<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-11103
-------
CENTOCOR, INC.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2117202
- - ----------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
200 Great Valley Parkway Malvern, Pennsylvania 19355-1307
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(Address of principal executive offices) (Zip Code)
610-651-6000
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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
------- -------
Shares of Common Stock outstanding at April 30, 1994 were 50,695,459.
<PAGE>
Part I: Financial Information
Item 1: Financial Statements
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1994 1993
- - ---------------------------------------------- --------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Notes 4, 6 and 8) $ 41,862 $ 46,210
Short-term investments (Notes 4, 6 and 8) 126,254 76,662
Accounts and contracts receivable 8,304 12,078
Interest receivable 546 471
Inventory (Note 5) 15,315 13,874
Prepaid expenses 2,198 2,392
Other current assets 1,073 1,024
-------- --------
195,552 152,711
Fixed assets (Note 6):
Land and buildings 64,854 64,284
Equipment, furniture, fixtures and
improvements 81,514 78,932
-------- --------
146,368 143,216
Less accumulated depreciation (62,736) (58,533)
-------- --------
83,632 84,683
Long-term investments (Note 4) 7,365 17,156
Intangible and other assets 18,600 26,489
-------- --------
Total assets $305,149 $281,039
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT'D.)
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1994 1993
- - -------------------------------------- --------- ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,774 $ 7,133
Accrued expenses 27,081 23,127
Unearned revenues 1,213 2,690
Notes payable (Note 6) 6,383 6,186
Current portion of
long-term debt (Note 6) 20,828 20,468
--------- ---------
59,279 59,604
Long-term debt (Note 6) 238,083 238,100
Other liabilities 2,588 2,023
Minority interest 507 506
Shareholders' equity (Notes 2 and 8):
Preferred Stock, $.01 par value,
10,000 shares authorized, none issued -- --
Common Stock, $.01 par value,
100,000 shares authorized and
50,692 and 43,672 issued and
outstanding at March 31, 1994
and December 31, 1993, respectivley 507 437
Additional paid-in capital 676,671 601,138
Deficit (675,686) (625,049)
Unrealized loss on marketable
securities (1,587) (635)
Cumulative foreign currency
translation adjustments 4,787 4,915
--------- ---------
4,692 (19,194)
--------- ---------
Total liabilities and
shareholders' equity $ 305,149 $ 281,039
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------
For the three months ended March 31, 1994 1993
- - -----------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Sales $ 9,829 $11,684
Contracts (including related
party revenues of $1,652
in 1994 and $2,970 in 1993)
(Note 7) 5,444 3,294
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15,273 14,978
Costs and expenses:
Cost of sales 3,630 3,894
Research and development (including contract
revenue-related expenses of $1,572 in 1994
and $2,577 in 1993) 14,389 18,711
Marketing, general and administrative (including
contract revenue-related expenses of $343
in 1994 and $873 in 1993) 6,818 9,630
Charge for acquired research and
development (Note 8) 36,966 --
Restructuring charges (Note 11) -- 4,273
------- -------
61,803 36,508
Other income (expense):
Interest income 1,108 1,211
Interest expense (4,960) (5,021)
Minority interest and other (255) (189)
------- -------
(4,107) (3,999)
Net loss ($50,637) ($25,529)
======= =======
Net loss per share ($1.13) ($0.62)
======= =======
Weighted average number of shares
outstanding 44,783 41,265
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
For the three months ended March 31, 1994 1993
- - --------------------------------------------------------------------------------
<S> <C> <C>
Cash flows used for operating activities:
Net loss ($50,637) ($25,529)
Adjustments to reconcile net loss to net cash
used for operating activities:
Charge for acquired research and development 36,966 --
Restructuring charges -- 4,273
Net loss on long-term investments 512 --
Depreciation and amortization 5,064 7,008
Amortization of deferred income (1,738) (2,006)
Minority interest and other 1 198
Changes in assets and liabilities:
Accounts and contracts receivable 3,800 1,748
Interest receivable 55 577
Inventory (1,353) (506)
Prepaid expenses (451) (81)
Other current assets (28) (850)
Intangible and other assets (818) --
Accounts payable (3,395) 1,339
Unearned revenue 238 --
Accrued expenses and other liabilities (3,085) (4,747)
Other long-term liabilities 565 51
-------- --------
Net cash used for operating activities (14,304) (18,525)
Cash flows from investing activities:
Net sales of investments 5,534 31,891
Net purchases of fixed assets (1,391) (492)
Acquisition of Tocor II 3,991 --
-------- --------
Net cash from investing activities 8,134 31,399
Cash flows from (used for) financing activities:
Net proceeds from issuance of Common Stock 2,065 417
Reduction of long-term debt and notes payable (249) (2,014)
-------- --------
Net cash from (used for) financing activities 1,816 (1,597)
Effect of foreign currency translation 6 111
-------- --------
Net increase (decrease) in cash and cash equivalents (4,348) 11,388
Beginning cash and cash equivalents 46,210 28,496
-------- --------
Ending cash and cash equivalents $41,862 $39,884
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
Centocor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
Note 1
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles applicable to interim
periods. These financial statements do not include all disclosures required
for annual financial statements and should be read in conjunction with the
more complete disclosures contained in Centocor Inc.'s (the "Company") audited
financial statements in the Company's Annual Report on Form 10-K for the year
ended December 31, 1993.
The statements reflect, in the opinion of management, all adjustments of
a normal and recurring nature necessary to present fairly the Company's
consolidated financial position at March 31, 1994 and December 31, 1993 and
the consolidated results of operations and the consolidated cash flows for the
three months ended March 31, 1994 and 1993. The results of operations and the
cash flows for the three months ended March 31, 1994 are not necessarily
indicative of the results to be expected for the entire year.
