<PAGE> 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 MARCH 31, 1999
--------------
COMMISSION FILE NUMBER 000-23736
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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
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(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 May 10, 1998
Common Stock, $.01 par value 19,422,752
- ---------------------------- ------------------------------
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION (UNAUDITED) Page (s)
--------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations
Three months ended March 31, 1999 and 1998 4
Consolidated Statements of Changes in
Stockholders' Equity
Three months ended March 31, 1999 5
Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-26
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 26
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
</TABLE>
<PAGE> 3
GUILFORD PHARMACEUTICALS INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, 1999
(UNAUDITED) DECEMBER 31, 1998
-------------------------- -------------------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,125 $ 8,480
Investments 88,436 103,281
Accounts receivable 1,847 1,241
Inventories 1,316 1,291
Other current assets 546 709
-------------------------- --------------------------
Total current assets 100,270 115,002
Investments - restricted 21,064 16,500
Property and equipment, net 18,297 18,790
Other assets 388 736
-------------------------- --------------------------
$ 140,019 $ 151,028
========================== ==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 2,135 $ 3,265
Current portion of long-term debt 2,159 2,159
Accrued payroll related costs 2,148 2,279
Accrued contracted services 3,067 2,095
Accrued expenses and other current liabilities 1,415 960
Deferred income 1,125 1,125
-------------------------- --------------------------
Total current liabilities 12,049 11,883
Long-term liabilities:
Long-term debt, net of current portion 8,227 8,766
-------------------------- --------------------------
Total liabilities 20,276 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
19,600,017 and 19,594,316 issued
at March 31, 1999 and December 31, 1998 196 196
Additional paid-in capital 187,156 187,139
Accumulated deficit (64,506) (56,009)
Accumulated other comprehensive income (loss) (221) 876
Notes receivable on common stock (60) (60)
Treasury stock, at cost: 201,122 and 77,224 at March 31, (2,596) (1,399)
1999 and December 31, 1998, respectively.
Deferred compensation (226) (364)
-------------------------- --------------------------
Total stockholders' equity 119,743 130,379
-------------------------- --------------------------
$ 140,019 $ 151,028
========================== ==========================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
GUILFORD PHARMACEUTICALS INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
--------------------------- ----------------------------
<S> <C> <C>
Revenues:
Product sales $ 1,192 $ 658
License fees and royalties 547 580
Revenues under collaborative agreements 1,137 1,144
--------------------------- ----------------------------
Total revenues 2,876 2,382
Costs and Expenses:
Cost of sales 630 339
Research and development 9,127 8,655
General and administrative 3,521 2,517
--------------------------- ----------------------------
Total costs and expenses 13,278 11,511
--------------------------- ----------------------------
Operating loss (10,402) (9,129)
Other income (expense):
Investment and other income 2,069 2,258
Interest expense (164) (203)
--------------------------- ----------------------------
Net loss $ (8,497) $ (7,074)
=========================== ============================
Basic and diluted loss per common share: $ (0.44) $ (0.36)
=========================== ============================
Average common shares outstanding 19,491 19,411
=========================== ============================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
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GUILFORD PHARMACEUTICALS INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
------------------- ADDITIONAL OTHER
NUMBER PAID-IN ACCUMULATED COMPREHENSIVE
OF SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS)
--------- ------ ------- ------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 19,594,316 $ 196 $ 187,139 $ (56,009) $ 876
Comprehensive loss:
Net loss for the period (8,497)
Unrealized loss on available-for-sale
securities (1,097)
Total comprehensive loss
Issuances of common stock 5,701 17
Purchase of 129,400 shares of common stock
Distribution of 5,502 shares of treasury stock to 401(k) plan
Stock option compensation 110
Amortization of deferred compensation
Forfeiture of unvested restricted stock (110)
----------- ----------- -------------- -------------- ---------------
Balance, March 31, 1999 19,600,017 $ 196 $ 187,156 $ (64,506) $ (221)
=========== =========== ============== ============== ===============
</TABLE>
<TABLE>
<CAPTION>
NOTE
RECEIVABLE TOTAL
ON COMMON TREASURY DEFERRED STOCKHOLDERS'
STOCK STOCK, AT COST COMPENSATION EQUITY
----- -------------- ------------ ------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 $ (60) $ (1,399) $ (364) $ 130,379
Comprehensive loss:
Net loss for the period (8,497)
Unrealized loss on available-for-sale
securities (1,097)
---------------
Total comprehensive loss $ (9,594)
---------------
Issuances of common stock 17
Purchase of 129,400 shares of common stock (1,277) (1,277)
Distribution of 5,502 shares of treasury stock to 401(k) plan 80 80
Stock option compensation 110
Amortization of deferred compensation 28 28
Forfeiture of unvested restricted stock 110 -
------------- ----------------- -------------- ---------------
Balance, March 31, 1999 $ (60) $ (2,596) $ (226) $ 119,743
============= ================= ============== ===============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 6
GUILFORD PHARMACEUTICALS INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,497) $ (7,074)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,053 824
Noncash compensation expense 138 131
Gain on sale of assets - 6
Changes in assets and liabilities:
Accounts receivable, other current assets and other assets (95) (1,125)
Inventories (25) (292)
Accounts payable (1,130) (516)
Accrued expenses and other current liabilities 1,376 780
Deferred income - 158
------------ ------------
Net cash used in operating activities (7,180) (7,108)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (560) (2,133)
Sales and maturities of investments 79,706 12,030
Purchases of investments (70,521) (15,866)
------------ ------------
Net cash (used in) provided by investing activities 8,625 (5,969)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuances of common stock 17 440
Purchase of treasury stock (1,277) (46)
Principal payments on bond and term loan payable (540) (540)
------------ ------------
Net cash used in financing activities (1,800) (146)
------------ ------------
Net decrease in cash and cash equivalents (355) (13,223)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 8,480 24,980
------------ ------------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 8,125 $ 11,757
============ ============
Supplemental disclosures of cash flow information:
Net interest paid $ 172 $ 212
Distribution of treasury stock to 401(k) plan $ 80 $ -
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
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GUILFORD PHARMACEUTICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations. These consolidated financial statements should be
read in conjunction with the audited 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 month
period ended March 31, 1999 as set forth in the Index. Interim results are not
necessarily indicative of results for the full fiscal year.
