<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) February 15, 1996
-------------------------------
CENTOCOR, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 0-11103 23-2117202
- --------------------------------------------------------------------------------
(State or other juris- (Commission file (IRS Employer
diction of incorporation) number) Identification No.)
200 Great Valley Parkway, Malvern, Pennsylvania 19355
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 651-6000
-----------------------------
Not applicable
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 5. Other Events.
------------
On January 22, 1996, the Registrant filed a Registration Statement on Form
S-3 relating to a proposed public offering by the Registrant of 3,500,000 shares
of its Common Stock. Promptly following the filing of this Current Report on
Form 8-K, the Registrant intends to file an amendment to the Registration
Statement that will include consolidated financial information of the Registrant
for the fiscal year-ended December 31, 1995, which had not been included in the
Registration Statement as originally filed. Accordingly, the Registrant is
filing as exhibits to this Current Report on Form 8-K consolidated selected
financial data, management's discussion and analysis of financial condition and
results of operations and consolidated financial statements and financial
statement schedule, together with the auditor's report thereon, as of December
31, 1995 and 1994 and for each of years in the three-year period ended December
31, 1995.
Item 7. Financial Statements and Exhibits.
---------------------------------
(c) Exhibits:
--------
23.1 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule
99.1 Selected consolidated financial data
99.2 Management's discussion and analysis of financial condition
and results of operations.
99.3 Consolidated financial statements and financial statement
schedule, together with the auditor's report thereon, as of
December 31, 1995 and 1994 and for each of the years in the
three year-period ended December 31, 1995.
<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 hereunto duly authorized.
CENTOCOR, INC.
Dated: February 15, 1996 By:/s/ Dominic J. Caruso
---------------------------------
Dominic J. Caruso, Vice
President-Finance and Chief
Financial Officer
<PAGE>
Exhibit 23.1
------------
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, 33-29141 and
333-00337 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 14, 1996, relating to the consolidated balance
sheets of Centocor, Inc. and subsidiaries as of December 31, 1995 and 1994 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, 1995, which report appears in
an Exhibit to the Form 8-K Current Report of Centocor, Inc. dated February 15,
1996.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
February 15, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTOCOR
INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AND CENTOCOR INC. AND
SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 16,002
<SECURITIES> 115,435
<RECEIVABLES> 13,137
<ALLOWANCES> 0
<INVENTORY> 20,783
<CURRENT-ASSETS> 168,969
<PP&E> 142,864
<DEPRECIATION> 74,727
<TOTAL-ASSETS> 260,284
<CURRENT-LIABILITIES> 56,137
<BONDS> 231,640
0
0
<COMMON> 585
<OTHER-SE> (29,981)
<TOTAL-LIABILITY-AND-EQUITY> 260,284
<SALES> 65,001
<TOTAL-REVENUES> 78,916
<CGS> 29,166
<TOTAL-COSTS> 29,166
<OTHER-EXPENSES> 97,053
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,001
<INCOME-PRETAX> (57,132)
<INCOME-TAX> 0
<INCOME-CONTINUING> (57,132)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (57,132)
<EPS-PRIMARY> (.98)
<EPS-DILUTED> (.98)
</TABLE>
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The Consolidated Statement of Operations Data set forth below for each of
the years in the five-year period ended December 31, 1995 and the Consolidated
Balance Sheet Data set forth below as of the years ended December 31, 1991
through 1995 are derived from the consolidated financial statements of the
Company which have been audited by KPMG Peat Marwick LLP. The Consolidated
Statement of Operations Data for each of the years in the three-year period
ended December 31, 1995 and the Consolidated Balance Sheet Data as of
December 31, 1994 and 1995 are derived from the audited consolidated financial
statements of the Company and notes thereto included herein. The selected
consolidated financial data presented below should be read in conjunction with
the Company's audited consolidated financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included herein.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1991 1992 1993 1994 1995
--------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Sales.................... $ 44,328 $ 58,394 $ 48,071 $ 39,984 $ 65,001
Contracts:
Related parties......... 4,902 16,071 10,109 1,652 --
Other................... 3,967 51,767 17,750 25,590 13,915
--------- --------- -------- --------- --------
Total revenues........... 53,197 126,232 75,930 67,226 78,916
Costs and expenses(1)..... 247,151 295,978 130,683 173,290 126,219
Other income
(expenses)(2)............ (1,601) (24,400) (19,626) (20,594) (9,829)
--------- --------- -------- --------- --------
Loss...................... $(195,555) $(194,146) $(74,379) $(126,658) $(57,132)
========= ========= ======== ========= ========
Loss per share............ $ (5.72) $ (4.90) $ (1.79) $ (2.55) $ (0.98)
========= ========= ======== ========= ========
Weighted average number of
shares outstanding (3)... 34,172 39,623 41,482 49,597 58,207
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash and investments(4). $233,598 $163,083 $140,028 $184,507 $137,206
Total assets............ 472,929 349,268 281,039 305,915 260,284
Long-term debt.......... 259,368 238,166 238,100 231,640 231,640
Shareholders' equity
(deficit).............. 144,027 30,721 (19,194) 5,278 (29,396)
</TABLE>
- --------
No dividends have been declared or paid during any of the periods presented.
(1) Costs and expenses include the following: (a) charges for acquired
research and development of $70,147 and $36,966 in 1991 and 1994,
respectively, (b) charges of $64,877 and $3,500 in 1992 and 1993,
respectively, related to HA-1A inventory, (c) restructuring charges of
$15,266, $9,387 and $1,642 in 1992, 1993 and 1995, respectively, (d) a
royalty buyout of $17,098 in 1994, and (e) a write-down of facilities and
equipment of $7,870 in 1994.
(2) Other income (expenses) include charges of $11,245, $1,275 and $3,750 in
1992, 1994 and 1995, respectively, related to the settlement of certain
litigation.
(3) No shares of Common Stock issuable upon the exercise of stock options or
warrants or the vesting of restricted stock awards have been included, as
their inclusion would have an antidilutive effect because the Company has
incurred a net loss in each period presented.
(4) Cash and investments at December 31, 1995 include equity investments
classified as available for sale of $5,769, and $27,500 of investments
maintained at certain banks as collateral for certain debt outstanding at
December 31, 1995.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
General
Centocor is a biotechnology company, which, since inception, has incurred
significant operating expenses developing therapeutic and diagnostic products.
The Company has also incurred significant special charges. To date, product
sales have not produced sufficient revenues to cover the Company's operating
expenses. Consequently, the Company has experienced substantial operating
losses.
The Company commenced commercial sales of two therapeutic products in 1995:
ReoPro in January 1995 and Panorex in February 1995. Because of positive
findings at interim analyses, in December 1995 the Company halted two clinical
trials of ReoPro designed to expand its authorized use. After completing the
data analyses for these trials, the Company expects to seek additional
regulatory approvals in the United States and Europe for expanded indications.
