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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1994
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OR
[ ] 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
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
200 Great Valley Parkway, Malvern, PA 19355
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 651-6000
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
None Not Applicable
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Securities registered pursuant to Section 12(g) of the Act:
Series A Preferred Stock Purchase Rights
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(Title of Class)
Common Stock, par value $.01 per share
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(Title of Class)
Warrants for the purchase of shares of Common Stock,
par value $.01 per share*
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(Title of Class)
7 1/4% Convertible Subordinated Notes Due February 1, 2001
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(Title of Class)
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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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the 57,505,345 shares of voting stock held
by non-affiliates of the registrant as of March 1, 1995 was $1,099,789,723.
Common Stock outstanding at March 1, 1995: 58,000,883 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following document are incorporated by reference in this
Report on Form 10-K:
Proxy Statement for the Annual Meeting of Shareholders to be held on May
17, 1995 -- Part III, Items 11, 12 and 13.
*Includes Warrants issued in January 1992 which were registered pursuant to
Section 12(g) of the Securities Exchange Act of 1934 as part of Units, each
Unit consisting of one share of Callable Common Stock of Tocor II, Inc., one
Series T Warrant and one callable Warrant.
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Part I
Item 1. Business
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GENERAL
Centocor, Inc. ("Centocor" or the "Company") is a biopharmaceutical
company specializing in the development and commercialization of monoclonal
antibody-based products to meet critical human health care needs. Additionally,
the Company performs research activities in the field of small peptide molecule-
based pharmaceutical products. See "Business - Research and Development." The
Company focuses on four major disease areas - infectious, cardiovascular and
autoimmune diseases and cancer. To date, the Company's in-vitro diagnostic
products have generated substantially all of its product sales.
In December 1994, the U.S. Food and Drug Administration ("FDA")
granted Centocor a product license for ReoPro(Trademark), a product indicated
for the reduction of acute ischemic cardiac complications in patients undergoing
angioplasty procedures who are at high risk for abrupt artery closure, and the
Committee for Proprietary Medicinal Products ("CPMP") of the European Union
("EU") issued a positive opinion regarding the granting of marketing
authorization in 11 of the 12 member states for ReoPro(Trademark). Also in
December 1994, the Paul Ehrlich Institute, the German regulatory body for
vaccines and antibodies, granted Centocor marketing authorization for the use of
Panorex(Registermark), an adjuvant therapy in the treatment of post-operative
colorectal cancer, in Germany. Centocor commenced commercial sales of
ReoPro(Trademark) in January 1995 and Panorex(Registermark) in February 1995.
In addition to conducting further clinical trials of ReoPro(Trademark)
and Panorex(Registermark) in an effort to expand their authorized use, the
Company is developing CenTNF(Trademark), a therapeutic product targeted for the
treatment of rheumatoid arthritis and inflammatory bowel diseases such as
Crohn's disease. Other therapeutic products are also under development.
ReoPro(Trademark) is being developed by Centocor for Centocor Partners III, L.P.
("CPIII"). See "Business - Research and Development." For a further discussion
of ReoPro(Trademark), Panorex(Registermark), CenTNF(Trademark) and other
therapeutic products, see "Products - Pharmaceutical Products."
The Company's in-vivo diagnostic products include
Myoscint(Registermark), a cardiac imaging agent, and other contrast agents under
development for use in in-vivo diagnostic imaging procedures. Centocor has
received FDA approval to market two of its in-vitro diagnostic products: CA
125(Trademark) II, a second generation assay used as an aid in the detection of
residual epithelial ovarian cancer, and CAPTIA(Trademark) Syphilis-G, an
infectious disease serology test used as a primary screening method for the
detection of Treponema pallidum antibodies in human serum or plasma. The Company
has also developed a number of other in-vitro diagnostic products. For a further
discussion of CA 125(Trademark) II, CAPTIA(Trademark) Syphilis G and other
diagnostic products, see "Products - In-Vitro Diagnostic Products."
In the diagnostics area, Centocor has maintained distribution
agreements with companies having established positions and distribution networks
in applicable market segments. Since 1992, the Company has implemented a
pharmaceutical business plan employing a collaborative strategy utilizing, among
other things, alliances with established pharmaceutical companies. The
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Company expects to continue to pursue its current strategy in both the
diagnostic and pharmaceutical areas. See Part II Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
Part II Item 8 "Financial Statements and Supplementary Data."
At March 1, 1995, Centocor had approximately 550 full-time employees.
To complement its own expertise in various fields, Centocor utilizes scientific
consultants and advisors, many of whom have formal consulting agreements with
Centocor.
Centocor was incorporated in Pennsylvania in 1979 and maintains its
principal executive offices at 200 Great Valley Parkway, Malvern, Pennsylvania
19355. Its telephone number is (610) 651-6000. The Company also maintains
facilities in Leiden, The Netherlands, and Surrey, the United Kingdom, and
offices in Tokyo, Japan and Munich, Germany.
TECHNOLOGY AND KNOW-HOW
Antibodies are proteins produced by white blood cells from the immune
system in response to the presence of specific antigens. An antigen is any
substance which activates this immune response. Antibodies recognize the shape
of particular compositions on the surface of antigens and bind specifically with
only those antigens having such surface compositions.
Prior to the development of monoclonal antibody technology in the
1970s, it was not practicable to separate and grow white blood cells producing a
single type of antibody. Monoclonal antibody technology involves the creation
of a hybrid cell, or hybridoma, by combining a white blood cell which produces a
specific antibody with a cell which reproduces indefinitely. The resulting
hybridoma produces a specific antibody continually. Antibodies produced by such
hybridomas are chemically and structurally homogeneous and hence are monoclonal.
Centocor believes that there is a significant potential for using monoclonal
antibodies to develop human health care products.
While the specificity of monoclonal antibodies makes them attractive
candidates for pharmaceutical product development, antibody-based products
generally must be administered by injection, usually in a hospital setting, and
are therefore used principally to treat acute diseases. Centocor believes that
small peptide molecule drugs may potentially be formulated for convenient
administration, including oral delivery, thereby affording an opportunity to
treat not only acute diseases, but the larger patient population with chronic
disease indications as well. The Company is conducting research activities in
the field of small peptide molecule-based pharmaceutical products. See
"Business - Research and Development."
PRODUCTS
Pharmaceutical Products
The Company is selling therapeutic products for use in the treatment
of specific types of cardiovascular disease and cancer, and developing
therapeutic products for use in the treatment of specific types of infectious
and autoimmune diseases.
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Cardiovascular Therapy. In December 1994, the FDA granted Centocor a
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product license for ReoPro(Trademark), a product indicated for the reduction of
acute ischemic cardiac complications in patients undergoing angioplasty
procedures who are at high risk for abrupt artery closure, and the CPMP issued a
positive opinion regarding the granting of marketing authorization in 11 of the
12 member states for ReoPro(Trademark). Belgium, the only dissenting country in
the EU, will require additional clinical trial results. For products recommended
for approval by the CPMP prior to January 1, 1995, each EU member state issues
its own national licenses. In addition, some countries require approvals for
pricing and reimbursement. ReoPro(Trademark) has been approved for sale in
Sweden, Norway, The U.K., and The Netherlands. The Company commenced commercial
sales of ReoPro(Trademark) in January 1995. During the second quarter of 1993,
Eli Lilly and Company ("Lilly") exercised its option, under a Sales and
Distribution Agreement between Lilly and the Company dated July 15, 1992, to
become the exclusive worldwide distributor of ReoPro(Trademark), and the Company
and Lilly amended the Sales and Distribution Agreement to reflect such event.
See "Business - Marketing and Sales." Pursuant to that amendment, Lilly has
assisted the Company and will continue to assist the Company in the regulatory
filings and continuing development of ReoPro(Trademark) for additional clinical
indications.
Cancer Therapy. In December 1994, the Paul Ehrlich Institute, the
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German regulatory body for vaccines and antibodies, granted the Company
marketing authorization for the use of Panorex(Registermark), an adjuvant
therapy in the treatment of post-operative colorectal cancer, in Germany.
Applications for marketing authorization have also been submitted in Austria,
Switzerland, Finland and Sweden. The Company commenced commercial sales of
Panorex(Registermark) in February 1995. 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(Registermark). See "Business - Marketing
and Sales." Additional clinical studies with Panorex(Registermark) will be
conducted by Wellcome and are expected to begin in Europe, Japan and the United
States in 1995.
Autoimmune Disease Therapy. The Company is currently developing
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CenTNF(Trademark), a product targeted for the treatment of rheumatoid arthritis
and inflammatory bowel diseases such as Crohn's disease. The Company is
conducting multiple Phase II clinical trials of CenTNF(Trademark) in rheumatoid
arthritis and Crohn's disease. The Company has entered into an agreement with
Tanabe Seiyaku Co., Ltd. under which Tanabe will undertake the human clinical
testing and distribution of CenTNF(Trademark) in Japan.
Infectious Disease Therapy. HA-1A(Registermark)
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("Centoxin(Trademark)") is a product intended for the treatment of patients with
severe sepsis. The Company filed product license applications in the United
States, Europe, and other countries seeking approval to market
HA-1A(Registermark). Regulatory approvals to market HA-1A(Registermark) 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(Registermark] 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(Registermark) in the treatment of patients with Gram-negative bacteremia
and septic shock (the "CHESS trial"). The Company terminated this trial in 1993
after concluding that there was no reduction in the mortality rate among HA-
1A(Registermark) 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(Registermark), Lilly, also voluntarily suspended
sales and conducted a recall of the drug in Europe and elsewhere where
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the drug is authorized for sale. The regulatory approvals to market HA-
1A(Registermark) 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(Registermark) in the treatment of patients with fulminant meningococcemia.
There can be no assurance that such trial will be successful or that any further
trials of HA-1A(Registermark) will be initiated or will be successful.
The Company is supplying HA-1A(Registermark) on a limited
compassionate-use basis in certain countries in Europe. There can be no
assurance that any commercial sales of HA-1A(Registermark) will resume in
Europe.
In-Vivo Diagnostic Products
The Company has developed techniques for modifying monoclonal
antibodies so that they may be coupled with radioactive isotopes and used as
contrast agents in diagnostic imaging procedures. After injection, antibodies
labelled with a radioactive isotope travel to the disease site, allowing the
site to be visualized or "imaged" with nuclear medicine equipment in a procedure
similar to an X-ray. The Company's focus in this area is primarily on
developing imaging agents for cardiovascular disease.
The Company has received marketing approvals for
Myoscint(Registermark), a cardiac imaging agent, in several European countries.
A product license application is under review in Japan. A United States product
license application for Myoscint(Registermark) is expected to be submitted to
the FDA in 1995. Revenues from the sale of Myoscint(Registermark) in Europe have
not been significant. There can be no assurance that Myoscint(Registermark) will
be approved by the FDA or that sales, if any, in the United States will be
significant.
In-Vitro Diagnostic Products
In-vitro diagnostic products are used to test patient blood samples
outside the body to detect or monitor disease. In this area, the Company has
focused principally on developing cancer diagnostic assays, and other in-vitro
diagnostic products for infectious disease, certain of which it now manufactures
and sells, as follows:
CA 125(Trademark) II Ovarian Cancer Test. CA 125(Trademark) II, a
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second generation assay which aids in the detection of residual epithelial
ovarian cancer following first-line therapy, is sold for clinical use in the
United States, certain European countries and Japan.
CAPTIA(Trademark) Syphilis G. In 1995, the Company received
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clearance from the FDA to market CAPTIA(Trademark) Syphilis G, an infectious
disease serology test for use as a primary screening method for the detection of
Treponema pallidum antibodies in human serum or plasma, as performed in blood
bank or plasma center testing laboratories. CAPTIA(Trademark) Syphilis G is
offered for sale in the United States and certain European and South American
countries.
CA 19-9(Trademark) Pancreatic Cancer Test. CA 19-9(Trademark), which
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aids in the detection of pancreatic cancer, is sold for clinical use in
certain European countries and Japan.
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CA 15-3(Registermark) Breast Cancer Test. CA 15-3(Registermark),
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which aids in the monitoring of breast cancer, is sold for clinical use in
certain European countries and Japan.
CA 72-4(Registermark) Gastric Cancer Test. CA 72-4(Registermark),
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which aids in the monitoring of gastrointestinal cancer, is sold for clinical
use in certain European countries and Japan.
P-glycoCHEK(Registermark) Multidrug Resistance Test.
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P-glycoCHEK(Registermark), which detects a cellular protein associated with
resistance to chemotherapeutic drugs, is sold for investigational use in
certain European countries and Japan.
CYFRA(Trademark) 21-1 Non-Small Cell Lung Cancer Test.
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CYFRA(Trademark) 21-1, which aids in the monitoring of non-small cell lung
cancer, is sold for clinical use in certain European countries and Japan.
CYFRA(Trademark) is a trademark of Boehringer Mannheim GmbH.
MARKETING AND SALES
In the in-vitro and in-vivo diagnostic areas, Centocor has
distribution agreements with companies having established positions and
distribution networks in applicable market segments. During 1992, the Company
adopted a similar collaborative strategy in its pharmaceutical business. In
conjunction with such marketing strategy, the Company eliminated its European
pharmaceutical sales force in 1992 and eliminated its United States
pharmaceutical sales force in 1993.
In July 1992, the Company and Lilly entered into a Sales and
Distribution Agreement("the Agreement"). During the second quarter of 1993,
Lilly exercised its option under the Agreement to become the exclusive worldwide
distributor of ReoPro(Trademark) and the Company and Lilly amended the Agreement
to reflect such event. Under that agreement, the Company is principally
responsible for developing and manufacturing HA-1A(Registermark) and
ReoPro(Trademark) and for securing regulatory approvals. Lilly is principally
responsible for the marketing, selling and distribution of ReoPro(Trademark) and
HA-1A(Registermark), if sales of HA-1A(Registermark) are resumed. The Agreement
provides that the Company sells the product(s) to Lilly for Lilly's further sale
to the end market. See Part II Item 8 "Financial Statements and Supplementary
Data."
In November 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(Registermark). In November 1994, the Company and Wellcome amended their
alliance agreement and Wellcome became the exclusive worldwide distributor for
Panorex(Registermark). Under that agreement, Wellcome is responsible for the
continuing clinical development of Panorex(Registermark) and other potential
drugs and for the marketing, sale and distribution of any approved drugs
worldwide. The Company is principally responsible for manufacturing
Panorex(Registermark) and securing regulatory approvals. See Part II Item 8
"Financial Statements and Supplementary Data."
During 1994, approximately 60 percent of the Company's total product
sales were to four distributors: Abbott Laboratories, Boehringer Mannheim GmbH,
CIS bio International and Toray-Fuji Bionics, Inc. During 1993, approximately
40 percent of the Company's total product sales were to three distributors:
Boehringer Mannheim GmbH, CIS bio International and Toray-
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Fuji Bionics, Inc. Additionally, prior to June 30, 1991, sales of in-vitro
diagnostic products included investigational-use-only sales in the United States
of certain products which have not been approved by the FDA. Effective June 30,
1991, the Company ceased sales in the United States of all diagnostic products
which had not been approved by the FDA in order to remain in compliance with an
earlier Consent Decree and applicable FDA regulations.
Certain financial information by geographic area as well as major
customer information is set forth in Part II Item 8 "Financial Statements and
Supplementary Data."
The Company has no significant product backlog.
MANUFACTURING
The Company currently maintains a biopharmaceutical manufacturing
facility in Leiden, The Netherlands, for the production of monoclonal antibody-
based products using a proprietary cell-culture system. See Item 2
"Properties." The Company manufactures in-vitro diagnostic products at
facilities in Malvern, Pennsylvania, and Surrey, the United Kingdom.
PATENTS AND LICENSING ARRANGEMENTS
The Company owns or has rights to certain proprietary information,
patent applications and patents which it deems important to the future
commercial success of its products. There can be no assurance that others will
not independently develop substantially equivalent proprietary information or
obtain access to the Company's expertise, or that any patents, or rights
thereto, of the Company will provide it with sufficient protection of its
technology or survive any challenge to the scope or validity thereof. In
addition, there can be no assurance that any patents will issue from any patent
applications.
