-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VAdwJXXjAyPfr8WVqQePIXcxA7g6AHQyuvmjkJcE3v7tPYa9fOAIOBcimW8V0Ius wHmkwTrCyVHTqk5jU7yOQQ== 0000950133-98-003824.txt : 19981116 0000950133-98-003824.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950133-98-003824 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GUILFORD PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000918066 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 521841960 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23736 FILM NUMBER: 98748107 BUSINESS ADDRESS: STREET 1: 6611 TRIBUTARY ST CITY: BALTIMORE STATE: MD ZIP: 21224 BUSINESS PHONE: 4106316300 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 ------------------ COMMISSION FILE NUMBER 0-23736 ------- GUILFORD PHARMACEUTICALS INC. (Exact name of registrant as specified in its charter) - -------------------------------------------------------------------------------- DELAWARE 52-1841960 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 6611 TRIBUTARY STREET, BALTIMORE, MARYLAND 21224 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 410-631-6300 - -------------------------------------------------------------------------------- (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 ------ ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Outstanding at November 10, 1998 Common Stock, $.01 par value 19,534,919 - ---------------------------- ----------
2 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES INDEX
Page (s) ---- PART I. FINANCIAL INFORMATION (UNAUDITED) Item 1. Consolidated Financial Statements Consolidated Balance Sheets September 30, 1998 and December 31, 1997..............................3 Consolidated Statements of Operations Three and nine months ended September 30, 1998 and 1997...........................................4 Consolidated Statements of Stockholders' Equity Nine months ended September 30, 1998..................................5 Consolidated Statements of Cash Flows Three and nine months ended September 30, 1998 and 1997...........................................6 Notes to Consolidated Financial Statements............................7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................11-23 Item 3. Quantitative and Qualitative Disclosures About Market Risk...........................................................23 PART II. OTHER INFORMATION..............................................................24-25 SIGNATURES.....................................................................26
2 3 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, 1998 (UNAUDITED) DECEMBER 31, 1997 ----------------------------- -------------------------------- ASSETS Current assets: Cash and cash equivalents $ 9,965 $ 24,980 Investments 114,149 123,120 Investments - restricted 12,723 12,119 Accounts receivable 1,266 606 Inventories 1,606 1,342 Other current assets 761 494 ----------------------------- ------------------------------- Total current assets 140,470 162,661 Property and equipment, net 21,105 17,153 Other assets 267 267 ----------------------------- ------------------------------- $ 161,842 $ 180,081 ============================= =============================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,199 $ 2,743 Current portion of long-term debt 2,159 2,159 Accrued payroll related costs 2,132 2,000 Accrued contracted services 2,849 1,527 Accrued licensing and royalty payments 2,183 531 Accrued expenses and other current liabilities 1,046 776 Deferred income 1,125 1,125 ----------------------------- ------------------------------- Total current liabilities 12,693 10,861 Long-term liabilities: Long-term debt, net of current portion 9,306 10,926 ----------------------------- ------------------------------- Total liabilities 21,999 21,787 ----------------------------- ------------------------------- Stockholders' equity: Preferred stock, par value $.01 per share Authorized 4,700,000 shares, none issued - - Series A junior participating preferred stock, par value $.01 per share. Authorized 300,000 shares, none issued - - Common stock, par value $.01 per share. Authorized 75,000,000 shares 19,496,201 and 19,387,946 issued and outstanding at September 30, 1998 and December 31, 1997, respectively 195 194 Additional paid-in capital 186,421 185,205 Accumulated deficit (47,379) (26,311) Accumulated other comprehensive income 1,946 426 Notes receivable on common stock (60) (60) Treasury stock, at cost (924) (878) Deferred compensation (356) (282) ----------------------------- ------------------------------- Total stockholders' equity 139,843 158,294 ----------------------------- ------------------------------- $ 161,842 $ 180,081 ============================= ===============================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 3 4 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 1998 1997 ----------------- ----------------- ----------------- ----------------- Revenues: Contract revenues $ 1,000 $ 15,000 $ 1,000 $ 15,000 Product sales 920 1,055 2,575 4,880 License fees and royalties 717 496 2,027 1,152 Revenues under collaborative agreements 1,194 97 3,521 266 ----------------- ----------------- ----------------- ----------------- Total revenues 3,831 16,648 9,123 21,298 Costs and Expenses: Cost of sales 423 538 1,267 2,060 Research and development 9,479 9,469 27,444 23,080 General and administrative 2,675 2,152 7,724 5,779 ----------------- ----------------- ----------------- ----------------- Total costs and expenses 12,577 12,159 36,435 30,919 ----------------- ----------------- ----------------- ----------------- Operating income (loss) (8,746) 4,489 (27,312) (9,621) Other income (expense): Investment and other income 2,028 2,067 6,832 4,963 Interest expense (189) (215) (588) (615) ----------------- ----------------- ----------------- ----------------- Net income (loss) $ (6,907) $ 6,341 $ (21,068) $ (5,273) ================= ================= ================= ================= Basic earnings (loss) per common share: $ (0.35) $ 0.34 $ (1.08) $ (0.31) ================= ================= ================= ================= Average common shares outstanding 19,481 18,644 19,453 16,961 ================= ================= ================= ================= Diluted earnings (loss) per common share: $ (0.35) $ 0.32 $ (1.08) $ (0.31) ================= ================= ================= ================= Average common and dilutive equivalent shares outstanding 19,481 20,052 19,453 16,961 ================= ================= ================= =================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 4 5 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ------------- ADDITIONAL NUMBER PAID-IN ACCUMULATED OF SHARES AMOUNT CAPITAL DEFICIT --------- ------ ------- ------- BALANCE, DECEMBER 31, 1997 19,387,946 $ 194 $ 185,205 $ (26,311) Issuances of common stock 108,255 1 886 Purchase of 2,077 shares of common stock Stock option compensation 330 Amortization of deferred compensation Net loss for the period (21,068) Unrealized gain on available-for-sale securities --------------- ------------ --------------- ---------------- BALANCE, SEPTEMBER 30, 1998 19,496,201 $ 195 $ 186,421 $ (47,379) =============== ============ =============== ================ ACCUMULATED NOTES OTHER RECEIVABLE COMPREHENSIVE ON COMMON TREASURY DEFERRED INCOME * STOCK STOCK, AT COST COMPENSATION ------ ----- -------------- ------------ BALANCE, DECEMBER 31, 1997 $ 426 $ (60) $ (878) $ (282) Issuances of common stock (151) Purchase of 2,077 shares of common stock (46) Stock option compensation Amortization of deferred compensation 77 Net loss for the period Unrealized gain on available-for-sale securities 1,520 ------------------- -------------- ------------------ -------------- BALANCE, SEPTEMBER 30, 1998 $ 1,946 $ (60) $ (924) $ (356) =================== ============== ================== ============== TOTAL STOCKHOLDERS' EQUITY ------ BALANCE, DECEMBER 31, 1997 $ 158,294 Issuances of common stock 736 Purchase of 2,077 shares of common stock (46) Stock option compensation 330 Amortization of deferred compensation 77 Net loss for the period (21,068) Unrealized gain on available-for-sale securities 1,520 ---------------- BALANCE, SEPTEMBER 30, 1998 $ 139,843 ================
* Relates to unrealized gain (loss) on available-for-sale securities. SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 5 6 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED SEPTEMBER 30, 1998 1997 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (6,907) $ 6,341 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 830 874 Noncash compensation expense 140 132 Gain on sale of assets 20 - Changes in assets and liabilities: Accounts receivable, other current assets, and other assets 155 (19,578) Inventory (148) 176 Accounts payable and other current liabilities (1,392) 1,577 -------------- ------------- Net cash used in operating activities (7,302) (10,478) -------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in purchases of property and equipment, net (633) (897) Sale and maturities of marketable securities 31,455 26,137 Purchases of marketable securities (19,675) (49,354) Restricted investments (1,118) 205 -------------- ------------- Net cash provided by (used in) investing activities 10,029 (23,909) -------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuances of common stock 393 20,849 Purchase of treasury stock - (151) Proceeds from bond and term loan issuances - 620 Equity proceeds from Gell Pharmaceuticals Inc. relating to the put option - - Payment of notes receivable on common stock - 39 Principal payments on bond and term loan payable (540) (236) -------------- ------------- Net cash provided by (used in) financing activities (147) 21,121 -------------- ------------- Net increase (decrease) in cash and cash equivalents 2,580 (13,266) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 7,385 20,985 -------------- ------------- CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 9,965 $ 7,719 ============== ============= Supplemental disclosures of cash flow information: Net interest paid $ 181 $ 215 Income taxes paid $ - $ - Unrealized gain on available-for-sale securities $ 1,032 $ 226 Collateral transferred from unrestricted to restricted investments, net $ 172 $ 800 NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (21,068) $ (5,273) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 2,578 2,073 Noncash compensation expense 407 1,072 Gain on sale of assets 26 - Changes in assets and liabilities: Accounts receivable, other current assets, and other assets (928) (20,701) Inventory (264) 280 Accounts payable and other current liabilities 1,831 275 -------------- ------------- Net cash used in operating activities (17,418) (22,274) -------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in purchases of property and equipment, net (6,358) (3,680) Sale and maturities of marketable securities 75,573 61,192 Purchases of marketable securities (65,429) (137,595) Restricted investments (604) 556 Net cash provided by (used in) investing activities 3,182 (79,527) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuances of common stock 887 92,067 Purchase of treasury stock (46) (878) Proceeds from bond and term loan issuances - 1,710 Equity proceeds from Gell Pharmaceuticals Inc. relating to the put option - 698 Payment of notes receivable on common stock - 69 Principal payments on bond and term loan payable (1,620) (706) -------------- ------------- Net cash provided by (used in) financing activities (779) 92,960 -------------- ------------- Net increase (decrease) in cash and cash equivalents (15,015) (8,841) -------------- ------------- CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 24,980 16,560 -------------- ------------- CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 9,965 $ 7,719 ============== ============= Supplemental disclosures of cash flow information: Net interest paid $ 594 $ 609 Income taxes paid $ - $ 179 Unrealized gain on available-for-sale securities $ 1,520 $ 375 Collateral transferred from unrestricted to restricted investments, net $ (429) $ 1,656
