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As filed with the Securities and Exchange Commission on June 19, 1998
Registration No. 333-53157
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
--------------------------
CENTOCOR, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2117202
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 GREAT VALLEY PARKWAY
MALVERN, PA 19355-1307
(610) 651-6000
--------------
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
-------------------------------------------------------
GEORGE D. HOBBS, ESQUIRE
VICE PRESIDENT, CORPORATE COUNSEL AND SECRETARY
CENTOCOR, INC.
200 GREAT VALLEY PARKWAY
MALVERN, PA 19355
(610) 651-6000
--------------
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
JOHN G. HARKINS, JR., ESQ. PATRICIA MORAN CHUFF, ESQ.
HARKINS CUNNINGHAM SKADDEN, ARPS, SLATE,
1800 ONE COMMERCE SQUARE MEAGHER & FLOM LLP
2005 MARKET STREET ONE RODNEY SQUARE
PHILADELPHIA, PA 19103 WILMINGTON, DE 19801
(215) 851-6700 (302) 651-3000
________________________
Approximate date of commencement of proposed sale to the public: FROM TIME TO
TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
________________________
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [_]
If any of the Securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement from the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [_]
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________________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(a), MAY DETERMINE.
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PROSPECTUS
[LOGO] CENTOCOR, INC.
$460,000,000 PRINCIPAL AMOUNT OF 4 3/4% CONVERTIBLE
SUBORDINATED DEBENTURES DUE 2005
(INTEREST PAYABLE AUGUST 15 AND FEBRUARY 15)
--------------------------------------
9,338,015 COMMON SHARES
($.01 PAR VALUE PER SHARE)
----------------------------
This Prospectus relates to the $460,000,000 aggregate principal amount
of 4 3/4% Convertible Subordinated Debentures due 2005 (the "Debentures") of
Centocor, Inc., a Pennsylvania corporation ("Centocor" or the "Company"), and
the 9,338,015 common shares, par value $.01 per share (the "Common Stock") of
the Company, issuable upon conversion of the Debentures plus such additional
indeterminate number of shares of Common Stock as may become issuable upon
conversion of the Debentures as a result of anti-dilution adjustments. The
Debentures were issued and sold by the Company on February 20, 1998 in a private
offering (the "Original Offering") to Morgan Stanley & Co. Incorporated (the
"Initial Purchaser"), and were simultaneously resold by the Initial Purchaser in
transactions exempt from the registration requirements of the Securities Act of
1933, as amended (the "Securities Act"), in the United States to persons
reasonably believed by the Initial Purchaser to be qualified institutional
buyers as defined in Rule 144A under the Securities Act and certain
institutional "accredited investors" within the meaning of Rule 501 under the
Securities Act.
The Debentures and the Common Stock issuable upon conversion of the
Debentures (collectively, the "Registered Securities") are being registered to
permit public secondary trading of the Debentures and, upon conversion, the
Common Stock and may be offered and sold from time to time by the holders named
herein or by their transferees, pledgees, donees or their successors
(collectively, the "Selling Securityholders") pursuant to this Prospectus. The
Registered Securities may be sold by the Selling Securityholders from time to
time directly to purchasers or through agents, underwriters or dealers. See
"Selling Securityholders" and "Plan of Distribution." If required, the names of
any such agents or underwriters involved in the sale of the Registered
Securities and the applicable agent's commission, dealer's purchase price or
underwriter's discount, if any, will be set forth in an accompanying supplement
to this Prospectus (the "Prospectus Supplement"). The Selling Securityholders
will receive all of the net proceeds from the sale of the Registered Securities
and will pay all underwriting discounts, selling commissions and transfer taxes,
if any, applicable to any such sale. The Company is responsible for payment of
all other expenses incident to the registration of the Registered Securities.
The Selling Securityholders and any broker-dealers, agents or underwriters that
participate in the distribution of the Registered Securities may be deemed to be
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"underwriters" within the meaning of the Securities Act, and any commission
received by them and any profit on the resale of the Registered Securities
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act. See "Plan of Distribution" for a description of
indemnification arrangements.
Each Debenture is convertible at the option of the holder thereof into
shares of Common Stock at any time through maturity, unless previously redeemed,
at a conversion price of $49.261 per share, subject to adjustment in certain
events. See "Description of Debentures -- Conversion of Debentures." The
Company's Common Stock is listed on the Nasdaq National Market ("Nasdaq") under
the symbol "CNTO." On June 16, 1998, the closing bid price of the Common Stock
as reported by Nasdaq was $37.0625.
Interest on the Debentures is payable semi-annually on February 15 and
August 15 of each year, commencing on August 15, 1998.
The Debentures are not redeemable by the Company prior to February 21,
2001. Thereafter, the Debentures will be redeemable on at least 30 days prior
notice at the option of the Company, in whole or in part, at any time, at the
redemption prices set forth in this Prospectus, in each case together with
accrued interest. Upon a Fundamental Change (as defined herein), each holder of
Debentures shall have the right, at the holder's option, to require the Company
to repurchase such holder's Debentures at a price equal to 100% of the principal
amount of the Debentures to be redeemed plus accrued interest to, but excluding,
the date of redemption. See "Description of Debentures -- Redemption at Option
of the Holder."
The Debentures are unsecured obligations of the Company, subordinate
in right of payment to all present and future Senior Obligations (as defined
herein) of the Company and are effectively subordinated to all indebtedness and
liabilities of subsidiaries of the Company. At March 31, 1998, aggregate Senior
Obligations were approximately $5,769,000. The Indenture (as defined herein)
relating to the Debentures does not restrict the incurrence of any other
indebtedness or liabilities by the Company or its subsidiaries. See
"Description of Debentures -- Subordination of Debentures."
-----------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 8
FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-----------------------------
THE DEBENTURES AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THE DEBENTURES
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-----------------------------
THE DATE OF THIS PROSPECTUS IS JUNE 19, 1998
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TABLE OF CONTENTS
PAGE
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Available Information. .................................................... 3
Incorporation of Certain Documents by Reference. .......................... 4
Disclosure Regarding Forward-Looking Statements. .......................... 5
The Company. .............................................................. 6
Risk Factors. ............................................................. 8
Use of Proceeds ........................................................... 22
Ratio of Earnings to Fixed Charges. ....................................... 22
Description of Debentures ................................................. 23
Description of Capital Stock .............................................. 36
Certain United States Federal Income Tax Considerations ................... 41
Plan of Distribution ...................................................... 48
Selling Securityholders ................................................... 50
Legal Matters ............................................................. 52
Experts.................................................................... 52
Avakine, Panorex and Retavase are trademarks of Centocor, Inc. ReoPro is a
trademark of Eli Lilly and Company.
-----------------------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company with the Commission may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549-1004 and
at its Regional Offices located at Suite 1400, Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661-2511 and at Seven World Trade Center, 13th
Floor, New York, New York 10048, and copies of such material may be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549-1004, at prescribed fees. In addition, the Commission
maintains a Website that contains reports, proxy statements and other
information regarding registrants such as the Company that file electronically.
The address of the Commission's Website is http:/www.sec.gov. The Common Stock
is listed on the Nasdaq National Market ("Nasdaq") under the symbol "CNTO."
The Company has filed with the Commission a Registration Statement
(which term shall encompass any amendments thereto) on Form S-3 under the
Securities Act of 1933, as amended (the "Securities Act") with respect to the
Registered Securities (the "Registration Statement"). This Prospectus, which
constitutes part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain items of which are
contained in exhibits to the Registration Statement as permitted by the rules
and regulations of the Commission. For further information with respect to the
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Company and the Registered Securities, reference is made to the Registration
Statement, including exhibits thereto, and the financial statements and notes
thereto filed or incorporated by reference as a part thereof, and the other
documents incorporated by reference herein, each of which are on file at the
offices of the Commission and may be obtained upon payment of the fee prescribed
by the Commission or may be examined without charge at the offices of the
Commission. Statements made in this Prospectus concerning the contents of any
document referred to herein are not necessarily complete, and, in each such
instance, are qualified in all respects by reference to the applicable documents
filed with the Commission. The Registration Statement and the exhibits thereto
filed by the Company with the Commission may be inspected and copied at the
locations described above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company (File No. 0-11103) with
the Commission under the Exchange Act are incorporated herein by reference:
a. Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
b. Quarterly Report on Form 10-Q for the quarter ended March
31, 1998;
c. Current Reports on Form 8-K, dated January 21, 1998,
February 12, 1998 and February 20, 1998; and
d. Proxy Statement for the Annual Meeting of Shareholders held
on May 13, 1998.
All documents filed by the Company pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the Registered Securities shall be
deemed to be incorporated by reference in this Prospectus from the respective
dates of filing of such documents. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any subsequently filed document
that also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
Copies of the above documents (excluding exhibits) may be obtained
upon request without charge from the Company. Requests for such copies should
be directed to the Company's Corporate Secretary at its principal executive
offices at 200 Great Valley Parkway, Malvern, Pennsylvania 19355, telephone
number: (610) 651-6000.
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed under the caption "Risk Factors" and
elsewhere in this Prospectus or in the information incorporated by reference
herein may constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are based on current expectations, estimates and projections about
the Company's business and industry, management's beliefs and certain
assumptions made by the Company's management. Investors are cautioned that
matters subject to forward-looking statements involve risks and uncertainties
including economic, competitive, governmental, technological and other factors
which may affect the Company's business and prospects. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict. Such risks and uncertainties include those associated
with (i) the timing, completion and outcome of clinical trials for, regulatory
approval of, and market acceptance of the Company's products; (ii) the strength
of the Company's patent position and the patent positions of others; (iii) the
Company's forward integration into direct commercialization of certain products;
(iv) strategic options with respect to the Company's diagnostics subsidiary; (v)
the Company's ability to construct and maintain manufacturing facilities that
meet regulatory requirements and satisfy the Company's inventory needs; (vi) the
Company's dependence on its collaborative partners; (vii) uncertainties
regarding health care reform and reimbursement from third party payors; (viii)
changes in the competitive environment in which the Company operates; (ix) the
outcome of pending litigation; and (x) the potential for product liability
claims. Therefore, actual results may differ materially from those expressed or
forecasted in any such forward-looking statements. Unless required by law, the
Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
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THE COMPANY
Centocor is a biopharmaceutical company the mission of which is to
develop or otherwise acquire and commercialize novel therapeutic products that
solve critical needs in human healthcare, with a primary technology focus on
monoclonal antibodies and DNA-based products.
The Company's strategy is to identify proprietary high value-added
product opportunities, and to commercialize those opportunities by focusing on
clinical development, manufacturing, market development and marketing. The
Company seeks to license or otherwise acquire technology and product candidates
from research institutions and other sources, in addition to conducting selected
basic research. In an effort to reach the market in an expeditious manner, and
establish itself as the market leader, the Company's clinical development and
regulatory strategy for its therapeutic products under development is to pursue
initial approval for a narrowly defined indication. The Company then seeks to
expand the indications for which products may be marketed by conducting
additional clinical trials and providing health economic data in support of the
product's utility.
The Company has three therapeutic products approved for sale and
several product candidates in various stages of development. ReoPro(R)
(abciximab) is marketed by Eli Lilly and Company ("Lilly") and sold in the
United States and Europe for the reduction of acute ischemic cardiac
complications in patients undergoing percutaneous coronary intervention ("PCI")
such as angioplasty procedures, and for those patients with unstable angina who
are refractory to conventional therapy for whom PCI is planned within twenty-
four hours. The Company and Lilly co-promote ReoPro in the United States for the
refractory unstable angina indication in emergency rooms and cardiac-care units.
If regulatory approval is obtained in Japan, ReoPro will be exclusively
distributed in Japan by Fujisawa Pharmaceutical Co., Ltd. ("Fujisawa").
Retavase(TM) (reteplase) is a fibrinolytic ("clot-buster") product, which is
administered usually in the hospital emergency room, for the treatment of acute
myocardial infarction (heart attack). The Company markets Retavase in the United
States and The DuPont Merck Pharmaceutical Company ("DuPont Merck") co-promotes
Retavase with the Company. Panorex(R) (edrecolomab) is marketed by Glaxo
Wellcome plc ("Glaxo Wellcome") and sold in Germany as an adjuvant therapy in
the treatment of post-operative colorectal cancer.
The Company filed a Biologics License Application ("BLA") with the
United States Food and Drug Administration ("FDA") for Avakine(TM) (infliximab)
in December 1997 and thereafter was notified by the FDA that its BLA for Avakine
will receive a priority review. On May 28, 1998, the FDA's Gastrointestinal
Drugs Advisory Committee voted unanimously to recommend to the FDA approval of
Avakine for the treatment of patients with moderate to severe Crohn's disease
for whom conventional therapy is inadequate and for the treatment of Crohn's
patients with draining fistulae. This recommendation is not binding on the FDA
in its review of the Avakine application. Centocor has an application pending,
for the same indications for Avakine, with the European Medicines Evaluation
Agency. The Company also is conducting studies for Avakine in the treatment of
rheumatoid arthritis. If approved by the FDA, the Company intends to market
Avakine in the United States through its own direct sales force. The Company has
entered into an agreement with Schering-Plough Ltd. ("Schering-Plough") pursuant
to which, for the Crohn's disease and rheumatoid arthritis indications,
Schering-Plough has the exclusive right to buy and resell Avakine worldwide
except for the United States, Japan and certain other Asian countries. The
Company has an agreement with Tanabe Seiyaku Co., Ltd.
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("Tanabe") under which Tanabe has commenced Phase II clinical testing and has
the right to distribute Avakine in Japan and certain other Asian countries if
regulatory approval is obtained in those countries.
Through its wholly owned subsidiary, Centocor Diagnostics, Inc.
("Centocor Diagnostics"), the Company also markets several diagnostics products
for cancer and has under development a cardiovascular diagnostic product
candidate for use in the acute coronary syndrome market. The Company's proposed
initial public offering of Centocor Diagnostics in the fourth quarter of 1997
was postponed due to market conditions. Given the Company's strong emphasis on
the pharmaceutical business following the Retavase acquisition, the continuing
success of ReoPro and the anticipated market launch of Avakine, the Company
currently also is evaluating other strategic options for Centocor Diagnostics,
including divestiture.
The Company's principal offices are located at 200 Great Valley
Parkway, Malvern, Pennsylvania 19355 and its telephone number at such office is
(610) 651-6000.
7
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RISK FACTORS
Prospective investors should consider carefully, in addition to the
other information contained in this Prospectus, the following factors before
purchasing the Registered Securities. The matters set forth below constitute
cautionary statements identifying important factors with respect to certain
forward-looking statements appearing in this Prospectus and in the documents
incorporated by reference herein, including certain risks and uncertainties,
that could cause actual results to differ materially from those reflected in
such forward-looking statements. See "Disclosure Regarding Forward-Looking
Statements."
LIQUIDITY AND CAPITAL RESOURCES
The Company, since inception, has incurred significant operating
expenses attempting to develop therapeutic and diagnostic products. The Company
also has incurred significant special charges. Consequently, the Company had
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
financial results progressively improved throughout 1996 culminating with the
Company achieving profitability in the fourth quarter of 1996 and for the full
year 1997. The Company incurred a net loss for the first quarter of 1998,
largely as a result of significant one-time charges a substantial portion of
which related to the Retavase acquisition; it did, however, realize a profit on
an operating basis for such period. While the Company believes that it will be
profitable on an operating basis for the full year in 1998, there can be no
assurance that product sales and other revenues in 1998 will be sufficient to
cover operating expenses for the year.
The Company's future financial condition is dependent upon the
Company's rate of net cash inflows and, ultimately, upon the achievement of
significant and sustained levels of therapeutic product sales. 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 the Company's products will be dependent upon several factors,
including, but not limited to, the timing and extent of future regulatory
approvals of the Company's products, approval and commercialization of
competitive products and the degree of acceptance of the Company's products in
the marketplace. There can be no assurance that the FDA or other regulatory
authorities will approve expanded labeling for ReoPro, Retavase and other
products or will approve any of the Company's other product candidates under
development for commercial sale. Failure to obtain additional timely FDA or
other regulatory approvals for the expanded use of ReoPro or for the use of
product candidates, including Avakine, may have a material adverse effect on the
Company.
LEVERAGE
At March 31, 1998, the Company's total long-term debt, including
current portion, and shareholders' equity were $514,765,000 and $109,601,000,
respectively, representing a debt to equity ratio of 4.70 to 1.00. On April 16,
1998, the Company's outstanding $54,765,000 of 6 3/4% Convertible Subordinated
Debentures due 2001 (the "6 3/4% Debentures") were redeemed at par and were
subsequently retired, thereby reducing long-term debt by that amount.
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The Indenture (as defined herein) does not restrict the ability of the Company
or its subsidiaries to incur additional indebtedness, including Senior
Obligations (as defined herein). Additional indebtedness of the Company may rank
senior to or pari passu with the Debentures. The Company's ability to satisfy
its obligations will be dependent upon its future performance, which is subject
to many factors, including factors beyond the Company's control. There is no
assurance that the Company will be able to meet its debt service requirements or
to repay the Debentures at maturity or at the request of the holders upon a
Fundamental Change (as defined herein). See "Description of Debentures."
