<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 September 30, 1994
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-11103
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CENTOCOR, INC.
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(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
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Shares of Common Stock outstanding at November 1, 1994 were 51,249,782.
<PAGE>
Part I: Financial Information
Item 1: Financial Statements
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1994 1993
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Notes 4, 6 and 8) $ 47,367 $ 46,210
Short-term investments (Notes 4, 6 and 8) 86,443 76,662
Accounts and contracts receivable 9,667 12,078
Interest receivable 1,098 471
Inventory (Note 5) 17,990 13,874
Prepaid expenses 971 2,392
Other current assets 1,263 1,024
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164,799 152,711
Fixed assets (Note 6):
Land and buildings 66,803 64,284
Equipment, furniture, fixtures and improvements 83,911 78,932
-------- --------
150,714 143,216
Less accumulated depreciation (70,521) (58,533)
-------- --------
80,193 84,683
Long-term investments (Note 4) 14,223 17,156
Intangible and other assets 17,947 26,489
-------- --------
Total assets $277,162 $281,039
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
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CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT'D.)
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1994 1993
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<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,299 $ 7,133
Accrued expenses 23,527 23,127
Unearned revenues 1,635 2,690
Notes payable (Note 6) 6,977 6,186
Current portion of long-term debt (Note 6) 27,587 20,468
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65,025 59,604
Long-term debt (Note 6) 231,640 238,100
Other liabilities 2,924 2,023
Minority interest 509 506
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 51,213 and 43,672 issued and
outstanding at September 30, 1994 and
December 31, 1993, respectively 512 437
Additional paid-in capital 682,622 601,138
Deficit (708,683) (625,049)
Unrealized loss on marketable securities (3,173) (635)
Cumulative foreign currency translation
adjustments 5,786 4,915
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(22,936) (19,194)
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Total liabilities and shareholders' equity $ 277,162 $ 281,039
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
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CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------
For the three months ended September 30, 1994 1993
- - -------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Sales $9,319 $12,048
Contracts (including related
party revenues of $2,407 in 1993)
(Note 7) 3,608 4,681
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12,927 16,729
COSTS AND EXPENSES:
Cost of sales 3,652 3,842
Research and development (including contract
revenue-related expenses of $2,368 in 1993) 15,701 15,964
Marketing, general and administrative (including
contract revenue-related expenses of
$427 in 1993) 7,159 8,420
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26,512 28,226
OTHER INCOME (EXPENSE):
Interest income 1,584 1,036
Interest expense (4,974) (5,093)
Minority interest and other (604) (250)
------- --------
(3,994) (4,307)
NET LOSS ($17,579) ($15,804)
======== ========
NET LOSS PER SHARE ($0.34) ($0.38)
======== ========
Weighted average number of shares
outstanding 51,111 41,387
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
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For the nine months ended September 30, 1994 1993
- - --------------------------------------------------------------------------------
Revenues:
Sales $ 31,261 $ 34,650
Contracts (including related
party revenues of $1,652
in 1994 and $7,950 in 1993)
(Note 7) 13,322 10,810
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44,583 45,460
Costs and expenses:
Cost of sales 11,753 11,719
Research and development (including contract
revenue-related expenses of $1,572 in 1994
and $7,358 in 1993) 46,754 51,436
Marketing, general and administrative (including
contract revenue-related expenses of $343
in 1994 and $1,876 in 1993) 20,787 27,714
Charge for acquired research and
development (Note 8) 36,966 -
Restructuring charges (Note 11) - 9,387
-------- -------
116,260 100,256
Other income (expense):
Interest income 4,252 3,272
Interest expense (14,867) (15,117)
Minority interest and other (1,342) (713)
-------- -------
(11,957) (12,558)
Net loss ($83,634) ($67,354)
======== ========
Net loss per share ($1.71) ($1.63)
======== ========
Weighted average number of shares
outstanding 48,931 41,315
======== ========
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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For the nine months ended September 30, 1994 1993
- - --------------------------------------------------------------------------------
Cash flows used for operating activities:
Net loss ($83,634) ($67,354)
Adjustments to reconcile net loss to net cash
used for operating activities:
Charge for acquired research and development 36,966 -
Restructuring charges - 9,387
Net loss on long-term investments 1,793 -
Depreciation and amortization 13,852 19,119
Amortization of deferred income (2,148) (2,187)
Minority interest and other 3 510
Changes in assets and liabilities:
Accounts and contracts receivable 3,263 1,904
Interest receivable (484) 1,434
Inventory (3,379) (404)
Prepaid expenses (355) 15
Other current assets (128) 733
Intangible and other assets (1,478) (1,215)
Accounts payable (1,875) (748)
Unearned revenues 1,000 2,997
Accrued expenses and other liabilities (2,891) (4,802)
Other long-term liabilities 901 -
-------- -------
Net cash used for operating activities (38,594) (40,611)
Cash flows from investing activities:
Net sales of investments 35,610 41,789
Net purchases of fixed assets (3,434) (806)
Proceeds from sale of St. Louis facility - 11,913
Acquisition of Tocor II 3,991 -
-------- -------
Net cash from investing activities 36,167 52,896
Cash flows from financing activities:
Net proceeds from issuance of Common Stock 4,536 584
Proceeds from issuance of long-term debt and
notes payable - 2,500
Reduction of long-term debt and notes payable (1,631) (8,513)
-------- -------
Net cash from (used for) financing activities 2,905 (5,429)
Effect of foreign currency translation 679 (546)
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Net increase in cash and cash equivalents 1,157 6,310
Beginning cash and cash equivalents 46,210 28,496
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Ending cash and cash equivalents $47,367 $34,806
======== =======
See accompanying Notes to Consolidated Financial Statements.
