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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 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 check mark 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 requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in 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 2, 1999 at a closing price of $26.00 per share as reported by the Nasdaq
National Market was approximately $212,146,064. 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 because 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 2, 1999 was 9,467,773.
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
1999 Annual Meeting of Stockholders (the "Proxy Statement").
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GLIATECH INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
PAGE
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PART I
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Item 1. Business 1
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Securityholders 12
Item 4A. Executive Officers of the Company 12
PART II
Item 5. Market for Company's Common Equity and Related
Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 21
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 32
PART III
Item 10. Directors and Executive Officers of the Company 32
Item 11. Executive Compensation 32
Item 12. Security Ownership of Certain Beneficial Owners and
Management 32
Item 13. Certain Relationships and Related Transactions 32
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K. 33
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PART I
ITEM 1. BUSINESS.
GENERAL
Gliatech is engaged in the research, development and commercialization
of ADCON, a family of proprietary, resorbable, carbohydrate polymer medical
devices designed to inhibit surgical scarring and adhesions. 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
continuing to pursue its AD program through its strategic alliance with Janssen
Pharmaceutica, N.V. of Belgium ("Janssen"), a wholly owned subsidiary of Johnson
& Johnson. See "Neurologic Drug Development Programs--The Janssen Alliance." The
discussion presented below should be read in conjunction with the Company's
consolidated financial statements and related notes appearing elsewhere in this
Annual Report on Form 10-K.
GLIAL CELL-DERIVED TECHNOLOGIES
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 Cognition Modulation program is based on
controlling the levels of the neurotransmitter, histamine, within 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
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 to inhibit scarring and adhesions in all
patients undergoing lumbar 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 Company also conducted a multi-center double-blind
clinical trial of ADCON-L in the U.S. at 16 centers. The Company enrolled 371
patients in this trial.
Marketing and Sales. In August 1995, the Company obtained regulatory
clearances to affix CE Marking for ADCON-L, which allows the Company to market
ADCON-L in the 19 European countries which recognize CE Marking. The Company
currently markets ADCON-L in approximately 30 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, Portugal, the Republic
of South Africa, Slovakia, Spain, Sweden, Switzerland and the United Kingdom
(collectively, the "Distributing Countries"). In addition, the Company signed a
development and exclusive license agreement in December 1996 with Chugai
Pharmaceutical Co. Ltd.
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("Chugai") for the sale of ADCON-L and ADCON-T/N in Japan. Chugai subsequently
filed an application requesting regulatory approval to market such products in
Japan.
After receiving FDA approval to market ADCON-L in the U.S., the Company
commenced sales in the U.S. in June 1998. In the U.S., the Company markets
ADCON-L through a network of independent manufacturer's agents which serve the
orthopaedic and neurosurgical markets. The Company utilizes approximately 30 of
such independent organizations in order to market ADCON-L in the U.S. The sales
representatives of these organizations are trained and managed by the sales
personnel of the Company, which includes a National Sales Manager who is
assisted by regional sales managers. In the U.S., the Company establishes the
price of its products for sale to hospitals and the independent manufacturers'
agents are reimbursed on a commissioned basis.
ADCON-P
ADCON-P is formulated as a proprietary, resorbable, carbohydrate
polymer liquid which is applied directly into the peritoneal 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.
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 was conducted at six centers. The
Company enrolled 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
evaluated patients between one to three months after surgery to assess the
incidence and extent of postsurgical scarring and adhesions. In November 1998,
the Company received approval from the FDA to initiate a pivotal clinical trial
for ADCON-P in the U.S. The Company commenced patient enrollment of its pivotal
clinical trial in January 1999.
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.
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.
Marketing and Sales. In January 1996, the Company obtained regulatory
clearance to affix CE Marking for ADCON-T/N, which allows the Company to market
ADCON-T/N in the 19 European countries which recognize CE Marking. The Company
is currently marketing its ADCON-T/N medical device in the approximately 30
Distributing Countries through independent medical device distributors. The
Company provides ongoing technical and marketing support through its Area Sales
Managers, Marketing and Medical departments.
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, the Company's ADCON products are being designed to be adapted for use at
the specific surgical site. The additional devices include ADCON-A for use in
abdominal surgery, ADCON-I for use in implant/prosthetic surgery, and ADCON-C
for use in cardiac surgery. Although ADCON-A utilizes the same formulation as
ADCON-P, the Company intends to do a separate clinical trial for ADCON-A for use
in abdominal rather than pelvic surgeries.
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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 a strategic alliance with Janssen. In October 1998, this
alliance was restructured to provide for further research by the Company until
May 1999.
Cognition Modulation
The Company is conducting research to discover and develop a class of
small molecules designed to act on the histamine H(3) 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 H(3) 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.
Clinical Results. In February 1999, the Company completed a Phase I
double-blind human clinical trial of its H(3) receptor antagonist, which was
conducted at a single site in London, England. The trial involved 40 patients
and was used to test the safety and tolerability profile of the H(3) receptor
antagonist. The Company is currently conducting a Phase II human clinical trial
to test the utility of multiple doses of its H(3) receptor antagonist.
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 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'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.
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. 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. The Company has discovered that beta-amyloid can bind
one of the complement proteins and activate the entire complement cascade,
providing an explanation for
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the presence of activated complement in patients with AD. 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 Alliance
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 October 1998, this alliance was restructured to provide for further
research by the Company until May 1999. Janssen is required to make 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 approximately 30 Distributing Countries.
The distributors in Europe are managed by the Company's European sales
organization, which consists of four Area Sales Managers. 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. In December 1997 and February 1998, Chugai filed applications
requesting regulatory approval to market ADCON-L and ADCON-T/N, respectively, in
Japan.
The Company's 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 such arrangement. The Company currently
establishes the price of its products for sale to distributors and each
distributor then sets the price. 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 markets ADCON-L through a network of
independent manufacturer's agents which serve the orthopaedic and neurosurgical
markets. The Company utilizes approximately 30 such independent organizations in
order to market ADCON-L in the U.S. The sales representatives of these
organizations are trained and managed by the sales personnel of the Company,
which includes a National Sales Manager who is assisted by regional sales
managers. In the U.S., the Company establishes the price of its products for
sale to hospitals and the independent manufacturer's agents are reimbursed on a
commissioned basis.
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MANUFACTURING AND SUPPLIERS
Currently, the Company does not have any operational manufacturing
facilities and 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 requirements worldwide and
its future requirements for ADCON products outside the U.S. 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.
In December 1998, the Company leased a 12,400 square foot facility in
Solon, Ohio to establish a manufacturing site for its sales of ADCON-L in the
U.S. This facility will be subject to QSR requirements. After this facility
becomes operational, which is expected to occur during 2000, the Company
believes that it will have the ability at this facility to supply sufficient
products to satisfy its future requirements for the development and
commercialization of its ADCON products in the U.S.
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.