FORWARD INTEGRATION
The Company has relied primarily on collaborative arrangements for the
marketing of its products. However, in connection with its acquisition of the
Retavase Assets (as defined herein), the Company established its own sales force
and hired many of the Boehringer Mannheim Corporation sales personnel who were
successful in launching Retavase in the United States. With this sales force,
the Company directly markets Retavase in the United States (DuPont Merck co-
promotes Retavase in the United States). With this sales force, the Company also
co-promotes ReoPro with Lilly in the United States for the refractory unstable
angina indication in emergency rooms and cardiac care units. In addition, the
Company intends to market Avakine directly in the United States, if regulatory
approval is obtained. As a consequence of this forward integration, the Company
has incurred and will continue to incur additional personnel costs and other
marketing and marketing support costs. There can be no assurance that the
revenues from the products being marketed and supported directly in the United
States will be sufficient to cover the additional costs to be incurred or, even
if such costs are covered, to generate sufficient earnings and profits to
justify the investment. See "--Sales and Marketing Uncertainties."
DEPENDENCE ON COLLABORATIVE PARTNERS; CUSTOMER CONCENTRATION
The Company's strategy for research, development and commercialization
of its products historically has entailed collaborative arrangements with
corporate partners and others. The success of these products is dependent, in
part, upon the subsequent success of these outside parties in performing their
responsibilities. The Company's collaborators also could compete with the
Company. Although the Company believes its collaborators have an economic
incentive to succeed in performing their contractual responsibilities, the
amount and timing of resources that they devote to these activities is not
within the control of the Company. There can be no assurance that such parties
will perform their obligations as expected or that any revenue will be derived
from such arrangements. If any of Centocor's collaborators breaches or
terminates its agreement with the Company or otherwise fails to conduct its
collaborative activities in a timely manner, the development or
commercialization of the product candidate or research program under such
collaborative arrangement may be delayed, the Company could be required to
undertake unforeseen additional responsibilities or to devote unforeseen
additional funds or other resources to such development or commercialization, or
such development or commercialization could be terminated. The termination or
cancellation of collaborative arrangements also could adversely affect the
Company's financial condition, intellectual property position and operations.
In addition, disagreements between collaborators and the Company could lead to
delays in the collaborative research, development or commercialization of
certain products or could require or result in formal legal process or
9
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arbitration for resolution. These consequences could be time-consuming and
expensive and could have material adverse effects on the Company.
Centocor and Lilly are parties to a Sales and Distribution Agreement
regarding the commercialization of ReoPro. Under the terms of such Sales and
Distribution Agreement, in the event of any change in control of Centocor prior
to December 31, 1999, or in the event of any governmental action or
determination that results in the Sales and Distribution Agreement not being in
full force and effect in all material respects in major jurisdictions, excluding
the United States, and the subsequent termination of the Sales and Distribution
Agreement by Lilly based solely on such events, Centocor may be required to make
a payment to Lilly of up to approximately $20,000,000.
The Company may seek additional collaborative arrangements to develop
and commercialize its products in the future. There can be no assurance that
the Company will be able to negotiate acceptable collaborative arrangements in
the future or that any such collaborative arrangements will be successful. In
addition, there can be no assurance that the Company's collaborative partners
will not pursue alternative technologies or develop alternative compounds
independently or in collaboration with others as a means of developing
treatments for the diseases targeted by their collaborative programs with
Centocor.
During 1997 and 1996, approximately 81% and 67%, respectively, of the
Company's total product sales were to one customer, Lilly. During 1995,
approximately 50% of the Company's total product sales were to three customers
as follows: 24% to Lilly, 11% to Glaxo Wellcome and 15% to Toray-Fuji Bionics,
Inc.
RISKS RELATED TO RETAVASE
Pursuant to an Asset Purchase Agreement (the "Purchase Agreement")
between Centocor and Roche Healthcare Limited ("Roche Healthcare"), a Bermuda
corporation and a subsidiary of Roche Holding Ltd., a Swiss corporation
("Roche"), the Company acquired the exclusive United States and Canadian rights
for Retavase, an acute-care cardiovascular drug, and other related assets
(collectively, the "Retavase Assets"), for $335,000,000 in cash (the
"Acquisition"). The Acquisition closed on March 13, 1998, and sales of Retavase
by Centocor began on March 16, 1998.
FTC Approvals. The Acquisition took place as a result of the United
States Federal Trade Commission (the "FTC") requiring Roche to divest the
Retavase Assets as a condition of Roche's acquisition of Corange Limited, the
parent company of Boehringer Mannheim GmbH, which owned the Retavase Assets. The
divestiture was required because of Roche's majority interest in Genentech, Inc.
("Genentech"), which manufactures and markets a competing product. Centocor is
named as an approved purchaser of the Retavase Assets in a consent decree
submitted to the FTC by Roche which has been issued by the FTC as its final
order (the "Consent Decree").
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Pursuant to the terms of the Consent Decree, the FTC may terminate the
Purchase Agreement and the Retavase Assets would revert to Roche if the Company
(i) voluntarily ceases for at least 60 days to sell or pursue good faith efforts
to sell Retavase in the United States at any time prior to obtaining all
necessary FDA approvals to manufacture Retavase for sale in the United States
(the "FDA Approvals"); (ii) fails to pursue good faith efforts to obtain the FDA
Approvals; or (iii) fails to obtain the FDA Approvals within four years of the
date of the Consent Decree (subject to extension by the FTC for up to two
additional one year periods if it appears that the required FDA approvals are
likely to be obtained within such extended time period). In such events,
Centocor would not be refunded the purchase price.
Uncertainty Regarding Long-Term Financial Impact of Acquisition of
Retavase. The Company believes that the acquisition of Retavase will enhance
Centocor's role in the cardiovascular field, building on the growing use of
ReoPro. In particular, sales of Retavase will contribute to revenues without
the risks inherent in the long-term development cycle typically associated with
such products. No assurance can be given, however, that the Company will
realize the benefits it anticipates from the Acquisition, or that the
realization of such benefits will not require significant capital or other
expenditures that may adversely affect the Company's results of operations or
financial condition.
Retavase was launched in the United States in January 1997 and has not
yet been launched in Canada. Although the Company believes, based upon industry
data, that Retavase captured approximately 12% of the fibrinolytic market in the
United States in 1997, there can be no assurance that Retavase's market share
will continue to increase or that it will not decline. The sale and marketing
of Retavase is and is expected to continue to be subject to intense competition.
The current market leader, Activase, made by Genentech, has a substantial
majority of the fibrinolytic market. There can be no assurance that Genentech
will not aggressively compete with respect to pricing and in other ways. There
also can be no assurance that other competing products will not be approved for
sale in the United States. Given the uncertainty regarding these and other
factors effecting the future performance of Retavase, there can be no assurance
that the product will achieve financial returns sufficient to justify the
Company's investment.
Sales and Marketing Uncertainties. The Company primarily has relied
on collaborative partners, such as Lilly, to market and commercialize its
products. See "--Dependence on Collaborative Partners; Customer Concentration."
In connection with the Acquisition, the Company established its own sales force
and hired many of the Boehringer Mannheim Corporation sales personnel who were
successful in launching Retavase in the United States. With this sales force,
the Company directly markets Retavase in the United States (DuPont Merck co-
promotes Retavase in the United States). With this sales force, the Company also
co-promotes ReoPro with Lilly in the United States for the refractory unstable
angina indication in emergency rooms and cardiac care units. Because of the
complementary nature of Retavase and ReoPro in the cardiovascular field, the
Company is jointly promoting Retavase and ReoPro to emergency room and cardiac
care unit customers and believes that the joint promotion of Retavase and ReoPro
could result in increased market penetration for both products. There can be no
assurance, however, that these collaborative marketing efforts with respect to
ReoPro and Retavase will be successful. Moreover, there can be no assurance that
the Company will be able to successfully integrate its sales force into its
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operations, that the cost of such marketing and sales force will not exceed any
product revenues or that its sales and marketing efforts will be successful.
Manufacturing Uncertainties. Under a Supply Agreement (the "Supply
Agreement") between the Company and Boehringer Mannheim GmbH, the current
manufacturer of Retavase in Germany, Boehringer Mannheim GmbH will supply
Retavase to the Company for a period of four years (subject to extension by the
FTC for up to two additional one year periods if it appears that the Company's
FDA Approvals are likely to be obtained within such extended time period).
Pursuant to the Purchase Agreement, the Company must assume responsibility for
manufacturing within such period. Of the purchase price of $335,000,000 for the
Acquisition, $20,000,000 has been placed in escrow (the "Escrow Amount"), to be
recovered by the Company upon the Company's completion of certain milestones
relating to the transfer of the manufacturing process from Boehringer Mannheim
GmbH. There can be no assurance that the Company will successfully complete the
steps necessary to transfer the manufacture of Retavase from Boehringer Mannheim
GmbH. As a result, the Company may not recover all or a portion of the Escrow
Amount under the Purchase Agreement. Furthermore, there can be no assurance
that Boehringer Mannheim GmbH (which is owned by Roche, the majority shareholder
of the leading competitor with regard to Retavase) will fulfill its obligations
under the Supply Agreement.
In order to successfully complete the transfer of responsibility for
the manufacture of Retavase to the Company, the Company will be required to make
significant capital expenditures. There can be no assurance that the Company
will have sufficient resources to do so. There also can be no assurance that
the Company will obtain all necessary regulatory approvals for the manufacture
of Retavase or otherwise successfully assume manufacturing responsibility.
Retavase Patent Litigation. Retavase is the subject of active patent
infringement lawsuits brought by Genentech, the manufacturer of the competing
product, Activase, in the United States District Court for the District of
Massachusetts and in Germany, before the Company acquired the Retavase Assets.
Pursuant to the terms of the Purchase Agreement, the Company has assumed
responsibility for the litigation in the District of Massachusetts and in
Germany. Following the Acquisition, Genentech brought a patent infringement
lawsuit against the Company in the United States District Court for the Northern
District of California with respect to two newly issued patents. The new
patents issued from the original application of one of the patents at issue in
the District of Massachusetts litigation. While the Company believes that
significant defenses exist to the Retavase litigation, there can be no assurance
as to the outcome of such litigation. While the Company has certain protection
against risk of loss by virtue of the indemnification and reimbursement
provisions of the Purchase Agreement and by virtue of the Keep Well Agreement
(as defined herein), which, Roche has confirmed, apply to all of the Retavase
litigation described herein, an adverse determination in any of the proceedings
could have a material adverse effect on the Company's ability to market Retavase
by, for example, prohibiting the Company from marketing Retavase entirely.
Indemnification and Reimbursement Limitations. Roche Healthcare is a
Bermuda corporation and an indirect wholly owned subsidiary of Roche. Neither
Roche nor any of its other subsidiaries is a party to the Purchase Agreement.
Accordingly, the Company's rights to indemnification and reimbursement under the
Purchase Agreement, including its indemnification and reimbursement rights
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relating to the Retavase litigation, run solely from Roche Healthcare. Moreover,
the indemnification and reimbursement obligations of Roche Healthcare are
limited to 125% of the total purchase price under the Purchase Agreement (less,
as to the indemnification aspect of the obligations, any portion of the Escrow
Amount returned to the Company).
Roche Healthcare and Roche have entered into a Keep Well Agreement
(the "Keep Well Agreement") whereby Roche has agreed, among other things, to
maintain its ownership of Roche Healthcare and to cause Roche Healthcare to
maintain a consolidated net worth of at least $1,000,000 at all times. The Keep
Well Agreement, however, does not constitute a guarantee by Roche of Roche
Healthcare's indemnification and reimbursement obligations under the Purchase
Agreement. Furthermore, the Company is not a party to the Keep Well Agreement
and the Keep Well Agreement is not enforceable by the Company. Accordingly,
there can be no assurance that Roche will fulfill its obligations under the Keep
Well Agreement or that such obligations are sufficient to ensure that Roche
Healthcare will have adequate resources to fulfill its indemnification and
reimbursement obligations to the Company under the Purchase Agreement.
Strategic Fit with ReoPro. The Company believes that ReoPro and
Retavase, when administered in combination, may have a therapeutic advantage
over monotherapy for acute myocardial infarction patients. Clinical trials
confirming such advantage, however, have not yet been completed. Phase II
trials related to the combination of ReoPro and a fibrinolytic product are
expected to be completed by the end of 1998. Depending on the outcome of these
Phase II trials, Centocor plans a Phase III clinical trial to further evaluate
the safety and efficacy of a combination therapy compared to the current
monotherapy approach involving use of a fibrinolytic product alone. Such a
trial would not begin before the first half of 1999 and would not be expected to
be completed until at least the year 2000. There can be no assurance that the
results of a Phase III trial will be consistent with the results obtained in
preclinical or early clinical studies. Moreover, there can be no assurance that
the combination of Retavase and ReoPro will be shown to be safe and efficacious
or that regulatory approval for any such combination will be obtained on a
timely basis, if at all. The clinical trial and regulatory approval process can
take a number of years and there can be no assurance that the current and
currently planned trials will be completed in the time frames presently
contemplated, or at all. The failure of the Company to obtain regulatory
approval relating to the combination of ReoPro and Retavase on a timely basis
could result in the Company not achieving the financial results it expects from
the Acquisition. In addition, clinical trials require the expenditure of
significant resources; unanticipated significant expenditures on the current and
currently planned clinical studies could adversely affect the financial
condition of the Company.
PRODUCTS UNDER DEVELOPMENT
In years prior to 1997, Centocor recorded significant losses from
operations primarily resulting from the long-term development cycle associated
with the Company's products. Although the Company now has products that have
been approved by the FDA and are being commercialized, its product candidates
are in various stages of research, development or clinical testing, and cannot
be sold commercially without first obtaining a license for marketing from the
FDA and, outside the United States, other regulatory authorities. The process
of obtaining such licenses usually takes a number of years to complete and
requires significant expenditures to conduct clinical trials of the safety and
efficacy of a potential product. There can be no assurance that any of the
Company's products currently under development will obtain the required
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approvals or, if approved, will obtain sufficient market acceptance to become
commercially successful. Even if one or more of its products under development
is licensed for marketing by the FDA and foreign regulatory authorities and
achieves substantial market acceptance, there can be no assurance that such
product will achieve profitability. In order to successfully commercialize new
products, the Company, in addition to obtaining the required regulatory
approvals, must successfully manufacture and market such products. There can be
no assurance that any of these requirements will be met.
MANUFACTURING EXPANSION
In order to fulfill anticipated demand for ReoPro and Avakine (if
approved for sale), the Company is expanding its facilities in The Netherlands
and is in the early stages of constructing a new biopharmaceutical manufacturing
facility at its location in Malvern, Pennsylvania. There can be no assurance
that these production facility projects will be completed in a timely manner.
There also can be no assurance that the Company will secure all regulatory
approvals necessary to permit products manufactured there to be sold. If the
Company fails to complete these projects or to complete them in a timely manner
or to secure all necessary regulatory approvals, it would not be able to meet
the expected demand for its products, which in turn could adversely affect the
financial condition of the Company. In addition, the Company's gross margin can
be adversely affected by unplanned production losses, reduced cell line yields,
increases in royalty obligations, increases in the costs of raw materials, the
unavailability of raw materials, and production interruptions due to plant
upgrades, natural disasters or other causes.
LITIGATION
The Company is subject to litigation, including those matters
described under the caption "- Risks Related to Retavase - Retavase Patent
Litigation" and in documents filed by the Company with the Commission which are
incorporated herein by reference. Such litigation includes essentially
identical class action suits filed in January and February 1998 in which the
plaintiffs claim that the Company and its Chief Executive Officer violated the
federal securities laws by making allegedly false and misleading statements in
connection with earnings forecasts. Other litigation to which the Company
currently is or has been subject relates to, among other things, the Company's
patent and intellectual property rights, licensing arrangements with other
persons and financing activities. The Company cannot predict with certainty the
eventual outcome of pending litigation, and could be required to incur
substantial expense in defending these lawsuits. The Company has in the past
taken substantial special charges relating to certain litigation, and there can
be no assurance that pending, or future, legal proceedings will not result in
additional special charges or have a material adverse effect on the Company's
financial condition and results of operations.
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PATENTS AND LICENSING ARRANGEMENTS
Products currently being marketed, developed or considered for
development by the Company are in the biopharmaceutical area, which entails
extensive patent filings. The Company's commercial success will depend, in
part, on its ability and the ability of its collaborators and licensors to
obtain patent protection for its products and technologies, both in the United
States and other countries. The patent positions of biotechnology firms
generally are highly uncertain and involve complex legal and factual questions.
To date, no consistent policy has emerged regarding the breadth of claims
allowed in biopharmaceutical patents. This uncertain situation also is affected
by revisions to United States patent law adopted in recent years to give effect
to international accords to which the United States has become a party. The
extent to which such changes in law will affect the Company's obligations cannot
be ascertained. Accordingly, there can be no assurance that patent applications
owned or licensed by the Company will result in patents being issued or that, if
issued, such patents will afford protection against competitors with similar
technology, and will not be challenged, invalidated, circumvented, or infringed.