2. ACCOUNTING POLICIES
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per share ("EPS") is computed by dividing earnings
(loss) available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS is computed by increasing the
weighted-average number of shares outstanding for the period by the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. Potential common shares are excluded if
the effect on earnings (loss) per share is antidilutive.
The following table sets forth the computation of the Company's basic and
diluted net earnings (loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998
------------------------------------------
<S> <C> <C>
Net loss $ (8,497) $ (7,074)
----------------------- ------------------
Weighted-average shares outstanding 19,491 19,411
Dilutive incremental shares assumed to be outstanding
related to stock options, warrants and put options - -
----------------------- ------------------
Weighted-average shares and assumed conversions 19,491 19,411
----------------------- ------------------
Basic and Diluted (loss) per share $ ( .44) $ ( .36)
======================= ==================
</TABLE>
7
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVENTORIES
Inventories at March 31, 1999 and December 31, 1998 consist of the
following:
<TABLE>
<CAPTION>
1999 1998
-------- ----
(in thousands)
<S> <C> <C>
Raw materials $222 $ 283
Work in process 606 371
Finished goods 488 637
------ ------
$1,316 $1,291
====== ======
</TABLE>
Inventories are net of applicable reserves and allowances. Inventories
include products and materials that may be either available for sale and/or
production or utilized 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
<PAGE> 9
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,
- our efforts in conjunction with RPR to increase end-user sales of
GLIADEL (R) Wafer,
- our efforts in conjunction with RPR to expand the labeled uses for
GLIADEL (R) Wafer,
- our efforts to develop polymer product line extensions,
- conducting and completing research programs related to our FKBP
neuroimmunophilin ligand, 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 (R) Wafer) and our
pharmaceutical product candidates (including NIL-A and any other
lead compounds in our FKBP neuroimmunophilin ligand program, any
lead compounds in our NAALADase and PARP programs, and DOPASCAN(R)
Injection),
- our strategic plans,
- anticipated expenditures and the potential need for additional
funds, and
9
<PAGE> 10
- 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 the section entitled "Risk
Factors" in our Annual Report on Form 10-K for the year ended December 31, 1998.
For convenience we refer to this document as the "1998 Form 10-K" in the
discussion set forth below. In addition, any forward-looking statement made 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 the date of this document.
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.
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 financial statements present the results of our
operations for the first quarter of 1999 and 1998 as well as our financial
position at March 31, 1999 and December 31, 1998. In Management's Discussion and
Analysis, we analyze and explain the annual changes in the specific line items
set forth in the section of our Consolidated Financial Statements entitled
"Consolidated Statements of Operations". Our analysis may be important to you in
making decisions about your investment in Guilford.
You will notice some changes in this year's discussion compared to past
years. In 1998 the SEC adopted new rules requiring public companies like
Guilford to write certain documents in
10
<PAGE> 11
plain English. Even though the Commission 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, and
- therapeutic and diagnostic products for neurological diseases and
conditions.
In February 1997, we commercially launched our first product, GLIADEL(R)
Wafer, in the United States through RPR. GLIADEL is a proprietary polymer
product for the treatment of certain types of brain cancer. This product
degrades 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, initially for the targeted and controlled delivery of
drugs for cancer.
In addition, in the first quarter of 1999 we accelerated research and
development activities with respect to certain of these technologies.
We anticipate that our future revenues will come primarily from the
following sources:
- sales of those products we manufacture to our marketing partners,
which currently consists of sales of GLIADEL to our marketing
partners. We sometimes refer to these amounts as "transfer
payments",
- royalties from our marketing partners related to their sales of
products to third parties, such as RPR's sales of GLIADEL to
hospitals, and any sales of 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., 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 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.