The level of the Company's research and development expenses has been
primarily dependent upon the extent of clinical trial activity. The Company
does not anticipate that the termination of the two ReoPro clinical trials
will result in any significant reduction in 1996 research and development
expenses as compared to 1995 levels due principally to continued follow-up of
enrolled patients and analysis of clinical trial data. Further, the impact on
the level of sales of ReoPro of the early termination of these two trials will
depend upon the timing and extent of any future regulatory approvals and the
degree of market acceptance of ReoPro.
In June 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed of"
("Statement 121"), which requires companies to review long-lived assets and
certain identifiable intangibles to be held, used or disposed of, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The Company is required to adopt Statement 121
for 1996. The Company believes that the adoption of Statement 121 will not have
a significant effect on its financial statements.
Year ended December 31, 1995 compared to year ended December 31, 1994
The increase in sales for the year ended December 31, 1995 as compared to
the year ended December 31, 1994 is principally due to the commencement of
sales of ReoPro in January 1995 and Panorex in February 1995.
The Company is highly dependent upon the ability of its marketing partners
to develop and expand the markets for both ReoPro and Panorex. For the year
ended December 31, 1995, ReoPro sales to Eli Lilly and Company ("Lilly") were
$15,545,000 and Lilly's announced sales to end-users were $22,800,000. During
the same period, the Company's sales of Panorex to Glaxo Wellcome plc ("Glaxo
Wellcome") were $6,531,000 and Glaxo Wellcome reported to the Company that sales
to end-users were approximately $3,400,000. The level of the Company's sales of
ReoPro to Lilly and of Panorex to Glaxo Wellcome is dependent upon the orders
placed and the levels of inventory maintained by each of these marketing
partners, which in 1995 included initial launch period quantities.
Diagnostic product sales for the year ended December 31, 1995 were
$42,859,000 as compared to $39,697,000 for the year ended December 31, 1994.
The increase in sales for the year ended December 31, 1995 as compared to the
year ended December 31, 1994 is primarily related to a third quarter reagent
sale to a new customer within the oncology product line.
The level of future sales of both diagnostic and therapeutic 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. For the Company's
diagnostic products, the level of sales is also dependent upon the extent of
and timing of reagent sales to marketing partners developing new automated
instruments, as well as the mix of completed diagnostic kit sales and sales of
antibody to collaborative partners who pay the Company for such antibody upon
sales of their respective diagnostic kits incorporating the Company's
antibody. The Company is currently attempting to expand its diagnostic
distribution channels to
<PAGE>
include additional distributors on a non-exclusive basis, which the Company
expects will result in reduced sales prices on certain diagnostic products. The
Company's gross margins from sales of antibodies to partners are higher than
its gross margin from sales of its completed diagnostic kits.
The decrease in contract revenues for the year ended December 31, 1995 as
compared to the year ended December 31, 1994 was primarily due to the
achievement of certain milestones and expansion of certain marketing and
distribution rights with Glaxo Wellcome in 1994, which in the aggregate
amounted to $14,000,000. Contract revenues for the year ended December 31, 1995
and 1994 included $10,000,000 and $9,500,000, respectively, recognized pursuant
to the Company's agreements with Lilly as a result of the Company's achievement
of milestones in the development of ReoPro. Contract revenues for the year
ended December 31, 1994 also included $1,652,000 recognized pursuant to the
Company's development agreement with Tocor II, Inc. ("Tocor II"). As a result
of an exchange offer which was completed in March 1994 and pursuant to which
the Company acquired all of the outstanding callable common stock of Tocor II
(the "Exchange Offer"), the revenues under the Tocor II research program
terminated in 1994. 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 its achievement of
milestones under current arrangements.
Cost of sales increased for the year ended December 31, 1995 as compared to
the year ended December 31, 1994 due to the initiation of sales of ReoPro and
Panorex. The Company is required to make certain royalty payments, based on
sales of products, which payments represent a significant percentage of cost of
sales. The Company expects an increase in cost of sales in 1996, the extent of
which will depend primarily on the amount and mix of products sold. Beginning
in 1997, the Company is required to make certain royalty payments to Lilly up to
a designated level of sales of ReoPro. The Company's gross margins from sales of
its therapeutic products were approximately 45% of such sales for the year ended
December 31, 1995. There were no sales of therapeutic products in 1994. The
Company's gross margins from sales of its diagnostic products were approximately
60% of such sales for the years ended December 31, 1995 and 1994.
Research and development expenses for the year ended December 31, 1995
decreased as compared to the year ended December 31, 1994 due principally to
the capitalization as inventory in 1995 of certain costs associated with the
manufacture of ReoPro and Panorex. In 1994, such costs were not associated with
the production of inventory and therefore were expensed as research and
development expenses. Clinical trial expenses increased in 1995 as compared to
1994 because of the Company's efforts to obtain regulatory approvals for
additional indications of therapeutic products and further developing other
therapeutic and diagnostic product opportunities. The level of the Company's
total research and development expenses in future periods is dependent upon the
extent of clinical trial-related activities.
Marketing, general and administrative expenses for the year ended December
31, 1995 increased as compared to the year ended December 31, 1994 due
principally to increases in facilities, insurance and market development
expenses. The levels of the Company's marketing, general and administrative
expenses may increase in future periods as compared to 1995 levels if the
Company expands its market development activities in connection with sales of
therapeutic and diagnostic products.
Interest income increased for the year ended December 31, 1995 as compared
to the year ended December 31, in 1994 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 rates of return obtained on such
investments.
Interest expense decreased for the year ended December 31, 1995 as compared
to the year ended December 31, 1994 due principally to a one-time adjustment of
$2,200,000 on a loan which was renegotiated with the Commonwealth of
Pennsylvania. Interest expense in future periods will depend upon the level of
debt outstanding.
<PAGE>
Other income increased for the year ended December 31, 1995 as compared to
the year ended December 31, 1994 due to the Company's equity in earnings of a
company in which Centocor has invested. The Company does not expect any
significant additional income from this investment in the near future.
Other income (expenses) also includes a charge to operations of $3,750,000
for the year ended December 31, 1995 relating to the settlement of certain class
action securities litigation. The results of operations for the year ended
December 31, 1995 also included a charge to costs and expenses of $1,642,000 for
severance costs related to a reduction in the level of the Company's personnel
in the fourth quarter of 1995.
Year ended December 31, 1994 compared to year ended December 31, 1993
The decrease in sales for the year ended December 31, 1994 as compared to
the year ended December 31, 1993 is principally due to lower sales of certain
diagnostic reagents and the discontinuance of certain diagnostic product lines.
Contract revenues for the year ended December 31, 1994 included $1,652,000
recognized pursuant to the Company's agreements with Tocor II, as compared to
$10,109,000 for the year ended December 31, 1993. As a result of the Exchange
Offer, 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 Glaxo Wellcome in
connection with the achievement of milestones and the expansion of certain
marketing and distribution rights. Contract revenues for the year ended
December 31, 1994 included $9,500,000, as compared to $5,000,000 for the year
ended December 31, 1993, recognized 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 Glaxo Wellcome.
Cost of sales increased for the year ended December 31, 1994 as compared to
the year ended December 31, 1993 due to the mix of diagnostic products sold.
The Company is required to make certain royalty payments based on sales of
products, which payments represent a significant percentage of cost of sales.
