-----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, GYCVe+oVJxsEw8jXNAtr/OgoVEt/VYmEweEtXZDvKKUbXzQKKp+lRM4fzLmTT9BJ +dZiunpxcJtdHtzxsEFX6w== 0000950133-99-003611.txt : 19991117 0000950133-99-003611.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950133-99-003611 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99754580 BUSINESS ADDRESS: STREET 1: 6611 TRIBUTARY ST CITY: BALTIMORE STATE: MD ZIP: 21224 BUSINESS PHONE: 4106316300 10-Q 1 FORM 10-Q FOR GUILFORD PHARMACEUTICALS INC. 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, 1999 ------------------ COMMISSION FILE NUMBER 000-23736 --------- 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 15, 1999 Common Stock, $.01 par value 23,049,670 - ---------------------------- ---------- 2 INDEX
PART I. FINANCIAL INFORMATION (UNAUDITED) Pages ------- Item 1. Financial Statements Consolidated Balance Sheets September 30, 1999 and December 31, 1998 3 Consolidated Statements of Operations Three and Nine months ended September 30, 1999 and 1998 4 Consolidated Statement of Changes in Stockholders' Equity Nine months ended September 30, 1999 5 Consolidated Statements of Cash Flows Three and Nine months ended September 30, 1999 and 1998 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 29 PART II. OTHER INFORMATION 30 SIGNATURES 31
2 3 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, 1999 (UNAUDITED) DECEMBER 31, 1998 ----------- ----------------- ASSETS Current assets: Cash and cash equivalents $ 43,119 $ 8,480 Investments 75,175 103,281 Accounts receivable 1,415 1,241 Inventories 1,368 1,291 Other current assets 896 709 --------- --------- Total current assets 121,973 115,002 Investments - restricted 26,356 16,500 Property and equipment, net 17,978 18,790 Other assets 627 736 ========= ========= $ 166,934 $ 151,028 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,107 $ 3,265 Current portion of long-term debt 2,159 2,159 Accrued payroll related costs 1,841 2,279 Accrued outside services 2,782 2,095 Accrued expenses and other current liabilities 1,653 960 Deferred income 1,125 1,125 --------- --------- Total current liabilities 10,667 11,883 Long-term liabilities: Long-term debt, net of current portion 7,146 8,766 --------- --------- Total liabilities 17,813 20,649 --------- --------- 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 23,328,313 and 19,594,316 issued at September 30, 1999 and December 31, 1998, respectively 233 196 Additional paid-in capital 232,441 187,139 Accumulated deficit (78,329) (56,009) Accumulated other comprehensive income (loss) (1,656) 876 Notes receivable on common stock (60) (60) Treasury stock, at cost: 278,643 and 77,224 shares at September 30, 1999 and December 31, 1998, respectively (3,352) (1,399) Deferred compensation (156) (364) --------- --------- Total stockholders' equity 149,121 130,379 ========= ========= $ 166,934 $ 151,028 ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 3 4 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 1999 1998 -------- -------- -------- -------- Revenues: Contract Revenues $ 4,500 $ 1,000 $ 4,500 $ 1,000 Product sales 565 920 3,432 2,575 License fees and royalties 542 717 1,785 2,027 Revenues under collaborative agreements 1,269 1,194 3,682 3,521 -------- -------- -------- -------- Total revenues 6,876 3,831 13,399 9,123 Costs and Expenses: Cost of sales 303 423 1,746 1,267 Research and development 10,396 9,479 29,535 27,444 General and administrative 2,862 2,675 9,508 7,724 -------- -------- -------- -------- Total costs and expenses 13,561 12,577 40,789 36,435 -------- -------- -------- -------- Operating loss (6,685) (8,746) (27,390) (27,312) Other income (expense): Investment and other income 1,642 2,028 5,584 6,832 Interest expense (166) (189) (514) (588) -------- -------- -------- -------- Net loss $ (5,209) $ (6,907) $(22,320) $(21,068) ======== ======== ======== ======== Basic and diluted loss per common share $ (0.26) $ (0.35) $ (1.14) $ (1.08) ======== ======== ======== ======== Weighted average common shares outstanding 19,937 19,481 19,608 19,453 ======== ======== ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 4 5 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON ACCUMULATED STOCK ADDITIONAL OTHER NUMBER DOLLAR PAID-IN ACCUMULATED COMPREHENSIVE OF SHARES ISSUED AMOUNT CAPITAL DEFICIT INCOME (LOSS) ---------------- ------ ------- ------- ------------- BALANCE, DECEMBER 31, 1998 19,594,316 $196 $187,139 $(56,009) $876 Comprehensive loss: Net loss for the period (22,320) Unrealized loss on available-for-sale securities (2,532) Total comprehensive loss Issuance of common stock in private placement @ $13.50 per share, net of offering costs 3,360,000 34 42,486 Issuances of common stock 373,997 3 2,616 Purchase of 222,275 shares of common stock Distribution of 20,856 shares of treasury stock to 401(k) plan 5 Stock option compensation 337 Amortization of deferred compensation Forfeiture of unvested restricted stock (142) ------------------ ---------- ---------------- ----------------- ------------------ BALANCE, SEPTEMBER 30, 1999 23,328,313 $233 $232,441 $(78,329) $(1,656) ================== ========== ================ ================= ==================
NOTE RECEIVABLE TOTAL ON COMMON TREASURY DEFERRED STOCKHOLDERS' STOCK STOCK, AT COST COMPENSATION EQUITY ----- -------------- ------------ ------ BALANCE, DECEMBER 31, 1998 $(60) $(1,399) $(364) $130,379 Comprehensive loss: Net loss for the period (22,320) Unrealized loss on available-for-sale securities (2,532) ----------------- Total comprehensive loss $(24,852) ----------------- Issuance of common stock in private placement @ $13.50 per share, net of offering costs 42,520 Issuances of common stock 2,619 Purchase of 222,275 shares of common stock (2,209) (2,209) Distribution of 20,856 shares of treasury stock to 401(k) plan 256 261 Stock option compensation 337 Amortization of deferred compensation 66 66 Forfeiture of unvested restricted stock 142 - --------------- ----------------------------------- ----------------- BALANCE, SEPTEMBER 30, 1999 $(60) $(3,352) $(156) $149,121 =============== ================= ================ =================
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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 1999 1998 1999 1998 -------- -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (5,209) $ (6,907) $(22,320) $(21,068) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,152 830 3,801 2,578 Noncash compensation expense 638 160 995 433 Changes in assets and liabilities: Accounts receivable, other current assets and other assets (300) 155 (695) (928) Inventories (225) (148) (77) (264) Accounts payable (1,422) (2,428) (2,158) (1,544) Accrued expenses and other current liabilities (192) 1,036 855 3,375 Deferred income 1,125 - - - -------- -------- -------- -------- Net cash used in operating activities (4,433) (7,302) (19,599) (17,418) -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment, net (576) (633) (2,790) (6,358) Sale and maturities of investments 4,505 31,455 90,276 75,573 Purchases of investments (1,136) (20,793) (74,558) (66,033) -------- -------- -------- -------- Net cash provided by investing activities 2,793 10,029 12,928 3,182 -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuances of common stock 42,749 393 45,139 887 Purchase of treasury stock - - (2,209) (46) Principal payments on bond and term loan payable (540) (540) (1,620) (1,620) -------- -------- -------- -------- Net cash (used in) provided by financing activities 42,209 (147) 41,310 (779) -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents 40,569 2,580 34,639 (15,015) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 2,550 7,385 8,480 24,980 -------- -------- -------- -------- CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 43,119 $ 9,965 $ 43,119 $ 9,965 ======== ======== ======== ======== Supplemental disclosures of cash flow information: Interest paid $ 161 $ 181 $ 497 $ 594 Distribution of treasury stock to 401(k) plan $ 92 $ - $ 261 $ - ======== ======== ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 6 7 GUILFORD PHARMACEUTICALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 (UNAUDITED) 1. ORGANIZATION AND BASIS OF PRESENTATION Guilford Pharmaceuticals Inc. (together with its subsidiaries, "Guilford" or the "Company") is a biopharmaceutical company, located in Baltimore, Maryland, engaged in the development and commercialization of novel products in two principal areas: (i) targeted and controlled drug delivery systems using proprietary biodegradable polymers for the treatment of cancer and other diseases or conditions; and (ii) therapeutic and diagnostic products for neurological diseases and conditions. The consolidated financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). 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 financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1998. 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 three and nine month periods ended September 30, 1999 as set forth in the Index. Interim results are not necessarily indicative of results for the full fiscal year. 2. ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Guilford Pharmaceuticals Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. 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 any loss per share is antidilutive. 7 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table sets forth the computation of the Company's basic and diluted net earnings (loss) per share:
