<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
-------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-11103
-------
CENTOCOR, INC.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2117202
- ------------------------------------ ------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
200 Great Valley Parkway Malvern, Pennsylvania 19355-1307
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
610-651-6000
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
-----
Shares of Common Stock outstanding at August 1, 1997 were 69,788,241.
<PAGE>
Part I: Financial Information
- -----------------------------
Item 1: Financial Statements
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1997 1996
- ------------------------------------ ------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Notes 4 and 8) $56,364 $55,953
Short-term investments (Notes 4 and 8) 105,782 120,362
Accounts and contracts receivable 49,729 27,440
Interest receivable 1,754 2,147
Inventory (Note 5) 21,324 23,815
Prepaid expenses 1,956 4,279
Other current assets 64 752
------------- --------------
236,973 234,748
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 69,402 71,607
Equipment, furniture, fixtures and
improvements 68,043 69,884
------------- --------------
137,445 141,491
Less accumulated depreciation (77,048) (79,954)
------------- --------------
60,397 61,537
LONG-TERM INVESTMENTS (NOTE 4) 7,708 9,502
INTANGIBLE AND OTHER ASSETS (NOTE 6) 61,027 35,334
------------- --------------
TOTAL ASSETS $366,105 $341,121
============= ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT'D.)
(IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1997 1996
- ---------------------------------------- ------------- -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $7,887 $9,543
Accrued expenses 38,546 28,940
Notes payable (Note 8) 6,122 6,897
Other current liabilities (Note 7) 10,800 100
------------- -------------
63,355 45,480
LONG-TERM DEBT (NOTE 8) 54,765 54,765
OTHER LIABILITIES (NOTE 7) 6,002 1,127
MINORITY INTEREST - 3,839
SHAREHOLDERS' EQUITY (NOTES 2, 3 AND 8):
Preferred Stock, $.01 par value,
10,000 shares authorized, none issued - -
Common Stock, $.01 par value,
100,000 shares authorized and
69,708 and 69,177 issued and
outstanding at June 30, 1997
and December 31, 1996, respectively 697 692
Additional paid-in capital 1,054,800 1,050,062
Accumulated deficit (817,611) (821,602)
Unrealized gain on marketable
securities 2,928 2,342
Cumulative foreign currency
translation adjustments 1,169 4,416
------------- -------------
241,983 235,910
------------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $366,105 $341,121
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In THOUSANDS EXCEPT PER SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
For the three months ended June 30, 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Sales $ 51,007 $ 29,526
Contracts 2,636 1,060
--------- ---------
53,643 30,586
COSTS AND EXPENSES:
Cost of sales 22,183 14,554
Research and development 17,292 13,296
Marketing, general and administrative 9,588 7,882
--------- ---------
49,063 35,732
OTHER INCOME (EXPENSES):
Interest income 2,448 3,222
Interest expense (965) (2,464)
Loss on sale of facility and related business (Note 11) (4,565) -
Other income (expenses) (758) (640)
--------- ---------
(3,840) 118
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 740 (5,028)
PROVISION FOR INCOME TAXES 20 -
--------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 720 (5,028)
EXTRAORDINARY ITEM:
NET GAIN ON EXTINGUISHMENT OF DEBT (NOTE 8) - 705
--------- ---------
NET INCOME (LOSS) $ 720 ($ 4,323)
--------- ---------
NET INCOME (LOSS) PER SHARE:
BEFORE EXTRAORDINARY ITEM $ 0.01 ($ 0.07)
EXTRAORDINARY ITEM - 0.01
--------- ---------
NET INCOME (LOSS) PER SHARE $ 0.01 ($ 0.06)
========= =========
Weighted average common and dilutive equivalent
shares outstanding 71,597 67,645
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
For the six months ended June 30, 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Sales $95,943 $51,236
Contracts 2,736 1,232
---------- ----------
98,679 52,468
COSTS AND EXPENSES:
Cost of sales 39,989 25,108
Research and development 31,629 25,844
Marketing, general and administrative 19,384 15,285
---------- ----------
91,002 66,237
OTHER INCOME (EXPENSES):
Interest income 4,602 5,487
Interest expense (1,962) (5,731)
Loss on sale of facility and related business (Note 11) (4,565) 0
Other income (expenses) (1,671) (713)
---------- ----------
(3,596) (957)
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (4,081) (14,726)
PROVISION FOR INCOME TAXES 90 -
---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 3,991 (14,726)
EXTRAORDINARY ITEM:
NET GAIN ON EXTINGUISHMENT OF DEBT (NOTE 8) - 705
---------- ----------
NET INCOME (LOSS) $ 3,991 ($14,021)
========= =========
NET INCOME (LOSS) PER SHARE:
BEFORE EXTRAORDINARY ITEM $ 0.06 ($ 0.23)
EXTRAORDINARY ITEM - 0.01
---------- ----------
NET INCOME (LOSS) PER SHARE $ 0.06 ($ 0.22)
========= =========
Weighted average common and dilutive equivalent
shares outstanding 71,629 63,901
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
For the six months ended June 30, 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows used for operating activities:
Net income (loss) $ 3,991 ($14,021)
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Loss on disposal of facility and related business 4,565 -
Net gain on extinguishment of debt - (705)
Provisions for depreciation and amortization 8,283 7,067
Amortization of deferred income - (74)
Other 2,369 1,316
Changes in assets and liabilities:
Accounts and contracts receivable (24,369) (14,177)
Interest receivable 388 (364)
Inventory (2,565) (2,073)
Prepaid expenses 272 (12,215)
Other current assets (663) (451)
Intangible and other assets (18,244) (3,966)
Accounts payable (1,153) 1,426
Accrued expenses and other liabilities 14,711 127
Other long-term liabilities (225) 176
--------- ---------
Net cash used for operating activities (12,640) (37,934)
Cash flows from investing activities:
Purchases of investments (40,500) (40,445)
Sales of investments 53,400 53,740
Sale of facility and related business 2,400 -
Purchases of fixed assets (7,623) (1,773)
--------- ---------
Net cash from investing activities 7,677 11,522
Cash flows from financing activities:
Net proceeds from issuance of Common Stock relating
to public offering - 125,916
Net proceeds from other issuances of Common Stock 4,423 13,529
Reduction of long-term debt and notes payable - (68,820)
--------- ---------
Net cash from financing activities 4,423 70,625
Effect of foreign currency translation 951 (328)
--------- ---------
Net increase in cash and cash equivalents 411 43,885
Beginning cash and cash equivalents 55,953 16,002
--------- ---------
Ending cash and cash equivalents $56,364 $59,887
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
6
<PAGE>
Centocor, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
----------------------------------------------------------------------
Note 1
BASIS OF PRESENTATION
Centocor, Inc. ("Centocor" or the "Company") is a biotechnology company
whose mission is to develop and commercialize novel therapeutic and diagnostic
products and services that solve critical needs in human health care. The
Company concentrates on research and development, manufacturing and market
development, with a primary technological focus on monoclonal antibodies and
DNA-based products.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles applicable to interim
periods. These financial statements do not include all disclosures required for
annual financial statements and should be read in conjunction with the more
complete disclosures contained in Centocor, Inc.'s audited financial statements
in the Company's Annual Report on Form 10-K for the year ended December 31,
1996.