Other entities have filed applications for or have been issued patents
and are expected to obtain additional patents to which the Company may need to
acquire rights. There can be no assurance that the Company will not infringe
upon the patent rights of others. The extent to which the Company may need to
obtain rights to any such patents or to contest their scope or validity will
depend on final product formulation and other factors. The ability to license
any such patents and the likelihood of successfully contesting the scope or
validity of such patents are uncertain and the costs associated therewith may be
significant. If the Company is required to acquire rights to valid and
enforceable patents but cannot do so at a reasonable cost, the Company's ability
to manufacture or market its products in the country of issuance of any such
patent may be materially adversely affected.
Centocor presently licenses the majority of the cell lines used to
produce its monoclonal antibodies from research institutions pursuant to long-
term licenses, for which it is generally obligated to pay royalties based upon
sales of products incorporating such antibodies. There can be no assurance that
others will not acquire rights to such cell lines in the future.
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GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and other
countries is a significant factor in the manufacture and marketing of the
Company's products and in ongoing research and product development activities.
All of the Company's products will require regulatory approval by governmental
agencies prior to commercialization. In particular, human therapeutic products
are subject to rigorous preclinical and clinical testing and other premarket
approval requirements by the FDA and regulatory authorities in other countries.
Various statutes and regulations also govern or influence the manufacturing,
safety, labeling, storage, recordkeeping and marketing of such products. The
lengthy process of seeking these approvals, and the subsequent compliance with
applicable statutes and regulations, require the expenditure of substantial
resources. Any failure by the Company to obtain, or any delay in obtaining,
regulatory approvals could materially adversely affect the Company and the
Company's collaborative marketing partners' ability to market the Company's
products.
The activities required before a pharmaceutical product may be
marketed in the United States begin with preclinical testing. Preclinical tests
include laboratory evaluation of product chemistry and animal studies to assess
the potential safety and efficacy of the product and its formulations. The
results of these studies must be submitted to the FDA as part of an
Investigational New Drug application, which must be reviewed by the FDA before
proposed clinical testing can begin. Typically, clinical testing involves a
three-phase process. In Phase I, clinical trials are conducted with a small
number of subjects to determine the early safety profile and the pattern of drug
distribution and metabolism. In Phase II, clinical trials are conducted with
groups of patients afflicted with a specified disease in order to determine
preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase
III, large scale, multicenter, comparative clinical trials are conducted with
patients afflicted with a target disease in order to provide enough data to
statistically evaluate the efficacy and safety of the product, as required by
the FDA. The results of the preclinical and clinical testing of a
pharmaceutical product are then submitted to the FDA in the form of a New Drug
Application ("NDA"), or for a biological product in the form of a Product
License Application ("PLA"), for approval to commence commercial sales. In
responding to an NDA or PLA, the FDA may grant marketing approval, request
additional information or deny the application if it determines that the
application does not satisfy its regulatory approval criteria. There can be no
assurance that any approval required by the FDA will be obtained on a timely
basis, if at all.
Among the conditions for NDA or PLA approval is the requirement that
the prospective manufacturer's quality control and manufacturing procedures
conform on an ongoing basis with Current Good Manufacturing Practices ("CGMP").
An Establishment License Application ("ELA") must be submitted for approval by
the FDA with information about manufacturing facilities, systems and procedures.
Before approval of the ELA, the FDA will perform a prelicensing inspection of
the facility to determine its compliance with CGMP and other rules and
regulations. In complying with CGMP, manufacturers must continue to expend
time, money and effort in the area of production and quality control to ensure
full compliance. After the establishment is licensed for the manufacture of any
product, it is subject to periodic inspections by the FDA.
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The requirements such as those described above which the Company must
satisfy to obtain regulatory approval by governmental agencies in other
countries prior to commercialization of its products in such countries can be as
rigorous, costly, and uncertain.
The Company is also subject to various laws and regulations relating
to safe working conditions, laboratory and manufacturing practices, the
experimental use of animals and the use and disposal of hazardous or potentially
hazardous substances, including radioactive compounds and infectious disease
agents, used in connection with the Company's research. The extent of
government regulation which might result from any legislative or administrative
action cannot be accurately predicted.
The levels of revenues and profitability of biopharmaceutical
companies may be affected by the continuing efforts of governmental and third
party payors to contain or reduce the costs of health care through various
means. For example, in certain foreign markets pricing or profitability of
therapeutic and other pharmaceutical products is subject to government control.
In the United States, there have been, and the Company expects that there will
continue to be, a number of federal and state proposals to implement similar
government control. While the Company cannot predict whether any such
legislative or regulatory proposals will be adopted, the adoption of such
proposals could have a material adverse effect on the Company's business,
financial condition and profitability. In addition, in both the United States
and elsewhere, sales of therapeutic and other pharmaceutical products are
dependent in part on the availability of reimbursement to the consumer from
third party payors, such as government and private insurance plans. Third party
payors are increasingly challenging the prices charged for medical products and
services. There can be no assurance that either of the therapeutic products the
Company has brought to market or any therapeutic product candidates the Company
may bring to market in the future will be considered cost effective and that
reimbursement to the consumer will be available or will be sufficient to allow
the Company to sell its products on a competitive and profitable basis.
TECHNOLOGICAL CHANGES AND COMPETITION
Monoclonal antibody and peptide technology and other innovations in
biotechnology are being examined, evaluated and practiced in biology research
laboratories throughout the United States and in many other countries, including
laboratories of other biotechnology companies and major pharmaceutical firms,
many of which have greater resources than Centocor. In addition, many companies
have been formed to produce monoclonal antibody-based, peptide-based and other
biological products.
Several established pharmaceutical companies have internal research
and development groups, and alliances with other biotechnology companies, and
are seeking to develop monoclonal antibody-based, peptide-based, and other
biological products. In addition, many companies have recently entered the
biological products field, some through acquisition or merger, and more may be
expected to do so in the future. As a result, Centocor anticipates that new
monoclonal antibody-based, peptide-based and other biological products will be
developed by others, and that competition for highly qualified scientific,
technical, marketing, and managerial personnel will be intense.
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Centocor's management believes that the Company's ability to compete
in its targeted markets will depend upon, among other things, its ability to
develop, produce and market innovative products. Centocor's management also
believes that significant competition will come from established pharmaceutical
companies that have greater capital resources, manufacturing and marketing
experience, research and development staffs, sales forces and production
facilities than Centocor. Such competition is expected to be in the form of a
variety of pharmaceutical products which may include monoclonal antibody-based
and peptide-based products. There can be no assurance that the activities of
others will not render the Company's products or technologies obsolete or
uncompetitive.
RESEARCH AND DEVELOPMENT
Centocor's research and development activities focus primarily on
monoclonal antibody technology and proprietary techniques to modify monoclonal
antibodies in search of optimal pharmaceutical agents. The Company's ability to
select effective hybridomas and to produce antibodies from them is central to
its business. The Company has living hybridomas that it has produced or that it
has received under license agreements. These hybridomas are the source of the
antibodies used by the Company in its existing products and in the antibody-
based products it is developing and, therefore, are of proprietary importance.
An understanding of the structure and function of antibodies is
necessary in order to modify them for incorporation into diagnostic or
therapeutic products. The Company has developed techniques for characterizing
an antibody with respect to its structure, specificity and binding ability which
are used in an effort to select the best antibody for a particular application.
The Company carries out research efforts in the use of recombinant DNA
techniques to manipulate the genetic structure of antibody-producing cells.
These efforts are intended to create re-engineered antibodies which combine the
desired properties of more than one antibody, or the desired properties of
antibodies and other system-regulating biochemicals such as enzymes.
During 1992, the Company expanded its research efforts to include the
field of small peptide molecule-based pharmaceutical products.
For the three years ended December 31, 1994, 1993 and 1992, the
Company's research and development expenses were $70,003,000, $66,113,000 and
$106,633,000, respectively.
The Company organized Centocor Cardiovascular Imaging Partners, L.P.
("CCIP"), Centocor Partners II, L.P. ("CPII"), CPIII, Tocor, Inc. ("Tocor") and
Tocor II, Inc. ("Tocor II") to finance the research and development of certain
products and/or technology. Under agreements with each of these entities,
Centocor licensed certain technology to the entity and performed or continues to
perform research and development in such technology areas on behalf of the
entity. The Company purchased the limited partnership interests in CCIP and the
callable common stock of Tocor in 1991, the limited partnership interests in
CPII in 1992, and the callable common stock of Tocor II in 1994. The Company
granted CPIII an exclusive license to use all patent rights, know-how, technical
information and biological materials owned or controlled by the Company within
CPIII's field of activity, which includes ReoPro(Trademark). CPIII also
retains the rights to the results of research and development efforts conducted
on its behalf. The
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Company has the ability to acquire such rights through an option to purchase the
partnership interests in CPIII. See Part II Item 8 "Financial Statements and
Supplementary Data."
Item 2. Properties
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The Company owns four buildings in Malvern, Pennsylvania, and leases
space in other buildings at this location. These buildings contain Centocor's
corporate offices, research and development laboratories, marketing offices, and
certain manufacturing facilities. Space is available in these buildings for
future expansion. The acquisition costs of certain of these buildings were
financed in part by mortgage loans which are still outstanding.
The Company owns a biopharmaceutical manufacturing facility in Leiden,
The Netherlands, and also leases research and development laboratories and
office space at such location. A portion of the construction cost of the Leiden
facility was financed by a mortgage loan which is still outstanding. See Part
II Item 8 "Financial Statements and Supplementary Data." The Company also
leases an in-vitro diagnostic manufacturing facility in Surrey, the United
Kingdom.
At the Company's present level of operations, portions of the
Company's facilities and equipment in Malvern are idle. The Company continually
evaluates the future needs for its facilities and equipment.
Item 3. Legal Proceedings
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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. 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 offer to exchange shares of the Company's Common
Stock for Tocor II Units, 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 the retention of a
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. On February
27, 1995, this motion was denied without prejudice to its subsequent renewal.
The Company believes that the allegations set forth in the complaint are without
merit and intends to vigorously defend the suit.
In January 1993, following suspension of the Company's CHESS trial of
Centoxin(Trademark) ("HA-1A(Registermark)"), 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 was filed in May
10
<PAGE>
1993, based on alleged violations of securities laws and alleged breaches of
common law duties. All claims against all defendants, except the Company and two
of its officers/directors and a former director, were voluntarily dismissed when
that Complaint was filed. In November 1994, a Corrected Consolidated Amended
Class Action complaint was filed in which a number of the original defendants
were 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 Centoxin(Trademark) and the CHESS trial 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 and convertible
subordinated debentures 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 have answered the
Complaint and denied all material allegations therein. Discovery is in progress.
The Company believes that the allegations set forth in the Complaint are without
merit and intends to vigorously defend the suit.
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, Inc., charging infringement of a patent held by Genentech. The
complaint asked that the alleged infringement be enjoined preliminarily and
permanently and sought damages and counsel fees in an unspecified amount. While
the complaint did not identify any allegedly infringing product or conduct, it
purportedly asserted claims regarding ReoPro(Trademark) 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. In December 1994, before that motion was argued, the claims were
settled through the grant of a license by Genentech to the Company relating to
ReoPro(Trademark). The complaint was dismissed in January 1995.
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(Trademark) (HA-1A(Registermark)). 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 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 conditionally certified a class
of all purchasers of Corvas common stock during the period January 30, 1992
through April 14, 1992. An agreement has been reached by all parties which, if
approved by the Court, would lead to the settlement and dismissal of this
action. The Company would contribute to the
11
<PAGE>
settlement 600,000 shares of the stock of Corvas which it holds, which, at
December 31, 1994, had a quoted market price of $2.125 per share. In the fourth
quarter of 1994, the Company recorded a charge to earnings of $1,275,000
reflecting the proposed terms of the settlement.
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, to the amended
complaint (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. On February 6, 1995, the motion was denied. Discovery
has now been resumed and trial is fixed for January 1996. The Company believes
that the allegations of Velos are without merit and intends to vigorously defend
the suit.
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 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(Registermark) and ReoPro(Trademark).
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.
While it is not possible to predict accurately or determine the
eventual outcome of these matters, the Company believes that the foregoing
proceedings and investigations will not have a material adverse effect on the
financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
Not applicable.
12
<PAGE>
Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
-----------------------------------------------------------------------------
Centocor's Common Stock is traded on the Nasdaq National Market
under the symbol CNTO. Set forth below for the indicated periods are the high
and low sale prices for Centocor's Common Stock:
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
First Quarter 1993 19 1/2 5 1/2
Second Quarter 1993 9 1/2 5 1/4
Third Quarter 1993 10 7/8 6 3/4
Fourth Quarter 1993 15 3/4 10
First Quarter 1994 14 10
Second Quarter 1994 14 3/8 8 7/8
Third Quarter 1994 18 1/2 9 5/8
Fourth Quarter 1994 18 3/4 15 1/2
</TABLE>
The number of shareholders of record on March 1, 1995 was 5,015.
No dividends have been paid on the Common Stock to date, and the
Company does not expect to pay cash dividends in the foreseeable future.
13
<PAGE>
Item 6. Selected Financial Data
--------------------------------
(in thousands except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
<TABLE>
<CAPTION>
For the years ended December 31, 1994 1993 1992 1991 1990
---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Sales $ 39,984 $ 48,071 $ 58,394 $ 44,328 $ 32,863
Contracts:
Related parties 1,652 10,109 16,071 4,902 27,870
Other 25,590 17,750 51,767 3,967 3,901
--------- -------- --------- --------- ---------
67,226 75,930 126,232 53,197 64,634
Costs and expenses* 173,290 130,683 295,978 247,151 217,966
Other income (expenses)** (20,594) (19,626) (24,400) (1,601) 18,952
Income tax benefit -- -- -- -- (2,200)
--------- -------- --------- --------- ---------
Loss (126,658) (74,379) (194,146) (195,555) (132,180)
--------- -------- --------- --------- ---------
Loss per share ($2.55) ($1.79) ($4.90) ($5.72) ($5.10)
--------- -------- --------- --------- ---------
Weighted average number
of shares outstanding 49,597 41,482 39,623 34,172 25,930
CONSOLIDATED BALANCE SHEET DATA
Cash and investments*** $ 184,507 $140,028 $ 163,083 $ 233,598 $ 100,877
Total Assets 305,915 281,039 349,268 472,929 273,080
Long-term debt 231,640 238,100 238,166 259,368 42,083
Shareholders' equity 5,278 (19,194) 30,721 144,027 168,664
</TABLE>
No dividends have been declared or paid during any of the periods presented.
*Costs and expenses include the following: (a) charges for acquired research and
development of $36,966, $70,147 and $115,475 in 1994, 1991 and 1990,
respectively, (b) charges of $3,500, $64,877 and $3,518 in 1993, 1992 and 1990,
respectively, related to HA-1A inventory, (c) restructuring charges of $9,387,
$15,266 and $3,548 in 1993, 1992 and 1990, respectively, (d) a royalty buyout of
$17,098 in 1994, and (e) a write-down of facilities and equipment of $7,870 in
1994.
**Other income (expenses) include charges of $1,275 and $11,245 in 1994 and
1992, respectively, related to the settlement of certain litigation and gains of
$12,976 in 1990 from the sale of certain investments.
***Cash and investments at December 31, 1994 included equity investments of
$2,919. Additionally, the Company maintained $27,000 of investments at certain
banks as collateral for certain debt outstanding at December 31, 1994.
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
------- -----------------------------------------------------------------------
of Operations
-------------
Financial Condition
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating expenses attempting to develop
pharmaceutical products. The Company's product sales through 1994 were almost
exclusively generated by in-vitro diagnostic products. Consequently, excluding
the impact of significant contract revenues through collaborative alliances with
pharmaceutical companies and financing activities, the Company experienced
substantial net cash outflows through 1994.
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 commenced the commercial sale of two pharmaceutical products -
ReoPro(Trademark) in January 1995 and Panorex(Registermark) in February 1995.