To protect its rights to its patent applications and/or its patents, the Company
may be required to participate in interference proceedings before the United
States Patent and Trademark Office to determine priority of invention and the
right to a patent. In addition, there can be no assurance that products covered
by such patents, or any other products developed by the Company or subject to
licenses acquired by the Company, will not be covered by third-party patents, in
which case continued development and marketing of such products would require a
license under such patents. There can be no assurance that such required
licenses will be available to the Company or its licensees on acceptable terms,
if at all.
There has been substantial litigation regarding patent and other
intellectual property rights in the biopharmaceutical industry. Litigation may
be necessary to enforce certain intellectual property rights of the Company.
Any such litigation could result in substantial cost to and diversion of effort
by the Company. There can be no assurance that the Company's patents or those
of its licensors would be held valid by courts or that competitors' technology
would be found to infringe such patents.
Other entities have filed applications for or have been issued patents
and are expected to obtain additional patents to which the Company may need to
acquire rights. The extent to which the Company may need to obtain rights to
any such patents or to contest their scope or validity will depend on final
product formulation and other factors. The ability to license any such patents
and the likelihood of successfully contesting the scope or validity of such
patents are uncertain and the costs associated therewith may be significant. If
the Company is required to acquire rights to valid and enforceable patents but
cannot do so at a reasonable cost, the Company's ability to manufacture or
market its products in the country of issuance of any such patent may be
materially adversely affected.
In addition to patent protection, the Company also relies to a
significant extent upon trade secret protection for its confidential and
proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets or disclose
such technology. To protect its trade secrets, the Company has required its
employees, consultants and others with which confidential information may be
shared to execute confidentiality agreements upon the commencement of
employment, the consulting arrangement or the collaboration or other agreement,
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as the case may be, with the Company. There can be no assurance, however, that
these agreements will provide meaningful protection of the Company's trade
secrets or adequate remedies in the event of unauthorized use or disclosure of
such information, or that the Company's trade secrets will not otherwise become
known or be independently discovered by its competitors or that the Company can
meaningfully protect its rights in such unpatented technology through other
means. The loss of trade secret protection of any of the Company's technologies
could materially and adversely affect the Company's competitive position and
could have a material adverse affect on the Company's financial condition.
GOVERNMENTAL REGULATION
Regulation by governmental authorities in the United States and other
countries is a significant factor in the manufacture and marketing of the
Company's products and in ongoing research and product development activities.
All of the Company's therapeutic products will require regulatory approval by
governmental agencies prior to commercialization. In particular, human
therapeutic products are subject to rigorous preclinical and clinical testing
and other premarket approval requirements by the FDA and regulatory authorities
in other countries. Various statutes and regulations also govern or influence
the manufacture, safety, labeling, storage, recordkeeping and marketing of such
products. The lengthy process of seeking these approvals, and the subsequent
compliance with applicable statutes and regulations, require the expenditure of
substantial resources. The Company believes it is currently in compliance with
such statutes and regulations. There can be no assurance, however, that
required approvals will be obtained and maintained. Any failure by the Company
to obtain, or any delay in obtaining, regulatory approvals, or any loss of
regulatory approvals, could materially adversely affect the Company and the
Company's marketing partners' ability to market the Company's products.
The activities required before a pharmaceutical product may be
marketed in the United States begin with preclinical testing. Preclinical tests
include laboratory evaluation of product chemistry and animal studies to assess
the potential safety and efficacy of the product and its formulations. The
results of these studies must be submitted to the FDA as part of an
Investigational New Drug Application, which must be reviewed by the FDA before
proposed clinical testing can begin. Typically, clinical testing involves a
three-phase process. In Phase I, clinical trials are conducted with a small
number of subjects to determine the early safety profile and the pattern of drug
distribution and metabolism. In Phase II, clinical trials are conducted with
groups of patients afflicted with a specified disease in order to determine
preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase
III, large scale, multicenter, comparative clinical trials are conducted with
patients afflicted with a target disease in order to provide enough data to
evaluate statistically the efficacy and safety of the product, as required by
the FDA. The results of the preclinical and clinical testing of a biological
pharmaceutical product are submitted to the FDA in the form of a BLA, for
approval to commence commercial sales. In responding to a BLA, the FDA may grant
marketing approval, request additional information or deny the application if it
determines that the application does not satisfy its regulatory approval
criteria. There can be no assurance that any approval required by the FDA will
be obtained on a timely basis, if at all.
For example, on May 28, 1998, the FDA's Gastrointestinal Drugs
Advisory Committee voted unanimously to recommend approval of Avakine for the
treatment of patients with moderate to severe Crohn's disease for whom
conventional therapy is inadequate and for the treatment of Crohn's patients
with draining fistulae. However, the FDA is not required to follow the
recommendations of its advisory committees, it has declined to do so with
respect to other products, and there can be no assurances that the FDA will
follow the committee's recommendation with respect to Avakine. Moreover, the
specifics of labeling and other details still must be considered by the FDA in
completing its review of the Avakine BLA.
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Among the conditions for BLA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
on an ongoing basis with Good Manufacturing Practices ("GMP"). Before approval
of the BLA, the FDA will perform a prelicensing inspection of the facility to
determine its compliance with GMP and other rules and regulations. In complying
with GMP, manufacturers must continue to expend time, money and effort in the
areas of production and quality control to ensure full compliance. After the
establishment is licensed for the manufacture of any product, it is subject to
periodic inspections by the FDA and to correction of deficiencies noted by the
FDA.
The requirements such as those described above which the Company must
satisfy to obtain and maintain regulatory approval by governmental agencies in
other countries prior to and after commercialization of its products in such
countries can be rigorous, costly and uncertain. There can be no assurance that
such requirements will be met.
The Company also is subject to various laws and regulations relating
to safe working conditions, laboratory and manufacturing practices, the
experimental use of animals and the use and disposal of hazardous or potentially
hazardous substances, including radioactive compounds and infectious disease
agents, used in connection with the Company's research. The extent of
additional governmental regulation that might result from any legislative or
administrative action cannot be accurately predicted. Additionally, the
European Union is considering regulations which could lead to the ban of
products using certain raw materials. The Company's products currently utilize
these raw materials and such regulation, if enacted, could prevent the sale of
such products in member states of the European Union.
UNCERTAINTIES REGARDING HEALTH CARE REIMBURSEMENT AND REFORM
The levels of revenues and profitability of biopharmaceutical
companies may be affected by the continuing efforts of government and third
party payors to contain or reduce the costs of health care through various
means. For example, in certain foreign markets, pricing or profitability of
therapeutic and other pharmaceutical products is subject to governmental
control. In the United States, there have been, and the Company expects that
there will continue to be, a number of federal and state proposals to implement
similar governmental control. While the Company cannot predict whether any such
legislative or regulatory proposals will be adopted, the adoption of such
proposals could have a material adverse effect on the Company. In addition, in
both the United States and elsewhere, sales of therapeutic and other
pharmaceutical products are dependent in part on the availability of
reimbursement to the consumer from third party payors, such as government and
private insurance plans. Third party payors are increasingly challenging the
prices charged for medical products and services. There can be no assurance
that the therapeutic products the Company has brought to market or any
therapeutic product candidates the Company may bring to market in the future
will be considered cost effective and that reimbursement to the consumer will be
available or will be sufficient to allow the Company to sell its products on a
competitive and profitable basis.
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SIGNIFICANT COMPETITION AND TECHNOLOGICAL CHANGE
Monoclonal antibody, genetic vaccine and peptide technology and other
innovations in biotechnology are being examined, evaluated and practiced in
biology research laboratories throughout the United States and in many other
countries, including laboratories of other biotechnology companies and major
pharmaceutical firms, many of which have greater resources than Centocor.
Many established pharmaceutical companies have internal research and
development groups, and alliances with other biotechnology companies, and are
seeking to develop monoclonal antibody-based, genetic vaccine-based, peptide-
based and other biological products. In addition, a number of these companies
have entered the biological products field through acquisition or merger, and
more may be expected to do so in the future. As a result of the efforts of
pharmaceutical and biotechnology companies, Centocor anticipates that many new
biological products will be developed by others.
Centocor's management believes that its ability to compete in its
targeted markets will depend upon, among other things, its ability to develop or
acquire, produce and market innovative products. Centocor's management also
believes that significant competition will come from established pharmaceutical
companies that have greater capital resources, manufacturing and marketing
experience, research and development staffs, sales forces and production
facilities than Centocor. Such competition is expected to be in the form of a
variety of therapeutic products, which may include monoclonal antibody-based,
genetic vaccine-based and peptide-based products. Additionally, with regard to
Retavase, the Company faces significant competition from Genentech, which makes
Activase, the leading product in the market. With regard to ReoPro, the Company
faces competition from Merck & Co. and COR Therapeutics Inc., which make
Aggrastat and Integrilin, respectively. There can be no assurance that the
activities of these companies or others will not render Centocor's products or
technologies obsolete or uncompetitive.
EXPOSURE TO CURRENCY FLUCTUATIONS
The Company maintains a pharmaceutical manufacturing facility in
Leiden, The Netherlands and has outstanding notes denominated in Dutch Guilders.
In addition, the Company's product sales include sales in foreign currencies.
As a result, the Company's operating results are subject to currency
fluctuations. Currency fluctuations may result in variations in the costs of
products produced which may affect the Company's gross margin from sales.
Furthermore, currency fluctuations may cause reported sales to fluctuate from
period to period regardless of the fluctuation in the volume of such sales in
foreign currencies. Currently, the Company does not engage in any derivatives
transactions as a hedge against foreign currency fluctuations. In addition, the
Treaty on the European Economic and Monetary Union provides for the introduction
of the Euro in substitution for the national currencies of the member states
which adopt the Euro, including The Netherlands. There can be no assurance,
however, that a single European currency will be adopted or, if adopted, what
the time frame will be. Moreover, the Company cannot predict what the impact,
if any, of conversion to the Euro will be on the Company's results of
operations.
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CHANGE IN CONTROL
Certain provisions of Centocor's charter documents (including
cumulative voting provisions for electing directors and provisions permitting
Centocor to issue preferred stock in the future), the terms of Centocor's
shareholders rights plan, pursuant to which the holders of the Common Stock have
certain rights to purchase shares of the Company's preferred stock, the terms
relating to the acceleration of the exerciseability of certain options and the
vesting of certain restricted stock awards and the terms of certain convertible
securities relating to the purchase of such securities by Centocor, including
the Debentures, may have the effect of delaying, deferring or preventing a
change in control of Centocor, thereby possibly having the effect of depriving
shareholders of receiving a premium for their shares of Common Stock. Certain
provisions of Pennsylvania law relating to the acquisition of shares
representing voting control over 20% or more of Centocor's stock may have a
similar effect. See "Description of Capital Stock."
SKILLED PERSONNEL AND KEY RELATIONSHIPS
The success of Centocor will depend, in large part, on Centocor's
continued ability to attract and retain highly qualified management, scientific,
manufacturing, and sales and marketing personnel, and on its ability to develop
and maintain important relationships with leading research institutions and key
distributors. Competition for such personnel and relationships is intense.
There can be no assurance that Centocor will be able to attract or retain such
personnel or maintain such relationships.
PRODUCT LIABILITY AND PRODUCT RECALL
The testing and marketing of medical products entail an inherent risk
of product liability. There also is a risk that circumstances might develop
requiring a product recall. The Company maintains limited product liability
insurance and does not maintain product recall or product tampering coverage.
The Company's business may be materially adversely affected by a successful
product liability claim in excess of any insurance coverage or by a product
recall or product tampering claim. There can be no assurance that product
liability insurance coverage will continue to be available to the Company in the
future on reasonable terms or at all.
VARIATION IN QUARTERLY OPERATING RESULTS
The Company's results of operations can be expected to be subject to
quarterly fluctuations. Quarterly results can fluctuate as a result of a number
of factors, including timing of research and development expenses, the level of
product sales, timing of sales and marketing expenditures, the completion or
commencement of significant contracts, timing of special charges, a reduction in
the valuation allowance relating to the Company's deferred tax assets and
foreign exchange fluctuations. The Company believes that quarterly comparisons
of its financial results should not be relied upon as an indication of future
performance.
SUBORDINATION OF DEBENTURES
The Debentures are unsecured and subordinate in right of payment to
all current and future Senior Obligations of the Company. Senior Obligations
include all indebtedness of the Company, whether existing on or created or
incurred after the date of the issuance of the Debentures, that is not made
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subordinate to or pari passu with the Debentures by the instrument creating such
indebtedness. At March 31, 1998, the aggregate amount of Senior Obligations
outstanding was approximately $5,769,000. On April 16, 1998, the Company
redeemed its outstanding 6 3/4% Debentures, totaling $54,765,000, which ranked
pari passu with the Debentures. The Indenture does not limit the amount of
additional indebtedness, including Senior Obligations, which the Company or any
of its subsidiaries can create, incur, assume or guarantee and the incurrence of
additional indebtedness by the Company could adversely affect the Company's
ability to pay its obligations on the Debentures. By reason of such
subordination of the Debentures, in the event of insolvency, bankruptcy,
liquidation or reorganization of the Company or upon acceleration of the
Debentures due to an Event of Default under the Indenture and in certain other
events, the assets of the Company will be available to pay the amounts due on
the Debentures only after all Senior Obligations of the Company have been paid
in full after which there may not be sufficient assets remaining to pay amounts
due on any or all of the Debentures then outstanding. In addition, holders of
the Debentures are effectively subordinated to the claims of creditors of the
Company's subsidiaries to the extent of the assets of such subsidiaries. In the
event of the insolvency, bankruptcy, liquidation, reorganization, dissolution or
winding up of the business of any subsidiary of the Company, creditors of such
subsidiary generally will have the right to be paid in full before any
distribution is made to the Company or the holders of the Debentures. The
Company anticipates that from time to time it will incur additional
indebtedness, including Senior Obligations, and that it and its subsidiaries
will from time to time incur other additional indebtedness and liabilities. See
"Description of Debentures."
LIMITATIONS ON REPURCHASE UPON A FUNDAMENTAL CHANGE
In the event of a Fundamental Change, each holder of the Debentures
will have the right, at the holder's option, to require the Company to
repurchase all or a portion of such holder's Debentures as described herein
under the caption "Description of Debentures--Redemption at Option of the
Holder." The Company's ability to repurchase the Debentures upon a Fundamental
Change may be limited by the terms of the Company's Senior Obligations and the
subordination provisions of the Indenture. Further, the ability of the Company
to repurchase Debentures upon a Fundamental Change will be dependent on the
availability of sufficient funds and compliance with applicable securities laws.
Accordingly, there can be no assurance that the Company will be able to
repurchase the Debentures upon a Fundamental Change. The failure of the Company
to repurchase any Debentures upon a Fundamental Change at the request of the
holder thereof would constitute an Event of Default under the Indenture which
could result in the acceleration of other indebtedness of the Company at the
time outstanding pursuant to cross-default provisions. The term "Fundamental
Change" is limited to certain specified transactions and may not include other
events that might adversely affect the financial condition of the Company nor
would the requirement that the Company offer to repurchase the Debentures upon a
Fundamental Change necessarily afford holders of the Debentures protection in
the event of a highly leveraged reorganization, merger or similar transaction
involving the Company. See "Description of Debentures."
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VOLATILITY OF CENTOCOR COMMON STOCK PRICE; ABSENCE OF DIVIDENDS
The market prices for securities of biotechnology companies in
general, and Centocor in particular, have been highly volatile and may continue
to be highly volatile in the future. Announcements of technological innovations
or new commercial products by Centocor or its competitors, developments
concerning proprietary rights, including patents, publicity regarding actual or
potential medical results relating to products under development by Centocor or
others, developments regarding collaborative arrangements, regulatory
developments in both the United States and foreign countries, public concern as
to the safety of biotechnology products and economic and other external factors
or other calamity or crisis, as well as period-to-period fluctuations in
financial results, may have a significant impact on the market price of the
Common Stock. Centocor has not paid any dividends and does not expect to pay
any dividends in the foreseeable future.
DILUTION
At May 31, 1998, approximately 4,456,088 shares of Common Stock were
issuable upon exercise of outstanding options and warrants and upon vesting of
restricted stock awards. In addition, the Debentures presently are convertible
into 9,338,015 shares of Common Stock. To the extent such options and warrants
are exercised and such securities are converted, the ownership interests of
holders of Common Stock will be diluted. As of June 16, 1998, there were
approximately 70,393,927 shares of Common Stock issued and outstanding.
ABSENCE OF PUBLIC MARKET; TRANSFER RESTRICTIONS
There is no existing public trading market for the Debentures and
there can be no assurance as to the future development of a public trading
market for the Debentures, the ability of the holders to sell their Debentures
or the price at which holders of the Debentures may be able to sell their
Debentures. Future trading prices of the Debentures will depend on many
factors, including, among other things, prevailing interest rates, the Company's
operating results, the price of the Common Stock and the market for similar
securities. The Initial Purchaser currently makes a market in the Debentures;
however, the Initial Purchaser is not obligated to do so, and such market-making
activity may be terminated at any time without notice to the holders of the
Debentures. Accordingly, there can be no assurance as to the liquidity of any
trading market for the Debentures or that any active public market for the
Debentures will develop or be sustained. The Debentures have been designated for
trading in the Private Offerings Resales and Trading through Automated Linkages
Market; however, they will no longer be eligible for trading in such market
following effectiveness of the Registration Statement. The Company does not
intend to apply for listing of the Debentures on any securities exchange.