Note 2
Commitments and Contingencies
LIQUIDITY AND CAPITAL RESOURCES
The Company's future financial condition is highly dependent upon the
reduction of the Company's rate of net cash outflows and, ultimately, upon the
achievement of significant and sustained levels of pharmaceutical product
sales. The Company will need to secure significant additional capital in the
future from collaborative arrangements with pharmaceutical companies or from
the capital markets until significant and sustained levels of pharmaceutical
sales are achieved. There can be no assurance that significant additional
capital will be available to the Company. There also can be no assurance that
the Company will materially reduce its current rate of net cash outflows or
generate significant and sustained levels of pharmaceutical product sales. The
United States Food and Drug Administration ("FDA") has not approved any of the
Company's pharmaceutical products for marketing. There can be no assurance
that FDA or other regulatory approvals of any of the Company's products will
be obtained. Failure to obtain timely FDA or other regulatory approvals of
pharmaceutical products will have a material adverse effect on the Company.
The status of the Company's major pharmaceutical products is discussed below.
The Company's ability to further reduce its current rate of net cash
outflows is also
6
<PAGE>
Centocor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
dependent upon the extent to which it can expand collaborations with
established pharmaceutical companies and achieve milestones under such
collaborative agreements. No assurance can be given that such collaborations
can be expanded or that such milestones can be achieved.
At March 31, 1994, the Company had cash, cash equivalents and investments
of $175,481,000, including equity investments of $7,365,000. During the first
quarter of 1994, the Company had negative cash flows from operations of
$14,304,000. The Company's total cash, cash equivalents and investments
increased by $35,453,000, principally as a result of the exchange offer, which
is discussed in Note 8.
Agreements covering $20,760,000 of the Company's outstanding debt
balances contain certain financial and non-financial covenants, including the
maintenance of minimum equity and cash balances and compliance with certain
financial ratios. The Company has obtained waivers of certain of such
covenants on the condition that it maintain certain investments at the lending
bank, which at March 31, 1994 totalled $20,000,000. There can be no assurance
that the Company will be able to continue to collateralize such loans and,
accordingly, the Company has classified $20,760,000 of debt as short-term.
Additionally, $6,383,000 of the Company's short-term debt is secured by
investments at the lending bank of $6,340,000. If cash flows continue to be
negative, the Company's ability to service its debt may be impaired.
STATUS OF CENTORX
The Company's therapeutic products under development include CentoRx, a
product intended to treat or prevent the formation of blood clots in the
cardiovascular system. In the first quarter of 1993, the Company completed a
randomized, double-blinded, placebo-controlled, Phase III trial in high-risk
coronary angioplasty patients that enrolled 2,099 patients at 56 medical
centers. The Company filed product license applications for CentoRx in the
United States, Canada and in several countries in Europe. There can be no
assurance that CentoRx will be approved for commercial sale in the United
States, Europe or elsewhere. During the second quarter of 1993, Eli Lilly and
Company ("Lilly") exercised its option to become the exclusive worldwide
distributor of CentoRx and the Company and Lilly amended their Sales and
Distribution Agreement to reflect such event. Pursuant to that amendment,
Lilly has assisted the Company and will continue to assist the Company in the
regulatory filings and continued development of CentoRx for various clinical
indications. A patent infringement action has recently been filed against the
Company by Genentech, Inc. ("Genentech") which involves CentoRx. See "Other
Litigation".
7
<PAGE>
Centocor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
STATUS OF PANOREX
Panorex, a product intended to treat colorectal cancer, has been tested
in a Phase III trial at six German medical centers which enrolled 189
colorectal cancer patients who were subsequently monitored for the
accumulation of five-year survival data. The Company expects to complete the
filing of an application in 1994 requesting marketing approval for Panorex in
Germany. There can be no assurance that Panorex will be approved for
commercial sale in Germany or elsewhere. During 1993, the Company and Wellcome
plc ("Wellcome") entered into an alliance agreement for the development and
marketing of certain of the Company's monoclonal antibody-based cancer
therapeutic products, including Panorex.
STATUS OF HA-1A
HA-1A is a product intended for the treatment of patients with severe
sepsis who are dying from endotoxemia. The Company has filed product license
applications in the United States, Europe, and other countries seeking
approval to market HA-1A. Regulatory approvals to market HA-1A were received
in several European countries. In April 1992, the FDA advised the Company that
there was insufficient evidence of efficacy for approval of HA-1A at that
time. In June 1992, the Company initiated a second randomized, double-blinded,
placebo-controlled, Phase III U.S. clinical trial of HA-1A in the treatment of
patients with Gram-negative bacteremia and septic shock. The Company
terminated this trial in 1993 after concluding that there was no reduction in
the mortality rate among HA-1A-treated patients who did have Gram-negative
bacteremia in comparison with placebo-treated patients in the same group. The
Company and its principal distributor of HA-1A, Lilly, also voluntarily
suspended sales and conducted a recall of the drug in Europe and elsewhere
where the drug is authorized for sale. The regulatory approvals to market HA-
1A in certain countries currently remain in effect pending the results of
further clinical trials. The Company is currently conducting a randomized,
double-blinded, placebo-controlled Phase III European clinical trial of the
efficacy of HA-1A in the treatment of patients with fulminant meningococcemia.
There can be no assurance that this trial will be successful or that any
further trials of HA-1A will be initiated or will be successful.
The Company is supplying HA-1A on a limited compassionate-use basis in
certain countries in Europe. There can be no assurance that any commercial
sales of HA-1A will resume in Europe.
SHAREHOLDER LITIGATION
On December 23, 1993, a purported class action captioned Peter Cordaro v.
Hubert J.P.
8
<PAGE>
Centocor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
Schoemaker, Stelios Papadopoulos, Marc Feldmann, David Golden, Centocor, Inc.,
and Tocor II, Inc. ("Tocor II") was filed in the Court of Common Pleas of the
Commonwealth of Pennsylvania, in and for Chester County. The complaint alleges
that the defendants breached their fiduciary duties to Tocor II Unitholders
by, among other things, making an exchange offer (as defined in Note 8, the
"Exchange Offer"), recommending acceptance of the Exchange Offer, and failing
to maximize shareholder value. The complaint sought, among other relief, an
injunction against consummation of the Exchange Offer, the establishment of a
"truly independent" special committee and financial advisor to consider the
Exchange Offer, and an award of damages (including rescissionary damages),
costs and plaintiff's counsel fees. No injunction was, in fact, sought, and
the Exchange Offer was made and consummated. The Company believes that the
allegations set forth in the complaint are without merit and intends to
vigorously defend the suit. The Company does not expect the effect, if any, of
the outcome of this litigation to be material to the Company's financial
condition.