The statements reflect, in the opinion of management, all adjustments of a
normal and recurring nature necessary to present fairly the Company's
consolidated financial position at June 30, 1997 and December 31, 1996 and the
consolidated results of operations for the three and six months ended June 30,
1997 and 1996 and consolidated cash flows for the six months ended June 30, 1997
and 1996. The results of operations and the cash flows are not necessarily
indicative of the results to be expected for the entire year.
Note 2
COMMITMENTS AND CONTINGENCIES
Liquidity and Capital Resources
-------------------------------
The Company has incurred significant operating expenses attempting to
develop therapeutic and diagnostic products. Consequently, the Company has
experienced substantial net operating 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 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
ending December 31, 1997, sales of the Company's products, primarily ReoPro,
would be expected to generate sufficient revenue to result in positive cash flow
for the year. However, due to the Company's capital expenditure plans to support
expected increases in its manufacturing activities, the Company does not expect
product sales alone to generate positive cash flow for the year ending December
31, 1997. Under the Company's strategy of entering into
7
<PAGE>
Centocor, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
----------------------------------------------------------------------
collaborative alliances with established pharmaceutical companies, the Company
generally shares sales revenues from products covered by such arrangements with
its partners. 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 product approvals from the Food and Drug Administration, ("FDA")
or other regulatory agencies expanding the authorized use of ReoPro and other
products 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 or other product
candidates, including the Company's cA2 (infliximab) anti-inflammatory agent,
will have a material adverse effect on the Company.
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 applications and foreign patents. 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"). Over
the course of the litigation, plaintiff asserted eleven different claims for
relief and the Company asserted affirmative defenses and a counterclaim against
Velos with respect to the license agreement. After rulings on motions for
summary judgment filed by both sides, the majority of plaintiff's claims were
dismissed. The case proceeded to trial on February 18, 1997 on plaintiff's four
remaining claims under the license agreement and on the Company's affirmative
defenses and counterclaim. The parties agreed that plaintiff's claim for
attorneys fees under the license agreement would be severed to await the outcome
of the trial. On March 4, 1997, the jury returned a verdict which, if it were to
become the final judgment of the Court, would render the Company liable to pay
plaintiff approximately $4,000,000 plus interest and fees and expenses pursuant
to the license agreement. The Company and its counsel believe the jury's
findings are not supported by the evidence and law and have filed post-trial
motions, and, if necessary, will file an appeal. Accordingly, no provision has
been made in the accompanying financial statements for this matter. The Company
believes that the allegations of Velos are without merit and intends to continue
vigorously to defend this suit.
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 Inc. ("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,
8
<PAGE>
Centocor, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
----------------------------------------------------------------------
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 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.
Plaintiff's motion for class certification was denied, plaintiff petitioned for
rehearing and that motion has been denied. 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, a wholly-owned
subsidiary of Paine Webber Group Inc., caused suits to be filed against the
Company by two research and development partnerships formed in the mid-1980s by
PaineWebber and managed by it since then. The two PaineWebber partnerships
(PaineWebber R&D Partners, L.P. and PaineWebber R&D Partners II, L.P.) were,
respectively, investors in Centocor Partners II, L.P. ("CPII") and Centocor
Partners III, L.P. ("CPIII"), research partnerships for which PaineWebber acted
as the sales agent and in other capacities. The Company purchased the limited
partners' interests in CPII in February 1992 and that partnership was then
dissolved. The Company purchased the Class A and Class C limited partners'
interests in CPIII in January 1997 and, purchased the Class B limited
partnership interest in CPIII in May 1997.
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 (Centoxin) and that the Company is obligated to pay a percentage thereof
to the former limited partners of CPII, in addition to amounts already paid.
The Company moved to dismiss the New York suit on the ground that it was brought
in an inconvenient forum and that motion was granted. The suit has been refiled
in the Delaware Superior Court. Discovery is beginning and plaintiff has moved
for certification of a class of all former limited partners of CPII, which the
Company has opposed. Prior to the dismissal of the New York action, a similar
suit was filed by another former CPII partner, Jerome J. Petrisko, in the Court
of Common Pleas of Chester County, Pennsylvania. Petrisko has also been allowed
to intervene in the Delaware action. The Delaware action has been scheduled for
trial in early 1998. The Company believes that the allegations regarding
Centocor in these actions are without merit and intends to vigorously defend
them.