YEAR 2000 RISKS
As described more fully in documents filed by the Company with the
Commission which are incorporated herein by reference, the "Year 2000" issue
concerns the potential exposures related to the automated generation of business
and financial misinformation resulting from the application of computer programs
which have been written using two digits, rather than four, to define the
applicable year of business transactions. A failure successfully to address the
Year 2000 issue or the costs of addressing the issue could have a material
adverse effect on the Company's business or results of operations.
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USE OF PROCEEDS
The Selling Securityholders will receive all of the proceeds from the
sale of the Registered Securities. The Company will not receive any proceeds
from the sale of the Registered Securities.
RATIO OF EARNINGS TO FIXED CHARGES
For the purpose of computing the ratio of earnings to fixed charges,
earnings represent net income plus fixed charges. Fixed charges represent rent
expense, interest expense and amortization of debt issuance cost. The following
table sets forth the ratio of earnings to fixed charges for each period
indicated.
Ratio of earnings to fixed charges
Three months ended Year Ended December 31,
March 31, 1998/*/ 1997 1996/*/ 1995/*/ 1994/*/ 1993/*/
- -------------- ---- ---- ---- ---- ----
-- 3.16 -- -- -- --
______________________________
* Adjusted earnings did not cover fixed charges for the three months ended
March 31, 1998 and the years ended December 31, 1996, 1995, 1994 and 1993.
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DESCRIPTION OF DEBENTURES
The Debentures have been issued under an Indenture dated as of
February 20, 1998 (the "Indenture") between the Company and United States Trust
Company of New York, as trustee (the "Trustee"). The following summaries of
certain provisions of the Debentures, the Indenture and the Registration Rights
Agreement do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, all the provisions of the Debentures, the
Indenture and the Registration Rights Agreement, including the definitions
therein of certain terms which are not otherwise defined in this Prospectus.
Wherever particular provisions or defined terms of the Indenture (or of the Form
of Debenture which is a part of the Indenture) or the Registration Rights
Agreement are referred to, such provisions or defined terms are incorporated
herein by reference. References in this section to the "Company" are solely to
Centocor, Inc., a Pennsylvania corporation, and not its subsidiaries. A copy of
the form of Indenture and Registration Rights Agreement will be available from
the Trustee upon request by a registered holder of the Debentures.
GENERAL
The Debentures represent unsecured general obligations of the Company
subordinate in right of payment to certain other obligations of the Company as
described under "Subordination of Debentures" and convertible into Common Stock
as described under "Conversion of Debentures." The Debentures are limited to
$460,000,000 aggregate principal amount, are issued only in denominations of
$1,000 and integral multiples thereof and will mature on February 15, 2005
unless earlier redeemed at the option of the Company or at the option of the
holder upon a Fundamental Change.
The Indenture does not contain any financial covenants or restrictions
on the payment of dividends, the incurrence of Senior Obligations or the
issuance or repurchase of other outstanding securities of the Company. The
Indenture contains no covenants or other provisions to afford protection to
holders of the Debentures in the event of a highly leveraged transaction or a
change in control of the Company, except to the extent described under
"Redemption at Option of the Holder."
The Debentures will bear interest at the annual rate of 4 3/4% from
February 20, 1998, payable semi-annually on February 15 and August 15,
commencing on August 15, 1998, to holders of record at the close of business on
the preceding February 1 and August 1, respectively, except (i) that the
interest payable upon redemption (unless the date of redemption is an interest
payment date) will be payable to the person to whom principal is payable and
(ii) as set forth in the next succeeding sentence. In the case of any Debenture
(or portion thereof) which is converted into Common Stock of the Company during
the period from (but excluding) a record date for any interest payment date to
(but excluding) such interest payment date either: (i) if such Debenture (or
portion thereof) has been called for redemption on a redemption date which
occurs during such period, or is to be redeemed in connection with a Fundamental
Change on a Repurchase Date (as defined herein) which occurs during such period,
the Company shall not be required to pay interest on such interest payment date
in respect of any such Debenture (or portion thereof); or (ii) if otherwise, any
Debenture (or portion thereof) submitted for conversion during such period shall
be accompanied by New York Clearing House funds or other funds acceptable to the
Company in an amount equal to the interest payable on such interest payment
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<PAGE>
date on the principal amount so converted. See "Conversion of Debentures."
Interest may, at the Company's option, be paid either (i) by check mailed to the
address of the person entitled thereto as it appears in the Debenture register,
provided that a holder of Debentures with an aggregate principal amount in
excess of $2,000,000 shall, at the written election of such holder, be paid by
wire transfer in immediately available funds or (ii) by transfer to an account
maintained by such person located in the United States; provided, however, that
payments to The Depository Trust Company, New York, New York ("DTC") will be
made by wire transfer of immediately available funds to the account of DTC or
its nominee. Interest will be computed on the basis of a 360-day year comprised
of twelve 30-day months.
FORM, DENOMINATION AND REGISTRATION
The Debentures have been issued in fully registered form, without
coupons, in denominations of $1,000 principal amount and integral multiples
thereof.
Global Debentures, Book-Entry Form. Debentures held by "qualified
institutional buyers," as defined in Rule 144A under the Securities Act
("QIBs"), but not by other purchasers, are evidenced by a global Debenture (the
"Global Debenture") which has been deposited with, or on behalf of, DTC and
registered in the name of Cede & Co. ("Cede") as DTC's nominee. Except as set
forth below, the Global Debentures may be transferred, in whole or in part, only
to another nominee of DTC or to a successor of DTC or its nominee.
QIBs may hold their interests in the Global Debentures directly
through DTC if such holder is a participant in DTC, or indirectly through
organizations which are participants in DTC (the "Participants"). Transfers
between Participants will be effected in the ordinary way in accordance with DTC
rules and will be settled in clearing house funds.
QIBs who are not Participants may beneficially own interests in the
Global Debentures held by DTC only through Participants or certain banks,
brokers, dealers, trust companies and other parties that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants"). So long as Cede, as the nominee of DTC,
is the registered owner of the Global Debentures, Cede for all purposes will be
considered the sole holder of the Global Debentures. Except as provided below,
owners of beneficial interests in the Global Debentures will not be entitled to
have certificates registered in their names, will not receive or be entitled to
receive physical delivery of certificates in definitive registered form, and
will not be considered the holders thereof.
Payment of interest on and the redemption price or repurchase price of
the Global Debentures will be made to Cede, the nominee for DTC, as the
registered owner of the Global Debentures by wire transfer of immediately
available funds on each interest payment date or redemption date or Repurchase
Date, as the case may be. None of the Company, the Trustee or any paying agent
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in the Global
Debentures or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
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The Company has been informed by DTC that, with respect to any payment
of interest on, or the redemption price of, the Global Debentures, DTC's
practice is to credit Participants' accounts on the payment date thereof with
payments in amounts proportionate to their respective beneficial interest in the
principal amount represented by the Global Debentures as shown on the records of
DTC, unless DTC has reason to believe that it will not receive payment on such
payment date. Payments by Participants to owners of beneficial interests in the
principal amount represented by the Global Debentures held through such
Participants will be the responsibility of such Participants, as is now the case
with securities held for the accounts of customers registered in "street name."
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a person
having a beneficial interest in the principal amount represented by the Global
Debentures to pledge such interest to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
interest, may be affected by the lack of a physical certificate evidencing such
interest.
Neither the Company nor the Trustee (or any registrar, paying agent or
conversion agent under the Indenture) will have any responsibility for the
performance by DTC or its Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations. DTC has advised the Company that it will take any action permitted
to be taken by a holder of Debentures (including, without limitation, the
presentation of Debentures for exchange as described below), only at the
direction of one or more Participants to whose account with DTC interests in a
Global Debenture are credited, and only in respect of the principal amount of
the Debentures represented by such Global Debentures as to which such
Participant or Participants has or have given such direction.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and to facilitate the clearance and settlement
of securities transactions between Participants through electronic book-entry
changes to the accounts of its Participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Certain of such Participants (or their
representatives), together with other entities, own DTC. Indirect access to the
DTC system is available to others such as banks, brokers, dealers and trust
companies that clear through, or maintain a custodial relationship with, a
Participant, either directly or indirectly.
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of interests in Global Debentures among Participants, it is
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
the Company within 90 days, the Company will cause Debentures to be issued in
definitive registered form in exchange for the Global Debentures.
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<PAGE>
Certificated Debentures. Debentures sold to investors that are not
QIBs have been issued in definitive registered form and may not be represented
by a Global Debenture. In addition, QIBs may request that certificated
Debentures be issued in exchange for Debentures represented by a Global
Debenture. Furthermore, certificated Debentures may be issued in exchange for
Debentures represented by the Global Debentures if DTC is unable or unwilling to
continue as depositary and no successor depositary is appointed by the Company
as set forth above under "Global Debentures, Book-Entry Form."
CONVERSION OF DEBENTURES
The holders of Debentures will be entitled at any time through the
close of business on the final maturity date of the Debentures, subject to prior
redemption, to convert any Debentures or portions thereof (in denominations of
$1,000 or multiples thereof) into Common Stock of the Company, at the conversion
prices set forth below. Except as described below, no payment or other
adjustment will be made on conversion of any Debentures for interest accrued
thereon or for dividends on any Common Stock issued. If any Debentures not
called for redemption are converted during the period from (but excluding) a
record date for any interest payment date to (but excluding) such interest
payment date, such Debentures must be accompanied by funds equal to the interest
payable on such interest payment date on the principal amount so converted. The
Company is not required to issue fractional shares of Common Stock upon
conversion of Debentures and, in lieu thereof, will pay a cash adjustment based
upon the market price of Common Stock on the last business day prior to the date
of conversion. In the case of Debentures called for redemption, conversion
rights will expire at the close of business on the fifth business day preceding
the day fixed for redemption unless the Company defaults in the payment of the
redemption price. A Debenture in respect of which a holder is exercising its
option to require redemption upon a Fundamental Change may be converted only if
such holder withdraws its election to exercise its option in accordance with the
terms of the Indenture.
The initial conversion price of $49.261 per share of Common Stock is
subject to adjustment under formulae as set forth in the Indenture in certain
events, including:
(i) the issuance of Common Stock of the Company as a dividend or
distribution on the Common Stock;
(ii) certain subdivisions and combinations of the Common Stock;
(iii) the issuance to all holders of Common Stock of certain rights or
warrants to purchase Common Stock at less than the then Current Market
Price (as defined in the Indenture) of the Common Stock;
(iv) the distribution to all holders of Common Stock or capital stock
(other than Common Stock) or evidences of Indebtedness of the Company or of
assets (including securities, but excluding those rights, warrants,
dividends and distributions referred to above or paid in cash);
(v) distributions consisting of cash, excluding any quarterly cash
dividend on the Common Stock to the extent that the aggregate cash dividend
per share of Common Stock in any fiscal quarter does not exceed the greater
of (x) the amount per share of Common Stock of the next preceding
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<PAGE>
quarterly cash dividend on the Common Stock to the extent that such
preceding quarterly dividend did not require an adjustment of the
conversion price pursuant to this clause (v) (as adjusted to reflect
subdivisions or combinations of the Common Stock), and (y) 3.75% of the
average of the last reported sales price of the Common Stock during the ten
trading days immediately prior to the date of declaration of such dividend,
and excluding any dividend or distribution in connection with the
liquidation, dissolution or winding up of the Company. If an adjustment is
required to be made as set forth in this clause (v) as a result of a
distribution that is a quarterly dividend, such adjustment would be based
upon the amount by which such distribution exceeds the amount of the
quarterly cash dividend permitted to be excluded pursuant to this clause
(v). If an adjustment is required to be made as set forth in this clause
(v) as a result of a distribution that is not a quarterly dividend, such
adjustment would be based upon the full amount of the distribution;
(vi) payment in respect of a tender offer or exchange offer by the
Company or any subsidiary of the Company for all or any portion of the
Common Stock (other than tender offers or exchange offers for less than 15%
of the outstanding shares of Common Stock of the Company) to the extent
that the cash and value of any other consideration included in such payment
per share of Common Stock exceeds the Current Market Price per share of
Common Stock on the trading day next succeeding the last day on which
tenders or exchanges may be made pursuant to such tender or exchange offer;
and
(vii) payment in respect of a tender offer or exchange offer by a
person other than the Company or any subsidiary of the Company as to which,
as of the closing date of the offer, the Board of Directors of the Company
(the "Board of Directors") is not recommending rejection of the offer. The
adjustment referred to in this clause (vii) will only be made if the tender
offer or exchange offer is for an amount that increases the offeror's
ownership of Common Stock to more than 25% of the total shares of Common
Stock outstanding, and if the cash and value of any other consideration
included in such payment per share of Common Stock exceeds the Current
Market Price per share of Common Stock on the business day next succeeding
the last date on which tenders or exchanges may be made pursuant to such
tender or exchange offer. The adjustment referred to in this clause (vii)
will generally not be made, however, if, as of the closing of the offer,
the offering documents with respect to such offer disclose a plan or an
intention to cause the Company to engage in a consolidation or merger of
the Company or a sale of all or substantially all of the Company's assets
and such consolidation or merger is consummated within twelve (12) months
of the closing of the offer.
In the case of (i) any reclassification of the Common Stock or (ii) a
consolidation, merger or combination involving the Company or a sale or
conveyance to another person of the property and assets of the Company as an
entirety or substantially as an entirety, in each case as a result of which
holders of Common Stock shall be entitled to receive stock, other securities,
other property or assets (including cash) with respect to or in exchange for
such Common Stock, the holders of the Debentures then outstanding will generally
be entitled thereafter to convert such Debentures into the kind and amount of
shares of stock, other securities or other property or assets which they would
have owned or been entitled to receive upon such reclassification,
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<PAGE>
consolidation, merger, combination, sale or conveyance had such Debentures been
converted into Common Stock immediately prior to such reclassification,
consolidation, merger, combination, sale or conveyance assuming that a holder of
Debentures would not have exercised any rights of election as to the stock,
other securities or other property or assets receivable in connection therewith.
In the event of a taxable distribution to holders of Common Stock or
in certain other circumstances requiring conversion price adjustments, the
holders of Debentures may, in certain circumstances, be deemed to have received
a distribution subject to United States income tax as a dividend; in certain
other circumstances, the absence of such an adjustment may result in a taxable
dividend to the holders of Common Stock. See "Certain United States Federal
Income Tax Considerations."
The Company from time to time may to the extent permitted by law
reduce the conversion price by any amount for any period of at least 20 days, in
which case the Company shall give at least 15 days' notice of such reduction, if
the Board of Directors has made a determination that such reduction would be in
the best interests of the Company, which determination shall be conclusive. The
Company may, at its option, make such reductions in the conversion price, in
addition to those set forth above, as the Board of Directors deems advisable to
avoid or diminish any income tax to holders of Common Stock resulting from any
dividend or distribution of stock (or rights to acquire stock) or from any event
treated as such for income tax purposes. See "Certain United States Federal
Income Tax Considerations."
No adjustment in the conversion price will be required unless such
adjustment would require a change of at least 1% in the conversion price then in
effect; provided that any adjustment that would otherwise be required to be made
shall be carried forward and taken into account in any subsequent adjustment.
Except as stated above, the conversion price will not be adjusted for the
issuance of Common Stock or any securities convertible into or exchangeable for
Common Stock or carrying the right to purchase any of the foregoing.
OPTIONAL REDEMPTION BY THE COMPANY
The Debentures are not entitled to any sinking fund. At any time on
or after February 21, 2001, the Debentures will be redeemable at the Company's
option on at least 30 days' notice as a whole or, from time to time, in part at
the following prices (expressed as a percentage of the principal amount),
together with accrued interest to, but excluding, the date fixed for redemption:
If redeemed during the period beginning February 21, 2001 and ending
on February 14, 2002 at a redemption price of 102.714%, and if redeemed during
the 12-month period beginning February 15:
YEAR REDEMPTION PRICE
--------------- -----
2002 102.036%
2003 101.357%
2004 100.679%
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and 100% at February 15, 2005, provided that any semi-annual payment of interest
becoming due on the date fixed for redemption shall be payable to the holders of
record on the relevant record date of the Debentures being redeemed.
If less than all of the outstanding Debentures are to be redeemed, the
Trustee shall select the Debentures to be redeemed in principal amounts of
$1,000 or multiples thereof by lot, pro rata or by another method the Trustee
considers fair and appropriate. If a portion of a holder's Debentures is
selected for partial redemption and such holder converts a portion of the
Debentures of such holder, such converted portion shall be deemed to be of the
portion selected for redemption.
REDEMPTION AT OPTION OF THE HOLDER
If a Fundamental Change occurs at any time prior to February 15, 2005,
each holder of Debentures shall have the right, at the holder's option, to
require the Company to redeem any or all of such holder's Debentures outstanding
on the date (the "Repurchase Date") that is 30 days after the date of the
Company's notice of such Fundamental Change. The Debentures will be redeemable
in integral multiples of $1,000 principal amount.
