advise Chugai as to all material developments with respect
to such applications and prosecution, and shall provide copies of all
papers received and filed in connection with such prosecution to
Chugai to enable Chugai to comment thereon, and shall otherwise give
Chugai access to the patent files and records and an opportunity to
participate. Gliatech's right of primary responsibility shall include
selection of counsel, though Chugai may, at its sole expense, retain
its own counsel in connection with its right to review and comment as
provided herein.
(b) Should Gliatech decide it is no longer interested in
prosecuting or maintaining any of the Patent Rights contemplated by
this Section, it shall timely notify Chugai in writing of such
decision. Within thirty (30) days after receipt of such notice,
Chugai may, at its option, determine to prosecute and maintain such
Patent Rights at its sole expense by so notifying Gliatech of its
election. Gliatech shall thereafter cooperate with Chugai as needed
and shall assign all rights in such Patent Rights to Chugai without
additional consideration required. The cost for recording any
assignment documents and for continuing the prosecution and
maintenance of the Patent Rights after such first notice, shall be
exclusively paid by the continuing party. Gliatech's election to
cease prosecuting or maintaining any Patent Rights shall not
constitute a waiver of its rights of
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<PAGE> 9
primary responsibility with respect to any other Patent Rights for
which Gliatech does not and has not elected to cease prosecuting or
maintaining.
7.2 ENFORCEMENT AGAINST OR BY OTHER PERSONS. (a) Chugai and Gliatech
shall promptly notify each other in writing of any activity of a type
or nature which may be an infringement of or a challenge to the
Technology or the Products (including any Patent Rights in the same).
Upon such notification, Chugai and Gliatech shall discuss the
situation and shall cooperate with each other in all respects
concerning any legal or other action resulting from such infringement
or challenge.
(b) Chugai and Gliatech agree that Gliatech shall have the
initial right, but not the obligation, to prosecute or defend any
such infringement or challenge at its own expense and may join Chugai
as a co-party in any action that should ensue. If the action is
against a Person for infringement wholly or in part within the Field
of Use herein, Chugai shall be entitled to any recovery derived
therefrom attributable to the Field of Use as defined herein, but
only after reimbursement to Gliatech for its costs in the action.
Gliatech shall not enter into any voluntary disposition or settlement
of any such infringement or challenge without the prior advice to and
knowledge and consent of Chugai.
(c) If, within ninety (90) days after notice of such
infringement or challenge, Gliatech shall not have resolved the same
and shall not have brought or be defending an action on the same, or
if Gliatech shall have notified Chugai in writing of its intention
not to do so, then Chugai shall have the right, but not the
obligation, to prosecute or defend the infringement or challenge at
its own expense and may join Gliatech as a co-party in any action
that should ensue. Gliatech shall execute and deliver any
documentation that reasonably may be required to enable Chugai to
prosecute or defend the action in its own name. If the action is
against a Person for infringement wholly or in part within the Field
of Use herein, Chugai shall be entitled to any recovery derived
therefrom attributable to the Field of Use as defined herein, but
only after the same payment to Gliatech as set forth in Section
7.2(b). If any recovery is for infringement outside the Field of Use
herein, Gliatech shall be entitled to the recovery derived therefrom,
but only after Chugai is reimbursed for its costs in the action.
Chugai shall not enter into any voluntary disposition or settlement
of any such infringement or challenge without the prior knowledge and
consent of Gliatech.
(d) Whether Chugai or Gliatech pursue any such infringement
or challenge on its own or jointly, each party shall keep the other
informed of the progress in and status of the same, including any
action that results therefrom, and shall provide the other with
copies of all court and other documents upon request and if legally
permitted. Each party shall also have the absolute right to
participate in any such action brought by or against the other party,
and shall include the opportunity to confer with the other party and
the right to be represented by counsel of its own selection. A
party's exercise of this absolute right to participate shall be at
its own expense, and shall not be deductible from any recovery in any
such action unless the party actually joins or is joined as a party
defendant or party plaintiff in the same.
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<PAGE> 10
8. LEGAL REQUIREMENTS.
If the laws of the Territory require that this Agreement or any
document relating to the subject matter hereof be legalized and/or
notarized, or be submitted, filed or registered with any government
agency or ministry of the Territory, Chugai and Gliatech will work
together in complying with those requirements with such costs so
incurred to be paid by Chugai.
9. TERM.
Unless sooner terminated as provided in Section 10, this Agreement
and the license and rights granted to Chugai herein shall begin as of
the Effective Date and shall continue in full force and effect until
the date on which the last Japanese patent issued with respect to the
Technology and the Products in this Agreement relating to the Field
of Use shall expire.
10. TERMINATION.
This Agreement shall continue in full force and effect during the
term set forth in Section 9, unless Chugai or Gliatech, in the
exercise of its discretion, earlier terminates this Agreement for any
one of the following causes:
10.1 BREACH, NOTICE AND CURE. If Chugai or Gliatech fails to perform any
of its respective obligations or covenants under this Agreement,
including, without limitation, the failure of Chugai or Gliatech to
have as an on-going strategic focus of the business of respectively,
Chugai or Gliatech, the sale of Products in the Field of Use, the
failure of Chugai to use its best efforts in any undertaking or
action in connection with or related to this Agreement or the failure
of Chugai to complete the mutually agreed upon initial Development
Activities, the non-failing party shall be entitled to notify the
failing party in writing specifying such failure and requiring cure
or remedy of the same. This notice shall be initially discussed by
Gliatech and Chugai, for a period of thirty (30) days after receipt
in an effort to resolve the same. If such failure is not cured or
remedied, or the non-failing party does not withdraw its notification
of such failure, within such thirty (30) day period, then the General
Manager of Chugai and the Chief Executive Officer of Gliatech shall
attempt to resolve the same for a period of thirty (30) days
thereafter. If such failure is not cured or remedied, or the
non-failing party does not withdraw its notification of such failure,
within this second thirty (30) day period, and if the failure is
material, then the non-failing party shall have the right to
terminate this Agreement by giving fifteen (15) days prior written
notice thereof to the failing party. Thereafter, the parties shall
proceed in accordance with Section 12.1 hereof.