The suit by PaineWebber R&D II, L.P. ("PWR&DII") 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
("CDCIII"), a wholly owned subsidiary of the Company which acts as the general
partner of CPIII,
9
<PAGE>
Centocor, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
----------------------------------------------------------------------
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 the former CPIII limited
partners 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 Development
Corporation. The cross-claim seeks an offset against any damages awarded the
partners based on theories of unjust enrichment and quasi contract. The third-
party claims (later amended to add additional theories of liability and to make
PaineWebber, Inc. an additional third-party defendant) seek to hold the
PaineWebber entities liable for some or all of any alleged injury to the
partnership. 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, CDCIII 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 Development Corporation, later amended to add
additional theories of liability and to name PaineWebber, Inc. as a further
third-party defendant. Abdo moved to amend his complaint to assert claims
against the persons appointed by PaineWebber to the CDCIII Board of Directors.
That motion was granted. Motions to disqualify PWR&DII from serving as the
derivative plaintiff were filed in July 1996 by CPIII and in August 1996 by
Centocor and CDCIII. Abdo joined those motions. No decision has been issued on
those motions. The case brought by PWR&DII has been settled, subject to final
approval of the settlement by the Court. A hearing on the adequacy and fairness
of the settlement is scheduled for September 4, 1997. Abdo and certain other
former limited partners have indicated that they intend to object to the
settlement.
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 Company.
Royalties
---------
The Company is required to make certain future payments to the former
limited partners of Centocor Cardiovascular Imaging Partners, L.P. ("CCIP"),
CPII and CPIII based on sales of products developed by each of the respective
partnerships.
Centocor had an exclusive option to purchase the limited partnership
interests in CPIII. In 1997, the Company exercised this option and made an
advance payment of approximately $13,600,000 in cash to the former limited
partners of CPIII. The Company recorded the $13,600,000 advance payment to
the former limited partners of CPIII as a prepaid royalty, a component of
Intangible and other assets.
10
<PAGE>
Centocor, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
---------------------------------------------------------------------
In June 1997, the Company announced that it has reached an agreement to
settle the litigation brought by PaineWebber R&D Partners II, L.P. on behalf of
CP III, against Centocor arising out of Centocor's sales and distribution
agreement with Lilly with respect to ReoPro. The settlement is conditional on
Delaware Chancery Court approval. The agreement provides, among other things,
for Centocor to pay CP III investors $10,800,000 from which attorney's fees and
expenses will be deducted, an additional $5,000,000, if and when cumulative
world-wide sales of ReoPro exceed $600 million, and a revision to the royalties
payable to the former CPIII partners. The Company has recorded these probable
payments to CP III investors as a prepaid royalty, a component of Intangible and
other assets in the second quarter of 1997.
The Company has entered into agreements to support research at certain
research institutions. These agreements, which grant the Company licenses and/or
options to license certain technology resulting from the research, generally
require the Company to pay royalties to such institutions on the sales of any
products that utilize the licensed technology. Further, the Company has licenses
under certain patents, patent applications and technology and pays the licensors
or their licensees royalties under such agreements.
All royalties are reflected in cost of sales as incurred. Royalty costs
represent a significant percentage of sales.
Product Liability
-----------------
The testing and marketing of medical products entails an inherent risk of
product liability. The Company maintains limited product liability insurance
coverage. 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 3
COLLABORATIVE ARRANGEMENTS
Relationship with Eli Lilly and Company
- ---------------------------------------
In July 1992, Centocor and Lilly entered into a Sales and Distribution
Agreement later amended in June 1993. Under that Agreement, as amended in June
1993, 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
11
<PAGE>
Centocor, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
----------------------------------------------------------------------
continued supply of the product, even to the extent of acquiring Centocor's
related manufacturing assets at their independently appraised values.
In June 1996, the Company and Lilly amended its Sales and Distribution
Agreement. Under the amendment, Lilly no longer has the right to buy ReoPro for
resale in Japan; however, Lilly will maintain its exclusive right to buy and
resell ReoPro in the rest of the world. In July 1996, in consideration of the
amendment and other activities in connection with the commercialization and
market development of ReoPro, the Company issued 920,716 shares of its Common
Stock to Lilly.
Note 4
CASH EQUIVALENTS AND INVESTMENTS
Management determines the appropriate classification of its investments in
debt and equity securities at the time of purchase and reevaluates such
determination at each balance sheet date. Securities that the Company has both
the intent and ability to hold to maturity are carried at amortized cost.
Securities that the Company does not intend to hold to maturity are classified
either as "available for sale" or as "trading" and are carried at fair value.
Unrealized gains and losses on securities classified as available for sale are
carried as a separate component of shareholders' equity. Unrealized gains and
losses on specific securities classified as trading are reported as a component
of Other income (expenses).
At June 30, 1997, securities classified as trading, available for sale and
held to maturity are summarized below (in thousands).
<TABLE>
<CAPTION>
Adjusted Unrealized Carrying
Cost Gains (Losses) Value
-------- ----- -------- ---------
<S> <C> <C> <C> <C>
Trading securities:
Securities and obligations of
the U.S. Treasury and other
U.S. government agencies $ 20,981 $ - $ (3) $ 20,978
Other short-term obligations 7,680 - - 7,680
Corporate bonds and
commercial paper 7,328 - (35) 7,293
-------- ---- ----- ---------
$ 35,989 $ - $(38) $ 35,951
======== ==== ===== =========
</TABLE>
12
<PAGE>
Centocor, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
----------------------------------------------------------------------
<TABLE>
<CAPTION>
Estimated
Adjusted Unrealized Carrying
Cost Gains (Losses) Value
-------- ----- ------- -------
<S> <C> <C> <C> <C>
Investments available for sale:
Equity securities $ 4,780 $2,928 $ - $ 7,708
======== ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Estimated
Carrying Unrealized Fair
Value Gains (Losses) Value
-------- ----- -------- --------
<S> <C> <C> <C> <C>
Investments held to maturity:
Securities and obligations of
the U.S. Treasury and other
U.S. government agencies $ 95,885 $ 44 $ (18) $ 95,911
Certificates of deposit 8,112 - - 8,112
--------- ----- -------- ---------
$ 103,997 $ 44 $ (18) $ 104,023
========= ===== ======== =========
</TABLE>
At June 30, 1997, the carrying value of these securities were classified as
follows (in thousands):
<TABLE>
<S> <C>
Cash equivalents $ 34,127
Short-term investments 105,782
Long-term investments 7,708
--------
$ 147,617
=========
</TABLE>
The Company has agreed to maintain investments with fair values of
$7,260,000 as of June 30, 1997 at the lending bank as collateral for loans from
that bank. See Note 8 - Debt.