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 6 7 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1997. In the opinion of the Company's management, any adjustments contained in the accompanying unaudited consolidated financial statements are of a normal recurring nature, necessary to present fairly its financial position, results of operations, changes in stockholders' equity and cash flows for the respective periods as set forth in the Index to Financial Information. Interim results are not necessarily indicative of results for the full fiscal year. 2. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Guilford Pharmaceuticals Inc. (together with its subsidiaries, "Guilford" or the "Company") and subsidiaries, all of which are wholly-owned. All significant intercompany accounts and transactions have been eliminated in consolidation. 3. ACCOUNTING POLICIES EARNINGS (LOSS) PER COMMON SHARE Basic earnings (loss) per share ("EPS") is computed by dividing earnings (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed by increasing the weighted-average number of shares outstanding for the period by the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Potential common shares are excluded if the effect on earnings (loss) per share is antidilutive. RECENT ACCOUNTING PRONOUNCEMENTS In the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", which establishes standards for the reporting and display of comprehensive income and its components. This Statement also requires that an entity classify items of 7 8 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACCOUNTING POLICIES (CONTINUED) comprehensive income by their nature and display the accumulated balance of other comprehensive income separately from accumulated earnings and additional paid-in capital, as shown in the Company's Consolidated Statement of Stockholders' Equity. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. It also requires that gains or losses resulting from changes in the values of those derivatives be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The Company is required to adopt SFAS 133 for its fiscal year beginning January 1, 2000. The Company is currently evaluating the impact of SFAS 133, and believes that the adoption of SFAS 133 will not have a material impact on its consolidated financial position and results of operations. FINANCIAL INSTRUMENTS The Company is sensitive to changes in the general level of U.S. interest rates. In this regard, the Company has entered into interest rate swap agreements to reduce the impact of changes in interest rates on its floating rate long-term debt. At September 30, 1998, the Company had outstanding one interest rate swap agreement with First Union National Bank ("First Union") for a total principal amount of $10 million. This agreement effectively changes the Company's interest rate exposure on its $10 million floating rate notes to a fixed 6.125%. This interest rate swap agreement matures at the time the related notes mature. The differential is accrued as interest rates change and is recorded as either an increase or decrease in interest expense. In addition, the Company entered two additional interest rate swap agreements on October 19, 1998 with First Union on current debt of $1.2 million and $8.8 in future financial obligations related to a real estate development agreement and operating lease (see Note 6 to Notes to Consolidated Financial Statements). These agreements change the Company's floating interest rate exposure to a fixed 5.66% and 5.69%, respectively. No additional cash requirements or related costs are necessary with respect to these agreements and management believes that any losses related to this credit risk, which could occur in the event of First Union's nonperformance under the interest rate swap agreements, are remote. RECLASSIFICATIONS Certain amounts have been reclassified to conform with the current period's presentation. 8 9 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVENTORIES Inventories at consist of the following:
September 30, 1998 (Unaudited) December 31, 1997 ------------------- --------------- (in thousands) Raw materials $ 305 $ 386 Work in process 416 497 Finished goods 885 459 ------ ------ $1,606 $ 1,342 ====== ======
Inventories include products and materials that can be either available for sale and/or production or utilized internally in the Company's development activities. Inventories identified for development activities are expensed immediately upon designation as intended for such use. 5. REVENUES The Company recognized $1.125 million and $3.375 million for the three and nine months ended September 30, 1998, related to certain research support funding provided by Amgen Inc. ("Amgen") under the terms of an agreement (the "Amgen Agreement") entered into in August 1997. Under the terms of the Amgen Agreement, Amgen has agreed to provide the Company up to $13.5 million in the aggregate, payable quarterly over three years beginning on October 1, 1997, to support research activities relating to the Company's FKBP-based neuroimmunophilin ligand technology. Pursuant to the Company's Marketing, Sales and Distribution Rights Agreement (together with related agreements, the "RPR Agreements") with Rhone-Poulenc Rorer Pharmaceuticals Inc. ("RPR") and the Company's License and Distribution Agreement with Orion Corporation Farmos, the Company recognized revenues of $1.6 million ($920,000 in product sales and $717,000 in royalty revenues and license fees) and $4.6 million ($2.6 million in product sales and $2.0 million in royalty revenues), respectively, for the three and nine months ended September 30, 1998 relating to sales of GLIADEL(R) Wafer ("GLIADEL"). The Company recognized revenues of $1.45 million ($1.0 million in product sales and $446,000 in royalty revenues) and $6.0 million ($4.9 million in product sales and $1.1 million in royalty revenues), respectively, for the three and nine months ended September 30, 1997 relating to sales of GLIADEL. GLIADEL was commercially launched in the United States in February 1997. 9 10 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. REVENUES (CONTINUED) In September 1998, the Company amended the RPR Agreements by agreeing to share the costs of a Phase III clinical trial for first surgery indication of GLIADEL and splitting of the previously agreed international regulatory milestones between first and recurrent surgery for market clearances of GLIADEL in France, Germany, Italy, Spain, United Kingdom and Australia. The amendment also gave certain rights to GLIADEL and other new polymer products back to the Company. 6. REAL ESTATE DEVELOPMENT AGREEMENT In February 1998, the Company entered into a real estate development agreement and an operating lease agreement in connection with the construction of a new research and development facility. The facility, which is expected to be approximately 72,500 square feet, will be adjacent to the Company's headquarters in Baltimore and construction costs are estimated not to exceed $20 million in the aggregate. The lease term is for a maximum term of 84 months, which includes a construction period termination date ("construction period") of up to 24 months. The Company will not make rental payments during the construction period and the Company has the option to purchase the facility at the end of the lease term in February 2005. The lease expires in February 2005 and the Company anticipates that the lease payments for this facility will not exceed $1.5 million annually. In the event the Company chooses not to exercise this option, the Company is obligated to arrange for the sale of the facility to an unrelated party and is required to pay the lessor any difference between the net sales proceeds and the lessor's net investment in the facility, in an amount not to exceed that which would preclude classification of the lease as an operating lease. The Company, prior to the construction period termination date, must maintain cash collateral equal to the then aggregate property cost. Upon final completion, the Company may reduce the amount of cash collateral by approximately $5.1 million. In addition, the Company is subject to certain financial covenants the most restrictive of which requires that the Company maintain cash, cash equivalents and investments in the aggregate equal to $40 million. As of September 30, 1998, the Company had established cash collateral of approximately $4.1 million related to this transaction. This cash collateral is included in "Investments - restricted" in the accompanying Consolidated Balance Sheets. 7. OPERATING LEASE AGREEMENTS In March 1998, the Company entered into certain Master Lease Agreements to provide up to $10.8 million for computer and equipment financing. The Company's ability to draw on these Master Lease Agreements expires on December 31, 1999. The term of each operating lease may range from 24 to 48 months based upon the type of equipment being financed. As of September 30, 1998, the Company had leased an aggregate of $2.6 million in computer and other equipment under these agreements. Additionally, the Company has remaining operating lease commitments aggregating approximately $4.8 million, excluding future rental obligations under the real estate development agreement and operating lease in Note 6. 10 11 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Any statements made by Guilford Pharmaceuticals Inc. (together with its subsidiaries, "Guilford" or the "Company") in this quarterly report that are forward-looking are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements contained in this quarterly report, may include, but are not limited to, those concerning (i) application for international regulatory clearances and labeling expansion for GLIADEL, (ii) polymer product line extensions, (iii) the conduct and completion of the research programs relating to the Company's FKBP-based neuroimmunophilin ligand technology ("FKBP Neuroimmunophilin Technology") and other technologies, (iv) clinical development activities, including without limitation commencement and conduct of clinical trials related to the Company's polymer based drug delivery candidates, including GLIADEL, and its pharmaceutical candidates including DOPASCAN(R), drug candidates falling under the FKBP Neuroimmunophilin Technology, NAALADase inhibitors and PARP inhibitors, (v) the Company's strategic plans, (vi) anticipated expenditures and the need for additional funds, and (vii) the Company's plans to address and implement solutions, if necessary, to the Year 2000 issue discussed below, all of which involve significant risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the Company's filings with the Securities and Exchange Commission including without limitation the section entitled "Risk Factors" contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997 Form 10-K"). * * * GENERAL Guilford is a biopharmaceutical company engaged in the development and commercialization of novel products in two principal areas: (i) targeted and controlled drug delivery products using proprietary biodegradable polymers for the treatment of cancer and other diseases; and (ii) therapeutic and diagnostic products for neurological diseases and conditions. In February 1997, the Company commercially launched its first product, GLIADEL(R)Wafer ("GLIADEL"), a proprietary biodegradable polymer product for delivering the chemotherapeutic agent, BCNU, for brain cancer, in the United States through its exclusive worldwide (except Scandinavia and Japan) marketing partner, Rhone-Poulenc Rorer Pharmaceuticals Inc. ("RPR"). The Company has also in-licensed and internally developed certain technologies that may be useful in connection with the prevention and treatment of certain neurological diseases and conditions as well as a new class of biodegradable polymers and has accelerated research and development activities with respect to certain of these technologies. The Company anticipates that its future revenues will come primarily from two sources: (i) transfer payments and/or royalties related to sales of GLIADEL and other products that may be developed in the future and (ii) milestone, rights and other payments made under the Company's current and any future collaborative agreements relating to the research, development and/or commercialization of the Company's technologies. 11 12 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) As noted below, the Company is eligible for certain milestone and other payments in the future under its collaborations with RPR and Amgen Inc. ("Amgen") if certain regulatory and/or development objectives are attained and views these potential payments as significant future revenue opportunities. As noted below and in the 1997 Form 10-K, there can be no assurance, however, that the Company will be successful in its efforts to enter into future collaborations for the research, development and/or commercialization of its technologies or will receive any or all of the milestone payments for which it is eligible under its existing or any future collaborations. GLIADEL was commercially launched in the United States by RPR in February 1997, and since launch, the Company has recognized, as of September 30, 1998, an aggregate of $11.7 million in product sales and royalties. Of this $11.7 million, $8.3 million represent sales of GLIADEL to RPR and to Orion Corporation Farmos, the Company's marketing partner in Scandinavia, and $3.4 million represent royalties from RPR sales to third parties. In addition, under the terms of its agreements with RPR, the Company is eligible to receive up to $35 million in additional milestone and equity payments if RPR is able to achieve certain specified regulatory objectives. As noted below and in the 1997 Form 10-K, future sales of GLIADEL are subject to significant risk and uncertainty, and there can be no assurance that both sales to RPR and sales to third parties will increase or continue at the current rate in future periods. Furthermore, the milestone and other payments payable by RPR are contingent on making certain domestic and international regulatory filings and obtaining marketing, labeling and acceptable pricing clearances for GLIADEL, the timing and extent of which are not within the control of the Company, and there can be no assurance that any or all of such regulatory objectives will be attained. Except for GLIADEL, the Company's product candidates are not expected to generate revenues from product sales for at least the next several years, if at all. In August 1997, the Company entered into an agreement with Amgen (the "Amgen Agreement") respecting the research, development and commercialization of the Company's FKBP Neuroimmunophilin Technology for all human therapeutic and diagnostic applications. Pursuant to the terms of the Amgen Agreement, Amgen initially paid the Company an aggregate of $35 million as follows: (a) a one-time, non-refundable payment of $15 million upon the signing of the Amgen Agreement in August 1997, and (b) a second payment of $20 million made on October 1, 1997 upon the closing of Amgen's purchase of 640,095 shares of the Company's common stock and five-year Warrants to purchase up to an additional 700,000 shares of common stock at an exercise price of $35.15 per share. In connection with the sale of these securities, the Company granted Amgen certain demand and "piggyback" registration rights under applicable securities laws. Under the terms of the Amgen Agreement, Amgen also agreed to provide to the Company up to $13.5 million in the aggregate, payable quarterly over three years beginning October 1, 1997, to support research activities at the Company relating to the FKBP Neuroimmunophilin Technology, with an option to fund a fourth year of research or, under certain conditions, to terminate the research program after two years. The Amgen Agreement provided for milestone payments of up to $392 million in the aggregate to the Company in the event Amgen achieves certain specified development milestones in each of ten different specified clinical indications. In addition, the Company will receive royalties on product sales, if any, related to the FKBP Neuroimmunophilin Technology in the future. Subject to its obligation to fund two years of research at the Company, Amgen may elect at any time to discontinue all activities 12 13 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) relating to the development and commercialization of the FKBP Neuroimmunophilin Technology. As noted below and in the 1997 Form 10-K, there can be no assurance Amgen will be able to successfully develop any FKBP-based neuroimmunophilin compound or that such compounds will be approved as safe and effective drugs for neurological or other uses and that Guilford will earn any of the milestone payments related to such development activities. In addition to revenues related to GLIADEL, the Company's only other significant revenues recognized in fiscal year 1998 through September 30, 1998 consist of approximately $3.375 million in research payments made by Amgen and a one-time $1.0 million non-refundable milestone payment from Amgen following initiation of a one-month Good Laboratory Practices ("GLP") toxicology study of Amgen's lead FKBP-based neuroimmunophilin compound, NIL-A, which is being developed initially for the treatment of Parkinson's disease. As noted above, the Company anticipates recognizing an additional $1.125 million in revenue from Amgen in the fourth quarter 1998 to support certain research activities related to the FKBP Neuroimmunophilin Technology. In the future, the Company may be entitled to certain other non-refundable, milestone payments in the event certain development and/or regulatory milestones are achieved by Amgen and to royalties on future product sales, if any. As noted below and in the 1997 Form 10-K, whether the Company will ever recognize future revenues in the form of milestone payments and royalties under the Amgen Agreement is subject to significant risk and uncertainty, and there can be no assurance that the Company will recognize significant revenues, if any, from these sources in the future. The Company has incurred net operating losses in each fiscal year since its inception in July 1993, with the exception of fiscal 1996 for which the Company recorded net earnings of $5.1 million, primarily due to two one-time rights payments from RPR in the aggregate amount of $27.5 million related to (i) the signing of the Company's agreements with RPR for the sales, marketing and distribution of GLIADEL and (ii) approval from the U.S. Food & Drug Administration ("FDA") of the New Drug Application for GLIADEL in September 1996. For the three and nine months ended September 30, 1998, the Company incurred net operating losses of $6.9 million and $21.1 million, respectively, and through September 30, 1998, the Company had an accumulated deficit of $47.4 million. The Company does not anticipate that 1998 will be profitable, and there can be no assurance that the Company will ever achieve or sustain profitability in the future. Furthermore, the Company expects to experience quarter-to-quarter and year-to-year fluctuations in its operating results based upon the timing and amount of sales of GLIADEL, the timing and realization of milestone and other payments under the Company's agreements with RPR and Amgen and other existing and potential collaborations, expenditures relating to the Company's research and development, clinical and manufacturing activities, and the extent and timing of costs related to the Company's patenting activities and other activities undertaken in connection with the extension, enforcement and /or defense of the Company's intellectual property rights. 13 14 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company expects that expenses related to research and product development, preclinical testing, clinical trials, regulatory matters, operations, manufacturing and general and administrative expenses will continue to increase as the Company conducts research and development activities to develop its technologies and potential products. The Company has experienced substantial personnel growth since its inception. As of September 30, 1998 the Company had 222 full-time employees compared to 187 full-time employees at September 30, 1997. The Company's ability to achieve consistent profitability in the future will depend, among other things, upon future sales of GLIADEL as well as the Company's ability, either alone or with others, to develop its product candidates successfully including any product candidates identified pursuant to activities under the collaboration with Amgen, conduct clinical trials, obtain required regulatory approvals, manufacture at reasonable cost and successfully market its product candidates and enter into collaborative arrangements and license agreements on acceptable terms. For discussion of these and other risks, see the "Risk Factors" section of the 1997 Form 10-K, particularly those paragraphs specifically addressing the aforementioned risks. Future sales of GLIADEL are subject to certain risks, including the following. The Company's agreements with RPR do not impose any minimum purchase requirements on the part of RPR, and there can be no assurance that RPR will be successful in marketing and selling GLIADEL. Furthermore, GLIADEL represents a novel approach to the treatment of brain cancer, and there can be no assurance of broad acceptance by the medical or patient communities. The Company currently relies on a single supplier for BCNU, the chemotherapeutic agent used in GLIADEL, and while the Company expects to qualify other suppliers in the future, there can be no assurance that the Company's efforts in this regard will be successful. Further, the Company currently depends on its own single manufacturing facility to produce GLIADEL, and while the Company has completed construction of a second manufacturing facility, both are located in the same building at the Company's headquarters in Baltimore, Maryland. Inability to secure timely, sufficient, or current Good Manufacturing Practice (cGMP) quality supply of BCNU, unforeseen plant shutdowns due to personnel, plant or equipment problems (including any related to the Year 2000 issue), or natural disasters, risks associated with regulatory compliance (including the need to manufacture GLIADEL in accordance with the FDA's cGMP regulations), uncertainties regarding the receipt and timing of international regulatory clearances for GLIADEL, the potential inability to meet future product demand, and the risk of product recalls due to excessive product breakage or other reasons, among others, could adversely affect the timing and extent of any future revenues related to GLIADEL sales. For discussion of these and other risks, see the "Risk Factors" section of the 1997 Form 10-K, particularly those paragraphs specifically addressing the aforementioned risks. Moreover, there can be no assurance that Amgen will be able to achieve any of the development and/or regulatory milestones set forth in the Amgen Agreement with respect to any specified indications. The research, development and commercialization of early stage technology like the FKBP Neuroimmunophilin Technology is subject to significant risks and uncertainty respecting, among other things, selection of an appropriate lead compound, successful completion of the preclinical and clinical development activities, regulatory clearances, formulation of final product dosage forms, scale-up from bench quantities to commercial quantities and manufacture of products and commercialization of such products as well as the successful extension, enforcement and/or defense of patent and other intellectual property rights. 14 15 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) For discussion of these and other risks, see the "Risk Factors" section of the 1997 Form 10-K, particularly those paragraphs specifically addressing the aforementioned risks. RESULTS OF OPERATIONS Comparison of the Three and Nine Month Periods Ended September 30, 1998 and 1997 The Company recognized $3.8 million and $9.1 million in revenues for the three and nine months ended September 30, 1998, respectively, consisting primarily of revenues from product sales and royalties relating to GLIADEL and $1.125 million in quarterly research funding and a one-time $1.0 million non-refundable milestone payment from Amgen made pursuant to the Amgen Agreement. For the same periods in 1997 the Company recognized $16.6 million and $21.3 million in revenues, respectively, consisting primarily of the one-time, non-refundable signing fee of $15 million from Amgen under the Amgen Agreement and revenues from product sales and royalties relating to GLIADEL. Revenues related to the sale and distribution of GLIADEL consist primarily of transfer payments (sales directly to the Company's marketing and distribution partners) and royalties based on RPR's end-user sales. Transfer payments for the three and nine months ended September 30, 1998 were $920,000 and $2.6 million, respectively. Transfer payments for the same periods in 1997 were $1.1 million and $4.9 million, respectively. Sales of GLIADEL to RPR for the three and nine months ended September 30, 1997 include sales made in the first half of 1997 which reflect RPR's initial build-up of inventory to support commercial launch of the product in 1997. The reduction in the level of transfer payments from RPR in the 1998 periods as compared to the three and nine months ended September 30, 1997 reflects stabilization of RPR's current inventory requirements for GLIADEL. Net royalty revenue with respect to GLIADEL sales increased 45% and 58%, respectively, to $717,000 and $1.9 million for the three and nine months ended September 30, 1998 as compared to $496,000 and $1.2 million for the same periods in 1997. The increase in royalties paid in the latter periods reflects increased end-user sales by RPR during the three and nine months ended September 30, 1998 as awareness about GLIADEL has increased among neurosurgeons and as neurosurgeons have gained greater familiarity with the product. In addition the increase for the nine-month period ended September 30, 1998 also reflects, in part, the fact that GLIADEL sales commenced in late February 1997, and thus were made only during part of the nine months ended September 30, 1997 and a consistent increase in RPR's sales to third parties in consecutive quarters since product launch. As noted above and in the 1997 Form 10-K, future GLIADEL sales are subject to a number of risks and uncertainties, and there can be no assurance that GLIADEL sales will remain at or increase from current levels or generate significant revenues for the Company in the future. Cost of sales for the three and nine months ended September 30, 1998 were $423,000 and $1.3 million, respectively, compared to $538,000 and $2.1 million, respectively, for the same periods in 1997. Included in these amounts are approximately $32,000 and $100,000, respectively, for the 1998 periods and approximately $43,000 and $214,000, respectively, for the 1997 periods, representing royalty payments made to a third party from which the Company has licensed certain technologies related to GLIADEL. The reduction in the cost of sales for the 1998 15 16 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) periods compared to the 1997 periods primarily reflects a reduction in the number of units sold to RPR during the 1998 periods. To the extent GLIADEL production levels increase in future periods, the Company expects that per unit product costs may decrease as greater economies of scale are achieved. There can be no assurance, however, that GLIADEL product sales will ever reach levels necessary for the Company to realize significant costs savings related to manufacturing economies of scale. Research and development expenses were $9.5 million and $27.4 million, respectively, for the three and nine months ended September 30, 1998 as compared to $9.5 million and $23.1 million for the same periods in 1997. While research and development expenses remained constant for the three month periods ended September 30, 1998 and 1997, research and development expenses for the third quarter 1997 included an amount payable to a third-party licensor of certain technology as a result of the one-time $15 million signing