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
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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. The regulatory process
is lengthy, expensive and uncertain. Prior to commercial sale in the United
States the Company's products under development must be approved by the FDA. The
Company must also seek supplemental premarket approval for changes to a marketed
product, such as ADCON-L. Securing FDA approvals may require the submission of
extensive clinical data and supporting information. Product approvals can be
withdrawn for failure to comply with regulatory standards or the occurrence of
unforeseen problems following initial marketing. 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
approval, 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 approval requirements
may differ. There can be no assurance that the Company will be able to obtain
necessary regulatory approvals on a timely basis, if at all, for any of its
products under development, 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.
There is no certainty that the ongoing 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-T/N or ADCON-P or any other products
under development on a timely basis, if at all.
ADCON-L and any other products manufactured or distributed pursuant to
FDA approval are subject to pervasive and continuing regulation by the FDA,
including recordkeeping requirements and reporting of adverse patient
experience. The Federal Food, Drug, and Cosmetic Act (the "FDC Act") requires
that medical devices and drugs be manufactured in registered establishments and
in accordance with the Good Manufacturing Practices ("GMP") requirements. Such
manufacturing facilities are subject to periodic inspections by the FDA.
Approval Process for Medical Devices - United States. The FDC Act
requires FDA approval 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 GMP requirements) and class
II devices are subject to premarket clearance and special controls (e.g.,
performance standards, postmarket surveillance 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)
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premarket notification or a premarket approval application ("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 class I or II 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 to obtain FDA permission prior to
commencing human clinical trials. 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 GMP 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.
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.
Approval Process for Drugs - United States. Before a new drug may be
commercially sold in the United States, extensive clinical trials and other
tests on the product must be conducted and the results submitted to the
appropriate regulatory agencies as part of a lengthy approval process.
The steps required before a new drug product may be marketed in the
United States include (1) preclinical laboratory and animal tests conducted in
accordance with Good Laboratory Practices, (2) submission to the FDA of an
application for an investigational new drug ("IND"), which must become effective
before human clinical trials may commence, (3) well-controlled human clinical
trials to establish the safety and efficacy of the new drug product, (4)
submission of a new drug application ("NDA") to the FDA for nonbiological drugs,
and (5) FDA approval of the NDA prior to any commercial sale or shipment of the
drug. The Company's drug products are in preclinical and early Phase I
development. 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.
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.
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The IRB considers, among other 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.
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.
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.
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 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.
Medical devices can only be placed on the market in the 18 countries of
the European Economic Area ("EEA") (including the 15 countries of the European
Union), if these products are CE marked. CE marking attests compliance with the
requirements of the Medical Devices Directive ("MDD").
In order to qualify for CE marking, a medical device must be in
compliance with the requirements related to the performance and safety of
medical devices of the MDD (the "Essential Requirements"). These relate to the
safety and performance of the device. In addition, the Company must obtain
conformity assessment certification from a body such as a testing laboratory or
other certifying body (the "Notified Body"). The Company is using a Dutch
Notified Body for this purpose and has chosen a particular conformity assessment
path involving type examination of the devices and auditing of the Company's
quality system used in production. There are also specific requirements related
to clinical investigation and reporting of adverse incidents.
Once CE marked medical devices are placed on the market, they come
under regulatory surveillance of national Competent Authorities ("CAs"). CAs are
responsible for enforcement and can restrict, prohibit or recall CE marked
devices if they are unsafe. Such negative decisions must be reviewed by the
European Commission in order to remain valid.
Although countries of the EEA may require use of national language on
labels and instructions for use, they must accept CE marked devices in their
market without imposing additional technical requirements that would be in
violation of the MDD. There can be no assurances, however, that these countries
will always respect this principle in practice.
8
<PAGE> 11
The regulatory system created by the MDD does allow in practice
substantial national variations in requirements relating to clinical
investigation and reporting of adverse incidents. Pricing and reimbursement
requirements are not covered by European Union legislation and therefore can be
freely regulated by the countries of the EEA.
The regulation of drugs in the European Union is subject to a separate
and different regulatory framework, which requires, among other things,
pre-market approval by the applicable regulatory agencies before such products
can be placed on the market.
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, one of which expires in
2014, and two of which expire in 2015, three pending U.S. patent applications,
and corresponding foreign patent applications relating to its ADCON products.
The Company has been approached by a third party regarding potential
infringement by the ADCON line of products of two U.S. patents for which the
third party is the licensee. Based upon its investigation, the Company believes
that the claims of such issued patents are invalid or not infringed by the ADCON
products. There can, however, be no assurance that the Company will not be sued
by such third party. 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.
On March 17, 1998, a lawsuit filed by the Company entitled Gliatech
Inc. v. Dr. Jerry Silver and Case Western Reserve University, Civil Action No.
1:97CV 2306, which sought a declaration that Dr. Silver is not a co-inventor of
one of the Company's three issued patents relating to its ADCON technology, was
dismissed pursuant to the terms and conditions of a Settlement Agreement by and
among the Company, Jerry Silver and Case Western Reserve University.
A U.S. patent, filed solely by the Company, has been issued covering
the composition of a matter for a different series of synthetic H(3) receptor
antagonist compounds. Several additional U.S. patent applications and their
corresponding foreign applications for an additional series of H(3) receptor
antagonist and one series of H(3) receptor agonist 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.
9
<PAGE> 12
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 issue as 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, the U.S.
Patent and Trademark Office may require that the claims of a 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.
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 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
10
<PAGE> 13
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.
RESEARCH AND DEVELOPMENT EXPENSES
As a result of the Company's ongoing research and development efforts
with respect to its ADCON family of products, other than ADCON-L, its Cognition
Modulation program and AD program, the Company's research and development
expenses have increased since 1996. Research and development expenses for fiscal
year ended December 31, 1998, 1997 and 1996 were approximately $9.8 million,
$7.0 million and $6.1 million, respectively. The Company employs approximately
36 individuals who are engaged in or directly support its research and
development efforts.
DOMESTIC AND FOREIGN PRODUCT SALES
Sales of the Company's ADCON products, particularly ADCON-L, comprised
approximately 80%, 31%, and 24% of the Company's revenues for years ending
December 31, 1998, 1997 and 1996, respectively. For a description of domestic
and foreign product sales and certain related information, see Note I of Notes
to Consolidated Financial Statements included herein.
EMPLOYEES
As of December 31, 1998, the Company had 67 full-time employees, 18 of
whom hold a Ph.D. or M.D. degree; 36 employees are engaged in, or directly
support, research and development; 14 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. In addition, the Company leases a 12,400 square
feet facility in Solon, Ohio to establish its manufacturing facilities for its
sales of ADCON-L in the U.S. This lease expires on April 30, 2009.
In September 1998, the Company announced its plans to relocate its
corporate headquarters. This project, however, was terminated as of December 31,
1998 when project costs were estimated to be substantially in excess of
available funding.
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<PAGE> 14
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is involved in various disputes arising
in the ordinary course of business. In management's opinion, the outcome of
these matters will not have a material adverse effect on the Company's financial
condition.
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 1998.
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 of Collaborative Research, Inc.
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 54 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 49 years old.
