<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
------------------
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 0-11103
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CENTOCOR, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2117202
- --------------------------------------- ------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
200 Great Valley Parkway Malvern, Pennsylvania 19355-1307
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
610-651-6000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _______
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Shares of Common Stock outstanding at November 1, 1995 were 58,368,088.
<PAGE>
PART I: FINANCIAL INFORMATION
- -----------------------------
ITEM 1: FINANCIAL STATEMENTS
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
1995 1994
- ------------------------------------ -------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Notes 4 and 6) $39,182 $78,925
Short-term investments (Notes 4 and 6) 86,691 102,663
Accounts and contracts receivable 15,529 11,842
Interest receivable 2,459 1,082
Inventory (Note 5) 21,823 16,682
Prepaid expenses 1,464 2,722
Other current assets 606 1,041
-------------- ---------------
167,754 214,957
FIXED ASSETS (NOTE 6):
Land and buildings 72,953 71,137
Equipment, furniture, fixtures and
improvements 67,798 60,671
-------------- ---------------
140,751 131,808
Less accumulated depreciation (72,259) (61,768)
-------------- ---------------
68,492 70,040
LONG-TERM INVESTMENTS (NOTE 4) 26,105 2,919
INTANGIBLE AND OTHER ASSETS 17,721 17,999
-------------- ---------------
TOTAL ASSETS $280,072 $305,915
============== ===============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT'D.)
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1995 1994
- ----------------------------------- -------------- -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,529 $6,383
Accrued expenses 27,842 26,378
Unearned revenues 156 1,407
Notes payable (Note 6) 7,500 6,897
Current portion of
long-term debt (Note 6) 19,553 26,182
----------- ----------
58,580 67,247
Long-term debt (Note 6) 231,640 231,640
Other liabilities 1,321 1,240
Minority interest 631 510
Shareholders' equity (Note 2):
Preferred Stock, $.01 par value,
10,000 shares authorized, none issued - -
Common Stock, $.01 par value,
100,000 shares authorized and
58,364 and 57,081 issued and
outstanding at September 30, 1995
and December 31, 1994 respectively 583 571
Additional paid-in capital 768,504 750,175
Deficit (789,413) (751,707)
Unrealized gain on marketable
securities 1,590 -
Cumulative foreign currency
translation adjustments 6,636 6,239
----------- ----------
(12,100) 5,278
----------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $280,072 $305,915
=========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
For the three months ended September 30, 1995 1994
---------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Sales $15,860 $9,319
Contracts 3,295 3,608
----------- -----------
19,155 12,927
COSTS AND EXPENSES:
Cost of sales 7,271 3,652
Research and development 18,376 15,701
Marketing, general and administrative 7,643 7,159
----------- -----------
33,290 26,512
OTHER INCOME (EXPENSE):
Interest income 2,425 1,584
Interest expense (2,592) (4,974)
Other 2,147 (604)
----------- -----------
1,980 (3,994)
NET LOSS ($12,155) ($17,579)
=========== ===========
NET LOSS PER SHARE ($0.21) ($0.34)
=========== ===========
Weighted average number of shares
outstanding 58,347 51,111
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
For the nine months ended September 30, 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Sales $52,933 $31,261
Contracts (including related
party revenues of $1,652
in 1994) (Note 7) 10,971 13,322
----------- -----------
63,904 44,583
COSTS AND EXPENSES:
Cost of sales 23,996 11,753
Research and development (including contract
revenue-related expenses of $1,572 in 1994) 48,885 46,754
Marketing, general and administrative (including
contract revenue-related expenses of $343
in 1994) 22,228 20,787
Charge for acquired research and
development (Note 8) - 36,966
----------- -----------
95,109 116,260
OTHER INCOME (EXPENSE):
Interest income 8,008 4,252
Interest expense (12,424) (14,867)
Litigation settlement (Note 2) (3,750) -
Other 1,665 (1,342)
----------- -----------
(6,501) (11,957)
NET LOSS ($37,706) ($83,634)
=========== ===========
NET LOSS PER SHARE ($0.65) ($1.71)
=========== ===========
Weighted average number of shares
outstanding 58,125 48,931
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
For the nine months ended September 30, 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows used for operating activities:
Net loss ($37,706) ($83,634)
Adjustments to reconcile net loss to net cash
used for operating activities:
Charge for acquired research and development 0 36,966
Net (gain) loss on long-term investments (919) 1,793
Depreciation and amortization 12,628 13,852
Amortization of deferred income (1,657) (2,148)
Other 121 3
Changes in assets and liabilities:
Accounts and contracts receivable (3,729) 3,263
Interest receceivable (1,359) (484)
Inventory (4,681) (3,379)
Prepaid expenses (1,362) (355)
Other current assets 186 (128)
Intangible and other assets (1,380) (1,478)
Accounts payable (2,998) (1,875)