Gross margins decreased from 67% in 1993 to 60% in 1994. Such decrease was due
to the higher percentage of diagnostic reagent sales in 1993 as compared to
1994, on which the Company realizes higher margins than on sales of its
diagnostic kits.
Research and development expenses increased for the year ended December 31,
1994 as compared to the year ended December 31, 1993 due principally to costs
associated with increased clinical trials and regulatory activities related to
products under development.
Marketing, general and administrative expenses for the year ended December
31, 1994 decreased as compared to the year ended December 31, 1993 due
principally to reductions in sales and administrative staffs, marketing
expenses and other cost reductions.
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. The results of operations for the year
ended December 31, 1994 also included 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. 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 inventory was
recorded in the fourth quarter of 1993. The Company commenced sales of HA-1A, a
therapeutic product intended for the treatment of patients with severe sepsis
resulting from Gram-negative bacterial infections, in Europe in 1990. The
Company voluntarily discontinued sales of HA-1A in 1993, as a result of data
from a U.S. clinical trial of HA-1A.
Interest income increased in the year ended December 31, 1994 as compared to
the year ended December 31, 1993 due principally to an increase in the
Company's cash and investment balances as a result of the Exchange Offer.
During 1994, the Company recorded unrealized losses of $3,649,000 compared to
$2,477,000
<PAGE>
for 1993, due to other than temporary reductions in the market value of
marketable equity investments below the Company's cost for such investments.
QUARTERLY RESULTS
The following table sets forth certain unaudited consolidated statement of
operations data for the three years ended December 31, 1995:
<TABLE>
<CAPTION>
(IN THOUSANDS)
QUARTER ENDED
-------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1993 1993 1993 1993 1994 1994
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Total revenues... $ 14,978 $ 13,753 $ 16,729 $30,470 $ 15,273 $ 16,384
Cost and
expenses:
Cost of sales... 3,894 3,983 3,842 4,100 3,630 4,471
Research and
development.... 18,711 16,760 15,964 14,678 14,389 16,666
Marketing,
general and
administrative. 9,630 9,664 8,420 8,150 6,818 6,809
Special charges. 4,273 5,114 -- 3,500 36,966 --
-------- -------- -------- ------- -------- --------
Total costs and
expenses........ 36,508 35,521 28,226 30,428 61,803 27,946
Other income
(expense)....... (3,999) (4,254) (4,307) (7,066) (4,107) (3,856)
-------- -------- -------- ------- -------- --------
Net loss......... $(25,529) $(26,022) $(15,804) $(7,024) $(50,637) $(15,418)
======== ======== ======== ======= ======== ========
<CAPTION>
(IN THOUSANDS)
QUARTER ENDED
-------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1994 1994 1995 1995 1995 1995
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Total revenues... $ 12,927 $ 22,642 $ 23,995 $ 20,754 $ 19,155 $15,012
Cost and
expenses:
Cost of sales... 3,652 4,231 8,625 8,071 7,271 5,199
Research and
development.... 15,701 23,247 13,501 17,008 18,376 17,350
Marketing,
general and
administrative. 7,159 4,583 7,494 7,120 7,643 6,919
Special charges. -- 24,968 -- -- -- 1,642
-------- -------- -------- -------- -------- --------
Total costs and
expenses........ 26,512 57,029 29,620 32,199 33,290 31,110
Other income
(expense)....... (3,994) (8,637) (2,617) (5,864) 1,980 (3,328)
-------- -------- -------- -------- -------- --------
Net loss......... $(17,579) $(43,024) $ (8,242) $(17,309) $(12,155) $(19,426)
======== ======== ======== ======== ======== ========
</TABLE>
The Company's losses, as a percentage of total revenues, have fluctuated on a
quarterly basis and can be expected to continue to be subject to quarterly
fluctuations. Quarterly results can fluctuate as a result of a number of
factors, including the timing of research and development expenses, the level of
product sales, the completion or commencement of significant contracts, and
foreign exchange fluctuations.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating expenses attempting to
develop therapeutic and diagnostic products. The Company's product sales have
not produced sufficient revenues to cover the Company's operating costs.
Consequently, the Company has experienced substantial net cash outflows, which
have been only partially offset by significant contract revenues received
through collaborative alliances with pharmaceutical companies and the
Company's financing activities.
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 therapeutic product sales.
For the year ended December 31, 1995, sales of the Company's products,
including ReoPro and Panorex, did not generate sufficient revenue to result in
positive cash flow for the year. Under the Company's strategy of entering into
collaborative 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 therapeutic product candidates under
development and 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 therapeutic 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 U.S. Food
and Drug Administration ("FDA") or other regulatory approvals expanding the
authorized use of ReoPro and Panorex 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
and Panorex or other product candidates will have a material adverse effect on
the Company.
<PAGE>
Until significant and sustained levels of therapeutic product sales are
achieved, 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. There can be no
assurance that sufficient 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 sustain the Company's operations until it generates positive
cash flows from operations.
At December 31, 1995, the Company had cash, cash equivalents and
investments of $137,206,000, including equity investments of $5,769,000. For
the year ended December 31, 1995, the Company had negative cash flows from
operations of $56,551,000. The Company's total cash flows for the year ended
December 31, 1995 included the receipt of $18,557,000 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. The Company's total cash, cash
equivalents and investments decreased by $47,301,000 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 and options as discussed above. The Company believes that its
cash, cash equivalents and investments will be sufficient to fund its
operations through at least the end of 1996.
Agreements covering $18,289,000 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 is currently not in compliance with certain of
these covenants; however, the Company has obtained waivers of such covenants
on the condition that it maintain certain investments at the lending bank,
which at December 31, 1995 totaled $20,000,000. The Company has classified
this $18,289,000 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
$7,500,000. If cash flows continue to be negative, the Company's ability to
service its debt may be impaired.
Inventory at December 31, 1995 increased as compared to December 31, 1994
due primarily to the production of ReoPro and Panorex.
Gross fixed assets at December 31, 1995 increased as compared to December
31, 1994, principally due to the investment of $4,845,000 for the purchase of
fixed assets, in addition to the impact of exchange rates on fixed assets
denominated in foreign currencies. The Company expects to make investments in
fixed assets of approximately $4,100,000 in 1996. 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 reduce
the carrying value of certain fixed assets will not be required in the future.
Long-term investments at December 31, 1995 increased as compared to
December 31, 1994, principally due to the increase in market value of a
certain equity investment classified as available for sale.
ReoPro is being developed by Centocor for Centocor Partners III, L.P.
("CPIII"). Centocor has an exclusive option to purchase the limited partnership
interests in CPIII. Centocor'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% of the total capital contributions of such limited partner (approximately
$7,926,000 in the aggregate) 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
<PAGE>
Development Agreement with CPIII. Centocor commenced commercial sales of
ReoPro in January 1995 and, as of December 31, 1995, the limited partners of
CPIII had received cumulative distributions of approximately $1,796,000. If
the Company elects to exercise this option, 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 shares of the Company's Common Stock, and future
payments generally of six percent of sales of products developed by CPIII. If
Centocor does not exercise this option, it will have no rights to the
technology or products developed on behalf of CPIII, including ReoPro.