6
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CENTOCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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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, which are necessary to present fairly the Company's
consolidated financial position at September 30, 1994 and December 31, 1993 and
the consolidated results of operations for the three and nine months ended
September 30, 1994 and 1993 and the consolidated cash flows for the nine months
ended September 30, 1994 and 1993. The results of operations for the three and
nine months ended September 30, 1994 and the cash flows for the nine months
ended September 30, 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 two of the Company's major pharmaceutical products which have been
submitted for regulatory approval is discussed below.
7
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CENTOCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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The Company's ability to further reduce its current rate of net cash
outflows is also influenced by 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 September 30, 1994, the Company had cash, cash equivalents and
investments of $148,033,000, including equity investments of $4,498,000. During
the nine months ended September 30, 1994, the Company had negative cash flows
from operations of $38,594,000. The Company's total cash, cash equivalents and
investments increased by $8,005,000 from December 31, 1993, principally as a
result of the exchange offer, which is discussed in Note 8, partially offset by
the cash used for operations.
Agreements covering $21,111,000 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
September 30, 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 $21,111,000 of debt as short-term. Additionally,
$6,977,000 of the Company's notes payable are secured by investments at the
lending bank of $7,000,000. If cash flows continue to be negative, the
Company's ability to service its debt may be impaired.
STATUS OF ReoPro(TM)
The Company's therapeutic products under development include ReoPro(TM), a
product intended to treat or prevent the formation of blood clots in the
cardiovascular system. The Company filed product license applications for
ReoPro(TM) in the United States, Canada, Australia, New Zealand and in several
countries in Europe. On June 9, 1994, the FDA Cardiovascular and Renal Drugs
Advisory Committee recommended approval of ReoPro(TM) for the indication of
high-risk angioplasty. The Company has also been informed that the Board of
Drugs of the Swedish Medical Products Agency ("MPA") has recommended approval of
ReoPro(TM) in Sweden. Written notification has not yet been received. There can
be no assurance that ReoPro(TM) will be approved for commercial sale in the
United States, Europe or elsewhere. Even if ReoPro(TM) receives some or all
such approvals, the level of future sales will depend upon other factors,
including the approval and commercialization of competitive products, the degree
of acceptance of ReoPro(TM) in the market place, and the strength of the
Company's patent position and that of others. A patent infringement action was
filed against the Company by Genentech, Inc. ("Genentech") which involves
ReoPro(TM). See "Other Litigation".
8
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CENTOCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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STATUS OF PANOREX
The Company has completed the filing of an application requesting marketing
approval for Panorex in Germany. Panorex is a product intended to treat
colorectal cancer. There can be no assurance that Panorex will be approved for
commercial sale in Germany or elsewhere.
SHAREHOLDER LITIGATION
On December 23, 1993, a purported class action captioned Peter Cordaro v.