The Company shall redeem such Debentures at a price equal to 100% of
the principal amount to be redeemed plus accrued interest to (but excluding) the
Repurchase Date; provided that, if such Repurchase Date is an interest payment
date, then the interest payable on such date shall be paid to the holder of
record of the Debentures on the relevant record date and not to the holder of
such Debentures on the stated interest payment date.
The Company is required to mail to all holders of record of the
Debentures a notice of the occurrence of a Fundamental Change and of the
redemption right arising as a result thereof on or before the tenth day after
the occurrence of such Fundamental Change. The Company also is required to
deliver to the Trustee a copy of such notice. To exercise the redemption right,
a holder of Debentures must deliver, on or before the 30th day after the date of
the Company's notice of a Fundamental Change (the "Fundamental Change Expiration
Time"), written notice of the holder's exercise of such right, together with the
Debentures to be so redeemed, duly endorsed for transfer, to the Company (or an
agent designated by the Company for such purpose). Payment for Debentures
surrendered for redemption (and not withdrawn) prior to the Fundamental Change
Expiration Time will be made promptly following the Repurchase Date.
The term "Fundamental Change" means the occurrence of any transaction
or event in connection with which all or substantially all of the outstanding
Common Stock shall be exchanged for, be converted into, be acquired for, or
constitute in all material respects solely the right to receive, consideration
which is not all or substantially all common stock listed (or, upon consummation
of or immediately following such transaction or event which will be listed) on a
United States national securities exchange or approved for quotation on Nasdaq
or any similar United States system of automated dissemination of quotations of
securities prices (whether by means of an exchange offer, liquidation, tender
offer, consolidation, merger, combination, reclassification, recapitalization or
otherwise).
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The Company will comply with the provisions of Rule 13e-4 and any
other tender offer rules under the Exchange Act to the extent then applicable in
connection with the redemption rights of the holders of Debentures in the event
of a Fundamental Change.
The redemption rights of the holders of Debentures could discourage a
potential acquiror of the Company. The Fundamental Change redemption feature,
however, is not the result of management's knowledge of any specific effort to
obtain control of the Company by means of a merger, tender offer, solicitation
or otherwise.
The term "Fundamental Change" is limited to certain specified
transactions and, accordingly, the Company could, in the future, enter into
other transactions, including certain recapitalizations of the Company, that
would not constitute a Fundamental Change, but that would increase the amount of
Senior Obligations outstanding at such time or otherwise adversely affect the
financial condition of the Company. In addition, the payment of the Fundamental
Change redemption price on the Debentures may be subordinated to the prior
payment of Senior Obligations as described under "Subordination of Debentures"
below. There are no restrictions in the Indenture on the creation of additional
Senior Obligations or other indebtedness. Under certain circumstances, the
incurrence of additional indebtedness could have an adverse effect on the
Company's ability to service its indebtedness, including the Debentures. A
default by the Company on its obligations to pay the Fundamental Change
redemption price could result in acceleration of the payment of other
indebtedness of the Company at the time outstanding pursuant to cross-default
provisions. The Company's failure to redeem tendered Debentures in connection
with a Fundamental Change would in any event constitute an Event of Default
under the Indenture. If a Fundamental Change were to occur, there can be no
assurance that the Company would have sufficient funds to pay the redemption
price for all the Debentures tendered by the holders thereof. Further, the
ability of the Company to repurchase Debentures upon a Fundamental Change will
be dependent on compliance with applicable laws.
SUBORDINATION OF DEBENTURES
The Indebtedness evidenced by the Debentures is subordinated to the
extent provided in the Indenture to the prior payment in full of all Senior
Obligations of the Company. The Debentures also are effectively subordinated to
all indebtedness and other liabilities, including trade payables and lease
obligations, if any, of the Company's subsidiaries.
Upon any distribution of assets of the Company upon any dissolution,
winding up, liquidation or reorganization, the payment of the principal of, or
premium, if any, and interest (including Liquidated Damages (as defined in the
Indenture), if any) on the Debentures is to be subordinated to the extent
provided in the Indenture in right of payment to the prior payment in full of
all Senior Obligations. In the event of any acceleration of the Debentures
because of an Event of Default (as defined herein), the holders of any Senior
Obligations then outstanding would be entitled to payment in full of all
obligations in respect of such Senior Obligations before the holders of the
Debentures are entitled to receive any payment or distribution in respect
thereof. The Indenture will require that the Company promptly notify holders of
Senior Obligations if payment of the Debentures is accelerated because of an
Event of Default.
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The Company also may not make any payment upon or in respect of the
Debentures (including upon redemption at the option of the holder of any
Debenture or at the option of the Company) if (i) a default in the payment of
the principal, premium, if any, interest, rent or other obligations in respect
of Senior Obligations occurs and is continuing (a "Payment Default") or (ii) any
other default occurs and is continuing with respect to Designated Senior
Obligations (as defined herein) that permits a holder of the Designated Senior
Obligation as to which such default relates to accelerate its maturity and the
Trustee receives a written notice of such default (a "Payment Blockage Notice")
from the Company or other person permitted to give such notice under the
Indenture (a "Non-Payment Default"). Payments on the Debentures may and shall
be resumed (i) in case of a Payment Default, upon the date on which such default
is cured or waived or ceases to exist and (ii) in case of a Non-Payment Default,
the earlier of the date on which such Non-Payment Default is cured or waived or
ceases to exist or 179 days after the date on which the applicable Payment
Blockage Notice is received by the Trustee if the maturity of such Designated
Senior Obligations has not been accelerated and no Payment Default with respect
to any Senior Obligations has occurred which has not been cured or waived (in
which case clause (i) shall instead be applicable). No Non-Payment Default that
existed or was continuing on the date of delivery of any Payment Blockage Notice
to the Trustee shall be, or shall be made, the basis for a subsequent Payment
Blockage Notice.
Notwithstanding the foregoing, in the event that the Trustee or any
holder of the Debentures receives any payment or distribution of assets of the
Company of any kind in contravention of any of the subordination provisions of
the Indenture, whether in cash, property or securities, including, without
limitation, by way of set-off or otherwise, in respect of the Debentures before
all Senior Obligations are paid in full, then such payment or distribution will
be held by the recipient in trust for the benefit of holders of Senior
Obligations or their representative to the extent necessary to make payment in
full of all Senior Obligations remaining unpaid, after giving effect to any
concurrent payment or distribution, or provision therefor, to or for the benefit
of the holders of Senior Obligations.
By reason of the subordination provisions described above, in the
event of the Company's bankruptcy, dissolution or reorganization, holders of
Senior Obligations may receive more, ratably, and holders of the Debentures may
receive less, ratably, than the other creditors of the Company. Such
subordination will not prevent the occurrence of any Event of Default under the
Indenture.
The term "Senior Obligations" means the principal of, premium, if any,
interest (including all interest accruing subsequent to the commencement of any
bankruptcy or similar proceeding, whether or not a claim for post-petition
interest is allowable as a claim in any such proceeding) and rent payable on or
in connection with, and all fees, costs, expenses and other amounts accrued or
due on or in connection with, Indebtedness (as defined herein) of the Company,
whether outstanding on the date of the Indenture or thereafter created,
incurred, assumed, guaranteed or in effect guaranteed by the Company (including
all deferrals, renewals, extensions or refundings of, or amendments,
modifications or supplements to, the foregoing), unless in the case of any
particular Indebtedness the instrument creating or evidencing the same or the
assumption or guarantee thereof expressly provides that such Indebtedness shall
not be senior in right of payment to the Debentures or expressly provides that
such Indebtedness is pari passu or junior to the Debentures.
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Notwithstanding the foregoing, the term Senior Obligations shall not include any
Indebtedness of the Company to any subsidiary of the Company, all of the
outstanding voting stock of which is owned, directly or indirectly, by the
Company.
The term "Indebtedness" means, with respect to any Person (as defined
in the Indenture) and without duplication:
(a) all indebtedness, obligations and other liabilities (contingent or
otherwise) of such Person for borrowed money (including obligations of the
Company in respect of overdrafts, foreign exchange contracts, currency
exchange agreements, interest rate protection agreements, and any loans or
advances from banks, whether or not evidenced by notes or similar
instruments, and all commitment, standby and other fees due and payable to
financial institutions with respect to credit facilities available to such
Person) or evidenced by bonds, debentures, notes or similar instruments
(whether or not the recourse of the lender is to the whole of the assets of
such Person or to only a portion thereof), other than any account payable
or other accrued current liability or obligation incurred in the ordinary
course of business in connection with the obtaining of materials or
services;
(b) all reimbursement obligations and other liabilities (contingent or
otherwise) of such Person with respect to letters of credit, bank
guarantees or bankers' acceptances;
(c) all obligations and liabilities (contingent or otherwise) in
respect of leases of real or personal property or other assets of such
Person required, in conformity with generally accepted accounting
principles, to be accounted for as capitalized lease obligations on the
balance sheet of such Person and all obligations and other liabilities
(contingent or otherwise) under any lease or related document (including a
purchase agreement) in connection with the lease of real property which
provides that such Person is contractually obligated to purchase or cause a
third party to purchase the leased property and thereby guarantee a minimum
residual value of the leased property to the lessor and the obligations of
such Person under such lease or related document to purchase or to cause a
third party to purchase such leased property;
(d) all obligations of such Person (contingent or otherwise) with
respect to an interest rate or other swap, cap or collar agreement or other
similar instrument or agreement or foreign currency hedge, exchange,
purchase or similar instrument or agreement;
(e) all direct or indirect guaranties or similar agreements by such
Person in respect of, and obligations or liabilities (contingent or
otherwise) of such Person to purchase or otherwise acquire or otherwise
assure a creditor against loss in respect of, indebtedness, obligations or
liabilities of another Person of the kind described in clauses (a) through
(d);
(f) any indebtedness or other obligations described in clauses (a)
through (e) secured by any mortgage, pledge, lien or other encumbrance
existing on property which is owned or held by such Person, regardless of
whether the indebtedness or other obligation secured thereby shall have
been assumed by such Person; and
(g) any and all deferrals, renewals, extensions and refundings of, or
amendments, modifications or supplements to, any indebtedness, obligation
or liability of the kind described in clauses (a) through (f).
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The term "Designated Senior Obligations" means any Senior Obligations
in which the instrument creating or evidencing the same or the assumption or
guarantee thereof (or related agreements or documents to which the Company is a
party) expressly provides that such Senior Obligations shall be "Designated
Senior Obligations" for purposes of the Indenture (provided that such
instrument, agreement or other document may place limitations and conditions on
the right of such Senior Obligations to exercise the rights of Designated Senior
Obligations).
The Debentures also are effectively subordinated to all
liabilities, including trade payables and lease obligations, if any, of the
Company's subsidiaries. Any right of the Company to receive the assets of any
of its subsidiaries upon the liquidation or reorganization thereof (and the
consequent right of the holders of the Debentures to participate in these
assets) are effectively subordinated to the claims of that subsidiary's
creditors (including trade creditors), except to the extent that the Company is
itself recognized as a creditor of such subsidiary, in which case the claims of
the Company would still be subordinate to any security interests in the assets
of such subsidiary and any indebtedness of such subsidiary senior to that held
by the Company.
The Company's subsidiaries are separate and distinct legal entities
and have no obligation, contingent or otherwise, to pay any amounts due pursuant
to the Debentures or to make any funds available therefor, whether by dividends,
loans or other payments. In addition, the payment of dividends and the making
of loans and advances to the Company by its subsidiaries may be subject to
statutory, contractual or other restrictions and are dependent upon the earnings
or financial condition of those subsidiaries and subject to various business
considerations. As a result, the Company may be unable to gain access to the
cash flow or assets of its subsidiaries.
As of March 31, 1998, the Company has approximately $5,769,000 of
Senior Obligations. The Indenture does not limit the amount of additional
indebtedness, including Senior Obligations, which the Company can create, incur,
assume or guarantee, nor will the Indenture limit the amount of indebtedness or
other liabilities that any subsidiary can create, incur, assume or guarantee.
The Company is obligated to pay reasonable compensation to the Trustee
and to indemnify the Trustee against certain losses, liabilities or expenses
incurred by it in connection with its duties relating to the Indenture. The
Trustee's claims for such payments will generally be senior to those of the
holders of the Debentures in respect of all funds collected or held by the
Trustee.
EVENTS OF DEFAULT; NOTICE AND WAIVER
An "Event of Default" is defined in the Indenture as being: default in
payment of the principal of or premium, if any (upon redemption or otherwise),
on the Debentures (whether or not such payment is permitted to be made under the
subordination provisions described above); default for 30 days in payment of any
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installment of interest, including Liquidated Damages, if any, on the Debentures
(whether or not such payment is permitted to be made under the subordination
provisions described above); default by the Company for 60 days after notice in
the observance or performance of any other covenants in the Debentures or the
Indenture; or certain events involving bankruptcy, insolvency or reorganization
of the Company. The Indenture provides that the Trustee may withhold notice to
the holders of the Debentures of any default (except in payment of principal or
premium, if any, or interest (including Liquidated Damages, if any) with respect
to the Debentures) if the Trustee considers it in the interest of the holders of
the Debentures to do so.
The Indenture provides that, if an Event of Default shall have
occurred and be continuing, the Trustee, subject to certain limitations or the
holders of not less than 25% in principal amount of the Debentures then
outstanding may declare the principal of, premium, if any, and accrued interest
(including Liquidated Damages, if any) on the Debentures to be immediately due
and payable. In the case of certain events of bankruptcy or insolvency of the
Company, the principal of, premium, if any, and accrued interest (including
Liquidated Damages, if any) on the Debentures shall automatically become and be
immediately due and payable. However, if the Company shall cure all defaults
(except the nonpayment of principal of, premium, if any, and interest (including
Liquidated Damages, if any) on any of the Debentures which shall have become due
by acceleration) and certain other conditions are met, with certain exceptions,
such declaration may be canceled and past defaults may be waived by the holders
of a majority of the principal amount of the Debentures then outstanding.
The holders of a majority in principal amount of the Debentures then
outstanding shall have the right to direct in writing the time, method and place
of conducting any proceedings for any remedy available to the Trustee, subject
to certain limitations specified in the Indenture.
The Indenture provides that no holder of the Debentures may pursue any
remedy under the Indenture, except, subject to the conditions in the succeeding
sentence for a default in the payment of principal, premium, if any, or interest
(including Liquidated Damages, if any), on the Debentures. In order for such a
holder to be able to pursue remedies for such a default: (i) the holders of at
least 25% in principal amount of the outstanding Debentures shall have made a
written request, and offered reasonable indemnity, to the Trustee to pursue the
remedy; (ii) the Trustee shall not have received from the holders of a majority
in principal amount of the outstanding Debentures a direction inconsistent with
such request and shall have failed to comply with such request within 60 days
after receipt of such request; and (iii) such holder shall have previously given
to the Trustee written notice that such Event of Default shall have occurred and
be continuous.
MODIFICATION OF THE INDENTURE
The Indenture contains provisions permitting the Company and the
Trustee, with the consent of the holders of a majority in principal amount of
the Debentures at the time outstanding, to modify the Indenture or any
supplemental indenture or the rights of the holders of the Debentures, except
that no such modification shall (i) extend the fixed maturity of any Debenture,
reduce the rate or extend the time for payment of interest thereon, reduce the
principal amount thereof or premium, if any, thereon, reduce any amount payable
upon redemption thereof, change the obligation of the Company to redeem any
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Debenture upon the happening of any Fundamental Change in a manner adverse to
the holders of the Debentures, impair the right of a holder to institute suit
for the payment thereof, change the currency in which the Debentures are
payable, impair the right to convert the Debentures into Common Stock subject to
the terms set forth in the Indenture, or modify the provisions of the Indenture
with respect to the subordination of the Debentures in a manner adverse to the
holders of the Debentures in any material respect, without the consent of each
holder of a Debenture so affected or (ii) reduce the aforesaid percentage of
Debentures whose holders are required to consent to any such modification of the
Indenture or any such supplemental indenture, without the consent of the holders
of all of the Debentures then outstanding. The Indenture also provides for
certain modifications of its terms without the consent of the holders of the
Debentures.
REGISTRATION RIGHTS OF THE DEBENTUREHOLDERS
The Company has filed with the Commission, the Registration Statement
covering resales by holders of the Debentures and the Common Stock issuable upon
conversion of the Debentures. The Company has agreed to use reasonable efforts
to cause the Registration Statement to become effective as promptly as is
practicable and to keep the Registration Statement effective until the earlier
of (i) the sale pursuant to the Registration Statement of all the securities
registered thereunder or the sale to the public of all securities pursuant to
Rule 144 under the Securities Act and (ii) the expiration of the holding period
applicable to such securities pursuant to Rule 144(k) under the Securities Act
or any successor provision, calculated assuming the holder is not an affiliate
of the Company. The Company will be permitted to suspend the use of the
Prospectus which is a part of the Registration Statement for a period not to
exceed an aggregate of 60 days in any 365 day period under certain circumstances
relating to pending corporate developments, public filings with the Commission
and similar events. The Company has agreed to pay predetermined liquidated
damages to those holders of Debentures and those holders of Common Stock issued
upon conversion of the Debentures who have requested to sell pursuant to the
Registration Statement if the Registration Statement is not timely filed or if,
after effectiveness of the Registration Statement, the Prospectus is
unavailable for a period in excess of that permitted above. The Company has
further agreed, if such failure to file or unavailability continues for a period
of 30 days in excess of that permitted above, to pay predetermined liquidated
damages to all holders of Debentures and all holders of Common Stock issued upon
conversion of the Debentures, whether or not such holder has requested to sell
pursuant to the Registration Statement. A holder who sells the Debentures or
the Common Stock issued upon conversion of the Debentures pursuant to the
Registration Statement generally will be required to be named as a selling
shareholder in the related Prospectus, deliver a Prospectus to purchasers and be
bound by those provisions of the Registration Rights Agreement which are
applicable to such holder (including certain indemnification provisions). The
Company will pay all expenses of the Registration Statement, provide to each
registered holder who has requested to sell pursuant to the Registration
Statement copies of such Prospectus, notify each registered holder who has
requested to sell pursuant to the Registration Statement when the Registration
Statement has become effective and take certain other actions as are required to
permit, subject to the foregoing, unrestricted resales of the Debentures or the
Common Stock.