fee from Amgen recognized in that same quarter. The increase in these costs for the nine months ended September 30, 1998 as compared to the same period in 1997 was primarily attributable to expenses related to increased personnel costs, contract services, and research supply costs, including license fees payable to a third party licensor of certain technology. At September 30, 1998, 189 individuals were employed on a full-time basis in the areas of research, development and manufacturing as compared to 158 individuals at September 30, 1997. In the first nine months of 1998, the Company continued to increase its research and development efforts, particularly with respect to the Company's NAALADase inhibitor and PARP inhibitor neuroprotectant programs, its FKBP neuroimmunophilin ligand program, and its polymer development program, continued to fund development activities at a potential third-party manufacturer of clinical supply of DOPASCAN(R)Injection, continued with Phase I clinical trials for a high dose formulation of GLIADEL and provided financial support for RPR's Phase III clinical trial program in support of a first surgery indication for GLIADEL. In addition, in the three and nine months ended September 30, 1998, research and development expenses included charges relating to certain consulting agreements entered into in April 1996, consisting of non-cash compensation expense of $110,000 and $330,000, respectively, and cash compensation expense of $68,000 and $208,000, respectively. For the three and nine month periods ended September 30, 1997, the Company recorded non-cash compensation expense related to these agreements of $93,000 and $858,000, respectively, and cash compensation expense of $62,500 and $181,000, respectively. These agreements are intended to enhance the Company's ability to develop new polymer technologies and products for the delivery of chemotherapeutics in indications where local tumor recurrence is likely and controlled release may be more effective than current therapies. The Company expects it will be required to record varying amounts of non-cash compensation charges in research and development expenses quarterly through 2001 relating to these agreements of up to an aggregate of an additional $860,000. The Company anticipates that its research and development expenses will continue to increase in future periods. General and administrative expenses were $2.7 million and $7.7 million, respectively, for the three and nine months ended September 30, 1998 as compared to $2.2 million and $5.8 million, respectively, for the same periods in 1997. The increase in general and administrative expenses of approximately $523,000 and $1.9 million, respectively, for the three and nine months ended September 30, 1998, compared to the same periods in 1997 was primarily attributable to higher costs related to the preparation, filing and prosecution of domestic and international patent applications and 16 17 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) to a lesser degree higher personnel costs related to an increase in the number of employees necessary to support the Company's research and development and commercialization activities. Additionally, indirect personnel costs, including recruiting and relocation costs, have increased as the total number of such employees has increased. At September 30, 1998, 33 individuals were employed on a full-time basis in general and administrative areas as compared to 29 individuals at September 30, 1997. The Company anticipates that its general and administrative expenses, particularly those related to patenting and other activities related to extension, enforcement and/or defense of the Company's intellectual property rights, will increase in future periods. Other income and expense relates primarily to investment income and interest expense. Investment income was $2.0 million and $6.8 million, respectively, for the three and nine months ended September 30, 1998 compared to $2.1 million and $5.0 million, respectively, for the same periods in 1997. The increase for the nine-month period ended September 30, 1998 was primarily attributable to an increase in the average invested capital over that period as compared to the same period in 1997. The increase in average invested capital was primarily due to the public sale of the Company's common stock in April 1997, the one-time, non-refundable signing fee of $15 million paid by Amgen in August 1997 and the sale of shares of Company common stock and warrants to Amgen for $20 million consummated in October 1997. The decrease in investment and other income for the three months ended September 30, 1998 as compared to the same period in 1997 resulted from a decrease in the amount of average invested capital during the latter period as a result of the Company's use of cash to meet operating expenses and to fund capital expenditures. For the three and nine months ended September 30, 1998, the Company incurred interest expense of $189,000 and $588,000 relating to borrowings under its financing arrangements with First Union National Bank (formerly Signet Bank, hereinafter referred to as "First Union") providing for the construction of manufacturing, administrative and research and development facilities and the purchase of related furniture and equipment. Interest expense was $215,000 and $615,000, respectively, for the three and nine months ended September 30, 1997. The decrease in interest expense for the three and nine month periods ended September 30, 1998 as compared to the same periods in 1997 was primarily due to a lower average outstanding principal balance under the Company's borrowings from First Union during the latter periods as a result of the Company's continued repayment of that indebtedness. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and investments were approximately $136.8 million at September 30, 1998. Of this amount, $12.7 million was pledged as collateral with respect to certain of the Company's indebtedness and other financial obligations and is recorded as "investments - restricted" on the accompanying consolidated balance sheet. The increase of $604,000 in the amount of restricted investments at September 30, 1998 as compared to December 31, 1997 resulted from an increase in cash collateral related to the Company's design and construction of a new research and development facility (see discussion below), which increase was partially offset by the release of cash collateral as a result of an increase in certain loan guarantees from the State of Maryland effective in June 1998 and the Company's continued repayment of principal amounts under its indebtedness to First Union. 17 18 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In September 1998, the Company announced a share repurchase program for up to one million shares of its common stock. As of September 30, 1998, the Company had not repurchased any shares of its common stock under this share repurchase program. Long term debt decreased to $11.5 million at September 30, 1998 compared to $13.1 million at December 31, 1997, primarily as a result of the Company's continued repayment of principal under its outstanding bond-financed construction loan and related term loan with First Union. The Company incurred net capital expenditures of $633,000 for the three months ended September 30, 1998, compared to net capital expenditures of $897,000 for the three months ended September 30, 1997. The capital expenditures made in the 1998 and 1997 periods were primarily related to the construction of the Company's expansion of its manufacturing plant and research laboratories as well as for the purchase of research and development equipment. In March 1998, the Company entered into master equipment lease arrangements for up to an aggregate of $10.8 million, pursuant to which the Company expects to lease additional equipment, including computer hardware and software, furniture and fixtures. Depending on the type of equipment covered and certain other factors, the term of any lease entered into under these arrangements can range from two to four years. At September 30, 1998, $8.2 million was available under these arrangements to lease additional equipment (see Note 7 to Notes to Consolidated Financial Statements). Such financing, along with the Company's internal resources as well as external sources of funds, is expected to provide for the Company's current equipment needs at least until the end of 1999. To the extent the Company expands its research and development programs, its capital equipment requirements may increase and thus require additional capital funding. In February 1998, in order to meet the Company's anticipated future facilities needs, the Company entered into an operating lease and related agreements with a trust affiliated with First Union for an approximately 72,500 square foot facility. This new facility is being constructed on a lot adjacent to the Company's current headquarters in Baltimore, Maryland in order to support the Company's expected future research, development and administrative activities. During the construction period, the Company will act as construction agent for the trust, responsible for performing all duties associated with the development of the property and anticipates that the facility will be ready for occupancy prior to the end of the second quarter of 1999. The lease expires in February 2005 and the Company anticipates that the lease payments for this facility will not exceed $1.5 million annually. At the expiration of the lease term, the Company may either purchase the property for an amount equal to any and all unamortized acquisition and construction costs as well as accrued but unpaid interest and similar costs incurred by the trust as part of its acquisition and construction activities related to the property (the "Termination Amount"), or the Company may sell the property on behalf of the trust, which is then obligated to apply the proceeds from such sale against repayment of the Termination Amount. If such sale proceeds are insufficient to cover the entire Termination Amount, the Company is then obligated to repay any such shortfall, subject to a total cap on such payments by the 18 19 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Company of an aggregate amount equal to 83% of the Termination Amount. In addition, the Company may, with the consent of First Union, enter into a new lease arrangement (see Note 6 to Notes to Consolidated Financial Statements). The Company has available up to $7.5 million under a loan agreement with RPR respecting expansion of the Company's GLIADEL and polymer manufacturing capacity. As of January 2, 1997, $4.0 million was available under the loan agreement; the remainder is available no earlier than 12 months nor later than 18 months following funding of the initial portion. Any principal amounts borrowed under this loan agreement are due five years from the date borrowed and will carry an interest rate equal to the lowest rate paid by RPR from time to time on its most senior indebtedness. No amounts were outstanding under this loan at September 30, 1998. The Company has not yet determined whether to draw on the capital available under its loan agreement with RPR to finance the expansion of the Company's manufacturing facilities. During the third quarter 1998, the Company entered into an interest rate swap transaction with First Union in order to lock in fixed rates with respect to certain of the Company's floating rate indebtedness (see Note 3 to Notes to Consolidated Financial Statements). In particular with respect to $10 million in principal amount of indebtedness related to the Company's bond-financed construction loan and term loan with First Union, the Company was able to attain fixed interest rates of 6.125% for the remaining terms of these loans which are due December 2004 and April 2003, respectively, as compared to the previous floating rates of LIBOR plus 75 basis points (6.1875% at September 30, 1998) and LIBOR plus 62.5 basis points (6.0625% at September 30, 1998), respectively. In October 1998, the Company entered into two additional interest rate swaps related to the Company's remaining bond-financed construction and term loan principal balances of $1.2 million and $8.8 million related to the Company's future financial obligations under its lease for the new research and development facility discussed above. The Company was able to attain fixed interest rates of 5.66% and 5.69%, respectively. The Company will require substantial funds in order to continue its research and development programs and preclinical and clinical testing, to manufacture and, where applicable, market its products and to meet its future facilities needs. The Company's capital requirements depend on numerous factors, including the progress of its research and development programs, the progress of preclinical and clinical testing, the time and costs involved in obtaining regulatory approvals, the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, competing technological and market developments, changes in the Company's existing research relationships, the ability of the Company to establish collaborative arrangements, the development of collaborative and licensing agreements and other arrangements and the progress of manufacturing scale-up efforts. The Company's accumulated deficit was $47.4 million at September 30, 1998. The Company believes that its existing resources will be sufficient to fund the Company's