THREE MONTHS ENDED SEPTEMBER 30, ---------------------------------------- 1999 1998 ---------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ---------------------------------------- Net loss $ (5,209) $ (6,907) ---------------------------------------- Weighted-average common shares outstanding 19,937 19,481 ---------------------------------------- Basic and diluted earnings (loss) per common share $ (0.26) $ (0.35) ----------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------------- 1999 1998 ---------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ---------------------------------------- Net loss $ (22,320) $ (21,068) ---------------------------------------- Weighted-average common shares outstanding 19,608 19,453 ---------------------------------------- Basic and diluted earnings (loss) per common share $ (1.14) $ (1.08) ----------------------------------------
3. INVENTORIES Inventories at September 30, 1999 and December 31, 1998 consist of the following:
SEPTEMBER 30, 1999 DECEMBER 31, 1998 ------------------ ----------------- (IN THOUSANDS) Raw materials $ 238 $ 283 Work in process 546 371 Finished goods 584 637 ----- ----- $1,368 $1,291 ===== =====
Inventories are net of applicable reserves and allowances. Inventories include finished goods and raw materials that may be either available for sale, consumed in production or consumed internally in the Company's development activities. Inventories identified for development activities are expensed in the period in which such inventories are designated for such use. 8 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. LEASE - RESEARCH AND DEVELOPMENT FACILITY 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 is located adjacent to the Company's corporate headquarters in Baltimore, Maryland and was substantially completed in June 1999. Construction costs are expected to total slightly less than the initial budget of $20 million. During the construction period, the Company must maintain cash collateral equal to 100% of the cost of construction, not to exceed $20 million. As of September 30, 1999, the Company had established cash collateral of approximately $19.0 million related to this transaction. The cash collateral is included in the accompanying consolidated balance sheets as "Investments-restricted". Close-out of the construction is expected to occur in the fourth quarter, at which time the Company expects up to approximately $5 million of such cash collateral to be released. In addition to its cash collateral requirements, the Company is subject to certain financial covenants, the most restrictive of which requires that the Company maintain unrestricted cash, cash equivalents and investments in the aggregate equal to $40 million. The lease term is for a maximum of 84 months (including the construction period). At the end of the initial lease term, the Company may re-lease the facility, purchase the building, or arrange for the sale of the building to a third party. In the event the building is sold to a third party, the Company will be obligated to pay the lessor any shortfall between the sales price and 83% of the lessor's net investment in the facility. The Company anticipates the annual lease payments to be approximately $1.4 million during the initial lease term. 5. EQUITY TRANSACTION In September 1999, the Company completed a private placement of 3.36 million shares of its common stock to certain institutional and other accredited investors, resulting in net proceeds to the Company of approximately $42.5 million. 9 10 GUILFORD PHARMACEUTICALS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY NOTE From time to time in this quarterly report we may make statements which reflect our current expectations regarding our future results of operations, economic performance, and financial condition as well as other matters that may affect our business. In general, we try to identify these forward-looking statements by using words such as: - "anticipate", - "believe", - "expect", - "estimate" and similar expressions While these statements reflect our current plans and expectations and we base the statements on information currently available to us, we cannot be sure that we will be able to implement these plans successfully. We may not realize our expectations in whole or in part in the future. The forward-looking statements contained in this quarterly report may cover, but are not necessarily limited to, the following topics: - our efforts in conjunction with Rhone-Poulenc Rorer Pharmaceuticals Inc. (or "RPR") to obtain international regulatory clearances to market and sell GLIADEL(R) Wafer ("GLIADEL") and to increase end-user sales of GLIADEL, - our efforts in conjunction with RPR to expand the labeled uses for GLIADEL, - our efforts to develop polymer drug delivery product line extensions and new polymer drug delivery products, - conducting and completing research programs related to our FKBP neuroimmunophilin ligand technology partnered with Amgen, as well as our NAALADase inhibition, PARP inhibition, polymer drug delivery and other technologies, - clinical development activities, including commencing and conducting clinical trials, related to our polymer-based drug delivery products and product candidates (including GLIADEL) and our pharmaceutical product candidates (including lead compounds in our FKBP neuroimmunophilin ligand program and any future lead compounds in our NAALADase and PARP programs), - our efforts to scale-up product candidates from laboratory bench quantities to commercial quantities, 10 11 - our efforts to secure supply of the active pharmaceutical ingredients for the clinical development and commercialization of our polymer-based and other drug candidates, - our efforts to manufacture drug candidates for clinical development and eventual commercial supply, - our strategic plans, - anticipated expenditures and the potential need for additional funds, and - plans to assess and implement solutions, if necessary, to the Year 2000 issue. All of these items involve significant risks and uncertainties. Any of the statements we make 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. We wish to caution you that our actual results may differ significantly from the results we discuss in the forward-looking statements. We discuss factors that could cause or contribute to such differences elsewhere in this quarterly report as well as in our filings with the Securities and Exchange Commission. Our SEC filings include our Annual Report on Form 10-K for the year ended December 31, 1998 and our registration statement on Form S-3 (SEC file no. 333-87091) we initially filed on September 14, 1999. For convenience we refer to these documents as the "1998 Form 10-K" and the "September 1999 Form S-3" in the discussion set forth below. In addition, any forward-looking statement we make in this document speaks only as of the date of this document, and we do not intend to update any such forward-looking statement to reflect events or circumstances that occur after that date. INTRODUCTION In the following section, called "Management's Discussion and Analysis", we explain the general financial condition and the results of operations for Guilford and its subsidiaries, including: - what factors affect our business, - what our revenues and expenses were in the periods presented, - why such revenues and expenses changed between periods, - where our revenues came from, - how all of the foregoing affect our overall financial condition, and - what our expenditures for capital projects were in the periods presented. 