10.2 FORCE MAJEURE. Chugai and Gliatech agree that it shall not be a
ground for seeking termination of this Agreement that any alleged
failure to perform an obligation herein results from "Force Majeure"
as provided in Section 12.5.
10.3 NON-WAIVER. The right of either party to seek termination of this
Agreement as provided herein shall not be in any way by its waiver of
or failure to take action with respect to any previous failure to
perform an obligation under this Agreement by the other party.
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<PAGE> 11
10.4 ADDITIONAL GROUNDS FOR GLIATECH TO TERMINATE. In addition to the
rights of Gliatech to terminate under Section 10.1 above, Gliatech
may immediately terminate this Agreement on thirty (30) days prior
written notice to Chugai if Chugai shall institute or consent to the
filing of voluntary bankruptcy proceedings, or Chugai shall file a
petition or answer or consent seeking reorganization under any
applicable bankruptcy laws; or Chugai shall consent to the
appointment of a receiver or liquidator under any applicable
bankruptcy law; or upon the issuance or entry of a decree or order by
a court adjudging Chugai bankrupt or insolvent or approving a
petition seeking reorganization of Chugai under any applicable
bankruptcy law, appointing a receiver or liquidator or trustee or
assignee in bankruptcy or insolvency for Chugai or of all or
substantially all of its property.
10.5 ADDITIONAL GROUNDS FOR CHUGAI TO TERMINATE. In addition to the rights
of Chugai to terminate under Section 10.1 above, Chugai may
immediately terminate this Agreement on thirty (30) days prior
written notice to Gliatech upon the occurrence of any of the
following events:
(a) Gliatech shall institute or consent to the filing of
voluntary bankruptcy proceedings, or Gliatech shall file a petition
or answer or consent seeking reorganization under any applicable
bankruptcy laws; or Gliatech shall consent to the appointment of a
receiver or liquidator under any applicable bankruptcy law; or upon
the issuance or entry of a decree or order by a court adjudging
Gliatech bankrupt or insolvent or approving a petition seeking
reorganization of Gliatech under any applicable bankruptcy law,
appointing a receiver or liquidator or trustee or assignee in
bankruptcy or insolvency for Gliatech or of all or substantially all
of its property.
(b) The application by Chugai for the Importation Approval
shall have been dismissed or it is found in the reasonable opinion of
Chugai that the Importation Approval shall not be given by the
Ministry of Health and Welfare of Japan.
11. INDEMNIFICATION.
11.1 INDEMNIFICATION BY CHUGAI. Chugai shall indemnify, defend and hold
Gliatech harmless from and against any and all liabilities, claims,
demands, judgments, losses, damages, costs and expenses (including
court costs and reasonable attorneys' fees) (hereinafter "Losses")
incurred or suffered by Gliatech arising in any way out of or in
connection with or resulting from: (a) the use, without obtaining
proper Authorizations, or the sale by Chugai of the Products in the
Field of Use except in accordance with the Manufacturing Agreement,
(b) any advertising or other promotional activities undertaken by
Chugai alone with respect to the Products which have not previously
been submitted to or approved by Gliatech and Chugai or (c) a breach
by Chugai of any of its representations, warranties and covenants
contained in this Agreement; PROVIDED, HOWEVER, that this indemnity
shall not be applicable to the production, use or sale of the
Products by Gliatech or by any other Person not authorized by Chugai
or instructed in writing by Chugai to so act.
11.2 INDEMNIFICATION BY GLIATECH. Gliatech shall indemnify and hold
harmless Chugai from and against any and all Losses in respect of
claims made by third parties arising out of or
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<PAGE> 12
relating to: (a) any material defect of the Products, which would
ordinarily cause death or injury of a person or any damage to
property or (b) a breach by Gliatech of any representations,
warranties and covenants contained in Section 4 above.
11.3 NOTICE. As a condition of the indemnifications in Section 11, the
party seeking indemnification shall give the other party written
notice within fifteen (15) days of the assertion of any such claim,
proceeding, action or suit; PROVIDED, HOWEVER, that the failure to
give such notice shall only waive or release the indemnification
obligation to the other party to the extent the other party is
actually prejudiced by such failure.
12. MISCELLANEOUS.
12.1 INTERPRETATION AND ENFORCEMENT OF AGREEMENT. All matters, questions
or disputes relating to the interpretation, form, validity,
performance and the parties' rights and obligations under this
Agreement shall be governed by and decided in accordance with the
laws of the United States. Any disputes or questions which the
parties cannot resolve after negotiation shall be settled by
arbitration instituted at the option of either party. The arbitration
will be conducted by a certified arbitration service under
regulations of the American Arbitration Association. An Arbitrator
will be selected by mutual agreement of the parties. Each party
hereby accepts and submits itself unconditionally to the exclusive
jurisdiction of the arbitrator.
12.2 SURVIVAL. The representations and warranties made by each party to
this Agreement shall survive beyond the Effective Date.
12.3 SUCCESSORS AND ASSIGNS. The provision of this Agreement shall inure
to the benefit of and shall be binding upon the successors of the
parties hereto. Chugai and Gliatech shall not assign this Agreement
or any of their rights or obligations to any Person without the prior
written consent of the other which shall not be unreasonably
withheld; PROVIDED, HOWEVER, that Chugai or Gliatech shall have the
right to assign this Agreement and their respective rights and
obligations to any successor who acquires or succeeds to
substantially all of Chugai's business or of Gliatech's business
(whether by way of recapitalization, reorganization, merger,
acquisition of assets, or otherwise), but only upon the prior written
assumption of all such rights and obligations of this Agreement by
such successor, which successor shall be specifically required to and
shall assume this Agreement according to its terms as a condition
precedent to such assignment.
