<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, 2000
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 9, 2000 was 9,581,806 shares.
<PAGE> 2
GLIATECH INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1 Financial Statements: (unaudited)
Consolidated Balance Sheets - 1
June 30, 2000 and December 31, 1999
Consolidated Statements of Operations -
for the three months and six months ended
June 30, 2000 and 1999 2
Consolidated Statements of Cash Flows -
for the six months ended June 30, 2000 and 1999 3
Notes to Consolidated Financial Statements 4-9
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-15
Item 3 Quantitative and Qualitative Disclosures
About Market Risk 16
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 17
Item 4 Submission of Matters to a Vote of
Security-Holder 18
Item 6 Exhibits and Reports on Form 8-K 19
</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,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,936,523 $ 3,350,245
Short-term investments 10,178,335 15,750,620
Accounts receivable, net 3,622,241 899,696
Government grants receivable 277,838 413,608
Inventories, net 5,812,064 5,353,696
Prepaid expenses and other 921,899 824,720
----------- -----------
Total current assets 25,748,900 26,592,585
Long term investments 1,711,552 1,712,790
Property and equipment, net 3,430,614 3,232,712
Other assets, net 951,050 845,668
----------- -----------
TOTAL ASSETS $31,842,116 $32,383,755
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,383,201 $1,129,470
Accrued expenses 1,372,460 2,084,490
Accrued research contracts 194,249 485,470
Accrued compensation 333,600 207,558
Accrued clinical trial costs 1,447,719 2,085,011
----------- -----------
Total current liabilities 4,731,229 5,991,999
Stockholders' equity:
Common stock 95,877 95,536
Additional paid-in capital 73,876,255 73,967,823
Treasury stock at cost, 27,500 and 75,000 shares at
June 30, 2000 and December 31, 1999, respectively (531,280) (1,448,950)
Accumulated other comprehensive loss (49,422) (54,839)
Accumulated deficit (46,280,543) (46,167,814)
----------- -----------
Total stockholders' equity 27,110,887 26,391,756
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $31,842,116 $32,383,755
=========== ===========
</TABLE>
See notes to consolidated financial 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
------------------------------- --------------------------------
2000 1999 2000 1999
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Product sales $ 7,035,345 $ 7,929,085 $ 13,866,881 $ 15,685,355
Research contracts and licensing fees - 171,398 - 514,194
Government grants 242,752 245,168 485,504 430,851
----------- ----------- ------------ ------------
Total revenues 7,278,097 8,345,651 14,352,385 16,630,400
OPERATING COSTS AND EXPENSES
Cost of products sold 1,164,927 1,147,525 2,367,061 2,294,655
Research and development 3,229,933 3,360,182 5,802,849 7,300,551
Selling, general and administrative 3,384,941 3,194,393 6,837,180 6,170,669
----------- ----------- ------------ ------------
Total operating costs and expenses 7,779,801 7,702,100 15,007,090 15,765,875
----------- ----------- ------------ ------------
Operating (loss) income (501,704) 643,551 (654,705) 864,525
Interest income, net 271,738 306,818 541,976 560,086
----------- ----------- ------------ ------------
NET (LOSS) INCOME $ (229,966) $ 950,369 $ (112,729) $ 1,424,611
=========== =========== ============ ============
(Loss) Earnings per share
Basic $ (0.02) $ 0.10 $ (0.01) $ 0.15
=========== =========== ============ ============
Diluted $ (0.02) $ 0.09 $ (0.01) $ 0.14
=========== =========== ============ ============
Average shares outstanding
Basic 9,519,949 9,498,917 9,505,232 9,463,663
=========== =========== ============ ============
Diluted 9,519,949 10,104,888 9,505,232 10,128,941
=========== =========== ============ ============
</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
JUNE 30,
2000 1999
---------- -----------
<S> <C> <C>
Operating activities
Net (loss) income ($112,729) $1,424,611
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 325,723 275,006
Patent cost write-off 178,122
Provision (credit) for losses on accounts receivable 16,666 (82,770)
Compensation from issuance of stock and stock options 103,276 187,400
Gain on sale of investments (9,093) -
Changes in operating assets and liabilities:
Accounts receivable (2,739,211) (568,847)
Inventories (458,368) (1,064,819)
Government grants receivable and other assets 38,591 500,141
Accounts payable and other accrued expenses (332,257) 57,603
Deferred contract research revenue (514,194)
Other liabilities (928,513) 730,763
---------- -----------
Net cash (used in) provided by operating activities (4,095,915) 1,123,016
INVESTING ACTIVITIES
Sale of investments 12,087,523 15,100,000
Purchase of investments (6,499,490) (12,585,767)
Payment for patent rights and trademarks (114,108) (128,913)
Purchase of property and equipment (514,898) (1,282,610)
---------- -----------
Net cash provided by investing activities 4,959,027 1,102,710
FINANCING ACTIVITIES
Proceeds from exercise of stock options 723,166 320,036
---------- -----------
Net cash provided by financing activities 723,166 320,036
---------- -----------
Increase in cash and cash equivalents 1,586,278 2,545,762
Cash and cash equivalents at beginning of period 3,350,245 4,731,814
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $4,936,523 $7,277,576
========== ===========
</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, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. 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, 1999 filed with the Securities and Exchange Commission.