In January 1993, purported security holders of the Company and/or Tocor
II filed complaints in the United States District Court for the Eastern
District of Pennsylvania against the Company, Tocor II, and certain present
and former directors and/or officers of the Company and/or Tocor II, and
Lilly. The cases were consolidated pursuant to an order, and a Consolidated
Class Action Complaint captioned In Re Centocor Securities Litigation II, No.
93-CV-0236 (the "Complaint") was filed in May 1993, based on alleged
violations of securities laws and alleged breaches of the named individual
defendants of fiduciary duties to Centocor. All claims against all defendants,
except the Company and two of its officers/directors, were voluntarily
dismissed when the Complaint was filed. The Complaint alleges that defendants
knowingly or recklessly omitted certain material facts and made false and
misleading statements of material facts about the Company in violation of
Sections 10(b) and 20 of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder, and also alleges violations of the common law of negligent
misrepresentation. The action has been conditionally certified as a class
action on behalf of persons who purchased common stock of the Company from
April 21, 1992 through January 15, 1993 and who were allegedly damaged
thereby. The Complaint seeks compensatory damages in unspecified amounts,
counsel fees, interest, costs of suit, and such other relief that the court
deems appropriate. Defendants answered the Complaint and denied the
allegations therein. The Company believes that the allegations set forth in
the Complaint are without merit and intends to vigorously defend the suit. The
Company does not expect the effect, if any, of the outcome of this litigation
to be material to the Company's financial condition.
OTHER LITIGATION
In October 1992, the Company was served with a complaint filed by the
Velos Group, a
9
<PAGE>
Centocor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
Maryland partnership ("Velos"), in the United States District Court for the
District of Maryland. The complaint alleges, principally, that the Company
breached certain provisions of a license agreement between Velos and the
Company pursuant to which the Company has exclusive rights to U.S. Patent No.
5,057,598, which includes claims relating to monoclonal antibodies used in
treating manifestations of Gram-negative bacterial infections. The complaint
seeks declaratory relief, monetary relief in excess of $100,000,000, and
requests that the Company place in escrow one-half of the amounts received by
the Company pursuant to its agreements with Lilly. The complaint does not seek
to terminate or rescind any of the Company's rights under the license
agreement. The Company answered the complaint and asserted affirmative
defenses and counterclaims on January 7, 1993, but the counterclaims and
certain affirmative defenses were dismissed with leave to replead on June 22,
1993. On July 28, 1993, the Court permitted plaintiff to file an amended
complaint that updated some of the claims in the original complaint but
otherwise reasserted the basic factual allegations and, with one minor
exception, relied upon the same legal theories. On August 27, 1993, the
Company filed its Answer, Affirmative Defenses and Counterclaim for Damages
and Equitable Relief (the "Amended Answer"). In the Amended Answer, the
Company again denied all of the allegations made by Velos and stated certain
affirmative defenses and counterclaims against Velos with respect to the
license agreement, based on theories of (i) failure of consideration, (ii)
fraud in the inducement, and (iii) unilateral mistake as to facts, which
mistake was induced by the fraudulent misrepresentation of Velos. On September
22, 1993, plaintiff moved to dismiss the Company's counterclaims and to strike
certain of the Company's affirmative defenses. The Company has responded to
that motion. No decision on the motion has been rendered. The Company believes
that the allegations of Velos are without merit and intends to vigorously
defend the suit. The Company does not expect the effect, if any, of the
outcome of this litigation to be material to the Company's financial
condition.
In May 1993, the Company was served with a complaint filed earlier in the
United States District Court for the Southern District of California at San
Diego. The plaintiff, who allegedly had purchased shares of Corvas
International, Inc. ("Corvas") in its initial public offering on January 30,
1992, brought suit against Corvas and certain of its directors, the Company,
and one of the Company's directors and a former director (the "Centocor
defendants"), on behalf of similarly situated investors. The complaint alleges
the defendants violated the federal securities laws by disclosing to Corvas'
investors that Centocor and Corvas had entered into a "strategic alliance" to
develop one of Corvas' products, but failing to disclose that the Company
allegedly would not be able to perform on that agreement because of events
relating to Centoxin (HA-1A). The Complaint sought to proceed as a class
action on behalf of all those who purchased Corvas common stock during the
period from January 30, 1992 through January 15, 1993. A motion to dismiss the
complaint in its entirety as to the Centocor defendants was filed in early
June 1993. Corvas and its
10
<PAGE>
Centocor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
directors had also filed a motion to dismiss. In September the Court dismissed
a number of plaintiff's claims including claims relating to the period after
April 14, 1992 and, in effect, the claim brought against the Company under
Section 10(b) of the Securities Exchange Act of 1934. As to the remaining
claims, the Court has conditionally certified a class of all purchasers of
Corvas common stock during the period January 30, 1992 through April 14, 1992.
The Company believes the allegations which remain are without merit and
intends to vigorously defend the suit. The Company does not expect the effect,
if any, of the outcome of this litigation to be material to the Company's
financial condition.
On April 21, 1994, a complaint was filed against the Company in the
United States District Court for the Northern District of California by
Genentech, charging infringement of a patent held by Genentech. The complaint
asks that the alleged infringement be enjoined preliminarily and permanently
and seeks damages and counsel fees in an unspecified amount. While the
complaint does not identify the allegedly infringing product by name, it
appears to refer to CentoRx. While the complaint has only recently been
received, and, therefore, a complete investigation has not yet been conducted,
the Company believes that its product does not infringe any valid claim of the
patent in question. Accordingly, unless the matter can be resolved amicably,
the Company expects to defend the action vigorously. The Company does not expect
the effect, if any, of the outcome of this litigation to be material to the
Company's financial condition.