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INFORMATION CONCERNING THE TRUSTEE
United States Trust Company of New York, as Trustee under the
Indenture, has been appointed by the Company as paying agent, conversion agent,
registrar and custodian with regard to the Debentures.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000
shares of Common Stock and 10,000,000 Preferred Shares, par value $.01 per share
("Preferred Stock"), 2,000,000 of which have been designated as Series A
Preferred Shares, par value $.01 per share (the "Series A Preferred Stock").
Under the Company's Articles of Incorporation, as amended, the Board
of Directors is authorized to make divisions of authorized shares of the capital
stock of the Company into classes and into series within any class and to make
determinations of the designation and the number of shares of any class or
series and the voting rights, preferences, limitations and special rights, if
any, of the shares of any class or series, including the power to increase the
previously determined number of shares of any class or series to a number not
greater than the aggregate number of shares of all classes and series that the
Company is authorized to issue and to decrease the previously determined number
of shares of any class or series to a number not less than that then
outstanding. Accordingly, the issuance of Preferred Stock or new classes or
series of Common Stock, while promoting flexibility in connection with possible
acquisitions and other corporate purposes, could adversely affect the voting
rights of holders of Common Stock and, under certain circumstances, make it more
difficult for a third party to gain control of the Company or remove incumbent
members of the Board of Directors.
COMMON STOCK
As of June 16, 1998, there were approximately 70,393,927 shares of
Common Stock outstanding held of record by approximately 3,093 shareholders.
The holders of shares of Common Stock are entitled to one vote per
share on all matters to be voted on by shareholders, except that the holders of
shares of Common Stock are entitled to cumulate their votes in the election of
directors. The holders of shares of Common Stock are entitled to receive such
dividends, if any, as may be declared, from time to time, by the Board of
Directors, in its discretion, from funds legally available therefor.
Except as described below under "The Rights Agreement," the holders of
Common Stock are not entitled to preemptive, subscription or conversion rights,
and there are no redemption or sinking fund provisions applicable to the Common
Stock. Upon the liquidation, dissolution or winding up of the Company, the
holders of shares of Common Stock are entitled to receive all assets available
for distribution to shareholders, subject to the rights of any holders of shares
of Preferred Stock that may be then outstanding. The holders of Common Stock
are not subject to further calls or assessments by the Company. All outstanding
shares of Common Stock are validly issued, fully paid and nonassessable.
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PREFERRED STOCK
The Company currently has no shares of Preferred Stock outstanding.
Of the 10,000,000 shares of Preferred Stock authorized, 2,000,000 shares have
been designated as Series A Preferred Stock.
SERIES A PREFERRED STOCK
The Series A Preferred Stock was designated in connection with the
Company's stock rights plan. See "The Rights Agreement" below. Holders of
Series A Preferred Stock are entitled to receive when, as and if declared by the
Board of Directors out of funds legally available for the purpose, a quarterly
dividend following the first issuance of a share of Series A Preferred Stock at
a rate per share equal to the greater of (i) $1.00 or (ii) 100 times the
aggregate per share amount of all cash dividends, and 100 times the aggregate
per share amount of all non-cash dividends or distributions (payable in kind)
except for a dividend payable in shares of Common Stock or a subdivision of the
outstanding Common Stock declared on the Common Stock since the preceding
quarterly dividend payment date for the Series A Preferred Stock. The amount
set forth in the preceding clause (ii) is subject to adjustment in the event of
any dividend on the Common Stock payable in shares of Common Stock and any
subdivision or combination of the outstanding Common Stock. In the event of any
liquidation, dissolution or winding up of the Company, the holders of Series A
Preferred Stock then outstanding are entitled to be paid out of the assets and
funds of the Company legally available for distribution, before any payment
shall be made to holders of Common Stock, the amount of $100 per share plus any
accrued but unpaid dividends on the Series A Preferred Stock. Upon any
consolidation, merger, combination or other transaction in which shares of
Common Stock are exchanged for or changed into other securities, cash or other
property, the shares of the Series A Preferred Stock shall at the same time be
similarly exchanged or changed into an amount per share (subject to adjustment
in the events described above) equal to 100 times the aggregate amount of
securities, cash or other property into which or for which the Common Stock is
changed or exchanged.
The holders of the Series A Preferred Stock are entitled to vote
together with the holders of the Common Stock as a single class on all matters
presented to the Company's shareholders, including the election of directors,
and each share of Series A Preferred Stock is entitled to 100 votes on all
matters submitted to the shareholders. This number of votes is subject to
adjustment in the event of any dividend on the Common Stock payable in shares of
Common Stock and any subdivision or combination of the outstanding Common Stock,
such that the number of votes per share of Series A Preferred Stock after such
event shall equal the number of votes per share before such event multiplied by
a fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock outstanding immediately prior to such event.
In the event dividends on the Series A Preferred Stock fall in arrears in an
amount equal to six quarterly dividend payments, the holders of the Series A
Preferred Stock, together with the holders of any other outstanding Preferred
Stock of the Company, have certain rights to elect two persons as directors of
the Company. In addition, the Company is restricted from taking certain actions
with respect to dividends or other distributions on, or acquisitions or
redemptions of, any shares of stock ranking junior to or on a parity with the
Series A Preferred Stock, whenever any dividends or distributions payable on the
Series A Preferred Stock are in arrears.
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The Series A Preferred Stock is not redeemable, and will rank junior
with respect to payment of dividends and on liquidation to all other series of
the Company's Preferred Stock, except to the extent that any such series
specifically provides that it shall rank on a parity with or junior to the
Series A Preferred Stock.
CERTAIN ARTICLES OF INCORPORATION AND BY-LAW PROVISIONS AND PENNSYLVANIA ANTI-
TAKEOVER PROVISIONS
The Articles of Incorporation and By-laws of the Company and
Pennsylvania law contain certain provisions that may enhance the likelihood of
continuity and stability in the composition of the Board of Directors and may
discourage a future unsolicited takeover of the Company. These provisions could
have the effect of discouraging certain attempts to acquire the Company or
remove incumbent management, including incumbent members of the Board of
Directors, even if some or a majority of the Company's shareholders deemed such
an attempt to be in their best interests.
The Company's Articles of Incorporation, as amended, or By-laws, as
applicable, among other things (i) provide that the number of directors will not
be fewer than five nor more than eleven, with the exact number of directors to
be determined from time to time by the Board of Directors; (ii) provide that
vacancies on the Board of Directors that may occur between annual meetings,
including vacancies resulting from an increase in the number of directors, shall
be filled by the Board of Directors until the next annual meeting of
shareholders and until successors are elected and qualified; (iii) except under
limited circumstances, do not permit the shareholders to call special meetings
of shareholders; (iv) prohibit the shareholders from taking action by less than
unanimous written consent; and (v) provide that the Board of Directors has the
authority to issue and fix the rights and preferences of shares of Preferred
Stock and new classes or series of Common Stock. These provisions may have the
effect of delaying, deferring or preventing a change of control of the Company
without further action by the shareholders, may discourage bids for the Common
Stock at a premium over the market price of the Common Stock and may adversely
affect the market price of, and the voting or other rights of the holders of,
the Common Stock.
The Pennsylvania Business Corporation Law of 1988, as amended ("BCL"),
contains certain statutory "anti-takeover" provisions which are triggered, in
general, if any person or group acquires, or discloses an intent to acquire, 20
percent or more of the voting power of a covered corporation, other than
pursuant to a registered firm commitment underwriting or, in certain cases,
pursuant to the approving vote of the board of directors. The relevant
provisions are contained in Chapter 25 of the BCL.
Subchapter 25E (relating to control transactions) provides that if any
person or group acting in concert acquires 20 percent or more of the voting
power of a covered corporation, the remaining shareholders may demand from such
person or group the fair value of their shares, including a proportionate amount
of any control premium.
Subchapter 25F (relating to business combinations) effectively
prohibits for five years certain business combinations involving a covered
corporation and an "interested shareholder" (generally defined to include a
person, or group acting in concert, who beneficially owns 20 percent or more of
the voting power of the corporation), unless the transaction is approved by the
board of directors or a specified supermajority of shareholders. The term
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"business combination" is defined broadly to include various transactions
utilizing a corporation's assets for purchase price amortization or refinancing
purposes. Depending on the time of shareholder approval and the percentage of
voting stock approving the business combination, the interested shareholder may
also be required to comply with detailed valuation provisions.
Subchapter 25G (relating to control-share acquisitions) prevents a
person, or group acting in concert, who acquires beneficial ownership of any one
of three specified percentages of stock ownership (20 percent; 33 1/3 percent;
and 50 percent), for the first time, from voting the "control shares" (i.e.,
those shares the ownership of which puts that person over the relevant
threshold), unless both the "disinterested" shareholders and all voting
shareholders of the corporation vote to restore the voting rights of those
shares in two separate votes. Failure to obtain such approval exposes the holder
to the risk of a forced sale of the shares to the issuer. If shareholder
approval is obtained, the corporation is also subject to Subchapters 25I and
25J. Subchapter 25I provides for a minimum severance payment to certain
employees terminated within two years of approval. Subchapter 25J prohibits the
abrogation of certain labor contracts prior to their stated date of expiration.
Subchapter 25H (relating to disgorgement) applies in the event that
(i) any person or group publicly discloses that the person or group may acquire
control of the corporation, or (ii) a person or group acquires (or publicly
discloses an offer or intent to acquire) 20 percent or more of the voting power
of the corporation and, in either case, sells shares within 18 months
thereafter. Any profits from sales of equity securities of the corporation by
the person or group during the 18-month period must be disgorged to the
corporation if the securities that were sold were acquired during the 18-month
period or within 24 months prior thereto.
Subchapters 25E-H contain a wide variety of transactional and status
exemptions, exclusions and safe harbors. Centocor has not opted-out of any of
these provisions.
In addition, the fiduciary duty standards applicable to the Board of
Directors under the BCL (i) explicitly give the Board of Directors the authority
to weigh (in addition to consideration of employees, suppliers, customers and
creditors of the corporation, the communities in which the corporation is
located and other pertinent factors) the short-and long-term interests of the
corporation and the possibility that they may best be served by the independence
of the corporation, and the resources, intent and past and potential conduct of
the prospective acquirer; (ii) relieve the Board of Directors from any duty to
regard the shareholder interest as dominant or controlling; (iii) explicitly
give the Board of Directors the discretion to refuse to redeem a shareholders
rights plan or to refuse to take certain specified actions with respect to
potential acquisitions of control of the corporation; (iv) declare actions by
directors with respect to a takeover bid to be subject to the same standard of
conduct for directors that is applicable to all other conduct; and (v) establish
a presumption that actions with respect to a takeover bid by the "disinterested
directors" (a term defined to include essentially all directors except certain
officers and persons associated with the prospective acquirer) are lawful unless
it is proved under a clear and convincing evidence standard that the director
did not act in good faith after reasonable investigation.
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These and other related BCL provisions may discourage open market
purchases of a corporation's stock or a non-negotiated tender or exchange offer
for such stock and, accordingly, may limit a shareholder's ability to realize a
premium over the market price of the Common Stock in connection with any such
transaction.
THE RIGHTS AGREEMENT
Each outstanding share of the Common Stock is, and each share of
Common Stock to be issued prior to the earliest of (i) the Distribution Date (as
defined below), (ii) the date on which the Rights (as defined below) are
redeemed or (iii) the expiration of the Rights on September 26, 1998, will be,
accompanied by one half of one right (a "Right") to purchase one one-hundredth
of a share of Series A Preferred Stock, in accordance with the terms and
conditions of the Rights Agreement, dated as of September 26, 1988 (the "Rights
Agreement"), between the Company and The First National Bank of Boston, as
Rights Agent. The Rights are attached to the certificates representing shares
of the Common Stock and will continue to be so attached until the date (the
"Distribution Date") that is the earlier to occur of (i) ten days following a
public announcement that a person or group has acquired beneficial ownership of
20% or more of the outstanding shares of Common Stock (an "Acquiring Person") or
(ii) ten business days following the commencement of a tender offer or exchange
offer that would, if consummated, result in a person or group owning 30% or more
of the outstanding shares of Common Stock.
In the event a Distribution Date occurs, each holder of a Right will
be entitled to purchase one one-hundredth of a share of Series A Preferred Stock
at a price of $170 (the "Rights Exercise Price"). If, following an acquisition
of 20% or more of the outstanding shares of Common Stock by an Acquiring Person,
the Company is acquired by any person or group, or sells 50% or more of its
assets or earning power to any person or group, the holder of each Right will be
entitled to purchase, at the Rights Exercise Price, shares of common stock of
such person or group having a market value equal to twice the Rights Exercise
Price. In addition, if any person or group acquires 30% or more of the
outstanding shares of Common Stock or if an Acquiring Person merges into the
Company or engages in certain self-dealing transactions, then the holder of each
Right, other than the Acquiring Person, will be entitled to purchase, at the
Rights Exercise Price, shares of Common Stock having a market value equal to
twice the Rights Exercise Price.
The Rights will become exercisable only upon the terms and conditions
set forth in the Rights Agreement and may be redeemed by the Company at $.02 per
Right at any time prior to the tenth day following a public announcement that an
Acquiring Person has acquired beneficial ownership of 20% or more of the
outstanding shares of Common Stock (which date may be extended under certain
conditions set forth in the Rights Agreement). Until a Right is exercised, the
holder thereof will have no additional rights as a shareholder of the Company.
The Rights will expire on September 26, 1998 unless earlier redeemed. The
offering made by this Prospectus will not cause the Rights to become
exercisable.
Prior to a Distribution Date, the terms of the Rights Agreement may be
amended by the Board of Directors without the approval of the holders of shares
of Common Stock, including an amendment to lower the thresholds for
exerciseability of the Rights to not less than the greater of (i) the largest
percentage of the outstanding shares of Common Stock then known by the Company
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to be beneficially owned by any person or group or (ii) 10%. After the
Distribution Date, the terms of the Rights Agreement may be amended by the Board
of Directors without the approval of the holders of the Rights, except that no
such amendment may change the redemption price, the final expiration date of the
Rights Agreement, the Rights Exercise Price or the number of one-hundredths of a
share of Series A Preferred Stock for which a Right is exercisable or otherwise
adversely affect the interests of the holders of the Rights (other than an
Acquiring Person or an affiliate or associate thereof).
The Rights may have certain anti-takeover effects. The Rights are
designed to cause substantial dilution to a person or group that attempts to
acquire the Company on terms not approved by the Board of Directors. The
Company does not believe that the Rights will interfere with any merger or other
business combination approved by the Board of Directors since the Rights may be
redeemed by the Company as described above. To the extent the Rights may
discourage potential acquirors from obtaining equity positions in the Company,
shareholders may be deprived of receiving a premium for their shares of Common
Stock.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain material United States federal
income and estate tax considerations relating to the purchase, ownership and
disposition of the Debentures and of Common Stock into which Debentures may be
converted, but does not purport to be a complete analysis of all the potential
tax considerations relating thereto. This summary is based on the provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), the applicable
Treasury Regulations promulgated or proposed thereunder ("Treasury
Regulations"), judicial authority and current administrative rulings and
practice, all of which are subject to change, possibly on a retroactive basis.
This summary deals only with holders that will hold Debentures and Common Stock
into which Debentures may be converted as "capital assets" (within the meaning
of Section 1221 of the Code) and does not address tax considerations applicable
to investors that may be subject to special tax rules, such as banks, tax-exempt
organizations, insurance companies, dealers in securities or currencies, persons
that will hold Debentures as a position in a hedging transaction, "straddle" or
"conversion transaction" for tax purposes, or persons that have a "functional
currency" other than the U.S. dollar. The Company has not sought any ruling
from the Internal Revenue Service ("IRS") with respect to the statements made
and the conclusions reached in the following summary, and there can be no
assurance that the IRS or a court will agree with such statements and
conclusions. INVESTORS CONSIDERING THE PURCHASE OF REGISTERED SECURITIES SHOULD
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED
STATES FEDERAL INCOME AND ESTATE TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL
AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN
TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
UNITED STATES HOLDERS
As used herein, the term "United States Holder" means the beneficial
owner of a Debenture or Common Stock that for United States federal income tax
purposes is (i) a citizen or resident of the United States, (ii) a corporation,
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corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, (iii) an estate
the income of which is subject to United States federal income taxation
regardless of its source, or (iv) a trust if (a) a court within the United
States is able to exercise primary supervision over the administration of the
trust and (b) one or more U.S. persons have the authority to control all
substantial decisions of the trust.