Certain fiscal 1999 amounts have been reclassified to conform with the fiscal
2000 presentation.
Note 2. Investments
Short-term and long-term investments at June 30, 2000 and December 31, 1999 are
as follows:
<TABLE>
<CAPTION>
Gross Unrealized
June 30, 2000 Amortized Cost Holding Gain Holding Loss Fair Value
------------- -------------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Available-for-sale:
Corporate debt securities $ 9,739,309 $ 5,775 $(24,322) $ 9,720,762
U.S. Treasury securities 2,200,000 0 (30,875) 2,169,125
----------- ------- --------- -----------
$11,939,309 $ 5,775 $(55,197) $11,889,887
=========== ======= ========= ===========
December 31, 1999
Available-for-sale:
Corporate debt securities 14,822,004 1,880 (18,657) 14,805,227
U.S. Treasury securities 2,696,245 0 (38,062) 2,658,183
----------- ------- ------- -----------
$17,518,249 $ 1,880 $(56,719) $17,463,410
=========== ======= ========= ===========
</TABLE>
4
<PAGE> 7
All of the Company's investments are classified as available-for-sale. Such
investments are stated at fair value with unrealized holding gains and losses
charged or credited to shareholders' equity.
Realized gains and losses on available-for-sale securities are determined on a
specific identification basis. Any decline in market value below cost that is
determined to be other than temporary is an impairment that would result in a
reduction in the carrying amount to fair value. Such impairment, if any, is
charged to current earnings and an adjusted cost for the security is
established.
Investments with maturity dates of less than one year are classified as
short-term; investments with maturity dates of more than one year are classified
as long-term.
Maturities of short-term and long-term investments classified as
available-for-sale securities at June 30, 2000 were as follows:
<TABLE>
<CAPTION>
June 30, 2000 Amortized Cost Fair Value
------------- -------------- ----------
<S> <C> <C>
Due in 1 year or less $10,198,691 $10,178,335
Due in 1-3 years 1,740,618 1,711,552
----------- -----------
$11,939,309 $11,889,887
=========== ===========
</TABLE>
Note 3. Inventories
At June 30, 2000 and December 31, 1999, inventories, net of reserves,
consisted of:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------------------------------
<S> <C> <C>
Raw material $3,427,257 $4,549,976
Work in process 1,570,724 205,007
Finished goods 814,083 598,713
------------ ----------
$5,812,064 $5,353,696
========== ==========
</TABLE>
The Company records reserves for obsolete and impaired inventory when items
are identified that will not meet either the Company's quality or regulatory
validation requirements.
5
<PAGE> 8
Note 4. Other Assets
At June 30, 2000 and December 31, 1999, other assets consisted of:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------------------------------
<S> <C> <C>
Patent rights, net of accumulated amortization of $130,950
at June 30, 2000 and $124,722 at December 31, 1999 $899,156 $791,139
Trademark cost, net of accumulated amortization of $27,500
at June 30, 2000 and $25,000 at December 31, 1999 39,559 40,241
Other 12,335 14,286
-------- --------
$951,050 $845,668
======== ========
</TABLE>
Patent rights are amortized on the straight-line basis over the shorter of the
estimated useful life of the patented technology or seventeen years, beginning
at the time the patent is granted. The Company reviews its patents to determine
if the expected future operating cash flows to be derived from the patents are
less than the carrying value and, if an impairment has occurred, the patent is
written-down to its expected future cash flows or if the patent is abandoned,
it is written-off in its entirety. Patent expense due to impairments or
abandonments was $0 and $178,122 for the six months ended June 30, 2000 and
1999, respectively.