MICHAEL A. ZUPON, PH.D. Dr. Zupon has served as Executive Vice
President of Research and Development since September 1998. Prior to that time,
he 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. Dr. Zupon is 44 years old.
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<PAGE> 15
PART II
ITEM 5(A) MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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.
HIGH LOW
---- ---
FISCAL 1998
Fourth Quarter $31 $14 1/2
Third Quarter $18 5/8 $12 1/2
Second Quarter $20 $11 1/2
First Quarter $12 1/4 $ 7 7/8
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
As of the close of business on March 2, 1999, the price of the Common
Stock of the Company was $26.00 per share as reported on the Nasdaq National
Market and there were approximately 283 stockholders of record for the Common
Stock of the Company.
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.
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-K. All such
proceeds were directly or indirectly paid to others pursuant to Rule
701(f)(4)(vii):
Construction 0
Machinery and Equipment 0
Real Estate 0
Acquisition 0
Repayment of debt 0
Working Capital 551,000
Temporary Investments (specify):
Commercial Paper 1,342,000
Corporate Bonds 1,652,000
Other Short-Term Investments 232,000
Other:
Clinical Trials 3,037,000
Research and Development 9,477,000
Sales and Marketing 3,283,000
General Corporate Purposes 73,000
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<PAGE> 16
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, 1998 through 1994 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,
-----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES
Product sales $ 13,925 $ 1,536 $ 901 $ 182 $ 86
Research contracts and
licensing fees 2,559 2,954 2,855 2,217 918
Government grants 846 410 122 255 141
---------------------------------------------------------------
Total revenues 17,330 4,900 3,878 $ 2,654 1,145
OPERATING COSTS AND EXPENSES
Cost of product sales 2,468 614 342 123 58
Research and development 9,758 6,952 6,120 5,107 4,600
Selling, general and administrative 9,359 4,401 4,070 2,599 2,365
Depreciation and amortization 419 293 166 170 272
---------------------------------------------------------------
Total operating costs and
expenses 22,004 12,260 10,698 7,999 7,295
---------------------------------------------------------------
Loss from operations (4,674) (7,360) (6,820) (5,345) (6,150)
Settlement of claim (2,025)
Interest income, net 916 824 1,120 360 98
---------------------------------------------------------------
Net loss $ (3,758) $ (8,561) $ (5,700) $ (4,985) $ (6,052)
========= ========= ========= ========= ========
Basic and diluted net
loss per common share $ (0.44) $ (1.16) $ (0.78) $ (3.28) $ (35.14)
========= ========= ========= ========= ========
Shares used for purposes
of computing basic
and diluted net loss
per common share 8,511,014 7,354,124 7,313,230 1,518,955 172,244
========= ========= ========= ========= =======
<CAPTION>
DECEMBER 31,
------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and short-term
investments $ 26,399 $ 11,542 $ 17,996 $ 23,023 $ 4,671
Working capital 24,778 9,370 15,821 21,762 1,511
Total assets 33,962 14,805 20,804 25,346 6,716
Retained deficit (45,772) (42,014) (33,454) (27,754) (22,768)
Total stockholders'
equity $ 27,153 $ 11,440 $ 17,627 $ 23,182 $ 3,122
</TABLE>
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<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
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 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
approximately 30 countries outside the U.S., including the major countries in
the European Union pursuant to its CE Marking. The Company also commenced sales
of ADCON-L in the U.S. in June 1998. 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 October 1998, this alliance was restructured to provide for further research
by the Company until May 1999. In addition to funds derived from contract
research payments relating to its strategic alliance with Jannsen, the Company
receives 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. In June 1998, the Company received
proceeds of approximately $18.9 million in connection with the completion of a
public offering of 1,725,000 shares of Common Stock.
RESULTS OF OPERATIONS
Years ended December 31, 1998 and 1997.
Revenues. Total revenues more than tripled to $17.3 million in 1998
from $4.9 million in fiscal 1997. The increase in total revenues is primarily
the result of an increase in product sales, which increased to $13.9 million in
1998 from $1.5 million in 1997. This increase in product sales resulted
primarily from the commercialization in the U.S. of the Company's first product,
ADCON-L, which was approved for marketing by the FDA in May 1998. The Company
commenced sales of ADCON-L in the U.S. in June 1998.
The Company's research contract revenues decreased by 15.4% to $2.6
million in 1998 from $3.0 million in 1997. These research contract revenues were
from the Company's research contract with Janssen, which was restructured in
October 1998 to provide for further research by the Company and revenues from
Janssen until May 1999.
The Company's government-funded grant revenues more than doubled to
$846,202 in 1998 from $410,333 in 1997. This increase was a result of an
increase in the number of government-funded grants to the Company. The Company
received a second Phase II Small Business Innovation Research ("SBIR") award
from the National Institute of Neurological Disorders and Stroke ("NINDS") in
September 1998, for the research to evaluate the histamine H(3) antagonists. The
Company's first Phase II SBIR Program grant from the NINDS was awarded in
February 1997 for the research to evaluate the histamine H(3) receptor
antagonists. Both Phase II grants have a two-year term and each may provide as
much as $750,000 in funding. In addition, in 1998 the Company received three
additional Phase I grants. Two were in the second quarter, each in the amount of
$97,500 from the National Institutes of Health ("NIH"). One was for the research
development of drugs for schizophrenia and dementia and the other was to
evaluate anti-properdin agents as novel anti-inflammatories. The Company
received a third Phase I grant in the third quarter from NIH for $99,800 to
research combinatorial construction of novel imidazole
15
<PAGE> 18
libraries. In 1997 the Company received two Phase I grants in the third quarter.
One was from NINDS in the amount of $99,500, and the other from the National
Institute of Nursing Research ("NINR") in the amount of $99,000.
Operating Costs and Expenses. Total operating costs and expenses
increased by 78.9% to $22 million in 1998, compared to $12.3 million in 1997.
Cost of products sold increased to $2.5 million in 1998 compared to $614,424 in
1997, but decreased, as a percentage of products sales in 1998 to 17.7% from 40%
in 1997. The percentage decrease in 1998 was primarily due to: (1) the favorable
impact of the unit sales prices of ADCON-L in the United States and (2)
increased production volumes.
Research and development expenses increased by 40.4% to $9.8 million in
1998 from $7.0 million in 1997. This increase was primarily due to: (1) an
increase in development expenses for the Company's lead compound for its
Cognition Modulation program, which commenced a Phase I human clinical trial in
the fourth quarter of 1998 and (2) increased clinical research costs associated
with the pilot clinical trial of ADCON-P, which was completed in the third
quarter of 1998.
Selling, general and administrative expenses increased 112.7% to $9.4
million in 1998 compared to $4.4 in 1997. This increase was primarily due to an
increase in the sales and marketing expenses and sales commissions resulting
from the sales and marketing of ADCON-L in the U.S. The increase was also due to
$647,000 of costs associated with the Company's efforts to select and finance a
new building for its future research and development and corporate headquarters
facilities. This project was terminated as of December 31, 1998 when project
costs were estimated to be substantially in excess of available funding.
