<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _____________
COMMISSION FILE NUMBER 0-20096
GLIATECH INC.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1587242
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
23420 COMMERCE PARK ROAD
CLEVELAND, OHIO 44122
(Address of principal executive offices) (Zip Code)
(216) 831-3200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
The number of shares outstanding of the registrant's Common Stock, $0.01 par
value per share, as of AUGUST 10, 1999 WAS 9,539,462 SHARES.
<PAGE> 2
GLIATECH INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1 Financial Statements: (unaudited)
Consolidated Balance Sheets - 1
December 31, 1998 and June 30, 1999
Consolidated Statements of Operations -
for the three months and six months ended
June 30, 1999 and 1998 2
Consolidated Statements of Cash Flows -
for the six months ended June 30, 1999 and 1998 3
Notes to Consolidated Financial Statements 4-5
Item 2 Management's Discussion and Analysis of Financial Condition 6-12
and Results of Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risk 13
PART II. OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds 14
Item 4 Submission of Matters to a Vote of Security-Holder 15-16
Item 6 Exhibits and Reports on Form 8-K 17
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GLIATECH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,277,576 $ 4,731,814
Short-term investments 19,152,830 21,667,064
Accounts receivable 3,647,165 2,995,548
Government grants receivable 451,824 401,160
Inventories 1,840,876 776,057
Prepaid expenses and other 465,293 1,016,098
------------ ------------
Total current assets 32,835,564 31,587,741
Property and equipment, net 2,574,459 1,556,815
Other assets, net 758,381 817,630
------------ ------------
TOTAL ASSETS $ 36,168,404 $ 33,962,186
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities:
Accounts payable 933,065 875,462
Accrued expenses 2,130,061 2,083,273
Accrued research contracts 1,472,928 1,418,653
Accrued compensation 485,176 790,041
Accrued clinical trial costs 2,062,556 1,127,991
Deferred research contract revenue 0 514,194
------------ ------------
Total current liabilities 7,083,786 6,809,614
Stockholders' equity:
Common stock 95,276 94,109
Additional paid-in capital 73,337,229 72,830,961
Accumulated deficit (44,347,887) (45,772,498)
------------ ------------
Total stockholders' equity 29,084,618 27,152,572
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 36,168,404 $ 33,962,186
============ ============
</TABLE>
See notes to consolidated statements.
1
<PAGE> 4
GLIATECH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------------- -----------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Product sales $ 7,929,085 $ 1,150,870 $15,685,355 $ 1,662,370
Research contracts and licensing fees 171,398 738,500 514,194 1,477,000
Government grants 245,168 259,923 430,851 410,257
----------- ----------- ----------- -----------
Total revenues 8,345,651 2,149,293 16,630,400 3,549,627
OPERATING COSTS AND EXPENSES
Cost of products sold 1,147,525 297,832 2,294,655 464,666
Research and development 3,360,182 2,451,013 7,300,551 4,767,179
Selling, general and administrative 3,194,393 1,777,213 6,170,669 3,033,782
----------- ----------- ----------- -----------
Total operating costs and expenses 7,702,100 4,526,058 15,765,875 8,265,627
----------- ----------- ----------- -----------
Operating income (loss) 643,551 (2,376,765) 864,525 (4,716,000)
Interest income, net 306,818 133,001 560,086 279,809
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 950,369 $(2,243,764) $ 1,424,611 $(4,436,191)
=========== =========== =========== ===========
Earnings (loss) per share
Basic $ 0.10 $ (0.28) $ 0.15 $ (0.57)
=========== =========== =========== ===========
Diluted $ 0.09 $ (0.28) $ 0.14 $ (0.57)
=========== =========== =========== ===========
Average shares outstanding
Basic 9,498,917 8,044,761 9,463,663 7,768,980
=========== =========== =========== ===========
Diluted 10,104,888 8,044,761 10,128,941 7,768,980
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
GLIATECH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income(loss) $ 1,424,611 ($ 4,436,191)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 275,006 185,338
Patent Cost Write-off 178,122 49,998
Compensation from issuance of stock and stock options 187,400 0
Changes in operating assets and liabilities:
Accounts receivable (651,617) (443,466)
Inventory (1,064,819) (514,605)
Government grants receivable and other assets 500,141 (674)
Accounts payable 57,603 987,262
Deferred contract research revenue (514,194) (737,000)
Other liabilities 730,763 176,282
------------ ------------
Net cash provided by (used in) operating activities 1,123,016 (4,733,056)
INVESTING ACTIVITIES
Sale of investments, net 2,514,233 4,935,130
Payment for patent rights and trademarks (128,913) (91,347)
Purchase of property and equipment (1,282,610) (260,057)
------------ ------------
Net cash (used in) provided by investing activities 1,102,710 4,583,726
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock, net 0 19,261,166
Proceeds from exercise of stock options 320,036 180,128
------------ ------------
Net cash provided by financing activities 320,036 19,441,294
------------ ------------
Decrease in cash and cash equivalents 2,545,762 19,291,964
Cash and cash equivalents at beginning of period 4,731,814 5,601,398
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,277,576 $ 24,893,362
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
GLIATECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended June 30, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. These financial statements should be read in
conjunction with the consolidated financial statements and footnotes thereto
included in the Annual Report on Form 10-K of Gliatech Inc. for the fiscal year
ended December 31, 1998 filed with the Securities and Exchange Commission.