Trademark costs are amortized on the straight-line basis over the shorter of the
estimated useful life of the trademark or ten years, beginning at the time the
trademark is granted.
Note 5. Business Segment
The Company operates in one business segment. The Company is engaged in the
discovery and development of biosurgical and therapeutic products to improve
surgical outcomes and to treat neurological disorders. The Company's principal
products are the ADCON(R) family of products, which are medical devices designed
to inhibit excess scarring and adhesion following surgery. The Company sells
ADCON(R) products through independent medical device distributors in
approximately 30 countries outside the United States 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>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
2000 1999 2000 1999
---------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Domestic $5,853,131 $7,085,620 $11,712,471 $13,917,114
Foreign 1,182,214 843,465 2,154,410 1,768,241
---------- ---------- ----------- -----------
Total $7,035,345 $7,929,085 $13,866,881 $15,685,355
========== ========== =========== ===========
</TABLE>
6
<PAGE> 9
Note 6. Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net (loss) income $ (229,966) $ 950,369 $ (112,729) $ 1,424,611
Unrealized gain on investments 7,012 5,417
----------- ---------- ---------- -----------
Total comprehensive income (loss) $ (222,954) $ 950,369 $ (107,312) $ 1,424,611
=========== ========== ========== ===========
</TABLE>
Accumulated other comprehensive loss, which is shown as a separate charge to
shareholders' equity, was $(49,422) and $(54,839) at June 30, 2000 and December
31, 1999, respectively, and consists entirely of unrealized losses on
investments.
Note 7. Earnings Per Share Calculation
The following table sets forth the computation of basic and diluted earnings
per share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Basic Earnings Per Share Computation
Net (Loss) Income $ (229,966) $ 950,369 $ (112,729) $1,424,611
============ =========== ========== ==========
Average Common
Shares outstanding 9,519,949 9,498,917 9,505,232 9,463,663
============ =========== ========= =========
Basic (Loss) Earnings Per Share $ (0.02) $ 0.10 $ (.01) $ 0.15
============ =========== ========= =========
</TABLE>
7
<PAGE> 10
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Diluted Earnings Per Share Computation
Net (Loss) Income $ (229,966) $ 950,369 $ (112,729) $1,424,611
============ =========== ========== ==========
Basic Shares Outstanding 9,519,949 9,498,917 9,505,232 9,463,663
Stock Options Calculated Under
the Treasury Stock Method 605,971 665,278
------------ ----------- ---------- ----------
Total Shares 9,519,949 10,104,888 9,505,232 10,128,941
============ =========== ========== ==========
Diluted (Loss) Earnings Per Share $ (0.02) $ 0.09 $ (.01) $ 0.14
============ =========== ========== ==========
</TABLE>
Securities that could potentially dilute earnings per share in future periods
totaled 430,728 and 439,252 for the three and six months ending June 30, 2000,
respectively. Such shares were not included in the computation of diluted
loss per share for those periods because to do so would have been
antidilutive.
Note 8. Stock-Based Compensation to Employees and Non-employees
The Company accounts for stock-based compensation related to employees in
accordance with Accounting Principles Board Opinion ("APBO") No. 25, "Accounting
for Stock Issued to Employees." No compensation cost has been recognized for the
three or six months ended June 30, 2000 or 1999 for fixed stock options issued
to employees or directors.
The Company accounts for stock-based compensation related to non-employees in
accordance with Emerging Issues Task Force Issue No. 96-18, "Accounting for
Equity Instruments that are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services." Accordingly, the Company
recognized compensation expense related to stock options issued to non-employee
consultants of $50,964 and $103,277 for the three and six months ended June 30,
2000, respectively, and $10,800 and $187,400 for the three and six months ended
June 30, 1999, respectively.