11 12 As you read Management's Discussion and Analysis, you may find it helpful to refer to our Consolidated Financial Statements beginning on page 3 of this quarterly report. These consolidated financial statements present the results of our operations for the third quarter and first nine months of 1999 and 1998, as well as our financial position at September 30, 1999 and December 31, 1998. In Management's Discussion and Analysis, we analyze and explain the changes in the specific line items set forth in the section of our Consolidated Financial Statements entitled "Consolidated Statements of Operations". You will notice some changes in this year's discussion compared to prior years. In 1998 the SEC adopted new rules requiring public companies like Guilford to write certain documents in "plain English". Even though the SEC does not require us to present our Management's Discussion and Analysis in plain English, we have decided voluntarily to apply these rules to the following discussion. Our goal is to describe and analyze our financial condition in language that may be easier for our stockholders to understand. GENERAL Guilford is a biopharmaceutical company engaged in the development and commercialization of novel products in two principal areas: - targeted and controlled drug delivery products using proprietary biodegradable polymers for the treatment of cancer and other diseases or conditions, and - therapeutic and diagnostic products for neurological diseases and conditions. In February 1997, we commercially launched our first product, GLIADEL, in the United States through RPR. GLIADEL is a proprietary polymer product for the treatment of certain types of brain cancer. This product dissolves over time and releases an anti-cancer drug known as "BCNU" (or carmustine) directly to the tumor site. RPR is our exclusive worldwide marketing partner for GLIADEL, except in Japan and Scandinavia. Orion Corporation Pharma (formerly Orion Corporation Farmos) is our marketing partner for GLIADEL in Scandinavia. We have also licensed from others and internally developed on our own: - technologies that may be useful in preventing and treating certain neurological diseases and conditions, and - a new class of biodegradable polymers different from the type used in GLIADEL, which we are using for the targeted and controlled delivery of cancer chemotherapeutics. In addition, in the third quarter of 1999, we continued to increase our investment in research and development activities with respect to certain of these technologies. We anticipate that our future revenues will come primarily from the following sources: 12 13 - sales of those products we manufacture to our marketing partners, which currently consists of sales of GLIADEL to our marketing partners. We may sometimes refer to these amounts as "transfer payments" or "product sales", - royalties from our marketing partners related to the sale of products to third parties, such as RPR's sales of GLIADEL to hospitals, and any other products we may develop in the future, and/or - one-time rights, milestone, and other payments from corporate partners under our current collaborative agreements and new ones we may enter into with others in the future. As we discuss in greater detail below, if we or our corporate collaborators, RPR and Amgen Inc. ("Amgen"), attain certain regulatory and/or development objectives, we are eligible to receive certain milestone and other payments from these companies. We view these potential payments as significant future revenue and/or capital raising opportunities. As we discuss in the 1998 Form 10-K, we cannot be sure that our corporate partners will achieve the designated milestones and that we will receive any or all of the milestone payments for which we are eligible under our existing or any future collaborations. We also cannot be sure that we will be able to enter into collaborations in the future with others for the research, development and/or commercialization of our technologies. Since the commercial launch of GLIADEL in the United States in February 1997 through September 30, 1999, we have recognized an aggregate of $18.9 million in product sales and royalties. Of this amount, $12.9 million represent revenues from sales of GLIADEL to both RPR and Orion Corporation Pharma. The additional $6.0 million are royalties paid to us from RPR on its sales of GLIADEL to third parties, such as hospitals. Under the terms of our agreements with RPR, if RPR is able to achieve certain specified regulatory objectives, RPR is obligated to pay us up to an additional $30.5 million in milestone payments and payments for the purchase of shares of our stock. These regulatory objectives include obtaining approvals to market GLIADEL in certain foreign countries. In July and August 1999, we received an aggregate of $4.5 million in non-refundable milestone payments from RPR. These milestone payments were paid upon RPR's receipt of specified regulatory approvals to market and sell GLIADEL for the recurrent surgery indication in France and Germany. As we discuss below and in greater detail in the 1998 Form 10-K and the September 1999 Form S-3, a number of factors subject our future sales of GLIADEL to significant risk and uncertainty. We cannot be sure that our sales of GLIADEL to RPR and RPR's sales of GLIADEL to third parties will increase over time or even continue at the current rate. The milestone payments and other amounts payable by RPR are contingent on: - making certain international regulatory filings and obtaining clearances to market GLIADEL for the recurrent surgery indication pursuant to such filings, - obtaining authorization from the FDA and international health regulatory authorities to 13 14 expand the description of the clinical uses for GLIADEL that we can put on its label to include use of the product in first surgeries, and - obtaining permission to sell GLIADEL in certain countries at prices that are acceptable to RPR and us. We cannot control the timing and extent of governmental clearances. We also cannot be sure that we and RPR will attain any of these regulatory objectives. Except for GLIADEL, we do not expect to sell other products for at least the next several years, if ever. In August 1997, we entered into a collaboration with Amgen to research, develop and commercialize our FKBP neuroimmunophilin compound technology. Under our agreement with Amgen, Amgen paid us $35 million in 1997. Of this amount, Amgen paid $15 million in the form of a one-time, non-refundable rights fee upon signing the agreement. Amgen paid us the remaining $20 million for the purchase of 640,095 shares of our common stock and warrants to purchase up to an additional 700,000 shares of our common stock. These warrants are exercisable for five years and have an exercise price of $35.15 per share. We also granted to Amgen certain rights to register shares of our common stock with the SEC for sale in the public markets. As part of this collaboration, Amgen agreed to fund up to a total of $13.5 million to support Guilford's research relating to the FKBP neuroimmunophilin ligand technology. This research funding began on October 1, 1997 and is payable quarterly over three years, with the last quarterly payment due July 1, 2000. As of September 30, 1999, we had recognized an aggregate of approximately $9.4 million in research support from Amgen under this arrangement. Amgen also has the option to fund a fourth year of research. Our agreement also requires that Amgen make milestone payments to us if Amgen achieves specified regulatory and product development milestones. If Amgen is able to meet all of these milestones for each of 10 different specified clinical indications (i.e., medical uses), these payments could total up to $392 million in the aggregate. Amgen is also required to pay us royalties on its sales to third parties of any product(s) that results from our collaboration. As we discuss below and in greater detail in the 1998 Form 10-K and the September 1999 Form S-3, we cannot be sure that Amgen will be successful in its efforts to develop one or more FKBP neuroimmunophilin compounds into products that the FDA and foreign regulatory authorities will approve as safe and effective drugs for neurological or other uses. Consequently, we cannot be sure that we will earn any of the milestone payments related to these regulatory and product development activities. In addition to revenues related to GLIADEL, the only other significant revenues we recognized for the first nine months of 1999 consist of approximately $3.4 million in research payments from Amgen. Under the Amgen agreement, we expect to recognize an additional $1.1 million of revenue in the fourth quarter of 1999 relating to research support for the FKBP neuroimmunophilin ligand technology. 