GUILFORD PHARMACEUTICALS INC - 10-Q Quarterly Report

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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, 2004

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 incorporation or organization)		(IRS Employer Identification No.)

6611 Tributary Street Baltimore, Maryland		21224 (Zip Code)
(Address of principal executive offices)

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 þ No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.


Class		Outstanding May 6, 2004

Common Stock, $.01 par value		33,951,574

Guilford Pharmaceuticals Inc.

INDEX


			Page

Part I Financial Information
	Item 1. Financial Statements			3
		Consolidated Balance Sheets		4
		Consolidated Statements of Operations		5
		Consolidated Statement of Changes in Stockholders’ Equity		6
		Consolidated Statements of Cash Flows		7
		Notes to Consolidated Financial Statements		8
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
	Item 3. Quantitative and Qualitative Disclosures About Market Risk			24
	Item 4. Controls and Procedures			25

Part II Other Information
	Item 1. Legal Proceedings			26
	Item 2. Changes in Securities and Use of Proceeds			26
	Item 3. Defaults Upon Senior Securities			26
	Item 4. Submission of Matters to a Vote of Security Holders			26
	Item 5. Other Information			26
	Item 6. Exhibits and Reports on Form 8-K			43
	Signatures			44
	Certifications			45

PART I. FINANCIAL INFORMATION


Item 1.	*Financial Statements*

The consolidated financial statements included in this report 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 accounting principles generally accepted in the United States of America, 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 the related notes included in our annual report on Form 10-K for the year ended December 31, 2003.

In the opinion of our management, any adjustments contained in the accompanying unaudited consolidated financial statements are of a normal recurring nature, necessary to present fairly our financial position, results of operations, changes in stockholders’ equity and cash flows as of and for the three-month period ended March 31, 2004. Interim results are not necessarily indicative of results for the full fiscal year.

GUILFORD PHARMACEUTICALS INC.

AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share data)


			March 31, 2004			December 31, 2003

			(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	12,071		$	29,939
	Investments, net			47,493			50,261
	Accounts receivable, net			4,453			3,460
	Inventories, net			2,824			2,504
	Prepaid expenses and other current assets			2,227			1,787

		Total current assets		69,068			87,951
Investments – restricted				21,465			21,743
Property and equipment, net				21,532			22,395
Intangible assets, net				81,074			82,796
Other assets				6,364			6,438

			$	199,503		$	221,323

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	7,161		$	8,549
	Current portion of long-term debt			3,056			3,394
	Accrued payroll related costs			1,750			4,538
	Accrued contracted services			1,735			1,909
	Accrued expenses and other current liabilities			3,903			3,590

		Total current liabilities		17,605			21,980
Long-term debt, excluding current portion				88,578			88,885
Revenue interest obligation				42,921			42,155
Other liabilities				1,390			1,103

		Total liabilities		150,494			154,123

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, 34,946,594 and 34,908,076 issued at March 31, 2004 and December 31, 2003, respectively			349			349
	Additional paid-in capital			377,294			377,168
	Accumulated deficit			(321,606	)		(303,538	)
	Accumulated other comprehensive loss			(2,023	)		(1,485	)
	Note receivable from officer			—			(85	)
	Treasury stock, at cost; 1,014,483 and 1,055,816 shares at March 31, 2004 and December 31, 2003, respectively			(5,005	)		(5,209	)

		Total stockholders’ equity		49,009			67,200

			$	199,503		$	221,323

See accompanying notes to consolidated financial statements.

GUILFORD PHARMACEUTICALS INC.

AND SUBSIDIARIES

Consolidated Statements of Operations (unaudited)

(in thousands, except per share data)



			Three Months Ended
			March 31,

			2004			2003

Revenues:
	Net product sales		$	8,727		$	3,404
	Revenues from license fees, milestones and other			201			59

		Total revenues		8,928			3,463
Costs and Expenses:
	Cost of sales			991			893
	Research and development			9,373			7,787
	Selling, general and administrative			11,747			6,511
	Intangible amortization			1,722			210

		Total costs and expenses		23,833			15,401

Operating loss				(14,905	)		(11,938	)
Other income (expense):
	Investment and other income			478			864
	Revenue interest expense			(2,335	)		—
	Interest expense			(1,306	)		(119	)

Net loss			$	(18,068	)	$	(11,193	)

Basic and diluted loss per common share:			$	(0.53	)	$	(0.37	)

Weighted-average shares outstanding to compute basic and diluted loss per share				33,921			29,916

See accompanying notes to consolidated financial statements.

GUILFORD PHARMACEUTICALS INC.