Note 2. Basic and Diluted Earnings (Loss) per Common Share
Basic earnings (loss) per common share is based on the weighted average number
of common shares outstanding for the three and six months ended June 30, 1999
and 1998. Diluted earnings (loss) per common share for the three and six months
ended June 30, 1999 is based on the weighted average number of common shares
outstanding plus the dilutive effect of stock options. Due to the net losses
incurred in 1998, the effect of stock options was not included in the diluted
loss per common share computation.
Note 3. 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(R) family,
which are medical devices designed to inhibit postsurgical scarring and adhesion
following surgery. The Company sells ADCON(R) products to independent
distributors in approximately 29 countries outside the United States and
directly to hospitals in the United States. In addition, the Company is pursuing
the development of small molecule drug candidates for the treatment of several
nervous system disorders, including Attention Deficit Hyperactive Disorder
("ADHD"), sleep disorders, anxiety and Alzheimer's disease ("AD"). The Company
does not have foreign facilities and therefore does not measure operating profit
or loss from foreign sales.
4
<PAGE> 7
Domestic and foreign product sales are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
-------------------------------- --------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Domestic product sales $ 7,085,620 $ 621,720 $13,917,114 $ 621,720
Foreign product sales 843,465 529,150 1,768,241 1,040,650
----------- ----------- ----------- -----------
Total product sales $ 7,929,085 $ 1,150,870 $15,685,355 $ 1,662,370
=========== =========== =========== ===========
</TABLE>
Note 4: Reclassification
Certain prior year amounts have been reclassified to conform with current year
financial statement presentation.
5
<PAGE> 8
ITEM 2 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(R) family of products, which are proprietary, resorbable, carbohydrate
polymer medical devices designed to inhibit surgical scarring and adhesions. The
Company is currently marketing ADCON(R)-L, which is designed to inhibit post
surgical scarring and adhesions following lumbar surgery, in 30 countries
including the U.S. It is also marketing ADCON(R)-T/N, which is designed to
inhibit scarring and adhesions following tendon and peripheral nerve surgeries,
in 28 countries outside of the U.S. through independent medical device
distributors, including the major countries in the European Union pursuant to
its CE Marking. The Company commenced sales of ADCON(R)-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(R)-L and
ADCON(R)-T/N in Japan. Further, the Company is pursuing the development of small
molecule drug candidates for the treatment of several nervous system disorders,
including Attention Deficit Hyperactive Disorder ("ADHD"), sleep disorders,
anxiety and Alzheimer's disease ("AD"). In October 1994, the Company entered
into a strategic alliance with Janssen Pharmaceutica, N.V. of Belgium
("Janssen") to collaborate on the discovery and development of therapeutic
models to treat AD. In October 1998, this alliance was restructured to provide
for further research by the Company until May 1999. The Company expects that
Janssen will select a lead drug candidate during 1999 for preclinical testing.
The Company has received and will continue to receive a significant portion of
its revenues from product sales particularly of ADCON(R)-L and, to a lesser
extent ADCON(R)-T/N. The Company also receives revenue from various government
grants awarded to the Company. In June 1998, the Company received net proceeds
of approximately $18.9 million in connection with the completion of a public
offering of 1,725,000 shares of Common Stock.
6
<PAGE> 9
RESULTS OF OPERATIONS
For the three and six months periods ended June 30, 1999 and 1998.