PARTNERSHIPS
The Company has licensed certain technology related to CentoRx and
Capiscint to Centocor Partners III, L.P. ("CPIII") and performs research and
development with respect to such technology on CPIII's behalf. CPIII holds the
rights to the licensed technology and results of the research and development
efforts related thereto. The Company has the option to acquire such rights
through its option to purchase the limited partnership interests in CPIII. The
Company's option to purchase the limited partnership interests in CPIII is
exercisable upon the earlier of (a) each limited partner having received
distributions related to sales of the CPIII products equal to $15,000 per full
limited partnership interest and the expiration of at least 24 months after
the first commercial sale of a CPIII product or (b) the expiration of at least
48 months after the first commercial sale of a CPIII product; but, in any
event, not prior to the expiration of the then applicable long-term capital
gains holding period after the expenditure by the Company of all funds paid to
it pursuant to the Development Agreement with CPIII. There have not as yet
been any commercial sales of CPIII products. If the Company elects to exercise
its option to purchase the limited partnership interests in CPIII, the Company
must make an advance payment of approximately $13,598,000 in cash or, at the
Company's election, approximately $15,229,000 in the Company's Common Stock,
and future
11
<PAGE>
Centocor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
payments generally of six percent of sales of products developed by CPIII. If
the Company exercises its CPIII purchase option, the Company expects that it
would record a significant charge to earnings representing the purchase of in-
process research and development. See Note 3 for a discussion of the option
that Lilly has exercised to become the exclusive distributor for CentoRx, a
cardiovascular product being developed by the Company for CPIII.
The Company has entered into indemnity agreements with CPIII and the
former limited partners of Centocor Cardiovascular Imaging Partners ("CCIP")
and Centocor Partners II, L.P. ("CPII") pursuant to which the Company would be
obligated, under certain circumstances, to compensate these parties for the
fair market value of their respective interests under any license agreements
with the Company relating to their respective products which are lost through
the exercise by the United States Government of any of its rights relating to
the licensed technology. The amount of any such loss would be determined
annually by independent appraisal.
ROYALTIES
The Company is required to make certain future payments to the former
limited partners of CCIP and CPII based on sales of products developed by each
of the respective partnerships, including payments to the former limited
partners of CPII based on any sales of HA-1A. Upon any exercise by the Company
of its option to acquire the limited partnership interests in CPIII, the
Company would be required to make future payments to the former limited
partners of CPIII, including payments based on any sales of CentoRx.
The Company has entered into agreements to support research at certain
research institutions. These agreements, which grant the Company licenses
and/or options to license certain technology resulting from the research,
generally require the Company to pay royalties to such institutions on the
sales of any products that utilize the licensed technology. Further, the
Company has licenses under certain patents and pays the patent holders or
their licensees royalties on sales of products covered by such patents.
All royalties are reflected in cost of sales as incurred. Royalty costs
represent a significant percentage of sales.
12
<PAGE>
Centocor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
PRODUCT LIABILITY
The testing and marketing of medical products entails an inherent risk of
product liability. The Company maintains limited product liability insurance
coverage. Such insurance is becoming increasingly difficult and expensive to
obtain. The Company's business may be adversely affected by a successful
product liability claim in excess of its insurance coverage.
Under various contractual agreements, the Company has agreed to indemnify
third parties against certain losses, including losses arising from product
liability and patent infringement claims pertaining to the Company's products.
Note 3
Collaborative Arrangements
Relationship with Eli Lilly and Company
In July 1992, the Company and Lilly entered into various agreements
pursuant to which Lilly made certain cash payments to the Company as further
described below.
During the second quarter of 1993, Lilly exercised its option to become
the exclusive worldwide distributor of CentoRx and the Company and Lilly
amended their Sales and Distribution Agreement. As part of the amendment Lilly
has assisted the Company and will continue to assist the Company in the
regulatory filings and continued development of CentoRx for various clinical
indications. Under the Sales and Distribution Agreement, the Company is
principally responsible for developing and manufacturing HA-1A and CentoRx and
for securing regulatory approvals. Lilly is principally responsible for the
marketing, selling and distribution of HA-1A and CentoRx after regulatory
approvals. If approved, the Company will sell HA-1A and CentoRx to Lilly for
Lilly's further sale to the end market. Under certain circumstances, such as
acts of God, material breach of the agreement or bankruptcy by the Company, or
in the event the Company cannot manufacture CentoRx, Lilly has the option to
assume the manufacture of CentoRx and assure the continued supply of the
product, even to the extent of acquiring the Company's related manufacturing
assets at their independently appraised values. Lilly and the Company are
cooperating in order to maximize the commercial potential of CentoRx. See Note
2 for a discussion of the Company's option to acquire the rights to CentoRx
through its option to acquire the limited partnership interests in CPIII. As
further described in Note 2, the Company and Lilly suspended sales and
conducted a recall of HA-1A in Europe.
13
<PAGE>
Centocor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
In the first quarter of 1994, Lilly paid the Company $3.5 million for the
achievement of certain milestones related to CentoRx and may make certain
future payments based on the achievement of additional milestones. The Company
may be required to make a payment to Lilly of $60 million through December 31,
1994, or decreasing amounts through December 31, 1999, in the event of any
change in control of the Company or in the event of any governmental action or
determination which results in the Sales and Distribution Agreement not being
in full force and effect in all material respects in major jurisdictions,
excluding the United States, and the subsequent termination of the Sales and
Distribution Agreement by Lilly based solely on such events.
Relationship with Wellcome plc
In 1993, Centocor and Wellcome entered into an alliance agreement for the
development and marketing of certain of Centocor's monoclonal antibody-based
cancer therapeutic products, including Panorex. Wellcome will contribute to
the continuing clinical development of Panorex and up to six other potential
drugs and then market and sell any approved drugs in most parts of the world.
Wellcome may make certain future payments up to $70 million based on the
achievement of milestones and the acquisition of certain manufacturing
technologies.