11
<PAGE> 12
Since the commercial launch of GLIADEL in the United States in February
1997 through March 31, 1999, we have recognized an aggregate of $15.5 million in
product sales and royalties. Of this amount, $10.8 million represent revenues
from sales of GLIADEL to both RPR and Orion Corporation Pharma. The additional
$4.7 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 $35 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.
As we discuss below and in greater detail in the 1998 Form 10-K, 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 U.S. and international regulatory filings and
obtaining clearances to market GLIADEL pursuant to such filings,
- obtaining authorization from the FDA to expand the description of
the clinical uses for GLIADEL that we can put on the label for that
product, 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.
12
<PAGE> 13
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. As of March 31, 1999, we had
recognized an aggregate of approximately $6.8 million in research support from
Amgen under this arrangement. Amgen also has the option to fund a fourth year of
research, or under certain conditions, to terminate the research program after
two years.
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., 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 result from our collaboration. So long as
it funds two years of research, Amgen may elect at any time to discontinue all
development and commercialization for the FKBP neuroimmunophilin compound
technology.
As we discuss below and in greater detail in the 1998 Form 10-K, 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 in 1999 through March 31, 1999 consist of approximately
$1.1 million in research payments from Amgen. As we describe above, we expect
Amgen to pay us an additional $3.4 million in 1999 to support our research on
the FKBP neuroimmunophilin ligand technology.
With the sole exception of 1996, we have not earned an operating profit
in any year since our inception in July 1993. Our operating profit in 1996 was
$5.1 million. This operating profit was primarily due to two, one-time rights
payments from RPR which totaled $27.5 million:
- a $7.5 million payment in June 1996 upon the signing of our
agreements with RPR for the sales, marketing and distribution of
GLIADEL, and
- a $20 million payment following FDA approval of the New Drug
Application to market GLIADEL in September 1996.
For the three months ended March 31, 1999, we incurred a net loss of
$8.5 million. Since inception through March 31, 1999, we had an accumulated
deficit of $64.5 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
have fluctuated significantly in the past because of the nature of their
sources. We expect fluctuations in our revenues to continue, and thus our
operating results should also vary significantly from quarter-to-quarter and
year-to-
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<PAGE> 14
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 patents on our inventions, and
- 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 as we conduct our research and product development activities. These
areas include research and product development, pre-clinical testing, human
clinical trials, regulatory affairs, operations, manufacturing and general and
administrative activities.
The number of our employees has grown significantly since inception. At
March 31, 1999, we had 222 full-time employees. This compares to 195 full-time
employees at March 31, 1998. Our ability to achieve consistent profitability in
the future will depend on many factors, including:
- the level of future sales of GLIADEL,
- our ability, either alone or with others, to develop our product
candidates successfully, including NIL-A and any other product
candidates identified pursuant to our collaboration with Amgen,
- the extent of any human clinical trials necessary to develop our
product candidates,
- 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 products
successfully, and
- our ability to enter into acceptable collaborative arrangements for
our technologies and license agreements for new technologies of
others in the future.
For a discussion of these and other risks, you should read the "Risk
Factors" section of the 1998 Form 10-K, particularly those paragraphs
specifically addressing the risks we note above.
14
<PAGE> 15
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, including approvals in France and/or Canada to 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 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 1998 Form
10-K, 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
never earn any of the milestone payments 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 is subject to significant risks and
uncertainty. These risks involve those relating to, among other things: (1)
selection of an appropriate lead compound, (2) successful completion of the
pre-clinical and clinical development activities, (3) the need to obtain
regulatory clearances to market and sell drug products, (4) formulation of final
product dosage forms, (5) scale-up from bench quantities to commercial
quantities, (5) manufacture of drug products, and (6) commercialization of such
products as well as (7) 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 1998 Form
10-K.
RESULTS OF OPERATIONS
In this section we discuss our revenues, costs and expenses, and other
income and expenses for the three month periods ended March 31, 1999 and 1998 as
well as the factors affecting each of them.
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
For the three month periods ended March 31, 1999 and 1998, we recognized
revenues of $2.9 million and $2.4 million, respectively. Our revenues for the
first quarter of 1999 and 1998 consisted primarily of revenues from product
sales and royalties relating to GLIADEL and $1.1 million in quarterly research
funding from Amgen.
Revenues from the sale and distribution of GLIADEL consist primarily of:
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<PAGE> 16
- 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.
Revenues from GLIADEL Sales
RPR and Orion Corporation Pharma made $1.2 million in payments to us in
the first quarter of 1999 for the purchase of GLIADEL compared to $658,000 in
1998. This represents an 81% increase in products sales in the 1999 period as
compared to the same period in 1998.
Our net royalty revenue on RPR's sales of GLIADEL to third parties
increased to $547,000 in the first quarter of 1999 as compared to $530,000 in
the first quarter of 1998. This represents a 3.2% increase in net royalty
revenue in the 1999 period as compared to the same period in 1998. An increase
in the number of units sold by RPR to third parties caused the increase in
royalty revenue during the 1999 period. We believe RPR's sales of GLIADEL to
third parties increased in 1999 period primarily because:
- awareness about GLIADEL has increased among neurosurgeons, the
physician group that uses GLIADEL and makes treatment
recommendations to brain cancer patients, and
- neurosurgeons have gained familiarity and experience in using
GLIADEL.