REVENUES
Total revenues increased to $8.3 million in the second quarter of 1999 from $2.1
million in the second quarter of 1998 and increased to $16.6 million in the
first six months of 1999 from $3.6 million in the first six months of 1998. The
increase in total revenues is a result of an increase in product sales, which
increased to $7.9 million in the second quarter of 1999 from $1.2 million in the
second quarter of 1998. This increase in product sales resulted from the
commercialization in the U.S. of ADCON(R)-L., which was approved for marketing
by the FDA in May 1998. The Company commenced sales of ADCON(R)-L in the U.S. in
June 1998.
This increase in revenues was offset by a decrease in the Company's research
contract revenues of 76.8% to $171,398 in the second quarter of 1999 from
$738,500 in the second quarter of 1998. 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.
In addition the Company's government-funded grant revenues decreased slightly by
6% to $245,168 in the second quarter of 1999 from $259,923 in the second quarter
of 1998 and increased slightly by 5% to $430,851 in the first six months of 1999
from $410,257 in the first six months of 1998. This decrease in the second
quarter was a result of the completion of three government grants. The increase
in the first six months of 1999 is due to the timing of the government-funded
grants to the Company.
OPERATING COSTS AND EXPENSES
Total operating expenses increased by 70.2% to $7.7 million in the second
quarter of 1999, compared to $4.5 million in the second quarter of 1998 and
increased 90.7% to $15.8 million in the first six months of 1999 compared to
$8.3 million in the first six months of 1998. Cost of products sold increased to
$1.1 million in the second quarter of 1999 compared to $297,832 in the second
quarter of 1998, but decreased, as a percentage of product sales, in the second
quarter of 1999 to 14.5% from 25.9% in the second quarter of 1998. The cost of
products sold increased to $2.3 million in the first six months of 1999 compared
to $464,666 in the first six months of 1998, but decreased as a percentage of
product sales in the first six months of 1999 to 14.6% from 28% in the first six
months of 1998. The percentage decrease in both the second quarter and the first
six months of 1999 is due to: (1) increased production volumes and (2) the
favorable impact of the unit sales prices of ADCON(R)-L in the United States.
The Company is establishing a manufacturing operation in the United States and
expects that it will incur startup cost in conjunction with this effort over the
next year.
7
<PAGE> 10
Research and development expenses increased by 37.1 % to $3.4 million in the
second quarter of 1999 from $2.5 million in the second quarter of 1998 and
increased 53.1% to $7.3 million in the first six months of 1999 from $4.8
million in the first six months of 1998. 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 human clinical trials in the
fourth quarter of 1998 and (2) increased clinical research costs associated with
the U.S. pivotal clinical trial of ADCON(R)-P, which started in the first
quarter of 1999.
Selling, general and administrative expenses increased to $3.2 million in the
second quarter of 1999 compared to $1.8 million in the second quarter of 1998
and increased 103.4% to $6.2 million in the first six months of 1999 compared to
$3.0 million in the first six months of 1998. This increase was due to an
increase in the sales and marketing expenses and sales commissions resulting
from the sales and marketing of ADCON(R)-L in the U.S.
INTEREST INCOME
Interest income, net increased to $306,818 in the second quarter of 1999 from
$133,001 in the second quarter of 1998 and increased to $560,086 in the first
six months of 1999 from $279,809 in the first six months of 1998. This increase
in both periods is due to carrying higher cash, cash equivalents and short-term
investment balances due to the proceeds from the public offering in June 1998.
NET INCOME (LOSS)
Gliatech's net income increased to $950,369 in the second quarter of 1999,
compared to a net loss of $2.2 million in the second quarter of 1998 and
increased to $1.4 million in the first six months of 1999 compared to a net loss
of $4.4 million in the first six months of 1998. The net income is a result of
ADCON(R)-L product sales in the U.S. significantly offset by an increase in
operating expenses. The diluted earnings per common share was $0.09 for the
second quarter of 1999, compared to a net loss per common share of $0.28 in the
second quarter of 1998, and the diluted earnings per common share was $0.14 for
the first six months of 1999 compared to a net loss per common share of $0.57 in
the first six months of 1998.
LIQUIDITY AND CAPITAL RESOURCES
In order to preserve principal and maintain liquidity, the Company's funds are
invested in commercial paper and other short-term investments. As of June 30,
1999 and December 31, 1998, the Company's cash and cash equivalents and
short-term investments totaled $26.4 million for each period. The Company
expects that its existing capital resources, interest earned thereon, and
revenues will enable the Company to maintain its current and planned operations
for the foreseeable future.
8
<PAGE> 11
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.
The Company also has established a $1.5 million line of credit with a bank. As
of June 30, 1999, the Company had no borrowings against the line of credit.