Note 4
Cash Equivalents and Investments
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standard No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"), which establishes a new accounting principle
for the valuation and classification of investments. The adoption of SFAS 115,
which has not been applied retroactively to prior years' financial statements,
requires the Company to report an unrealized loss of $1,587,000 associated
with the equity investment portfolio as a separate component of shareholders'
equity. The Company's investments in U.S. Treasury securities and corporate
bonds which are intended to be held to maturity are carried at amortized cost.
Cash equivalents and investments consist principally of U. S. Treasury
securities and bank certificates of deposit. Short-term investments at
December 31, 1993 also include equity investments with carrying values of
$2,800,000. Long-term investments also include certain equity investments with
carrying values of $7,365,000 and $8,430,000 at March 31, 1994 and December
31, 1993, respectively.
14
<PAGE>
Centocor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
The aggregate market value of all short-term investments at March 31,
1994 and December 31, 1993 was $125,983,000 and $76,739,000, respectively. The
aggregate market value of all long-term investments at March 31, 1994 and
December 31, 1993 was $7,365,000 and $17,156,000, respectively.
The Company has agreed to maintain investments of $26,340,000 as of March
31, 1994 at certain banks as collateral for loans from those banks. See Notes 2
and 6.
Note 5
Inventory
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
--------- ------------
<S> <C> <C>
Raw materials $ 3,408 $ 3,791
Work in process 10,235 8,388
Finished goods 1,582 1,695
------- -------
$15,315 $13,874
======= =======
</TABLE>
Inventory at March 31, 1994 and December 31, 1993 includes $7,155,000 and
$5,920,000, respectively of certain pharmaceutical products for which the
Company has not yet obtained marketing approval, including certain raw
materials to be used in the production of such inventories. See Note 2.
Inventories have various expiration dates. The Company continually evaluates
the extent of inventory reserves considered necessary based upon the future
regulatory and commercial status of such products. There can be no assurance
that reserves for inventories will not be required in the future.
Note 6
Debt
Notes Payable
Notes payable at March 31, 1994 and December 31, 1993 consist of
$6,383,000 and $6,186,000, respectively, of borrowings under short-term notes
at an interest rate of 5.7 percent per
15
<PAGE>
Centocor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
annum at March 31, 1994, payable in Dutch guilders no later than September 28,
1994. These borrowings are secured by investments at the lending bank of
$6,340,000.
Long-term debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
--------- ------------
<S> <C> <C>
7-1/4 percent Notes $106,640 $106,640
6-3/4 percent Debentures 125,000 125,000
Mortgage Debt 16,133 16,134
Long-term Note 11,138 10,794
-------- --------
258,911 258,568
Current Portion (20,828) (20,468)
-------- --------
$238,083 $238,100
======== ========
</TABLE>
7-1/4 Percent Notes
On January 28, 1991, the Company issued $106,645,000 principal amount of
7-1/4 percent Convertible Subordinated Notes (the "7-1/4 percent Notes") due
February 1, 2001. The 7-1/4 percent Notes are convertible by the holders into
approximately 3,843,000 shares of the Company's Common Stock at a conversion
price of $27.75 per share at any time prior to redemption or maturity. The 7-
1/4 percent Notes are subordinated in right of payment to senior indebtedness
at March 31, 1994 of $33,654,000 and all future senior indebtedness of the
Company, and rank pari passu with the 6-3/4 percent Debentures described
below. The 7-1/4 percent Notes are redeemable by the Company for cash in whole
or in part until February 1, 2001 at amounts ranging up to 105 percent of the
principal amount of the 7-1/4 percent Notes. The Company may be required to
redeem the 7-1/4 percent Notes at their principal amount at the option of the
holders of the 7-1/4 percent Notes in certain limited circumstances, including
a change in control of the Company.
6-3/4 Percent Debentures
On October 16, 1991, the Company issued $125,000,000 principal amount of
6-3/4 percent Convertible Subordinated Debentures (the "6-3/4 percent
Debentures") due October 16, 2001. The 6-3/4 percent Debentures are
convertible by the holders into approximately 2,049,000 shares of the
16
<PAGE>
Centocor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
Company's Common Stock at a conversion price of $61.00 per share at any time
prior to redemption or maturity. The 6-3/4 percent Debentures are subordinated
in right of payment to senior indebtedness at March 31, 1994 of $33,654,000
and all future senior indebtedness of the Company, and rank pari passu with
the 7-1/4 percent Notes. The 6-3/4 percent Debentures are redeemable by the
Company for cash in whole or in part until October 16, 2001 at amounts ranging
up to 104 percent of the principal amount of the 6-3/4 percent Debentures,
provided that prior to October 16, 1994, the 6-3/4 percent Debentures may not
be redeemed unless for 30 successive trading days ending within 15 days of the
date of the redemption notice the closing price of the Company's Common Stock
as reported on the NASDAQ National Market System is at least 130 percent of
the then effective conversion price of the 6-3/4 percent Debentures. The
Company may be required to redeem the 6-3/4 percent Debentures at their
principal amount at the option of the holders of the 6-3/4 percent Debentures
in certain limited circumstances, including a change in control of the
Company.
Mortgage Debt
Mortgage loans have been used to finance a portion of the acquisition and
expansion of certain of the Company's facilities in the United States and The
Netherlands. These loans are generally secured by the related land and
buildings. In the United States, the Company has such a loan outstanding with
a balance of approximately $6,510,000 at March 31, 1994 which bears interest
at an annual rate of 10 percent through its maturity date of May 1, 1995. A
Netherlands loan, with an outstanding balance of approximately $5,572,000 at
March 31, 1994, is payable in Dutch guilders, bears interest at an annual rate
of 8-1/4 percent through its final maturity date of September 30, 2011, and is
secured by certain equipment, inventories, and accounts receivable. At March
31, 1994, this loan is classified as short-term (see "Loan Covenants").
Long-term Note
The Company borrowed $11,138,000 under a 9-1/2 percent long-term note
which is payable in Dutch guilders. This loan is secured by the same assets as
the Netherlands loan discussed above. At March 31, 1994, this loan is
classified as short-term (see "Loan Covenants").