Hubert J.P. 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 defendants filed a
motion to dismiss the complaint on the ground that the Pennsylvania court should
not exercise jurisdiction over a matter relating to the internal affairs of a
foreign corporation. No decision on the motion has been rendered. 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 Eli Lilly and
Company ("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 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. On November 1, 1994, a Consolidated Amended Class Action
Complaint was filed in which a number of the original plantiffs have been
dropped ("the Complaint"). 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)
9
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CENTOCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- - --------------------------------------------------------------------------------
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 also seeks class
certification on behalf of purchasers of the Company's convertible subordinated
debentures during the same period. The Complaint seeks compensatory damages in
unspecified amounts, counsel fees, interest, costs of suit, and such other
relief that the court deems appropriate. Defendants intend to answer the
Complaint and will deny all material 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
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 any allegedly infringing product or conduct, it purportedly asserts
claims regarding ReoPro(TM) and other of the Company's products. The Company
filed a motion to dismiss for failure to state a claim, for summary judgment,
or, in the alternative, for a more definite statement. That motion is now
scheduled to be argued on November 18, 1994. The Company believes that its
products do 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.
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
10
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CENTOCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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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 directors had also filed a motion to dismiss.
In September 1993, 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. Discovery is now in progress and must be concluded
in early 1995. 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.
In October 1992, the Company was served with a complaint filed by the Velos
Group, a 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.
11
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CENTOCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- - --------------------------------------------------------------------------------
PARTNERSHIPS
The Company has licensed certain technology related to ReoPro(TM) 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
payments generally of six percent of sales of products developed by CPIII. The
Company and CPIII have formed a joint venture for the purpose of commercializing
ReoPro(TM). Joint venture profits, if any, are allocated 75 percent to the
Company and 25 percent to CPIII. The joint venture will terminate upon the
occurrence of certain events including the exercise or expiration of the
purchase option. 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
ReoPro(TM), 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, L.P. ("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.
The Company has been informed by PaineWebber Development Corporation
("PaineWebber"), which acted as the sales agent for the limited partnership
interests in CPII and CPIII and which also manages
12
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- - --------------------------------------------------------------------------------
partnerships which hold limited partnership interests in CPII and CPIII, that it
has retained counsel to represent the partnerships which it manages. Counsel
are investigating possible claims which the limited partners may have for
additional royalties in connection with the funds received by Centocor in the
transactions with Lilly in July 1992 and June 1993 relating to HA-1A and
ReoPro(TM). PaineWebber has stated that the fact that counsel have been retained
for these purposes does not constitute a representation that either partnership
has a claim or that any claim will be brought.
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. 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 ReoPro(TM). Additionally, pursuant to
its agreements with Lilly (see Note 3), the Company may be required to make
royalty payments to Lilly depending on the level of sales of ReoPro(TM), if any.
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, patent applications and technology and pays the
licensors or their licensees royalties under such agreements.
All royalties are reflected in cost of sales as incurred. Royalty costs
represent a significant percentage of sales.
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
13
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- - --------------------------------------------------------------------------------
pertaining to the Company's products.
NOTE 3
COLLABORATIVE ARRANGEMENTS
Relationship with Eli Lilly and Company
During the second quarter of 1993, Lilly exercised its option to become the
exclusive worldwide distributor of ReoPro(TM). Under a Sales and Distribution
Agreement, the Company is principally responsible for developing and
manufacturing HA-1A and ReoPro(TM).
The Company recognized revenue of $3,000,000 and $2,000,000 for the three
months ended September 30, 1994 and 1993, respectively, and $9,500,000 and
$2,000,000 for the nine months ended September 30, 1994 and 1993 respectively,
under an agreement with Lilly for the achievement of certain milestones related
to ReoPro(TM). Lilly may make certain future payments based on the achievement
of additional milestones. Under agreements with Lilly, the Company and Lilly
share equally in the profits from ReoPro(TM) and the Company may be required to
pay Lilly additional amounts depending on the level of sales of ReoPro(TM). 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, the Company and 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. Centocor is responsible
for the development and manufacture of Panorex and for securing regulatory
approvals for Panorex. Wellcome has the option to continue the clinical
development of up to six other potential drugs. Wellcome will then market and
sell any of such approved drugs, including Panorex, in most parts of the world.
Wellcome may make certain future payments to the Company based on the
achievement of milestones and the acquisition of certain manufacturing
technologies.
14
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- - --------------------------------------------------------------------------------
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 $3,173,000 associated with
the equity investment portfolio as a separate component of shareholders' equity.
There can be no assurance that a reduction in the carrying value of such
investments through a charge to earnings will not be required in the future.
Such unrealized loss represents the excess of the Company's adjusted cost over
the market value of securities classified as available for sale. The Company's
equity investments classified as available for sale are carried at the lower of
estimated fair value or adjusted cost. The Company's investments in U.S.