13
<PAGE>
Centocor, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
----------------------------------------------------------------------
Note 5
INVENTORY
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
<S> <C> <C>
Raw materials $ 4,373 $ 5,824
Work in process 8,552 7,948
Finished goods 8,399 10,043
------- -------
$21,324 $23,815
======= =======
</TABLE>
Inventories have various expiration dates. The Company continually
evaluates the extent of inventory reserves considered necessary based upon the
future regulatory and commercial status of such products. There can be no
assurance that reserves for inventories will not be required in the future.
Note 6
INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
<S> <C> <C>
Licenses $ 5,842 $ 5,378
Goodwill - 5,158
Prepaid royalties related
to CPIII 29,398 -
Deferred charges 22,804 23,026
Other 2,983 1,772
------- -------
$ 61,027 $35,334
======== =======
</TABLE>
Deferred charges at June 30, 1997 and December 31, 1996 include a
prepayment of certain future royalties and a prepayment associated with the
commercialization and market development of ReoPro. Prepaid royalties related to
CPIII at June 30, 1997 represent an advance payment of approximately $13,600,000
in cash paid to the former limited partners of CPIII in connection with the
purchase of the limited partnership interests in CPIII and an additional
$15,800,000 payable to the former limited
14
<PAGE>
Centocor, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
----------------------------------------------------------------------
partners of CPIII in connection with the revision of future royalties. See Note
2 - Commitments and Contingencies.
Also in June 1997, the Company sold its diagnostic manufacturing facility
in Guilford, England and its related infectious disease product line. In
connection with the transaction the Company recorded a one-time charge to
earnings of $4,565,000 in the second quarter of 1997, a component of which was
the write-off of goodwill on the facility and related business.
Licensing agreements 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.
Note 7
OTHER CURRENT LIABILITIES
In June 1997, the Company announced that it has reached an agreement to
settle the litigation brought by PaineWebber R&D Partners II, L.P. on behalf of
CP III, against Centocor arising out of Centocor's sales and distribution
agreement with Lilly with respect to ReoPro. The settlement is conditional on
Delaware Chancery Court approval. The agreement provides, among other things,
for Centocor to pay CP III investors $10,800,000 from which attorney's fees and
expenses will be deducted, an additional $5,000,000, if and when cumulative
world-wide sales of ReoPro exceed $600 million and a revision to the royalties
payable to the former CPIII partners. At June 30,1997, the Company has recorded
a current liability for the $10,800,000 and an other liability of $5,000,000 for
these probable payments to CP III investors.
Note 8
DEBT
Notes Payable
Notes payable at June 30, 1997 and December 31, 1996 consists of $6,122,000
and $6,897,000, respectively, of borrowings under short-term notes at an
interest rate of 3.644 percent per annum at June 30, 1997, payable in Dutch
guilders no later than September 27, 1997. These borrowings are secured by
investments at the lending bank of $7,260,000.
Long-term debt
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 were initially convertible by the holders into approximately
2,049,000 shares of the Company's Common Stock at a conversion price of
15
<PAGE>
Centocor, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
----------------------------------------------------------------------
$61.00 per share at any time prior to redemption or maturity. 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 102 percent of the
principal amount. The Company may be required to redeem the 6 3/4% Convertible
Debentures at their principal amount at the option of the holders in certain
limited circumstances, including a change in control of the Company.
In the second quarter of 1996, the Company purchased $70,235,000 of its
6 3/4% Convertible Debentures which were subsequently retired. At June 30, 1997
and December 31,1996, $54,765,000 of the 6 3/4% Convertible Debentures remain
outstanding and are convertible into approximately 898,000 shares of the
Company's Common Stock.
Note 9
INCOME TAXES
A provision for income taxes of $20,000 and $90,000 was recorded for the
three and six months ended June 30, 1997 respectively, representing current
federal and state income taxes. Realization of net deferred tax assets related
to the Company's loss carryforwards and other items is dependent on future
earnings, the extent of which remain uncertain, therefore, the Company recorded
a reserve against the asset of approximately $292,000,000. In addition, pursuant
to the Tax Reform Act of 1986, the annual utilization of these losses may be
limited. The Company will assess the adequacy of the valuation allowance at each
balance sheet date based on all available information at that time.
Note 10
SUPPLEMENTAL INFORMATION ON CASH FLOWS
Interest paid for the three and six months ended June 30, 1997 was
$1,852,000 as compared to $248,000 paid for the three months and $4,764,000 paid
for the six months ended June 30, 1996. Interest payments in 1997 are lower due
principally to the conversion of the Company's 7 1/4% Convertible Notes due
February 2001 into the Company's Common Stock, the purchase of $70,235,000 of
the Company's 6 3/4% Convertible Debentures and the repayment of mortgage loans
in Europe in 1996.
Income tax payments for the three and six months ended June 30, 1997 were
$20,000 and $101,000 respectfully, as compared to no tax payments for the three
months and $4,600 paid for the six months ended June 30, 1996, respectfully.
Note 11
SALE OF FACILITY AND RELATED BUSINESS
In June 1997, the Company sold its diagnostic manufacturing facility in
Guilford, England and its related infectious disease product line. In
connection with the transaction the Company recorded a one-time charge to
earnings of $4,565,000 in the second quarter of 1997.