Depreciation and amortization expense increased 43.2% to $419,293 in
1998 compared to $292,746 in 1997. The increase was primarily due to increased
amortization resulting from leasehold improvements made in 1997.
Other Income and Expenses. Net interest income increased to $915,582 in
1998 from $823,891 in 1997. This increase in 1998 was primarily due to higher
cash, cash equivalents and short-term investment balances due to the proceeds
from the public offering in June 1998.
Net Loss. Gliatech's net loss decreased to $3.8 million in 1998,
compared to $8.6 million in 1997. The decrease in net loss is a result of
ADCON-L product sales in the U.S., offset somewhat by an increase in total
expenses. The basic and diluted net loss per common share was $0.44 in 1998,
compared to $1.16 in 1997.
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 SBIR Program two year grant from the NINDS for research to evaluate the
histamine H(3) 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: (1) from NINDS for research to evaluate the molecular characterization
of the histamine receptor subtype and (2) 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
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<PAGE> 19
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: (1) 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; (2) increased staffing and
clinical consulting costs associated with the Premarket Approval Application
filed with the FDA for ADCON-L; (3) increased costs associated with the
development of a new delivery system for ADCON-L and (4) 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
Historically, 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. In June 1998, the Company raised additional funds through a
public offering of 1,725,000 shares of its Common Stock at a price of $12.00 per
share, including the exercise of the over-allotment option of 225,000 shares of
Common Stock. The net proceeds to the Company from this offering were
approximately $18.9 million. The Company has also established a $1.5 million
unsecured line of credit with a bank. As of December 31, 1998, the Company had
no borrowings against the line of credit.
In order to preserve principal and maintain liquidity, the Company's
funds are invested in commercial paper and other short-term investments. As of
December 31, 1998 and December 31, 1997, the Company's cash and cash equivalents
and short-term investments totaled $26.4 million and $11.5 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-2000. 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,
17
<PAGE> 20
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 the second quarter of 1998, the Company was awarded two Phase I SBIR
grants for up to $97,500 each from National Heart, Lung and Blood Institute and
National Institute of Mental Health, both divisions of the NIH. In addition, in
September 1998 the Company was awarded a second Phase II SBIR Program grant from
NINDS for research evaluating H(3) agonists. The grant has a two-year term and
may provide as much as $750,000 in funding. The Company was also awarded a Phase
I SBIR grant for up to $99,800 in the third quarter of 1998 to aid in additional
research studies. In February 1997, the Company was awarded a Phase II SBIR
Program grant, from NINDS for research evaluating histamine H(3) receptor
antagonists to treat ADHD. The grant has a two-year term and may provide as much
as $750,000 in funding. 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 NIH. In 1996, the Company received revenues from a
Phase I SBIR grant for up to $100,000 from the NINDS division of the NIH
relating to the development of histamine H(3) receptor agents. 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.
The Company does not expect to generate additional positive cash flow
from operations until the second half of 1999 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, 1998, the Company
has available net operating loss carryforwards of approximately $29.0 million
and research and development credit carryforwards of approximately $2.8 million.
These carryforwards expire at various dates between 2003 and 2013. The Company
has offset the tax benefit of the net 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 Year 2000 issue results from computer programs and systems that
were created to accept only two digit dates. Such systems may not be able to
distinguish 1900 from 2000. This could result in miscalculations and system
failures that could inhibit the Company's ability to engage in normal business
activities.
18
<PAGE> 21
The following discussion of the implications of the Year 2000 issue for
the Company contains numerous forward-looking statements. The cost of the
Company's Year 2000 project and the date upon which the Company plans to
complete its internal modifications are based upon management's best estimates,
which were derived utilizing a number of assumptions of future events,
including, without limitation, the continued availability of internal and
external resources, third-party modifications and other factors. Although
management believes it will be able to make the necessary modifications in
advance, there can be no guarantee that these estimates and timetable will be
achieved and actual results could differ materially from those anticipated.
In addition, the Company relies upon the computer systems of certain
third parties such as customers, suppliers and financial institutions. Although
the Company is assessing the readiness of these third parties and preparing
contingency plans, there can be no guarantee that the failure of these third
parties to modify their systems in advance of December 31, 1999 would not have a
material adverse effect on the Company.
State of Readiness. In 1998, the Company commenced a program intended
to mitigate and prevent the adverse effect of the Year 2000 issue. This program
consists of the following phases:
AWARENESS PHASE-development of a detailed strategic approach to
address the Year 2000 issues;
ASSESSMENT PHASE-an assessment of all computer systems, software,
building infrastructure components and equipment with embedded
technology to indentify each item that will require date code
remediation and an assessment and certification of third parties' Year
2000 compliance;
REMEDIATION PHASE-implementation of code enhancements, hardware and
software upgrades, systems replacements, vendor and customer
assurances, contingency planning and other associated changes; and
VALIDATION PHASE-testing of systems for Year 2000 readiness.
The Awareness and Assessment Phases have been completed. The Company
expects the Remediation Phase to be substantially completed by the end of the
second quarter of 1999. The Company's Remediation Phase consists of numerous
individual projects that vary in size, materiality and importance. The Company
has established a Year 2000 project team that is currently reviewing information
technology ("IT") systems and non-IT systems that could be affected by this
issue. The Company believes that its network information systems, including
Network Operating System (NOS) software and Enterprise Resource Planning (ERP)
software have been thoroughly tested as Year 2000 compliant, and should be able
to process year and data information beyond the year 1999. While the manufacture
of the Company's products are not dependent on computer chip driven processes,
any interruption in receipt of supplies, delivery of goods by outside carriers,
or processing of orders by distributors could have a material adverse effect on
the Company's business, prospects, financial condition or result of operations.
The Company communicated its Year 2000 status to all of its existing
customers and vendors by December 31, 1998. In this communication, the Company
requested that these same customers and vendors respond with their Year 2000
status. The Company maintains a database of customers and vendors who have and
have not responded to such inquiry, and the Company will promptly submit further
inquiries to certain of such third parties as business requirements dictate.
Although the Company estimates that, as of December 31, 1998, it had received
responses from over 10% of its customers and vendors, it had received responses
from all material suppliers, customers and vendors. The Company has also
requested similar information regarding Year 2000 status from hospitals where
its products are being used and the Company monitors responses, if any,
received from these hospitals. There can be no guarantee that these measures
will prevent any material adverse effect on the operations and business of the
Company if such suppliers and business partners fail to convert their systems
before December 31, 1999.
19
<PAGE> 22
Costs. The Company expects to primarily utilize internal resources to
reprogram, replace and test its computer systems, software, equipment and
building infrastructure components for Year 2000 modifications. The Company now
estimates that Year 2000 expenditures will be less than $100,000 and will be
funded by normal operating cash flow. All Year 2000 expenditures are expensed as
incurred and are not expected to have a material effect on results of
operations, liquidity or capital resources. As of December 31, 1998
approximately $20,000 of the estimated project cost have been incurred. The
remaining costs are expected to be incurred evenly over the period up through
January 31, 2000. These cost estimates may change as additional remediation and
testing efforts progress.