Treasury securities and corporate bonds which the Company has the ability and
intent to hold to maturity are carried at amortized cost.
At September 30, 1994, securities classified as available for sale and held
to maturity are summarized below.
<TABLE>
<CAPTION>
(in thousands) Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Investments available for sale:
Equity securities $ 7,671 $ - $(3,173) $ 4,498
======== ==== ======= ========
Investments held to maturity:
Securities and obligations of
the U.S. Treasury and other
U.S. government Agencies $ 69,888 $ 49 $ (419) $ 69,518
Certificates of deposit 28,812 - - 28,812
Corporate Bonds and
Commercial Paper 31,558 78 (22) 31,614
-------- ---- ------- --------
$130,258 $127 $ (441) $129,944
======== ==== ======= ========
</TABLE>
15
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- - --------------------------------------------------------------------------------
At September 30, 1994, these securities were classified as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Cash equivalents $ 34,090
Short-term investments 86,443
Long-term investments 14,223
--------
$134,756
========
</TABLE>
The Company has agreed to maintain investments of $27,000,000 as of
September 30, 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>
September 30, December 31,
1994 1993
------------- ------------
<S> <C> <C>
Raw materials $ 4,005 $ 3,791
Work in process 11,728 8,388
Finished goods 2,257 1,695
------- -------
$17,990 $13,874
======= =======
</TABLE>
Inventory at September 30, 1994 and December 31, 1993 includes $8,162,000
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.
16
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- - --------------------------------------------------------------------------------
NOTE 6
DEBT
Notes Payable
Notes payable at September 30, 1994 and December 31, 1993 consist of
$6,977,000 and $6,186,000, respectively, of borrowings under short-term notes at
an interest rate of 5.7 percent per annum at September 30, 1994, payable in
Dutch guilders no later than March 28, 1995. These borrowings are secured by
investments at the lending bank of $7,000,000.
Long-term debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30, 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 16,320 16,134
Long-term Note 11,267 10,794
-------- --------
259,227 258,568
Current Portion (27,587) (20,468)
-------- --------
$231,640 $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 September 30, 1994 of $34,564,000 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
17
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- - --------------------------------------------------------------------------------
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 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 September 30, 1994 of $34,564,000 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 103 percent of the
principal amount 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 $6,477,000 at September 30, 1994 which bears interest
at an annual rate of 10 percent through its maturity date of May 1, 1995. At
September 30, 1994, this loan is classified as short-term. A Netherlands loan,
with an outstanding balance of approximately $5,959,000 at September 30, 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 September 30, 1994, this
loan is classified as short-term (see "Loan Covenants").
Long-term Note
The Company borrowed $11,267,000 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 September 30, 1994, this loan is
classified as short-term (see "Loan Covenants").
18
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- - --------------------------------------------------------------------------------
Loan Covenants
Agreements covering $21,111,000 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 maintains certain investments at the lending bank, which at
September 30, 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 $21,111,000 of debt as short-term. Additionally,
$6,977,000 of the Company's notes payable are secured by investments at the
lending bank of $7,000,000. If cash flows continue to be negative, the
Company's ability to service its debt may be impaired.
NOTE 7
CONTRACT REVENUES
Lilly Related
The Company recognized revenues of $3,000,000 and $2,000,000 for the three
months ended September 30, 1994 and 1993, respectively, and $9,500,000 and
$2,000,000 for the nine months ended September 30, 1994 and 1993 respectively,
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 for the
nine months ended September 30, 1994 and $2,407,000 and $7,950,000 for the three
and nine months ended September 30, 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 the 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 the Exchange Offer pursuant to
which the
19
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- - --------------------------------------------------------------------------------
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 short-term investments and Warrants with a value of
$8,492,000 which were retired. The unaudited comparative statement of
operations data excluding the charge for 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 nine months
Statement of ended September 30, ended September 30,
Operations Data 1994 1993 1994 1993
- - --------------------- --------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 12,927 $ 14,322 $ 42,931 $ 37,510
Loss $(17,579) $(17,704) $(47,939) $(73,776)
Loss per share $ (.34) $ (.36) $ (.94) $ (1.52)
</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 was convertible into 2.88
shares of the Company's Common Stock. The Company did issue 215,000 shares in
connection with such merger. If all of the remaining shares of Tocor II
callable common stock are so converted, the Company would be obligated to issue
an additional 152,000 shares of its Common Stock. Warrants not tendered as part
of Units in the Exchange Offer remain outstanding.