8
<PAGE> 11
Note 9. Accounting Pronouncements
In December 1999, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin 101 ("SAB 101") "Revenue Recognition in
Financial Statements." SAB 101 outlines the basic criteria that must be met to
recognize revenue, and provides guidelines for disclosure related to revenue
recognition policies. This guidance is required to be implemented in the fourth
quarter of 2000, and is not expected to have a significant impact on the
Company's financial position or results of operations.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation and Interpretations of APB
Opinion No. 25", which is effective July 1, 2000. This interpretation clarifies
various accounting issues for stock compensation plans and is not expected to
have a significant impact on the Company's financials position or results of
operations.
Note 10. Recent Developments
In June 2000, Cartech Company, LTD. filed a lawsuit against Gliatech and
Guilford alleging breach of and interference with Gliatech's build-to-suit lease
agreement with Cartech. The parties subsequently entered into a settlement
agreement to resolve the litigation. Pursuant to the settlement agreement,
Guilford agreed to pay Cartech $4.5 million within seven days after the merger
has closed or, if the merger agreement is terminated prior to closing or if the
merger does not close by December 1, 2000, Gliatech will pay Cartech $4.5
million. In the event that Gliatech makes the payment to Cartech and upon
Gliatech's written request, Gliatech and Cartech will enter into good faith
negotiations for a new build-to-suit lease and Gliatech will receive a credit
against the cost of the new lease of up to $2.2 million. The lawsuit has been
dismissed by Cartech without prejudice, and the parties have agreed to a full
mutual release of claims and termination of the existing build-to-suit lease
effective upon receipt by Cartech of the payment by Guilford or Gliatech.
Pending such payment, Cartech has agreed to abstain from further legal action
against Guilford and Gliatech.
9
<PAGE> 12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is engaged in the discovery and development of biosurgical and
therapeutic products to improve surgical outcomes and to treat neurological
disorders. The biosurgical products include 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 other biosurgical products and small molecule drug candidates for
the treatment of several neurological disorders, including Attention Deficit
Hyperactive Disorder ("ADHD"), sleep disorders, anxiety, schizophrenia and
Alzheimer Disease ("AD"). The Company anticipates that a significant portion of
revenue from product sales will be derived from its ADCON family of products,
primarily ADCON-L. 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 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 United States, including
the major countries in the European Union pursuant to its CE Marking. The
Company also commenced sales of ADCON-L in the United States in June 1998. In
September 1999, the Food and Drug Administration ("FDA") issued a warning letter
to European Medical Contract Manufacturing ("EMCM"), the Company's third party
manufacturing contractor located in the Netherlands, which led to an import ban
on all ADCON-L shipments to the United States. After a successful re-inspection
of EMCM facilities, the import ban was lifted in December 1999 and the Company
resumed shipments of ADCON-L to the United States in January 2000. 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, subject to
regulatory approval.
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 May 1999, Janssen ceased funding this endeavor. The Company believes that
Janssen does not intend to select a lead compound from the identified compounds
or pursue clinical trials relating to any such compound. The Company is in
discussion with Janssen to transfer development rights of these compounds to the
Company. There can be no assurance that the Company will be successful in
obtaining such development rights from Janssen or, if the Company is successful,
that such rights will be obtained on favorable terms. In addition, the Company
receives revenues from various government grants awarded to the Company. The
Company recognizes revenues from government grants in the period in which the
associated costs are incurred.
10
<PAGE> 13
On May 30, 2000, Guilford Pharmaceuticals Inc. (NASDAQ: GLFD) and Gliatech Inc.
announced that they had entered into a definitive merger agreement pursuant to
which Guilford will acquire all of the outstanding common stock of Gliatech for
an exchange ratio of 1.38 shares of Guilford stock for one share of Gliatech
stock, subject to satisfaction of certain closing conditions, including, among
others, stockholder approval. The proposed transaction combines the capabilities
of both companies in biopolymer development and the development of novel drugs
for the treatment of central nervous system disorders. The combined company will
have three marketed products and nine product candidates in the clinical
development.
RESULTS OF OPERATIONS
For the three month and six month periods ended June 30, 2000 and 1999.