Unearned revenue 81 1,000
Accrued expenses and other liabilities (386) (2,891)
Other long-term liabilities 283 901
---------- ---------
Net cash used for operating activities (42,878) (38,594)
Cash flows from (used for) investing activities:
Net (purchases) sales of investments (2,493) 35,610
Net purchases of fixed assets (3,668) (3,434)
Acquisition of Tocor II - 3,991
---------- ---------
Net cash from (used for) investing activities (6,161) 36,167
Cash flows from financing activities:
Net proceeds from issuance of Common Stock 17,003 4,536
Reduction of long-term debt and notes payable (8,041) (1,631)
---------- ---------
Net cash from financing activities 8,962 2,905
Effect of foreign currency translation 334 679
---------- ---------
Net (decrease) increase in cash and cash equivalents (39,743) 1,157
Beginning cash and cash equivalents 78,925 46,210
---------- ---------
Ending cash and cash equivalents $ 39,182 $47,367
========== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
6
<PAGE>
Centocor, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
_________________________________________________________________________
Note 1
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles applicable to interim
periods. These financial statements do not include all disclosures required for
annual financial statements and should be read in conjunction with the more
complete disclosures contained in Centocor, Inc.'s ("Centocor" or "the Company")
audited financial statements in the Company's Annual Report on Form 10-K for the
year ended December 31, 1994.
The statements reflect, in the opinion of management, all adjustments of a
normal and recurring nature necessary to present fairly the Company's
consolidated financial position at September 30, 1995 and December 31, 1994 and
the consolidated results of operations for the three and nine months ended
September 30, 1995 and 1994 and consolidated cash flows for the nine months
ended September 30, 1995 and 1994. The results of operations and the cash flows
are not necessarily indicative of the results to be expected for the entire
year.
Note 2
COMMITMENTS AND CONTINGENCIES
Liquidity and Capital Resources
-------------------------------
The Company 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
has experienced substantial net cash outflows.
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/TM/ in January 1995 and Panorex(R) 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
7
<PAGE>
Centocor, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
---------------------------------------------------------------------------
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 the U.S. Food and Drug Administration ("FDA") or other
regulatory approvals expanding the authorized use of ReoPro/TM/ and Panorex(R)
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/TM/ and Panorex(R) or other
product candidates will have a material adverse effect on the Company.
The Company expects that it 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. ("Tocor II") was filed in the Court of Common
Pleas of the Commonwealth of Pennsylvania, in and for Chester County. The
complaint alleges that the defendants breached their fiduciary duties to Tocor
II Unitholders by, among other things, making an 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. A motion for class certification is pending. 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/TM/ (HA-1A(R)), shareholder class action litigation was instituted in
the United States District Court for the Eastern District of Pennsylvania
against the Company and others alleging that defendants knowingly
8
<PAGE>
Centocor, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
---------------------------------------------------------------------------
or recklessly omitted certain material facts and made false and misleading
statements of material facts about Centoxin/TM/ and the CHESS trial in violation
of Sections 10(b) and 20 of the Securities Exchange Act of 1934 and Rule 10-b-5
thereunder, and also alleging violations of the common law of negligent
misrepresentation. In June 1995, an agreement of settlement was reached. At a
hearing on October 11, 1995, the Court approved the settlement as fair,
reasonable and adequate to the class, which consisted of persons who purchased
common stock and convertible subordinated debentures of the Company from April
21, 1992 through January 15, 1993. In connection with the settlement, the
Company recorded a charge to operations of $3,750,000 for the nine months ended
September 30, 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 alleged
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/TM/ (HA-1A(R)). As to the claims remaining following
rulings on motions to dismiss filed by defendants, the Court conditionally
certified a class of all purchasers of Corvas common stock during the period
January 30, 1992 through April 14, 1992. After a hearing held on August 28,
1995, the Court approved a settlement of the action as fair, reasonable and
adequate to the class. The Company contributed to the settlement 600,000 shares
of the stock of Corvas which it held. Given its reduced investment in Corvas,
Centocor can no longer be deemed to be a control person with regard to Corvas.