During the year ending December 31, 1995, sales of those two products alone are
not expected to generate sufficient revenue to enable the Company to avoid a net
cash outflow for the year. Under the Company's collaborative strategy of
entering into alliances with established pharmaceutical companies, the Company
generally shares sales revenues from products covered by such arrangements with
its partners. There can be no assurance that those products, in conjunction
with the Company's pharmaceutical product candidates under development and in-
vitro diagnostic products, will achieve a level of sales sufficient to generate
positive cash flow from operations for the Company, given the current and
currently anticipated future scope of the Company's operations. The level of
future sales of both diagnostic and pharmaceutical products will be dependent
upon several factors including, but not limited to, the timing and extent of
future regulatory approvals of the Company's products, approval and
commercialization of competitive products and the degree of acceptance of the
Company's products in the marketplace. There can be no assurance that FDA or
other regulatory approvals expanding the authorized use of ReoPro(Trademark) and
Panorex(Registermark) or permitting the commercial sale of any of the Company's
product candidates under development will be obtained. Failure to obtain
additional timely FDA or other regulatory approvals for the use of
ReoPro(Trademark) and Panorex(Registermark) or other product candidates will
have a material adverse effect on the Company.
The Company will need to secure significant additional funding 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 funding will
be available to the Company or that the Company can obtain additional
collaborations with established pharmaceutical companies and receive payments
for product rights and/or the achievement of milestones under such collaborative
agreements. Even if the Company obtains such funding, there can be no assurance
that such funding will be sufficient to produce positive cash flows from
operations.
At December 31, 1994, the Company had cash, cash equivalents, and investments
of $184,507,000 including equity investments of $2,919,000. During the year
ended December
15
<PAGE>
31, 1994, the Company had negative cash flows from operations of $64,520,000,
including a payment of $17,098,000 representing a royalty buyout relating to
ReoPro(Trademark). The Company's total cash flows in 1994 included the receipt
of $50,124,000 as a result of an exchange offer and $71,633,000 from the
exercise of warrants and options to purchase shares of the Company's Common
Stock. 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.
At December 31, 1993, the Company had cash, cash equivalents, and investments
of $140,028,000, including equity investments of $11,230,000. During the year
ended December 31, 1993, the Company had negative cash flows from operations of
$42,297,000. The Company's total cash flows in 1993 included $30,000,000
received from Wellcome of which $20,000,000 was received for the purchase of
2,000,000 shares of the Company's Common Stock. Additionally, cash flows in
1993 included the proceeds of $11,900,000 from the sale of the Company's St.
Louis facility and the repayment of $5,800,000 of mortgage debt related to that
facility.
At December 31, 1992, the Company had cash, cash equivalents, and investments
of $163,083,000, including equity investments of $12,924,000. During the year
ended December 31, 1992, the Company had negative cash flows from operations of
$109,818,000 and acquired $23,309,000 of fixed assets. Cash flows from
operations for the year ended December 31, 1992 included $50,000,000 received
from Lilly primarily for reimbursement of expenses associated with HA-
1A(Registermark). Additionally, during 1992, the Company expended $12,375,000
to purchase the limited partnership interests in CPII, $8,700,000 to acquire all
the outstanding shares of capital stock of Mercia Diagnostics Limited
("Centocor U.K."), a European diagnostics manufacturing and sales company, and
$10,000,000 in connection with the settlement of certain class action securities
litigation. These cash outflows were partially offset by cash inflows which
included the receipt of $50,000,000 from Lilly for the purchase of 2,000,000
shares of the Company's Common Stock and $15,931,000 from borrowings under loan
agreements and $17,726,000 from the exercise of warrants and options to purchase
shares of the Company's Common Stock.
Agreements covering $19,722,000 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
December 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 $19,722,000 of debt as short-term. Additionally,
$6,897,000 of the Company's short-term debt is 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.
See Item 8 "Financial Statements and Supplementary Data - Note 2 to the
Company's Consolidated Financial Statements" for a discussion of litigation and
other factors that may affect the Company's future liquidity and capital
resources.
16
<PAGE>
ASSETS
The increase in the aggregate amount of cash and investments at December 31,
1994 as compared to December 31, 1993 is discussed under Liquidity and Capital
Resources. The increase in the Company's inventory balance at December 31, 1994
as compared to December 31, 1993 is primarily due to the production of
ReoPro(Trademark), Panorex(Registermark), and CAPTIA(Trademark) inventories.
Gross fixed assets at December 31, 1994 decreased as compared to December 31,
1993 principally due to the write-down of certain facilities and equipment,
partially offset by the investment of $4,555,000 for the purchase of fixed
assets. The Company expects to make investments in fixed assets of
approximately $9,000,000 in 1995. At the Company's present level of operations,
the Company currently maintains idle facilities and equipment in Malvern. 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.
Intangible and other assets at December 31, 1994 decreased as compared to
December 31, 1993 principally as a result of the exchange offer discussed in
Note 11 to the Company's Consolidated Financial Statements, which resulted in
the retirement of outstanding warrants and the writedown of related deferred
charges of approximately $9,000,000. The Company continually evaluates the
carrying value of intangible and other assets. There can be no assurance that
reserves to reduce the carrying value of certain intangible and other assets
will not be required in the future.
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' equity at December 31, 1994 increased as compared to December
31, 1993 principally as a result of the proceeds from the exercise of options
and warrants and the exchange offer as discussed in Note 11 to the Company's
Consolidated Financial Statements, partially offset by the Company's loss for
the year ended December 31, 1994. 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 product sales will be achieved or that any additional capital
will be available to the Company.
Results of Operations
GENERAL
Product sales have not produced sufficient revenues to cover the Company's
operating expenses. The Company has incurred significant operating expenses
attempting to develop products and has incurred significant special charges.
Consequently, the Company has experienced substantial operating losses. With
new product approvals, the Company will focus
17
<PAGE>
on increasing sales and has established a goal of achieving profitability in
1995. For the Company to become profitable, the following objectives must be
achieved: early and strong market acceptance for both ReoPro(Trademark) and
Panorex(Registermark); growth in the Company's diagnostic product sales;
establishment of a long-term strategic alliance for CenTNF(Trademark); and
management of the Company's internal cost structure. There can be no assurance
that the Company can achieve these objectives. If the Company does not achieve
these objectives, the Company's goal of profitability will not be attained in
1995, and the Company will incur an operating loss.
SPECIAL CHARGES
The results of operations for the year ended December 31, 1994 included a
charge to earnings of $36,966,000 for acquired research and development in
connection with the exchange offer discussed in Note 11 to the Company's
Consolidated Financial Statements. The results of operations for the year ended
December 31, 1994 also include charges of $7,870,000 related to the writedown of
certain facilities and equipment and $17,098,000 representing a royalty buyout
relating to ReoPro(Trademark). Additionally, a charge of $1,275,000 related
to a litigation settlement was recorded in the fourth quarter of 1994.
The results of operations for the year ended December 31, 1993 included
restructuring charges of $4,273,000 related to reserves for certain fixed assets
no longer used or subsequently disposed of and $5,114,000 principally related to
severance. A charge of $3,500,000 related to HA-1A(Registermark) inventory was
recorded in the fourth quarter of 1993. The results of operations for the year
ended December 31, 1992 included a charge of $64,877,000 representing reserves
for HA-1A(Registermark) inventories and a charge of $11,245,000 related to the
settlement of certain class action securities litigation. Additionally, during
the year ended December 31, 1992, the Company recorded a restructuring charge of
$15,266,000 related to the downsizing of its operations. Excluding the items
described above, the Company incurred losses for each of the years in the three
year period ended December 31, 1994. There can be no assurance that additional
charges will not be required in the future.
REVENUES
The decrease in sales for the year ended December 31, 1994 as compared to
December 31, 1993 is principally due to lower sales of certain diagnostic
reagents and the discontinuance of certain diagnostic product lines. The
decrease in sales for the year ended December 31, 1993 as compared to 1992 is
principally due to HA-1A(Registermark) sales recorded during 1992 which did not
reoccur in 1993. There were no HA-1A(Registermark) sales in 1993 whereas 1992
sales of HA-1A(Registermark) totalled $12,545,000. The Company commenced
commercial sales of two pharmaceutical products -- ReoPro(Trademark) in January
1995 and Panorex(Registermark) in February 1995. The level of future sales of
both diagnostic and pharmaceutical products will be dependent upon several
factors, including but not limited to the timing and extent of future regulatory
approvals of the Company's products, approval and commercialization of
competitive products and the degree of acceptance of the Company's products in
the marketplace.
Contract revenues for the year ended December 31, 1994 include $1,652,000
recognized pursuant to the Company's agreements with Tocor II, as compared to
$10,109,000 and $16,071,000 for the years ended December 31, 1993 and 1992,
respectively. As a result of the
18
<PAGE>
exchange offer which is more fully described in Note 11 to the Company's
Consolidated Financial Statements, the revenues under the Tocor II research
program terminated in 1994. The decrease in contract revenue from Tocor II was
principally offset by an increase in contract revenues recognized from Lilly and
Wellcome in connection with the achievement of certain milestones and the
expansion of certain marketing and distribution rights. Contract revenues for
the year ended December 31, 1994 include $9,500,000 as compared to $5,000,000
and $50,000,000 for the years ended December 31, 1993 and 1992, respectively,
pursuant to the Company's agreements with Lilly. The Company recorded
$14,000,000 and $10,000,000 of contract revenues for the years ended December
31, 1994 and 1993, respectively, pursuant to the Company's agreements with
Wellcome.
The level of contract revenues in future periods will depend primarily 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 increased for the year ended December 31, 1994 as compared to
December 31, 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. Cost of sales decreased in 1993 as compared to 1992 due to decreased
sales, principally sales of HA-1A(Registermark) as discussed above. The
Company expects an increase in cost of sales in 1995 as compared to 1994,
dependent upon the level of sales increase in 1995.
Research and development expenses increased for the year ended December 31,
1994 as compared to 1993 due principally to costs associated with increased
clinical trials and regulatory activities of products under development.
Research and development expenses decreased in 1993 as compared to 1992 due
principally to a decrease in costs associated with clinical trials of products
under development. The Company expects an increased level of clinical trial
expenses in 1995 as compared to 1994, however the level of total research and
development expenses in 1995 is expected to be lower than in 1994. This
decrease is expected to occur as a result of a higher allocation of costs to
manufacturing activities related to ReoPro(Trademark) and Panorex(Registermark)
production. These costs were previously charged to research and development
expenses in prior periods.
Marketing, general and administrative expenses for the year ended December 31,
1994 decreased as compared to December 31, 1993 due principally to reductions in
sales and administrative staffs, marketing expenses and other cost reductions.
Marketing, general and administrative expenses for the year ended December 31,
1993 decreased as compared to the year ended December 31, 1992, due principally
to reductions in sales and administrative staffs, marketing costs and legal
costs. The Company expects the levels of marketing, general and administrative
expenses to increase in 1995.
19
<PAGE>
OTHER INCOME AND EXPENSES
The Company recorded charges to earnings of $1,275,000 and $11,245,000 for the
years ended December 31, 1994 and December 31, 1992, respectively, in connection
with the settlement of certain litigation. Interest income increased in the year
ended December 31, 1994 as compared to December 31, 1993 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 11 to the Company's
Consolidated Financial Statements. Interest income in future periods will depend
primarily on the level of the Company's investments and the interest rates
earned on such investments. Interest income decreased in 1993 as compared to
1992 due principally to a reduction in the Company's cash and investment
balances and reduced interest rates on investments. During 1994, the Company
recorded unrealized losses of $3,649,000 compared to $2,477,000 and $2,296,000
for 1993 and 1992, respectively, due to other than temporary reductions in the
market value of marketable equity investments below the Company's cost for such
investments. During the year ended December 31, 1992, the Company recorded a
gain of $1,170,000 from the sale of certain securities. If the market value of
certain equity investments continues to decline in future periods, the Company
may record additional charges to earnings in such future periods representing
unrealized losses on such securities.
PER SHARE CALCULATIONS
At December 31, 1994, approximately 8,275,000 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 weighted average number of shares outstanding in calculating per share
data. The effect of Common Stock issuable upon the exercise of Common Stock
equivalents is reflected in the per share data calculation only if the effect
would be dilutive. The 3,843,000 shares issuable upon conversion of the 7-1/4
percent Convertible Subordinated Notes and the 2,049,000 shares issuable upon
conversion of the 6-3/4 percent Convertible Subordinated 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. See Item 8 "Financial Statements and
Supplementary Data - Note 7 to the Company's Consolidated Financial Statements."
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.
20
<PAGE>
Item 8. Financial Statements and Supplementary Data
---------------------------------------------------
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
December 31, 1994 1993
----------- ---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Notes 4, 7 and 11) $ 78,925 $ 46,210
Short-term investments (Notes 4, 7 and 11) 102,663 76,662
Accounts and contracts receivable 11,842 12,078
Interest receivable 1,082 471
Inventory (Note 5) 16,682 13,874
Prepaid expenses 2,722 2,392
Other current assets 1,041 1,024
-------- --------
214,957 152,711
Fixed assets (Notes 7 and 17):
Land and buildings 71,137 64,284
Equipment, furniture, fixtures and
improvements 60,671 78,932
-------- --------
131,808 143,216
Less accumulated depreciation (61,768) (58,533)
-------- --------
70,040 84,683
Long-term investments (Note 4) 2,919 17,156
Intangible and other assets 17,999 26,489
-------- --------
Total assets $305,915 $281,039
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
21
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT'D.)