As we discuss in greater detail in the 1998 Form 10-K, a number of factors
subject our future sales of GLIADEL to significant risk and uncertainty. We
cannot be sure 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 March 31, 1999 and 1998 were
$630,000 and $339,000, respectively. The increase in the cost of sales for the
first quarter of 1999 compared to the corresponding period in 1998 primarily
reflects an increase in the number of units of GLIADEL sold to our marketing
partners in the 1999 period. In the first quarter of 1999, cost of product sales
represented 53% of total product sales revenues compared to 52% in the first
quarter of 1998. Cost of sales is subject to volatility based on production
volumes.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses increased to $9.1 million for the
first quarter of 1999. This amount was $8.7 million in the first quarter of
1998. The increase in research and development expenses of $472,000 from the
first quarter of 1998 to the first quarter of 1999 was primarily attributable
to increased costs related to:
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- increased personnel costs, and
- outside services such as contracted research and consulting services
The increase in our research and development expenses for the first
quarter of 1999 was partially offset by a decrease in certain costs we incurred
in the first quarter of 1998 that were not repeated in first quarter of 1999,
including a payment to a university licensor expensed in the first quarter of
1998 relating to certain neuroimmunophilin ligand technology.
At March 31, 1999, we employed 189 individuals on a full-time basis in
the areas of research, development and manufacturing. We employed 168
individuals in these areas at March 31, 1998.
In the first quarter of 1999, we continued to increase our research and
product development efforts generally, particularly with respect to our
NAALADase inhibitor, 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 first quarter 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 $110,000 for both periods, and
- cash compensation expense of $67,500 and $62,000, 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 $640,000, in total, of non-cash compensation charges
in our research and development expenses quarterly through 2001 because of these
agreements. We also anticipate that our research and development expenses will
continue to increase in future periods.
GENERAL AND ADMINISTRATIVE EXPENSES
Our general and administrative expenses increased to $3.5 million in
first quarter of 1999. This amount was $2.5 million in the first quarter of
1998. We attribute the increase in general and administrative expenses of $1.0
million from the first quarter of 1998 to the first quarter 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 March 31, 1999 and 1998,
we employed 33 individuals and 30 individuals, respectively, on a full-time
basis in general and administrative areas. Our general and administrative
expenses, particularly those related to patenting and other activities related
to establishment, preservation and enforcement of our intellectual property
rights, may continue to increase in future periods depending upon the level of
activity in these areas.
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OTHER INCOME AND EXPENSE
Other income and expense consists primarily of interest income on our
monetary investments and interest expense on our debt and other financial
obligations. Our interest income decreased to $2.1 million in the first quarter
of 1999 compared to $2.3 million in the first quarter of 1998. The decrease
between these periods was primarily due to a decrease in the average investment
balance during the first quarter of 1999 as compared to the first quarter of
1998.
For the first quarter of 1999 and 1998, we incurred interest expense of
$164,000 and $203,000, respectively. These interest charges resulted from loans
we have with First Union National Bank. These loans have helped fund the
construction of our manufacturing, administrative, and research and development
facilities and the purchase of certain furniture and equipment. Because we
continue to repay these loans, interest expense decreased during the first
quarter of 1999 as compared to the same period in 1998, resulting in a lower
average principal balance during the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and investments were approximately $117.6
million at March 31, 1999. Of this amount, we pledged $21.1 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 of $4.6 million in the amount of restricted investments at
March 31, 1999 as compared to December 31, 1998 resulted from an increase during
the first quarter 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, our cash
collateral requirements will be reduced by up to approximately $5 million.
In 1998, the 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 March 31, 1999, we had repurchased a total 161,500 of our
shares under this program for an aggregate of $1.8 million. Of this amount, we
purchased 129,400 of our shares for a total of $1.2 million during the first
quarter of 1999.
Our total debt decreased to $10.4 million at March 31, 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.
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We incurred net capital expenditures of $560,000 in the first quarter of
1999 compared to net capital expenditures of $2.1 million for the first quarter
of 1998. We used these capital expenditures in the first quarter of 1999 to
purchase certain laboratory and computer equipment. We used the amounts we spent
in the first quarter of 1998 to fund the construction of our new GLIADEL and
biodegradable polymer manufacturing facilities. We also used these monies to
fund improvements to our research and development laboratories and
administrative offices and to purchase research and development equipment.
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 March
31, 1999, we had leased a total of $4.2 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. At March 31, 1999, $6.6 million was available under these
arrangements to lease additional equipment. In addition, at March 31, 1999, we
had leased an additional $3.5 million in equipment under a prior lease
arrangement.