AND SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Equity

Three Months Ended March 31, 2004

(unaudited)

(in thousands, except share data)


														Accumulated
				Common Stock										Other			Note
								Additional						Comprehensive			Receivable						Total
				Number of				Paid-in			Accumulated			Income			From			Treasury			Stockholders’
				Shares		Amount		Capital			Deficit			(Loss)			Officer			Stock, at Cost			Equity

Balance, January 1, 2004					34,908,076	$	349	$	377,168		$	(303,538	)	$	(1,485	)	$	(85	)	$	(5,209	)	$	67,200

Comprehensive loss:
	Net loss											(18,068	)											(18,068	)
	Other comprehensive loss:
		Unrealized loss on interest rate swap agreements													(287	)								(287	)
		Unrealized loss on available-for-sale securities													(251	)								(251	)

			Total other comprehensive loss																					(538	)

Total comprehensive loss																							$	(18,606	)

Forgiveness of officer loan																		85						85
Issuance of common stock					38,518				171															171
Distribution of 41,333 shares of treasury stock to ESP plan									(45	)											204			159

Balance, March 31, 2004					34,946,594	$	349	$	377,294		$	(321,606	)	$	(2,023	)	$	—		$	(5,005	)	$	49,009

See accompanying notes to consolidated financial statements.

GUILFORD PHARMACEUTICALS INC.

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

(in thousands)



				Three Months Ended
				March 31,

				2004			2003

Cash Flows From Operating Activities:
	Net loss			$	(18,068	)	$	(11,193	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Realized (gains)/losses on sale of available-for-sale securities			19			(90	)
		Depreciation and amortization			3,282			1,039
		Non-cash compensation expense			85			85
		Non-cash imputed revenue interest expense			729			—
	Changes in assets and liabilities:
		Accounts receivable, net, prepaid expenses and other assets			(1,574	)		(2,119	)
		Inventories			(320	)		330
		Accounts payable and other liabilities			(4,037	)		(4,307	)

			Net cash used in operating activities		(19,884	)		(16,255	)


Cash Flows From Investing Activities:
	Purchases of property and equipment				—			(201	)
	Maturities and sales of available-for-sale securities				14,165			24,778
	Purchases of available-for-sale securities				(11,684	)		(5,826	)

			Net cash provided by investing activities		2,481			18,751


Cash Flows From Financing Activities:
	Net proceeds from issuances of common stock				171			—
	Proceeds from issuances of treasury stock				159			—
	Principal payments on debt				(795	)		(983	)

			Net cash used in financing activities		(465	)		(983	)

Net increase (decrease) in cash and cash equivalents					(17,868	)		1,513
Cash and cash equivalents at the beginning of period					29,939			14,777

Cash and cash equivalents at the end of period				$	12,071		$	16,290

Supplemental disclosures of cash flow information:
	Net interest paid			$	3,665		$	87
	Non-cash investing and financing activities:
	Capital lease obligations pursuant to leases for certain equipment			$	150		$	678

See accompanying notes to consolidated financial statements.

GUILFORD PHARMACEUTICALS INC.

Notes to Consolidated Financial Statements

March 31, 2004

(unaudited)

1. Organization and Description of Business

Guilford Pharmaceuticals Inc. (together with its subsidiaries, “Guilford” or the “Company”) is a fully integrated pharmaceutical company located in Baltimore, Maryland, engaged in the research, development and commercialization of proprietary pharmaceutical products that target the hospital and neurology markets.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the financial statements of Guilford and its subsidiaries, all of which are wholly-owned. All intercompany balances and transactions have been eliminated in consolidation.

Earnings (Loss) Per Common Share

Basic earnings (loss) per share are computed by dividing net earnings (loss) by the weighted-average number of shares outstanding for the period. The computation of diluted earnings (loss) per share is similar to basic earnings (loss) per share except that the weighted-average number of shares outstanding for the period is increased to include the number of additional 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.

Revenue Recognition/Net Product Sales

Revenue from sales of GLIADEL® Wafer (“GLIADEL®”) and AGGRASTAT® Injection (“AGGRASTAT®”) are recognized when the following four criteria are met (i) the Company has persuasive evidence that an arrangement exists, (ii) the price is fixed and determinable, (iii) title has passed, and (iv) collection is reasonably assured. The Company’s credit and exchange policy includes provisions for return of its product that (i) has expired, or (ii) was damaged in shipment.

The Company’s historical return rate is applied to its unit sales to provide an allowance for future product returns. The product return rate is periodically updated to reflect actual experience.

The primary customer for GLIADEL® is Cardinal Health Specialty Pharmaceuticals Distribution (SPD), a division of Cardinal