Moreover, Centocor's relationship with Corvas is not in the nature of a
strategic alliance. Centocor remains a licensee of Corvas with respect to
Corvas' antibody product known as Corsevin M.
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
9
<PAGE>
Centocor, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
---------------------------------------------------------------------------
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 is in progress and trial is fixed for
June 1996. The Company has moved for partial summary judgment with respect to
the plaintiff's claim that under its license agreement, Lilly is allegedly a
sublicense of Centocor, thereby purportedly entitling plaintiff to a significant
part of the funds paid by Lilly to Centocor. The Company believes that the
allegations of Velos are without merit and intends vigorously to defend the suit
and to pursue its counterclaims.
In July 1995, PaineWebber Development Corporation ("PaineWebber"), a
wholly-owned subsidiary of Paine Webber Group, Inc., caused suits to be filed
against the Company by two research and development partnerships formed in the
mid-1980s by PaineWebber and managed by it since then. The two PaineWebber
partnerships (PaineWebber R&D Partners, L.P. and PaineWebber R&D Partners II,
L.P.) were, respectively, investors in Centocor Partners II, L.P. ("CPII"), and
Centocor Partners III, L.P. ("CPIII"), research partnerships for which
PaineWebber acted as the Sales Agent. The Company purchased the limited
partners' interests in CPII in February 1992 and that partnership was then
dissolved. The suit by PaineWebber R&D Partners, L.P., was filed in the Supreme
Court of the State of New York, County of New York, and purports to be a class
action on behalf of all former limited partners of CPII. The complaint charges
that some portion of the $100 million paid by Lilly to the Company in July 1992
constituted revenues to the Company for the licensing, sublicensing or sale of
Centoxin and that the Company is obligated to pay a percentage thereof to the
former limited partners of CPII, in addition to amounts already paid. The
theories of recovery are similar to those asserted by Velos in 1992, as
described above. The Company has moved to dismiss the New York suit on the
ground that it was brought in an inconvenient forum. The suit by PaineWebber R&D
II, L.P., was filed in the Court of Chancery of the State of Delaware. In the
complaint in this action, the plaintiff seeks to sue derivatively on behalf of
CPIII. CPIII is named as a nominal defendant and the Company and a wholly owned
subsidiary of the Company which acts as the general partner of CPIII are named
as defendants against whom relief is sought. The claim in this case is that at
least $25 million of the money paid by Lilly to the Company in 1992 represented
profits from the marketing of ReoPro, obligating the Company to pay a portion
thereof to CPIII, and that the Company is obligated to pay an increased
percentage of the profits
10
<PAGE>
Centocor, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
---------------------------------------------------------------------------
from ReoPro to CPIII going forward. The Company answered the complaint in the
Delaware action and filed a cross claim against nominal defendant CPIII and a
third-party complaint against Paine Webber Group, Inc. and PaineWebber
Development Corporation. On November 1, 1995, an additional suit was commenced
in the Delaware Court of Chancery by a limited partner, John E. Abdo, against
the Company, Centocor Development Corporation III and certain of their officers
and directors. The complaint, filed derivatively on behalf of CPIII, asserts
claims, inter alia, for breach of contract, breach of fiduciary duty, common law
----------
fraud, and conspiracy and aiding and abetting. The Company believes that these
suits are without merit and intends to defend them vigorously.
While it is not possible to predict with certainty the eventual outcome of
these matters, the Company believes that the foregoing proceedings will not have
a material adverse effect on the financial position of the Company.