16
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
General
Any statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations that are forward looking are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that forward looking statements
involve risks and uncertainties including economic, competitive, governmental,
technological and other factors which may affect the Company's business and
prospects, certain of which are described more fully below.
Centocor is a biotechnology company whose mission is to develop and
commercialize novel therapeutic and diagnostic products and services that solve
critical needs in human health care. The Company concentrates on research and
development, manufacturing and market development, with a primary technological
focus on monoclonal antibodies and DNA-based products.
The Company, since inception, has incurred significant operating expenses
developing therapeutic and diagnostic products. The Company has also incurred
significant special charges. Historically, the Company's product sales have not
produced sufficient revenues to cover the Company's operating expenses.
Consequently, the Company has experienced substantial operating losses. The
Company's financial results have progressively improved throughout 1996
culminating with the Company achieving profitability in the fourth quarter. The
Company expects that its sales of therapeutic and diagnostic products in 1997
will provide sufficient revenues to cover operating expenses resulting in net
income for the year.
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. The Company filed for
regulatory approvals in the United States for the expanded indications in
February 1997 and filed for additional regulatory approvals in Europe in April
1997. The level of the Company's research and development expenses has been
primarily dependent upon the extent of clinical trial activity. Further, the
impact on the level of future ReoPro sales based upon 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.
17
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
-------------------------------------------------------------------------------
Three months ended June 30, 1997 compared to the three months ended June 30,
1996
The increase in sales for the three months ended June 30, 1997 as compared
to the three months ended June 30, 1996 is principally due to the increase in
sales of ReoPro.
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 three
months ended June 30, 1997, ReoPro sales to Lilly were $40,603,000 and Lilly's
announced sales to end-users were approximately $59,829,000. For the three
months ended June 30, 1996 sales to Lilly were $18,497,000 and Lilly's announced
sales to end-users were approximately $37,200,000. For the three months ended
June 30, 1997, the Company's sales of Panorex to Glaxo Wellcome plc ("Glaxo
Wellcome") were $1,429,000 as compared to $634,000 for the three months ended
June 30, 1996. 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. The Company expects
ReoPro end sales to increase in 1997 as market acceptance continues to grow and
therefore the Company expects its sales of ReoPro to Lilly to increase in 1997
over 1996 levels. Panorex end sales in 1997 are also expected to increase as
compared to 1996 but Panorex sales to Glaxo Wellcome in 1997 are not expected to
have a significant impact on the Company's financial results.
Diagnostic product sales for the three months ended June 30, 1997 were
$8,975,000 as compared to $10,395,000 for the three months ended June 30, 1996.
The decrease in sales for the three months ended June 30, 1997 as compared to
the three months ended June 30, 1996 is primarily related to product mix and the
reduction in the sales price of certain of the Company's diagnostic products.
Diagnostic product sales in 1997 are expected to be at approximately the same
level or slightly lower than sales levels achieved in 1996.
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, the
availability of production capacity, as well as the continued availability of
necessary intermediate inputs into the production process, 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 include additional distributors on a non-exclusive basis and the
Company further expects that current distributors of its kits may increase sales
of their respective diagnostic kits incorporating the Company's antibodies,
which the Company expects will result in reduced sales prices on certain
diagnostic products. The
18
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
Company's revenues from sales of antibodies to partners are lower than revenues
from sales of its completed diagnostic kits.
The Company is also evaluating a number of business strategies to expand
and support both its therapeutic and diagnostic products and product candidates
including, but not limited to, access to instruments primarily in the
diagnostics area, directly participating in the promotion and marketing of
certain of the Company's products and product candidates and expanding the
Company's production capabilities. In order to implement such strategies the
Company may need to secure financing from the equity markets or from bank
relationships. There can be no assurance that such financing will be available
or that these business strategies, or any others, if implemented will be
successful in achieving increased product sales for the Company's therapeutic
and diagnostic products and product candidates.
Cost of sales increased for the three months ended June 30, 1997 as
compared to the three months ended June 30, 1996 due primarily to both the
increased sales of ReoPro and ReoPro production losses incurred in the second
quarter of 1997. 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 1997, the extent
of which will depend primarily on the amount and mix of products sold. Other
factors that can influence cost of sales include, but are not limited to,
exchange rate fluctuations, production losses, cell line yields, increases in
royalty obligations, amortization of prepaid royalties, the costs of raw
materials and production interruptions due to plant upgrades.
Research and development expenses for the three months ended June 30, 1997
increased as compared to the three months ended June 30, 1996 due principally to
increased clinical trial activities to expand the indications for ReoPro and the
continued development of the Company's cA2 (infliximab) anti-inflammatory agent.
The level of the Company's total research and development expenses in future
periods will be dependent upon the extent of clinical trial-related activities.
Research and development expenses are expected to increase in 1997 as compared
to 1996 due to clinical trial activities in connection with the continued
expansion of ReoPro use for additional indications including, but not limited
to, acute myocardial infarction, the use of ReoPro in conjunction with stents
and in stroke. In addition, clinical trial activities for cA2, primarily phase
III trials for the Crohn's and severe rheumatoid arthritis indications either
have begun or are expected to begin in 1997. The Company also expects to incur
additional clinical trial expenses in 1997 in support of continued Panorex
development primarily in the United States and Europe.
Marketing, general and administrative expenses for the three months ended
June 30, 1997 increased as compared to the three months ended June 30, 1996 due
principally to ReoPro and cA2 market development efforts. The levels of the
Company's marketing, general and administrative expenses may increase in future
periods as compared to 1996 levels if the Company expands its market development
activities in connection with sales of therapeutic and diagnostic products or
directly
19
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
undertakes the promotion, marketing and sale of any of its therapeutic or
diagnostic products. Marketing, general and administrative expenses are expected
to increase in 1997 as compared to 1996 due primarily to the Company's increased
investment in market development for its therapeutic and diagnostic products.