14 15 With the sole exception of 1996, we have not earned a net profit in any year since our inception in July 1993. Our net profit in 1996 was $5.1 million. This net profit was primarily due to two, one-time rights payments from RPR which totaled $27.5 million. For the three and nine months ended September 30, 1999, we incurred a net loss of $5.2 million and $22.3 million, respectively. Since inception through September 30, 1999, we have an accumulated deficit of $78.3 million. Our accumulated deficit is equal to the sum of our cumulative profits and losses since inception in July 1993. We do not expect 1999 to be profitable. We cannot be sure that we will ever achieve or sustain profitability in the future. Furthermore, our revenues and expenses have fluctuated significantly in the past because of the nature and timing of their sources. We expect fluctuations in our revenues and expenses to continue, and thus our operating results should also vary significantly from quarter-to-quarter and year-to-year. A variety of factors cause these fluctuations, including: - the timing and amount of sales of GLIADEL to RPR and RPR's sales to others, - the timing and realization of milestone and other payments from our corporate partners, including RPR and Amgen, - the timing and amount of expenses relating to our research, development, and manufacturing activities, and - the extent and timing of costs related to our activities to obtain, extend, enforce and /or defend our patent and other rights to our intellectual property. We expect that expenses in all areas of our business will continue to increase. These areas include research and product development, pre-clinical testing, human clinical trials, regulatory affairs, operations, manufacturing and general and administrative activities. In addition, we expect the number of employees working at our company to continue to increase. At September 30, 1999, we had 225 full-time employees. This compares to 222 full-time employees at September 30, 1998. Our ability to achieve consistent profitability in the future will depend on many factors, including: - our ability, either alone or with others, to develop our product candidates successfully, including NIL-A with Amgen, and any other product candidates, - the level of future sales of GLIADEL, - the extent of any human clinical trials and related costs necessary to develop our product candidates, 15 16 - our ability, either alone or with others, to obtain required regulatory approvals to market our product candidates, - our ability and that of our corporate partners to manufacture products at reasonable cost, - our ability and that of our collaborators to market and distribute products successfully, - our ability to enter into acceptable collaborative arrangements for our technologies and license agreements for new technologies of others in the future, and - our ability to invent new technologies and/or in-license new technologies from others and to obtain, defend and/or enforce patents on new and existing technologies. For a discussion of these and other risks, you should read the "Risk Factors" section of the September 1999 Form S-3, particularly those paragraphs specifically addressing the risks we note above. Future sales of GLIADEL are subject to certain risks and uncertainties. These risks include the following, among others: - RPR is not obligated to purchase any minimum amounts of GLIADEL from us, and so our revenues from the sale and distribution of GLIADEL are entirely dependent on the level of RPR's sales to end-users. - RPR may not be successful in its efforts to market and sell GLIADEL. - Neurosurgeons and their patients may not accept GLIADEL for a number of reasons, including the fact that GLIADEL represents a new and unfamiliar approach to the treatment of brain cancer and their assessment that benefits of this therapy do not outweigh its costs. - RPR may not be successful in its attempts to obtain any additional regulatory and marketing approvals to market GLIADEL and sell GLIADEL at acceptable prices. - BCNU, the chemotherapeutic agent we use in GLIADEL, is currently only available from two suppliers, and thus this material may not be available for GLIADEL manufacture. - The Company's current manufacturing plant for GLIADEL and a recently completed second manufacturing facility are both located in the same building at our headquarters in Baltimore, Maryland, and thus are subject to the risk that natural disasters or other factors may adversely affect their operation and interrupt GLIADEL manufacture. As we noted in the section captioned "Risk Factors" in the September 1999 Form S-3, there is no guarantee that we or Amgen will be able to successfully develop any FKBP neuroimmunophilin compounds or other product candidates into safe and effective drug(s) for neurological or other uses. Consequently, we may not earn additional milestone payments 16 17 related to Amgen's development activities or revenues related to product sales. In particular, the research, development and commercialization of early-stage technology like the FKBP neuroimmunophilin ligand technology are subject to significant risks and uncertainty. These risks involve those relating to, among other things: - selection of appropriate lead compounds, - successful completion of pre-clinical and clinical development activities, - the need to obtain regulatory clearances to market and sell drug products, - formulation of final product dosage forms, - scale-up from laboratory bench quantities to commercial quantities at a reasonable cost, - successful manufacture of drug products at an acceptable cost, - successful commercialization of such products at a price acceptable to us, any partners, and payers, and - the successful prosecution, enforcement and defense of patent and other intellectual property rights. For discussion of these and other risks, you should see the section captioned "Risk Factors" in the September 1999 Form S-3. RESULTS OF OPERATIONS In this section we discuss our revenues, costs and expenses, and other income and expenses for the three and nine month periods ended September 30, 1999 and 1998 as well as the factors affecting each of them. REVENUES For the three month periods ended September 30, 1999 and 1998, we recognized revenues of $6.9 million and $3.8 million, respectively. For the nine month periods ended September 30, 1999 and 1998, we recognized revenues of $13.4 million and $9.1 million, respectively. Our revenues for the third quarter and first nine months of 1999 and 1998 consisted primarily of: - revenues from product sales and royalties relating to GLIADEL, - $1.1 million in quarterly research funding from Amgen for each of the first three quarters of 1999 and 1998, and - in the third quarter of 1999 only, two milestone payments from RPR in the aggregate amount of $4.5 million for the receipt of certain regulatory approvals to market and sell GLIADEL for the recurrent surgery indication in France and Germany. Revenues from the sale and distribution of GLIADEL consist primarily of: - revenues from our marketing and distribution partners, RPR (for the entire world except Scandinavia and Japan) and Orion Corporation Pharma (for Scandinavia only), from our sales of GLIADEL to them, and - royalty payments from RPR based on its sales of GLIADEL to others, primarily hospitals. 17 18 GLIADEL Product Sales We earned $565,000 in the third quarter of 1999 from the sale of GLIADEL to our marketing partners compared to $920,000 in the same period in 1998. This represents a 39% decrease in net product sales in the 1999 period as compared to the same period in 1998. We earned $3.4 million in the first nine months of 1999 from the sale of GLIADEL to our marketing partners compared to $2.6 million in 1998. This represents a 33% increase in net product sales in the first nine months of 1999 compared to the same period in 1998. We believe the decrease in revenues attributable to sales of GLIADEL to RPR in the third quarter of 1999 compared to the third quarter of 1998 is due to fluctuations in the timing of deliveries of product to RPR, and expect GLIADEL product sales in 1999 will exceed last year's level. We believe that the 33% increase in net product sales in the first nine months of 1999 primarily reflects RPR's build-up of inventory of the product to support anticipated launch in France, Germany and other countries in Europe and elsewhere around the world. We cannot guarantee, however, that RPR will obtain all necessary regulatory approvals to launch the product in additional European countries or elsewhere to market and sell GLIADEL. In addition, we cannot be sure that, even if RPR does obtain these approvals in one or more European or other countries, GLIADEL will be launched in these countries in 1999 or thereafter, or that sales in those countries, if any, including France and Germany, will be significant. Royalties on GLIADEL Sales to Third Parties Our net royalty revenue on RPR's sales of GLIADEL to third parties was $542,000 in the third quarter of 1999 as compared to $717,000 in the third quarter of 1998. This represents a 24% decrease