Partnerships
- ------------
The Company has licensed certain technology related to ReoPro/TM/ 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/TM/ 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/TM/. Joint venture profits, if any, are allocated 75
percent to the Company and 25 percent to CPIII. The Company consolidates the
results of the joint venture's operations and records the profits allocable to
CPIII as a royalty expense, a component of cost of sales. The joint venture will
terminate upon the occurrence of certain events including the exercise or
expiration of the purchase option.
The Company has entered into indemnity agreements with CPIII and the former
limited
11
<PAGE>
Centocor, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
---------------------------------------------------------------------------
partners of Centocor Cardiovascular Imaging Partners, L.P. ("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.
Royalties
- ---------
The Company is required to make certain future payments to the former
limited partners of CCIP and CPII based on sales of products developed by each
of the respective partnerships. Upon any exercise by the Company of its option
to acquire the limited partnership interests in CPIII, the Company would be
required to make future payments to the former limited partners of CPIII,
including payments based on any sales of ReoPro/TM/. As discussed above, until
such option is exercised, CPIII's allocable profits are reported as royalty
expense. Additionally, pursuant to its agreements with Lilly, the Company may
be required to make royalty payments on sales of ReoPro/TM/.
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 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.
12
<PAGE>
Centocor, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
---------------------------------------------------------------------------
Note 3
COLLABORATIVE ARRANGEMENTS
Relationship with Lilly
- -----------------------
Under a Sales and Distribution Agreement, the Company is principally
responsible for developing and manufacturing HA-1A(R) and ReoPro/TM/. Lilly is
principally responsible for the marketing, sale and distribution of HA-1A(R) and
ReoPro/TM/.
Under agreements with Lilly, the Company and Lilly share equally in the
profits from ReoPro/TM/ and the Company may be required to pay Lilly royalties
on sales of ReoPro/TM/. 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 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 Glaxo/Wellcome plc.
- -------------------------------------
The Company entered into an alliance agreement with Glaxo/Wellcome plc.
(previously Wellcome plc.) for the development and marketing of certain of the
Company's monoclonal antibody-based cancer therapeutic products, including
Panorex(R). Under the alliance agreement, the Company and Glaxo/Wellcome share
revenues from the sale of the products, including Panorex(R). Centocor is
principally responsible for the manufacture of Panorex(R) and for securing
regulatory approvals for Panorex(R). Glaxo/Wellcome is principally responsible
for the clinical development, marketing, sale and distribution of such drugs,
including Panorex(R), on a worldwide basis.
Note 4
CASH EQUIVALENTS AND INVESTMENTS
The Company's equity investments classified as available for sale are
carried at estimated fair value with unrealized gains and losses recorded as a
component of stockholders' equity. The Company's other investments which the
Company has the ability and intent to hold to maturity are carried at amortized
cost.
At September 30, 1995, securities classified as available for sale and held
to maturity are summarized below (in thousands):
13
<PAGE>
Centocor, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
---------------------------------------------------------------------------
<TABLE>
<CAPTION>
Estimated
Adjusted Unrealized Carrying
Cost Gains (Losses) Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Investments available for sale:
Equity securities $ 4,550 $ 1,590 $ - $ 6,140
===== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
Estimated
Carrying Unrealized Fair
Value Gains (Losses) Value
----- ----- ------ -----
<S> <C> <C> <C> <C>
Investments held to maturity:
Securities and obligations of
the U.S. Treasury and other
U.S. government agencies $ 82,909 $ 111 $ (41) $ 82,979
Certificates of deposit 28,615 - - 28,615
Corporate bonds and
commercial paper 23,245 69 (4) 23,310
------ -- --- ------
$134,769 $ 180 $ (45) $134,904
======= --- ----- -------
</TABLE>
At September 30, 1995, these securities were classified as follows
(in thousands):
<TABLE>
<S> <C>
Cash equivalents $ 28,113
Short-term investments 86,691
Long-term investments 26,105
-------
$140,909
-------
</TABLE>
The Company has agreed to maintain investments of $27,300,000 as of
September 30, 1995 at certain banks as collateral for loans from those banks.
See Note 6.