NOTE 9
INCOME TAXES
At September 30, 1994, the tax effect of the Company's federal net tax
operating loss carryforwards was $138,242,000 with expiration dates ranging from
2005 to 2009. Additionally, at September 30, 1994, the Company had research and
development tax credits of $5,044,000 with
20
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- - --------------------------------------------------------------------------------
expiration dates ranging from 1999 to 2002. Further, the tax effect of
inventory reserves that are not currently deductible at September 30, 1994 was
$19,291,000. 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 September 30, 1994.
NOTE 10
SUPPLEMENTAL INFORMATION ON CASH FLOWS
Interest paid for the nine months ended September 30, 1994 and 1993 was
$14,389,000 and $14,488,000, respectively.
Cash used for the purchases of investments as well as the cash received
upon the maturities and sales of investments was as follows (in thousands):
<TABLE>
<CAPTION>
Nine months ended September 30, 1994 1993
--------- ----------
<S> <C> <C>
Purchases $(51,805) $(115,636)
Maturities and sales 87,415 157,425
-------- ---------
$ 35,610 $ 41,789
======== =========
</TABLE>
During 1994, the Company issued 7,008,000 shares of Common Stock, resulting
in a noncash increase to additional paid-in capital of $25,545,000 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 second quarter of 1993, the Company recorded a restructuring
charge of $5,114,000 consisting principally of severance related costs incurred
in connection with the further downsizing of its workforce.
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
21
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- - --------------------------------------------------------------------------------
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 or other restructuring charges
will not be required in the future.
22
<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 two of the Company's major pharmaceutical products which have been
submitted for regulatory approval is discussed below.
The Company's ability to further reduce its current rate of net cash
outflows is also influenced by 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 September 30, 1994, the Company had cash, cash equivalents and
investments of $148,033,000, including equity investments of $4,498,000. During
the nine months ended September 30, 1994, the Company had negative cash flows
from operations of $38,594,000. The Company's total cash, cash equivalents and
investments increased by $8,005,000 from December 31, 1993, principally as a
result of the exchange offer, which is discussed in Note 8, partially offset by
the cash used for operations.
Agreements covering $21,111,000 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
September 30, 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 $21,111,000 of debt as short-term. Additionally,
$6,977,000 of the Company's notes payable are secured by investments at the
lending bank of $7,000,000. If cash flows continue to be negative, the
Company's ability to service its debt may be impaired.
23
<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 certain factors which may affect the Company's future liquidity
and capital resources.
STATUS OF ReoPro(TM)
The Company's therapeutic products under development include ReoPro(TM), a
product intended to treat or prevent the formation of blood clots in the
cardiovascular system. The Company filed product license applications for
ReoPro(TM) in the United States, Canada, Australia, New Zealand and in several
countries in Europe. On June 9, 1994, the FDA Cardiovascular and Renal Drugs
Advisory Committee recommended approval of ReoPro(TM) for the indication of
high-risk angioplasty. The Company has also been informed that the Board of
Drugs of the Swedish Medical Products Agency ("MPA") has recommended approval of
ReoPro(TM) in Sweden. Written notification has not yet been received. There can
be no assurance that ReoPro(TM) will be approved for commercial sale in the
United States, Europe or elsewhere. Even if ReoPro(TM) receives some or all such
approvals, the level of future sales will depend upon other factors, including
the approval and commercialization of competitive products, the degree of
acceptance of ReoPro(TM) in the market place and the strength of the Company's
patent position and that of others. A patent infringement action was filed
against the Company by Genentech, Inc. ("Genentech") which involves ReoPro(TM).
See Item 1, Note 2 to the Company's Consolidated Financial Statements--"Other
Litigation".
STATUS OF PANOREX
The Company has completed the filing of an application requesting marketing
approval for Panorex in Germany. Panorex is a product intended to treat
colorectal cancer. There can be no assurance that Panorex will be approved for
commercial sale in Germany or elsewhere.
ASSETS
The increase in the aggregate amount of cash and investments at September
30, 1994 as compared to December 31, 1993 is discussed under Liquidity and
Capital Resources.
The Company has increased its level of inventories and expects to continue
to do so over the near term.
Gross fixed assets at September 30, 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 or other restructuring charges will not be required in the
future.
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' Equity at September 30, 1994 decreased as compared to
December 31, 1993
24
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations.