(In thousands)
<TABLE>
<CAPTION>
December 31, 1994 1993
----------- ---- ----
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,383 $ 7,133
Accrued expenses (Note 6) 26,378 23,127
Unearned revenues 1,407 2,690
Note payable (Note 7) 6,897 6,186
Current portion of
long-term debt (Note 7) 26,182 20,468
-------- --------
67,247 59,604
Long-term debt (Note 7) 231,640 238,100
Other liabilities 1,240 2,023
Minority interest 510 506
Shareholders' equity (Notes 2, 8 and 11):
Preferred Stock, $.01 par value,
10,000 shares authorized, none issued -- --
Common Stock, $.01 par value,
100,000 shares authorized and
57,081 and 43,672 issued and
outstanding at December 31, 1994
and 1993, respectively 571 437
Additional paid-in capital 750,175 601,138
Deficit (751,707) (625,049)
Unrealized loss on marketable
securities -- (635)
Cumulative foreign currency
translation adjustments 6,239 4,915
-------- --------
5,278 (19,194)
-------- --------
Total liabilities and
shareholders' equity $305,915 $281,039
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
22
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
<TABLE>
<CAPTION>
For the years ended December 31, 1994 1993 1992
------------------------------- ---- ---- ----
<S> <C> <C> <C>
Revenues:
Sales $ 39,984 $ 48,071 $ 58,394
Contracts (including related
party revenues of: $1,652
in 1994, $10,109 in 1993 and
$16,071 in 1992) (Note 10) 27,242 27,859 67,838
--------- -------- ---------
67,226 75,930 126,232
Costs and expenses:
Cost of sales 15,984 15,819 21,764
Research and development (including
contract revenue-related expenses
of $1,572 in 1994, $9,414 in 1993
and $11,871 in 1992) 70,003 66,113 106,633
Marketing, general and administrative
(including contract revenue-related
expenses of $343 in 1994, $2,327
in 1993, and $3,176 in 1992) 25,369 35,864 87,438
Charge for acquired research and
development (Note 11) 36,966 -- --
Other charges (Note 17) 24,968 12,887 80,143
--------- -------- ---------
173,290 130,683 295,978
Other income (expenses):
Interest income 5,999 4,192 8,446
Interest expense (19,821) (20,087) (19,798)
Net loss on long-term investments
(Note 12) (3,649) (2,477) (1,126)
Litigation settlement (Notes 2 and 12) (1,275) -- (11,245)
Other (1,848) (1,254) (677)
--------- -------- ---------
(20,594) (19,626) (24,400)
Net loss ($126,658) ($74,379) ($194,146)
========= ======== =========
Net loss per share ($2.55) ($1.79) ($4.90)
========= ======== =========
Weighted average number of shares
outstanding 49,597 41,482 39,623
========= ======== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
23
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands)
----------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows used for operating activities: $(126,658) $(74,379) $(194,146)
Net loss
Adjustments to reconcile net loss to net cash
used for operating activities:
Charge for acquired research and development 36,966 - -
Inventory and restructuring charges - 7,773 80,143
Write-down of facilities and equipment 7,870 - -
Litigation charges 1,275 (1,245) 1,245
Net loss on long-term investments 3,649 2,477 1,126
Provisions for depreciation and amortization 18,164 25,804 24,217
Amortization of deferred income (3,067) (268) (39)
Other 2,413 1,157 189
Changes in assets and liabilities:
Accounts and contracts receivable 1,330 490 1,385
Interest receivable (466) 1,296 2,714
Inventory (2,344) (591) (9,197)
Prepaid expenses (2,809) (1,606) (4,438)
Other current assets 81 529 2,388
Intangible and other assets (1,423) (1,759) 2,741
Accounts payable (962) 2,753 (12,650)
Unearned revenue 1,675 152 2,837
Accrued expenses and other liabilities (1,162) (5,157) (7,802)
Other long-term liabilities 948 277 (531)
-------- ------- --------
Net cash used for operating activities (64,520) (42,297) (109,818)
Cash flows from investing activities:
Net sales of investments 28,442 35,197 87,293
Net purchases of fixed assets (4,555) (2,008) (18,168)
Proceeds from sale of St. Louis facility - 11,913 -
Acquisition of interests in limited partnerships - - (12,375)
Acquisition of stock of Centocor U.K. - - (8,700)
Acquisition of Tocor II, net of cash acquired 3,991 - -
-------- ------- --------
Net cash from investing activities 27,878 45,102 48,050
Cash flows from financing activities:
Net proceeds from issuance of Common Stock 71,633 23,123 67,726
Proceeds from issuance of long-term debt and notes payable - 2,500 15,931
Reduction of long-term debt and notes payable (2,788) (9,453) (2,015)
Distribution to minority interest - - (756)
-------- ------- --------
Net cash from financing activities 68,845 16,170 80,886
Effect of foreign currency translation 512 (1,261) (1,508)
-------- ------- --------
Net increase in cash and cash equivalents 32,715 17,714 17,610
Beginning cash and cash equivalents 46,210 28,496 10,886
-------- ------- --------
Ending cash and cash equivalents $78,925 $46,210 $28,496
======== ======= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
24
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock Net Unrealized Cumulative
--------------- loss on foreign currency
Number of Par Additional Marketable translation
shares Value paid in capital Deficit Securities adjustments
---------- ----- --------------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991 37,681 $377 $489,468 $(356,524) -- $10,706
Issued to Eli Lilly and
Company (Note 8) 2,000 20 49,980 -- -- --
Issued upon exercise of options and
warrants or as stock grants 1,334 13 17,474 -- -- --
Issued to employee benefit plan 9 -- 479 -- -- --
Warrants issued in Tocor II
transaction (Note 11) -- -- 14,625 -- -- --
Vested pursuant to
restricted stock award plan 168 2 3,046 -- -- --
Translation adjustments -- -- -- -- -- (4,799)
Net loss -- -- -- (194,146) -- --
-------------------------------------------------------------------------------
Balance at December 31, 1992 41,192 412 575,072 (550,670) -- 5,907
Issued to Wellcome plc (Note 8) 2,000 20 19,980 -- -- --
Issued upon exercise of options and
warrants or as stock grants 329 3 2,908 -- -- --
Issued to employee benefit plan 57 1 970 -- -- --
Vested pursuant to
restricted stock award plan 94 1 2,208 -- -- --
Translation adjustments -- -- -- -- -- (992)
Carrying value adjustments -- -- -- -- (635) --
Net loss -- -- -- (74,379) -- --
-------------------------------------------------------------------------------
Balance at December 31, 1993 43,672 437 601,138 (625,049) (635) 4,915
Issued to Wellcome plc (Note 8) 140 1 3,500 -- -- --
Issued pursuant to the Tocor II
exchange offer (Note 11) 7,014 70 84,259 -- -- --
Warrants retired pursuant to Tocor II
exchange offer (Note 11) -- -- (8,492) -- -- --
Issued upon exercise of options and
warrants or as stock grants 6,151 62 68,070 -- -- --
Issued to employee benefit plan 17 -- 208 -- -- --
Vested pursuant to
restricted stock award plan 87 1 1,492 -- -- --
Translation adjustments -- -- -- -- -- 1,324
Carrying value adjustments -- -- -- -- 635 --
Net loss -- -- -- (126,658) -- --
-------------------------------------------------------------------------------
Balance at December 31, 1994 57,081 $571 $750,175 $(751,707) -- $6,239
===============================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
25
<PAGE>
Notes to Consolidated Financial Statements
Note 1
Summary of Significant Accounting Policies
Basis of Presentation
---------------------
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries and joint ventures.
Reclassification
----------------
Certain amounts have been reclassified to conform to current year
presentation.
Investments
-----------
The Company classifies investments with original maturities of three months or
less as cash equivalents. Investments with maturities of one year or less are
classified as short-term.
Short-term marketable securities are carried at cost, which approximates
market value. Long-term debt securities which the Company has the ability and
intent to hold until maturity are carried at cost. Long-term marketable equity
securities are carried at the lower of cost or market value.
Inventory
---------
Inventory is stated at the lower of cost or market value using the first-in,
first-out method for diagnostic product inventories and the average cost method
for pharmaceutical product inventories.
Inventories have various expiration dates. Reserves are provided for
inventories which are likely to expire prior to sale or are likely to otherwise
not be available for sale.
Fixed Assets and Depreciation
-----------------------------
Fixed assets are stated at cost. Depreciation is provided using the straight-
line method over the estimated useful lives of the assets, which range from 3 to
31 years. Leasehold improvements are amortized over the applicable lease period
or their estimated useful lives, whichever is shorter. Maintenance and repairs
are charged to expense, and major renewals and improvements are capitalized.
Intangible Assets
-----------------
Intangible assets are stated at cost, net of accumulated amortization.
Amortization is provided using the straight-line method over the estimated
useful lives of the assets, generally 10 to 20 years. Intangible assets at
December 31, 1994 and 1993 were $9,653,000 and $9,364,000, respectively, net of
accumulated amortization of $4,229,000 and $3,666,000 at December 31, 1994 and
1993, respectively.
26
<PAGE>
Notes to Consolidated Financial Statements
Revenue Recognition
-------------------
For contracts under which the Company is reimbursed for expenses, revenue is
recognized as the related expenses are incurred. Non-refundable fees or
milestone payments in connection with research and development or
commercialization agreements are recognized when they are earned in accordance
with the applicable performance requirements and contractual terms. Payments
received which are related to future performance are deferred and recognized as
revenue over the specified future performance periods.
Sales revenues are recognized at the time the goods are shipped or when title
to the goods passes to the buyer.
Income Taxes
------------
The Company has not recorded any deferred tax benefits since there can be no
assurance as to their future realizability.
Per Share Data
--------------
Per share data are calculated using the weighted average number of outstanding
shares of Common Stock. Common Stock issuable upon the exercise of stock
options or warrants and upon the vesting of restricted stock awards are included
in the per share calculations only to the extent their inclusion would have an
aggregate dilutive effect. Common Stock issuable upon conversion of convertible
debt securities are included only in the fully diluted per share calculations to
the extent their inclusion would have a dilutive effect.
Foreign Currency Translation
----------------------------
Assets and liabilities of subsidiaries denominated in foreign currencies are
translated at rates in effect at the appropriate year-end. The revenues and
expenses of such subsidiaries are translated at average rates for the period of
operation. The differences resulting from such translation as compared to the
equity of such subsidiaries translated at historical rates are included in
cumulative foreign currency translation adjustments, a separate component of
shareholders' equity.
Note 2
Commitments and Contingencies
Liquidity and Capital Resources
-------------------------------
The Company has incurred significant operating expenses attempting to develop
pharmaceutical products. The Company's product sales through 1994 were almost
exclusively generated by in-vitro diagnostic products. Consequently, excluding
the impact of significant contract revenues through collaborative alliances with
pharmaceutical companies and financing activities, the Company experienced
substantial net cash outflows through 1994.
27
<PAGE>
Notes to Consolidated Financial Statements
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 commenced the commercial sale of two pharmaceutical products -
ReoPro(Trademark) in January 1995 and Panorex(Registermark) in February 1995.
During the year ending December 31, 1995, sales of those two products alone are
not expected to generate sufficient revenue to enable the Company to avoid a net
cash outflow for the year. Under the Company's collaborative strategy of
entering into alliances with established pharmaceutical companies, the Company
generally shares sales revenues from products covered by such arrangements with
its partners. There can be no assurance that those products, in conjunction
with the Company's pharmaceutical product candidates under development and in-
vitro diagnostic products, will achieve a level of sales sufficient to generate
positive cash flow from operations for the Company, given the current and
currently anticipated future scope of the Company's operations. The level of
future sales of both diagnostic and pharmaceutical products will be dependent
upon several factors including, but not limited to, the timing and extent of
future regulatory approvals of the Company's products, approval and
commercialization of competitive products and the degree of acceptance of the
Company's products in the marketplace. There can be no assurance that FDA or
other regulatory approvals expanding the authorized use of ReoPro(Trademark) and
Panorex(Registermark) or permitting the commercial sale of any of the Company's
product candidates under development will be obtained. Failure to obtain
additional timely FDA or other regulatory approvals for the use of
ReoPro(Trademark) and Panorex(Registermark) or other product candidates will
have a material adverse effect on the Company.
The Company will need to secure significant additional funding 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 funding will
be available to the Company or that the Company can obtain additional
collaborations with established pharmaceutical companies and receive payments
for product rights and/or the achievement of milestones under such collaborative
agreements. Even if the Company obtains such funding, there can be no assurance
that such funding will be sufficient to produce positive cash flows from
operations.
Legal Proceedings
-----------------
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. 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 offer to exchange shares of the Company's Common
Stock for Tocor II Units, 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 the retention of a
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
28
<PAGE>
Notes to Consolidated Financial Statements
should not exercise jurisdiction over a matter relating to the internal affairs
of a foreign corporation. On February 27, 1995, this motion was denied without
prejudice to its subsequent renewal. The Company believes that the allegations
set forth in the complaint are without merit and intends to vigorously defend
the suit.
In January 1993, following suspension of the Company's CHESS trial of
Centoxin(Trademark) ("HA-1A(Registermark)"), 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 was filed in May 1993, based on alleged violations of securities laws
and alleged breaches of common law duties. All claims against all defendants,
except the Company and two of its officers/directors and a former director, were
voluntarily dismissed when that complaint was filed. In November 1994, a
Corrected Consolidated Amended Class Action complaint was filed in which a
number of the original defendants were 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
Centoxin(Trademark) and the CHESS trial 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 and convertible subordinated debentures 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 have answered the Complaint and denied all material allegations
therein. Discovery is in progress. The Company believes that the allegations set
forth in the Complaint are without merit and intends to vigorously defend the
suit.
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,
Inc., charging infringement of a patent held by Genentech. The complaint asked
that the alleged infringement be enjoined preliminarily and permanently and
sought damages and counsel fees in an unspecified amount. While the complaint
did not identify any allegedly infringing product or conduct, it purportedly
asserted claims regarding ReoPro(Trademark) 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. In December
1994, before that motion was argued, the claims were settled through the grant
of a license by Genentech to the Company relating to ReoPro(Trademark). The
complaint was dismissed in January 1995.
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
29
<PAGE>
Notes to Consolidated Financial Statements
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(Trademark) (HA-1A(Registermark)). 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 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
conditionally certified a class of all purchasers of Corvas common stock during
the period January 30, 1992 through April 14, 1992. An agreement has been
reached by all parties which, if approved by the Court, would lead to the
settlement and dismissal of this action. The Company would contribute to the
settlement 600,000 shares of the stock of Corvas which it holds, which, at
December 31, 1994, had a quoted market price of $2.125 per share. In the fourth
quarter of 1994, the Company recorded a charge to earnings of $1,275,000
reflecting the proposed terms of the settlement.
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, to the amended complaint (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. On February 6, 1995, the motion was denied. Discovery
has now been resumed and trial is fixed for January 1996. The Company believes
that the allegations of Velos are without merit and intends to vigorously defend
the suit.
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 partnerships which hold
limited partnership interests in CPII and CPIII, that it has retained counsel to
represent the partnerships which it manages. Counsel are
30
<PAGE>
Notes to Consolidated Financial Statements
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(Registermark) and
ReoPro(Trademark). 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.
While it is not possible to predict accurately or determine the eventual
outcome of these matters, the Company believes that the foregoing proceedings
and investigations will not have a material adverse effect on the financial
position of the Company.
Partnerships
------------
The Company has licensed certain technology related to ReoPro(Trademark) and a
certain cardiovascular imaging product to 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. The Company commenced
commercial sales of ReoPro(Trademark) in January 1995. 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(Trademark). 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. See Note 3 for a discussion of the option
that Lilly has exercised to become the exclusive distributor for
ReoPro(Trademark).
The Company has entered into indemnity agreements with CPIII and the former
limited partners of CCIP and 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.
31
<PAGE>
Notes to Consolidated Financial Statements
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(Trademark). Additionally,
pursuant to its agreements with Lilly, the Company may be required to make
royalty payments on sales of ReoPro(Trademark).
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 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 under the Sales
and Distribution Agreement to become the exclusive worldwide distributor of
ReoPro(Trademark). Under the Agreement, the Company is principally
responsible for developing and manufacturing HA-1A(Registermark) and
ReoPro(Trademark). Lilly is principally responsible for the marketing, sale
and distribution of HA-1A(Registermark) and ReoPro(Trademark).
Under agreements with Lilly, the Company and Lilly share equally in the
profits from ReoPro(Trademark) and the Company may be required to pay Lilly
royalties on sales of ReoPro(Trademark). The Company may be required to make
a payment to Lilly of $50 million through December 31, 1995, or decreasing
amounts through December 31, 1999, in the event of any change in control
32
<PAGE>
Notes to Consolidated Financial Statements
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(Registermark). Under the
alliance agreement, the Company and Wellcome share revenues from the sale of the
products, including Panorex(Registermark). Centocor is principally responsible
for the manufacture of Panorex(Registermark) and for securing regulatory
approvals for Panorex(Registermark). Wellcome is principally responsible for
the clinical development, marketing, sale and distribution of such drugs,
including Panorex(Registermark), on a worldwide basis.
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 impact of the adoption
of SFAS 115 was not significant to the Company's Consolidated Financial
Statements.
During 1994, the Company recorded unrealized losses associated with its equity
investment portfolio as a charge to earnings of $3,649,000 compared to
$2,477,000 and $1,126,000 for the years ended 1993 and 1992, respectively, due
to other than temporary reductions in the market value of marketable equity
investments below the Company's cost for such investments. There can be no
assurance that additional reductions in the carrying value of such investments
through a charge to earnings will not be required in the future.
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.
33
<PAGE>
Notes to Consolidated Financial Statements
At December 31, 1994, securities classified as available for sale and held to
maturity are summarized below (in thousands).
<TABLE>
<CAPTION>
Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
-------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Investments available for sale:
Equity securities $ 2,919 $-- $ -- $ 2,919
======== ========== ========== ========
Investments held to maturity:
Securities and obligations of
the U.S. Treasury and other
U.S. government agencies $ 59,485 $ 3 $(242) $ 59,246
Certificates of deposit 28,812 -- -- 28,812
Corporate bonds and
commercial paper 28,151 12 (112) 28,051
-------- ---------- ---------- --------
$116,448 $15 $(354) $116,109
======== ========== ========== ========
At December 31, 1994, these securities were classified as follows (in thousands):
Cash equivalents $ 13,785
Short-term investments 102,663
Long-term investments 2,919
--------
$119,367
========
</TABLE>
The Company has agreed to maintain investments of $27,000,000 as of December
31, 1994 at certain banks as collateral for loans from those banks. See Note 7.
Note 5
Inventory
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31 1994 1993
------- -------
<S> <C> <C>
Raw materials $ 3,564 $ 3,791
Work in process 8,973 8,388
Finished goods 4,145 1,695
------- -------
$16,682 $13,874
======= =======
</TABLE>
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.
34
<PAGE>
Notes to Consolidated Financial Statements
Note 6
Accrued Expenses
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1994 1993
------- -------
<S> <C> <C>
Compensation $ 2,621 $ 5,753
Interest 6,681 6,506
Clinical and R&D 3,790 2,663
Other 13,286 8,205
------- -------
$26,378 $23,127
======= =======
</TABLE>
Note 7
Debt
Note Payable
Note payable at December 31, 1994 and 1993 consists of $6,897,000 and
$6,186,000, respectively, of borrowings under short-term notes at an interest
rate of 5.67 percent per annum at December 31, 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 (see "Loan Covenants").