Loan Covenants
Agreements covering $20,760,000 of the Company's outstanding debt
balances contain certain financial and non-financial covenants, including the
maintenance of minimum equity and cash balances and compliance with certain
financial ratios. The Company has obtained waivers of certain
17
<PAGE>
Centocor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
of such covenants on the condition that it maintains certain investments at
the lending bank, which at March 31, 1994 totalled $20,000,000. There can be
no assurance that the Company will be able to continue to collateralize such
loans and, accordingly, the Company has classified $20,760,000 of debt as
short-term. Additionally, $6,383,000 of the Company's short-term debt is
secured by investments at the lending bank of $6,340,000. If cash flows
continue to be negative, the Company's ability to service its debt may be
impaired.
Note 7
Contract Revenues
Lilly Related
-------------
For the three months ended March 31, 1994, the Company recognized
$3,500,000 of revenues pursuant to the Company's agreements with Lilly as
further described in Note 3.
Related Party Research & Development
------------------------------------
During 1994 and 1993, the Company conducted research and development
under contract with Tocor II. Under the contract, the Company received
reimbursement of its costs plus a management fee and recorded revenue of
$1,652,000 and $2,970,000 for the three months ended March 31, 1994 and 1993,
respectively. Such revenues were recorded net of amortization of deferred
costs resulting from the issuance of warrants to Tocor II Unitholders. See
Note 8 for a discussion of an exchange offer which resulted in the termination
of the Tocor II research and development contract and services agreement.
Note 8
Charge for Acquired Research and Development
In February 1994, the Company initiated an Exchange Offer pursuant to
which the Company offered to exchange 3.2 shares of its Common Stock for each
of the 2,250,000 outstanding Tocor II Units tendered. Each Unit consisted of
one share of callable common stock of Tocor II, one callable warrant to
purchase one share of Centocor Common Stock and one Series T warrant to
purchase one share of Centocor Common Stock (the "Warrants"). The Exchange
Offer expired at the close of business on March 11, 1994, at which time the
Company accepted all of the 94 percent of the Tocor II Units tendered in
exchange for approximately 6,793,000 shares of its Common Stock, thereby
increasing shareholders equity by $81,607,000. The transaction was accounted
for as a purchase and the Company allocated the excess of the consideration
paid over the net assets of Tocor II to the value of the acquired research and
development. The Company recorded a charge to earnings in the first quarter of
1994 of approximately $36,966,000 representing principally the cost allocated
to the acquired research and development. In connection with the transaction,
the Company acquired $50,124,000 of cash and Warrants with a value of
$8,492,000 which were retired. The unaudited comparative statement of
operations data excluding the charge for
18
<PAGE>
Centocor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
acquired research and development, assuming the Exchange Offer was consummated
as of January 1, 1993, would have been as follows:
<TABLE>
<CAPTION>
For the three months For the three months
Statement of Operations Data ended March 31, 1994 ended March 31, 1993
---------------------------- -------------------- --------------------
<S> <C> <C>
Revenues $ 13,621 $ 12,008
Loss $(14,942) $(27,917)
Loss per share $ (0.29) $ (0.58)
</TABLE>
Effective March 30, 1994, the Company acquired the remaining shares of
Tocor II callable common stock through a merger of Tocor II into a wholly-
owned subsidiary of the Company. Each share of Tocor II callable common stock
acquired by the Company in the merger transaction is convertible into 2.88
shares of the Company's Common Stock. If all of the remaining shares of Tocor
II callable common stock are so converted, the Company would be obligated to
issue approximately 355,000 shares of its Common Stock. Warrants not tendered
as part of Units in the Exchange Offer remain outstanding.
Note 9
Income Taxes
The Company recorded a charge for acquired research and development of
$36,966,000 in 1994 which is not fully deductible for tax purposes in the year
incurred. The ultimate amount and timing of the deductions related to this
charge is uncertain; however, the Company believes that a portion of the
charge may be deductible for tax purposes over the estimated useful life of
the related technology acquired.
At March 31, 1994, the tax effect of the Company's federal net tax
operating loss carryforwards was $125,066,000 with expiration dates ranging
from 2005 to 2009. Additionally, at March 31, 1994, the Company had research
and development tax credits of $3,576,000 with expiration dates ranging from
1999 to 2002. Further, the tax effect of inventory reserves that are not
currently deductible at March 31, 1994 were $20,376,000. Realization of net
deferred tax assets related to these items is dependent on future earnings,
which are uncertain. Accordingly, a valuation reserve was recorded by the
Company and, therefore, the Company has no net deferred tax assets at March
31, 1994.
Note 10
Supplemental Information on Cash Flows
Interest paid for the three months ended March 31, 1994 and 1993 was
$4,831,000 and $5,139,000, respectively.
Cash used for the purchases of investments as well as the cash received
upon the maturities
19
<PAGE>
Centocor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
and sales of investments were as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended March 31, 1994 1993
-------- --------
<S> <C> <C>
Purchases $(22,786) $(30,809)
Maturities and sales 28,320 62,700
-------- --------
$ 5,534 $ 31,891
======== ========
</TABLE>
During 1994, the Company issued 6,793,000 shares of Common Stock,
resulting in a noncash increase to additional paid-in capital of $22,991,000
in connection with an exchange offer more fully described in Note 8.
During the first quarter of 1994, the Company acquired cash and short-
term investments of $50,124,000 in connection with an exchange offer more
fully described in Note 8.
Note 11
Restructuring Charges
During the first quarter of 1993, the Company recorded a restructuring
charge of $4,273,000, principally related to reserves for certain fixed assets
which were subsequently disposed. As a result of the downsizing of the
Company's staff and present level of operations, the Company currently
maintains idle facilities and equipment. The Company continually evaluates the
future needs for its facilities and equipment. There can be no assurance that
reserves to further reduce the carrying value of certain fixed assets will not
be required in the future.
20
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations.