in net royalty revenue in the 1999 period compared to the same period in 1998. Our net royalty revenue on RPR's sales of GLIADEL to third parties was $1.8 million in the first nine months of 1999 compared to $1.9 million in the first nine months of 1998. This represents a 5% decrease in net royalty revenue in the first nine months of 1999 as compared to the same period in 1998. A decrease in the net number of units sold by RPR to third parties caused the decrease in royalty revenue during the 1999 periods. RPR has informed us that this decrease is due in part to unusually low sales in August. As we discuss in greater detail in the 1998 Form 10-K and September 1999 Form S-3, a number of factors subject our future sales of GLIADEL to significant risk and uncertainty. We cannot guarantee that GLIADEL sales will increase from, or even remain at, current levels or will ever generate significant revenues for us in the future. COST OF SALES Our cost of sales for the three months ended September 30, 1999 and 1998 was $303,000 and $423,000, respectively. Our cost of sales for the nine months ended September 30, 1999 and 1998 was $1.8 million and $1.3 million, respectively. In the third quarter and first nine months of 18 19 1999, cost of product sales represented 54% and 51%, respectively, of total product sales revenues compared to 46% and 49%, respectively, for the comparable periods in 1998. The cost to manufacture GLIADEL at current production levels can vary materially with the production volume. Production volume in turn is dependent upon purchase orders and sales forecasts as provided by our partner, RPR. To the extent GLIADEL production levels increase in the future, we anticipate that the unit cost to manufacture GLIADEL may decrease, although we cannot be sure that GLIADEL product sales will ever reach levels necessary for us to realize such a reduction in the per unit cost of manufacturing GLIADEL. To the extent GLIADEL production levels decrease, we anticipate that the unit cost to manufacture GLIADEL will increase. Based on our experience to date, we would expect the cost of product sales of GLIADEL to fluctuate from quarter to quarter, based on production volumes. RESEARCH AND DEVELOPMENT EXPENSES Our research and development expenses increased to $10.4 million for the third quarter of 1999. This amount was $9.5 million in the third quarter of 1998. Our research and development expenses increased to $29.5 million for the first nine months of 1999. This amount was $27.4 million in the first nine months of 1998. The increase in research and development expenses of $917,000 from the third quarter of 1998 to the third quarter of 1999 and of $2.1 million from the first nine months of 1998 to the first nine months of 1999 were primarily attributable to increased costs related to outside services such as contracted research and consulting services. The increase in our research and development expenses for the first nine months of 1999 was partially offset by a decrease in certain costs we incurred in the first nine months of 1998 that were not repeated in first nine months of 1999, including amounts paid to a university licensor expensed in the first quarter of 1998 relating to certain neuroimmunophilin ligand technology. We also anticipate that our research and development expenses will continue to increase in future periods. At September 30, 1999, we employed 192 individuals on a full-time basis in the areas of research, development and manufacturing. We employed 189 individuals in these areas at September 30, 1998. In the third quarter of 1999, we continued to increase our research and product development efforts generally, particularly with respect to our PARP inhibitor neuroprotectant and polymer development technologies. We also continued to provide financial support for RPR's Phase III clinical trial program in support of a first surgery indication for GLIADEL. In the third quarter and first nine months of 1999 and 1998, our research and development expenses included charges relating to certain consulting agreements related to GLIADEL and the polymer drug delivery business which we entered into in April 1996. These charges consisted of: - non-cash compensation expense of approximately $110,000 for the third quarter of both 1999 and 1998, respectively, and approximately $330,000 for the first nine months of 19 20 both 1999 and 1998, respectively; and - cash compensation expense of approximately $72,000 and $68,000 for the third quarter of 1999 and 1998, respectively, and approximately $213,000 and $196,000 for the first nine months of 1999 and 1998, respectively. We entered into these agreements to assist in the commercialization of GLIADEL, including our efforts to expand the labeling for this product and to generate product line extensions, and to enhance our ability to develop new polymer technologies and products for the delivery of anti-cancer agents for those diseases or conditions where local tumor recurrence is likely and controlled release may be more effective than current therapies. We expect to record up to an additional $421,000 in total of non-cash compensation charges in our research and development expenses quarterly through 2001 because of these agreements. GENERAL AND ADMINISTRATIVE EXPENSES Our general and administrative expenses increased to $2.9 million in third quarter of 1999. This amount was $2.7 million in the third quarter of 1998. Our general and administrative expenses increased to $9.5 million in first nine months of 1999 compared to $7.7 million in the first nine months of 1998. We attribute the increases in general and administrative expenses of $187,000 from the third quarter of 1998 to the third quarter of 1999 and $1.8 million from the first nine months of 1998 to the first nine months of 1999 to higher legal fees, patent and professional contract services costs and costs for professional, advisory and related services. These costs increased, in part, because of an increase in the activities necessary to support our research, product development and commercialization efforts. At both September 30, 1999 and 1998, we employed 33 individuals on a full-time basis supporting general and administrative areas. Our general and administrative expenses, particularly those related to establishing, preserving and enforcing our intellectual property rights, may continue to increase in future periods depending upon the level of activity in these areas. OTHER INCOME AND EXPENSE Other income and expense consist primarily of interest income on our monetary investments and interest expense on our debt and other financial obligations. Our investment and other income decreased to $1.6 million in the third quarter of 1999 compared to $2.0 million in the third quarter of 1998. Our investment and other income decreased to $5.6 million in the first nine months of 1999 compared to $6.8 million in the first nine months of 1998. The decrease between these periods was primarily due to a decrease in the average investment balance during the third quarter and first nine months of 1999 as compared to the same periods in 1998. For the third quarter of 1999 and 1998, we incurred interest expense of $166,000 and $189,000, respectively. For the first nine months of 1999 and 1998, we incurred interest expense of $514,000 and $588,000, respectively. These interest charges resulted from loans we have with First Union National Bank. These loans helped fund the construction of our 20 21 manufacturing, administrative, and research and development facilities and the purchase of certain furniture and equipment. Because we continue to repay these loans, our average principal balance outstanding under these loans was lower during the third quarter and first nine months of 1999 compared to the same periods in 1998. As a consequence, interest expense decreased during the 1999 periods as compared to the same periods in 1998. LIQUIDITY AND CAPITAL RESOURCES Our cash, cash equivalents and investments were approximately $144.7 million at September 30, 1999. Of this amount, we pledged $26.4 million as collateral for certain of our loans and financial lease obligations. We have recorded this amount under "Investments - restricted" on our Consolidated Balance Sheets. The increase in cash and investments was primarily due to the private sale in September 1999 of an aggregate of 3.36 million shares of our common stock to certain institutional and other accredited investors, resulting in net proceeds of approximately $42.5 million. In addition, in June 1999 we issued 312,933 shares of our common stock upon the exercise of certain warrants in exchange for approximately $2.25 million. The increase of $9.9 million in the amount of restricted investments at September 30, 