On January 22, 1996, the Company filed a registration statement with the
Securities and Exchange Commission relating to the offering by the Company of
3,500,000 shares of its Common Stock. Upon the completion of this offering, the
Company anticipates calling its 7 1/4% Convertible Subordinated Notes due
February 1, 2001 (the "7 1/4% Convertible Notes") for redemption. At
December 31, 1995, the outstanding principal amount of the 7 1/4% Convertible
Notes was $106,640,000. Interest on these notes will cease to accrue from the
date fixed for redemption, and the Company's cash outflows in future periods
will be reduced accordingly.
FOREIGN CURRENCY
Certain of the Company's sales are denominated in currencies other than the
U.S. dollar. Additionally, the Company conducts operations in countries other
than the United States, primarily its manufacturing facility in Leiden, the
Netherlands. The Company's consolidated financial statements are denominated
in U.S. dollars, and, accordingly, changes in the exchange rate between
foreign currencies and the U.S. dollar will affect the translation of
financial results of foreign subsidiaries into U.S. dollars for purposes of
reporting the Company's consolidated financial results. To date, exchange rate
fluctuations have not had a material net effect on the Company's financial
results. The Company does not currently engage in any derivatives transactions
as a hedge against foreign currency fluctuations.
INFLATION
The Company believes the effects of inflation generally do not have a
material adverse impact on its operations or financial condition.
(Panorex and HA-1A are trademarks of Centocor. ReoPro is a trademark of Lilly.)
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, 1995 1994
- ------------------------------------------------------------- ------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents (Notes 5, 9, 13 and 20) $16,002 $78,925
Short-term investments (Notes 5, 9 and 13) 115,435 102,663
Accounts and contracts receivable 11,489 11,842
Interest receivable 1,648 1,082
Inventory (Note 6) 20,783 16,682
Prepaid expenses 2,959 2,722
Other current assets 653 1,041
---------- ----------
168,969 214,957
Fixed assets (Notes 9 and 19):
Land and buildings 72,980 71,137
Equipment, furniture, fixtures and
improvements 69,884 60,671
---------- ----------
142,864 131,808
Less accumulated depreciation (74,727) (61,768)
---------- ----------
68,137 70,040
Long-term investments (Note 5) 5,769 2,919
Intangible and other assets (Note 7) 17,409 17,999
---------- ----------
Total assets $260,284 $305,915
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT'D.)
(In thousands)
<TABLE>
<CAPTION>
December 31, 1995 1994
- ---------------------------------------- ---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $4,126 $6,383
Accrued expenses (Note 8) 26,139 26,378
Unearned revenues 83 1,407
Note payable (Note 9) 7,500 6,897
Current portion of
long-term debt (Note 9) 18,289 26,182
---------- ----------
56,137 67,247
Long-term debt (Notes 9 and 20) 231,640 231,640
Other liabilities 1,286 1,240
Minority interest 617 510
Shareholders' equity (Notes 3, 10, 13 and 20):
Preferred Stock, $.01 par value,
10,000 shares authorized, none issued - -
Common Stock, $.01 par value,
100,000 shares authorized and
58,538 and 57,081 issued and
outstanding at December 31, 1995
and 1994, respectively 585 571
Additional paid-in capital 770,068 750,175
Accumulated Deficit (808,839) (751,707)
Unrealized gain on marketable
securities 2,342 -
Cumulative foreign currency
translation adjustments 6,448 6,239
---------- ----------
(29,396) 5,278
---------- ----------
Total liabilities and
shareholders' equity $260,284 $305,915
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
For the years ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Sales $65,001 $39,984 $48,071
Contracts (including related party revenues of:
$1,652 in 1994, $10,109 in 1993) (Note 12) 13,915 27,242 27,859
------- ------- -------
78,916 67,226 75,930
Costs and expenses:
Cost of sales 29,166 15,984 15,819
Research and development (including contract
revenue related party expenses of $1,572
in 1994 and $9,414 in 1993) 66,235 70,003 66,113
Marketing, general and administrative (including
contract revenue related party expenses of $343
in 1994 and $2,327 in 1993) 29,176 25,369 35,864
Charge for acquired research and
development (Note 13) -- 36,966 --
Other charges (Note 19) 1,642 24,968 12,887
------- ------- -------
126,219 173,290 130,683
Other income (expenses):
Interest income 10,126 5,999 4,192
Interest expense (17,001) (19,821) (20,087)
Net loss on long-term investments (Note 14) -- (3,649) (2,477)
Litigation settlement (Note 14) (3,750) (1,275) --
Other 796 (1,848) (1,254)
------- ------- -------
(9,829) (20,594) (19,626)
Net loss ($57,132) ($126,658) ($74,379)
========= ========= =========
Net loss per share ($0.98) ($2.55) ($1.79)
======= ======= =======
Weighted average number of shares
outstanding 58,207 49,597 41,482
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Year ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows used for operating activities:
Net loss ($57,132) ($126,658) ($74,379)
Adjustments to reconcile net loss to net cash
used for operating activities:
Charge for acquired research and development - 36,966 -
Special charges - 9,145 6,528
Net loss on long-term investments - 3,649 2,477
Provisions for depreciation and amortization 16,394 18,164 25,804
Amortization of deferred income (1,616) (3,067) (268)
Other 204 2,413 1,157
Changes in assets and liabilities:
Accounts and contracts receivable 378 1,330 490
Interest receivable (542) (466) 1,296
Inventory (4,519) (2,344) (591)
Prepaid expenses (3,568) (2,809) (1,606)
Other current assets 462 81 529
Intangible and other assets (1,456) (1,423) (1,759)
Accounts payable (2,425) (962) 2,753
Unearned revenue 46 1,675 152
Accrued expenses and other liabilities (2,941) (1,162) (5,157)
Other long-term liabilities 164 948 277
--------- ---------- ---------
Net cash used for operating activities (56,551) (64,520) (42,297)
Cash flows (used for) from investing activities:
Purchases of investments (147,381) (98,808) (168,643)
Sales of investments 136,490 127,250 203,840
Purchases of fixed assets (4,845) (4,555) (2,008)
Proceeds from sale of St. Louis facility - - 11,913
Acquisition of Tocor II, net of cash acquired - 3,991 -
--------- ---------- ---------
Net cash (used for) from investing activities (15,736) 27,878 45,102
Cash flows from financing activities:
Net proceeds from issuance of Common Stock 18,557 71,633 23,123
Proceeds from issuance of debt - - 2,500
Reduction of debt (9,615) (2,788) (9,453)
--------- ---------- ---------
Net cash from financing activities 8,942 68,845 16,170
Effect of foreign currency translation 422 512 (1,261)
--------- ---------- ---------
Net (decrease) increase in cash and cash equivalents (62,923) 32,715 17,714
Beginning cash and cash equivalents 78,925 46,210 28,496
--------- ---------- ---------
Ending cash and cash equivalents $16,002 $78,925 $46,210
========= ========== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Net Unrealized Cumulative
--------------------- gain (loss) on foreign currency
Number of Additional Accumulated Marketable translation
shares Par value paid in capital Deficit Securities adjustments
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 41,192 $412 $575,072 $(550,670) - $5,907
Issued to Glaxo Wellcome plc (Note 10) 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 Glaxo Wellcome plc (Note 10) 140 1 3,500 - - -
Issued pursuant to the Tocor II
exchange offer (Note 13) 7,014 70 84,259 - - -
Warrants retired pursuant to Tocor II
exchange offer (Note 13) - - (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
Issued upon exercise of options and
warrants or as stock grants 1,388 14 18,323 - - -
Issued to employee benefit plan 31 - 511 - - -
Vested pursuant to
restricted stock award plan 38 - 1,059 - - -
Translation adjustments - - - - 209
Carrying value adjustments - - - - 2,342 -
Net loss - - - (57,132) - -
--------------------------------------------------------------------------------------
Balance at December 31, 1995 (Note 20) 58,538 $585 $770,068 $(808,839) $2,342 $6,448
======================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
Notes to Consolidated Financial Statements
Note 1
Description of Business
Centocor is a biotechnology company that develops therapeutic and
diagnostic human health care products for cardiovascular, autoimmune and
infectious diseases and cancer. The Company concentrates on research and
development, manufacturing and market development, with a primary technological
focus on monoclonal antibodies, with additional programs in genetic vaccines and
peptides.