Payment of Interest
Interest on a Debenture generally will be includable in the income of
a United States Holder as ordinary income at the time such interest is received
or accrued, in accordance with such holder's method of accounting for United
States federal income tax purposes. The Company is obligated to pay liquidated
damages to holders of the Debentures in certain circumstances described under
"Description of Debentures--Registration Rights of the Debentureholders." The
Company believes that any such payment should be treated as subject to an
"incidental contingency" for purposes of the original issue discount rules
because the amount of such payments, if required to be made, is expected to be
insignificant relative to the total expected amount of remaining payments on the
Debentures. Accordingly, any such amounts should be taxable to holders as
payments of interest.
Premium
If a United States Holder purchases a Debenture for an amount that is
greater than such Debenture's principal amount, such holder will be considered
to have purchased such Debenture with "amortizable bond premium" equal in amount
to such excess. A United States Holder may elect to amortize such premium,
using a constant yield method, over the remaining term of such Debenture with
reference to either the amount payable on maturity or, if it results in a
smaller premium attributable to the period through the earlier call date, with
reference to the amount payable on the earlier call date. An election to
amortize bond premium applies to all taxable debt obligations then owned and
thereafter acquired by the United States Holder and may be revoked only with the
consent of the IRS.
Market Discount
If a United States Holder purchases a Debenture for an amount that is
less than its principal amount by at least .025% of its principal amount times
the number of remaining whole years to maturity, then such holder will be
considered to have purchased such Debenture with "market discount" equal in
amount to such difference between the principal amount and purchase price. In
that event, gain realized by the holder upon the sale, retirement or certain
other dispositions of the Debenture will be treated as ordinary interest income
to the extent of the accrued market discount. Market discount on a Debenture
will be treated as accruing ratably over such Debenture's term, or, at the
United States Holder's election, under a constant yield method. In addition,
such holder will be required to defer the deduction of a portion of the interest
paid on any indebtedness incurred or continued to purchase or carry the
Debenture (unless such holder elects to include market discount in income
currently as it accrues, on either a ratable or constant yield basis). Such
election, once made, applies to all market discount bonds acquired by the
taxpayer on or after the first day of the taxable year in which such election
applies, and may not be revoked without the consent of the IRS.
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<PAGE>
Sale, Exchange or Redemption of the Debentures
Except as described above under "--Market Discount," upon the sale,
exchange or redemption of a Debenture, a United States Holder generally will
recognize capital gain or loss equal to the difference between (i) the amount of
cash proceeds and the fair market value of any property received on the sale,
exchange or redemption (except to the extent such amount is attributable to
accrued interest income, which is taxable as ordinary income) and (ii) such
holder's adjusted tax basis in the Debenture. A United States Holder's adjusted
tax basis in a Debenture generally will equal the cost of the Debenture to such
holder, less any principal payments received by such holder. Such capital gain
or loss will be long-term capital gain or loss if the United States Holder's
holding period is more than 12 months. Under the Taxpayer's Relief Act of 1997
(the "1997 Act"), long-term capital gains on most capital assets held by an
individual for more than 18 months are taxed at a maximum rate of 20%, and long-
term capital gains on most capital assets held by an individual for more than 12
months but not more than 18 months are taxed at a maximum rate of 28%. Also,
under the 1997 Act, in taxable years beginning after December 31, 2000, the rate
of federal income tax applicable to long-term capital gains in certain
circumstances may be reduced below 20% for property held by an individual for
more than five years.
Conversion of the Debentures
A United States Holder generally will not recognize any income, gain
or loss upon conversion of a Debenture into Common Stock, except (i) to the
extent the Common Stock is considered attributable to accrued interest not
previously included in income (which is taxable as ordinary income) or (ii) with
respect to cash received in lieu of a fractional share of Common Stock. Such
holder's tax basis in the Common Stock received on conversion of a Debenture
will be the same as such holder's adjusted tax basis in the Debenture at the
time of conversion (reduced by any basis allocable to a fractional share
interest), and the holding period for the Common Stock received on conversion
will generally include the holding period of the Debenture converted. However,
a United States Holder's tax basis in shares of Common Stock considered
attributable to accrued interest as described above generally will equal the
amount of such accrued interest included in income, and the holding period for
such shares shall begin as of the date of conversion.
Cash received in lieu of a fractional share of Common Stock upon
conversion will be treated as a payment in exchange for the fractional share of
Common Stock. Accordingly, the receipt of cash in lieu of a fractional share of
Common Stock generally will result in capital gain or loss (measured by the
difference between the cash received for the fractional share and the United
States Holder's adjusted tax basis in the fractional share).
The conversion price of the Debentures is subject to adjustment under
certain circumstances. Section 305 of the Code and the Treasury Regulations
issued thereunder may treat the holders of the Debentures as having received a
constructive distribution, resulting in ordinary income (subject to a possible
dividends received deduction in the case of corporate holders) to the extent of
the Company's current and/or accumulated earnings and profits, if, and to the
extent that, certain adjustments in the conversion price that may occur in
limited circumstances (particularly an adjustment to reflect a taxable dividend
to holders of Common Stock) increase the proportionate interest of a holder of
Debentures in the fully diluted Common Stock, whether or not such holder ever
43
<PAGE>
exercises its conversion privilege. Moreover, if there is not a full adjustment
to the conversion ratio of the Debentures to reflect a stock dividend or other
event increasing the proportionate interest of the holders of outstanding Common
Stock in the assets or earnings and profits of the Company, then such increase
in the proportionate interest of the holders of the Common Stock generally will
be treated as a distribution to such holders, taxable as ordinary income
(subject to a possible dividends received deduction in the case of corporate
holders) to the extent of the Company's current and/or accumulated earnings and
profits.
The Common Stock
Distributions, if any, paid on the Common Stock after a conversion
generally will be treated as ordinary income (subject to a possible dividends
received deduction in the case of corporate holders) to the extent of the
Company's current or accumulated earnings and profits, then as a tax-free return
of capital to the extent of the holder's tax basis in the Common Stock and
thereafter as gain from the sale or exchange of such stock. Upon the sale or
exchange of Common Stock, a United States Holder generally will recognize
capital gain or loss equal to the difference between (i) the amount of cash and
the fair market value of any property received upon the sale or exchange and
(ii) such holder's adjusted tax basis in the Common Stock. Such capital gain or
loss will be long-term capital gain or loss if the United States Holder's
holding period is more than 12 months. Under the 1997 Act, long-term capital
gains on most capital assets held by an individual for more than 18 months are
taxed at a maximum rate of 20%, and long-term capital gains on most capital
assets held by an individual for more than 12 months but not more than 18 months
are taxed at a maximum rate of 28%. Also, under the 1997 Act, in taxable years
beginning after December 31, 2000, the rate of federal income tax applicable to
long-term capital gains in certain circumstances may be reduced below 20% for
property held by an individual for more than five years.
Information Reporting and Backup Withholding Tax
In general, information reporting requirements will apply to payments
of principal, premium, if any, and interest on a Debenture, payments of
dividends on Common Stock, payments of the proceeds of the sale of a Debenture
and payments of the proceeds of the sale of Common Stock to certain noncorporate
United States Holders. The payor will be required to withhold backup
withholding tax at the rate of 31% if (a) the payee fails to furnish a taxpayer
identification number ("TIN") to the payor or establish an exemption from backup
withholding, (b) the IRS notifies the payor that the TIN furnished by the payee
is incorrect, (c) there has been a notified payee underreporting with respect to
interest, dividends or original issue discount described in Section 3406(c) of
the Code or (d) there has been a failure of the payee to certify under the
penalty of perjury that the payee is not subject to backup withholding under the
Code. Any amounts withheld under the backup withholding rules from a payment to
a United States Holder will be allowed as a credit against such holder's United
States federal income tax and may entitle the holder to a refund, provided that
the required information is furnished to the IRS.
44
<PAGE>
NON-UNITED STATES HOLDERS
As used herein, the term "Non-United States Holder" means any
beneficial owner of a Debenture or Common Stock that is not a United States
Holder.
Payment of Interest
Generally, interest income of a Non-United States Holder that is not
effectively connected with a United States trade or business will be subject to
a withholding tax at a 30% rate (or, if applicable, a lower treaty rate).
However, interest paid on a Debenture by the Company or any Paying Agent to a
Non-United States Holder will qualify for the "portfolio interest exemption" and
therefore will not be subject to United States federal income tax or withholding
tax, provided that such interest income is not effectively connected with a
United States trade or business of the Non-United States Holder and provided
that the Non-United States Holder (i) does not actually or constructively own
(pursuant to the conversion feature of the Debentures or otherwise) 10% or more
of the combined voting power of all classes of stock of the Company entitled to
vote, (ii) is not a controlled foreign corporation related to the Company
actually or constructively through stock ownership, (iii) is not a bank which
acquired the Debentures in consideration for an extension of credit made
pursuant to a loan agreement entered into in the ordinary course of business and
(iv) either (a) provides a Form W-8 (or a suitable substitute form) signed under
penalties of perjury that includes its name and address and certifies as to its
non-United States status, or (b) is a securities clearing organization, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business and provides a statement to the Company or its
agent under penalties of perjury in which it certifies that a Form W-8 (or a
suitable substitute) has been received by it from the Non-United States Holder
or qualifying intermediary and furnishes the Company or its agent with a copy
thereof.
Recently released Treasury Regulations provide alternative methods for
satisfying the certification requirements described in clause (iv) above. The
Treasury Regulations are effective for payments made after December 31, 1999.
Generally, any certification provided on a Form W-8 that is validly in effect
prior to January 1, 2000 will be treated as a valid certification until it
expires under the Treasury Regulations or, if earlier, until December 31, 2000.
Accordingly, the alternative methods of satisfying the certification
requirements will generally not be effective until January 1, 2000, and
subsequent years.
Except to the extent that an applicable treaty otherwise provides, a
Non-United States Holder generally will be taxed in the same manner as a United
States Holder with respect to interest if the interest income is effectively
connected with a United States trade or business of the Non-United States
Holder. Effectively connected interest received by a corporate Non-United
States Holder may also, under certain circumstances, be subject to an additional
"branch profits tax" at a 30% rate (or, if applicable, a lower treaty rate).
Even though such effectively connected interest is subject to income tax, and
may be subject to the branch profits tax, it is not subject to withholding tax
if the holder delivers a properly executed IRS Form 4224 to the payor.
Sale, Exchange or Redemption of the Debentures
A Non-United States Holder of a Debenture will generally not be
subject to United States federal income tax or withholding tax on any gain
realized on the sale, exchange or redemption of the Debenture (including the
receipt of cash in lieu of fractional shares upon conversion of a Debenture into
45
<PAGE>
Common Stock) unless (1) the gain is effectively connected with a United States
trade or business of the Non-United States Holder, (2) in the case of a Non-
United States Holder who is an individual, such holder is present in the United
States for a period or periods aggregating 183 days or more during the taxable
year of the disposition and certain other conditions are met or (3) the holder
is subject to tax pursuant to the provisions of the Code applicable to certain
United States expatriates.
Conversion of the Debentures
A Non-United States Holder generally will not be subject to U.S.
federal income tax on the conversion of the Debentures into Common Stock, except
with respect to cash (if any) received in lieu of a fractional share or interest
not previously included in income. Cash received in lieu of a fractional share
may give rise to gain that would be subject to the rules described for the sale
of Common Stock below under "Non-United States Holders--Sale or Exchange of
Common Stock." Cash or Common Stock treated as issued for accrued interest would
be treated as interest under the rules described above under "Non-United States
Holders--Payment of Interest."
Sale or Exchange of Common Stock
A Non-United States Holder generally will not be subject to United
States federal income tax or withholding tax on the sale or exchange of Common
Stock unless any of the conditions described above under "Non-United States
Holder--Sale, Exchange or Redemption of the Debentures" is satisfied.
Dividends
Distributions by the Company with respect to the Common Stock that are
treated as dividends paid (or deemed paid), as described above under "--United
States Holders--Conversion of the Debentures" or "--The Common Stock" to a Non-
United States Holder (excluding dividends that are effectively connected with
the conduct of a trade or business in the United States by such holder and are
taxable as described below) will be subject to United States federal withholding
tax at a 30% rate (or lower rate provided under any applicable income tax
treaty). Except to the extent that an applicable tax treaty otherwise provides,
a Non-United States Holder generally will be taxed in the same manner as a
United States Holder on dividends paid (or deemed paid) that are effectively
connected with the conduct of a trade or business in the United States by the
Non-United States Holder. If such Non-United States Holder is a foreign
corporation, it may also be subject to a United States branch profits tax on
such effectively connected income at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty. Even though such effectively
connected dividends are subject to federal income tax, and may be subject to the
branch profits tax, they will not be subject to U.S. withholding tax if the
holder delivers a properly executed IRS Form 4224 to the payor.
Under currently applicable Treasury Regulations, dividends paid to an
address in a foreign country are presumed to be paid to a resident of that
country (unless the payor has knowledge to the contrary) for purposes of the
withholding discussed above and, under the current interpretation of Treasury
Regulations, for purposes of determining the applicability of a tax treaty rate.
Under recently issued Treasury Regulations, however, Non-United States Holders
46
<PAGE>
of Common Stock who wish to claim the benefit of an applicable treaty rate would
be required to satisfy certain certification requirements. The new Treasury
Regulations are effective for payments made after December 31, 1999.
United States Federal Estate Tax
A Debenture held by an individual who is not a citizen or resident of
the United States at the time of death will not be includable in the decedent's
gross estate for United States estate tax purposes, provided that such holder or
beneficial owner did not at the time of death actually or constructively own 10%
or more of the combined voting power of all classes of stock of the Company
entitled to vote, and provided that, at the time of death, payments with respect
to such Debenture would not have been effectively connected with the conduct by
such Non-United States Holder of a trade or business within the United States.
Common Stock actually or beneficially held by an individual who is a
Non-United States Holder at the time of his or her death (or previously
transferred subject to certain retained rights or powers) will be subject to
United States federal estate tax unless otherwise provided by an applicable
estate tax treaty.
United States Real Property Holding Corporations
The discussion of the United States federal income taxation of Non-
United States Holders of Debentures and Common Stock assumes that the Company is
at no time a United States real property holding corporation within the meaning
of Section 897(c) of the Code. Under present law, the Company would not be a
United States real property holding corporation so long as (a) the fair market
value of its United States real property interests is less than (b) 50% of the
sum of the fair market value of its United States real property interests, its
interests in real property located outside the United States, and its other
assets which are used or held for use in a trade or business. The Company
believes that it is not a United States real property holding corporation and
does not expect to become such a corporation. If the Company becomes a "United
States real property holding corporation," gain recognized on a disposition of
Debentures or Common Stock would be subject to United States federal income tax
unless (i) the Common Stock is "regularly traded on an established securities
market" within the meaning of the Code and (ii) either (A) the Non-United States
Holder disposing of Common Stock did not own, actually or constructively, at any
time during the five-year period preceding the disposition, more than 5% of the
Common Stock, or (B) in the case of a disposition of Debentures, the Non-United
States Holder did not own, actually or constructively, Debentures which, as of
any date on which such holder acquired Debentures, had a fair market value
greater than that of 5% of the Common Stock.
Information Reporting and Backup Withholding Tax
United States information reporting requirements and backup
withholding tax will not apply to payments on a Debenture to a Non-United States
Holder if the statement described in "Non-United States Holders-- Payment of
Interest" is duly provided by such holder, provided that the payor does not have
actual knowledge that the holder is a United States person.
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<PAGE>
Information reporting requirements and backup withholding tax will not
apply to any payment of the proceeds of the sale of a Debenture, or any payment
of the proceeds of the sale of Common Stock effected outside the United States
by a foreign office of a "broker" (as defined in applicable Treasury
Regulations) unless such broker (i) is a United States person, (ii) is a foreign
person that derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States or (iii) is a controlled
foreign corporation for United States federal income tax purposes. Payment of
the proceeds of any such sale effected outside the United States by a foreign
office of any broker that is described in (i), (ii) or (iii) of the preceding
sentence will not be subject to backup withholding tax, but will be subject to
information reporting requirements unless such broker has documentary evidence
in its records that the beneficial owner is a Non-United States Holder and
certain other conditions are met, or the beneficial owner otherwise establishes
an exemption. Payment of the proceeds of any such sale to or through the United
States office of a broker is subject to information reporting and backup
withholding requirements, unless the beneficial owner of the Debenture provides
the statement described in "Non-United States Holders--Payment of Interest" or
otherwise establishes an exemption.
If paid to an address outside the United States, dividends on Common
Stock held by a Non-United States Holder will generally not be subject to the
information reporting and backup withholding requirements described in this
section. However, under recently issued Treasury Regulations, dividend payments
will be subject to information reporting and backup withholding unless
applicable certification requirements are satisfied. The new Treasury
Regulations apply to dividend payments made after December 31, 1999.
THE PRECEDING DISCUSSION OF CERTAIN UNITED STATES FEDERAL INCOME AND
ESTATE TAX CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE.