1999 as compared to December 31, 1998 resulted from an increase during the first nine months of 1999 in the amount of cash collateral related to our design and construction of a new research and development facility. We describe the financing for this facility below. This increase in cash collateral was partially offset by our continued repayment of our loans from First Union National Bank, which resulted in a decrease in the cash collateral amounts related to these loans. In addition, under the agreements relating to the new research and development facility, upon completion of that facility, which we expect to occur before the end of 1999, we expect our cash collateral requirements will be reduced by up to approximately $5 million. In 1998, our Board of Directors approved a program to purchase up to 1,000,000 shares of our common stock in the open market from time to time at our discretion. Through September 30, 1999, we had repurchased a total of 252,500 of our shares under this program for an aggregate cash outlay of $2.7 million. In August 1999, we publicly announced that we had terminated this share repurchase program. Our total debt decreased to $9.3 million at September 30, 1999 compared to $10.9 million at December 31, 1998. This decrease was a result of our continued repayment of principal under our loans with First Union National Bank. We incurred net capital expenditures of $576,000 million in the third quarter of 1999 compared to net capital expenditures of $633,000 for the third quarter of 1998. We used these capital expenditures in the third quarter of 1999 to purchase equipment to support our ongoing research and development activities. We used the amounts we spent in the third quarter of 1998 to fund the construction of our new GLIADEL and biodegradable polymer manufacturing facilities. We also used these monies to fund the purchase of research and development equipment. 21 22 In March 1998, we entered into arrangements with certain equipment leasing companies that permit us to lease up to $10.8 million in equipment, including computer hardware and software, furniture and fixtures. As of September 30, 1999, we had leased a total of $5.7 million in equipment under these arrangements. Depending on the type of equipment covered and certain other factors, the term of any lease we enter under these arrangements may range from two to four years. Substantially all of the remaining portion of these lines have been extended to the December 31, 2000 period. We expect our existing financing arrangements, our internal capital resources and potential external sources of funds to provide for our current equipment needs at least through the end of 2000. If we decide to expand our research and development programs beyond current expectations, our capital equipment requirements could increase, and thus we may require additional capital funding. In order to meet our anticipated future facilities needs, in 1997 we initiated a project to design and construct a new research and development facility. To accomplish this task, in February 1998 we entered into an operating lease and other related agreements with First Union National Bank and related entities in connection with such a facility. This new facility, which was substantially completed in June 1999, was constructed on a lot adjacent to our current headquarters in Baltimore, Maryland. The facility is owned by a trust affiliated with First Union National Bank and provides 73,000 square feet of research and development capacity. We anticipate that this new research and development facility, along with our current facility, will support our research, development, commercialization and administrative activities through at least the end of 2000. We began moving personnel into the facility in June 1999 and consolidated all of our operations into our current headquarters and the new facility during the third quarter. Our lease for the new facility expires in February 2005. We anticipate that the lease payments for the new facility will not exceed $1.4 million annually. The elimination of certain rental expenses associated with two other research and development facilities we recently vacated should substantially offset this cost. At the expiration of the lease term, we may purchase the property for an amount equal to: - all unamortized acquisition and construction costs, plus - all accrued but unpaid interest and similar costs that the First Union trust incurs as part of its acquisition and construction of the property. For convenience we refer to this amount as the "Termination Amount". 22 23 In the alternative, we may sell the property on behalf of the First Union trust. The First Union trust is then obligated to credit the proceeds from the sale against our repayment of the Termination Amount. If the sale proceeds are not enough to cover the entire Termination Amount, we then have to repay the shortfall so long as our total payments to the trust are not more than 83% of the Termination Amount. In addition, we may extend the lease term provided that First Union National Bank in its discretion agrees to such an extension. Under our agreements with First Union National Bank related to this new R&D facility, we are required to hold in the aggregate unrestricted cash, cash equivalents and investments of $40 million at all times during the term of the lease. This requirement is in addition to the cash collateral requirements we discuss above in this "Liquidity and Capital Resources" section. Under a loan agreement we executed with RPR in 1996, RPR has extended to us a $7.5 million line of credit to support expansion of our GLIADEL and polymer manufacturing capacity, of which $4.0 million is currently available to us. The remaining $3.5 million becomes available no earlier than 12 months nor later than 18 months following funding of the initial portion. Any principal amounts we borrow are due five years from the date borrowed. The agreement provides that loan amounts carry an interest rate equal to the lowest rate RPR pays from time to time on its most senior debt. We have not borrowed any amounts under this credit facility as of September 30, 1999. During 1998, we entered into a series of interest rate swap transactions with First Union National Bank covering $20 million in financial obligations under our lease with the First Union trust. In January 1999, we entered into additional interest rate swap agreements with First Union National Bank covering $10 million in floating rate debt. As a result, we fixed the interest rates on these financial lease obligations and debt at approximately 6% in the aggregate. In the fourth quarter of 1998, we established an unsecured, revolving line of credit for $5 million with ALLFIRST (formerly First National Bank of Maryland). Borrowings under this line of credit carry an interest rate of LIBOR plus 0.55% and are payable on demand. We may draw on the line of credit from time to time to meet our short-term working capital needs. No amounts were outstanding under this facility at September 30, 1999. We expect to need significantly greater capital to continue our research and product development programs and pre-clinical and clinical testing and to manufacture and possibly market our products. We may also need additional funds to meet our future facility expansion needs if necessary. Our capital requirements depend on a number of factors, including: - the progress of our research and development programs, - the progress of pre-clinical 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 23 24 intellectual property rights, - competing technological and market developments, - changes in our existing research relationships, - our ability to establish collaborative arrangements, - our ability to enter into licensing agreements and contractual arrangements with others, and - the progress of efforts to scale-up manufacturing processes. We believe that our existing capital resources will be sufficient to fund our activities through at least December 31, 2000. We may, however, expend these resources before that time for a number of reasons including, among others: - changes in our research, product development and commercialization plans, - other factors that increase our expenses or capital expenditures, including potential acquisitions of other companies, assets, products, drug candidates or technologies, - repurchases of our stock under any stock repurchase program, and - unanticipated capital expenditures. THE YEAR 2000 ISSUE INTRODUCTION The so-called "Year 2000 issue" results from computer programs that rely on two-digit date codes instead of four-digit date codes to indicate the year. For example, these types of computer systems, which include computer software for desktop