- - --------------------------------------------------------------------------------
Financial Condition
LIQUIDITY AND CAPITAL RESOURCES
The Company's future financial condition is highly dependent upon the
reduction of the Company's rate of net cash outflows and, ultimately, upon the
achievement of significant and sustained levels of pharmaceutical product
sales. The Company will need to secure significant additional capital in the
future from collaborative arrangements with pharmaceutical companies or from
the capital markets until significant and sustained levels of pharmaceutical
sales are achieved. There can be no assurance that significant additional
capital will be available to the Company. There also can be no assurance that
the Company will materially reduce its current rate of net cash outflows or
generate significant and sustained levels of pharmaceutical product sales. The
United States Food and Drug Administration ("FDA") has not approved any of the
Company's pharmaceutical products for marketing. There can be no assurance
that FDA or other regulatory approvals of any of the Company's products will
be obtained. Failure to obtain timely FDA or other regulatory approvals of
pharmaceutical products will have a material adverse effect on the Company.
The status of the Company's major pharmaceutical products is discussed below.
The Company's ability to further reduce its current rate of net cash
outflows is also dependent upon the extent to which it can expand
collaborations with established pharmaceutical companies and achieve
milestones under such collaborative agreements. No assurance can be given that
such collaborations can be expanded or that such milestones can be achieved.
At March 31, 1994, the Company had cash, cash equivalents and investments
of $175,481,000, including equity investments of $7,365,000. During the first
quarter of 1994, the Company had negative cash flows from operations of
$14,304,000. The Company's total cash, cash equivalents and investments
increased by $35,453,000, principally as a result of the exchange offer, which
is discussed in Note 8 to the Company's Consolidated Financial Statements.
Agreements covering $20,760,000 of the Company's outstanding debt
balances contain certain financial and non-financial covenants, including the
maintenance of minimum equity and cash balances and compliance with certain
financial ratios. The Company has obtained waivers of certain of such
covenants on the condition that it maintain certain investments at the lending
bank, which at March 31, 1994 totalled $20,000,000. There can be no assurance
that the Company will be able to continue to collateralize such loans and,
accordingly, the Company has classified $20,760,000 of debt as short-term.
Additionally, $6,383,000 of the Company's short-term debt is secured by
investments at the lending bank of $6,340,000. If cash flows continue to be
negative, the Company's ability to service its debt may be impaired.
21
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations.
- - --------------------------------------------------------------------------------
See Note 2 to the Company's Consolidated Financial Statements for a
discussion of litigation and other factors which may effect the Company's
future liquidity and capital resources.
STATUS OF CENTORX
The Company's therapeutic products under development include CentoRx, a
product intended to treat or prevent the formation of blood clots in the
cardiovascular system. In the first quarter of 1993, the Company completed a
randomized, double-blinded, placebo-controlled, Phase III trial in high-risk
coronary angioplasty patients that enrolled 2,099 patients at 56 medical
centers. The Company filed product license applications for CentoRx in the
United States, Canada and in several countries in Europe. There can be no
assurance that CentoRx will be approved for commercial sale in the United
States, Europe or elsewhere. During the second quarter of 1993, Eli Lilly and
Company ("Lilly") exercised its option to become the exclusive worldwide
distributor of CentoRx and the Company and Lilly amended their Sales and
Distribution Agreement to reflect such event. Pursuant to that amendment,
Lilly has assisted the Company and will continue to assist the Company in the
regulatory filings and continued development of CentoRx for various clinical
indications. A patent infringement action has recently been filed against the
Company by Genentech, Inc. ("Genentech") which involves CentoRx. See Note 2 to
the Company's Consolidated Financial Statements.
STATUS OF PANOREX
Panorex, a product intended to treat colorectal cancer, has been tested
in a Phase III trial at six German medical centers which enrolled 189
colorectal cancer patients who were subsequently monitored for the
accumulation of five-year survival data. The Company expects to complete the
filing of an application in 1994 requesting marketing approval for Panorex in
Germany. There can be no assurance that Panorex will be approved for
commercial sale in Germany or elsewhere. During 1993, the Company and Wellcome
plc ("Wellcome") entered into an alliance agreement for the development and
marketing of certain of the Company's monoclonal antibody-based cancer
therapeutic products, including Panorex.
STATUS OF HA-1A
HA-1A is a product intended for the treatment of patients with severe
sepsis who are dying from endotoxemia. The Company has filed product license
applications in the United States, Europe, and other countries seeking
approval to market HA-1A. Regulatory approvals to market HA-1A were received
in several European countries. In April 1992, the FDA advised the Company that
there was insufficient evidence of efficacy for approval of HA-1A at that
time. In June 1992, the Company initiated a second randomized, double-blinded,
placebo-controlled, Phase III U.S. clinical trial of HA-1A in the treatment of
patients with Gram-negative bacteremia and septic shock. The Company
terminated this trial in 1993 after concluding that there was no reduction in
the mortality rate among HA-1A-treated patients who did have Gram-negative
bacteremia in comparison with placebo-treated patients in the same group. The
Company and its principal distributor of HA-1A, Lilly, also voluntarily
suspended sales and conducted a recall of the drug in Europe and elsewhere
where the drug is authorized for sale. The regulatory approvals to market HA-
1A in certain countries currently remain in effect pending the results of
further clinical trials. The Company is currently conducting a randomized,
double-blinded, placebo-controlled Phase III European clinical trial of the
efficacy of HA-1A in the treatment of patients with fulminant
22
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations.
- - --------------------------------------------------------------------------------
meningococcemia. There can be no assurance that this trial will be successful
or that any further trials of HA-1A will be initiated or will be successful.
The Company is supplying HA-1A on a limited compassionate-use basis in
certain countries in Europe. There can be no assurance that any commercial
sales of HA-1A will resume in Europe.
ASSETS
The increase in the aggregate amount of cash and investments at March 31,
1994 as compared to December 31, 1993 is discussed under Liquidity and Capital
Resources.
Gross fixed assets at March 31, 1994 increased as compared to December
31, 1993 principally due to upgrading of manufacturing facilities. As a result
of the downsizing of the Company's staff and present level of operations, the
Company currently maintains idle facilities and equipment. The Company
continually evaluates the future needs for its facilities and equipment. There
can be no assurance that reserves to further reduce the carrying value of
certain fixed assets will not be required in the future.