The Company's future capital requirements will depend on, and could increase as
a result of many factors, including, but not limited to, the commercial success
of its ADCON(R) family of products, the progress of the Company's research and
development, including the costs related to its Cognition Modulation and AD
programs, the scope, timing and results of preclinical studies and clinical
trials, the cost and timing of obtaining regulatory approvals, its success in
obtaining the strategic alliances required to fund certain of its programs, the
rate of technological advances, determinations as to the commercial potential of
certain of the Company's product candidates, the status of competitive products
and the establishment of additional manufacturing capacity.
The Company may raise additional funds through additional equity or debt
financing, government grants, future corporate alliances, collaboration
relationships or otherwise. The Company may engage in these capital raising
activities even if it does not have an immediate need for additional capital at
that time. There can be no assurance that any such additional funding will be
available to the Company or, if available, that it will be on acceptable terms.
If additional funds are raised by issuing equity securities, further dilution to
existing stockholders may result. If adequate funds are not available, the
Company may be required to delay, or 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.
In April 1999, the Company was awarded its third Phase II Small Business
Innovation Research ("SBIR") program grant from the National Cancer Institute
for research evaluating gynecological adhesions. Each of these Phase II SBIR
grants has a two-year term and each 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 from the National Institute of General Medical Sciences to aid
in additional research studies. 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.
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 20th century dates from 21st century dates. This could result in
miscalculations and system failures that could inhibit the Company's ability to
engage in normal business activities.
9
<PAGE> 12
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 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 identify 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
Company believes that its network information systems, including
Network Operating Systems (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.
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
10
<PAGE> 13
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 basic services such
as telecommunications, electric power, financial services and other
non-IT processes were disrupted.
The Awareness, Assessment and Remediation Phases have been completed. The
Company's Remediation Phase consisted of numerous individual projects that vary
in size, materiality and importance. The Company established a Year 2000 project
team that reviewed information technology ("IT") systems and non-IT systems that
could be affected by this issue. All necessary in-house computers have been
upgraded to be year 2000 compliant. The company is now currently in the
Validation Phase in which we are testing all systems for Year 2000 readiness.
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 results of operations. The Company has been communicating its Year
2000 status to all of its existing customers and vendors. In this communication,
the Company has requested that these same customers and vendors respond with
their Year 2000 status. The Company is maintaining a database of customers and
vendors who have and have not responded to such inquiry. The Company has
implemented a second mailing requesting Year 2000 status from its customer and
vendors. The Company will continue to maintain a database of customers and
vendors who have and have not responded to such inquiries. However, 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.
COSTS. The Company is primarily utilizing internal resources to reprogram,
replace and test its computer systems, software, equipment and building
infrastructure components for Year 2000 modifications. The Company 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 June 30, 1999 approximately $25,000 of the
estimated project cost has 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 the Validation Phase and testing efforts progress.
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 third 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 know as the "Euro." The current 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
11
<PAGE> 14
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 use of the Euro will materially affect the
Company's business, prospects, and results of operations or financial condition.
FORWARD-LOOKING STATEMENTS. Certain statements in this Quarterly Report on Form
10-Q constitute "forward-looking statements." When used in this report, the
words "believes," "anticipates," "expects," "intends" and other predictive,
interpretive and similar expressions are intended to identify such
forward-looking statements. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual results
of the Company to be different from expectations expressed or implied by such
forward-looking statements. Such factors included, but are not limited to,
commercial uncertainty of market acceptance of the Company's ADCON(R) family of
products, other than ADCON(R)-L, including the timing and content of decisions
made by the FDA, delays in product development of additional ADCON(R) 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 of ADCON(R) products, the ability of the Company, its customer and
vendor to appropriately address Year 2000 issues, the productivity of
distributors of the ADCON(R) products, shortages of supply of ADCON(R) products
from the Company's sole manufacturer, the ability of the Company to commence
manufacturing of its ADCON(R) 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, and personnel
and technological change. These statements are based on certain assumptions and
analysis made by the Company in light of its experience and its perception of
historical trends, current conditions, expected future developments and other
factors it believes are appropriate in the circumstances. Such statements are
subject to a number of other assumptions, risks, uncertainties, general economic
and business conditions, and the business opportunities (or lack thereof) that
may be presented to and pursued by the Company. Prospective investors are
cautioned that any such statements are not guarantees of future performance and
that actual results or developments may differ materially from those projected
in the forward-looking statements.
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<PAGE> 15
ITEM 3 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.