12.4 ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the full and
entire understanding and agreement between the parties with regard to
the subject hereof, and no party shall be liable or bound to any
other party in any manner by any representations, warranties or
covenants except as specifically set forth herein. Neither this
Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge or
termination is sought.
12.5 IMPOSSIBILITY OF PERFORMANCE. Neither party shall be liable to the
other due to the failure to perform any obligation or duty pursuant
to this Agreement where such failure has
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<PAGE> 13
been directly occasioned by any act of God, fire, inevitable
accident, governmental action, court order or other cause beyond the
reasonable control of the party who had the duty to perform and
occurring without its fault or negligence. The party whose
performance has been so interrupted shall give the other party prompt
notice of the interruption and the cause thereof, and shall use every
reasonable means to resume full performance of this Agreement as soon
as practicable.
12.6 CONFIDENTIALITY. (a) Chugai and Gliatech agree that any financial,
legal, business or technical information disclosed between them in
connection with the Agreement and the Products, whether before or
after the Effective Date, shall be considered confidential and
proprietary (hereinafter "Information") and shall not be disclosed to
any Person other than their employees, consultants, agents and other
representatives who need to know such information for purposes of
this Agreement (hereinafter "Representatives"). Chugai and Gliatech
also agree that such Information shall be held in confidence and
shall not be used other than as permitted under, and during the term
of, this Agreement. Such Information shall include, without
limitation, marketing and sales information, commercialization plans
and strategies, research and development work plans, and technical
information such as patent applications, trade secrets, systems,
methods, apparatus, designs, tangible material, and products and
derivatives thereof, whether or not related to the Technology, the
Products or the Improvements as discussed herein. Each party shall
cause its respective Representatives to comply with the
confidentiality and non-use covenants and agreements in this Section
and shall be responsible for any breach thereof by its
Representatives.
(b) The obligations of confidentiality and non-use in this
Section 12.6 shall not be applicable to the party receiving the
disclosure to the extent that such Information is currently or
becomes general public knowledge through no fault of such party.
(c) The covenants and agreements of Chugai and Gliatech in
Section 12.6 shall survive any expiration or termination of this
Agreement except for that Information, or portions thereof, which (i)
are or become generally available to the public through no action by
Chugai or employees, consultants, agents or other representatives of
Chugai or (ii) are or become available to Chugai on a nonconfidential
basis from a source other than Gliatech that is not otherwise bound
by obligations of confidentiality relating to such Information.
(d) In the event that Chugai is required by law or court
order to disclose any Information of Gliatech, Chugai shall: (i)
notify Gliatech in writing as soon as possible, but in no event less
than thirty (30) calendar days prior to any such disclosure; (ii)
cooperate with Gliatech to preserve the confidentiality of such
Information consistent with applicable law; and (iii) use its best
efforts to limit any such disclosure to the minimum disclosure
necessary to comply with such law or court order.
(e) This Agreement supersedes that certain Confidential
Disclosure Agreement entered into by and between Gliatech and Chugai,
dated as of November 13, 1995. All confidential information exchanged
between the parties under that agreement shall be
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<PAGE> 14
deemed Information hereunder and shall be subject to the
confidentiality provisions of this Section 12.6.
(f) Gliatech and Chugai agree that a breach or failure to
comply with any of the provisions of this Section 12.6 will
irreparably harm the business of Gliatech, and Gliatech will not have
an adequate remedy at law in the event of such breach or
non-compliance. Therefore, in the event that Chugai breaches or does
not comply with any of the provisions of this Section 12.6, Chugai
acknowledges that Gliatech shall be entitled to injunctive relief
and/or specific performance without the posting of bond or other
security, in addition to whatever other remedies Gliatech may have,
at law or in equity, in any court of competent jurisdiction against
any acts of such breach or non-compliance.
12.7 FURTHER ASSURANCES. Each of the parties hereto shall execute and
deliver any and all additional papers, documents and other
assurances, and shall do any and all acts and things reasonably
necessary in connection with the performance of its obligations
hereunder to carry out the rights and obligations of the parties
under this Agreement.
12.8 NOTICES. All notices and other communications required or permitted
in this Agreement shall be in writing and shall be by registered or
certified mail, postage prepaid, or otherwise delivered by hand, by
expedited delivery or courier service, or by messenger, addressed (a)
if to Chugai, at 1-9 Kyobashi 2-Chome, Chuo-Ku, Tokyo, Japan 104, to
the attention of the General Manager, Medical Device Division, and
with a copy to the attention of the Secretary, Medical Device
Division, at the same address, or at such other address as Chugai
shall have furnished to Gliatech in writing, or (b) if to Gliatech,
at 23420 Commerce Park Road, Cleveland, Ohio 44122, to the attention
of the President, or at such other address as Gliatech shall have
furnished to Chugai in writing. Each such notice or other
communication shall for all purposes of this Agreement be treated as
effective or having been given when delivered if delivered by hand,
expedited delivery service or courier service or by messenger, or if
sent by mail, at the earlier of its actual receipt of five (5) days
after the same has been deposited in a regularly maintained
receptacle for the deposit of the United States mail, addressed as
aforesaid.
12.9 DELAYS OR OMISSIONS. Any waiver, permit, consent or approval of any
kind on the part of a party of any breach or default under this
Agreement by the other party, or any waiver on the part of a party of
any provision or condition of this Agreement, shall be effective only
to the extent confirmed in writing to the other party. All remedies
under this Agreement, or by law or otherwise afforded to any party,
shall be cumulative and not alternative.