Interest income decreased for the three months ended June 30, 1997 as
compared to the three months ended June 30, 1996 due principally to both a
decrease in the Company's average investment balance and a decrease in interest
rates obtained on the Company's 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 three months ended June 30, 1997 as
compared to the three months ended June 30, 1996 due principally to the
conversion of the Company's 7 1/4% Convertible Notes due February 1, 2001 into
the Company's Common Stock, the purchase of $70,235,000 of the Company's 6 3/4%
Convertible Debentures and the repayment of mortgage loans in Europe. Interest
expense in future periods will depend upon the level of debt outstanding.
In June 1997, the Company sold its diagnostic manufacturing facility in
Guilford, England and its related infectious disease product line. In
connection with the transaction the Company recorded a one-time charge to
earnings of $4,565,000 in the second quarter of 1997.
Other expenses increased for the three months ended June 30, 1997 as
compared to the three months ended June 30, 1996 due to an increase in
Centocor's share of the losses of a company in which Centocor has invested.
Centocor does not expect the future share in the income or losses of this
investee company to have a material impact on the Company.
The Company expects its effective tax rate in 1997 to range between 2% and
5%. The effective tax rate in 1997 is heavily influenced by the ability of the
Company to use net operating loss carryforwards or other potential tax benefits
from prior years to offset its future tax liability.
Six months ended June 30, 1997 compared to the six months ended June 30, 1996
The increase in sales for the six months ended June 30, 1997 as compared to
the six months ended June 30, 1996 is principally due to the increase in sales
of ReoPro.
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 six
months ended June 30, 1997, ReoPro sales to Lilly were $75,866,000 and Lilly's
announced sales to end-users were approximately $111,545,000. For the six months
ended June 30, 1996 sales to Lilly were $28,421,000 and Lilly's announced sales
to end-users were approximately $60,000,000. For the six months ended June 30,
1997, the Company's
20
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
sales of Panorex to Glaxo Wellcome plc ("Glaxo Wellcome") were $2,358,000 as
compared to $2,073,000 for the six months ended June 30, 1996. 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. The Company expects ReoPro end sales to increase in 1997 as
market acceptance continues to grow and therefore the Company expects its sales
of ReoPro to Lilly to increase in 1997 over 1996 levels. Panorex end sales in
1997 are also expected to increase as compared to 1996 but Panorex sales to
Glaxo Wellcome in 1997 are not expected to have a significant impact on the
Company's financial results.
Diagnostic product sales for the six months ended June 30, 1997 were
$17,719,000 as compared to $20,742,000 for the six months ended June 30, 1996.
The decrease in sales for the six months ended June 30, 1997 as compared to the
six months ended June 30, 1996 is primarily related to product mix and the
reduction in the sales price of certain of the Company's diagnostic products.
Diagnostic product sales in 1997 are expected to be at approximately the same
level or slightly lower than sales levels achieved in 1996.
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, the
availability of production capacity, as well as the continued availability of
necessary intermediate inputs into the production process, 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 include additional distributors on a non-exclusive basis and the
Company further expects that current distributors of its kits may increase sales
of their respective diagnostic kits incorporating the Company's antibodies,
which the Company expects will result in reduced sales prices on certain
diagnostic products. The Company's revenues from sales of antibodies to partners
are lower than revenues from sales of its completed diagnostic kits.
The Company is also evaluating a number of business strategies to expand
and support both its therapeutic and diagnostic products and product candidates
including, but not limited to, access to instruments primarily in the
diagnostics area, directly participating in the promotion and marketing of
certain of the Company's products and product candidates and expanding the
Company's production capabilities. In order to implement such strategies the
Company may need to secure financing from the equity markets or from bank
relationships. There can be no assurance that such financing will be available
or that these business strategies, or any others, if implemented will be
successful in achieving increased product sales for the Company's therapeutic
and diagnostic products and product candidates.
21
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
Cost of sales increased for the six months ended June 30, 1997 as compared
to the six months ended June 30, 1996 due primarily to both the increased sales
of ReoPro and ReoPro production losses incurred in the second quarter of 1997.
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 1997, the extent of which
will depend primarily on the amount and mix of products sold. Other factors that
can influence cost of sales include, but are not limited to, exchange rate
fluctuations, production losses, cell line yields, increases in royalty
obligations, amortization of prepaid royalties, costs of raw materials and
production interruptions due to plant upgrades.
Research and development expenses for the six months ended June 30, 1997
increased as compared to the six months ended June 30, 1996 due principally to
increased clinical trial activities to expand the indications for ReoPro and the
continued development of the Company's cA2 (infliximab) anti-inflammatory agent.
The level of the Company's total research and development expenses in future
periods will be dependent upon the extent of clinical trial-related activities.
Research and development expenses are expected to increase in 1997 as compared
to 1996 due to clinical trial activities in connection with the continued
expansion of ReoPro use for additional indications including, but not limited
to, acute myocardial infarction, the use of ReoPro in conjunction with stents
and in stroke. In addition, clinical trial activities for cA2, primarily phase
III trials for the Crohn's and severe rheumatoid arthritis indications either
have begun or are expected to begin in 1997. The Company also expects to incur
additional clinical trial expenses in 1997 in support of continued Panorex
development primarily in the United States and Europe.
Marketing, general and administrative expenses for the six months ended
June 30, 1997 increased as compared to the six months ended June 30, 1996 due
principally to ReoPro and cA2 market development efforts. The levels of the
Company's marketing, general and administrative expenses may increase in future
periods as compared to 1996 levels if the Company expands its market development
activities in connection with sales of therapeutic and diagnostic products or
directly undertakes the promotion, marketing and sale of any of its therapeutic
or diagnostic products. Marketing, general and administrative expenses are
expected to increase in 1997 as compared to 1996 due primarily to the Company's
increased investment in market development for its therapeutic and diagnostic
products.