- - --------------------------------------------------------------------------------
principally as a result of the Company's loss for the nine months ended
September 30, 1994 and the unrealized loss in marketable equity securities.
Partially offsetting the decrease in Shareholders' equity is an increase in
additional paid-in capital due to the receipt of the proceeds from the exercise
of options and warrants and as a result of the Exchange Offer consummated on
March 11, 1994. See Note 8 to the Company's Consolidated Financial Statements.
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.
REVENUES
Product sales have not produced sufficient revenues to cover the Company's
operating expenses. The decrease in sales for the three months ended September
30, 1994 as compared to the year earlier period is principally due to decreased
sales of certain diagnostic reagents. The decrease in sales for the nine months
ended September 30, 1994 as compared to the year earlier period is principally
due to lower sales of certain diagnostic reagents and the discontinuance of
certain diagnostic product lines. Any increase in the level of sales in future
periods is primarily dependent upon the timing and extent of regulatory
approvals of products, principally pharmaceutical products, and the commercial
acceptance of such products, if approved.
The decrease in contract revenue for the three months ended September 30,
1994 as compared to the corresponding period of the prior year is principally
due to the cessation of contract revenue from Tocor II as discussed below,
partially offset by an increase in contract revenue recognized from Lilly in
connection with the achievement of certain milestones. Contract revenues for
the nine months ended September 30, 1994 have increased as compared to the
corresponding period of the prior year principally due to the recognition of
$9,500,000 from Lilly in connection with the achievement of certain milestones,
partially offset by the decrease in contract revenue from Tocor II as discussed
below. 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, the magnitude of such arrangements and the achievement of
milestones under current arrangements.
Contract revenues for the nine months ended September 30, 1994 include
$1,652,000, net of
25
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations.
- - --------------------------------------------------------------------------------
warrant amortization costs, recognized pursuant to the Company's agreements with
Tocor II as compared to $2,407,000 and $7,950,000 for the three and nine months
ended September 30, 1993, respectively. 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.
COSTS AND EXPENSES
Cost of sales decreased for the three months ended September 30, 1994 as
compared to the corresponding period of 1993 due to the decrease in certain
diagnostic sales. Cost of sales increased for the nine months ended September
30, 1994 as compared to the corresponding period of 1993 due to 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 for the three and nine months
ended September 30, 1994 as compared to the year earlier period due principally
to a decrease in activities associated with clinical trials of products under
development. The Company expects research and development expenses to increase
in the remaining quarter of 1994 as compared to the first three quarters of 1994
as the Company expands clinical trials of products under development.
Marketing, general and administrative expenses for the three and nine
months ended September 30, 1994 decreased as compared to the year earlier
periods due principally to reductions in sales and administrative staffs, and
marketing costs.
OTHER INCOME AND EXPENSE
Interest income increased in the three and nine months ended September 30,
1994 as compared to the year earlier period due principally to an increase in
the Company's cash and investment balances as a result of the Exchange Offer,
which is discussed more fully in Note 8 to the Company's Consolidated Financial
Statements, partially offset by 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. Additionally, if the market value of certain equity investments
continues to decline in future periods, the Company may record a charge to
earnings in such future periods representing an unrealized loss on such
securities.
26
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations.
- - --------------------------------------------------------------------------------
PER SHARE CALCULATIONS
At September 30, 1994, approximately 14,040,000 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.
27
<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 September 30, 1994:
None.
<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: November 14, 1994 /s/David P. Holveck
------------------------------
David P. Holveck
President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 1994 /s/Dominic J. Caruso
------------------------------
Dominic J. Caruso
Vice President, Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
Centocor Inc. Consolidated Balance Sheets and Centocor Inc. Consolidated
Statements of Operations and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<EXCHANGE-RATE> 1
<CASH> 47,367
<SECURITIES> 86,443
<RECEIVABLES> 10,765
<ALLOWANCES> 0
<INVENTORY> 17,990
<CURRENT-ASSETS> 164,799
<PP&E> 150,714
<DEPRECIATION> 70,521
<TOTAL-ASSETS> 277,162
<CURRENT-LIABILITIES> 65,025
<BONDS> 231,640
<COMMON> 512
0
0
<OTHER-SE> (23,448)
<TOTAL-LIABILITY-AND-EQUITY> 277,162
<SALES> 31,261
<TOTAL-REVENUES> 44,583
<CGS> 11,753
<TOTAL-COSTS> 11,753
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</TABLE>