Long-term debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
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 15,941 16,134
Long-term Note 10,241 10,794
-------- --------
257,822 258,568
Current Portion (26,182) (20,468)
-------- --------
$231,640 $238,100
======== ========
</TABLE>
35
<PAGE>
Notes to Consolidated Financial Statements
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
December 31, 1994 of $33,079,000 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 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 December 31, 1994 of $33,079,000 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. 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 $6,460,000 at December 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 $5,632,000 at
December 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
December 31, 1994, both of these loans are classified as short-term (see "Loan
Covenants").
In July 1993, the Company completed the sale of its St. Louis facility for
$11,900,000 and in connection therewith, repaid $5,800,000 of debt related to
this facility.
36
<PAGE>
Notes to Consolidated Financial Statements
Long-term Note
The Company borrowed $10,241,000 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 December 31, 1994, this loan is classified
as short-term (see "Loan Covenants").
Loan Covenants
Agreements covering $19,722,000 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
December 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 $19,722,000 of debt as short-term. Additionally,
$6,897,000 of the Company's short-term debt is 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.
Other
Scheduled repayments on the mortgage debt and long-term note pursuant to the
terms of the related loan agreements are $8,949,000 for 1995, $2,488,000 for
1996, $2,595,000 for 1997, $2,600,000 for 1998, $2,605,000 for 1999 and
$6,951,000 due thereafter.
The fair market value of the Company's long-term debt at December 31, 1994,
principally determined by quoted market prices, was $186,316,000 as compared to
its carrying value of $231,640,000. The carrying amount of the Company's debt
classified as short-term at December 31, 1994 approximates its fair market
value.
Note 8
Shareholders' Equity
Capital Stock
In 1994, the Company issued 7,014,000 shares of its Common Stock pursuant to
the terms of an exchange offer as described in Note 11, 6,151,000 shares of its
Common Stock in connection with the exercise of options and warrants and 140,000
shares pursuant to the terms of the extension of the alliance agreement with
Wellcome. In 1993, the Company issued 2,000,000 shares of its Common Stock
pursuant to the terms of an agreement with Wellcome. Additionally, in 1992, the
Company issued 2,000,000 shares of its Common Stock pursuant to the terms of an
Investment Agreement with Lilly. At December 31, 1994, approximately 17,318,000
shares of Common Stock were reserved for issuance upon exercise of warrants and
stock options, pursuant to employee retirement savings and stock award plans and
agreements, and upon conversion of convertible debt securities. Additionally,
at December 31, 1994,
37
<PAGE>
Notes to Consolidated Financial Statements
approximately 372,000 shares of preferred stock were reserved for issuance under
a shareholder rights plan which is further described below.
Warrants
At December 31, 1994, warrants to purchase approximately 3,088,000 shares
of the Company's Common Stock were outstanding. The specific exercise prices
per share and exercise periods of such warrants are set forth below (in
thousands except per share amounts):
Shares Issuable
Upon Exercise Exercise Period Exercise Price Per Share
--------------- --------------- ------------------------
<TABLE>
<CAPTION>
<C> <S> <C>
1,475 Through February 28, 1995 $19.33
874 Through February 28, 1995 $16.66
485 Through February 28, 1996 $13.33
127 January 1, 1994 through December 31, 1996 $64.50
127 January 1, 1996 through December 31, 1997 $49.75
</TABLE>
Stock Option and Restricted Stock Award Plans
The Company maintains stock option plans pursuant to which options to purchase
a total of approximately 8,650,000 shares of its Common Stock have been
authorized for grant to the Company's employees and to its non-employee
directors. Under the terms of these plans, the option exercise price may not be
less than the fair market value of the underlying stock at the time the option
is granted. The options granted under these plans generally expire upon the
earlier of the termination of the optionee's employment or service or ten years
from the date of the grant. Additionally, non-qualified stock options have been
granted to certain directors and employees of, and certain consultants to, the
Company pursuant to non-qualified stock option agreements with terms similar to
those set forth in the plans. The following table summarizes the activity with
respect to the Company's stock options (in thousands except per share amounts):
<TABLE>
<CAPTION>
For the Years ended December 31,
1994 1993 1992
Options Exercise Price Options Exercise Price Options Exercise price
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning
of year 5,770 $6.50-53.50 5,948 $7.38-56.00 6,126 $7.38-53.50
Granted 726 $9.13-17.94 2,681 $6.50-14.13 2,974 $8.38-58.50
Exercised (685) $6.88-16.00 (304) $7.38-12.00 (420) $7.38-16.00
Canceled (853) $6.88-51.75 (2,555) $6.88-56.00 (2,732) $7.38-58.50
----- ----------- ------ ----------- ------ -----------
Outstanding,
end of year 4,958 $6.50-53.50 5,770 $6.50-53.50 5,948 $7.38-56.00
===== =========== ====== =========== ====== ===========
</TABLE>
During 1993 and 1992, a substantial number of outstanding options were
canceled in exchange for the grant of fewer options with an exercise price equal
to the fair market value at date of grant of $7.125 per share in 1993 and
$12.625 in 1992. At December 31, 1994, options
38
<PAGE>
Notes to Consolidated Financial Statements
to purchase a total of approximately 2,719,000 shares of Common Stock were
exercisable, and approximately 2,239,000 options become exercisable as follows
(in thousands):
<TABLE>
<CAPTION>
Years ending December 31, Shares
------------------------- ------
<S> <C>
1995 921
1996 644
1997 505
1998 169
</TABLE>
The Company maintains a Restricted Common Stock Award Plan, pursuant to which
a total of approximately 2,000,000 shares of the Company's Common Stock have
been authorized for award to eligible employees. The number of shares awarded
in each year and the terms under which such shares vest are determined by the
Board of Directors at the time of the award. Generally, a portion of the shares
awarded vests annually over a period of five years from the date of the award.
As of December 31, 1994, awards of approximately 229,000 shares of the Company's
Common Stock were outstanding and are scheduled to vest in the following periods
(in thousands):
<TABLE>
<CAPTION>
Years ending December 31, Shares
------------------------- ------
<S> <C>
1995 79
1996 63
1997 45
1998 38
1999 4
</TABLE>
The terms of options unexercisable as of December 31, 1994 for an aggregate of
approximately 1,450,066 shares and restricted stock awards unvested as of
December 31, 1994 for an aggregate of approximately 119,185 shares provide for
the acceleration of the exercisability of such options and the vesting of such
restricted stock awards upon the occurrence of certain events constituting a
change in control of the Company. Further, in such event, the holders of
approximately 2,424,000 options may then choose to receive cash through the
exercise of a limited stock appreciation right in lieu of exercising their
options.
Qualified Savings and Retirement Plan
The Company maintains a Qualified Savings and Retirement Plan for the benefit
of its employees. Employees' benefits are based solely on the employees'
discretionary contributions and the Company's discretionary matching
contributions, which the Company generally makes in its Common Stock. Employee
contributions to the Plan may be invested in various instruments, including the
Company's Common Stock, at the discretion of the employee.
Shareholder Rights Plan
The Company maintains a Shareholder Rights Plan ("Rights Plan"). Under the
Rights Plan, each common shareholder receives one-half of one Right (a "Right")
for each share of
39
<PAGE>
Notes to Consolidated Financial Statements
Common Stock held. Each Right entitles the holder to purchase from the Company
one one-hundredth of a share of Series A Preferred Stock at an exercise price of
$170. The Rights will become exercisable and will detach from the Common Stock
in the event any individual or group acquires 20 percent or more of the Common
Stock, or announces a tender or exchange offer which, if consummated, would
result in the ownership by that person or group of at least 30 percent of the
Common Stock.
If, following an acquisition of 20 percent or more of the Common Stock, the
Company is acquired by any person in a merger or other business combination
transaction or sells more than 50 percent of its assets or earning power to any
person, each Right will entitle the holder to purchase, for the exercise price,
common stock of the acquiring company with a value of twice the exercise price.
In addition, if any person acquires 30 percent or more of the Common Stock, each
Right will entitle the holder, other than an acquiring person, to purchase
Common Stock of the Company with a value of twice the exercise price. The
Rights also provide for protection against self-dealing transactions by a 20
percent shareholder.
The Company may redeem the Rights at $.02 per Right at any time until the
tenth day after the acquisition by a person or group beneficially owning 20
percent or more of its Common Stock. The Rights will expire on September 26,
1998 unless earlier redeemed.
Note 9
Geographic and Customer Information
<TABLE>
<CAPTION>
Geographic Information (in thousands)
<S> <C> <C> <C>
Identifiable
Years ended December 31, Revenue Loss assets
1994
United States $ 59,294 $(112,266) $233,208
Europe 7,932 (14,392) 72,707
-------- --------- --------
$ 67,226 $(126,658) $305,915
======== ========= ========
1993
United States $ 66,655 $ (72,601) $211,411
Europe 9,275 (1,778) 69,628
-------- --------- --------
$ 75,930 $ (74,379) $281,039
======== ========= ========
1992
United States $108,181 $(184,547) $272,312
Europe 18,051 (9,599) 76,956
-------- --------- --------
$126,232 $(194,146) $349,268
======== ========= ========
</TABLE>
In January 1992, the Company acquired, for approximately $8,700,000 in cash,
all of the outstanding shares of Centocor U.K. The transaction was recorded as
a purchase and resulted in $6,711,000 of goodwill which is being amortized over
a 20-year period. The totals for Europe in the above table include the
operations of Centocor U.K. from January 1992.
40
<PAGE>
Notes to Consolidated Financial Statements
Customer Information
Sales to four distributors of the Company's diagnostic products in 1994
accounted for 61 percent of total product sales in 1994, and sales to three
distributors accounted for 42 percent, and 40 percent of total product sales in
1993, and 1992, respectively. Approximately 86 percent, 88 percent, and 90
percent of total product sales in 1994, 1993, and 1992, respectively, are
attributable to shipments to customers outside of the United States.
Note 10
Contract Revenues
Lilly Related
-------------
Pursuant to the Company's agreements with Lilly, the Company recognized
$9,500,000, $5,000,000 and $50,000,000 for the years ended December 31, 1994,
1993 and 1992, respectively, related to the achievement of ReoPro(Trademark)
milestones in 1994 and 1993 and principally related to reimbursement of
expenses associated with HA-1A(Registermark) in 1992. Lilly may make certain
future payments based on the achievement of certain milestones related to
ReoPro(Trademark).
Wellcome Related
----------------
Pursuant to the Company's agreements with Wellcome, the Company recognized
$14,000,000 and $10,000,000 for the years ended December 31, 1994 and 1993,
respectively, principally related to the reimbursement of prior expenses and
achievement of milestones associated with Panorex(Registermark). Wellcome may
make certain future payments to the Company based on the achievement of
certain milestones related to Panorex(Registermark).
Related Party Research & Development
------------------------------------
During 1994, 1993 and 1992, the Company conducted research and development
under a contract with Tocor II. Under the contract, the Company received
reimbursement of its costs plus a management fee. Such revenues were recorded
net of amortization of deferred costs resulting from the issuance of warrants to
Tocor II Unitholders. Additionally, the Company recorded revenue of $2,500,000
in 1992 representing a non-refundable fee from Tocor II in connection with the
license of certain technology by the Company to Tocor II. See Note 11 for a
discussion of an exchange offer which resulted in the termination of the
research and development contract and services agreement.
For the years ended December 31, 1994, 1993 and 1992, revenues related to the
Tocor II research program were $1,652,000, $10,109,000 and $16,071,000
respectively. Expenses incurred, including general and administrative expenses
for the years ended December 31, 1994, 1993 and 1992 were $1,915,000,
$11,741,000 and $15,047,000 respectively.
Additionally, the Company incurred expenses of $22,850,000, $19,389,000, and
$27,675,000, for the years ended December 31, 1994, 1993 and 1992,
respectively, representing aggregate CPIII research costs funded by the Company
in order to continue the
41
<PAGE>
Notes to Consolidated Financial Statements
progress of the research program and to preserve the value of its purchase
options (see Note 2).
Other
-----
The Company has entered into various commercialization agreements under which
it has recognized revenues from non-refundable fees or milestone payments in
support of its research and development efforts. Revenues recorded under these
agreements amounted to $2,090,000, $2,750,000, and $1,767,000, for the years
ended December 31, 1994, 1993 and 1992, respectively.
Note 11
Charge for Acquired Research and Development
In February 1994, the Company initiated the 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 $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(in thousands
except per share amounts):
<TABLE>
<CAPTION>
Statements of For the twelve months ended December 31,
Operations Data 1994 1993
------------------ --------------------- ----------------------
<S> <C> <C>
Revenues $ 65,574 $ 65,821
Loss $(90,963) $(83,143)
Loss per share $ (1.78) $ (1.72)
</TABLE>
Effective March 30, 1994, each remaining share of Tocor II callable Common
Stock ("Tocor II Shares") was converted into 2.88 shares of the Company's Common
Stock through a merger of Tocor II into a wholly-owned subsidiary of the
Company. Pursuant to the terms of the merger, holders of Tocor II Shares at the
time of the merger were required to surrender the certificates representing
Tocor II Shares to an exchange agent in exchange for certificates representing
Common Stock of the Company. Through December 31, 1994, stock certificates
representing 221,000 shares of the Company's Common Stock had been delivered by
the exchange agent in connection with the merger. If all of the remaining Tocor
II Shares are surrendered to the exchange agent, stock certificates representing
an additional 146,000 shares
42
<PAGE>
Notes to Consolidated Financial Statements
of the Company's Common Stock will be delivered. Shares of the Company's Common
Stock into which the Tocor II Shares were converted by the merger are not
classified as issued and outstanding until the delivery by the exchange agent of
the stock certificate representing such shares. Warrants not tendered as part
of Units in the exchange offer remain outstanding.
Note 12
Other Income (Expenses)
The Company recorded a charge to earnings of $1,275,000 and $11,245,000 for
the years ended December 31, 1994 and December 31, 1992, respectively, in
connection with the settlement of certain litigation (see Note 2). During 1994,
1993 and 1992, respectively, the Company recorded a charge to earnings of
$3,649,000, $2,477,000 and $2,296,000 representing an unrealized loss due to the
other than temporary decline in the market value of marketable equity
investments below the Company's cost for such investments. Other income
(expenses) for 1992 includes gains of $1,170,000 from sales of the Company's
investments. Other income (expenses) also includes the Company's equity share
of the losses of an unconsolidated entity.
Note 13
Income Taxes
Differences between the Company's (benefit) for income taxes for 1994, 1993,
and 1992 and that computed by applying the statutory U.S. Federal income tax
rate consist of the following (in thousands):
<TABLE>
<CAPTION>
Years ended December 31, 1994 1993 1992
--------- --------- ----------
<S> <C> <C> <C>
Statutory Federal income tax benefit
based upon loss before income taxes $(44,356) $(26,033) $(66,010)
Charge for acquired research and development 12,938 - -
Benefit not recorded 31,418 26,033 65,116
Other items, including certain
non-deductible expenses - - 894
-------- -------- --------
$ - $ - $ -
======== ======== ========
</TABLE>
The Company recorded a charge for acquired research and development of
$36,966,000 in 1994, which was not deductible for U.S. tax purposes. At
December 31, 1994, the tax effect of the Company's net tax loss carryforward was
$173,486,000 with expiration dates ranging from 2005 to 2009. Additionally, at
December 31, 1994, the Company had research and development tax credits and
other tax credits of $5,424,000 substantially all with expiration dates ranging
from 1999 to 2008.
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 had no net deferred tax
assets at December 31, 1994.
43
<PAGE>
Notes to Consolidated Financial Statements
Note 14
Leases
The Company is lessee under various non-cancelable operating leases, covering
certain of the Company's facilities and equipment. The facility leases
generally provide for the Company to pay all taxes and operating costs
associated with the facility.
The aggregate minimum rental commitments of leases are as follows (in
thousands):
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1995 $2,606
1996 $1,912
1997 $1,599
1998 $1,436
1999 $1,215
Thereafter $4,433
</TABLE>
Rent expense was $3,189,000, $5,428,000, and $9,665,000, for the years ended
December 31, 1994, 1993, and 1992, respectively.
Note 15
Supplemental Information on Cash Flows
Interest paid, net of amounts capitalized, was $19,192,000, $19,421,000, and
$19,703,000, in 1994, 1993, and 1992, respectively.