12.10 EXPENSES. Except as otherwise provided in this Agreement, Chugai and
Gliatech shall bear their own legal and other expenses in connection
with the transactions contemplated hereby.
12.11 PUBLICITY. Chugai and Gliatech agree that no press release or other
public announcement concerning the execution of this Agreement, any
of the provisions herein, or the
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<PAGE> 15
transactions contemplated hereby shall be issued without prior
approval of the form and content of the same by the parties;
PROVIDED, HOWEVER, that no consent shall be required if the
disclosure is required by applicable law or the rules of the
Securities and Exchange Commission or any recognized stock exchange
or automated trading system on which the common stock of either party
is listed or quoted, but the disclosing party shall provide the other
party with the text of such disclosure not less than three (3)
business days prior to its release.
12.12 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties
actually executing such counterparts, and all of which together shall
constitute one and the same instrument.
12.13 SEVERABILITY. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full
force and effect without said provision; PROVIDED, HOWEVER, that no
such severability shall be effective if it materially changes the
economic benefit of this Agreement to either party.
12.14 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement
are used for convenience only and are not to be considered in
construing or interpreting this Agreement or the right or obligations
of the parties herein.
IN WITNESS WHEREOF, Chugai and Gliatech have executed this
Agreement as of the Effective Date above.
CHUGAI PHARMACEUTICAL CO., LTD. GLIATECH INC.
By /s/ Koichiro Tsuji, Ph.D. By /s/ Thomas O. Oesterling, Ph.D.
------------------------- -------------------------------
Name: Koichiro Tsuji, Ph.D. Name: Thomas O. Oesterling, Ph.D.
Title: Senior Manager - Medical Title: President and Chief
Device Division Executive Officer
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<PAGE> 1
Exhibit 10.21
INDEMNIFICATION AGREEMENT
-------------------------
This INDEMNIFICATION AGREEMENT, dated as of _____________, 1998 (this
"Agreement"), is made and entered into by and between Gliatech Inc., a Delaware
corporation (the "Company"), and _________________ ("Indemnitee").
WHEREAS, it is essential to the Company to retain and attract as
directors and officers the most capable persons available;
WHEREAS, Indemnitee is a director and/or officer of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased risk
of litigation and other claims being asserted against directors and officers of
companies in today's environment;
WHEREAS, the Company's Second Restated Certificate of Incorporation
(the "Certificate") and the Amended and Restated By-Laws (the "By-Laws") provide
that the Company will indemnify its directors and officers to the fullest extent
permitted by law and will advance expenses in connection therewith, and
Indemnitee's willingness to serve as a director and/or officer of the Company is
based in part on Indemnitee's reliance on such provisions; and
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitee's continued service to
the Company in an effective manner, and Indemnitee's reliance on the aforesaid
provisions of the Certificate and By-Laws, and in part to provide Indemnitee
with specific contractual assurance that the protection promised by such
provisions will be available to Indemnitee regardless of, among other things,
any amendment to or revocation of such provisions or any change in the
composition of the Company's Board of Directors or any acquisition or business
combination transaction relating to the Company, the Company wishes to provide
in this Agreement for the indemnification of and the advancement of expenses to
Indemnitee as set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual agreements herein set
forth, the parties hereto hereby agree as follows:
1. Certain Definitions.
--------------------
1.1. CLAIM. The term "Claim" shall mean any threatened,
pending or completed action, suit or proceeding, or any inquiry or investigation
that Indemnitee in good faith believes might lead to the institution of any such
action, suit or proceeding, whether civil, criminal, administrative,
investigative or other.
1.2. INDEMNIFIABLE EVENT. The term "Indemnifiable Event" shall
mean any actual or asserted event or occurrence related to the fact that
Indemnitee is or was a director, officer, employee, agent, or fiduciary of the
Company, or is or was serving at the request of the Company as a director,
officer, employee, trustee, agent, or fiduciary of another corporation,
partnership,
<PAGE> 2
joint venture, employee benefit plan, trust, or other entity, or anything done
or not done by Indemnitee in any such capacity.
2. BASIC INDEMNIFICATION ARRANGEMENT. (a) In the event Indemnitee was,
is or becomes a party to or other participant in, or is threatened to be made a
party to or other participant in, a Claim by reason of (or arising in whole or
in part out of) an Indemnifiable Event, the Company shall indemnify Indemnitee
to the fullest extent permitted by law against any and all costs, charges and
expenses, including, without limitation, attorneys' fees and other fees and
expenses, judgments, fines and amounts paid in settlement (including all
interest, assessments and other charges paid or payable in connection with or in
respect of any such attorneys' fees and other fees and expenses, judgments,
fines or amounts paid in settlement) actually and reasonably incurred by
Indemnitee in connection with such Claim or any appeal therefrom, if Indemnitee
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interest of the Company, and, with respect to any
criminal action, proceeding or investigation, had no reasonable cause to believe
his or her conduct was unlawful.
(b) In the event Indemnitee was, is or becomes a party to or
other participant in, or is threatened to be made a party to or other
participant in, a Claim by or in the right of the Company to procure a judgment
in its favor by reason of (or arising in whole or in part out of) an
Indemnifiable Event, the Company will indemnify Indemnitee to the fullest extent
permitted by law against costs, charges and expenses, including, without
limitation, attorneys' fees and other fees and expenses, actually and reasonably
incurred by Indemnitee in connection with such Claim or any appeal therefrom, if
Indemnitee acted in good faith and in a manner he or she reasonably believed to
be in or not opposed to the best interests of the Company, except that no
indemnification shall be made in respect of any such Claim as to which
Indemnitee shall have been adjudged to be liable to the Company unless and only
to the extent that the Court of Chancery or the court in which such action, suit
or proceeding was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
Indemnitee is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
(c) To the extent that the Indemnitee has been successful on
the merits or otherwise, including, without limitation, the dismissal of an
action without prejudice, in defense of any Claim referred to in Sections 2(a)
or 2(b) hereof, Indemnitee shall be indemnified against costs, charges and
expenses (including attorneys' fees and other fees and expenses) actually and
reasonably incurred by him in connection therewith.