activities for at least the next 24 months. There can be no assurance, however, that changes in the Company's research and development and commercialization plans or other factors affecting the Company's operating expenses including potential acquisitions, and anticipated capital expenditures will not result in the expenditure of the Company's resources before that time. 19 20 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company anticipates that it will fund future capital requirements through a combination of its existing working capital, revenues (including product sales, royalty income, and milestones/licensing fees) generated under its agreements with RPR relating to GLIADEL and Amgen relating to the FKBP Neuroimmunophilin Technology, public or private equity or debt financing (as necessary), additional collaborative or other research and development agreements, commercialization and marketing arrangements with corporate partners or other potential sources. The Company's ability to raise future capital on acceptable terms are dependent on conditions in the public and private equity markets and the performance of the Company, as well as the overall performance of other companies in the biopharmaceutical and biotechnology sectors. There can be no assurance that any required future financing arrangements will be available on acceptable terms, or at all. THE YEAR 2000 ISSUE The Year 2000 issue is the result of computer programs that rely on two-digit date codes, instead of four-digit date codes, to indicate the year. Such computer programs, which are unable to interpret the date code "00" as the year 2000, may not be able to perform computations and decision-making functions and could cause computer systems or other equipment to malfunction. The Company has developed a multi-phase program for Year 2000 systems compliance that consists of the following: (i) assessment of the corporate systems and operations of the Company that could be affected by the Year 2000 issue, (ii) remediation of non-compliant systems and components, if any, and (iii) testing of systems and components following remediation. The Company has focused its Year 2000 compliance assessment program on four principal areas: (a) the Company's internal information technology ("IT") system applications, including voice and data systems ("IT Systems"), (b) the Company's internal non-IT facilities systems, including embedded software in environmental controls, security systems, fire protection systems, manufacturing hardware and monitoring controls, and public utility connections for gas, electric and telephone systems ("Facilities Systems"), (c) embedded and external software contained in laboratory and other equipment ("Equipment"), and (d) Year 2000 compliance by third parties with which the Company has a material relationship, such as significant vendors, financial institutions, insurers and corporate partners. The Company is in the process of conducting an inventory and assessment of its internal IT Systems, Facilities Systems, and Equipment (collectively, "internal systems") that it believes could be adversely affected by the Year 2000 issue, and anticipates that such activities will be complete no later than the end of first quarter 1999. Thereafter, prior to the end of the second quarter 1999, the Company plans to take the following actions: (i) repair or replace, as necessary, those internal systems that are found not to be Year 2000 compliant, (ii) re-test such internal systems to verify Year 2000 compliance, and (iii) seek to engage an outside consultant to conduct a Year 2000 compliance review of the Company's critical business systems. In addition, Company IT personnel have had discussions with vendors of the Company's enterprise-wide software systems and tested those systems for Year 2000 compliance, and based on these activities, Company management believes that such systems are Year 2000 compliant. The Company has been, and will continue to be, in contact with such vendors in order to obtain any additional revisions or upgrades issued by the vendors to ensure 20 21 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) that such enterprise-wide software remains Year 2000 compliant. The Company is also examining the Year 2000 readiness of third parties with which the Company has a material relationship, including (i) certain suppliers of manufacturing and laboratory equipment and supplies, (ii) financial institutions with which the Company has significant banking and investment management relationships, (iii) major insurance providers (iv) and its corporate partners, RPR and Amgen (collectively, "major third parties"). The Company considers these third parties, either collectively or potentially individually, to pose the greatest Year 2000 risk to the Company because their failure to become Year 2000 compliant could (a) result in the Company's inability to obtain equipment and supplies in a timely manner, (b) result in the inability to access the Company's financial capital and timely and accurate information about the Company's financial assets and materially disrupt the Company's financial transactions, and (c) interfere with the efforts of the Company's corporate partners to continue their research, development and/or commercialization activities with respect to GLIADEL and/or the FKBP Neuroimmunophilin Technology. The Company is in the process of requesting information from its major third parties with respect to Year 2000 compliance status. The Company currently expects to have mailed out Year 2000 compliance inquiry letters to its major third parties no later than the end of the fourth quarter 1998 and is asking for responses prior to the end of the first quarter 1999. Other than making inquiries of these third parties and assessing their responses regarding Year 2000 compliance, the Company is not in a position, however, to verify independently the Year 2000 compliance status of such third parties and in most cases has limited or no ability to directly influence the Year 2000 compliance activities of these major third parties. Failure of any or all of these third parties to achieve substantial Year 2000 compliance could have a material adverse effect on the Company's business, financial condition and results of operations. For the three and nine months ended September 30, 1998, the costs incurred by the Company related to its Year 2000 compliance assessment and remediation efforts have not been material. While the Company historically has not tracked such costs, management estimates that the Company's internal costs related to Year 2000 compliance have not exceeded $40,000 and $75,000 for the three and nine months ended September 30, 1998, respectively. The Company has incurred no external costs during 1998 related the Year 2000 issue. Based on information currently available to the Company's management, the Company does not believe that the future costs associated with bringing its internal systems into Year 2000 compliance and developing a Year 2000 compliance plan will be material and should not exceed $200,000 in the aggregate. However, as noted above, with respect to most of its internal systems the Company is still in the initial phase of its Year 2000 compliance assessment and remediation activities, and depending on the actual outcome of its initial Year 2000 compliance testing activities, the amount required may be significantly greater than management's current estimates. Furthermore, it is uncertain at this time whether the costs associated with the Company's efforts to assess and remediate any Year 2000 compliance concerns regarding major third parties will have a material financial effect on the Company's business, financial condition and results of operations. Moreover, as noted above, with most major third parties, the Company will have little or no direct ability to influence the Year 2000 compliance efforts of its major third parties. 21 22 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Depending on the responses it receives from suppliers, the Company will make a determination, on a case by case basis, as to whether it will seek out alternative suppliers. Nevertheless, in the event the Company determines to seek out an alternative supplier in the future because of that supplier's inability to assure the Company of its Year 2000 compliance, there can be no assurance that the Company will be able to find an adequate alternative supplier who will be able to supply the pertinent goods or services at a reasonable cost on a timely basis, or at all. Moreover, in certain cases, a vendor may represent the sole supplier for certain goods or services, such as is the case currently, for example, with the Company's supply of BCNU, the chemotherapeutic agent used in GLIADEL, and thus the Company may not have recourse to alternative suppliers in the event that supply of goods and services from such a sole source vendor is disrupted because of a Year 2000 issue. The Company, in consultation with an outside consulting firm, is in the process of putting together a comprehensive disaster recovery plan, which will include, among others, provisions addressing the Year 2000 issue, and the Company currently anticipates putting such a plan into place no later than the end of the second quarter 1999. The Company does not anticipate that the external costs associated with putting such a plan in place will exceed $75,000 in the aggregate. Furthermore, the Company currently makes complete back-up copies of all of the data generated on its IT System on a weekly basis, and backs-up changes to such data on a daily basis, which Company management believes should limit the amount of such IT System data that would be lost in the event of an IT Systems failure as a result of a Year 2000 issue. In addition, many of the Company's internal facilities systems, including its environmental controls, security systems, and fire protection systems have manual override functions that allow for continued operation in the event the software operating these systems malfunctions. Due to the nature of the Company's business, in the event (i) the Company were to fail to successfully implement its Year 2000 compliance program with respect to its internal systems in a timely manner or (ii) the Year 2000 compliance provisions of its disaster recovery plan were to prove inadequate, the Company believes that while such events would be disruptive to the Company's operations in the short term, such circumstances would not have a material adverse effect on the business, financial condition and results of operations of the Company over the long term. However, failure of the major third parties, in particular the financial institutions with which the Company has significant banking and investment management relationships and the Company's corporate partners, to be Year 2000 compliant could have a material adverse effect on the Company's business, financial condition and results of operations. The costs of the Company's Year 2000 compliance program and disaster recovery plan and the expected dates for implementing the initiatives are based on management's current best estimates, which were derived using numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no assurance that actual costs will not exceed management's expectations or that the business, financial condition or results of operations of the Company will not be substantially adversely affected as a result of the Year 2000 issue. Specific factors that might cause such material differences include, but are not limited to, the ability to locate and correct all relevant computer codes, including software imbedded in items of equipment related to environmental controls and manufacturing and laboratory equipment, the ability of the major 22 23 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) third parties to identify and resolve their own Year 2000 issues, and the availability and cost of personnel trained in the area of Year 2000 compliance. Furthermore, the Company's current cost estimates do not include costs that may be incurred as a result of the failure of major third parties, including Amgen and RPR, to become Year 2000 compliant on a timely basis. Finally, the ability of the Company to continue to manufacture GLIADEL, continue its research and development programs, and function as a viable business enterprise is dependent upon the continued availability of various basic infrastructure systems, including electric power, telecommunications and transportation systems. There can be no assurance at this time that these infrastructure systems will not experience disruptions caused by Year 2000 issues. If such disruptions were to occur in the Baltimore metropolitan region where the Company's manufacturing facilities and research and development laboratories are located and/or the East Coast of the United States, there can be no assurance that such disruptions will not have a material adverse effect on the Company's business, financial condition, results of operations, or business prospects. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable 23 24 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES PART II. - OTHER INFORMATION Item 1. Legal Proceedings: None Item 2. Changes In Securities and Use of Proceeds: None Item 3. Defaults in Senior Securities: None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information: None Item 6. Exhibits and Reports on Form 8-K: A. Exhibits Exhibit No. Description - ----------- ----------- 3.04 Amendment to Form of Stock Option Agreement 3.05 Amendment to Form of Restricted Share Agreement 4.03 Form of First Amendment to Rights Agreement (incorporated by reference to the Company's Current Report on Form 8-K, filed with the SEC on October 20, 1998) 10.65 Form of Change in Control Severance Agreement 10.66 Severance Provisions from the Employment Letter Agreement, effective September 21 1998 between the Company and Nancy Linck, Esq. 11.4 Statement Re: Computation of Earnings (Loss) Per Share 24 25 27.4 Financial Data Schedule B. Reports on Form 8-K: On September 2, 1998, the Company filed a Current Report on Form 8-K, the purpose of which was to describe the material terms of a stock repurchase program authorized by a committee of the Company's Board of Directors to repurchase up to one million shares of the Company's common stock and to file as an exhibit the press release announcing the repurchase program. On October 2, 1998, the Company filed a Current Report on Form 8-K, the purpose of which was to summarize the material terms of amendments to certain of the Company's agreements with RPR and to file those amendments as exhibits. On October 20, 1998, the Company filed a Current Report on Form 8-K, the purpose of which was to file the form of the First Amendment to the Company's Shareholder Rights Agreement, dated September 26, 1995. 25 26 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES 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. Guilford Pharmaceuticals Inc. Date: November 13, 1998 /s/ Craig R. Smith, M.D. --------------------------------- Craig R. Smith, M.D. President and CEO Date: November 13, 1998 /s/ Andrew R. Jordan --------------------------------- Andrew R. Jordan Senior Vice President and Chief Financial Officer (Principal Accounting Officer) 26 EX-3.04 2 AMENDMENT TO FORM OF STOCK OPTION AGREEMENT 1 EXHIBIT 3.04 AMENDMENT TO SHARE OPTION AGREEMENTS UNDER THE 1993 AND 1998 SHARE OPTION AND RESTRICTED SHARE PLANS, ADOPTED BY THE BOARD IN AUGUST 1998 I. Pursuant to Section 12.2 of the Guilford Pharmaceuticals Inc. 1993 Share Option and Restricted Share Plan, as amended, and Section 11.2 of the Guilford Pharmaceuticals Inc. 1998 Share Option and Restricted Share Plan, the limitations on exercise of all outstanding options granted under these plans are modified and Section 4.1 of the Optionee's Share Option Agreement is amended to read as follows: 4.1 VESTING UPON A CHANGE IN CONTROL Notwithstanding any other provisions of the Plan or this Agreement, in the event of a "Change in Control" (as defined below), any unvested Options granted hereunder shall be accelerated and be fully vested as of the date immediately prior to the effective date of the Change in Control if the Optionee continues to be employed by the Company as of the date of such accelerated vesting. II. Sections 4.2 and 4.3 of each Optionee's Share Option Agreement are hereby deleted in their entirety and Section 4.4 is hereby denominated Section 4.2, and is amended and restated to read in its entirety as follows: 4.2 DEFINITION OF "CHANGE IN CONTROL". A "Change in Control" shall be deemed to have occurred if: (a) any "person" (including, without limitation, any individual, sole proprietorship, partnership, trust, corporation, association, joint venture, pool, syndicate, or other entity, whether or not incorporated), or any two or more persons acting as a syndicate or group or otherwise acting in concert with regard to the ownership of securities of the Company and thereby deemed collectively to be a "person") as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), becomes, after the date hereof, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities (but excluding for purposes of such computation all securities of the Company beneficially owned by such person as of February 22, 1995), unless, in transaction in which a "person" becomes, after the date hereof, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing less than fifty percent (50%) of the combined voting power of the Company's then outstanding securities, prior to the acquisition by such person of securities of the Company which causes such person to have such beneficial ownership, the full Board shall 2 by at least a two-thirds vote have specifically approved such acquisition and determined that such acquisition shall not constitute a Change in Control for purposes of options granted under the Plan despite such beneficial ownership; or (ii) during any two (2) year period, individuals who at the beginning of such period constitute the Board, together with any new directors elected or appointed during the period whose election or appointment resulted from a vacancy on the Board caused by the retirement, death, or disability of a director and whose election or appointment was approved by a vote of at least two-thirds (2/3rds) of the directors then still in office who were directors at the beginning of the period, cease for any reason to constitute a majority thereof. III. Section 6 of each Optionee's Share Option Agreement is hereby amended to read as follows: 6. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding any other provision of this Share Option Agreement or of any other agreement, contract, or understanding heretofore or hereafter entered into by the Optionee and the Company, except an agreement, contract, or understanding hereafter entered into that expressly modifies or excludes application of this Section 6 (the "Other Agreements"), and notwithstanding any formal or informal plan or other arrangement heretofore or hereafter adopted by the Company for the direct or indirect compensation of the Optionee (including groups or classes of participants or beneficiaries of which the Optionee is a member), whether or not such compensation is deferred, is in cash, or is in the form of a benefit to or for an Optionee (a "Benefit Arrangement"), if the Optionee is a "disqualified individual," as defined in Section 280G(c) of the Code, in the event it shall be determined that any right to receive any payment or other benefit under this Share Option Agreement, taking into account all other rights, payments, or benefits to or for Optionee under the Plan, all Other Agreements, and all Benefit Arrangements, would cause any payment or benefit to an Optionee under this Plan to be considered a "parachute payment" within the meaning of Section 280G(b)(2) of the Code as then in effect (a "Payment") which would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Optionee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Optionee shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Optionee of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Optionee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 6(c), all determinations required to be made under this Section, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by KPMG Peat Marwick or such other certified public accounting firm as may be designated by the Optionee (the "Accounting Firm") which shall provide detailed supporting calculations both - 2 - 3 to the Company and the Optionee within 15 business days of the receipt of notice from the Optionee that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Optionee may appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section, shall be paid by the Company to the Optionee within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Optionee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 6(c) and the Optionee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Optionee. (c) The Optionee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. The Optionee shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Optionee in writing prior to the expiration of such period that it desires to contest such claim, the Optionee shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Optionee harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment - 3 - 4 of costs and expenses. Without limitation on the foregoing provisions of this Section 6(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Optionee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Optionee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Optionee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Optionee, on an interest-free basis and shall indemnify and hold the Optionee harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Optionee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Optionee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Optionee of an amount advanced by the Company pursuant to Section 6(c), the Optionee becomes entitled to receive any refund with respect to such claim, the Optionee shall (subject to the Company's complying with the requirements of Section 6(c)) promptly pay to the Company the amount of such refund (together with any interest actually paid or credited thereon after taxes applicable thereto). If, after the receipt by the Optionee of an amount advanced by the Company pursuant to Section 6(c), a determination is made that the Optionee shall not be entitled to any refund with respect to such claim and the Company does not notify the Optionee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. IV. Capitalized terms not otherwise defined herein shall have the means set forth in Guilford Pharmaceuticals Inc. 1993 Share Option and Restricted Share Plan, as amended, or the Guilford Pharmaceuticals Inc. 1998 Share Option and Restricted Share Plan, as applicable, or the Share Option Agreement. * * * * * - 4 - 5 IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Amendment to Share Option Agreement, or caused this Amendment to Share Option Agreement to be duly executed and delivered on their behalf, as of the 17th day of August, 1998. ATTEST: GUILFORD PHARMACEUTICALS INC. By: - --------------------- ----------------------------- Title: --------------------------- OPTIONEE: --------------------------------- - 5 - EX-3.05 3 AMENDMENT TO FORM OF RESTRICTED SHARE AGREEMENT 1 EXHIBIT 3.05 AMENDMENT TO RESTRICTED SHARE AGREEMENTS UNDER THE 1993 SHARE OPTION AND RESTRICTED SHARE PLAN, ADOPTED BY THE BOARD IN AUGUST 1998 I. Pursuant to Section 12.2 of the Guilford Pharmaceuticals Inc. 1993 Share Option and Restricted Share Plan, as amended, the share forfeiture requirements with respect to outstanding Restricted Share Awards granted under that plan are modified and Section 3.2 of the Holder's Restricted Agreement by replacing current Section 6.1 and replacing in its entirety with the following: 6.1 VESTING UPON A CHANGE IN CONTROL Notwithstanding any other provisions of the Plan or this Agreement, in the event of a "Change in Control" (as defined below), the Limitation Period shall be deemed terminated, the restrictions on transfer set forth above in Section 3.2 and the forfeiture provisions of Section 3.1 above shall be deemed waived in full with respect to all Shares granted hereunder, and all such Shares shall be deemed fully vested as of the date immediately prior to effective date of the Change in Control if the Holder continues to be employed by the Company as of the date of such accelerated vesting. II. Sections 6.2 and 6.3 of each Holder's Restricted Share Agreement is hereby deleted in their entirety and Section 6.4 is hereby denominated Section 6.2., and is amended and restated to read in its entirety as follows: 6.2 DEFINITION OF "CHANGE IN CONTROL". A "Change in Control" shall be deemed to have occurred if: (a) any "person" (including, without limitation, any individual, sole proprietorship, partnership, trust, corporation, association, joint venture, pool, syndicate, or other entity, whether or not incorporated), or any two or more persons acting as a syndicate or group or otherwise acting in concert with regard to the ownership of securities of the Company and thereby deemed collectively to be a "person") as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), becomes, after the date hereof, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities (but excluding for purposes of such computation all securities of the Company beneficially owned by such person as of February 22, 1995), unless, in transaction in which a "person" becomes, after the date hereof, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 2 securities of the Company representing less than fifty percent (50%) of the combined voting power of the Company's then outstanding securities, prior to the acquisition by such person of securities of the Company which causes such person to have such beneficial ownership, the full Board shall by at least a two-thirds vote have specifically approved such acquisition and determined that such acquisition shall not constitute a Change in Control for purposes of options granted under the Plan despite such beneficial ownership; or (ii) during any two (2) year period, individuals who at the beginning of such period constitute the Board, together with any new directors elected or appointed during the period whose election or appointment resulted from a vacancy on the Board caused by the retirement, death, or disability of a director and whose election or appointment was approved by a vote of at least two-thirds (2/3rds) of the directors then still in office who were directors at the beginning of the period, cease for any reason to constitute a majority thereof. III. A new Section 8A of each Holder's Restricted Share Agreement is hereby added to read as follows: 8A. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding any other provision of this Restricted Share Agreement or of any other agreement, contract, or understanding heretofore or hereafter entered into by the Holder and the Company, except an agreement, contract, or understanding hereafter entered into that expressly modifies or excludes application of this Section 8A (the "Other Agreements"), and notwithstanding any formal or informal plan or other arrangement heretofore or hereafter adopted by the Company for the direct or indirect compensation of the Holder (including groups or classes of participants or beneficiaries of which the Holder is a member), whether or not such compensation is deferred, is in cash, or is in the form of a benefit to or for a Holder (a "Benefit Arrangement"), if the Holder is a "disqualified individual," as defined in Section 280G(c) of the Code, in the event it shall be determined that any right to receive any payment or other benefit under this Restricted Share Agreement, taking into account all other rights, payments, or benefits to or for Holder under the Plan, all Other Agreements, and all Benefit Arrangements, would cause any payment or benefit to a Holder under this Plan to be considered a "parachute payment" within the meaning of Section 280G(b)(2) of the Code as then in effect (a "Payment") which would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Holder with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Holder shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Holder of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Holder retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. - 2 - 3 (b) Subject to the provisions of Section 8A(c), all determinations required to be made under this Section, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by KPMG Peat Marwick or such other certified public accounting firm as may be designated by the Holder (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Holder within 15 business days of the receipt of notice from the Holder that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Holder may appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section, shall be paid by the Company to the Holder within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Holder. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 8A(c) and the Holder thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Holder. (c) The Holder shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. The Holder shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Holder in writing prior to the expiration of such period that it desires to contest such claim, the Holder shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; - 3 - 4 provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Holder harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 8A(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Holder to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Holder agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Holder to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Holder, on an interest-free basis and shall indemnify and hold the Holder harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Holder with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Holder shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Holder of an amount advanced by the Company pursuant to Section 8A(c), the Holder becomes entitled to receive any refund with respect to such claim, the Holder shall (subject to the Company's complying with the requirements of Section 8A(c)) promptly pay to the Company the amount of such refund (together with any interest actually paid or credited thereon after taxes applicable thereto). If, after the receipt by the Holder of an amount advanced by the Company pursuant to Section 8A(c), a determination is made that the Holder shall not be entitled to any refund with respect to such claim and the Company does not notify the Holder in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. IV. Capitalized terms not otherwise defined herein shall have the means set forth in Guilford Pharmaceuticals Inc. 1993 Share Option and Restricted Share Plan, as amended, or the Restricted Share Agreement. * * * * * - 4 - 5 IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Amendment to Restricted Share Agreement, or caused this Amendment to Restricted Share Agreement to be duly executed and delivered on their behalf, as of the 17th day of August, 1998. ATTEST: GUILFORD PHARMACEUTICALS INC. By: - --------------------- ----------------------------- Title: --------------------------- HOLDER: --------------------------------- - 5 - EX-10.65 4 FORM OF CHANGE IN CONTROL SEVERANCE AGREEMENT 1 Exhibit 10.65 FORM OF CHANGE IN CONTROL SEVERANCE AGREEMENT 2 Note: In August 1997, the Company's Board of Directors authorized the Company to enter into Severance Agreements related to a Change in Control of the Company with all Company employees at the Vice President level and higher. 3 CHANGE IN CONTROL SEVERANCE AGREEMENT This SEVERANCE AGREEMENT (the "Agreement") is dated and effective as of ____________, 1998, between Guilford Pharmaceuticals Inc., (the "Employer"), and _____________________ (the "Employee"), a resident of the State of ____________. WHEREAS, the Employee serves as __________ of the Employer, and in that role has been important in developing and expanding the business and operations of the Employer and possesses valuable knowledge and skills with respect to such business; and WHEREAS, the Board of Directors of the Company (the "Board") believes that it is in the best interests of the Company to encourage the Employee's continued employment with and dedication to the Employer, including in the face of potentially distracting circumstances arising from the possibility of a change in control of the Company; and WHEREAS, the Board has adopted a policy which authorizes the Employer to enter into this Agreement with the Employee; and WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions for the payment of compensation to the Employee in the event of a termination of the Employee's employment during the term of this Agreement; NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements of the parties contained herein and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. TERM. The term of this Agreement shall be for a period commencing as of the date set forth above and will remain in effect until the earlier of the date on which (a) all obligations of the parties hereto shall have been satisfied, (b) the agreement is terminated by the mutual written agreement of the parties, (c) or the agreement is terminated pursuant to terms contained elsewhere herein. 2. TERMINATION OF EMPLOYMENT OTHER THAN FOLLOWING A CHANGE IN CONTROL EVENT. If, prior to a Change in Control Event, the Employee's employment is terminated by the Employer with or without Cause during the term of this Agreement or the Employee voluntarily terminates his employment with or without Good Reason, this Agreement shall, subject to the provisions contained in Section 17 below, terminate. 4 3. TERMINATION OF EMPLOYMENT FOLLOWING A CHANGE IN CONTROL EVENT. Subject to the terms of this Agreement, including without limitation Section 17 below, the Employee shall be entitled to receive severance payments from the Employer for services previously rendered to the Employer and its affiliates if a Change in Control Event occurs during the term of this Agreement and the Employee's employment is terminated by the Employee for Good Reason or by the Employer other than for Cause during the period commencing upon such Change in Control Event (as defined in SECTION 9) and ending two years after a Change in Control (as defined in SECTION 9)(the "Change in Control Period"). 3.1. GOOD REASON; OTHER THAN FOR CAUSE. If a Change in Control Event occurs during the term of this Agreement and the Employer terminates the Employee's employment other than for Cause or the Employee terminates employment for Good Reason during the Change in Control Period: (i) the Employer shall pay to the Employee the following amounts: A. the sum of (1) the Employee's Annual Base Salary (as defined in SECTION 6) through the Date of Termination to the extent not theretofore paid and (2) any compensation previously deferred by the Employee (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case, to the extent not theretofore paid, in a lump sum in cash no later than 10 days following the date of termination; and B. the amount equal to two (2) times the Employee's Annual Base Salary, which amount shall be payable in full in a lump sum in cash no later than 10 days following the date of termination.(1) (ii) for two (2) years after the Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Employer shall continue benefits to the Employee and/or the Employee's family at least equal to those which would have been provided to them in accordance with the welfare benefit plans, practices, policies and programs provided by the Employer and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the - ------------------------------ (1) In the case of the Company's Chief Executive Officer, the amount is three times (3x) base salary. - 5 - 5 extent applicable generally to other executive-level employees of the Employer and its affiliated companies, as if the Employee's employment had not been terminated; provided, however, that if the Employee becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. 3.2. CAUSE; OTHER THAN FOR GOOD REASON. If the Employee's employment is terminated for Cause during the Change in Control Period, this Agreement shall terminate without further obligations to the Employee hereunder. Furthermore, if the Employee voluntarily terminates employment during the Change in Control Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Employee hereunder. 4. (PROVISION INTENTIONALLY OMITTED) 5. CERTAIN ADDITIONAL PAYMENTS BY EMPLOYER. 5.1. GENERAL Notwithstanding anything in this Agreement to the contrary and except as set forth in this SECTION 5, in the event it shall be determined that any payment or distribution by the Employer to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this SECTION 5) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Employee shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Employee of all taxes, including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to the Excise Tax (including any interest or penalties imposed with respect to such taxes) imposed upon the Payments. 5.2. PROCEDURES Subject to the provisions of SECTION 5.3, all determinations required to be made under this SECTION 5, including whether and when a Gross-Up Payment is - 6 - 6 required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by KPMG Peat Marwick or such other certified public accounting firm as may be designated by the Employee and reasonably acceptable to the Employer (the "Accounting Firm") which shall provide detailed supporting calculations both to the Employer and the Employee within 15 business days of the receipt of notice from the Employee that there has been a Payment, or such earlier time as is requested by the Employer. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Employee may appoint another nationally recognized accounting firm and reasonably acceptable to the Employer to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Employer. Any Gross-Up Payment, as determined pursuant to this SECTION 5, shall be paid by the Employer to the Employee within five business days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Employer and the Employee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Employer should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Employer exhausts its remedies pursuant to SECTION 5.3 and the Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Employer to or for the benefit of the Employee. 5.3. NOTIFICATION OF CLAIMS The Employee shall notify the Employer in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Employer of the Gross-Up Payment. The Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Employer (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Employer notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (i) give the Employer any information reasonably requested by the Employer relating to such claim, (ii) take such action in connection with contesting such claim as the Employer shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by attorneys reasonably selected by the Employer, - 7 - 7 (iii) cooperate with the Employer in good faith in order effectively to contest such claim, and (iv) permit the Employer to participate in any proceedings relating to such claim; provided, however, that the Employer shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this SECTION 5.3, the Employer shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Employer shall determine; provided, however, that if the Employer directs the Employee to pay such claim and sue for a refund, the Employer shall advance the amount of such payment to the Employee, on an interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Employer's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. 