Income tax payments of $19,000, $46,000, and $70,000 were made in 1994, 1993,
and 1992, respectively.
Cash used for the purchases of investments as well as the cash received upon
the maturities and sales of investments were as follows (in thousands):
<TABLE>
<CAPTION>
Years ended December 31, 1994 1993 1992
--------- ---------- ----------
<S> <C> <C> <C>
Purchases $(98,808) $(168,643) $(135,603)
Maturities and sales 127,250 203,840 222,896
-------- --------- ---------
$ 28,442 $ 35,197 $ 87,293
======== ========= =========
</TABLE>
During 1994, the Company issued 7,014,000 shares of Common Stock, resulting in
a noncash increase to additional paid-in capital of $25,643,000 in connection
with an exchange offer more fully described in Note 11.
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 11.
44
<PAGE>
Notes to Consolidated Financial Statements
During 1992, the Company issued warrants to purchase 4,500,000 shares of
Common Stock, resulting in a noncash increase to additional paid-in capital of
$14,625,000. During 1992, the Company acquired $2,134,000 of fixed assets by
assuming the related debt obligation.
Note 16
Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
In thousands except per share data
Three Months Ended March 31 June 30 September 30 December 31
--------------------------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C>
1994
Total revenues $ 15,273 $ 16,384 $ 12,927 $ 22,642
Sales 9,829 12,114 9,319 8,722
Gross profit from sales 6,199 7,643 5,667 4,491
Net loss (50,637) (1) (15,418) (17,579) (43,024) (2)
Net loss per share $ (1.13) $ (.30) $(.34) $(.83)
1993
Total revenues $ 14,978 $ 13,753 $ 16,729 $ 30,470
Sales 11,684 10,918 12,048 13,421
Gross profit from sales 7,790 6,935 8,206 9,321
Net loss (25,529) (3) (26,022) (3) (15,804) (7,024) (4)
Net loss per share $ ( .62) $ ( .63) $( .38) $(.17)
</TABLE>
(1) During the first quarter of 1994, the Company recorded a charge for
acquired research and development of $36,966,000 in connection with the exchange
offer as discussed in Note 11.
(2) During the fourth quarter of 1994, the Company recorded a charge of
$17,098,000 representing a royalty buyout related to ReoPro(Trademark).
Additionally, the Company recorded charges of $7,870,000 in connection with
the writedown of certain facilities and equipment, and $1,275,000 in connection
with the settlement of certain litigation. See Notes 2 and 17.
(3) During the first and second quarters of 1993, the Company recorded
restructuring charges of $4,273,000 representing reserves for fixed assets no
longer used or subsequently disposed of and $5,114,000, representing severance
related costs, respectively. See Note 17.
(4) During the fourth quarter of 1993, the Company recorded reserves of
$3,500,000, relating to HA-1A(Registermark) inventories.
Note 17
Other Charges
The Company had an agreement which required it to make certain future royalty
payments depending on the level of ReoPro(Trademark) sales. In 1994, the
Company elected to buyout such future royalty obligation and, as a result,
recorded a charge of $17,098,000 representing such buyout. Additionally, the
Company recorded a charge of $7,870,000 in connection with the write-down of
certain facilities and equipment. For the years ended December 31, 1993 and
45
<PAGE>
Notes to Consolidated Financial Statements
1992, the Company recorded restructuring charges of $9,387,000 and $15,266,000,
respectively, consisting principally of severance related costs incurred in
connection with the further downsizing of its work force, and reserves for
certain fixed assets which are no longer used or have been subsequently
disposed. At the Company's 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, other
royalty buyout arrangements, or other charges will not be required in the
future.
For the years ended December 31, 1993 and 1992, the Company recorded
charges related to HA-1A(Registermark) inventory of $3,500,000 and $64,877,000,
respectively. 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.
46
<PAGE>
REPORT OF MANAGEMENT
The consolidated financial statements presented in this report have
been prepared by the Company's management in conformity with generally accepted
accounting principles from the Company's financial records. The Company's
management is responsible for all information and representations made in those
financial statements and for their integrity and objectivity. In those cases
where judgment and best estimates are necessary, appropriate consideration is
given to materiality in the preparation of the financial statements. The
Company's management has also prepared the other information in this report and
is responsible for its accuracy and consistency with the financial statements.
The Company's management has designed systems of internal accounting
controls to provide reasonable, but not absolute, assurance that assets are
safeguarded from unauthorized use or disposition, and that transactions are
recorded according to management's policies and procedures. The concept of
reasonable assurance is based on the recognition that there are inherent
limitations in all systems of internal accounting control and that the costs of
such systems should not exceed the benefits to be derived. These systems are
continually reviewed and modified, where appropriate, to maintain such
assurance. Additionally, in connection with their annual audit, independent
auditors perform examinations in accordance with generally accepted auditing
standards, which include a review of the system of internal accounting controls
to the extent necessary in order to determine the nature, timing, and extent of
audit tests to be applied on the financial statements. The Company's management
believes that the Company's system of internal accounting controls is adequate
to accomplish the objectives discussed herein.
The selection of the Company's independent auditors, KPMG Peat Marwick
LLP, has been approved by the Company's Board of Directors. An Audit Committee
of the Board of Directors, composed of three non-management directors, meets
with, and reviews the activities of, corporate financial management and the
independent auditors to ascertain that each is properly discharging its
responsibilities. The independent auditors also meet separately with the Audit
Committee without management present, to discuss the results of their work, the
adequacy of internal accounting controls, and the quality of financial
reporting.
47
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders, Centocor, Inc.:
We have audited the accompanying consolidated balance sheets of Centocor, Inc.
and subsidiaries as of December 31, 1994 and 1993, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1994. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Centocor, Inc. and
subsidiaries as of December 31, 1994 and 1993 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1994, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
February 24, 1995
48
<PAGE>
Item 9. Changes in and Disagreements with Accountants on
---------------------------------------------------------
Accounting and Financial Disclosure
-----------------------------------
Not Applicable.
Part III
Item 10. Directors and Executive Officers of the Registrant
------------------------------------------------------------
DIRECTORS OF THE REGISTRANT
The following table sets forth, as of March 1, 1995, information as to the
directors of the Company, including their recent employment, positions with the
Company, other directorships and age. Directors are elected to serve one-year
terms.
Name, Principal Occupations and Year First
Businesses During Last Five Years Elected
and Other Current Directorships Age Director
------------------------------- --- --------
Anthony B. Evnin 53 1980
General Partner of Venrock Associates, a
venture capital limited partnership.
Director, AgriDyne Technologies Inc.,
Arris Pharmaceutical Corporation, Athena
Neurosciences, Inc., Genetics Institute,
Inc., IDEXX Laboratories, Inc., Intelligent
Surgical Lasers, Inc., Kopin Corporation,
Opta Food Ingredients, Inc. and Sugen,
Inc.
William F. Hamilton 55 1985
Landau Professor of Management and Technology
at the Wharton School of the University of
Pennsylvania. Director, Hunt Manufacturing
Co., Marlton Technologies, Inc. and Neose
Pharmaceuticals, Inc.
49
<PAGE>
Name, Principal Occupations and Year First
Businesses During Last Five Years Elected
and Other Current Directorships Age Director
------------------------------- --- --------
David P. Holveck 49 1994
President and Chief Executive Officer of the
Company since November 1992; President and
Chief Operating Officer from April 1992 to
October 1992; and Executive Vice President
and President - Diagnostics Division from
December 1988 to April 1992.
Antonie T. Knoppers 80 1986
Self-employed business consultant. Former
President, Chief Operating Officer and Vice
Chairman, Merck & Co., Inc., a research-based
health products company. Trustee, The Salk
Institute. Director, Agouron Pharmaceuticals,
Inc.
Ronald A. Matricaria 52 1994
President and Chief Executive Officer of
St. Jude Medical, Inc., a medical device
company, since April 1993 and Chairman of
the Board since 1995. From 1970 to 1993,
Mr. Matricaria was employed by Eli Lilly
and Company, Inc., a research-based
pharmaceutical company, where he served in
a variety of capacities, including President
of the Medical Devices and Diagnostics
Division and Executive Vice President of the
Pharmaceutical Division and President of its
North American operations. Director, St. Jude
Medical, Inc., Diametrics Medical, Inc.,
InControl, Inc. and the Health Industry
Manufacturers Association.
50
<PAGE>
Name, Principal Occupations and Year First
Businesses During Last Five Years Elected
and Other Current Directorships Age Director
------------------------------- --- --------
Hubert J.P. Schoemaker 44 1983
Chairman of the Board since November 1987;
Chief Executive Officer of the Company from
November 1987 to October 1992; President of
the Company from 1983 to 1987. Director,
Apollon, Inc., Applied Technology Genetics
Corporation, Myco Pharmaceuticals, Inc. and
Safeguard Scientifics Inc.
Richard D. Spizzirri 62 1994
Senior Counsel to the law firm of Davis Polk
& Wardwell since January 1995; Partner, Davis
Polk & Wardwell from 1967 to 1994. Director,
Sugen, Inc. and Broadcast Partners, Inc.
Lawrence Steinman 47 1991
Professor of Immunology, Weizmann Institute
of Science, Rehovot, Israel since 1994;
Professor of Neurology and Neurological
Sciences and Pediatrics, Stanford University
School of Medicine since 1991 and Associate
Professor of Neurology, Pediatrics and
Genetics, Stanford University School of
Medicine from 1985 to 1991.
51
<PAGE>
Name, Principal Occupations and Year First
Businesses During Last Five Years Elected
and Other Current Directorships Age Director
------------------------------- --- --------
Jean C. Tempel 51 1993
General Partner of Technology Leaders L.P., a
venture capital affiliate of Safeguard
Scientifics Inc., an entrepreneurial
technology company since November 1993;
President and Chief Operating Officer of
Safeguard Scientifics Inc. from January 1992
to November 1993; Principal, Tempel Partners
Inc., a management consulting firm, from 1991
to January 1992; Executive Vice President and
Chief Operations Officer, The Boston Company,
a bank trust company, from 1988 to 1990.
Director, Cambridge Technology Partners Inc.,
Safeguard Scientifics Inc. and Trustee,
Scutter Family of Mutual Funds.
52
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, who are elected to serve at the
discretion of the Board of Directors, are as follows:
<TABLE>
<CAPTION>
Name Age Position
------------------------------------- --- ----------------------------------
<S> <C> <C>
David P. Holveck 49 President and Chief Executive
Officer
Bobba Venkatadri 51 Executive Vice President -
Pharmaceutical Division
Timothy P. Cost 35 Senior Vice President - Investor
Relations and Strategic Operations
Martin R. Page 50 Senior Vice President - Regulatory
Affairs and Quality Assurance.
James N. Woody 52 Senior Vice President - Research
and Development and Chief
Scientific Officer
</TABLE>
Mr. Holveck has been associated with Centocor since June 1983, as President
and Chief Executive Officer since November 1992, as President and Chief
Operating Officer from April 1992 to October 1992, and as Executive Vice
President and President - Diagnostics Division from December 1988 to April 1992.
Mr. Venkatadri has been associated with Centocor since March 1992, as
Executive Vice President - Pharmaceutical Division since August 1992, and as
Vice President - Pharmaceutical Manufacturing from March 1992 to August 1992.
Previously, Mr. Venkatadri was Senior Director of Pharmaceutical Operations for
Warner-Lambert Puerto Rico, Inc., a division of Warner-Lambert Company, from
October 1990 to February 1992, and President and Director of P. T. Warner-
Lambert Indonesia, an affiliate of Warner-Lambert Company, from March 1988 to
October 1990.
Mr. Cost has been associated with Centocor since January 1994, as Senior
Vice President - Investor Relations and Strategic Operations. Previously, Mr.
Cost was Director of Investor Relations for Eastman Kodak Company from October
1991 to December 1993, and Director of Strategic Planning for Worldwide
Manufacturing for Eastman Kodak Company from June 1989 to October 1991.
Mr. Page has been associated with Centocor since September 1987, as Senior
Vice President - Regulatory Affairs and Quality Assurance since March 1994, as
Senior Vice
53
<PAGE>
President - Worldwide Regulatory Affairs from August 1992 to March 1994, as Vice
President - Worldwide Regulatory Affairs from June 1990 to August 1992, and as
Vice President -International Regulatory Affairs from September 1987 to June
1990.
Dr. Woody has been associated with Centocor since August 1991, as Chief
Scientific Officer since August 1992, and as Senior Vice President - Research
and Development since August 1991. Previously, Dr. Woody served as Commanding
Officer of the U.S. Navy Medical Research and Development Command from 1988 to
1991.
Item 11. Executive Compensation
--------------------------------
Item 12. Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------
Item 13. Certain Relationships and Related Transactions
--------------------------------------------------------
In accordance with General Instruction G(3), the information called for by
Items 11, 12 and 13 of Part III are incorporated herein by reference from the
Company's definitive Proxy Statement for the Centocor Annual Meeting of
Shareholders to be held on May 17, 1995, which definitive Proxy Statement will
be filed with the Securities and Exchange Commission pursuant to Regulation 14A.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
--------------------------------------------------------------
on Form 8-K
-----------
(a) Documents filed as part of the Report:
(1) (i) Financial Statements of Centocor Partners III, L.P.:
Balance Sheets, December 31, 1994 and 1993.
Statements of Operations for the Years Ended December 31, 1994,
1993 and 1992.
Statements of Cash Flows for the Years Ended December 31, 1994,
1993 and 1992.
Statements of Partners' Capital for the Years Ended December 31,
1994, 1993 and 1992.
Notes to Financial Statements.
Independent Auditors' Report.
54
<PAGE>
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
Schedules, other than those listed above, have been omitted because of
the absence of conditions under which they are required or because the
required information is included in the financial statements or the
notes thereto.
(3) Exhibits:
2.1 Exchange Offer for Units of Tocor II, Inc., as described in
the Registrant's Schedule 14D-1 dated March 4, 1994, as
amended by Amendment No. 1 thereto dated March 7, 1994 and
Amendment No. 2 thereto dated March 18, 1994 (incorporated by
reference to the Registrant's Schedule 14D-1 dated March 4,
1994, as amended by Amendment No. 1 thereto dated march 7,
1994 and Amendment No. 2 thereto dated March 18, 1994.)
3.1 Restated Articles of Incorporation (incorporated by reference
to Exhibit 3.1 to Form S-1 Registration Statement, File No.
2-80098).
3.2 Statement of Reduction of Authorized Shares filed September 19,
1983 (incorporated by reference to Exhibit 3.2 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1986).
3.3 Statement of Reduction of Authorized Shares filed January 19,
1984 (incorporated by reference to Exhibit 3.3 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1986).
3.4 Articles of Amendment filed April 18, 1984 (incorporated by
reference to Exhibit 3.4 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1986).
3.5 Statement of Reduction of Authorized Shares filed February 25,
1985 (incorporated by reference to Exhibit 3.5 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1986).
55
<PAGE>
3.6 Statement of Reduction of Authorized Shares filed May 6, 1985
(incorporated by reference to Exhibit 3.6 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1986).
3.7 Statement of Reduction of Authorized Shares filed October 23,
1985 (incorporated by reference to Exhibit 3.7 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1986).
3.8 Articles of Amendment filed April 16, 1987 (incorporated by
reference to Exhibit 3.8 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1987).
3.9 Articles of Amendment filed April 21, 1988 (incorporated by
reference to Exhibit 3.9 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1988).
3.10 Articles of Amendment filed April 26, 1988 (incorporated by
reference to Exhibit 3.10 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1988).
3.11 Statement Re Series A Preferred Stock filed October 11, 1988
(incorporated by reference to Exhibit 3.11 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1988).
3.12 Articles of Amendment filed April 13, 1990 (incorporated by
reference to Exhibit 3.12 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1990).
3.13 Articles of Amendment filed April 26, 1991 (incorporated by
reference to Exhibit 3.13 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1991).
3.14 Statement of Correction filed October 16, 1991 to Articles of
Amendment filed April 26, 1991 (incorporated by reference to
Exhibit 3.14 to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991).
3.15 By-Laws of Centocor, Inc. as amended October 30, 1992
(incorporated by reference to Exhibit 3.15 to Registrant's
56
<PAGE>
Annual Report on Form 10-K for the year ended December 31,
1992).