(d) Subject to Section 3(a), any indemnification under
Sections 2(a) or 2(b), unless ordered by a court, shall be made by the Company
only as authorized in the specific case upon a determination that
indemnification of the Indemnitee is proper in the circumstances because
Indemnitee has satisfied the applicable standard set forth in Section 2(a) or
2(b), as the case may be. Subject to Section 4(a), such determination shall be
made (i) by the Board of Directors of the Company (the "Board"), by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit or proceeding, (ii) if such a quorum of disinterested directors is not
available or if such disinterested directors so direct, by independent legal
counsel (designated in the manner provided below in this subsection (d)) in a
written opinion or (iii) by the
-2-
<PAGE> 3
stockholders of the Company (the "Stockholders") by a majority vote of
Stockholders present at a meeting at which a quorum is present. Independent
legal counsel shall be designated by vote of a majority of the disinterested
directors; PROVIDED, HOWEVER, that if the Board is unable or fails to so
designate, such designation shall be made by the Indemnitee subject to the
approval of the Company which approval shall not be unreasonably withheld.
Independent legal counsel shall not be any person or firm who, under the
applicable standards of professional conduct then prevailing, would have a
conflict of interest in representing either the Company or the Indemnitee in an
action to determine the Indemnitee's rights under this Agreement. The Company
agrees to pay the reasonable fees and expenses of such independent legal counsel
and to indemnify fully such counsel against costs, charges and expenses,
including, without limitation, attorneys' fees and other fees and expenses,
actually and reasonably incurred by such counsel in connection with this
Agreement or the opinion of such counsel pursuant hereto.
(e) All expenses, including, without limitation, attorneys'
fees and other fees and expenses, incurred by Indemnitee in his capacity as a
director or officer of the Company in connection with a Claim shall be paid by
the Company in advance of the final disposition of such Claim in the manner
prescribed by Section 3(b) hereof.
3. CERTAIN PROCEDURES RELATING TO INDEMNIFICATION AND ADVANCEMENT OF
EXPENSES. (a) Except as otherwise permitted or required by the Delaware General
Corporation Law (the "DGCL"), for purposes of pursuing any rights to
indemnification under Sections 2(a), 2(b) or 4(a) hereof, as the case may be,
Indemnitee may, but shall not required to, (i) submit to the entity making the
determination whether the Indemnitee is entitled to indemnification (the
"Determining Entity") a written statement of request for indemnification stating
that he or she is entitled to indemnification hereunder and the basis for
asserting such a claim for indemnification; and (ii) present to the Company
reasonable evidence of all expenses for which payment is requested. Submission
of such a written statement to the Determining Entity shall create a presumption
that the Indemnitee is entitled to indemnification under Sections 2(a), 2(b) or
4(a) hereof, as the case may be, and the Determining Entity shall be deemed to
have determined that Indemnitee is entitled to such indemnification unless
within 30 calendar days after receipt of such written statement the Determining
Entity shall determine (i) in the case of a determination made by the Board, by
a vote of a majority of the directors who are not parties to such suit, action
or proceeding at a meeting at which a quorum is present, (ii) in the case of a
determination made by independent legal counsel, in its judgment, or (iii) in
the case of a determination made by the Stockholders, by a vote of a majority of
the Stockholders present at a meeting of Stockholders entitled to vote thereon
at a meeting at which a quorum is present, in each case based upon clear and
convincing evidence (sufficient to rebut the foregoing presumption) that
Indemnitee is not entitled to indemnification and Indemnitee shall have received
notice within such 30 calendar day period in writing of such determination that
Indemnitee is not so entitled to indemnification. The notice to the Indemnitee
specified in the preceding sentence shall disclose with particularity the
evidence in support of the Determining Entity's determination. The provisions of
this Section 3(a) are intended to be procedural only and shall not affect the
right of Indemnitee to indemnification under this Agreement and any
determination by the Determining Entity that the Indemnitee is not entitled to
indemnification and any failure to make the payments requested in the written
statement for indemnification shall be subject to judicial review as provided in
Section 7 hereof.
-3-
<PAGE> 4
(b) For purposes of determining whether to authorize
advancement of expenses pursuant to Section 2(e) hereof, Indemnitee shall submit
to the Board a sworn statement of request for advancement of expenses
substantially in the form of Exhibit 1 attached hereto and made a part hereof
(the "Undertaking"), averring that (i) he or she has reasonably incurred or will
reasonably incur actual expenses in connection with a Claim and (ii) he or she
undertakes to repay such amount if it shall ultimately be determined that he or
she is not entitled to be indemnified by the Company under this Agreement or
otherwise. For purposes of requesting advancement of expenses pursuant to
Section 4(b) hereof, Indemnitee shall submit an Undertaking or such other form
of request as he or she determines to be appropriate (an "Expense Request").
Upon receipt of an Undertaking or Expense Request, as the case may be, the Board
shall within 10 calendar days authorize immediate payment of the expenses stated
in the Undertaking or Expense Request, as the case may be, whereupon such
payments shall immediately be made by the Company. No security shall be required
in connection with any Undertaking or Expense Request and any Undertaking or
Expense Request shall be accepted without reference to the Indemnitee's ability
to make repayment.