13
<PAGE> 16
PART II
OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company registered 2,300,000 shares of Common Stock in connection with its
initial public offering on a Registration Statement on Form S-1, which went
effective on October 18, 1995. The data below reflects the use of proceeds from
such offering to the date of this Quarterly Report on Form 10-Q. All such
proceeds were directly or indirectly paid to others pursuant to Rule
701(f)(4)(vii):
<TABLE>
<CAPTION>
<S> <C>
Construction 0
Machinery and Equipment 0
Real Estate 0
Acquisition 0
Repayment of Debt 0
Working Capital 942,000
Temporary Investments (specify)
Commercial paper 000,000
Corporate Bonds 000,000
Other Short-Term Investments 000,000
Other:
Clinical Trials 4,140,000
Research and Development 11,209,000
Sales and Marketing 3,283,000
General Corporate Purposes 73,000
</TABLE>
14
<PAGE> 17
PART II
OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On May 19, 1999, at the Annual Meeting of Stockholders of Gliatech Inc., the
stockholders took the following actions:
(1) Elected as Directors all nominees designated in the Proxy Statement
dated April 12, 1999.
(2) Approved the appointment of the independent certified public
accountants of the Company for the current fiscal year.
(3) Amending and restating the Amended and Restated 1989 Stock Option Plan.
(4) Amending and restating the Amended and Restated 1995 Non-employee
Directors Stock Option Plan.
The Directors were elected pursuant to the following vote:
<TABLE>
<CAPTION>
BROKER
NOMINEE FOR WITHHELD ABSTAIN NON-VOTE
- ------- --- -------- ------- --------
<S> <C> <C> <C> <C>
William A. Clarke 8,193,995 261,165 ---- ----
Theodore E. Haigler, Jr. 8,193,995 261,165 ---- ----
Ronald D. Henriksen 8,193,995 261,165 ---- ----
</TABLE>
In addition, the following Directors' term of office continued after the
meeting:, Thomas O. Oesterling, Ph.D., Robert P. Pinkas, Allen H. Ford, Irving
S. Shapiro, and John L. Ufheil.
The approval of appointment of Ernst & Young LLP as independent certified public
accountants to the Company for its current fiscal year was approved by the
following vote:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST WITHHELD ABSTAIN NON-VOTE
- --- ------- -------- ------- --------
<C> <C> <C> <C> <C>
7,745,810 684,382 0 21,968 ----
</TABLE>
15
<PAGE> 18
The approval of the Amended and Restated 1989 Stock Options Plan:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST WITHHELD ABSTAIN NON-VOTE
- --- ------- -------- ------- --------
<C> <C> <C> <C> <C>
2,506,090 1,921,333 0 42,450 3,942,202
</TABLE>
The approval of the Amended and Restated 1995 Non-employee Directors Stock
Options Plan:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST WITHHELD ABSTAIN NON-VOTE
- --- ------- -------- ------- --------
<C> <C> <C> <C> <C>
4,176,216 254,162 0 39,495 3,942,202
</TABLE>
16
<PAGE> 19
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial data schedule
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K for the period
covered by this Quarterly Report on Form 10-Q
17
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 16, 1999 GLIATECH INC.
By: /s/Rodney E. Dausch
--------------------------------------------
Rodney E. Dausch
Vice President, Chief Financial Officer
and Secretary
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
18
<PAGE> 21
EXHIBIT INDEX
Exhibit No. Description of Exhibit Page Number
- ----------- ---------------------- -----------
27.1 Financial Data Schedule 20
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GLIATECH
INC'S QUARTERLY REPORT ON FORM 10Q FOR THE QUARTER ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 7,278
<SECURITIES> 19,153
<RECEIVABLES> 4,167
<ALLOWANCES> 519
<INVENTORY> 1,841
<CURRENT-ASSETS> 32,836
<PP&E> 4,683
<DEPRECIATION> 2,109
<TOTAL-ASSETS> 36,168
<CURRENT-LIABILITIES> 7,084
<BONDS> 0
0
0
<COMMON> 95
<OTHER-SE> 28,989
<TOTAL-LIABILITY-AND-EQUITY> 36,168
<SALES> 7,929
<TOTAL-REVENUES> 8,346
<CGS> 1,148
<TOTAL-COSTS> 1,148
<OTHER-EXPENSES> 6,555
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 950
<INCOME-TAX> 0
<INCOME-CONTINUING> 950
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 950
<EPS-BASIC> .10
<EPS-DILUTED> .09
</TABLE>