Risks. The Year 2000 issue presents a number of risks and uncertainties
that could affect the Company, including failure of utilities, competition for
skilled personnel and disruption of Company operations due to system failures or
operational failures of third parties. With respect to risks associated with the
Company's computer systems and equipment, management believes that it will be
able to make the necessary modifications and conversions in advance of the Year
2000. With respect to risks associated with the failure of computer systems or
equipment of third parties, the Company could experience a material adverse
impact on its operations if such third parties fail to make timely conversions
or modifications. The most serious impact on the Company operations in this
regard would result if the third party manufacturer is unable to supply the
Company with product and if basic services such as telecommunications, electric
power, financial services and other non-IT processes were disrupted.
Contingency Plans. The Company is in the process of developing business
resumption contingency plans specific to the Year 2000. These plans will address
the actions that would be taken if critical business functions cannot be carried
out in the normal manner upon entering the next century due to systems or third
party failures. Management estimates that these contingency plans will be
developed by the end of the second quarter of 1999.
EURO CONVERSION. On January 1, 1999, eleven of the fifteen countries (the
"Participating Countries") that are members of the European Union established a
new uniform currency known as the "Euro." The currency existing prior to such
date in the Participating Countries will be phased out during the transition
period commencing January 1, 1999 and ending January 1, 2002. During such
transition period both the Euro and the existing currency will be available in
the Participating Countries. Although certain of the Company's products are
being sold in the Participating Countries through independent distributors, the
Company receives revenues from such sales in U.S. dollars. As a result, the
Company does not anticipate that the introduction and use of the Euro will
materially affect the Company's business, prospects, results of operations or
financial condition.
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 regulatory approvals of the Company's ADCON products, other
than 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 additional 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 extend research collaborations,
the productivity of distributors of the ADCON products, shortages of supply of
ADCON products from the Company's sole manufacturer, the ability of the Company
to commence manufacturing of its ADCON products at its manufacturing facility
located in the U.S., 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
20
<PAGE> 23
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.
The Company does not enter into derivative financial instruments. The
Company primarily invests in commercial paper and corporate bonds that have
short-term maturities. The Company has no outstanding debt. Exposure to foreign
currency has been minimal because the Company's foreign product sales are in
U.S. currency. As a result, the Company believes that its market risk exposure
is not material to the Company's financial position, liquidity or results of
operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements
Report of Independent Auditors.
Consolidated Balance Sheets at December 31, 1998 and 1997.
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996.
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1996.
Notes to Consolidated Financial Statements.
21
<PAGE> 24
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 as of December 31, 1998 and 1997, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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, 1998 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, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
February 11, 1999
22
<PAGE> 25
GLIATECH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,731,814 $ 5,601,398
Short-term investments 21,667,064 5,940,476
Accounts receivable, less allowances of
$602,568 in 1998 and $41,888 in 1997 2,995,548 544,051
Government grants receivable 401,160 207,080
Inventories 776,057 164,078
Prepaid expenses and other 1,016,098 278,714
------------ ------------
Total current assets 31,587,741 12,735,797
Property and equipment, net 1,556,815 1,277,519
Other assets, net 817,630 792,072
------------ ------------
TOTAL ASSETS $33,962,186 $ 14,805,388
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 875,462 $ 570,310
Accrued expenses 2,083,273 689,710
Accrued research contracts 1,418,653 426,336
Accrued compensation 790,041 179,018
Accrued clinical trial costs 1,127,991 690,885
Deferred research contract revenue 514,194 809,359
------------ ------------
Total current liabilities 6,809,614 3,365,618
Stockholders' equity:
Preferred Stock, $.01 par value:
Authorized shares--5,000,000 at December 31,
1998 and 1997; None issued and outstanding
at December 31, 1998 or 1997
Common Stock, $.01 par value:
Authorized shares--30,000,000 at December 31,
1998 and 1997;
Issued and outstanding shares--9,410,825
at December 31, 1998 and 7,401,273 at
December 31, 1997 94,109 74,013
Additional paid-in capital 72,830,961 53,379,810
Retained deficit (45,772,498) (42,014,053)
------------ ------------
Total stockholders' equity 27,152,572 11,439,770
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 33,962,186 $ 14,805,388
============ ============
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 26
GLIATECH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES
Product sales $13,925,206 $ 1,536,440 $ 900,932
Research contracts and
licensing fees 2,559,131 2,954,000 2,854,860
Government grants 846,202 410,333 122,183
----------- ----------- -----------
Total revenues 17,330,539 4,900,773 3,877,975
OPERATING COSTS AND
EXPENSES
Cost of product sales 2,468,296 614,424 341,534
Research and development 9,757,717 6,952,247 6,119,533
Selling, general and
administrative 9,359,260 4,400,535 4,070,173
Depreciation and
amortization 419,293 292,746 166,411
----------- ----------- -----------
Total operating costs and
expenses 22,004,566 12,259,952 10,697,651
----------- ----------- -----------
(4,674,027) (7,359,179) (6,819,676)
Settlement of claim (2,025,000)
Interest income, net 915,582 823,891 1,120,121
----------- ----------- -----------
Net loss $(3,758,445) $(8,560,288) $(5,699,555)
=========== =========== ===========
Basic and diluted net
loss per common share $ (0.44) $ (1.16) $ (0.78)
=========== =========== ===========
Shares used for purposes
of computing basic and
diluted net loss per
common share 8,511,014 7,354,124 7,313,230
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
24
<PAGE> 27
GLIATECH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------ ADDITIONAL TOTAL
NUMBER OF PAID-IN DEFERRED RETAINED STOCKHOLDERS'
SHARES PAR VALUE CAPITAL COMPENSATION DEFICIT EQUITY
------ --------- ------- ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 7,297,865 $72,978 $50,886,788 ($23,111) ($27,754,210) $23,182,445
Exercise of Stock Options 12,175 122 91,191 91,313
Issuance of Stock Bonus 6,088 61 51,688 51,749
Costs of Issuance of Common Stock (21,954) (21,954)
Exercise of Stock Warrants 3,961 40 (40)
Deferred Compensation 23,111 23,111
Net Loss (5,699,555) (5,699,555)
---------- ------- ----------- -------- ------------ -----------
BALANCE AT DECEMBER 31, 1996 7,320,089 73,201 51,007,673 0 (33,453,765) 17,627,109
Exercise of Stock Options 76,000 760 306,365 307,125
Issuance of Stock Bonus 5,184 52 40,772 40,824
Settlement of Claim 2,025,000 2,025,000
Net Loss (8,560,288) (8,560,288)
---------- ------- ----------- -------- ------------ -----------
BALANCE AT DECEMBER 31, 1997 7,401,273 74,013 53,379,810 0 (42,014,053) 11,439,770
Exercise of Stock Options 84,552 846 610,052 610,898
Issuance of Common Stock for
Settlement of Claim 200,000 2,000 (2,000)
Issuance of Common Stock 1,725,000 17,250 18,843,099 18,860,349
Net Loss (3,758,445) (3,758,445)
---------- ------- ----------- -------- ------------ -----------
BALANCE AT DECEMBER 31, 1998 $9,410,825 $94,109 $72,830,961 $ 0 ($45,772,498) $27,152,572
========== ======= =========== ======== ============ ===========
</TABLE>
See notes to consolidated financial statements.