4. INDEMNIFICATION FOR ADDITIONAL EXPENSES. (a) Pursuant to Section
145(f) of the DGCL, without limiting any right which Indemnitee may have
pursuant to Section 2 hereof, the Certificate, the By-Laws, the DGCL, any policy
of insurance or otherwise, but subject to the limitations on the maximum
permissible indemnity which may exist under applicable law at the time of any
request for indemnity hereunder determined as contemplated by this Section 4(a),
the Company shall indemnify Indemnitee against any amount which he or she is or
becomes legally obligated to pay relating to or arising out of any Claim because
of any act, failure to act or neglect or breach of duty, including any actual or
alleged error, misstatement or misleading statement, by reason of an
Indemnifiable Event. The payments which the Company is obligated to make
pursuant to this Section 4(a) shall include, without limitation, damages,
judgments, settlements and charges, costs, expenses, expenses of investigation
and expenses of defense of legal actions, suits, proceedings or claims,
including attorneys' fees, and appeals therefrom, and expenses of appeal,
attachment or similar bonds, including attorneys' fees; PROVIDED, HOWEVER, that
the Company shall not be obligated under this Section 4(a) to make any payment
in connection with any claim against Indemnitee:
(i) to the extent of any fine or similar governmental
imposition which the Company is prohibited by applicable law from
paying which results in a final, nonappealable order; or
(ii) to the extent based upon or attributable to Indemnitee
gaining in fact a personal profit to which he or she was not legally
entitled, including, without limitation, profits made from the purchase
and sale by Indemnitee of equity securities of the Company which are
recoverable by the Company pursuant to Section 16(b) of the Securities
Exchange Act of 1934, and profits arising from transactions in publicly
traded securities of the Company which were effected by Indemnitee in
violation of Section 10(b) of the Securities Exchange Act of 1934,
including Rule 10b-5 promulgated thereunder.
The procedures set forth in Section 3(a) shall be available to the Indemnitee
for purposes of indemnification under this Section 4(a).
-4-
<PAGE> 5
(b) Expenses, including, without limitation, attorneys' fees and other
fees and expenses, incurred by Indemnitee in defending any actual or threatened
civil or criminal action, suit, proceeding or claim shall be paid by the Company
in advance of the final disposition thereof as authorized in accordance with
Section 3(b) hereof.
5. PARTIAL INDEMNITY, ETC. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines and amounts paid in settlement of a
Claim but not, however, for all of the total amount thereof, the Company will
nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is
entitled. Moreover, notwithstanding any other provision of this Agreement, to
the extent that Indemnitee has been successful on the merits or otherwise in
defense of any or all Claims relating in whole or in part to an Indemnifiable
Event or in defense of any issue or matter therein, including, without
limitation, dismissal without prejudice, Indemnitee will be indemnified against
all costs, charges and expenses, including, without limitation, attorneys' fees
and other fees and expenses, incurred in connection therewith.
6. NO PRESUMPTION. For purposes of this Agreement, the termination of
any Claim by judgment, order, settlement (whether with or without court
approval), or conviction, or upon a plea of nolo contendere or its equivalent,
will not create a presumption that Indemnitee did not meet any particular
standard of conduct or have any particular belief or that a court has determined
that indemnification is not permitted by applicable law.
7. ENFORCEMENT. (a) If a claim for indemnification made to the Company
is not paid in full by the Company within 30 calendar days after a written claim
has been received by the Company, the Indemnitee may at any time thereafter
bring suit against the Company to recover the unpaid amount of the claim.
(b) In any action brought under Section 7(a) hereof, it shall be a
defense to a claim for indemnification pursuant to Sections 2(a) or 2(b) hereof
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the
Undertaking, if any is required, has been tendered to the Company) that the
Indemnitee has not met the standards of conduct which make it permissible under
the DGCL for the Company to indemnify the Indemnitee for the amount claimed, but
the burden of proving such defense shall be on the Company. Neither the failure
of the Company, including the Board, independent legal counsel or the
Stockholders, to have made a determination prior to commencement of such action
that indemnification of the Indemnitee is proper in the circumstances because he
has met the applicable standard of conduct set forth in the DGCL, nor an actual
determination by the Company, including the Board, independent legal counsel or
the Stockholders, that the Indemnitee has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that the
Indemnitee has not met the applicable standard of conduct.
(c) It is intent of the Company that the Indemnitee not be required to
incur the expenses associated with the enforcement of his rights under this
Agreement by litigation or other legal action because the cost and expense
thereof would substantially detract from the benefits intended to be extended to
the Indemnitee hereunder. Accordingly, if it should appear to the Indemnitee
that the Company has failed to comply with any of its obligations under this
-5-
<PAGE> 6
Agreement or in the event that the Company or any other person takes any action
to declare this Agreement void or unenforceable, or institutes any action, suit
or proceeding designed (or having the effect of being designed) to deny, or to
recover from, the Indemnitee the benefits intended to be provided to the
Indemnitee hereunder, the Company irrevocably authorizes the Indemnitee from
time to time to retain counsel of his choice, at the expense of the Company as
hereinafter provided, to represent the Indemnitee in connection with the
initiation or defense of any litigation or other legal action, whether by or
against the Company or any director, officer, stockholder or other person
affiliated with the Company, in any jurisdiction. Regardless of the outcome
thereof, the Company shall pay and be solely responsible for any and all costs,
charges and expenses, including, without limitation, attorneys' and other fees
and expenses, reasonably incurred by the Indemnitee (i) as a result of the
Company's failure to perform this Agreement or any provision thereof or (ii) as
a result of the Company or any person contesting the validity or enforceability
of this Agreement or any provision thereof as aforesaid.