REVENUES
Total revenues decreased by 12.8% to $7.3 million in the second quarter of 2000
from $8.3 million in the second quarter of 1999 and decreased by 13.7% to $14.4
million in the first six months of 2000 from $16.6 million in the first six
months of 1999. The decrease in total revenues is primarily the result of a
decrease in product sales, which decreased to $7.0 million in the second quarter
of 2000 from $7.9 million in the second quarter of 1999 and decreased to $13.9
million in the first six months of 2000 from $15.7 million in 1999. This
decrease in sales resulted primarily from the temporary import embargo on
ADCON(R)-L in the United States in late 1999 and the first month of 2000. The
second quarter of 2000 represents the first full quarter of sales of ADCON(R)-L
in the United States during 2000. In addition, there were no research contract
revenues during fiscal 2000, because Janssen stopped funding the collaboration
efforts with the Company in May 1999.
Revenues from government grants decreased less than 1% to $242,752 in the
second quarter of 2000 from $245,168 in the second quarter of 1999 and
increased 12.7% to $485,504 for the first six months of 2000 from $430,851 for
the first six months of 1999. The Company recognized grant revenue over the
first six months of fiscal 2000 as the related costs for the two Phase II Small
Business Innovation Research ("SBIR") grants were incurred over that period.
The Company recognized grant revenue over the first six months of fiscal 1999
for only one of the two SBIR grants based on the costs incurred.
OPERATING COSTS AND EXPENSES
Total operating expenses increased by 1.0% to $7.8 million in the second quarter
of 2000, compared to $7.7 million in the second quarter of 1999 and decreased by
4.8% to $15.0 million in the first six months of 2000 from $15.8 million in the
first six months of 1999. Cost of products sold increased to $1.2 million in the
second quarter of 2000 compared to $1.1 million in the second quarter of 1999,
and increased, as a percentage of product sales to 16.6% from 14.5%. The cost of
products sold increased to $2.4 million in the first six months of 2000 compared
to $2.3 million in the first six
11
<PAGE> 14
months of 1999, and increased as a percentage of product sales to 17.1% from
14.6%. The increase in the second quarter of 2000 and in the first six months of
2000 as a percentage of product sales is primarily due to startup costs
associated with the Company's new manufacturing plant in Solon, Ohio, which is
currently undergoing validation testing. The startup costs for the Solon
manufacturing plant are approximately $450,000 for the first six months of 2000.
Research and development expenses decreased by 3.9% to $3.2 million in the
second quarter of 2000 from $3.4 million in the second quarter of 1999 and
decreased 20.5% to $5.8 million in the first six months of 2000 from $7.3
million in the first six months of 1999. This decrease was primarily due to a
reduction in clinical development costs due to the Perceptin Phase II clinical
trial having a slower than anticipated enrollment during the second quarter of
2000. In addition, research and development expenses decreased because the pilot
studies for ADCON(R)-A (for inhibition of postsurgical scarring and adhesion
following abdominal or colorectal surgeries) and ADCON(R)-L gel (for inhibition
of postsurgical scarring and adhesion following breast augmentation surgery)
were fully enrolled and expensed by the end of fiscal 1999 with limited new
enrollment in theses studies in 2000.
Write-offs of abandoned patents totaled $0 and $178,122 for the six months ended
June 30, 2000 and 1999, respectively. These patent costs were expensed in 1999
because the Company abandoned these patents based on a determination that it
would be more cost beneficial to pursue alternative patent technology.
Selling, general and administrative expenses increased 6.0% to $3.4 million in
the second quarter of 2000 compared to $3.2 million in the second quarter of
1999 and increased 10.8% to $6.8 million in the first six months of 2000 from
$6.2 million in the first six months of 1999. This increase in both the second
quarter and first six months of 2000 was primarily due to expenses and fees
relating to the proposed merger with Guilford Pharmaceutical Inc., which were
approximately $590,000 in the second quarter and $725,000 and the first six
months of 2000.
INTEREST INCOME
Interest income, net decreased by 11.4% to $271,738 in the second quarter of
2000 from $306,818 in the second quarter of 1999 and decreased 3.2% to $541,976
in the first six months of 2000 from $560,086 in the first six months of 1999.
The decrease was due to the reduction in short term investments, which were sold
to fund operations during the temporary import embargo of ADCON(R)-L.