Note 2
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.
Use of estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
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. The equity investments
classified as available for sale are carried at estimated fair value with
unrealized gains and losses recorded as a component of shareholders' equity.
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.
7
<PAGE>
Notes to Consolidated Financial Statements
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, the
depreciable lives are as follows:
Equipment and Furniture and Fixtures 3-5 years
Land improvements 10 years
Leasehold improvements 10 years
Building and Building improvements 31.5 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, 1995 and 1994 were $8,445,000 and $9,653,000, respectively, net of
accumulated amortization of $7,282,000 and $4,229,000 at December 31, 1995 and
1994, respectively. Licensing agreements, goodwill and other assets are reviewed
for impairment whenever events or circumstances provide evidence that suggest
that the carrying amount of the asset may not be recoverable. Impairment is
evaluated by using identified or expected cashflows.
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.
8
<PAGE>
Notes to Consolidated Financial Statements
Income Taxes
------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes." The
Company has a net operating loss carryforward for tax purposes that begins to
expire in 2005. Since realization of the tax benefit associated with this
carryforward is not assured, a valuation allowance was recorded against this tax
benefit. In addition, pursuant to the Tax Reform Act of 1986, the annual
utilization of these losses may be limited. The Company believes that any such
limitation will not have a material impact on the utilization of these
carryforwards.
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. Revenues and
expenses of such subsidiaries are translated at average rates of exchange 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.
New Accounting Standards
------------------------
In June 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-lived Assets to be Disposed of" which requires companies to
review long-lived assets and certain identifiable intangibles to be held, used
or disposed of, for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company is required to adopt Statement 121 for 1996. The Company believes the
adoption of Statement 121 will not have a significant effect on its financial
statements.
9
<PAGE>
Notes to Consolidated Financial Statements
In November 1995, the FASB issued Statement of Financial Accounting
Standards No.123, Accounting for Stock-Based Compensation ("Statement 123"),
which is effective for transactions entered into in fiscal years beginning after
December 15, 1995. The Company is currently evaluating the requirements of
Statement 123.
Note 3
Commitments and Contingencies
Liquidity and Capital Resources
-------------------------------
The Company has incurred significant operating expenses attempting to
develop therapeutic and diagnostic products. The Company's product sales have
not produced sufficient revenues to cover the Company's operating costs.
Consequently, the Company has experienced substantial net cash outflows, which
have been only partially offset by significant contract revenues received
through collaborative alliances with pharmaceutical companies and the Company's
financing activities.
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 therapeutic product sales.
For the year ended December 31, 1995, sales of the Company's products, including
ReoPro and Panorex, did not generate sufficient revenue to result in positive
cash flow for the year. Under the Company's strategy of entering into
collaborative 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 therapeutic product candidates under development and 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 therapeutic 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 and Panorex 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 and Panorex or other product candidates will
have a material adverse effect on the Company.
Until significant and sustained levels of therapeutic product sales are
achieved, the
10
<PAGE>
Notes to Consolidated Financial Statements
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. There can be no assurance that sufficient 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 sustain the Company's
operations until it generates positive cash flows from operations.
Legal Proceedings
-----------------
In October 1992, the Company was served with a complaint filed by the Velos
Group, a Maryland partnership ("Velos"), in the U.S. District Court for the
District of Maryland. The complaint primarily alleged 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, as well
as various patent application and foreign patents. The patents and applications
include claims relating to monoclonal antibodies used in treating manifestations
of Gram-negative bacterial infections, the targeted indication of HA-1A. The
complaint sought declaratory relief and monetary relief in excess of
$100,000,000, and requested that the Company place in escrow one-half of the
amounts received by the Company in 1992 pursuant to its agreements with Eli
Lilly and Company ("Lilly"). The complaint did 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 on
June 22, 1993 with leave to replead. 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 scheduled
for November 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 sublicensee of Centocor, thereby purportedly entitling plaintiff to
a significant
11
<PAGE>
Notes to Consolidated Financial Statements
part of the funds paid by Lilly to Centocor. The Company believes that the
allegations of Velos are without merit and intends to vigorously defend this
suit and to pursue its counterclaim.
On December 23, 1993, a purported class action captioned Peter Cordaro v.
Hubert J.P. Schoemaker, Stelios Papadopoulos, Marc Feldmann, David Golden,
Centocor and Tocor II was filed in the Court of Common Pleas of Chester County,
Pennsylvania. 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. Plaintiff took no additional action to obtain an injunction and
the exchange offer was made and consummated. A motion for class certification is
pending. No trial date has been fixed. The Company believes that the allegations
set forth in the complaint are without merit and intends to vigorously defend
this suit.
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
CPIII, research partnerships for which PaineWebber acted as the sales agent and
in other capacities. 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 HA-1A 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 Centocor Development Corporation III ("CDC
III"), a wholly owned subsidiary of the Company which acts as the general
12
<PAGE>
Notes to Consolidated Financial Statements
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 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
PaineWebber Group Inc. and PaineWebber. On November 1, 1995, an additional suit
was commenced in the Delaware Court of Chancery by John E. Abdo, a limited
partner of CPIII, against the Company, CDC 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 answered this complaint and
also filed a cross-claim against nominal defendant CPIII and a third party
complaint against PaineWebber Group Inc. and PaineWebber. The two Delaware suits
have been consolidated and discovery is proceeding. No trial date has been
fixed. In addition, on February 13, 1996, an additional suit was filed in the
Court of Common Pleas for Chester County for the Commonwealth of Pennsylvania by
an alleged former limited partner in CPII, against the Company, Lilly and an
officer and a director of the Company. The complaint purports to be a class
action on behalf of all former limited partners of CPII and asserts claims of
breach of contract, breach of fiduciary duty and breach of duty of good faith
and fair dealing and states theories of recovery similar to those asserted by
PaineWebber R&D Partners, L.P., as described above. The Company believes that
the allegations of the plaintiffs in these suits are without merit and intends
to vigorously defend them.