14
<PAGE>
Centocor, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
---------------------------------------------------------------------------
Note 5
INVENTORY
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
<S> <C> <C>
Raw materials $ 5,542 $ 3,564
Work in process 10,211 8,973
Finished goods 6,070 4,145
----- ------
$21,823 $16,682
======= =======
</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.
Note 6
DEBT
Notes Payable
Notes payable at September 30, 1995 and December 31, 1994 consists of
$7,500,00 and $6,897,000, respectively, of borrowings under short-term notes at
an interest rate of 4.25 percent per annum at September 30, 1995, payable in
Dutch guilders no later than March 28, 1996. These borrowings are secured by
investments at the lending bank of $7,300,000 (see "Loan Covenants").
15
<PAGE>
Centocor, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
---------------------------------------------------------------------------
Long-term debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
-------------- -------------
<S> <C> <C>
7-1/4 percent Notes $106,640 $106,640
6-3/4 percent Debentures 125,000 125,000
Mortgage Debt 9,390 15,941
Long-term Note 10,163 10,241
-------- --------
251,193 257,822
Current Portion (19,553) (26,182)
-------- --------
$ 231,640 $231,640
======== =======
</TABLE>
7-1/4 Percent Notes
On January 28, 1991, the Company issued $106,645,000 principal amount of 7-
1/4 percent Convertible Subordinated Notes (the "7-1/4 percent Notes") due
February 1, 2001. The 7-1/4 percent Notes are convertible by the holders into
approximately 3,843,000 shares of the Company's Common Stock at a conversion
price of $27.75 per share at any time prior to redemption or maturity. The 7-
1/4 percent Notes are subordinated in right of payment to senior indebtedness at
September 30, 1995 of $27,053,000 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 104 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 under certain limited circumstances,
including a change in control of the Company.
6-3/4 Percent Debentures
On October 16, 1991, the Company issued $125,000,000 principal amount of 6-
3/4 percent Convertible Subordinated Debentures (the "6-3/4 percent Debentures")
due October 16, 2001. The 6-3/4 percent Debentures are convertible by the
holders into approximately 2,049,000 shares of the Company's Common Stock at a
conversion price of $61.00 per share at any time prior to redemption or
maturity. The 6-3/4 percent Debentures are subordinated in right of payment to
senior indebtedness at September 30, 1995 of $27,053,000 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
16
<PAGE>
Centocor, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
---------------------------------------------------------------------------
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 under 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 repaid such a loan on its maturity
date of May 1, 1995 in the amount of $6,442,000. A Netherlands loan, with an
outstanding balance of approximately $6,125,000 at September 30, 1995, is
payable in Dutch guilders, bears interest at an annual rate of 8-1/4 percent
through its final maturity date of September 30, 2011, and is secured by certain
equipment, inventories, and accounts receivable. At September 30, 1995, this
loan is classified as short-term (see "Loan Covenants").
Long-term Note
The Company borrowed $10,163,000 under a 9-1/2 percent long-term note which
is payable in Dutch guilders. This loan is secured by the same assets as the
Netherlands loan discussed above. At September 30, 1995, this loan is classified
as short-term (see "Loan Covenants").
Loan Covenants
Agreements covering $19,553,000 of the Company's outstanding debt balances
contain certain financial and non-financial covenants, including the maintenance
of minimum equity and cash balances and compliance with certain financial
ratios. The Company has obtained waivers of certain of such covenants on the
condition that it maintains certain investments at the lending bank, which at
September 30, 1995 totaled $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 $19,553,000 of debt as short-term. Additionally,
$7,500,000 of the Company's short-term debt is secured by investments at the
lending bank of $7,300,000. If cash flows continue to be negative, the
Company's ability to service its debt may be impaired.
17
<PAGE>
Centocor, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
---------------------------------------------------------------------------
Note 7
CONTRACT REVENUES
Lilly Related
-------------
Pursuant to the Company's agreements with Lilly, the Company recognized
revenues of $3,095,000 and $9,095,000 for the three and nine months ended
September 30, 1995 and $3,000,000 and $9,500,000 for the three and nine months
ended September 30, 1994, respectively, related to ReoPro/TM/ milestones. Lilly
may make certain future payments based on the achievement of certain milestones
related to ReoPro/TM/.