computers, software used in scientific equipment, and software embedded in computer chips, indicate the year 1966 by the digits "66". As the year 2000 approaches, these systems will have to process information involving the year 2000 and later years. Systems that only use two-date digit codes may confuse the year 2000 with the year 1900. As a result, these computer programs may not be able to perform computations and decision-making functions correctly. This inability could also cause computer systems or other equipment to malfunction or shutdown completely. We have developed a multi-phase program to address this potential problem. It consists of the following steps: - assess those corporate systems and operations that the Year 2000 issue could adversely affect, 24 25 - fix or replace non-compliant systems and components, if any, and then - test these systems and components to ensure proper functioning. We have focused our Year 2000 compliance assessment program on four principal areas: - our internal information technology system, which includes our internal computer network and phone system, - our internal, non-information technology facilities systems, which include software embedded in: - environmental controls, - security systems, - fire protection systems, - manufacturing hardware and monitoring controls, and - public utility connections for gas, electric and telephone systems, which for convenience we refer to as "Facilities Systems", - software we use with our laboratory and other equipment, which may either be located outside of the equipment or embedded within it, and - Year 2000 compliance of those third parties which we have defined as critical to our mission, including: - our principal vendors of goods and services, including raw materials, laboratory and other equipment, - our financial institutions such as banks and investment managers, and - our corporate partners such as RPR and Amgen. For convenience, we refer to these institutions as our "Major Third Parties". ASSESSMENT AND REMEDIATION OF INTERNAL SYSTEMS During the later part of 1998 and the beginning of 1999, we conducted an inventory of the internal information technology systems, Facilities Systems, and equipment (which together make up our internal company systems) that we believe could be adversely affected by the Year 2000 issue. As of September 30, 1999, we had taken the following actions to address the Year 2000 issue: - repaired or replaced, as necessary, those internal company systems that we found not to be Year 2000 compliant, - re-tested these internal company systems to verify Year 2000 compliance, and 25 26 - engaged an independent outside consultant to review our approach to Year 2000 compliance and its conformity with industry best practices. Our information technology personnel have discussed whether our enterprise-wide software systems are Year 2000 compliant with the vendors of those systems. We have also tested those systems for Year 2000 compliance. Based on these activities, we believe that such systems are Year 2000 compliant. We will continue to stay in contact with these vendors in order to obtain any additional revisions or upgrades the vendors issue to ensure that such enterprise-wide software remains Year 2000 compliant. INQUIRIES OF THIRD PARTIES We have also been examining the Year 2000 readiness of our Major Third Parties. We consider these institutions, either together as a group or in certain cases on an individual basis, to pose the greatest Year 2000 risk to our business. Their failure to become Year 2000 compliant could: - limit our ability to obtain raw materials, equipment and supplies in a timely manner, - limit or prevent us from getting: - our cash and other financial assets, and - timely and accurate information about our financial assets, - significantly disrupt our financial transactions, and - interfere with the efforts of our corporate partners to continue their research, development and/or commercialization activities with respect to GLIADEL and the FKBP neuroimmunophilin compound technology. We have mailed Year 2000 compliance inquiry letters to, or have otherwise contacted, our Major Third Parties, to ask that they give us information about their Year 2000 compliance status, and are following up as necessary. Except for asking these third parties about their Year 2000 compliance and assessing their responses, we cannot independently verify whether these institutions are or will be Year 2000 compliant. In most cases we have limited or no ability to influence directly the Year 2000 compliance activities of these Major Third Parties. If any or all of these institutions fail to achieve substantial Year 2000 compliance, this failure could have a material adverse effect on our business, financial condition and results of operations. Furthermore, most of RPR's sales of GLIADEL are to hospitals. The failure of these hospitals, or of any of RPR's other customers for GLIADEL, to pay for their GLIADEL purchases because of a Year 2000 problem could materially and adversely affect our business. In addition, sales of GLIADEL are dependent, in part, on the availability of reimbursements from third-party healthcare payors, such as government insurance plans like Medicare and Medicaid, 26 27 and private insurance plans and managed-care plans. Again, the failure of these third-party healthcare payors to reimburse or pay for claims because of Year 2000 problems could materially and adversely affect our business. REMEDIATION COSTS As of September 30, 1999, the total costs for our Year 2000 compliance program have not been significant. Most of our costs relative to the Year 2000 issue have been internal personnel costs, which we have not tracked. We estimate that our internal and external costs did not exceed $100,000 in 1998. There were no costs incurred for the third quarter of 1999 since the major components of the program have been completed. We incurred approximately $57,400 for nine months ended 1999. Based on information currently available to us, we do not believe that the future costs associated with developing a Year 2000 compliance plan and bringing our internal computer systems into Year 2000 compliance will be material. We estimated that the total costs for our Year 2000 compliance efforts would not exceed $200,000 in the aggregate. As of September 30, 1999, we estimate that we have incurred approximately 79% of the total costs we anticipated that we would incur to address Year 2000 issues relating to our internal company systems. Further, as of September 30, 1999, we had not separately set aside funds specifically to address the Year 2000 issue, but rather are using funds allocated to our yearly information technology budget. However, as we note above, we will continue to spot check and test our internal computer systems for Year 2000 compliance problems. Depending on the actual outcome of these continuing Year 2000 compliance-testing activities, our remediation costs may be significantly greater than our current estimates. We also do not know whether the costs associated with our efforts to assess and address any Year 2000 compliance concerns regarding our Major Third Parties will be material. As we note above, with most Major Third Parties, we have little or no direct ability to influence the Year 2000 compliance efforts of these institutions. As of September 30, 1999, we had not decided to switch from any vendor because of a concern over Year 2000 compliance. We will continue to evaluate the Year 2000 readiness of our suppliers and will decide on a case-by-case basis whether to seek out alternatives. If we determine to seek out an alternative supplier in the future, we may not be able to find an adequate substitute. In certain cases, a vendor may represent the sole supplier for a good or service. DISASTER RECOVERY PLANS AND CERTAIN MITIGATING FACTORS In addition to our Year 2000 compliance activities, we have worked with an outside consulting firm to implement a comprehensive disaster recovery plan. This plan will cover a variety of areas, including the Year 2000 issue. We do not anticipate that the external costs for putting such a plan in place will exceed $125,000 in the aggregate. We currently make complete back-up copies and store off-site all of the data generated on our computer systems on a weekly basis. We also track changes to such data on a daily basis. We 27 28 believe this practice should limit the amount of computer system data that would be lost if our computer systems were to fail as a result of a Year 2000 issue or other disaster. Many of our Facilities Systems, including our environmental controls, security systems, and fire protection systems, have manual override functions. These will allow us to operate