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 until the end of 1999. 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 in connection with such a facility. This new
facility is being constructed on a lot adjacent to our current headquarters in
Baltimore, Maryland and will provide an additional 73,000 square feet of R&D
capacity. We anticipate that this new R&D facility, along with our current
facility, will support our research, development, commercialization and
administrative activities until at least the end of 2000.
We anticipate that we will be able to move into the facility prior to the
end of the second quarter of 1999 and expect to consolidate all of our
operations into our current headquarters and the new facility in 1999. Our lease
to the new facility expires in February 2005. We anticipate that the lease
payments for this facility will not exceed $1.5 million annually. Reducing
current rental commitments for other R&D facilities, which will be consolidated
as a result of the new facility, will offset much of 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 trust
which is the owner of the facility incurs as part of its
acquisition and construction of the property.
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For convenience we refer to this amount as the "Termination Amount".
In the alternative, we may sell the property on behalf of such trust. The
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 do not exceed 83% of the Termination Amount.
In addition, we may extend the lease term, but only if First Union National Bank
in its discretion agrees to such an extension.
Under our agreements with First Union National Bank related to this new
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.
RPR has extended to us a $7.5 million line of credit to support expansion
of our GLIADEL and polymer manufacturing capacity. As of January 2, 1997, $4.0
million was 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. These amounts will carry an interest rate equal to the lowest rate RPR
pays from time to time on its most senior debt. We had not borrowed any amounts
under this credit facility as of March 31, 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 National Bank 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. 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 March 31, 1999.
We expect to need much more money 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,
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- the cost of filing, prosecuting, defending and enforcing any
patent claims and other 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 resources will be sufficient to fund our
activities until 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 or
technologies,
- repurchases of our stock under our ongoing 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,
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- 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 purposes, we refer to these institutions as our "Major
Third Parties".
ASSESSMENT AND REMEDIATION OF INTERNAL SYSTEMS
During the past six months, 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. We are currently taking the following
actions to address the Year 2000 issue:
- repair or replace, as necessary, those internal company systems
that we find not to be Year 2000 compliant,
- re-test these internal company systems to verify Year 2000
compliance, and
- engaged an independent outside consultant to review our approach
to Year 2000 compliance and its conformity with industry best
practices.
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We believe that we will complete these actions no later than June 30, 1999,
but expect to continue to test our systems intermittently through the end of
1999.
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 are also 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 (which consist of approximately 20
institutions), 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, and private
insurance plans. Again, the failure of these third-party healthcare payors to
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reimburse claims because of Year 2000 problems could materially and adversely
affect our business.
REMEDIATION COSTS
As of March 31, 1999, the total costs for our Year 2000 compliance program
have not been significant. Because most of our costs relative to the Year 2000
issue are internal personnel costs, we have not tracked these costs. We estimate
that our costs did not exceed $100,000 in 1998, and that such costs for the
first quarter of 1999 were approximately $25,000. We did not incur any external
costs during 1998 related to the Year 2000 issue and incurred $9,000 in external
costs in the first quarter of 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 estimate that the total costs will not exceed
$200,000 in the aggregate. As of March 31, 1999, we estimate that we have
incurred approximately 60% of the total costs we anticipate that we will incur
to address Year 2000 issues relating to our internal company systems. Further,
as of March 31, 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, with respect to most
of our internal computer systems, we are still conducting our Year 2000
compliance and remediation activities. Depending on the actual outcome of our
Year 2000 compliance testing activities, the 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.
Depending on the responses we get from suppliers, we will decide on a
case-by-case basis whether to seek out alternative suppliers. As of March 31,
1999, we had not ascertained whether any vendors needed to be switched because
of concerns over Year 2000 readiness. If we determine to seek out an
alternative supplier in the future because of that supplier's inability to
assure us of its Year 2000 compliance, we may not be able to find an adequate
alternative supplier. 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 are working 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
currently anticipate putting such a plan into place no later than June 30, 1999.
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 of 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 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.
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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 we primarily hold our financial assets
at a single banking institution, 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 Y2K
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. However, 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
over the long term.
RISKS
We have based our estimate of the costs of our Year 2000 compliance
program and disaster recovery plan and our expected dates for implementing these
initiatives 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 not to be correct 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 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
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customers for GLIADEL to fail to pay for their GLIADEL purchases or (2)
third-party healthcare payors to fail to reimburse claims 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 and/or the East Coast of the United States,
these disruptions could very well have a material adverse effect on our
business, financial condition, results of operations, or business prospects.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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PART II. - OTHER INFORMATION
Item 1. Legal Proceedings:
None
Item 2. Changes In Securities:
None
Item 3. Defaults in Senior Securities:
None
Item 4. Submission of Matters to a Vote of Security Holders
None in the first quarter of 1999.
Item 5. Other Information:
None
Item 6. Exhibits and Reports on Form 8-K:
A. Exhibits
Exhibit No. Description
10.52 April 1, 1999 amendment to Consulting Agreement, dated
August 1, 1993, as amended between the Company and
Solomon H. Snyder, M.D.
