<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-K/A
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").
<PAGE> 2
Although the Consolidated Statement of Cash Flows for the years ended
December 31, 1997 and 1996 of this Item 8 contains certain amendments, the
complete text of Item 8 is included in this Form 10-K/A pursuant to Rule 12b-15
of the Securities and Exchange Act of 1934. Accordingly, Item 8 is hereby
amended and restated in its entirety as follows:
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.
<PAGE> 3
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
<PAGE> 4
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.
<PAGE> 5
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.
<PAGE> 6
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.
<PAGE> 7
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) 1,137,567
------------ ------------ ------------
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.
<PAGE> 8
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
<PAGE> 9
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>
<PAGE> 10
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>
<CAPTION>
<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
<PAGE> 11
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>
<PAGE> 12
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.
<PAGE> 13
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.
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this Amendment
No. 1 to the Annual Report on Form 10-K/A 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 26, 1999
Pursuant to the requirements of the Securities Exchange Act of
1934, this Amendment No. 1 to the Annual Report on Form 10-K/A 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 26, 1999
- ------------------------------ Officer (Principal Executive
Thomas O. Oesterling, Ph.D. Officer) and Director
/s/ RODNEY E. DAUSCH Vice President and Chief March 26, 1999
- ------------------------------ Financial Officer
Rodney E. Dausch (Principal Financial Officer and
Principal Accounting Officer)
* Chairman of the Board March 26, 1999
- ------------------------------
Robert P. Pinkas
* Director March 26, 1999
- ------------------------------
William A. Clarke
Director March 26, 1999
- ------------------------------
Theodore E. Haigler, Jr.
* Director March 26, 1999
- ------------------------------
Ronald D. Henriksen
* Director March 26, 1999
- ------------------------------
Irving S. Shapiro
* Director March 26, 1999
- ------------------------------
John L. Ufheil
</TABLE>
* The undersigned, by signing his name hereto, does sign and execute this
Amendment No. 1 to the Annual Report on Form 10-K/A 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 26, 1999
RODNEY E. DAUSCH, ATTORNEY-IN-FACT