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' equity at March 31, 1994 increased as compared to December
31, 1993 principally as a result of the Exchange Offer consummated on March
11, 1994. See Note 8 to the Company's Consolidated Financial Statements.
Additionally, shareholders' equity increased by proceeds from the exercise of
options and warrants. These increases were partially offset by the Company's
first quarter loss. The extent and timing of future warrant and option
exercises, if any, are primarily dependent upon the market price of the
Company's Common Stock and general financial market conditions, as well as the
exercise prices and expiration dates of the warrants and options.
The Company expects that shareholders' equity will decrease in future
periods unless and until the Company is successful in securing additional
capital from collaborative arrangements with pharmaceutical companies or the
capital markets or significant and sustained levels of pharmaceutical product
sales are achieved. There can be no assurance that significant and sustained
levels of pharmaceutical products sales will be achieved or that any
additional capital will be available to the Company.
23
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations.
- - --------------------------------------------------------------------------------
REVENUES
Product sales have not produced sufficient revenues to cover the
Company's operating expenses. The decrease in sales for the three months ended
March 31, 1994 as compared to the year earlier period is principally due to
lower sales of certain diagnostic reagents and the discontinuance of certain
product lines.
Contract revenues for the three months ended March 31, 1994 and 1993
include $1,652,000 and $2,970,000, respectively, net of warrant amortization
costs, recognized pursuant to the Company's agreements with Tocor II. The
decrease in contract revenue is principally the result of the Exchange Offer,
which is more fully described in Note 8 to the Company's Consolidated
Financial Statements. As a result of the Exchange Offer, no further contract
revenue will be recognized in connection with the Tocor II research program.
The increase in contract revenue for the three months ended March 31, 1994
as compared to the corresponding period of the prior year is principally due
to a payment of $3,500,000 received from Lilly in connection with the
achievement of certain milestones, partially offset by the decrease in
contract revenue from TOCOR II as discussed above. The level of contract
revenues in future periods will primarily depend upon the extent to which the
Company enters into other collaborative contractual arrangements, if any, and
the achievement of milestones under current arrangements.
COSTS AND EXPENSES
Cost of sales decreased in the first quarter of 1994 as compared to 1993
due to decreased sales. The production cost per unit and, consequently, the
profit margin from sales, are highly dependent upon the antibody yields as
well as the mix of products sold. As further described in Note 2 to the
Company's Consolidated Financial Statements, the Company is required to make
certain royalty payments based on sales of products, which payments are
reflected in cost of sales. Royalty costs represent a significant percentage
of sales.
Research and development expenses decreased in the first quarter of 1994
as compared to the year earlier period due principally to a decrease in
activities associated with clinical trials of products under development.
Additionally, during the first quarter of 1994, certain resources previously
employed in research and development activities were utilized in the
production of inventory, resulting in lower period expenses. The Company
expects research and development expenses to increase in the remaining
quarters of 1994 as compared to the first quarter of 1994 as the Company
expands clinical trials of products under development.
Marketing, general and administrative expenses for the three months ended
March 31, 1994 decreased as compared to the year earlier period due
principally to reductions in sales and administrative staffs, and marketing
costs.
24
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations.
- - --------------------------------------------------------------------------------
OTHER INCOME AND EXPENSE
Interest income decreased in the first quarter of 1994 as compared to the
year earlier period due principally to a reduction in the Company's cash and
investment balances and reduced interest rates on investments during the 1994
period. Interest income in future periods will depend primarily on the level
of the Company's investments and the interest rates obtained on such
investments.
PER SHARE CALCULATIONS
At March 31, 1994, approximately 14,120,000 shares of the Company's
Common Stock were issuable upon exercise of outstanding options and warrants
and upon vesting of restricted stock awards. Options, warrants, and stock
awards are considered Common Stock equivalents for purposes of per share data.
The Company uses the modified treasury stock method of calculating per share
data since the number of shares of the Company's Common Stock issuable upon
the exercise of Common Stock equivalents is in excess of 20 percent of the
Company's outstanding Common Stock. Under the modified treasury stock method,
the effect of Common Stock issuable upon the exercise of Common Stock
equivalents is reflected in the per share data calculation only if the
aggregate effect would be dilutive. The 3,843,000 shares issuable upon
conversion of the 7-1/4 percent Notes and the 2,049,000 shares issuable upon
conversion of the 6-3/4 percent Debentures are not considered Common Stock
equivalents and are not included in the calculation of primary per share data
but are included in the calculation of fully diluted per share data if their
effect is dilutive.
No Common Stock equivalents or shares issuable upon conversion of the 7-
1/4 percent Notes and 6-3/4 percent Debentures were included in the per share
calculations for any periods presented since to do so would have been
antidilutive as the Company has recorded net losses in all periods presented.
In future periods, depending upon the market value of the Company's Common
Stock and its results of operations for such periods, the Company may be
required to include its then outstanding Common Stock equivalents as well as
shares issuable upon the conversion of the 7-1/4 percent Notes and the 6-3/4
percent Debentures in its calculations of per share data for such periods if
the effect would be dilutive.
25
<PAGE>
Part II OTHER INFORMATION
Item 1: Legal Proceedings
See Note 2 to the Company's Consolidated Financial Statements, which is
incorporated herein by reference.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
--------
None.
(b) Reports on Form 8-K
-------------------
The Registrant has filed the following reports on Form 8-K since
the beginning of the quarter ended March 31, 1994:
Date of Report Items Covered
-------------- -------------
December 16, 1993 5, 7
December 23, 1993 5, 7
March 11, 1994 2, 7
April 21, 1994 5, 7
26
<PAGE>
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.
Centocor, Inc.
(Registrant)
Date: May 13, 1994 /s/David P. Holveck
------------ ---------------------------
David P. Holveck
President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 1994 /s/Dominic J. Caruso
------------ ---------------------------
Dominic J. Caruso
Vice President,
Corporate Controller and
Chief Accounting Officer
(Principal Financial and
Accounting Officer)
27