10.53 Amendment to Directors' Stock Option Plan.
10.54 Amendment to Form of Stock Option Agreement under the
Company's 1993 and 1998 Employee Share Option and
Restricted Share Plans
27.2 Financial Data Schedule
B. Report on Form 8-K:
None
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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: May 13, 1999 /s/ Craig R. Smith, M.D.
-------------------------------------------
Craig R. Smith, M.D.
Chairman of the Board, President and
Chief Executive Officer
Date: May 13, 1999 /s/ Andrew R. Jordan
-------------------------------------------
Andrew R. Jordan
Senior Vice President and Chief Financial Officer
(Principal Accounting Officer)
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EXHIBIT 10.52
AMENDMENT NO. 3
TO
CONSULTING AGREEMENT
THIS AMENDMENT NO. 3 ("Amendment") is effective as of April 1,
1999 ("Effective Date"), by and between Guilford Pharmaceuticals Inc., a
Delaware corporation (the "Company"), and Solomon H. Snyder, M.D., an individual
residing in the State of Maryland (the "Consultant").
WHEREAS, the Company and the Consultant are parties to a
Consulting Agreement dated September 1, 1995, as amended (the "Consulting
Agreement"), pursuant to which the Consultant has provided consulting services
to the Company; and
WHEREAS, the parties desire to extend such consulting
relationship on the terms and conditions contained herein;
NOW THEREFORE, in consideration of the foregoing, the mutual
promises of the parties hereunder, and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the Consultant and
the Company hereby agree as follows:
1. The term of the Consulting Agreement is hereby extended for
the period commencing April 1, 1999 through June 30, 1999 (the
"Third Extension").
2. In consideration of the performance of the Services by the
Consultant during the Third Extension, the Company agrees to
pay the Consultant at a rate of $14,166.67 per month, payable
in arrears.
3. Except as explicitly set forth in paragraph 2 above and in the
Consulting Agreement, Consultant shall receive no other
compensation (whether in cash, stock options or otherwise) for
his Services during the Third Extension.
4. The Consultant represents and warrants to the Company that the
Consultant is, as of the Effective Date, under no contractual
or other restriction or obligation, including agreements or
understandings with third parties, which conflicts with the
Consulting Agreement as amended hereby, the performance of his
duties under the Consulting Agreement as amended hereby, or
the other obligations of the Consultant to the Company.
5. The parties acknowledge that they may enter into a further
amendment of the Consulting Agreement or a new superseding
consulting agreement in the future, the effect of which may be
to make retroactive modifications to the terms (including
those regarding compensation) of the Consulting Agreement
and/or this Amendment.
<PAGE> 2
The foregoing notwithstanding, the parties agree that this
Amendment and the Consulting Agreement shall not be amended or
supplemented except by a written document executed and
delivered by both parties hereto. The failure on the part of
either party to enforce, or any delay in enforcing, any right,
power or remedy that such party may have under this Amendment
or the Consulting Agreement shall not constitute a waiver of
any such right, power or remedy, or release the other party
from any obligations under this Amendment or the Consulting
Agreement, except by a written document signed by the party
against whom such waiver or release is sought to be enforced.
6. Except as specifically set forth above in this Amendment, the
terms of the Consulting Agreement remain unchanged and in full
force and effect as set forth therein.
7. Capitalized terms used in this Amendment that have not been
defined herein shall have the meanings ascribed in the
Consulting Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Amendment No. 3 as of the Effective Date.
GUILFORD PHARMACEUTICALS INC.
By: /s/ Craig R. Smith, M.D.
-------------------------------------------
Name: Craig R. Smith, M.D.
Title: President and Chief Executive Officer
CONSULTANT
/s/ Solomon H. Snyder, M.D.
- ----------------------------------------------
Solomon H. Snyder, M.D.
Address: 3801 Canterbury Road, No. 1001
Baltimore, Maryland 21218
2
<PAGE> 1
EXHIBIT 10.53
AMENDMENT
TO THE DIRECTORS' STOCK OPTION PLAN
ADOPTED FEBRUARY 23, 1999 AND EFFECTIVE MARCH 1, 1995
I. Pursuant to Section 17.2 of the Guilford Pharmaceuticals Inc. Directors'
Stock Option Plan (the "Directors' Plan") vesting of the options upon
termination of service is modified by amending Section 9 of the Directors' Plan
to read as follows:
OPTION PERIOD
An Option shall be exercisable only during the Option Period.
The Option Period shall commence on the Grant Date and shall end at the close of
Business on the Expiration Date. Unless otherwise provided in the Stock Option
Agreement, the Optionee may exercise the Option only while serving as an
Eligible Director or for six months after termination of status as an Eligible
Director. Upon Optionee's termination of status as an Eligible Director, the
Optionee may (subject to the limitations on exercise set forth in Section 8,
above) exercise all or any part of the Option, but only to the extent the Option
was exercisable at the time of the termination of status as an Eligible Director
(unless the Stock Option Agreement provides otherwise) and prior to the
termination of the Option.
- 1 -
<PAGE> 1
EXHIBIT 10.54
GUILFORD PHARMACEUTICALS, INC.