ACCORDINGLY, EACH INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR AS TO PARTICULAR
TAX CONSEQUENCES TO IT OF PURCHASING, HOLDING AND DISPOSING OF THE DEBENTURES
AND THE COMMON STOCK OF THE COMPANY, INCLUDING THE APPLICABILITY AND EFFECT OF
ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY PROPOSED CHANGES IN APPLICABLE
LAWS.
PLAN OF DISTRIBUTION
The Registered Securities are being registered to permit public
secondary trading of such securities by the holders thereof. The Company has
agreed, among other things, to bear all expenses (other than underwriting
discounts and selling commissions, if any) in connection with the registration
and sale of the Registered Securities covered by this Prospectus.
The Company will not receive any proceeds from the sale of any of the
Registered Securities. The Registered Securities may be sold from time to time
by the Selling Securityholders or by pledgees, donees, transferees or other
successors in interest. The Selling Securityholders will act independently of
the Company in making decisions with respect to the timing, manner, price and
size of each sale.
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The outstanding Common Stock is publicly traded on Nasdaq. The
Initial Purchaser has advised the Company that it is making and currently
intends to continue to make a market in the Debentures; however, it is not
obligated to do so and any such market-making may be discontinued at any time
without notice, in the sole discretion of the Initial Purchaser. The Company
does not intend to apply for listing of the Debentures on Nasdaq or any
securities exchange. Accordingly, no assurance can be given as to the
development or liquidity of any trading market that may develop for the
Debentures. See "Risk Factors --Absence of Public Market; Transfer
Restrictions."
The Registered Securities may be sold from time to time to purchasers
directly by the Selling Securityholders. Alternatively, the Selling
Securityholders may from time to time offer the Registered Securities to or
through underwriters, broker/dealers or agents, who may receive compensation in
the form of underwriting discounts, concessions or commissions from the Selling
Securityholders or the purchasers of such securities for whom they may act as
agents. The Selling Securityholders and any underwriters, broker/dealers or
agents that participate in the distribution of Registered Securities may be
deemed to be "underwriters" within the meaning of the Securities Act and any
profit on the sale of such securities and any discounts, commissions,
concessions or other compensation received by any such underwriter,
broker/dealer or agent may be deemed to be underwriting discounts and
commissions under the Securities Act.
The Registered Securities may be sold from time to time in one or more
transactions at fixed prices, at prevailing market prices at the time of sale,
at varying prices determined at the time of sale or at negotiated prices. The
sale of the Registered Securities may be effected in transactions (which may
involve crosses or block transactions) (i) on any national securities exchange
or quotation service on which the Registered Securities may be listed or quoted
at the time of sale, (ii) in the over-the-counter market, (iii) in transactions
otherwise than on such exchanges or in the over-the-counter market or (iv)
through the writing of options. In connection with sales of the Registered
Securities or otherwise, the Selling Securityholders may enter into hedging
transactions with broker-dealers which may in turn engage in short sales of the
Registered Securities in the course of hedging the positions they assume. The
Selling Securityholders may also sell Registered Securities short and deliver
Registered Securities to close out such short positions, or loan or pledge
Registered Securities to broker-dealers that in turn may sell such securities.
At the time a particular offering of the Registered Securities is made, a
Prospectus Supplement, if required, will be distributed which will set forth the
aggregate amount and type of Registered Securities being offered and the terms
of the offering, including the name or names of any underwriters, broker/dealers
or agents, any discounts, commissions and other terms constituting compensation
from the Selling Securityholders and any discounts, commissions or concessions
allowed or reallowed or paid to broker/dealers and the proposed selling price to
the public.
In addition, any securities covered by this Prospectus which qualify
for sale pursuant to Rule 144, Rule 144A or any other available exemption from
registration under the Securities Act may be sold under Rule 144, Rule 144A or
such other available exemption rather than pursuant to this Prospectus. There
is no assurance that any Selling Securityholder will sell any or all of the
Debentures or Common Stock described herein, and any selling Securityholder may
transfer, devise or gift such securities by other means not described herein.
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<PAGE>
To comply with the securities laws of certain jurisdictions, if
applicable, the Registered Securities will be offered or sold in such
jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain jurisdictions the Registered Securities may not be offered
or sold unless they have been registered or qualified for sale in such
jurisdictions or any exemption from registration or qualification is available
and is complied with.
The Selling Securityholders will be subject to applicable provisions
of the Exchange Act and the rules and regulations thereunder, which provisions
may limit the timing of purchases and sales of any of the Registered Securities
by the Selling Securityholders. The foregoing may affect the marketability of
such securities.
The Company has agreed pursuant to the Registration Rights Agreement
to use its best efforts to cause the Registration Statement to which this
Prospectus relates to become effective as promptly as is practicable and to keep
the Registration Statement effective until the earlier of (i) the sale pursuant
to the Registration Statement of all the securities registered pursuant to the
Registration Rights Agreement thereunder and (ii) the expiration of the holding
period applicable to such securities under Rule 144(k) under the Securities Act
or any successor provision. The Registration Rights Agreement provides that the
Company may suspend the use of this Prospectus in connection with sales of
Debentures and Common Stock by holders for a period not to exceed an aggregate
of 60 days in the 365 day period, under certain circumstances relating to
pending corporate developments, public filings with the Commission and similar
events.
Pursuant to the Registration Rights Agreement, all expenses of the
registration of the Registered Securities will be paid by the Company,
including, without limitation, Commission filing fees and expenses of compliance
with state securities or "blue sky" laws; provided, however, that the Selling
Securityholders will pay all underwriting discounts and selling commissions, if
any. The Selling Securityholders will be indemnified by the Company against
certain civil liabilities, including certain liabilities under the Securities
Act, or will be entitled to contribution in connection therewith. The Company
will be indemnified by the Selling Securityholders severally against certain
civil liabilities, including certain liabilities under the Securities Act, or
will be entitled to contribution in connection therewith.
SELLING SECURITYHOLDERS
The Debentures originally were issued and sold by the Company in the
Original Offering, and were simultaneously resold by the Initial Purchaser in
transactions exempt from the registration requirements of the Securities Act, to
persons reasonably believed by the Initial Purchaser to be "qualified
institutional buyers" (as defined in Rule 144A under the Securities Act) or
institutional "accredited investors" (as defined in Rule 501 under the
Securities Act). The Selling Securityholders may from time to time offer and
sell pursuant to this Prospectus any or all of the Registered Securities. The
term Selling Securityholders includes the holders listed below and the
beneficial owners of the Registered Securities and their transferees, pledgees,
donees or other successors.
The following table sets forth information with respect to the Selling
Securityholders of the Registered Securities and the respective number of
Registered Securities beneficially owned by each Selling Securityholder that
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may be offered pursuant to this Prospectus.
<TABLE>
<CAPTION>
NUMBER OF
CONVERSION
NAME OF SELLING AMOUNT OF DEBENTURES PERCENT OF SHARES THAT
SECURITYHOLDER(1) BENEFICIALLY OWNED OUTSTANDING DEBENTURES MAY BE SOLD(2)
- ---------------------------- -------------------- ----------------------- --------------
<S> <C> <C> <C>
Aloha Airlines Non-Pilots 150,000 .03 3,045
Pension Trust
Aloha Airlines Pilots 90,000 .02 1,827
Retirement Trust
Arkansas PERS 1,665,000 .36 33,799
Allstate Insurance Company 3,500,000 .76 71,050
Argent Classic Convertible 7,000,000 1.52 142,100
Arbitrage Fund L.P.
Argent Classic 38,000,000 8.26 771,401
Convertible Arbitrage Fund
(Bermuda) L.P.
BNP Arbitrage, Inc. 1,000,000 .22 20,300
The Class IC Company, Ltd. 500,000 .11 10,150
Concordia Retirement Plan 750,000 .16 15,225
of the Lutheran Church -
Missouri Synod
Delaware PERS 1,200,000 .26 24,360
Hawaiian Airlines Pension Plan 20,000 .004 406
for Salaried Employees
Hawaiian Airlines Retirement 135,000 .03 2,740
Plan for Pilots
Hawaiian Airlines Employees 85,000 .02 1,725
Pension Plan-IAM
ICI American Holdings Trust 500,000 .11 10,150
Kapiolani Medical Center 200,000 .04 4,060
Lipper Convertibles, L.P. 18,000,000 3.91 365,400
Lipper Offshore 7,000,000 1.52 142,100
Convertibles, L.P.
McMahan Securities Co., L.P. 10,000 .002 203
Nalco Chemical Corp. Retirement 260,000 .05 5,278
PRIM Board 2,200,000 .48 44,660
SBC Warburg Dillon Read Inc. 8,000,000 1.74 162,400
Societe Generale Securities Corp. 2,750,000 .60 55,825
Starvest Discretionary Portfolio 500,000 .11 10,150
State of Oregon/SAIF Corporation 4,000,000 .87 81,200
State of Oregon Equity 6,000,000 1.30 121,800
Swiss Bank Corporation 5,000,000 1.08 101,500
London Branch
The TCW Group, Inc. 7,180,000 1.56 145,754
TQA Vantage Fund, Ltd. 4,000,000 .87 81,200
Zeneca Holdings Trust 500,000 .11 10,150
Total: 120,195,000 26.106 2,439,958
</TABLE>
______________________________
(1) The information set forth herein is as of June 16, 1998 and will be updated
as required.
(2) Assumes conversion of the full amount of Debentures held by such holder at
the initial conversion price of $49.261 per share of Common Stock. Under
the terms of the Indenture, fractional shares will not be issued upon
conversion of the Debentures; cash will be paid in lieu of any fractional
shares.
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None of the Selling Securityholders has, or within the past three
years has had, any position, office or other material relationship with the
Company or any of their predecessors or affiliates. Because the Selling
Securityholders may, pursuant to this Prospectus, offer all or some portion of
the Registered Securities, no estimate can be given as to the amount of the
Registered Securities that will be held by the Selling Securityholders upon
termination of any such sales. In addition, the Selling Securityholders
identified above may have sold, transferred or otherwise disposed of all or a
portion of their Registered Securities since the date on which they provided the
information regarding their Registered Securities, in transactions exempt from
the registration requirements of the Securities Act.
LEGAL MATTERS
The validity of the Registered Securities will be passed upon for the
Company by Harkins Cunningham, or other counsel satisfactory to the Company,
which counsel may be an officer of the Company. Certain legal matters in
connection with offerings made by this Prospectus may be passed upon for any
underwriters, agents or dealers by counsel named in a Prospectus Supplement.
EXPERTS
The financial statements of the Company as of December 31, 1997 and
1996, and for each of the years in the three-year period ended December 31, 1997
in the Company's annual report on Form 10-K have been incorporated by reference
herein in reliance on the report of KPMG Peat Marwick LLP, independent certified
public accountants, and upon the authority of said firm as experts in accounting
and auditing.
52
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LOGO
53
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the expenses of the sale and distribution of the
securities being registered, all of which will be paid by the registrant. Other
than the SEC registration fee and the Nasdaq listing fee, all of such expenses
are estimated.
SEC Registration fee $135,700
Nasdaq listing fee $ 17,500
Printing expenses $ 5,000
Legal fees and expenses $ 80,000
Accounting fees and expenses $ 15,000
Total $253,200
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Pennsylvania Business Corporation Law, as amended, authorizes the
registrant to grant indemnities in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act.
As permitted by Pennsylvania law, Article 13 of Centocor's by-laws
provides for the indemnification of each director and officer with regard to any
actual or alleged act or omission made in his or her official capacity, provided
he or she met the standard of conduct of (i) acting in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the Company and, (ii) with respect to any criminal proceeding,
having no reasonable cause to believe his or her conduct was unlawful. Article
13 also permits the Company to indemnify an employee or agent of the Company for
money damages and expenses relating to his or her service on the behalf of the
Company, provided he or she met the applicable standards of conduct set forth in
the by-laws.
The Board of Directors of Centocor has determined to provide liability
insurance for each director and officer for certain losses arising from claims
or charges made against him or her while acting in his or her capacity as a
director or officer of Centocor.
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<PAGE>
ITEM 16. EXHIBITS
A. Exhibits
Exhibit
Number Description
- ------- -----------
4.1 Indenture by and between the Company and The United States Trust
Company of New York, as Trustee, dated as of February 20, 1998
(incorporated by reference to Exhibit 4.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1998 ("March 31, 1998 10-Q")).
4.2 Form of 4 3/4% Convertible Subordinated Debenture Due 2005
(included in Exhibit 4.1 hereto).
4.3 Specimen Certificate for Common Stock (incorporated by reference
to Exhibit 4 to Amendment No. 1 to Form S-1 Registration
Statement, File No. 2-80098).
4.4 Rights Agreement between Centocor, Inc. and the First National
Bank of Boston as Rights Agent dated September 26, 1988
(incorporated by reference to Exhibit 4 to Registrant's Current
Report on Form 8-K dated September 26, 1988).
5.1 Opinion of Harkins Cunningham as to the validity of Securities
being registered.*
10 Registration Rights Agreement, dated as of February 13, 1998
(incorporated by reference to Exhibit 10.1 to the March 31, 1998
10-Q).
12 Ratio of Earnings to Fixed Charges.*
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Harkins Cunningham (included in Exhibit 5.1).*
24 Powers of Attorney.*
25 Statement of Eligibility of Trustee on Form T-1.*
- ----------------
*Previously filed.
B. Financial Statements & Schedules
All schedules for which provision is made in Regulation S-X of the
Securities and Exchange Commission either are not required under the related
instructions or the information required to be included therein has been
included in the financial statements of the Company.
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<PAGE>
ITEM 17. UNDERTAKINGS
1. The undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
2. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
3. The undersigned registrant hereby undertakes:
a. To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement (i) to
include any prospectus required by section 10(a)(3) of the Securities Act of
1933; (ii) to reflect in the prospectus any facts or events arising after the
effective date of this registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and (iii) to include any material
information with respect to the plan of distribution not previously disclosed in
this registration statement or any material change to such information in this
registration statement; provided, however, that paragraphs (3)(a)(i) and
(3)(a)(ii) do not apply if the registration statement is on Form S-3, Form S-8
or Form F-3, and the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the registrant pursuant to section 13 or section
15(d) of the Securities Exchange Act of 1934 that are incorporated by reference
in this registration statement.
b. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
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<PAGE>
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
c. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Malvern, Pennsylvania, on this 18th day of June, 1998.
CENTOCOR, INC.
By: /s/ David P. Holveck
-------------------------
David P. Holveck
Chief Executive Officer
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<PAGE>
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Hubert J.P. Schoemaker Director, Chairman of the June 18, 1998
- -------------------------- Board
Hubert J.P. Schoemaker
/s/ David P. Holveck Chief Executive June 18, 1998
- -------------------- Officer and
David P. Holveck Director (principal
executive officer)
/s/ Dominic J. Caruso Senior Vice President June 18, 1998
- --------------------- and Chief Financial
Dominic J. Caruso Officer (principal
financial and
accounting officer)
/s/ Anthony B. Evnin Director June 18, 1998
- --------------------
Anthony B. Evnin
/s/ William F. Hamilton Director June 18, 1998
- -----------------------
William F. Hamilton
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<PAGE>
/s/ Antonie T. Knoppers Director June 18, 1998
- -----------------------
Antonie T. Knoppers
/s/ Ronald A. Matricaria Director June 18, 1998
- ------------------------
Ronald A. Matricaria
/s/ Lawrence Steinman Director June 18, 1998
- ---------------------
Lawrence Steinman
/s/ Richard D. Spizzirri Director June 18, 1998
- ------------------------
Richard D. Spizzirri
/s/ Jean C. Tempel Director June 18, 1998
- ------------------
Jean C. Tempel
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Exhibit
Number Description
- ------- -----------
<S> <C>
4.1 Indenture by and between the Company and The United States Trust
Company of New York, as Trustee, dated as of February 20, 1998
(incorporated by reference to Exhibit 4.1 to the March 31, 1998 10-Q).
4.2 Form of 4 3/4% Convertible Subordinated Debenture Due 2005 (included
in Exhibit 4.1 hereto).
4.3 Specimen Certificate for Common Stock (incorporated by reference to
Exhibit 4 to Amendment No. 1 to Form S-1 Registration Statement,
File No. 2-80089).
4.4 Rights Agreement between Centocor, Inc. and the First National Bank
of Boston as Rights Agent dated September 26, 1988 (incorporated by
reference to Exhibit 4 to Registrant's Current Report on Form 8-K
dated September 26, 1988).
5.1 Opinion of Harkins Cunningham as to the validity of
Securities being registered.*
10 Registration Rights Agreement, dated as of February 13, 1998
(incorporated by reference to Exhibit 10.1 to the March 31, 1998 10-
Q).
12 Ratio of Earnings to Fixed Charges.*
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Harkins Cunningham (included in Exhibit 5.1).*
24 Powers of Attorney.*
25 Statement of Eligibility of Trustee on Form T-1.*
</TABLE>
- ---------------
*Previously filed.
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<PAGE>
Exhibit 23.1
------------
Consent of Independent Auditors
-------------------------------
The Board of Directors
Centocor, Inc.:
We consent to the use of our report incorporated herein by reference and to the
reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
June 18, 1998