25
<PAGE> 28
GLIATECH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net loss $ (3,758,445) $ (8,560,288) $ (5,699,555)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization 419,293 292,746 166,411
Patent cost write-off 30,002 48,668 277,889
Provision for losses on
accounts receivable 560,680
Compensation from
issuance of stock and
stock options 23,111
Settlement of claim 2,025,000
Changes in operating
assets and liabilities:
Accounts receivable (3,012,177) (212,894) (192,729)
Inventories (611,979) 223,040 30,541
Government grants
receivable and other
assets (931,464) (201,228) 61,834
Accounts payable and
accrued expenses 1,698,715 316,773 327,822
Other liabilities 1,745,281 (87,462) (83,039)
------------ ------------ ------------
Net cash used in operating
activities (3,860,095) 6,155,645) (3,867,109)
Investing activities:
(Purchase) Sale of
short-term investments,
net (15,726,588) 2,934,746 (6,632,281)
Payment for patent rights
and trademarks (103,770) (186,812) (114,629)
Purchase of property and
equipment (650,378) (418,563) (715,153)
------------ ------------ ------------
Net cash (used in) provided
by investing activities (16,480,736) 2,329,371 (7,462,063)
Financing activities:
Payment of demand note
from bank (400,000)
Proceeds from (cost of)
issuance of Common
Stock, net 18,860,349 (21,954)
Proceeds from exercise of
stock options 610,898 307,125 91,313
------------ ------------ ------------
Net cash provided by
(used in) financing
activities 19,471,247 (307,125) (330,641)
------------ ------------ ------------
Decrease in cash
and cash equivalents (869,584) (3,519,149) (11,659,813)
Cash and cash equivalents
at beginning of
year 5,601,398 9,120,547 20,780,360
------------ ------------ ------------
Cash and cash equivalents
at end of year $ 4,731,814 $ 5,601,398 $ 9,120,547
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 29
GLIATECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
A. BACKGROUND AND ACCOUNTING POLICIES
BACKGROUND
Gliatech Inc. 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. The
Company is also pursuing the development of small molecule drug candidates for
the treatment of several nervous system disorders, including Attention Deficit
Hyperactive Disorder ("ADHD"), sleep disorders, anxiety and Alzheimer's disease
("AD").
Historically, since commencing operations in 1988, the Company had been a
development stage company. However, the Company introduced its first product,
ADCON-L, in the United States during 1998, resulting in significant product
sales. As a result, the Company no longer considers itself a development stage
company. 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 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.
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 (3 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
27
<PAGE> 30
income when earned. Licensing fees and other milestone payments are recognized
as income when earned.
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes."
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.
NEW ACCOUNTING PRONOUNCEMENT
During 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments and related disclosures about
products and services, geographic area and major customers. The adoption of this
statement did not effect the Company's reported financial position, results of
operations or cash flows.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with current year
financial statement presentation.
B. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
---- ----
<S> <C> <C>
Raw materials $349,550 $ 36,755
Work in process 272,390 71,572
Finished goods 154,117 55,751
-------- --------
$776,057 $164,078
======== ========
</TABLE>
C. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
---- ----
<S> <C> <C>
Laboratory equipment $ 1,472,202 $ 1,213,267
Office equipment 815,181 485,674
Leasehold improvements 1,113,321 1,051,385
----------- -----------
3,400,704 2,750,326
Accumulated depreciation and amortization (1,843,889) (1,472,807)
----------- -----------
Property and equipment, net $ 1,556,815 $ 1,277,519
=========== ===========
</TABLE>
28
<PAGE> 31
D. OTHER ASSETS
Other assets consist of:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
---- ----
<S> <C> <C>
Patent rights, net of accumulated
amortization of $110,955 at December 31, 1998
and $82,744 at December 31, 1997 $764,182 $718,973
Trademark costs, net 39,951 59,503
Other 13,497 13,596
-------- --------
$817,630 $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, 1998, 1997
and 1996. Rent expense relating to the operating lease of office space was
approximately $356,000, $318,000 and $297,000 in 1998, 1997 and 1996,
respectively. Future annual minimum lease commitments at December 31, 1998 are
as follows:
<TABLE>
<S> <C>
1999 $ 482,125
2000 521,501
2001 521,501
2002 105,003
2003 105,003
Thereafter 612,516
----------
Total $2,347,649
==========
</TABLE>
F. INCOME TAXES
At December 31, 1998, the Company has available net operating loss carryforwards
of approximately $29.0 million. In addition, the Company has approximately $2.8
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 2013. 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.
The Company's net deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax liabilities $ (290,000) $ (273,000)
Deferred tax assets:
Amortization of capitalized research
and development expenses for tax 3,740,000 4,420,000
Research and development tax credit carryforwards 2,783,000 2,119,000
Net operating tax loss carryforwards 12,369,000 9,931,000
Other 957,000 1,118,000
------------ ------------
Total deferred tax assets 19,849,000 17,588,000
Valuation allowance (19,559,000) (17,315,000)
------------ ------------
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. RIGHTS PLAN
On July 1, 1997, the Company declared a dividend distribution of one right (a
"Right") for each outstanding share of Common Stock. The terms of the Rights are
set forth in the Rights Agreement, dated July 1, 1997, between the Company and a
rights agent. The Rights generally will become exercisable and allow a holder to
acquire Common Stock at a discounted price if a person or group acquires 15% or
more of the outstanding shares of Common Stock of the Company. The Company is
also subject to provisions of state law which will prohibit the Company from
engaging in any "business combination" with a person who, together with
affiliates and
29
<PAGE> 32
associates, owns 15% or more of the Company's Common Stock (an "Interested
Stockholder") for a period of three years following the date that such person
became an Interested Stockholder, unless the business combination is approved in
a prescribed manner or certain other requirements are satisfied.
H. STOCK OPTION PLANS
The Company has a 1989 Stock Option Plan for employees and 1992 and 1995 Stock
Option Plans for members of the Company's Board of Directors. These plans
provide for the granting of 1,270,000 options to employees and 190,000 options
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. At December 31, 1998, there were 131,142 options available for future
grant.