NET INCOME
Gliatech's net income decreased by $1.1 million to a net loss of $229,966 in
the second quarter of 2000 compared to net income of $950,369 in the second
quarter of 1999 and decreased by $1.5 million to a net loss of $112,729 for the
first six months of 2000 from net income of $1.4 million for the first six
months of 1999. The decrease in net income is primarily due to lower sales of
ADCON(R)-L in the United States, due to of the temporary import embargo of
ADCON(R)-L in late 1999 and the first month of 2000. The decrease in net income
is also due to costs of $725,000 incurred through June 30, 2000.
12
<PAGE> 15
related to the proposed merger with Guilford Pharmaceuticals Inc. The diluted
loss per common share was $0.02 in the second quarter of 2000 compared to a
diluted net income of $0.09 in the second quarter of 1999. The diluted loss per
common share was $0.01 for the first six months of 2000 compared to a diluted
net income per common share of $0.14 for the first six months of 1999. Excluding
merger costs, the Company would have earned $0.04 and $0.06 per diluted common
share for the second quarter and six months of fiscal 2000, respectively.
CONSOLIDATED BALANCE SHEETS
Short-term investments decreased to $10.2 million at June 30, 2000 from $15.8
million at December 31, 1999, due primarily to payments of accrued expenses and
accrued clinical trial costs and slower accounts receivable turnover. Accounts
receivable increased by $2.8 million to $3.6 million at June 30, 2000, compared
to $.9 million at December 31, 1999. Total work in process and finished goods
inventory increased to $2.4 million at June 30, 2000 from $.8 million at
December 31, 1999. The increase in accounts receivable, work in process and
finished goods inventory were due to the Company resuming shipments of ADCON-L
into the United States and related production of ADCON(R)-L in January 2000
after the temporary embargo was lifted.
LIQUIDITY AND CAPITAL RESOURCES
In order to preserve principal and maintain liquidity, the Company's funds are
invested primarily in commercial paper and other short-term investments. As of
June 30, 2000 and December 31, 1999, the Company's cash and cash equivalents and
short-term and long-term investments totaled $16.8 million and $20.8 million and
respectively. The Company expects that its existing capital resources, interest
earned thereon, and product sales will enable the Company to maintain its
current and planned operations for the foreseeable future.
Prior to the commercialization of ADCON-L in the United States, the Company
historically 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. The Company
also has established a $1.5 million line of credit with a bank. As of June 30,
2000, the Company had no borrowings against the line of credit.
On May 30, 2000, Guilford Pharmaceuticals Inc. (NASDAQ: GLFD) and Gliatech Inc.
announced that they had entered into a definitive merger agreement pursuant to
which Guilford will acquire all of the outstanding common stock of Gliatech for
an exchange ratio of 1.38 shares of Guilford stock for one share of Gliatech
stock, subject to satisfaction of certain closing conditions, including, among
others, stockholder approval.
In the second quarter of 1999 the Company was awarded a third Phase II SBIR
Program grant from the National Cancer Institute ("NCI"), a division of the NIH,
for the research of inhibition of
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<PAGE> 16
postoperative gynecological adhesions. In September 1998, the Company was
awarded a Phase II SBIR Program grant from the NINDS for research evaluating H
(3) agonists. Each of these Phase II grants has a two-year term and each may
provide as much as approximately $750,000 in funding. In February 1997, the
Company was awarded a two-year Phase II SBIR Program grant from NINDS for
research evaluating histamine H (3) receptor antagonists to treat ADHD, which
may provide as much as $750,000 in funding. If the Company is successful in
other Phase I research, additional Phase II awards may be sought for funding to
aid in further development of pharmaceutical compounds, however, there is no
assurance that such Phase I research will be successful or that additional
funding will be obtained.
The Company's future capital requirements will depend on, and could increase as
a result of many factors, including, but not limited to, the cost for
commercialization of ADCON-L, the commercialization success of its ADCON family
of products, the progress of the Company's research and development, including
the costs related to its Cognition Modulation, Perceptin, AD, schizophrenia and
other neurological disorders programs, the scope, timing and results of
preclinical studies and clinical trials, the cost and timing of obtaining
regulatory approvals, the Company's 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.
STOCK REPURCHASE PROGRAM
On May 29, 2000, the Board of Directors of the Company approved the termination
of the Company's stock repurchase program.