Related Party Research & Development
------------------------------------
In 1994, 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.
See Note 8 for a discussion of an exchange offer which resulted in the
termination of the research and development contract and services agreement.
For the nine months ended September 30, 1994, revenues related to the Tocor
II research program were $1,652,000. Expenses incurred, including general and
administrative expenses for the nine months ended September 30, 1994 were
$1,915,000.
Note 8
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
18
<PAGE>
Centocor, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
---------------------------------------------------------------------------
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 three months ended For the nine months ended
Operations Data September 30, 1994 September 30, 1994
--------------- ------------------ ------------------
<S> <C> <C>
Revenues $ 12,927 $ 42,931
Loss $ (17,579) $ (47,939)
Loss per share $(.34) $(.94)
</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 September 30, 1995, 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 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 9
INCOME TAXES
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
September 30, 1995, the tax effect of the Company's net tax loss carryforward
was $188,768,000 with expiration dates ranging from 2005 to 2010. Additionally,
at September 30, 1995, 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 September 30, 1995.
Note 10
SUPPLEMENTAL INFORMATION ON CASH FLOWS
Interest paid for the nine months ended September 30, 1995 and 1994 was
$14,053,000 and $14,389,000, respectively.
Income tax payments for the nine months ended September 30, 1995 were
$9,000. No
19
<PAGE>
Centocor, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
---------------------------------------------------------------------------
income tax payments were made for the nine months ended September 30, 1994.
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>
Nine months ended September 30, 1995 1994
---------- ---------
<S> <C> <C>
Purchases $(108,893) $(51,805)
Maturities and sales 106,400 87,415
-------- -------
$ (2,493) $ 35,610
</TABLE>
During the first quarter of 1994, the Company acquired cash and short-term
investments of $50,124,000 in connection with an exchange offer more fully
described in Note 8.
20
<PAGE>
Item 2: 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
has experienced substantial net cash outflows.
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/TM/ in January 1995 and Panorex(R) 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 the U.S.
Food and Drug Administration ("FDA") or other regulatory approvals expanding the
authorized use of ReoPro/TM/ and Panorex(R) 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/TM/ and Panorex(R) or other product candidates will have a
material adverse effect on the Company.
The Company expects that it 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 September 30, 1995, the Company had cash, cash equivalents, and
investments of $151,978,000 including equity investments of $6,140,000. For the
nine months ended September 30, 1995, the Company had negative cash flows from
operations of $42,878,000. The Company's total cash flows for the nine months
ended September 30, 1995 included the receipt of $12,100,000 from the exercise
of warrants to purchase shares of the Company's Common Stock. The extent and
21
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -------------------------------------------------------------------------------
timing of future warrant 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.
The Company's total cash, cash equivalents and investments decreased by
$32,529,000 from December 31, 1994 principally as a result of cash used for
operations, debt repayments, and purchases of fixed assets partially offset by
cash received from the exercise of warrants as discussed above.
Agreements covering $19,553,000 of the Company's outstanding debt balances
contain certain financial and non-financial covenants, including the maintenance
of minimum equity and cash balances and compliance with certain financial
ratios. The Company has obtained waivers of certain of such covenants on the
condition that it maintain certain investments at the lending bank, which at
September 30, 1995 totaled $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 $19,553,000 of debt as short-term. Additionally,
$7,500,000 of the Company's short-term debt is secured by investments at the
lending bank of $7,300,000. If cash flows continue to be negative, the
Company's ability to service its debt may be impaired.
See 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.
ASSETS
The decrease in the aggregate amount of cash and investments at September
30, 1995 as compared to December 31, 1994 is discussed under Liquidity and
Capital Resources.
Accounts and contracts receivable at September 30, 1995 increased as
compared to December 31, 1994 principally as a result of commercial sales of
ReoPro/TM/ to Lilly and sales of Panorex(R) to Glaxo/Wellcome.