A summary of the status of the Company's three stock option plans as of
December 31, 1998, 1997 and 1996 and changes during the years then ended is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
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 1,110,175 $ 7.56 978,375 $ 6.85 765,700 $ 7.34
Granted 131,000 17.66 225,300 9.46 247,800 8.53
Exercised (84,552) 7.23 (76,000) 4.04 (12,175) 7.50
Canceled (31,807) 11.15 (17,500) 8.14 (22,950) 7.75
---------- --------- ---------
Outstanding at end of
year 1,124,816 $ 8.67 1,110,175 $ 7.56 978,375 $ 6.85
========== ====== ========= ====== ========= ======
Options exercisable
at year-end 723,370 491,692 362,650
Weighted-average fair
value of options
granted during the year $ 11.16 $ 6.12 $ 5.15
</TABLE>
The following table summarizes information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/98 LIFE (YRS) PRICE AT 12/31/98 PRICE
- -------- ----------- ---------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$ 0-5 131,800 2.20 $ .99 131,800 $ .99
5-10 720,816 7.10 8.08 510,153 8.05
10-25 272,200 8.98 13.94 81,417 12.65
--------- -------
1,124,816 723,370
========= =======
</TABLE>
At December 31, 1998, 1,255,958 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.
The Company applies APBO No. 25, "Accounting for Stock Issued to Employees" and
related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for the fixed stock option plans. 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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Net loss As reported $(3,758,445) $(8,560,288) $(5,699,555)
Pro forma $(5,011,723) $(9,166,993) $(6,351,247)
Basic and diluted net
loss per common share As reported $ (.44) $ (1.16) $ (.78)
Pro forma $ (.59) $ (1.25) $ (.87)
</TABLE>
30
<PAGE> 33
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 assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected volatility 77% 75% 67%
Risk-free interest rates 4.31-5.60% 5.71-6.48% 5.32-6.49%
Expected life 4 or 5 years 4 or 5 years 4 or 5 years
</TABLE>
I. BUSINESS SEGMENT
The Company operates in one business segment. It is engaged in the development
and commercialization of the Company's principal products, the ADCON family,
which are medical devices designed to inhibit excess postsurgical scarring and
adhesion following surgery. The Company sells ADCON products to independent
distributors in approximately 30 European countries and directly to hospitals in
the United States. The Company does not have foreign facilities and therefore
does not measure operating profit or loss from foreign sales.
Domestic and foreign product sales are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Domestic product sales $11,648,214
Foreign product sales 2,276,992 $ 1,536,440 $ 900,932
=========== =========== ===========
Total product sales $13,925,206 $ 1,536,440 $ 900,932
</TABLE>
All of the Company's long-lived assets are located in the United States.
J. 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. In October 1998, this
collaboration was restructured to provide for further research by the Company
until May 1999. Deferred revenue related to these agreements was $514,228 and
$809,359 at December 31, 1998 and 1997, respectively. In addition, Janssen is
required to make milestone payments to the Company upon the achievement of
development and clinical benchmarks. Johnson & Johnson has worldwide
distribution rights for all products developed as a result of this
collaboration. The Company will receive a royalty on sales of such products.
Janssen is also responsible for all development costs, including clinical trials
and obtaining regulatory approval.
K. 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, 1998, minimum commitments under research, clinical trial and
consulting agreements are $1,116,761 for 1999.
31
<PAGE> 34
L. 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.
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. The Company recorded the offset to the
charge as a component of stockholders' equity in 1997.
In March 1998 the suit was dismissed pursuant to the terms and conditions of a
Settlement Agreement between the Company and CWRU and the Company issued 200,000
shares of common stock to CWRU and the employee.
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 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 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 under the heading "Election of Directors" and 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 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.
32
<PAGE> 35
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, 1998 and 1997.
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts and Reserves.
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning of Cost and End of
Description Period Expenses Deductions Period
----------- ------ --------- ---------- ------
<S> <C> <C> <C> <C>
Years ended
December 31, 1998
Allowances deducted from assets:
Trade receivable allowances 41,888 560,680 A 602,568
Inventory obsolescence reserve 138,000 244,763 B 382,763
</TABLE>
Note A - Principally the provision for bad debts and sales returns
reserve Note B - Principally the provision for obsolete inventory
The Company was in the development stage for the years ended
December 31, 1997 and 1996 as principal operations had not
commenced. Due to the lack of significant sales, the trade
receivable allowances and inventory obsolescence reserve were
not significant for the years then ended and have been
excluded herein.
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and therefore are omitted.
33
<PAGE> 36
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).
34
<PAGE> 37
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
*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 is incorporated by reference to
Exhibit 10.9 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 (File No. 0-20096).
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).
35
<PAGE> 38
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
*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. 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, 1997 (File No. 0-20096).
10.21 Form of Indemnification Agreement 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, 1997 (File
No. 0-20096).
10.22 Form of U.S. Manufacturer's Representative Agreement is
incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1998 (File No. 0-20096).
10.23 Research Agreement, dated as of October 13, 1998, between
the Company and Janssen Pharmaceutica, N.V.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
24.1 Powers of Attorney.
27.1 Financial Data Schedule for period ending December 31, 1998.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1998.
36
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GLIATECH INC.
BY: /s/ RODNEY E. DAUSCH
Rodney E. Dausch
Vice President and Chief Financial Officer
DATE: March 5, 1999
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>
* President and Chief Executive March 5, 1999
Thomas O. Oesterling, Ph.D. Officer (Principal Executive
Officer) and Director
/s/ RODNEY E. DAUSCH Vice President and Chief March 5, 1999
Rodney E. DauschFinancial Officer (Principal Financial Officer and
Principal Accounting Officer)
*
Robert P. Pinkas Chairman of the Board March 5, 1999
*
William A. Clarke Director March 5, 1999
Theodore E. Haigler, Jr. Director March 5, 1999
*
Ronald D. Henriksen Director March 5, 1999
*
Irving S. Shapiro Director March 5, 1999
*
John L. Ufheil Director March 5, 1999
</TABLE>
* 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.
By: /s/ RODNEY E. DAUSCH March 5, 1999
RODNEY E. DAUSCH, ATTORNEY-IN-FACT
37
<PAGE> 40
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).
X-1
<PAGE> 41
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
*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 is incorporated by
reference to Exhibit 10.9 of the Company's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1997 (File No. 0-20096).
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).
X-2
<PAGE> 42
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
*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. 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, 1997 (File No.
0-20096).
10.21 Form of Indemnification Agreement 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, 1997 (File No.
0-20096).
10.22 Form of U.S. Manufacturer's Representative Agreement
is incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998 (File No. 0-20096).
10.23 Research Agreement, dated as of October 13, 1998,
between the Company and Janssen Pharmaceutica, N.V.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
24.1 Powers of Attorney.
27.1 Financial Data Schedule for period ending December
31, 1998.
* 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-3
<PAGE> 1
Exhibit 10.23
RESEARCH AGREEMENT
This Agreement is made effective as of the 13th day of October, 1998 by
and between GLIATECH, INC., a Delaware Corporation having its principal place of
business at 23420 Commerce Park Road, Cleveland, Ohio, 44122 ("Gliatech") and
JANSSEN PHARMACEUTICA, N.V., a Belgium corporation having its principal place of
business at Turnhoutseweg 30, 2340 Beerse, Belgium (Janssen").
1. Janssen and Gliatech previously entered into an agreement dated October 14,
1994 (hereinafter the Collaboration Agreement"). While the research
term in that agreement has expired, the Collaboration Agreement, as amended to
date, remains in full force and effect with respect to, among others, provisions
regarding the treatment of Collaboration Compounds as defined in that agreement.