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 currencies 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 currencies 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.
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<PAGE> 17
FORWARD-LOOKING STATEMENTS. Certain statements in this Quarterly Report on Form
10-Q constitute "forward-looking statements." When used in this Form 10-Q, 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, including the timing and content of decisions made by the FDA,
commercial uncertainty of the market acceptance of the Company's ADCON(R) family
of products, delays in product development of additional ADCON(R) products,
uncertainty of outcomes of future FDA audits and inspections, uncertainty due to
the early stage of development for the neurological disorder programs,
uncertainties relating to the integration and completion of any strategic
alternative, the productivity of distributors of the ADCON(R) products, the
uncertainty of 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 United States,
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 and uncertainties related the Company's ability to consummate the
proposed merger with Guilford Pharmaceuticals Inc. 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> 18
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company does not enter into derivative financial instruments. The Company
primarily invests in U.S. treasury securities, 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.
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<PAGE> 19
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
In June 2000, Cartech Company, LTD. filed a lawsuit against Gliatech and
Guilford alleging breach of and interference with Gliatech's build-to-suit lease
agreement with Cartech. The parties subsequently entered into a settlement
agreement to resolve the litigation. Pursuant to the settlement agreement,
Guilford agreed to pay Cartech $4.5 million within seven days after the merger
has closed or, if the merger agreement is terminated prior to closing or if the
merger does not close by December 1, 2000, Gliatech will pay Cartech $4.5
million. In the event that Gliatech makes the payment to Cartech and upon
Gliatech's written request, Gliatech and Cartech will enter into good faith
negotiations for a new build-to-suit lease and Gliatech will receive a credit
against the cost of the new lease of up to $2.2 million. The lawsuit has been
dismissed by Cartech without prejudice, and the parties have agreed to a full
mutual release of claims and termination of the existing build-to-suit lease
effective upon receipt by Cartech of the payment by Guilford or Gliatech.
Pending such payment, Cartech has agreed to abstain from further legal action
against Guilford and Gliatech.
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<PAGE> 20
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On May 16, 2000, 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 14, 2000.
(2) Approved the appointment of the independent certified public
accountants of the Company for the current fiscal year.
(3) Approved the Directors Equity Plan
The Directors were elected pursuant to the following vote:
<TABLE>
<CAPTION>
BROKER
NOMINEE FOR WITHHELD ABSTAIN NON-VOTE
------- --- -------- ------- --------
<S> <C> <C> <C> <C>
Irving S. Shapiro 8,479,792 117,945 ---- ----
John L. Ufheil 8,479,892 117,845 ---- ----
</TABLE>
In addition, the following Directors' term of office continued after the
meeting:, Thomas O. Oesterling, Ph.D., Robert P. Pinkas, Willaim A. Clark,
Theodore E. Haigler and Ronald D. Henriksen.
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
--- ------- -------- ------- --------
<S> <C> <C> <C> <C>
6,627,141 1,956,727 0 13,869 ----
</TABLE>
The approval of Director's Equity Plan:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST WITHHELD ABSTAIN NON-VOTE
--- ------- -------- ------- --------
<S> <C> <C> <C> <C>
8,144,018 260,285 0 193,434 ----
</TABLE>
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<PAGE> 21
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger, dated as of May 29, 2000, as amended,
by and among the Company, Guilford Pharmaceuticals, Inc. and St. John
Development Corp. (incorporated by reference to Exhibit 2.01 to the
Registration Statement on Form S-4 (Reg. No. 333-39546)).
27.1 Financial data schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on June 2, 2000.
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<PAGE> 22
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 14, 2000 GLIATECH INC.
By: /s/Rodney E. Dausch
---------------------------------------
Rodney E. Dausch
Executive Vice President,
Chief Financial Officer and Secretary
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
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<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Page Number
<S> <C> <C>
2.1 Agreement and Plan of Merger, dated as of
May 29, 2000 as amended, by and among the
Company, Guilford Pharmaceuticals, Inc. and
St. John Development Corp. (incorporated by
reference to Exhibit 2.01 to the Registration
Statement on Form S-4 (Reg. No. 333-39546)).
27.1 Financial Data Schedule 22
</TABLE>
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