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
- ------------
Centocor has an exclusive option to purchase the limited partnership
interests in CPIII. Centocor'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% of the total capital contributions of such limited partner (approximately
13
<PAGE>
Notes to Consolidated Financial Statements
$7,926,000 in the aggregate) 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. Centocor commenced commercial
sales of ReoPro in January 1995 and, as of December 31, 1995, the limited
partners of CPIII had received cumulative distributions of approximately
$1,796,000. If the Company elects to exercise this option, 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 shares of the Company's Common Stock, and
future payments generally of six percent of sales of products developed by
CPIII. If Centocor does not exercise this option, it will have no rights to the
technology or products developed on behalf of CPIII, including ReoPro.
The Company has entered into indemnity agreements with CPIII and the former
limited 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. Beginning in 1997, the
Company is required to make certain royalty payments to Lilly up to a designated
level of sales of ReoPro.
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
14
<PAGE>
Notes to Consolidated Financial Statements
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. Centocor's business may be materially adversely affected by a
successful product liability claim in excess of any insurance coverage. There
can be no assurance that product liability insurance coverage will continue to
be available to Centocor in the future on reasonable terms or at all.
Note 4
Collaborative Arrangements
Relationship with Eli Lilly and Company
- ---------------------------------------
In July 1992, Centocor and Lilly entered into a Sales and Distribution
Agreement. Under that Agreement, Centocor is principally responsible for
developing and manufacturing ReoPro, and Lilly will assist Centocor in the
regulatory filings and continued development of ReoPro for various clinical
indications. Also, in the event Centocor cannot manufacture ReoPro or under
certain other circumstances, such as material breach of the agreement by or the
bankruptcy of Centocor, Lilly has the option to assume the manufacture of ReoPro
and assure the continued supply of the product, even to the extent of acquiring
Centocor's related manufacturing assets at their independently appraised values.
Relationship with Glaxo Wellcome plc
- ------------------------------------
In November 1993, Centocor and Glaxo Wellcome plc ("Glaxo Wellcome")
entered into an alliance agreement for the development and marketing of certain
of Centocor's monoclonal antibody-based cancer therapeutic products, including
Panorex. In November 1994, Centocor and Glaxo Wellcome amended their alliance
agreement and Glaxo Wellcome became the exclusive worldwide distributor for
Panorex. Under the agreement, Glaxo Wellcome is responsible principally for the
continuing clinical development of Panorex, and Centocor is responsible
principally for manufacturing Panorex and securing regulatory approvals.
15
<PAGE>
Notes to Consolidated Financial Statements
Note 5
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 shareholders' equity. The Company's other investments which the
Company has the ability and intent to hold to maturity are carried at amortized
cost.
At December 31, 1995, securities classified as available for sale and held
to maturity are summarized below (in thousands).
<TABLE>
<CAPTION>
Estimated
Adjusted Unrealized Carrying
Cost Gains (Losses) Value
--------- -------- --------- ----------
<S> <C> <C> <C> <C>
Investments available for sale:
Equity securities $ 3,427 $ 2,342 $ - $ 5,769
======== ======== ======== =========
Estimated
Carrying Unrealized Fair
Value Gains (Losses) Value
-------- ----- -------- ------
Investments held to maturity:
Securities and obligations of
the U.S. Treasury and other
U.S. government agencies $ 70,622 $ 148 $ (2) $ 70,768
Certificates of deposit 32,801 - - 32,801
Corporate bonds and
commercial paper 24,260 62 (1) 24,321
-------- ----- --- --------
$127,683 $ 210 $ (3) $127,890
======== ===== === ========
</TABLE>
At December 31, 1995, these securities were classified as follows (in
thousands) :
<TABLE>
<S> <C>
Cash equivalents $ 12,248
Short-term investments 115,435
Long-term investments 5,769
--------
$133,452
========
</TABLE>
16
<PAGE>
Notes to Consolidated Financial Statements
The Company has agreed to maintain investments with fair values of
$27,500,000 as of December 31, 1995 at certain banks as collateral for loans
from those banks. See Note 9.
At December 31, 1994, securities classified as available for sale and held
to maturity are summarized below (in thousands).
<TABLE>
<CAPTION>
Estimated
Adjusted Unrealized Carrying
Cost Gains (Losses) Value
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Investments available for sale:
Equity securities $ 2,919 $ - $ - $ 2,919
======= ======== ======= =======
<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 $ 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
======== ====== ==== ========
</TABLE>
At December 31, 1994, these securities were classified as follows (in
thousands):
<TABLE>
<S> <C>
Cash equivalents $ 13,785
Short-term investments 102,663
Long-term investments 2,919
--------
$119,367
========
</TABLE>
17
<PAGE>
Notes to Consolidated Financial Statements
Note 6
Inventory
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1995 1994
------- -------
<S> <C> <C>
Raw materials $ 4,965 $ 3,564
Work in process 9,382 8,973
Finished goods 6,436 4,145
------- -------
$20,783 $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 7
Intangibles and Other Assets
Intangibles and other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1995 1994
------- -------
<S> <C> <C>
Licenses $ 4,126 $ 3,517
Goodwill 5,502 5,847
Debt issuance costs 3,854 4,566
Other 3,927 4,069
------- -------
$17,409 $17,999
======= =======
</TABLE>
Licensing agreements, goodwill and other assets are reviewed for impairment
whenever events or circumstances provide evidence that suggest that the carrying
amount of the asset may not be recoverable. Impairment is evaluated by using
identified or expected cashflows.
18
<PAGE>
Notes to Consolidated Financial Statements
Note 8
Accrued Expenses
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1995 1994
------- -------
<S> <C> <C>
Compensation $ 3,191 $ 2,621
Interest 5,473 6,681
Research 4,942 3,790
Other 12,533 13,286
------- -------
$26,139 $26,378
======= =======
</TABLE>
Note 9
Debt
Note Payable
Note payable at December 31, 1995 and 1994 consists of $7,500,000 and
$6,897,000, respectively, of borrowings under short-term notes at an interest
rate of 5.26 percent per annum at December 31, 1995, payable in Dutch guilders
no later than March 28, 1996. These borrowings are secured by investments at the
lending bank of $7,500,000 (see "Loan Covenants").
Long-term debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1995 1994
------ ------
<S> <C> <C>
7-1/4% Convertible Notes $106,640 $106,640
6-3/4% Convertible Debentures 125,000 125,000
Mortgage Debt 9,101 15,941
Long-term Note 9,188 10,241
-------- --------
249,929 257,822
Current Portion (18,289) (26,182)
-------- --------
$231,640 $231,640
======== ========
</TABLE>
19
<PAGE>
Notes to Consolidated Financial Statements
7-1/4% Convertible Notes
On January 28, 1991, the Company issued $106,645,000 principal amount of 7-
1/4% Convertible Notes due February 1, 2001. The 7-1/4% Convertible 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% Convertible Notes are subordinated in right
of payment to senior indebtedness at December 31, 1995 of $25,789,000 and all
future senior indebtedness of the Company, and rank pari passu with the 6-3/4%
Convertible Debentures described below. The 7-1/4% Convertible 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%
Convertible Notes. The Company may be required to redeem the 7-1/4% Convertible
Notes at their principal amount at the option of the holders of the 7-1/4%
Convertible Notes in certain limited circumstances, including a change in
control of the Company. See Note 20.