Inventory at September 30, 1995 increased as compared to December 31, 1994
due primarily to the production of ReoPro/TM/ and Panorex(R). The Company
continually evaluates the realizability of its inventories. There can be no
assurance that reserves to reduce the carrying value of inventory will not be
required in the future.
Gross fixed assets at September 30, 1995 increased as compared to December
31, 1994 principally due to the investment of $3,668,000 for the purchase of
fixed assets, in addition to the impact of exchange rates on fixed assets
denominated in foreign currencies. 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 will not be required in the future.
Long-term investments at September 30, 1995 increased as compared to
December 31, 1994 principally due to the purchase of investments in long-term
U.S. treasury notes with maturity dates in excess of one year. The Company has
the ability and intent to hold these securities to maturity and they are carried
at amortized cost. See Note 4 to the Company's Consolidated Financial
22
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -------------------------------------------------------------------------------
Statements.
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' equity at September 30, 1995 decreased as compared to
December 31, 1994 principally as a result of the Company's loss for the nine
months ended September 30, 1995 partially offset by the proceeds from the
exercise of options and warrants. 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.
Shareholders' equity at September 30, 1995 was negative. The Company
expects that shareholders' equity will continue to be negative 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. The
Company established a goal of achieving profitability in 1995. To achieve
profitability, the Company established the following objectives: early and
strong market acceptance for both ReoPro/TM/ and Panorex(R); growth in the
Company's diagnostic product sales; establishment of a long-term strategic
alliance for CenTNF/TM/; and management of the Company's internal cost
structure. Although the Company is implementing plans to address each of these
areas, the Company will not be profitable in 1995.
Given the financial results for the three and nine months ended September
30, 1995, the Company will reduce its level of operations and employment in the
fourth quarter of 1995. The reductions will result in a fourth quarter severance
charge estimated to be less than $3,000,000.
REVENUES
The increase in sales for the three and nine months ended September 30,
1995 as compared to the three and nine months ended September 30, 1994 is
principally due to the commencement of commercial sales of two pharmaceutical
products - ReoPro/TM/ in January 1995 and Panorex(R) in February 1995. The
Company is highly dependent upon the ability of its marketing partners to
develop and expand markets for both ReoPro/TM/ and Panorex(R). ReoPro/TM/ sales
to Lilly for the three and nine months ended September 30, 1995 were $1,636,000
and $14,083,000, respectively. The Company expects that ReoPro/TM/ sales to
Lilly in the fourth quarter of 1995 will be lower than the level of sales in the
third quarter of 1995 primarily due to the level of inventory maintained by
23
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -------------------------------------------------------------------------------
Lilly. Panorex(R) sales to Glaxo/Wellcome for the three and nine months ended
September 30, 1995 were $2,680,000 and $5,764,000, respectively. The Company
expects that Panorex(R) sales to Glaxo/Wellcome in the fourth quarter of 1995
will be lower than the level of sales in the third quarter of 1995 primarily due
to the level of inventory maintained by Glaxo/Wellcome.
Diagnostic product sales for the three and nine months ended September 30,
1995 were $11,514,000 and $33,020,000 as compared to $9,303,000 and $31,203,000
for the three and nine months ended September 30, 1994, respectively. The
increase in sales for the three and nine months ended September 30, 1995 as
compared to the same period in 1994 is primarily related to a third quarter
reagent sale to a new customer within the oncology product line. The Company
expects that Diagnostic product sales in the fourth quarter of 1995 will be less
than the level of sales in the third quarter of 1995 primarily due to the above
mentioned reagent sale.
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 ultimately the degree of
acceptance of the Company's products in the marketplace.
Contract revenues for the three and nine months ended September 30, 1995
include $3,095,000 and $9,095,000 recognized pursuant to the Company's
agreements with Lilly, as compared to $3,000,000 and $9,500,000 for the three
and nine months ended September 30, 1994. Contract revenues for the nine months
ended September 30, 1994 include $1,652,000 recognized pursuant to the Company's
agreement with Tocor II. As a result of the exchange offer which is more fully
described in Note 8 to the Company's Consolidated Financial Statements, the
revenues under the Tocor II research program terminated in 1994. Contract
revenues for the nine months ended September 30, 1995 include government subsidy
revenue of $1,600,000 which relates to the completion of certain manufacturing
requirements.