1993 EMPLOYEE SHARE OPTION AND RESTRICTED SHARE PLAN
OPTION AGREEMENT
AMENDMENT
This Amendment (the "Amendment") to the Guilford Pharmaceuticals, Inc.
1993 Employee Share Option and Restricted Share Plan Option Agreement (the
"Option Agreement") is made as of ________ __, 1999 by Guilford Pharmaceuticals,
Inc. (the "Corporation") and ________________.
WHEREAS, the Corporation has adopted the 1993 Employee Share Option and
Restricted Share Plan (the "Plan");
WHEREAS, the Corporation desires to amend the Option Agreement to
provide for an extended exercise period for the Option upon the Optionee's
termination of service following retirement;
NOW, THEREFORE, the Option Agreement is hereby amended as follows:
1. EXERCISE PERIOD FOR VESTED OPTIONS FOR RETIRED EMPLOYEES FOLLOWING
TERMINATION OF SERVICE
The first sentence of SECTION 3.3 of the Option Agreement is hereby
amended and restated to read as follows:
"The Optionee may exercise the Option only while the Optionee is
employed by the Company or any "subsidiary corporation" thereof within the
meaning of Section 424(f) of the Code (a "Subsidiary") or for three months
thereafter, after which the Option shall terminate, except as provided in
Sections 3.4, 3.5, and 3.5A."
SECTION 3.4 of the Option Agreement is hereby amended and restated in
its entirety to read as follows:
"In the event of the Optionee's death either while employed by the
Company or a Subsidiary or within the period following the termination of
employment with the Company or a Subsidiary during which the Option was
exercisable pursuant to Section 3.3, 3.5 or 3.5A, the personal representative or
legatees or distributees of the Optionee's estate, as the case may be, shall
have the right (subject to the limitations on exercise set forth in Section 3.7
below) to exercise all or any part of the Option, whether or not the Option was
exercisable on the date of the Optionee's death, at any time within one (1)
1
<PAGE> 2
year after the date of the Optionee's death and prior to the termination of the
Option as set forth in Section 3.5."
SECTION 3.5A is inserted immediately following SECTION 3.5 to read as
follows:
SECTION 3.5A RETIREMENT
"If the Optionee retires from the Company or a Subsidiary following the
attainment of age 62 and (i) the Optionee has completed as least five years but
fewer than ten years of service with the Company or a Subsidiary, the Optionee
shall have the right (subject to the limitations on exercise set forth in
Section 3.7 below) to exercise all or any part of the Option, to the extent the
Option was vested upon the Optionee's retirement, for a period equal to the
shorter of (a) five (5) years following the Optionee's retirement or (b) the
remaining term of the Option, or (ii) the Optionee has completed as least ten
years of service with the Company or a Subsidiary, the Optionee shall have the
right (subject to the limitations on exercise set forth in Section 3.7 below) to
exercise all or any part of the Option, to the extent the Option was vested upon
the Optionee's retirement, for the remaining term of the Option.
SECTION 3.6 of the Option Agreement is hereby amended and restated in
its entirety to read as follows:
"The Option shall terminate upon the earlier of (i) the expiration of a
period of ten years from the Date of Grant of the Option, as set forth in
Section 1 above or (ii) three months after the Optionee's termination of
employment with the Company or a Subsidiary, unless such termination falls
within the scope of Section 3.4, 3.5, or 3.5A."
SECTION 3.7 of the Option Agreement is hereby amended and restated in
its entirety to read as follows:
"Notwithstanding the foregoing Subsections of this Section, the Option
may not be exercised, in whole or in part, to the extent additional authorized
Shares under the Plan are required to be approved under the Plan by the
stockholders of the Company unless such approval is obtained, or after ten years
following the date upon which the Option is granted, as set forth in Section 1
above, or after the occurrence of an event referred to in Section 9 below which
results in termination of the Option. In no event may the Option be exercised
for a fractional Share."
2
<PAGE> 3
2. AFFIRMATION
Except to the extent amended by this Amendment, the Option Agreement is
hereby ratified and reaffirmed in its entirety and will remain in full force and
effect as amended hereby. Any term capitalized but not defined herein which is
capitalized and defined in the Option Agreement has the same meaning herein as
in the Option Agreement.
IN WITNESS WHEREOF, the Corporation has duly executed and delivered
this Amendment, or caused this Amendment to be duly executed and delivered in
its name and on its behalf, as of the day and year first above written.
GUILFORD PHARMACEUTICALS INC.
By:
---------------------------------
Title:
------------------------------
3
<PAGE> 4
GUILFORD PHARMACEUTICALS, INC.
1998 EMPLOYEE SHARE OPTION AND RESTRICTED SHARE PLAN
OPTION AGREEMENT
AMENDMENT
This Amendment (the "Amendment") to the Guilford Pharmaceuticals, Inc.
1998 Employee Share Option and Restricted Share Plan Option Agreement (the
"Option Agreement") is made as of ________ __, 1999 by Guilford Pharmaceuticals,
Inc. (the "Corporation") and ________________.