6-3/4% Convertible Debentures
On October 16, 1991, the Company issued $125,000,000 principal amount of
6-3/4% Convertible Debentures due October 16, 2001. The 6-3/4% Convertible
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% Convertible Debentures are
subordinated in right of payment to senior indebtedness at December 31, 1995 of
$25,789,000 and all future senior indebtedness of the Company, and rank pari
passu with the 7-1/4% Convertible Notes. The 6-3/4% Convertible 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%
Convertible Debentures. The Company may be required to redeem the 6-3/4%
Convertible Debentures at their principal amount at the option of the holders of
the 6-3/4% Convertible 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 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 December 31, 1995, is payable
in Dutch guilders and bears interest at an annual rate of 8-1/4 percent
20
<PAGE>
Notes to Consolidated Financial Statements
through its final maturity date of September 30, 2011. At December 31, 1995 and
1994 these loans are classified as short-term debt (see "Loan Covenants").
Long-term Note
The Company borrowed $9,188,000 under a 9-1/2 percent long-term note which
is payable in Dutch guilders. At December 31, 1995 and 1994, this loan is
classified as short-term (see "Loan Covenants").
Loan Covenants
Agreements covering $18,289,000 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 is currently not in compliance with certain of these
covenants; however, the Company has obtained waivers of such covenants on the
condition that it maintains certain investments at the lending bank, which at
December 31, 1995 totalled $20,000,000. The Company has classified the
$18,289,000 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 $7,500,000. 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 as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1996 $ 2,692,000
1997 2,809,000
1998 2,814,000
1999 2,818,000
2000 2,261,000
Thereafter 4,895,000
</TABLE>
The fair value of the Company's long-term debt at December 31, 1995,
principally determined by quoted market prices, was $241,419,000 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, 1995 approximates its fair value.
21
<PAGE>
Notes to Consolidated Financial Statements
Note 10
Shareholders' Equity
Capital Stock
In 1995 the Company issued 1,388,000 shares of its Common Stock par value
$.01 per share ("Common Stock") in connection with the exercise of options and
warrants. 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 13, 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 Glaxo Wellcome. In 1993, the Company issued 2,000,000
shares of its Common Stock pursuant to the terms of an agreement with Glaxo
Wellcome. At December 31, 1995, approximately 14,571,000 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, 1995,
approximately 365,000 shares of preferred stock were reserved for issuance under
a shareholder rights plan which is further described below. See Note 20.
Warrants
At December 31, 1995, warrants to purchase approximately 700,000 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):
<TABLE>
<CAPTION>
Shares Issuable
Upon Exercise Exercise Period Exercise Price Per Share
- ---------------- --------------- ------------------------
<S> <C> <C>
446 Through February 28, 1996 $13.33
127 January 1, 1996 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 9,050,000 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
22
<PAGE>
Notes to Consolidated Financial Statements
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,
1995 1994 1993
Options Exercise Price Options Exercise Price Options Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning
of year 4,958 $6.500-53.50 5,770 $6.50-53.50 5,948 $7.38-56.00
Granted 713 $9.875-24.00 726 $9.13-17.94 2,681 $6.50-14.13
Exercised (678) $6.875-31.75 (685) $6.88-16.00 (304) $7.38-12.00
Canceled (336) $6.500-53.50 (853) $6.88-51.75 (2,555) $6.88-56.00
----- ------------ ----- ----------- ------ -----------
Outstanding,
end of year 4,657 $6.875-51.75 4,958 $6.50-53.50 5,770 $6.50-53.50
===== ============ ===== =========== ====== ===========
</TABLE>
During 1993, 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. At December 31, 1995,
options to purchase a total of approximately 2,887,000 shares of Common Stock
were exercisable, and approximately 1,770,000 options become exercisable as
follows (in thousands):
<TABLE>
<CAPTION>
Years ending December 31, Shares
- ------------------------- ------
<S> <C>
1996 554
1997 712
1998 312
1999 152
2000 40
</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, 1995, awards of approximately 255,000 shares of the
Company's Common Stock were outstanding and are scheduled to vest in the
following periods (in thousands):
23
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Years ending December 31, Shares
- ------------------------- ------
<S> <C>
1996 87
1997 70
1998 64
1999 34
</TABLE>
The terms of options unexercisable as of December 31, 1995 for an aggregate
of approximately 1,178,000 shares and restricted stock awards unvested as of
December 31, 1995 for an aggregate of approximately 187,000 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 2,747,000 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 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.
24
<PAGE>
Notes to Consolidated Financial Statements
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 11
Geographic and Customer Information
<TABLE>
<CAPTION>
Geographic Information (in thousands)
Income Identifiable
Years ended December 31, Revenue (Loss) assets
<S> <C> <C> <C>
1995
United States $35,272 $(61,208) $160,094
Europe 43,466 4,076 100,190
Other 178 - -
------- --------- --------
$78,916 $(57,132) $260,284
======= ========= ========
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
======= ========= ========
</TABLE>
Customer Information
During 1995, approximately 50% of the Company's total product sales were
to three customers: Lilly, Glaxo Wellcome and Toray-Fuji Bionics, Inc. During
1994, approximately 60% of the Company's total product sales were to four
customers: Abbott Laboratories, Boehringer Mannheim GmbH, CIS bio International
and Toray-Fuji Bionics, Inc.
25
<PAGE>
Notes to Consolidated Financial Statements
Note 12
Contract Revenues
Lilly Related
-------------
Pursuant to the Company's agreements with Lilly, the Company recognized
revenues of $10,000,000, $9,500,000 and $5,000,000 for the years ended December
31, 1995, 1994 and 1993, respectively, related to the achievement of ReoPro
milestones.
Glaxo Wellcome Related
----------------------
Pursuant to the Company's agreements with Glaxo Wellcome, the Company
recognized revenues of $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. Glaxo
Wellcome may make certain future payments to the Company based on the
achievement of certain milestones related to Panorex.
Related Party Research & Development
------------------------------------
During 1994 and 1993, 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 13 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 and 1993, revenues related to the
Tocor II research program were $1,652,000 and $10,109,000 respectively.
Expenses incurred, including general and administrative expenses for the years
ended December 31, 1994 and 1993 were $1,915,000 and $11,741,000 respectively.
Additionally, the Company incurred expenses of $29,900,000, $22,850,000,
and $19,389,000, for the years ended December 31, 1995, 1994 and 1993,
respectively, representing aggregate CPIII research costs funded by the Company
in order to continue the progress of the research program and to preserve the
value of its purchase option. See Note 3.
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 $3,915,000, $2,090,000, and $2,750,000, for the
years ended December 31, 1995, 1994 and 1993, respectively.