Interest income decreased for the six months ended June 30, 1997 as
compared to the six months ended June 30, 1996 due principally to a decrease in
the interest rates obtained on the Company's 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 six months ended June 30, 1997 as
compared to the six months ended June 30, 1996 due principally to the conversion
of the Company's 7 1/4% Convertible Notes due February 1, 2001 into the
Company's Common Stock, the purchase of $70,235,000 of the Company's
22
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
6 3/4% Convertible Debentures and the repayment of mortgage loans in Europe.
Interest expense in future periods will depend upon the level of debt
outstanding.
In June 1997, the Company sold its diagnostic manufacturing facility in
Guilford, England and its related infectious disease product line. In
connection with the transaction the Company recorded a one-time charge to
earnings of $4,565,000 in the second quarter of 1997.
Other expenses increased for the six months ended June 30, 1997 as compared
to the six months ended June 30, 1996 due to an increase in Centocor's share of
the losses of a company in which Centocor has invested. Centocor does not expect
the future share in the income or losses of this investee company to have a
material impact on the Company.
The Company expects its effective tax rate in 1997 to range between 2% and
5%. The effective tax rate in 1997 is heavily influenced by the ability of the
Company to use net operating loss carryforwards or other potential tax benefits
from prior years to offset its future tax liability.
PER SHARE CALCULATIONS
At June 30, 1997, approximately 4,240,000 shares of the Company's Common
Stock were issuable upon exercise of outstanding options and warrants and upon
vesting of restricted stock awards. When dilutive, options and warrants are
included as share equivalents using the treasury stock method. The approximately
898,000 shares issuable upon conversion of the 6 3/4% Convertible Debentures
are not considered Common Stock equivalents and are not included in the
calculation of primary per share data but are included in the calculation of
fully diluted per share data if their effect is dilutive.
The shares issuable upon conversion of the 6 3/4% Convertible Debentures
were not included in the per share calculations for the periods presented since
to do so would have been antidilutive. In March 1996, the Company completed a
public offering of 4,025,000 shares, in April 1996 the Company issued 3,450,000
shares as a result of the conversion of the Company's 7 1/4% Convertible Notes
and in July 1996, the Company issued 920,716 shares in connection with its
agreements with Lilly. These shares have been included in the per share
calculations and, depending upon the market value of the Company's Common Stock
and its results of operations for such periods, the Company may be required to
include its then outstanding Common Stock equivalents as well as shares issuable
upon the conversion of the 6 3/4% Convertible Debentures in its calculations of
per share data for such periods if the effect would be dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 Earnings per Share ("Statement 128").
This Statement replaces the presentation of primary EPS with a presentation of
basic EPS and requires the dual presentation of basic
23
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
and diluted EPS on the face of the income statement of all entities with complex
capital structures. Statement 128 also requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. This statement is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods; earlier application is not permitted.
Had Statement 128 been adopted, basic and diluted EPS for the three and six
months ended June 30, 1997 would have been $0.01 and $0.06 per share,
respectfully.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating expenses attempting to
develop therapeutic and diagnostic products. Consequently, the Company has
experienced substantial net operating 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 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
ending December 31, 1997, sales of the Company's products, primarily ReoPro,
would be expected to generate sufficient revenue to result in positive cash flow
for the year. However, due to the Company's capital expenditure plans to support
expected increases in its manufacturing activities, the Company does not expect
product sales alone to generate positive cash flow for the year ending December
31, 1997. 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. 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 product
approvals from the Food and Drug Administration, ("FDA") or other regulatory
agencies expanding the authorized use of ReoPro and other products 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 or other product candidates, including cA2, will
have a material adverse effect on the Company.
At June 30, 1997, the Company had cash, cash equivalents and investments of
$169,854,000, including equity investments of $7,708,000. For the six months
ended June 30, 1997, the Company had negative cash flows from operations of
$12,640,000 primarily related to the advance payment of approximately
$13,600,000 to the former limited partners of CPIII in January 1997. The
Company's total cash flows for the six months ended June 30, 1997 included the
receipt of $4,423,000 from the exercise
24
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
of options to purchase shares of the Company's Common Stock. The extent and
timing of future warrant and option exercises, if any, are primarily dependent
upon the market price of the Company's Common Stock and general financial market
conditions, as well as the exercise prices and expiration dates of the warrants
and options. At June 30, 1997 the Company has a note payable of $6,122,000 which
is secured by investments at the lending bank of $7,260,000. The Company's total
cash, cash equivalents and investments decreased by $15,924,000 from December
31, 1996, principally as a result of the negative cashflows from operations and
investments in fixed assets. The Company believes that its cash, cash
equivalents and investments will be sufficient to fund its operations through at
least the end of 1998.
Accounts Receivable at June 30, 1997 increased as compared to December 31,
1996 due to increased sales of ReoPro to Lilly.
Inventory at June 30, 1997 decreased as compared to December 31, 1996 due
primarily to the Company's agreement to sell its diagnostic manufacturing
facility and related infectious disease product line in the second quarter of
1997.
Gross property, plant and equipment at June 30, 1997 decreased as compared
to December 31, 1996, principally due to the impact of exchange rates on
property and equipment denominated in foreign currencies and the sale of the
Company's manufacturing facility and infectious disease business product line in
the second quarter of 1997, partially offset by the investment of $7,623,000 for
the purchase of property and equipment. The Company expects to increase its
investments in property, plant and equipment by up to approximately $30,000,000
in 1997 to support its manufacturing capacity expansion plans. Presently, the
Company also maintains certain idle or under-utilized facilities. The Company
continually evaluates the future needs for its facilities and equipment. There
can be no assurance that losses resulting from reserves to reduce the carrying
value, of certain fixed assets will not be required in the future.