WHEREAS, the Corporation has adopted the 1998 Employee Share Option and
Restricted Share Plan (the "Plan");
WHEREAS, the Corporation desires to amend the Option Agreement to
provide for an extended exercise period for the Option upon the Optionee's
termination of service following retirement;
NOW, THEREFORE, the Option Agreement is hereby amended as follows:
1. EXERCISE PERIOD FOR VESTED OPTIONS FOR RETIRED EMPLOYEES FOLLOWING
TERMINATION OF SERVICE
The first sentence of SECTION 3.3 of the Option Agreement is hereby
amended and restated to read as follows:
"The Optionee may exercise the Option only while the Optionee is
employed by the Company or any "subsidiary corporation" thereof within the
meaning of Section 424(f) of the Code (a "Subsidiary") or for three months
thereafter, after which the Option shall terminate, except as provided in
Sections 3.4, 3.5, and 3.5A."
SECTION 3.4 of the Option Agreement is hereby amended and restated in
its entirety to read as follows:
"In the event of the Optionee's death either while employed by the
Company or a Subsidiary or within the period following the termination of
employment with the Company or a Subsidiary during which the Option was
exercisable pursuant to Section 3.3, 3.5 or 3.5A, the personal representative or
legatees or distributees of the Optionee's estate, as the case may be, shall
have the right (subject to the limitations on exercise set forth in Section 3.7
below) to exercise all or any part of the Option, whether or not the Option was
exercisable on the date of the Optionee's death, at any time within one (1) year
after the date of the Optionee's death and prior to the termination of the
Option as set forth in Section 3.5."
4
<PAGE> 5
SECTION 3.5A is inserted immediately following SECTION 3.5 to read as
follows:
SECTION 3.5A RETIREMENT
"If the Optionee retires from the Company or a Subsidiary following the
attainment of age 62 and (i) the Optionee has completed as least five years but
fewer than ten years of service with the Company or a Subsidiary, the Optionee
shall have the right (subject to the limitations on exercise set forth in
Section 3.7 below) to exercise all or any part of the Option, to the extent the
Option was vested upon the Optionee's retirement, for a period equal to the
shorter of (a) five (5) years following the Optionee's retirement or (b) the
remaining term of the Option, or (ii) the Optionee has completed as least ten
years of service with the Company or a Subsidiary, the Optionee shall have the
right (subject to the limitations on exercise set forth in Section 3.7 below) to
exercise all or any part of the Option, to the extent the Option was vested upon
the Optionee's retirement, for the remaining term of the Option.
SECTION 3.6 of the Option Agreement is hereby amended and restated in
its entirety to read as follows:
"The Option shall terminate upon the earlier of (i) the expiration of a
period of ten years from the Date of Grant of the Option, as set forth in
Section 1 above or (ii) three months after the Optionee's termination of
employment with the Company or a Subsidiary, unless such termination falls
within the scope of Section 3.4, 3.5, or 3.5A."
SECTION 3.7 of the Option Agreement is hereby amended and restated in
its entirety to read as follows:
"Notwithstanding the foregoing Subsections of this Section, the Option
may not be exercised, in whole or in part, to the extent additional authorized
Shares under the Plan are required to be approved under the Plan by the
stockholders of the Company unless such approval is obtained, or after ten years
following the date upon which the Option is granted, as set forth in Section 1
above, or after the occurrence of an event referred to in Section 9 below which
results in termination of the Option. In no event may the Option be exercised
for a fractional Share."
5
<PAGE> 6
2. AFFIRMATION
Except to the extent amended by this Amendment, the Option Agreement is
hereby ratified and reaffirmed in its entirety and will remain in full force and
effect as amended hereby. Any term capitalized but not defined herein which is
capitalized and defined in the Option Agreement has the same meaning herein as
in the Option Agreement.
IN WITNESS WHEREOF, the Corporation has duly executed and delivered
this Amendment, or caused this Amendment to be duly executed and delivered in
its name and on its behalf, as of the day and year first above written.
GUILFORD PHARMACEUTICALS INC.
By:
---------------------------------
Title:
------------------------------
6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 8,125
<SECURITIES> 109,500
<RECEIVABLES> 1,847
<ALLOWANCES> 0
<INVENTORY> 1,316
<CURRENT-ASSETS> 100,270
<PP&E> 27,103
<DEPRECIATION> 8,806
<TOTAL-ASSETS> 140,019
<CURRENT-LIABILITIES> 12,049
<BONDS> 8,227
0
0
<COMMON> 196
<OTHER-SE> 119,547
<TOTAL-LIABILITY-AND-EQUITY> 140,019
<SALES> 1,739
<TOTAL-REVENUES> 2,876
<CGS> 630
<TOTAL-COSTS> 13,278
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 164
<INCOME-PRETAX> (8,497)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,497)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,497)
<EPS-PRIMARY> (.44)<F1>
<EPS-DILUTED> (.44)
<FN>
<F1>"EPS-PRIMARY" DENOTES BASIC EPS
</FN>
</TABLE>