8. NON-EXCLUSIVITY AND SEVERABILITY. (a) The rights of Indemnitee
hereunder will be in addition to any other rights Indemnitee may have under the
Certificate, the By-Laws or the DGCL or otherwise; PROVIDED, HOWEVER, that to
the extent that Indemnitee otherwise would have any greater right to
indemnification under any provision of the Certificate or By-Laws as in effect
on the date hereof, Indemnitee will be deemed to have such greater right
hereunder; and, PROVIDED FURTHER, that to the extent that any change is made to
the DGCL (whether by legislative action or judicial decision), the Certificate
and/or the By-Laws which permits any greater right to indemnification than that
provided under this Agreement as of the date hereof, Indemnitee will be deemed
to have such greater right hereunder. The Company will not adopt any amendment
to the Certificate or the By-Laws the effect of which would be to deny, diminish
or encumber Indemnitee's right to indemnification under the Certificate, the
By-Laws, the DGCL, or otherwise as applied to any act or failure to act
occurring in whole or in part prior to the date upon which the amendment was
approved by the Company's Board of Directors and/or its Stockholders, as the
case may be.
(b) If any provision of this Agreement or the application of any
provision hereof to any person or circumstance is held invalid, unenforceable or
otherwise illegal, the remainder of this Agreement and the application of such
provision to any other person or circumstance will not be affected, and the
provision so held to be invalid, unenforceable or otherwise illegal will be
reformed to the extent (and only to the extent) necessary to make it
enforceable, valid or legal.
9. LIABILITY INSURANCE. To the extent the Company maintains an
insurance policy or policies providing directors' and officers' liability
insurance, Indemnitee will be covered by such policy or policies, in accordance
with its or their terms, to the maximum extent of the coverage available for any
Company director or officer.
10. ALLOWANCE FOR COMPLIANCE WITH COMMISSION REQUIREMENTS. Indemnitee
acknowledges that the Securities and Exchange Commission (the "Commission") has
expressed the opinion that indemnification of directors and officers from
liabilities under the Securities Act of 1933 ("Act") is against public policy as
expressed in the Act and is, therefore, unenforceable. Indemnitee hereby
acknowledges and agrees that it will not be a breach of this Agreement for the
Company to undertake with the Commission in connection with the registration for
sale of any
-6-
<PAGE> 7
shares or other securities of the Company from time to time that, in the event a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director or officer of the Company
in the successful defense of any action, suit or proceeding) is asserted in
connection with such shares or other securities being registered, the Company
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of competent jurisdiction the question
of whether or not such indemnification by the Company is against public policy
as expressed in the Act and the Company will be governed by the final
adjudication of such issue. Indemnitee further agrees that such submission to a
court of competent jurisdiction shall not be a breach of this Agreement.
11. SUBROGATION. In the event of payment under this Agreement, the
Company will be subrogated to the extent of such payment to all of the related
rights of recovery of Indemnitee against other persons or entities. Indemnitee
will execute all papers reasonably required and will do everything that may be
reasonably necessary to secure such rights and enable the Company effectively to
bring suit to enforce such rights, including all of Indemnitee's reasonable
costs and expenses, including attorneys' fees and disbursements, to be
reimbursed by, or at the option of Indemnitee advanced by, the Company.
12. NO DUPLICATION OF PAYMENTS. The Company will not be liable under
this Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, the Certificate, the By-Laws or otherwise) of the
amounts otherwise indemnifiable hereunder.
13. SUCCESSORS AND BINDING AGREEMENT. (a) The Company will use
reasonable efforts to require any successor (whether direct or indirect, by
purchase, merger, consolidation, reorganization or otherwise) to all or
substantially all of the business or assets of the Company, by agreement in form
and substance satisfactory to Indemnitee, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent the Company
would be required to perform if no such succession had taken place. This
Agreement will be binding upon and inure to the benefit of the Company and any
successor to the Company, including, without limitation, any person acquiring
directly or indirectly all or substantially all of the business or assets of the
Company whether by purchase, merger, consolidation, reorganization or otherwise
(and such successor will thereafter be deemed the "Company" for purposes of this
Agreement), but this Agreement will not otherwise be assignable, transferable or
delegatable by the Company.
(b) This Agreement will inure to the benefit of and be enforceable by
Indemnitee's personal or legal representatives, executors, administrators,
successors, heirs, distributees and legatees.
(c) This Agreement is personal in nature and neither of the parties
hereto may, without the consent of the other, assign, transfer or delegate this
Agreement or any rights or obligations hereunder except as expressly provided in
Sections 12(a) and 12(b). Without limiting the generality or effect of the
foregoing, Indemnitee's right to receive payments hereunder will not be
assignable, transferable or delegatable, whether by pledge, creation of a
security interest, or otherwise, other than by a transfer by Indemnitee's will
or by the laws of descent and distribution and, in the event of any attempted
assignment or transfer contrary to this Section 12(c), the
-7-
<PAGE> 8
Company will have no liability to pay any amount so attempted to be assigned,
transferred or delegated.
14. NOTICES. For all purposes of this Agreement, all communications,
including, without limitation, notices, consents, requests or approvals,
required or permitted to be given hereunder will be in writing and will be
deemed to have been duly given when hand delivered or dispatched by electronic
facsimile transmission (with receipt thereof orally confirmed), or five calendar
days after having been mailed by United States registered or certified mail,
return receipt requested, postage prepaid, or one business day after having been
sent for next-day delivery by a nationally recognized overnight courier service
such as Federal Express, UPS or Purolator, addressed to the Company, to the
attention of the President of the Company, at its principal executive office and
to Indemnitee at Indemnitee's principal residence as shown in the Company's most
current records, or to such other address as any party may have furnished to the
other in writing and in accordance herewith, except that notices of changes of
address will be effective only upon receipt.
15. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement will be governed by and construed in accordance
with the substantive laws of the State of Delaware, without giving effect to the
principles of conflict of laws of such State.