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 three and nine months ended September 30,
1995 as compared to the corresponding periods of 1994 due to the initiation of
sales of ReoPro/TM/ and Panorex(R) in the first quarter of 1995. 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. 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 for the three and nine months ended
September 30, 1995 were $18,376,000 and $48,885,000 as compared to $15,701,000
and $46,754,000 for the three and nine months ended September 30, 1994,
respectively. Research and development expenses increased for the nine months
ended September 30, 1995 as compared to the corresponding period
24
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -------------------------------------------------------------------------------
of 1994 due principally to an increased level of clinical trial expenses in 1995
as compared to 1994. The increase in clinical trial expenses expected in 1995
relates to obtaining regulatory approvals for additional indications of
pharmaceutical products and further developing other pharmaceutical and
diagnostic product opportunities.
Marketing, general and administrative expenses for the three and nine
months ended September 30, 1995 increased as compared to the corresponding
period of 1994 due principally to increases in facilities, insurance and market
development expenses. The Company expects the levels of marketing, general and
administrative expenses to increase in 1995 as compared to 1994.
OTHER INCOME AND EXPENSES
Interest income increased for the three and nine months ended September 30,
1995 as compared to the year earlier period due principally to an increase in
interest rates on investments and an increase in the Company's average cash and
investment balances. Interest income in future periods will depend primarily on
the level of the Company's investments and the interest rates obtained on such
investments.
Interest expense decreased for the three and nine months ended September
30, 1995 as compared to the year earlier period due principally to a one-time
adjustment of $2,200,000 on a loan that was renegotiated with the Commonwealth
of Pennsylvania.
Other income increased for the three and nine months ended September 30,
1995 as compared to the year earlier period due to the Company's equity in
earnings of an investee company. The Company does not expect any additional
income from this investment in the near future.
The Company recorded a charge to operations of $3,750,000 for the nine
months ended September 30, 1995 relating to litigation. See Note 2 to the
Company's Consolidated Financial Statements for a discussion of commitments and
contingencies.
PER SHARE CALCULATIONS
At September 30, 1995, approximately 5,897,040 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.
No Common Stock equivalents or shares issuable upon conversion of the 7-1/4
percent Notes
25
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -------------------------------------------------------------------------------
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.
26
<PAGE>
Part II OTHER INFORMATION
Item 1: Legal Proceedings
See Note 2 to the Company's Consolidated Financial Statements, which is
incorporated herein by reference.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
--------
None.
(b) Reports on Form 8-K
-------------------
The Registrant has filed the following reports on Form 8-K since
the beginning of the quarter ended June 30, 1995:
Date of Report Item Covered
-------------- ------------
July 12, 1995 5, 7
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Centocor, Inc.
(Registrant)
Date: November 14, 1995 /s/David P. Holveck
----------------- ------------------------------
David P. Holveck
President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 1995 /s/Dominic J. Caruso
----------------- ------------------------------
Dominic J. Caruso
Vice President, Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTOCOR,
INC. CONSOLIDATED BALANCE SHEETS CENTOCOR, INC. CONSOLIDTED STATEMENTS OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 39,182
<SECURITIES> 86,691
<RECEIVABLES> 17,988
<ALLOWANCES> 0
<INVENTORY> 21,823
<CURRENT-ASSETS> 167,754
<PP&E> 140,751
<DEPRECIATION> 72,259
<TOTAL-ASSETS> 280,072
<CURRENT-LIABILITIES> 58,580
<BONDS> 231,640
<COMMON> 583
0
0
<OTHER-SE> (12,683)
<TOTAL-LIABILITY-AND-EQUITY> 280,072
<SALES> 52,933
<TOTAL-REVENUES> 63,904
<CGS> 23,996
<TOTAL-COSTS> 23,996
<OTHER-EXPENSES> 71,113
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,424
<INCOME-PRETAX> (37,706)
<INCOME-TAX> 0
<INCOME-CONTINUING> (37,706)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (37,706)
<EPS-PRIMARY> (.65)
<EPS-DILUTED> (.65)
</TABLE>