Long-term investments at June 30, 1997 decreased as compared to December
31, 1996 principally due to a decrease in carrying value of an investment
classified as available for sale accounted for under the equity method.
Intangible and other assets at June 30, 1997 increased as compared to
December 31, 1996 resulting primarily from the advance payment of approximately
$13,600,000 to the former limited partners of CPIII. In June 1997, the Company
announced that it has reached an agreement to settle the litigation brought by
PaineWebber R&D Partners II, L.P. on behalf of CP III, against Centocor arising
out of Centocor's sales and distribution agreement with Lilly with respect to
ReoPro. The settlement is conditional on Delaware Chancery Court approval. The
agreement provides, among other things, for Centocor to pay CP III investors
$10,800,000 from which attorney's fees and expenses will be deducted, an
additional $5,000,000, if and when cumulative world-wide sales of ReoPro exceed
$600 million and a revision to the royalties payable to the former CPIII
partners. The Company expects to pay the
25
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
$10,800,000 in 1997. The Company has recorded these probable payments to CP III
investors as a prepaid royalty, a component of Intangible and other assets in
the second quarter of 1997.
The Company has entered into indemnity agreements with the former limited
partners of CCIP, CPII and CPIII 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 U.S. government of any of its rights relating to the licensed
technology. The amount of any such loss would be determined annually by
independent appraisal.
LEGAL PROCEEDINGS
The Company is subject to certain litigation, as more fully described in
Note 2 to the Company's Consolidated Financial Statements. While it is not
possible to predict with certainty the eventual outcome of these matters, the
Company believes that such legal proceedings will not have a material adverse
effect on the Company.
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.
26
<PAGE>
Part II OTHER INFORMATION
Item 1: Legal Proceedings
See Note 2 to the Company's Consolidated Financial Statements, which
is incorporated herein by reference.
Item 4: Submission of Matters to a Vote of Security Holder.
(a) The Annual Meeting of Shareholders was held on May 14, 1997 at
the Company's principal office at 200 Great Valley Parkway,
Malvern, Pennsylvania.
(b) With respect to the election of directors for a term of one year
expiring on the date of the 1998 annual meeting of shareholders,
each nominee was elected with the following vote:
<TABLE>
<CAPTION>
Total Vote for Total Vote Withheld
Each Director From Each Director
-------------- -------------------
<S> <C> <C>
Anthony B. Evnin 61,416,160 244,564
William F. Hamilton 61,414,705 246,019
David P. Holveck 61,415,619 245,105
Antonie T. Knoppers 61,367,394 293,330
Ronald A. Matricaria 61,412,773 247,951
Hubert J.P. Schoemaker 61,416,229 244,495
Richard D. Spizzirri 61,413,225 247,951
Lawrence Steinman 61,410,710 250,014
Jean C. Tempel 61,412,676 248,048
</TABLE>
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
--------
11 Computation of Earnings (Loss) per Common Share
(b) Reports on Form 8-K
-------------------
The Registrant has filed the following reports on Form 8-K since
the beginning of the quarter ended June 30, 1997:
Date of Report Item Covered
-------------- ------------
None.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Centocor, Inc.
(Registrant)
Date: August 14, 1997 /s/David P. Holveck
------------------------------
David P. Holveck
President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 1997 /s/Dominic J. Caruso
------------------------------
Dominic J. Caruso
Vice President- Finance
and Chief Financial Officer
(principal financial and
accounting officer)
<PAGE>
Exhibit 11
CENTOCOR, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(unaudited)
(in thousands, except per share data)
Computation of Earnings (Loss) Per Common Share
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average shares outstanding 69,688 67,645 69,603 63,901
Net effect of dilutive stock option and warrants
based on the treasury stock method using
average market price 1,909 - 2,026 -
--------- --------- --------- ---------
Totals 71,597 67,645 71,629 63,901
========= ========= ========= =========
Net income (loss) $ 720 ($ 4,323) $ 3,991 ($14,021)
========= ========= ========= =========
Per share amount $ 0.01 ($ 0.06) $ 0.06 ($ 0.22)
========= ========= ========= =========
FULLY DILUTED:
Weighted average shares outstanding 69,688 67,645 69,603 63,901
Net effect of dilutive stock option and warrants
based on the treasury stock method using
average market price which is greater than
quarter-end market price 1,909 - 2,026 -
--------- --------- --------- ---------
Totals 71,597 67,645 71,629 63,901
========= ========= ========= =========
Net income (loss) $ 720 ($ 4,323) $ 3,991 ($14,021)
========= ========= ========= =========
Per share amount $ 0.01 ($ 0.06) $ 0.06 ($ 0.22)
========= ========= ========= =========
</TABLE>
Note: Common stock equivalents which would have an antidilutive effect on the
calculations of per share data are not included in the above analysis.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTOCOR,
INC. CONSOLIDATED BALANCE SHEETS, CENTOCOR, INC. CONSOLIDATED STATEMENTS OF
OPERATIONS AND IS QUALIFIED IN ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 56,364
<SECURITIES> 105,782
<RECEIVABLES> 49,729
<ALLOWANCES> 0
<INVENTORY> 21,324
<CURRENT-ASSETS> 236,973
<PP&E> 137,445
<DEPRECIATION> 77,048
<TOTAL-ASSETS> 366,105
<CURRENT-LIABILITIES> 63,355
<BONDS> 54,765
0
0
<COMMON> 697
<OTHER-SE> 241,286
<TOTAL-LIABILITY-AND-EQUITY> 366,105
<SALES> 95,943
<TOTAL-REVENUES> 98,679
<CGS> 39,989
<TOTAL-COSTS> 39,989
<OTHER-EXPENSES> 57,249
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,962
<INCOME-PRETAX> 4,081
<INCOME-TAX> 90
<INCOME-CONTINUING> 3,991
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,991
<EPS-PRIMARY> $0.06
<EPS-DILUTED> $0.06
</TABLE>