26
<PAGE>
Notes to Consolidated Financial Statements
Note 13
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, 1995, stock certificates
representing 222,000 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 145,000 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.
27
<PAGE>
Notes to Consolidated Financial Statements
Note 14
Other Income (Expenses)
The Company recorded a charge to earnings of $3,750,000 and $1,275,000 for
the years ended December 31, 1995 and December 31, 1994, respectively, in
connection with the settlement of certain litigation. During 1994 and 1993,
respectively, the Company recorded a charge to earnings of $3,649,000 and
$2,477,000 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) also includes the Company's
equity share of the gain and/or losses of an investee company.
Note 15
Income Taxes
The components of the deferred tax assets are as follows as of December 31,
1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Tax credits $ 5,424 $ 5,424
Loss carryforwards 229,855 199,375
Acquired research 30,357 35,215
Facilities and equipment 2,326 2,443
Depreciation 977 819
Investments 1,553 2,947
--------- ---------
Total 270,492 246,223
Valuation reserve (270,492) (246,223)
--------- ---------
Net deferred tax assets $ - $ -
========= =========
</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.
Additionally, at December 31, 1995, the Company had research and development tax
credits and other tax credits of $5,043,000 substantially all with expiration
dates ranging from 1999 to 2008, and minimum tax credits of $381,000 which do
not expire.
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, 1995.
Of the $270 million valuation allowance at December 31, 1995, $7.6 million
relating to deductions for non-qualified stock options will be credited to paid
in capital if realized. At December 31, 1995 there were unused foreign tax
subsidies that may be used to offset foreign taxable income of approximately
$30 million. The Company had net operating loss carryforwards available in the
United States for federal income tax purposes of approximately $590 million
which will begin to expire at various dates from the year 2005 to 2010. Net
operating loss carryforwards may be also be subject to various annual and other
limitations on the amounts to be utilized.
Note 16
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.
28
<PAGE>
Notes to Consolidated Financial Statements
The aggregate minimum rental commitments of leases are as follows (in
thousands):
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1996 $2,709
1997 2,337
1998 1,782
1999 1,470
2000 777
Thereafter 4,078
</TABLE>
Rent expense was $3,308,000, $3,189,000, and $5,428,000, for the years
ended December 31, 1995, 1994, and 1993, respectively.
Note 17
Supplemental Information on Cash Flows
Interest paid, net of amounts capitalized, was $18,358,000, $19,192,000,
and $19,421,000, in 1995, 1994, and 1993, respectively.
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 and acquired
cash and short-term investments of $50,124,000 in connection with an exchange
offer more fully described in Note 13.
Note 18
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>
1995
Total revenues $23,995 $20,754 $19,155 $15,012
Sales 19,319 17,754 15,860 12,068
Gross profit from sales 10,694 9,683 8,589 6,869
Net loss (8,242) (17,309) (1) (12,155) (19,426) (2)
Net loss per share $(.14) $(.30) $(.21) $(.33)
</TABLE>
29
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
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) (3) (15,418) (17,579) (43,024) (4)
Net loss per share $(1.13) $(.30) $(.34) $(.83)
</TABLE>
(1) During the second quarter of 1995, the Company recorded a reserve of
$3,750,000 relating to the settlement of litigation.
(2) During the fourth quarter of 1995, the Company recorded restructuring
charges of $1,642,000 relating to severance costs.
(3) 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 13.
(4) During the fourth quarter of 1994, the Company recorded a charge of
$17,098,000 representing a royalty buyout related to ReoPro. 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 Note 19.
Note 19
Other Charges
In 1995, the Company recorded a charge of $1,642,000 representing severance
costs in connection with the downsizing of its workforce. In 1994, the Company
elected to buyout a future royalty obligation and, as a result, recorded a
charge of $17,098,000 representing such buyout. Additionally in 1994, the
Company recorded a charge of $7,870,000 in connection with the write-down of
certain facilities and equipment. In 1993, the Company recorded restructuring
charges of $9,387,000 consisting principally of severance related costs incurred
in connection with the 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.
Also in 1993, the Company recorded charges related to HA-1A inventory of
$3,500,000. 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.
30
<PAGE>
Notes to Consolidated Financial Statements
Note 20
Subsequent Event
In January 1996, the Company filed a Registration Statement to register and
then offer 3,500,000 shares of the Company's Common Stock, par value $.01 per
share.
Upon the completion of the offering, the Company intends to call for
redemption the 7 1/4% Convertible Notes at a redemption price of 103.222% of the
outstanding principal amount. At December 31, 1995, the outstanding principal
amount of the 7 1/4% Convertible Notes was $106,640,000. If, at the time of
redemption, the market price of Centocor's Common Stock exceeds the $28.64 per
share effective conversion price of the 7 1/4% Convertible Notes, Centocor
anticipates that some or all of the holders of the 7 1/4% Convertible Notes will
exercise their rights to convert the 7 1/4% Convertible Notes into the Company's
Common Stock. To the extent the holders do not exercise such rights, the Company
intends to use the proceeds from this offering to redeem the 7 1/4% Convertible
Notes remaining outstanding. If the U.S. Underwriters' over-allotment option is
not exercised and none of the 7 1/4% Convertible Notes are converted, the
Company intends to use approximately $1,167,000 of cash on hand in addition to
the net proceeds from the offering to redeem the 7 1/4% Convertible Notes.
The balance of the proceeds not used to redeem 7 1/4% Convertible Notes, if
any, will be utilized for working capital and other corporate purposes, which
may include expenses associated with the development and clinical testing of
therapeutic products, reduction of debt, purchase of the CPIII partnership
interests and other acquisitions. The Company is not currently in discussions
with respect to any acquisitions. Pending such uses, the Company intends to
invest the net proceeds from this offering in short-term, investment grade,
interest-bearing securities.
The unaudited pro forma condensed balance sheet, assuming the stock
offering was consummated and adjusted for the redemption of the 7 1/4%
Convertible Notes as of December 31, 1995 would have been as follows:
<TABLE>
<CAPTION>
(In thousands)
Balance Sheet Data December 31, 1995
------------------ -----------------
<S> <C>
Cash and investments $136,039
Total Assets 257,260
Long- term debt 125,000
Shareholders' equity 74,220
</TABLE>
31
<PAGE>
SCHEDULE II
CENTOCOR, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance Charged to Balance Charged to Balance Charged to Balance
at Costs and at Costs and at Cost and at
Classification 12/31/92 Expenses Deductions 12/31/93 Expenses Deductions 12/31/94 Expenses Deduction 12/31/95
- -------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Inventory Reserves $68,306 $3,500 (1) ($7,063) $64,743 $3,609 ($53,472) $14,880 $2,094 ($15,938) $1,036
---------------------------------------------------------------------------------------------------------------
</TABLE>
1) The Company recorded reserves for HA-1A inventories of $3,500,000 in 1993 due
to the uncertainties regarding future HA-1A sales resulting from the current
regulatory and commercial status of HA-1A.
32
<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, 1995 and 1994, 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, 1995. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule. 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
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Centocor, Inc. and
subsidiaries as of December 31, 1995 and 1994 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, 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 14, 1996
33