4.1 Specimen Certificate for Common Stock (incorporated by
reference to Exhibit 4 to Amendment No. 1 to Form S-1
Registration Statement, File No. 2-80098).
4.2 Form of Warrant Issued to Purchasers of Limited Partnership
Interests in CPIII (incorporated by reference to Exhibit 4.5
to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1987).
4.3 Rights Agreement between Centocor, Inc. and the First National
Bank of Boston as Rights Agent dated September 26, 1988
(incorporated by reference to Exhibit 4 to Registrant's
Current Report on Form 8-K dated September 26, 1988).
4.4 Form of Indenture between Centocor, Inc. and CoreStates Bank,
N.A. as Trustee Dated as of January 18, 1991 (incorporated by
reference to Exhibit 4.3 to Amendment No. 1 to Form S-3
Registration Statement, Reg. No. 33-38110).
4.5 Form of Note Issued to Purchasers of 7 1/4% Convertible
Subordinated Notes Due February 1, 2001 (incorporated by
reference to Exhibit 4.4 to Amendment No. 1 to Form S-3
Registration Statement, Reg. No. 33-38110).
4.6 Form of Indenture between Centocor, Inc. and Chase Manhattan
Trustees Limited as Trustee Dated as of October 16, 1991
(incorporated by reference to Exhibit 4.3 to Form S-3
Registration Statement, Reg. No. 33-44231).
4.7 Form of Debenture Issued to Purchasers of 6-3/4% Convertible
Subordinated Debentures Due October 16, 2001 (included in
Exhibit 4.9) (incorporated by reference to Exhibit 4.3 to Form
S-3 Registration Statement, Reg. No. 33-44231).
4.8 Form of Series T Warrant Issued to Purchasers of Units, each
Unit consisting of one share of Tocor II Callable Common
Stock, one Series T warrant to purchase one share of Centocor
Common Stock, and one Callable warrant to purchase one share
of Centocor Common Stock (incorporated by reference to Exhibit
4.2 to Amendment No. 4 to Form S-1/S-3
57
<PAGE>
Registration Statement of Tocor II and Centocor, Reg. No. 33-
44072).
4.9 Form of Callable Warrant Issued to Purchasers of Units, each
Unit consisting of one share of Tocor II Callable Common
Stock, one Series T warrant to purchase one share of Centocor
Common Stock, and one Callable warrant to purchase one share
of Centocor Common Stock (incorporated by reference to Exhibit
4.3 to Amendment No. 4 to Form S-1/S-3 Registration Statement
of Tocor II and Centocor, Reg. No. 33-44072).
10.1* Form of Non-Qualified Stock Option Agreement (incorporated by
reference to Exhibit 10.01 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1987).
10.2* Incentive Stock Option Plan, as amended (incorporated by
reference to Exhibit 10.03 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1986).
10.3* 1983 Incentive Stock Option Plan, as amended (incorporated by
reference to Exhibit 10.04 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1986).
10.4* 1983 Restricted Common Stock Award Plan, as amended and
restated (incorporated by reference to Exhibit 10.04 to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993).
10.5* 1987 Non-Qualified Stock Option Plan, as amended and restated
(incorporated by reference to Exhibit 10.05 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1990).
10.6* 1989 Non-Employee Directors' Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 10.06 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1989).
10.7 Lease Agreement for property located at Great Valley Parkway,
Malvern, PA 19355 (incorporated by reference to Exhibit 10.07
to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1989).
58
<PAGE>
10.8 Partnership Purchase Option Agreement among Centocor, Inc.,
CCIP, Centocor Development Corporation I, each Class A limited
partner and the Class B limited partner, dated September 12,
1985 (incorporated by reference to Exhibit 10.53 to
Registrant's Post Effective Amendment No. 1 to Form S-1
Registration Statement, File No. 2-95057).
10.9 Indemnity Agreement between Centocor, Inc. and CCIP, dated
September 12, 1985 (incorporated by reference to Exhibit 10.71
to Registrant's Post Effective Amendment No. 1 to Form S-1
Registration Statement, File No. 2-95057).
10.10* Qualified Savings and Retirement Plan, as amended and restated
(incorporated by reference to Exhibit 10.14 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1989).
10.11 Partnership Purchase Option Agreement among Centocor, Inc.,
CPII, Centocor Development Corporation II, each Class A
limited partner and the Class B limited partner, dated
December 17, 1986 (incorporated by reference to Exhibit 10.23
to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1986).
10.12 Indemnity Agreement between Centocor, Inc. and CPII, dated
December 17, 1986 (incorporated by reference to Exhibit 10.26
to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1986).
10.13 Consent Decree of Permanent Injunction in U.S. v. Centocor,
Inc. et al., Civil Action No. 85-5613, in the United States
District Court for the Eastern District of Pennsylvania
(incorporated by reference to Exhibit 10.60 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1985).
10.14 CPIII Agreement of Limited Partnership, dated December 23,
1987 as amended and restated on January 15, 1988 and March 23,
1988 (incorporated by reference to Exhibit 10.26 to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1988).
10.15 Cross License Agreement between CPIII and Centocor, Inc., dated
December 23, 1987 (incorporated by reference to Exhibit
59
<PAGE>
10.38 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1987).
10.16 Amendment dated March 23, 1988 to Cross License Agreement
between CPIII and Centocor, Inc. dated December 23, 1987
(incorporated by reference to Exhibit 10.28 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1988).
10.17 Development Agreement between CPIII and Centocor, Inc., dated
December 23, 1987 (incorporated by reference to Exhibit 10.39
to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1987).
10.18 Amendment dated March 23, 1988 to Development Agreement
between CPIII and Centocor, Inc. dated December 23, 1987
(incorporated by reference to Exhibit 10.30 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1988).
10.19 Joint Venture Agreement between CPIII and Centocor, Inc.,
dated December 23, 1987 (incorporated by reference to Exhibit
10.40 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1987).
10.20 Amendment dated March 23, 1988 to Joint Venture Agreement
between CPIII and Centocor, Inc. dated December 23, 1987
(incorporated by reference to Exhibit 10.32 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1988).
10.21 Indemnity Agreement between CPIII and Centocor, Inc., dated
December 23, 1987 (incorporated by reference to Exhibit 10.41
to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1987).
10.22 Inducement Agreement among Centocor, Inc., CPIII, Centocor
Development Corporation III, PaineWebber Development
Corporation, PaineWebber, Inc. and PaineWebber R&D Partners
II, L.P., dated December 23, 1987 (incorporated by reference
to Exhibit 10.42 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1987).
60
<PAGE>
10.23 Amendment dated March 23, 1988 to Inducement Agreement among
Centocor, Inc., CPIII, Centocor Development Corporation III,
PaineWebber Development Corporation, PaineWebber, Inc. and
PaineWebber R&D Partners II, L.P. dated December 23, 1987
(incorporated by reference to Exhibit 10.35 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1988).
10.24 Partnership Purchase Option Agreement among Centocor, Inc.,
CPIII, Centocor Development Corporation III, and the Class C
limited partner, dated December 23, 1987 (incorporated by
reference to Exhibit 10.43 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1987).
10.25 Amendment dated March 23, 1988 to Partnership Purchase Option
Agreement among Centocor, Inc., CPIII, Centocor Development
Corporation III and the Class C limited partner dated December
23, 1987 (incorporated by reference to Exhibit 10.37 to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1988).
10.26 Purchase Option Agreement by and among Centocor, Inc.,
PaineWebber Incorporated, The First Boston Corporation,
Hambrecht & Quist Incorporated and J. P. Morgan Securities
Inc. dated January 21, 1992 (incorporated by reference to
Exhibit 10.3 to Amendment No. 5 to Form S-1/S-3 Registration
Statement of Tocor II and Centocor, Reg. No. 33-44072).
10.27 Series E, F and G Preferred Stock Purchase Agreement dated as
of November 20, 1991 between Centocor Delaware, Inc. and
Corvas International, Inc. (incorporated by reference to
Exhibit 10.28 to Form S-1 Registration Statement of Corvas
International, Inc. Reg. No. 33-44555).
10.28 Sales and Distribution Agreement between Centocor, Inc. and Eli
Lilly and Company dated July 15, 1992. (The Registrant has
requested confidential treatment from the Securities and
Exchange Commission for portions of this Agreement.)
(incorporated by reference to Exhibit 10.32 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1992).
61
<PAGE>
10.29 Reimbursement Agreement between Centocor, Inc. and Eli Lilly
and Company dated July 15, 1992. (The Registrant has
requested confidential treatment from the Securities and
Exchange Commission for portions of this Agreement.)
(incorporated by reference to Exhibit 10.33 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1992).
10.30 Investment Agreement between Centocor, Inc. and Eli Lilly and
Company dated July 15, 1992. (The Registrant has requested
confidential treatment from the Securities and Exchange
Commission for portions of this Agreement.) (incorporated by
reference to Exhibit 10.34 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1992).
10.31 Amendment to Sales and Distribution Agreement among Centocor,
Inc., Centocor B.V. and Eli Lilly and Company dated June 27,
1993. (The Registrant has requested confidential treatment
from the Securities and Exchange Commission for portions of
this Agreement.) (incorporated by reference to Exhibit 10.35
to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993).
10.32 Option Agreement between Centocor B.V. and Eli Lilly Nederland
B.V. dated August 20, 1993. (The Registrant has requested
confidential treatment from the Securities and Exchange
Commission for portions of this Agreement.) (incorporated by
reference to Exhibit 10.36 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993).
10.33 Deed of Mortgage from Centocor B.V. to Eli Lilly Nederland
B.V. dated August 26, 1993 (incorporated by reference to
Exhibit 10.37 to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1993).
10.34 Deed of Pledge from Centocor B.V. to Eli Lilly Nederland B.V.
dated August 26, 1993 (incorporated by reference to Exhibit
10.38 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993).
10.35 Stock Purchase Agreement made as of December 16, 1993 by and
between Centocor, Inc. and The Wellcome Foundation
62
<PAGE>
Limited (incorporated by reference to Exhibit 10(a) to the
Registrant's Current Report on Form 8-K dated December 16,
1993).
10.36 Supply, Distribution and Sales Agreement dated December 16,
1993 by and among Centocor, Inc.., Centocor B.V., The Wellcome
Foundation Limited and Burroughs Wellcome Co. (The Registrant
has requested confidential treatment from the Securities and
Exchange Commission for portions of this Agreement.)
(Incorporated by reference to Exhibit 10(b) to the
Registrant's Current Report on Form 8-K dated December 16,
1993).
10.37 Clinical and Regulatory Development Agreement dated December
16, 1993 among Centocor, Inc.., Centocor B.V., The Wellcome
Foundation Limited and Burroughs Wellcome Co. (The Registrant
has requested confidential treatment from the Securities and
Exchange Commission for portions of this Agreement.)
(Incorporated by reference to Exhibit 10(c) to the
Registrant's Current Report on Form 8-K dated December 16,
1993).
10.38 Centocor Technology License Agreement dated as of December 16,
1993 among Centocor, Inc., Centocor B.V., The Wellcome
Foundation Limited and Burroughs Wellcome Co. (The Registrant
has requested confidential treatment from the Securities and
Exchange Commission for portions of this Agreement.)
(incorporated by reference to Exhibit 10(e) to the
Registrant's Current Report on Form 8-K dated December 16,
1993).
10.39 Relicense Agreement dated as of December 16, 1993 among
Centocor, Inc., Centocor B.V., The Wellcome Foundation Limited
and Burroughs Wellcome Co. (incorporated by reference to
Exhibit 10(f) to the Registrant's Current Report on Form 8-K
dated December 16, 1993).
10.40 Appendix A - Glossary of Terms to each of the Agreements dated
as of December 16, 1993 by and among Centocor, Inc., Centocor
B.V., The Wellcome Foundation Limited and Burroughs Wellcome
Co. (The Registrant has requested confidential treatment from
the Securities and Exchange Commission for portions of this
Agreement.) (incorporated by
63
<PAGE>
reference to Exhibit 10(g) to the Registrant's Current Report
on Form 8-K dated December 16, 1993).
10.41 First Supplemental Agreement dated as of November 15, 1994
among Centocor, Inc., Centocor B.V., The Wellcome Foundation
Limited and Burroughs Wellcome Co. (The Registrant has
requested confidential treatment from the Securities and
Exchange Commission for portions of this Agreement.)
(Incorporated by reference to Exhibit 10(a) to the
Registrant's Current Report on Form 8-K dated November 15,
1994).
10.42 Wellcome Clinical Development Agreement dated as of November
15, 1994 among Centocor, Inc., Centocor B.V., The Wellcome
Foundation Limited and Burroughs Wellcome Co. (The Registrant
has requested confidential treatment from the Securities and
Exchange Commission for portions of this Agreement.)
(incorporated by reference to Exhibit 10(b) to the
Registrant's Current Report on Form 8-K dated November 15,
1994).
12 Statement re: Computation of Ratios.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
*These exhibits constitute compensatory plans.
64
<PAGE>
(b) The Registrant has filed the following reports on Form 8-K since the
beginning of the quarter ended December 31, 1994:
Date of Report Item Covered
-------------- ------------
November 15, 1994 5, 7
December 22, 1994 5, 7
For the purposes of complying with the amendments to the rules governing Form
S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned
registrant hereby undertakes as follows, which undertaking shall be incorporated
by reference into registrant's Registration Statements on Form S-8, Nos. 2-
86486, 33-16285, 33-00167, 33-35731, 33-23480, 33-16284, and 33-35730.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
65
<PAGE>
Centocor Partners III, L.P.
Balance Sheets
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, December 31,
1994 1993
---- ----
<S> <C> <C>
Assets
Investment in joint venture (Note 4) $ 511,630 $ 507,140
============ ============
Liabilities and partners' capital
Current liabilities:
Accounts payable and accrued expenses $ 42,407 $ 37,907
Due to Centocor, Inc. (Note 5) 6,997,126 4,134,126
------------ ------------
7,039,533 4,172,033
Partners' capital (Note 3) (6,527,903) (3,664,893)
------------ ------------
Total liabilities and partners' capital $ 511,630 $ 507,140
=========== ============
</TABLE>
See accompanying Notes to Financial Statements.
66
<PAGE>
Centocor Partners III, L.P.
Statements of Operations
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
For the Years Ended December 31, 1994 1993 1992
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Equity in earnings of
joint venture (Note 4) $ 4,490 $ 3,375 $ 128,571
------------ ------------ ------------
Costs and Expenses:
Research and development (Note 5) 22,850,000 19,875,000 28,366,000
Amortization - - 115,705
General and administrative 4,500 7,336 6,090
------------ ------------ ------------
22,854,500 19,882,336 28,487,795
------------ ------------ ------------
Loss for the period $(22,850,010) $(19,878,961) $(28,359,224)
============ ============ ============
</TABLE>
See accompanying Notes to Financial Statements.
67
<PAGE>
Centocor Partners III, L.P.
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------------------------------------------------
1994 1993 1992
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows used for operating activities:
Loss $(22,850,010) $(19,878,961) $(28,359,224)
Amortization - - 115,705
(Decrease) increase in due to Centocor, Inc. 2,863,000 (2,461,664) 4,050,042
Change in accounts payable and accrued expenses 4,500 1,000 (65,184)
Equity in earnings of joint venture (4,490) (3,375) (3,304)
------------ ------------ ------------
Net cash used for operating activities (19,987,000) (22,343,000) (24,261,965)
Cash flows from (used for) financing activities:
General partner capital contributions 19,987,000 22,343,000 24,246,634
Distributions to partners - - (151,507)
------------ ------------ -----------
Net cash from financing activities 19,987,000 22,343,000 24,095,127
------------ ------------ -----------
Decrease in cash and cash equivalents - - (166,838)
Cash and cash equivalents at beginning of year - - 166,838
------------ ------------ -----------
Cash and cash equivalents at end of year $ $ $
- - -
============ ============ ===========
</TABLE>
See accompanying Notes to Financial Statements
68
<PAGE>
Centocor Partners III, L.P.