certain of our Facilities Systems even if their software malfunctions. In addition, while a single banking institution acts as custodian for most of our financial assets, we hold certain other financial assets at, and have established a $5 million line of credit with, another banking institution. This arrangement should allow us to meet our operating expenses in the short term in the event our primary banking relationship were to be interrupted because of a Year 2000 issue. With respect to GLIADEL, we maintain what we believe to be sufficient inventories of raw materials, package components and product to prevent a product supply interruption if a vendor should have a Year 2000 problem. Due to the nature of our business, even if (1) we were to fail to implement our Year 2000 compliance program successfully for our internal company systems or (2) the Year 2000 compliance provisions of our disaster recovery plan prove inadequate, we believe that these circumstances would not have a material adverse effect on our business, financial condition and results of operations over the long term. They would, however, disrupt our operations in the short-term. The failure of one or more of our Major Third Parties, particularly our banks, investment managers, corporate partners, and suppliers of key raw materials to be Year 2000 compliant could have a material adverse effect on our business, financial condition and results of operations in the short term and potentially over the long term. RISKS We have based our estimate of the costs of our Year 2000 compliance program and disaster recovery plan on the information currently available to us. We have based these estimates on a number of assumptions regarding future events. These include the continued availability of certain resources and other factors. We cannot be sure that these costs will not exceed our expectations or that the Year 2000 issue will not substantially and adversely affect our business, financial condition or results of operations. Specific factors that might cause our estimates to be incorrect include: - our ability to locate and correct all relevant computer codes, including software embedded in environmental controls and manufacturing and laboratory equipment, - the ability of the Major Third Parties to identify and resolve their own Year 2000 issues, - the availability and cost of personnel trained in the area of Year 2000 compliance, and - unforeseen or unanticipated problems that we are unable to address or can only remedy at great cost. Furthermore, our current cost estimates do not include costs that we may incur as a result of 28 29 the failure of Major Third Parties, including Amgen and RPR, to become Year 2000 compliant on a timely basis. Moreover, if a Year 2000 issue causes (1) hospitals and other of RPR's customers for GLIADEL to fail to pay for their GLIADEL purchases or (2) third-party healthcare payors to fail to reimburse claims or pay for GLIADEL, such failures could materially and adversely affect our business. Finally, our ability to continue to manufacture GLIADEL, conduct our research and product development programs, and function as a viable business enterprise depends on the continued availability of various basic infrastructure systems. These include electric power, telecommunications and transportation systems. We cannot be sure that the Year 2000 issue will not disrupt these infrastructure systems. If such disruptions were to occur in the Baltimore, Maryland metropolitan region where our manufacturing facilities and research and development laboratories are located, or in the areas in which we or our Major Third Parties conduct business, these disruptions could very well have a material adverse effect on our business, financial condition, results of operations, or business prospects. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable. 29 30 PART II. - OTHER INFORMATION Item 1. Legal Proceedings: None Item 2. Changes In Securities: In September 1999, we issued 3.36 million shares of our common stock in a private placement to certain institutional and other accredited investors. In exchange we received in the aggregate approximately $45.4 million (before deduction of related fees and expenses), which we will use for working capital and general corporate purposes. These shares were issued to these investors without registration under the Securities Act of 1933 pursuant to the exemption from registration set forth in sections 4(2). 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 - ----------- ----------- 10.58 Form of Severance Agreement 10.59 Form of Change in Control Severance Agreement 27.4 Financial Data Schedule B. Report on Form 8-K: On September 13, 1999, we filed a Current Report on Form 8-K, the sole purpose of which was to file the press release announcing the private placement described in Item 2 above. 30 31 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 15, 1999 /s/ Craig R. Smith, M.D. ------------------------------------ Craig R. Smith, M.D. Chairman of the Board, President and Chief Executive Officer Date: November 15, 1999 /s/ Andrew R. Jordan ------------------------------------ Andrew R. Jordan Senior Vice President and Chief Financial Officer (Principal Accounting Officer) 31 EX-10.58 2 FORM OF SEVERANCE AGREEMENT 1 August 10, 1999 EXHIBIT 10.58 Ms. Denise Battles 2901 Boston Street, unit 318 Baltimore, Maryland 21224 Dear Denise: Congratulations on your promotion to Vice President, Corporate Quality for Guilford Pharmaceuticals Inc. (the "Company"). As a vice president of the Company in the event your employment is terminated by the Company other than for cause, you will 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 following your promotion; 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, all of which are set forth and governed pursuant to separate standard agreements generally available to vice presidents of the Company. To acknowledge your acknowledgement and agreement to the foregoing as of the date of this letter agreement, pleas sign both copies of this letter below and return one fully executed copy to the Legal Department. You should retain the other copy for your records. Sincerely, Craig R. Smith, M.D. President & Chief Executive Officer ACKNOWLEDGED AND AGREED as of August 10, 1999 - ----------------------------------- Denise Battles EX-10.59 3 FORM OF CHANGE IN CONTROL SEVERANCE AGREEMENT 1 EXHIBIT 10.59 CHANGE IN CONTROL SEVERANCE AGREEMENT This SEVERANCE AGREEMENT (the "Agreement") is dated and effective as of August 10, 1999, between Guilford Pharmaceuticals Inc., (the "Employer"), and Denise Battles (the "Employee"), a resident of the State of Maryland. WHEREAS, the Employee serves as Vice President, Corporate Quality 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. - 1 - 2 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. (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 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. - 2 - 3 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 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 LLP 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 - 3 - 4 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, (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 - 4 - 5 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 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) - 5 - 6 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 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 - 6 - 7 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. 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: - 7 - 8 If to the Employer: Guilford Pharmaceuticals Inc. 6611 Tributary Street Baltimore, Maryland 21224 Attn: Corporate Secretary Fax: 410/631-6899 If to the Employee: Ms. Denise Battles 2901 Boston Street, unit 318 Baltimore, Maryland 21224 Fax: 410-342-4637 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 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 letter agreement between the Company and the Employee, effective August 10, 1999 (a copy of the form of which agreement is attached hereto for reference purposes). - 8 - 9 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 August 10, 1999. GUILFORD PHARMACEUTICALS INC. By: -------------------------------------- Name: Craig R. Smith, M.D. Title: President and Chief Executive Officer EMPLOYEE ----------------------------------------- Name: Denise Battles - 9 - EX-27.4 4 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 43,119 101,531 1,415 0 1,368 121,973 29,333 11,355 166,934 10,667 7,146 0 0 233 148,888 166,934 3,432 13,399 1,746 40,789 0 0 514 (21,320) 0 0 0 0 0 (22,320) (1.14) (1.14) "EPS-PRIMARY" DENOTES BASIC EPS
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