5.4. REFUNDS If, after the receipt by the Employee of an amount advanced by the Employer pursuant to SECTION 5.3, the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall (subject to the Employer's complying with the requirements of SECTION 5.3) promptly pay to the Employer the amount of such refund (together with any interest actually paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Employer pursuant to SECTION 5.3, a determination is made that the Employee shall not be entitled to any refund with respect to such claim and the Employer does not notify the Employee in writing of its intent to contest such denial - 8 - 8 of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 6. DEFINITION OF "ANNUAL BASE SALARY". Annual base salary ("Annual Base Salary") means the greater of (a) the annual base salary payable to the Employee by the Employer and its affiliates as of the Date of Termination of employment (the "Current Annual Base Salary") or (b) the amount equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Employee by the Employer and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Date of Termination occurs. 7. DEFINITION OF "CAUSE". "Cause" means (i) conviction of a crime involving fraud or theft against the Company or a crime involving moral turpitude; or (ii) a finding by the Board that an employee has (x) compromised trade secrets or other proprietary information of the Company, (y) willfully failed or refused to perform material assigned duties, or (z) engaged in gross or willful misconduct that causes substantial and material harm to the business and operations of the Company. 8. DEFINITION OF "GOOD REASON". "Good Reason" means (i) any proposed reduction in an employee's base salary; (ii) any reduction of an employee's responsibilities or areas of supervision within the Company, or (iii) relocation of an employee's office outside the metropolitan area in which the office of the employee was located immediately prior to the change in control. 9. DEFINITION OF "CHANGE IN CONTROL" AND "CHANGE IN CONTROL EVENT". A "Change in Control" shall be deemed to have occurred if: (a) any "person" (including, without limitation, any individual, sole proprietorship, partnership, trust, corporation, association, joint venture, pool, syndicate, or other entity, whether or not incorporated), or any two or more persons acting as a syndicate or group or otherwise acting in concert with regard to the ownership of securities of the Company and thereby deemed collectively to be a "person") as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), becomes, after the date hereof, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or - 9 - 9 indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities, unless, in transaction in which a "person" becomes, after the date hereof, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing less than fifty percent (50%) of the combined voting power of the Company's then outstanding securities, prior to the acquisition by such person of securities of the Company which causes such person to have such beneficial ownership, the full Board shall by at least a two-thirds vote have specifically approved such acquisition and determined that such acquisition shall not constitute a Change in Control for purposes of this Agreement despite such beneficial ownership; or (b) during any two (2) year period, individuals who at the beginning of such period constitute the Board, together with any new directors elected or appointed during the period whose election or appointment resulted from a vacancy on the Board caused by retirement, death , or disability of a director and whose election or appointment was approved by a vote of at least two-thirds (2/3rds) of the directors then still in office who were directors at the beginning of the period, cease for any reason to constitute a majority thereof. A "Change in Control Event" shall mean the earlier of (i) a Change in Control or (ii) the execution and delivery by the Company of an agreement providing for a Change in Control. 10. EXPENSES. The Employer shall pay any and all reasonable legal fees and expenses incurred by the Employee in seeking to obtain or enforce, by bringing an action against the Employer, any right or benefit provided in this Agreement if the Employee is successful in whole or in part in such action. 11. WITHHOLDING. Notwithstanding anything in this Agreement to the contrary, all payments required to be made by the Employer hereunder to the Employee or his estate or beneficiaries shall be subject to the withholding of such amounts relating to taxes as the Employer reasonably may determine it should withhold pursuant to any applicable law or regulation. In lieu of withholding such amounts, in whole or in part, the Employer may, in its sole discretion, accept other provisions for the payment of taxes and any withholdings as required by law, provided that the Employer is satisfied that all requirements of law affecting its responsibilities to withhold compensation have been satisfied. 12. NO DUTY TO MITIGATE. - 10 - 10 The Employee's payments received hereunder shall be considered severance pay in consideration of past service, and pay in consideration of continued service from the date hereof and entitlement thereto shall not be governed by any duty to mitigate damages by seeking further employment or otherwise. 13. AMENDMENTS OR ADDITIONS; ACTION BY THE BOARD OF DIRECTORS. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties hereto. The prior approval by the Board shall be required in order for the Employer to authorize any amendments or additions to this Agreement, unless this requirement is specifically waived in writing by the Employee in any document effecting any such amendment. 14. GOVERNING LAW; JURISDICTION. This Agreement shall be governed by the laws of United States to the extent applicable and otherwise by the laws of the State of Maryland, excluding any choice of law rules. In the event that an unresolved dispute arises over the enforcement, interpretation, construction or breach of this Agreement, the parties agree that it shall be litigated in the U.S. District Court for the District of Maryland or in the circuit courts of Baltimore City, Maryland, and the parties hereby irrevocably submit to the exclusive jurisdiction of such courts for all purposes with respect to any legal action or proceeding in connection with this Agreement. 15. ASSIGNMENT. The rights and obligations of the Employer under this Agreement shall be binding upon its successors and assigns and may be assigned by the Employer to the successors in interest of the Employer. The rights and obligations of the Employee under this Agreement shall be binding upon his heirs, legatees, personal representatives, executors or administrators. This Agreement may not be assigned by the Employee, but any amount owed to the Employee upon his death shall inure to the benefit of his heirs, legatees, personal representatives, executors, or administrators. 16. NOTICE. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when hand delivered, sent by overnight courier, or mailed by first-class, registered or certified mail, return receipt requested, postage prepaid, or transmitted by telegram, telecopy, or telex (against receipt of answerback confirming delivery), addressed as follows: If to the Employer: - 11 - 11 Guilford Pharmaceuticals Inc. 6611 Tributary Street Baltimore, Maryland 21224 Attn: Corporate Secretary Fax: 410/631-6899 If to the Employee: or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. In the case of notices sent by telegram, telecopy, or telex, which notice shall be deemed duly given if made pursuant to the provisions of this Section 16 above, the notifying party shall also send a confirmation copy of any such notice to the other party by first class-mail. 17. OTHER AGREEMENTS. This Agreement may not constitute the entire agreement between the parties hereto providing for severance payments in connection with a termination of employment following a Change in Control Event; provided, however, that if the Employee is entitled to severance payments pursuant to this Agreement and pursuant to any other oral or written agreements, commitments or understandings calling for severance payments in connection with a termination of employment following a Change in Control Event, the severance payments paid to the Employee by the Employer in connection with such termination of employment shall be limited to the greater of (i) severance payments provided pursuant to this Agreement and any share option agreements and restricted share agreements between the Company and the Employee or (ii) severance payments provided by the Employer pursuant to such other oral or written agreements, commitments or understandings. If the Employee is entitled to severance payments pursuant to this Agreement and any share option agreements and restricted share agreements between the Company and the Employee, on the one hand, and pursuant to any other oral or written agreements, commitments or understandings calling for severance payments in connection with a termination of employment following a Change in Control Event, on the other hand, the Employee shall determine, in the Employee's sole discretion, by notice given in writing to the Employer, which payments are greater. For the avoidance of doubt, the parties agree the terms of this Agreement shall in no way be deemed to diminish or other modify any - 12 - 12 terms set forth in any other oral or written agreements, commitments or understandings related to the payment of severance amounts to the Employee in connection with a termination of employment that are not conditioned on a Change in Control Event, including without limitation the employment offer letter between the Company and the Employee, effective _______________ 199___. 18. SEVERABILITY. If any part of any provision of this Agreement shall be invalid or unenforceable under applicable law, such part shall be ineffective to the extent of such invalidity or unenforceability only, without in any way affecting the remaining parts of such provision or the remaining provisions of this Agreement. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement, or have caused this Agreement to be executed and delivered, to be effective as of ___________________, 1998. GUILFORD PHARMACEUTICALS INC. By: -------------------------------- Name: ------------------------------ Title: ----------------------------- EMPLOYEE ----------------------------------- Name: ------------------------------ - 13 - EX-10.66 5 SEVERANCE PROVISIONS 1 EXHIBIT 10.66 PROVISIONS REGARDING SEVERANCE BENEFITS FROM EMPLOYMENT LETTER AGREEMENT, EFFECTIVE SEPTEMBER 21, 1998, TO NANCY J. LINCK In the event your employment is terminated by the Company other than for cause, you would be entitled to severance in the form of a continuation of your then-current base salary, as follows: 1. Six months salary if the termination occurs in the first twelve months of your employment; and 2. Twelve months salary if the termination occurs thereafter. Such payments (except those resulting from a change in control, see below) would cease upon your commencement of paid employment or consultancy during the severance period. During the severance period, the Company would also reimburse you for the cost of continuation of any health, life and disability insurance coverage available at the time of the termination of employment, provided that the Company reserves the right to provide substantially equivalent alternative life and disability coverage to the extent reasonably available upon conversion from full-time employment. Such continuing coverage is conditioned upon your reasonable cooperation in complying with any necessary application procedures. Remaining benefits of employment, including your eligibility for any bonus program and the vesting of unvested options would cease at termination and not continue to accrue during the severance period. The Company offers certain terms in the event of a change in control of the Company, including acceleration of vesting of unvested stock options, indemnity for certain excise tax obligations and increased and modified severance arrangements, pursuant to standard agreements generally available to Vice Presidents of the Company. These terms will be extended to you upon commencement of your hire. EX-11.4 6 COMPUTATION OF EARNINGS (LOSS) PER SHARE 1 EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table sets forth the calculation of total number of shares used in the computation of net earnings (loss) per common share.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 1998 1997 -------------- -------------- -------------- -------------- Weighted average common shares outstanding 19,481 18,644 19,453 16,961 Dilutive incremental shares assumed to be outstanding related to stock options, warrants and put options - 1,408 - Weighted average common and common equivalent shares used in the computation of -------------- -------------- -------------- -------------- net income (loss) per share 19,481 20,052 19,453 16,961 ============== ============== ============== ============== Net income (loss) $ (6,907) $ 6,341 $ (21,068) $ (5,273) ============== ============== ============== ============== Basic earnings per share $ (0.35) $ 0.34 $ (1.08) $ (0.31) ============== ============== ============== ============== Diluted earnings per share $ (0.35) $ 0.32 $ (1.08) $ (0.31) ============== ============== ============== ==============
EX-27.4 7 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 9,965 126,872 1,266 0 1,606 140,470 27,960 6,855 161,842 12,693 9,306 0 0 195 139,648 161,842 4,602 9,123 1,267 36,435 0 0 588 (21,068) 0 (21,068) 0 0 0 (21,068) (1.08) (1.08) THE EPS-PRIMARY TAG REPRESENTS BASIC EPS UNDER SFAS 128. THE EPS-DILUTED TAG REPRESENTS DILUTED EPS UNDER SFAS 128
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