The parties now desire to enter into a separate and independent research
agreement under which Gliatech will conduct certain research pursuant to a
research plan, a copy of which is attached hereto as Appendix A (hereinafter the
"Research Plan"). Nothing, however, in this Agreement is meant to amend or
supersede any of the provisions that remain in effect in the Collaboration
Agreement.
2. In consideration for payment as set forth hereinafter, Gliatech agrees to
carry out the research pursuant to the Research Plan. Gliatech agrees to carry
out such research during the period beginning as of the effective date of this
agreement and ending on May 15, 1999. Moreover, Gliatech agrees to use
reasonable efforts consistent with its normal business practices to carry out
and conduct the research set forth in the Research Plan. In return for the
performance of the work described in the research plan, Janssen shall pay
Gliatech at a rate of $16,000 per FTE month for 49 FTE months totaling $784,000.
This total amount shall be due and payable on or before January 1st, 1999.
3. In carrying out the work outlined in the Research Plan, Gliatech will take
all necessary steps to ensure that the results obtained are scientifically
accurate and valid according to the standards presently accepted in the relevant
field. All results obtained are the property of Janssen and will be considered
Information, as hereinafter defined, under this agreement.
4. In order to carry out the work outlined in the Research Plan, it maybe
necessary for Janssen to disclose to Gliatech certain proprietary information
relating to the materials that it provides to Gliatech. Further, in the course
of Gliatech's work under this Agreement, Gliatech may develop information or
conceive of ideas, which Janssen regards as confidential information. With
respect to such disclosed and developed information (herein collectively
"Information"), Gliatech agrees to hold such information in strict confidence
and not disclose it to others or cause the same to be published without
Janssen's prior written consent or use it for any purpose other than pursuant to
conducting the Research Plan. The obligation of confidentiality and non-use
shall apply to each of Gliatech's employees who have access to the Information.
5. Gliatech agrees that Janssen shall own and be free to use all information
disclosed by Gliatech to Janssen without incurring any further obligation. In
particular, all information developed or obtained during the performance of
services in connection with this agreement and
1
<PAGE> 2
all ideas conceived within the scope of and during the performance under this
agreement will be the exclusive property of Janssen. All samples, drawings, data
and the like shall be the exclusive property of Janssen. All inventions, whether
patentable or not, made or conceived in carrying out the work under this
agreement, are to be the property of Janssen and are to be formerly assigned to
Janssen by Gliatech. To this end, Gliatech agrees to execute any application for
patent, assignment, or other document, which Janssen deems necessary to protect
and secure to it any such inventions. Any expense involved in filing such patent
applications, or obtaining any patent upon such an application shall be paid and
discharged by Janssen without any expense to Gliatech. Janssen shall compensate
Gliatech for any time spent by Gliatech employees and out-of-pocket expenses
incurred at Janssen's request, in assisting in preparation and prosecution of
such application for patent which do not occur within the period of this
agreement. Gliatech further agrees that any inventions arising out of
information obtained from Janssen or developed at the request of Janssen under
this agreement shall be included in those inventions, which are to be assigned
to Janssen.
6. Gliatech agrees not to originate any publicity, news release or other
public announcement, whether oral or written, whether to the public, press or
otherwise, relating to this agreement, to any amendment hereto, to performance
hereunder or results obtained hereunder without Janssen's expressed prior
written consent.
7. Gliatech shall be free to make any disclosure which is in the opinion of
its legal counsel is required by law to be made, but shall give Janssen an
opportunity to review the form of such disclosure in advance of its release.
8. Gliatech represents that it is not presently under agreement or obligation
with any third party, which will prevent it from carrying out its duties and
obligations under this agreement.
9. Gliatech agrees that it is operating as an independent contractor in the
performance of all services under this agreement and not as an agent or employee
of Janssen. Gliatech agrees that all matters arising under this agreement shall
be interpreted under the laws of the State of New Jersey, without regard to its
conflict of laws, principals, except as otherwise expressly provided herein.
10. The rights and obligations set forth in Paragraph Nos. 4-5 shall survive
termination of this agreement.
11. Any dispute, controversy or claim arising out of relating to the validity,
construction, and forceability or performance of this agreement, including
disputes relating to alleged breach or to termination of this agreement, shall
be settled by binding alternate dispute resolution ("ADR") in the matter
described in Article 13 of the Collaboration Agreement between the parties.
12. This agreement shall come into effect on the effective date of this
agreement which is the date first written above and shall terminate upon
completion of the work to be conducted pursuant to the research plan.
13. Gliatech shall not have the right to assign, transfer, or encumber its
rights or obligations under this agreements without the prior written consent of
Janssen, except that Gliatech may make such assignment without the prior written
consent to any affiliate or purchaser or transferee of all or substantially all
of the assets of its business to which this agreement relates upon written
notice to Janssen.
2
<PAGE> 3
In Witness Whereof, the parties have executed this agreement in
duplicate originals by their proper officers as of the day and year first
written above.
JANSSEN PHARMACEUTICA, N.V.
/s/ Frank Konings, Ph.D. By: /s/ Gustaaf Van Reet, Ph.D.
Vice-President Title: Managing Director
December 4, 1998. Date: December 4, 1998.
GLIATECH, INC.
By: /s/ Thomas O. Oesterling, Ph.D.
Title: CEO
Date: December 17, 1998
3
<PAGE> 1
Exhibit 21.1
Subsidiaries Of The Company
Name State of Incorporation Business Name
- ---- ---------------------- -------------
Gliatech R & D, Inc. Ohio Gliatech R & D, Inc.
GIC, Inc. Delaware GIC, Inc.
-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 February 11, 1999, with
respect to the consolidated financial statements and schedule of Gliatech Inc.
included in the 1998 Annual Report (Form 10-K) for the year ended December 31,
1998.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 3, 1999
<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, 1998, 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 20th day of February 1999.
/s/ Robert P. Pinkas /s/ William A. Clarke
- ---------------------------- -----------------------------
Robert P. Pinkas William A. Clarke
Director Director
/s/ Ronald D. Henriksen /s/ Irving S. Shapiro
- ---------------------------- -----------------------------
Ronald D. Henriksen Irving S. Shapiro
Director Director
/s/ Theodore E. Haigler, Jr. /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>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
GLIATECH'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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<CASH> 4,732
<SECURITIES> 21,667
<RECEIVABLES> 3,597
<ALLOWANCES> 602
<INVENTORY> 776
<CURRENT-ASSETS> 31,588
<PP&E> 3,401
<DEPRECIATION> 1,844
<TOTAL-ASSETS> 33,962
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0
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<COMMON> 94
<OTHER-SE> 27,058
<TOTAL-LIABILITY-AND-EQUITY> 33,962
<SALES> 13,925
<TOTAL-REVENUES> 17,331
<CGS> 2,468
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<OTHER-EXPENSES> 19,536
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<INCOME-PRETAX> (3,758)
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