16. MISCELLANEOUS. No provision of this Agreement may be waived,
modified or discharged unless such waiver, modification or discharge is agreed
to in writing signed by Indemnitee and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance with
any condition or provision of this Agreement to be performed by such other party
will be deemed a waiver of similar or dissimilar provisions or conditions at the
same or at any prior or subsequent time. No agreements or representations, oral
or otherwise, expressed or implied with respect to the subject matter hereof
have been made by either party which are not set forth expressly in this
Agreement.
-8-
<PAGE> 9
17. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original but all of which
together will constitute one and the same agreement.
IN WITNESS WHEREOF, the parties to this Agreement have executed this
Agreement as of the date first above written.
GLIATECH, INC.
By:
-------------------------------------
Name:
Title:
INDEMNITEE:
-------------------------------------
Name:
Title:
-9-
<PAGE> 1
Exhibit 21.1
Subsidiaries Of The Company
<TABLE>
<CAPTION>
Name State of Incorporation Business Name
- ---- ---------------------- -------------
<S> <C> <C>
Gliatech R & D, Inc. Ohio Gliatech R & D, Inc.
GIC, Inc. Delaware GIC, Inc.
</TABLE>
-1-
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-00406) pertaining to the Amended and Restated 1989 Stock Option Plan
and 1992 Directors Stock Option Plan of Gliatech Inc., and in the Registration
Statement (Form S-8 No. 333-00408) pertaining to the 1995 Nonemployee Directors
Stock Option Plan of Gliatech Inc. of our report dated March 10, 1998, with
respect to the consolidated financial statements of Gliatech Inc. included in
the 1997 Annual Report (Form 10-K) for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 30, 1998
<PAGE> 1
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned
directors and officers of Gliatech Inc., a Delaware corporation, hereby
constitutes and appoints Thomas O. Oesterling, Ph.D., Rodney E. Dausch, Michael
A. Zupon, Ph.D. and Thomas C. Daniels, and each of them, as the true and lawful
attorney or attorneys-in-fact, with full power of substitution and revocation,
for each of the undersigned and in the name, place and stead of each of the
undersigned, to sign on behalf of each of the undersigned an Annual Report on
Form 10-K for the fiscal year ended December 31, 1997, pursuant to Section 13 of
the Securities Exchange Act of 1934 and to sign any and all amendments to such
Annual Report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, including, without limitation, a Form 12b-25,
with the Securities and Exchange Commission, granting to said attorney or
attorneys-in-fact, and each of them, full power and authority to do so and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as the undersigned
might or could do in person, hereby ratifying and confirming all that said
attorney or attorneys-in-fact or any of them or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
This Power of Attorney may be executed in multiple
counterparts, each of which shall be deemed an original with respect to the
person executing it.
Executed as of this 15th day of March 1998.
/s/Robert P. Pinkas /s/Allen H. Ford
- ------------------------------- --------------------------------------
Robert P. Pinkas Allen H. Ford
Director Director
/s/Ronald D. Henriksen /s/Irving S. Shapiro
- ------------------------------- --------------------------------------
Ronald D. Henriksen Irving S. Shapiro
Director Director
/s/Thomas O. Oesterling, Ph.D.
- ------------------------------- --------------------------------------
Theodore E. Haigler, Jr. Thomas O. Oesterling, Ph.D.
Director President and Chief Executive
Officer (Principal Executive
Officer) and Director
/s/John L. Ufheil /s/Rodney E. Dausch
- ------------------------------- --------------------------------------
John L. Ufheil Rodney E. Dausch
Director Vice President, Secretary and Chief
Financial Officer (Principal Financial
Officer and Principal Accounting
Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GLIATECH
INC.'S ANNUAL REPORTS ON FORM 10-K FOR THE YEAR ENDED DEC. 31, 1995 AND 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 20,780 9,121
<SECURITIES> 2,243 8,875
<RECEIVABLES> 143 344
<ALLOWANCES> 5 13
<INVENTORY> 418 387
<CURRENT-ASSETS> 23,926 18,999
<PP&E> 1,617 2,332
<DEPRECIATION> 1,050 1,202
<TOTAL-ASSETS> 25,346 20,804
<CURRENT-LIABILITIES> 2,163 3,177
<BONDS> 0 0
0 0
0 0
<COMMON> 73 73
<OTHER-SE> 23,109 17,554
<TOTAL-LIABILITY-AND-EQUITY> 25,346 20,804
<SALES> 182 901
<TOTAL-REVENUES> 2,654 3,878
<CGS> 123 342
<TOTAL-COSTS> 123 342
<OTHER-EXPENSES> 7,876 10,356
<LOSS-PROVISION> 67 9
<INTEREST-EXPENSE> 14 2
<INCOME-PRETAX> (4,986) (5,700)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,986) (5,700)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,986) (5,700)
<EPS-PRIMARY> (3.28) (0.78)
<EPS-DILUTED> (3.28) (0.78)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GLIATECH
INC.'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DEC. 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,601
<SECURITIES> 5,941
<RECEIVABLES> 586
<ALLOWANCES> 42
<INVENTORY> 164
<CURRENT-ASSETS> 12,736
<PP&E> 2,751
<DEPRECIATION> 1,473
<TOTAL-ASSETS> 14,805
<CURRENT-LIABILITIES> 3,366
<BONDS> 0
0
0
<COMMON> 74
<OTHER-SE> 11,366
<TOTAL-LIABILITY-AND-EQUITY> 14,805
<SALES> 1,536
<TOTAL-REVENUES> 4,901
<CGS> 614
<TOTAL-COSTS> 614
<OTHER-EXPENSES> 11,646
<LOSS-PROVISION> 29
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,560)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,560)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,560)
<EPS-PRIMARY> (1.16)
<EPS-DILUTED> (1.16)
</TABLE>