Statements of Partners' Capital
----------------------------------------------------------------------
<TABLE>
<CAPTION>
Limited General
Partners Partner Total
---------- ------------- -------------
<S> <C> <C> <C>
Balance, December 31, 1991 $ 617,657 $ (2,482,492) $ (1,864,835)
Contributions - 24,246,634 24,246,634
Distributions (149,992) (1,515) (151,507)
Earnings (Loss) 6,708 (28,365,932) (28,359,224)
--------- ------------ ------------
Balance, December 31, 1992 474,373 (6,603,305) (6,128,932)
Contributions - 22,343,000 22,343,000
Loss (3,921) (19,875,040) (19,878,961)
--------- ------------ ------------
Balance, December 31, 1993 470,452 (4,135,345) (3,664,893)
Contributions - 19,987,000 19,987,000
Loss (10) (22,850,000) (22,850,010)
--------- ------------ ------------
Balance, December 31, 1994 $ 470,442 $ (6,998,345) $ (6,527,903)
========= ============ ============
</TABLE>
See accompanying Notes to Financial Statements.
69
<PAGE>
Centocor Partners III, L.P.
Notes to Financial Statements
-------------------------------------------------------------------------------
1. Organization and Business Operations
------------------------------------
Centocor Partners III, L.P. (the "Partnership"), was formed in December
1987, and is managed by its general partner, Centocor Development Corporation
III, a wholly owned subsidiary of Centocor, Inc. ("Centocor"), a Pennsylvania
corporation, which is subject to the reporting requirements of the Securities
Exchange Act of 1934. The Partnership was organized to develop and derive
income from the sale of one therapeutic product (ReoPro(Trademark), formerly
CentoRx(Registermark)) and one imaging product (Capiscint) which are expected
to be used in the treatment and diagnosis, respectively, of two different
types of cardiovascular disease.
In 1987 and 1988, the Partnership and Centocor sold (a) 542.25 units,
consisting of 111 Class C limited partnership interests and 431.25 Class A
limited partnership interests each together with warrants to purchase shares of
Centocor common stock, and (b) one Class B limited partnership interest,
together with warrants to purchase shares of Centocor common stock. The
purchase prices were $90,000 for each of the Class C interests, $100,000 for
each of the Class A interests and $150,000 for the Class B interest.
The net proceeds from the sale of limited partnership interests were used
primarily to pay expenses incurred under the Partnership's agreement with
Centocor (the "Development Agreement") to perform research and development for
the Partnership (see Note 5).
The Partnership also entered into a Cross License Agreement pursuant to
which Centocor granted to the Partnership an exclusive license to use all patent
rights, know-how, technical information and biological materials owned or
controlled by Centocor within the Partnership's field of activity. Under the
Cross License Agreement, the Partnership agreed to grant to Centocor an
exclusive royalty-free license to all patent rights, know-how, technical
information and biological materials arising from research and development
conducted under the Development Agreement for all purposes outside of the
Partnership's field of activity.
The profits and losses of the Partnership are generally allocated 1 percent
to the general partner and 99 percent to the limited partners. Losses in excess
of the limited partners' capital contributions are allocated to the general
partner. The general partner is permitted but not required to make additional
capital contributions for the working capital of the partnership (see Note 5).
2. Summary of Significant Accounting Policies
------------------------------------------
Investment in Joint Venture
---------------------------
The Partnership accounts for its investment in the joint venture (see Note
4) under the equity method of accounting.
70
<PAGE>
Centocor Partners III, L.P.
Notes to Financial Statements
-------------------------------------------------------------------------------
Income Taxes
------------
Income or loss credited to the partners' capital accounts is reportable for
income tax purposes by the partners; therefore, no provision for income taxes
has been made in the accompanying financial statements. The Partnership's tax
returns are subject to examination by federal and state taxing authorities.
Because many types of transactions are susceptible to varying interpretations
under federal and state income tax laws and regulations, certain amounts may be
subject to change at a later date upon final determination by the respective
taxing authorities.
3. Partnership Purchase Option
---------------------------
Centocor has entered into a Partnership Purchase Option Agreement with each
of the limited partners. Under its terms, Centocor has the option to purchase
each limited partnership interest upon the earlier of (a) the limited partners
having received distributions from the joint venture (see Note 4) equal to 15
percent of their capital contributions to the Partnership and the expiration of
at least 24 months after the first commercial sale of products by the joint
venture or (b) the expiration of at least 48 months after the first commercial
sale of products by the joint venture; but, in any event, not prior to the
expiration of the then applicable long-term capital gains holding period after
the expenditure by Centocor of all funds paid to it pursuant to the Development
Agreement. Through the joint venture, Centocor commenced sales of
ReoPro(Trademark) to Lilly in February 1995. The ability of Centocor to exercise
this option is highly dependent upon the future financial condition of Centocor.
If Centocor exercises the Partnership Purchase Option, each limited partner
will enter into a Partnership Purchase Agreement with Centocor which sets forth
the terms under which Centocor will purchase the limited partnership interests.
Under the terms of the Partnership Purchase Agreement, the aggregate purchase
price for the limited partnership interests would be payable as follows: (a) an
advance payment of $13,598,000 in cash (or, at Centocor's option, $15,229,000 in
Centocor common stock), and (b) quarterly payments equal to certain percentages
of revenue to Centocor from sales of the Partnership's products, or products of
Centocor or its affiliates which are competitive, or sold in combination, with
the Partnership's products. Beginning with the 12th calendar quarter after the
calendar quarter in which the advance payment is made, Centocor's payment to the
limited partners will be reduced by 25 percent of the amount which the limited
partners would otherwise have received until Centocor has recouped the amount of
the advance payment.
71
<PAGE>
Centocor Partners III, L.P.
Notes to Financial Statements
-------------------------------------------------------------------------------
4. Joint Venture
-------------
The Partnership and Centocor have formed a joint venture for the purpose of
commercializing any products developed within the Partnership's field of
activity. The joint venture agreement provides that Centocor shall manufacture
the products on behalf of the joint venture for its actual costs of
manufacturing. Under the joint venture agreement, Centocor also provides
marketing services for the joint venture for a commission of 17 percent of joint
venture sales and receives 10 percent of joint venture sales as reimbursement
for its management and administrative services. The profits and losses of the
joint venture are to be allocated 75 percent to Centocor and 25 percent to the
Partnership.
The joint venture will terminate upon the occurrence of certain events,
principally related to the exercise or expiration of the purchase option granted
to Centocor (see Note 3).
On July 15, 1992, Centocor and Eli Lilly and Company ("Lilly") entered into
a Sales and Distribution Agreement, pursuant to which Lilly was granted the
option to be the exclusive worldwide distributor for ReoPro(Trademark). Pursuant
to the Agreement, the Joint Venture recognized $500,000 of revenue in 1992
related to the ReoPro(Trademark) option. During the second quarter of 1993,
Lilly exercised its option to become the exclusive worldwide distributor for
ReoPro(Trademark) and Centocor and Lilly amended their Sales and Distribution
Agreement. As part of the amendment, Lilly has assisted Centocor and will
continue to assist Centocor in the regulatory filings and continued development
of ReoPro(Trademark) for various clinical indications.
Status of ReoPro(Trademark)
---------------------------
In December 1994, the U.S. Food and Drug Administration ("FDA") granted
Centocor a product license for ReoPro(Trademark), a product indicated for the
reduction of acute ischemic cardiac complications in patients undergoing
angioplasty procedures who are high risk for abrupt artery closure, and the
Committee for Proprietary Medicinal Products ("CPMP") issued a positive opinion
regarding the granting of marketing authorization in 11 of the 12 member states
for ReoPro(Trademark). Belgium, the only dissenting country in the European
Union ("EU"), will require additional clinical trial results. For products
recommended for approval by the CPMP prior to January 1, 1995, each EU member
state issues its own national licenses. In addition, some countries require
approvals for pricing and reimbursement. ReoPro(Trademark) has been approved for
sale in Norway, Sweden, The U.K., and The Netherlands. Through the joint
venture, Centocor commenced sales of ReoPro(Trademark) to Lilly in January 1995.
The level of sales of ReoPro(Trademark) will depend upon a number of factors,
including the timing and extent of additional regulatory approvals for
ReoPro(Trademark), approval and commercialization of competitive products, the
degree of acceptance of ReoPro(Trademark) in the marketplace, and the strength
of Centocor's patent position and that of others.
72
<PAGE>
Centocor Partners III, L.P.
Notes to Financial Statements
-------------------------------------------------------------------------------
5. Research Funding
----------------
The initial funding by the limited partners for the Partnership's research
program pursuant to the Development Agreement with Centocor was exhausted in
1990. In order to continue the research program, the Partnership extended the
terms of the Development Agreement with Centocor. Approximately $91,224,000 of
the Partnership's research costs through December 31, 1994 were funded by the
general partner. At December 31, 1994 and December 31, 1993, approximately
$6,997,000 and $4,134,000, respectively, was due to Centocor for expenditures
under the Development Agreement. The general partner may continue to provide
funding but is under no obligation to do so. The ability of the general partner
to continue to fund, and the ability of Centocor to perform under, the
Development Agreement is highly dependent upon the future financial condition of
Centocor.
73
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners of Centocor Partners III, L.P.:
We have audited the accompanying balance sheets of Centocor Partners III, L.P.
as of December 31, 1994 and 1993, and the related statements of operations,
partners' capital and cash flows for each of the years in the three-year period
ended December 31, 1994. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Centocor Partners III, L.P. at
December 31, 1994 and 1993, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1994, in
conformity with generally accepted accounting principles.
Continuation of the product research programs by the Partnership is dependent
upon the general partner continuing to provide funding and/or the ability of the
Partnership to obtain funding from another source. See Note 5 to the financial
statements.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
March 24, 1995
74
<PAGE>
Schedule II
CENTOCOR, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions Additions Additions
Balance Charged to Balance Charged to Balance Charged to Balance
at Costs and at Costs and at Costs and at
Classification 12/31/91 Expenses Deductions 12/31/92 Expenses Deductions 12/31/93 Expenses Deductions 12/31/94
-------------- -------- ---------- ---------- -------- ---------- ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Inventory Reserves $10,827 $68,144(1) ($10,665) $68,306 $3,500(1) ($7,063) $64,743 $3,609 ($53,472) $14,880
======= ======= ======== ======= ====== ======= ======= ====== ======== =======
</TABLE>
(1) The Company recorded reserves for HA-1A inventories of $3,500,000 and
$64,877,000 in 1993 and 1992, due to the uncertainties regarding future
HA-1A sales resulting from the current regulatory and commercial status
of HA-1A.
75
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
March 30, 1995 By: /s/David P. Holveck
--------------------------
David P. Holveck
(President and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Hubert J.P. Schoemaker Director, Chairman of March 30, 1995
------------------------- the Board
Hubert J. P. Schoemaker
/s/ Dominic J. Caruso Vice President, March 30, 1995
--------------------- Finance and
Dominic J. Caruso Chief Financial
Officer (Principal
Accounting and Financial
Officer)
/s/Anthony B. Evnin Director March 30, 1995
-------------------
Anthony B. Evnin
/s/William F. Hamilton Director March 30, 1995
-------------------------
William F. Hamilton
/s/David P. Holveck Director, President March 30, 1995
------------------------- and Chief Executive
David P. Holveck Officer
/s/Antonie T. Knoppers Director March 30, 1995
-------------------------
Antonie T. Knoppers
/s/Ronald A. Matricaria Director March 30, 1995
-------------------------
Ronald A. Matricaria
/s/Richard D. Spizzirri Director March 30, 1995
-------------------------
Richard D. Spizzirri
/s/Lawrence Steinman Director March 30, 1995
-------------------------
Lawrence Steinman
/s/Jean C. Tempel Director March 30, 1995
-------------------------
Jean C. Tempel
</TABLE>
76
<PAGE>
Exhibit Index
-------------
Exhibit
Number
-------
12 Statement re: Computation of Ratios.
21 Subsidiaries of The Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
<PAGE>
Exhibit 12
----------
CENTOCOR, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF RATIOS
RATIO OF EARNINGS TO FIXED CHARGES
(in thousands)
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
EARNINGS (LOSS):
Pretax income (loss) ($126,658) ($74,379) ($194,146) ($195,555) ($134,380)
PLUS:
Fixed charges (below) 21,719 22,820 24,046 14,893 3,254
LESS:
Interest capitalized - - - 800 380
--------- --------- ---------- ---------- ----------
ADJUSTED EARNINGS (LOSS) ($104,939) ($51,559) ($170,100) ($181,462) $ 131,506
========= ========= ========== ========== ==========
FIXED CHARGES:
Rent expense deemed interest $ 1,187 $ 1,987 $ 3,537 $ 2,347 $ 1,019
Interest expense 19,821 20,087 19,798 11,354 1,855
Amortization of debt issuance cost 711 746 711 392 -
Interest capitalized - - - 800 380
--------- --------- ---------- ---------- ----------
TOTAL FIXED CHARGES $ 21,719 $22,820 $ 24,046 $ 14,893 $ 3,254
========= ========= ========== ========== ==========
RATIO * * * * *
========= ========= ========== ========== ==========
</TABLE>
* Adjusted earnings did not cover fixed charges for the years ended December 31,
1994, 1993, 1992, 1991 and 1990 by $126,658,000, $74,379,000, $194,146,000,
$196,355,000 and $134,760,000, respectively.
<PAGE>
Exhibit 21
----------
CENTOCOR, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction of Incorporation
Subsidiares of the Registrant or Organization
----------------------------- -----------------------------
<S> <C> <C>
1. Centocor B.V. The Netherlands
2. Centocor Development Corporation III Delaware
3. Centocor Property Management Delaware
4. Centocor Property Management Corp. II Delaware
5. Centocor Ventures III Delaware
6. First Valley Insurance Company Vermont
7. Centocor U.K. Limited United Kingdom
8. Nippon Centocor K.K. Japan
9. Tocor, Inc. Delaware
10. Centocor (BVI), Inc. British Virgin Islands
</TABLE>
<PAGE>
Exhibit 23
----------
Consent of Independent Auditors
-------------------------------
The Board of Directors
Centocor, Inc.
We consent to incorporation by reference in Registration Statement Nos. 33-
35729, 33-38110, 33-16286, 33-7311, 33-23481, 33-26810, 33-44231 and 33-29141 on
Form S-3, and in Registration Statement Nos. 33-35731, 2-86486, 33-35730, 33-
00167, 33-16285, 33-16284 and 33-23480 on Form S-8 of Centocor, Inc. of our
report dated February 24, 1995, relating to the consolidated balance sheets of
Centocor, Inc. and subsidiaries as of December 31, 1994 and 1993 and the related
consolidated statements of operations, shareholders' equity and cash flows and
related consolidated financial statement schedule for each of the years in the
three-year period ended December 31, 1994, which report appears in the December
31, 1994 annual report on Form 10-K of Centocor, Inc.; and of our report dated
March 24, 1995 relating to the balance sheets of Centocor Partners III, L.P. as
of December 31, 1994 and 1993 and the related statements of operations,
partners' capital and cash flows for each of the years in the three-year period
ended December 31, 1994, which report appears in the December 31, 1994 annual
report on Form 10-K of Centocor, Inc. and which report contains an explanatory
paragraph that states that the continuation of the product research programs by
the Partnership is dependent upon the general partner continuing to provide
funding and/or the ability of the Partnership to obtain funding and/or the
ability of the Partnership to obtain funding from another source.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
March 27, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (IDENTIFY
SPECIFIC FINANCIAL STATEMENTS) AND IS QUALIFED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<EXCHANGE-RATE> 1
<CASH> 78,925
<SECURITIES> 102,663
<RECEIVABLES> 12,924
<ALLOWANCES> 0
<INVENTORY> 16,682
<CURRENT-ASSETS> 214,957
<PP&E> 131,808
<DEPRECIATION> 61,768
<TOTAL-ASSETS> 305,915
<CURRENT-LIABILITIES> 67,247
<BONDS> 231,640
<COMMON> 571
0
0
<OTHER-SE> 4,707
<TOTAL-LIABILITY-AND-EQUITY> 305,915
<SALES> 39,984
<TOTAL-REVENUES> 67,226
<CGS> 15,984
<TOTAL-COSTS> 15,984
<OTHER-EXPENSES> 157,306
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,821
<INCOME-PRETAX> (126,658)
<INCOME-TAX> 0
<INCOME-CONTINUING> (126,658)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (126,658)
<EPS-PRIMARY> (2.55)
<EPS-DILUTED> (2.55)
</TABLE>
