Item 1. Business -----------------
GENERAL
Centocor, Inc. ("Centocor" or the "Company") is a biopharmaceutical company specializing in the development and commercialization of monoclonal antibody-based products to meet critical human health care needs. Additionally, the Company performs research activities in the field of small peptide molecule- based pharmaceutical products. See "Business - Research and Development." The Company focuses on four major disease areas - infectious, cardiovascular and autoimmune diseases and cancer. To date, the Company's in-vitro diagnostic products have generated substantially all of its product sales.
In December 1994, the U.S. Food and Drug Administration ("FDA") granted Centocor a product license for ReoPro(Trademark), a product indicated for the reduction of acute ischemic cardiac complications in patients undergoing angioplasty procedures who are at high risk for abrupt artery closure, and the Committee for Proprietary Medicinal Products ("CPMP") of the European Union ("EU") issued a positive opinion regarding the granting of marketing authorization in 11 of the 12 member states for ReoPro(Trademark). Also in December 1994, the Paul Ehrlich Institute, the German regulatory body for vaccines and antibodies, granted Centocor marketing authorization for the use of Panorex(Registermark), an adjuvant therapy in the treatment of post-operative colorectal cancer, in Germany. Centocor commenced commercial sales of ReoPro(Trademark) in January 1995 and Panorex(Registermark) in February 1995.
In addition to conducting further clinical trials of ReoPro(Trademark) and Panorex(Registermark) in an effort to expand their authorized use, the Company is developing CenTNF(Trademark), a therapeutic product targeted for the treatment of rheumatoid arthritis and inflammatory bowel diseases such as Crohn's disease. Other therapeutic products are also under development. ReoPro(Trademark) is being developed by Centocor for Centocor Partners III, L.P. ("CPIII"). See "Business - Research and Development." For a further discussion of ReoPro(Trademark), Panorex(Registermark), CenTNF(Trademark) and other therapeutic products, see "Products - Pharmaceutical Products."
The Company's in-vivo diagnostic products include Myoscint(Registermark), a cardiac imaging agent, and other contrast agents under development for use in in-vivo diagnostic imaging procedures. Centocor has received FDA approval to market two of its in-vitro diagnostic products: CA 125(Trademark) II, a second generation assay used as an aid in the detection of residual epithelial ovarian cancer, and CAPTIA(Trademark) Syphilis-G, an infectious disease serology test used as a primary screening method for the detection of Treponema pallidum antibodies in human serum or plasma. The Company has also developed a number of other in-vitro diagnostic products. For a further discussion of CA 125(Trademark) II, CAPTIA(Trademark) Syphilis G and other diagnostic products, see "Products - In-Vitro Diagnostic Products."
In the diagnostics area, Centocor has maintained distribution agreements with companies having established positions and distribution networks in applicable market segments. Since 1992, the Company has implemented a pharmaceutical business plan employing a collaborative strategy utilizing, among other things, alliances with established pharmaceutical companies. The
Company expects to continue to pursue its current strategy in both the diagnostic and pharmaceutical areas. See Part II Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Part II Item 8 "Financial Statements and Supplementary Data."
At March 1, 1995, Centocor had approximately 550 full-time employees. To complement its own expertise in various fields, Centocor utilizes scientific consultants and advisors, many of whom have formal consulting agreements with Centocor.
Centocor was incorporated in Pennsylvania in 1979 and maintains its principal executive offices at 200 Great Valley Parkway, Malvern, Pennsylvania 19355. Its telephone number is (610) 651-6000. The Company also maintains facilities in Leiden, The Netherlands, and Surrey, the United Kingdom, and offices in Tokyo, Japan and Munich, Germany.
TECHNOLOGY AND KNOW-HOW
Antibodies are proteins produced by white blood cells from the immune system in response to the presence of specific antigens. An antigen is any substance which activates this immune response. Antibodies recognize the shape of particular compositions on the surface of antigens and bind specifically with only those antigens having such surface compositions.
Prior to the development of monoclonal antibody technology in the 1970s, it was not practicable to separate and grow white blood cells producing a single type of antibody. Monoclonal antibody technology involves the creation of a hybrid cell, or hybridoma, by combining a white blood cell which produces a specific antibody with a cell which reproduces indefinitely. The resulting hybridoma produces a specific antibody continually. Antibodies produced by such hybridomas are chemically and structurally homogeneous and hence are monoclonal. Centocor believes that there is a significant potential for using monoclonal antibodies to develop human health care products.
While the specificity of monoclonal antibodies makes them attractive candidates for pharmaceutical product development, antibody-based products generally must be administered by injection, usually in a hospital setting, and are therefore used principally to treat acute diseases. Centocor believes that small peptide molecule drugs may potentially be formulated for convenient administration, including oral delivery, thereby affording an opportunity to treat not only acute diseases, but the larger patient population with chronic disease indications as well. The Company is conducting research activities in the field of small peptide molecule-based pharmaceutical products. See "Business - Research and Development."
PRODUCTS
Pharmaceutical Products
The Company is selling therapeutic products for use in the treatment of specific types of cardiovascular disease and cancer, and developing therapeutic products for use in the treatment of specific types of infectious and autoimmune diseases.
Cardiovascular Therapy. In December 1994, the FDA granted Centocor a ---------------------- product license for ReoPro(Trademark), a product indicated for the reduction of acute ischemic cardiac complications in patients undergoing angioplasty procedures who are at high risk for abrupt artery closure, and the CPMP issued a positive opinion regarding the granting of marketing authorization in 11 of the 12 member states for ReoPro(Trademark). Belgium, the only dissenting country in the EU, will require additional clinical trial results. For products recommended for approval by the CPMP prior to January 1, 1995, each EU member state issues its own national licenses. In addition, some countries require approvals for pricing and reimbursement. ReoPro(Trademark) has been approved for sale in Sweden, Norway, The U.K., and The Netherlands. The Company commenced commercial sales of ReoPro(Trademark) in January 1995. During the second quarter of 1993, Eli Lilly and Company ("Lilly") exercised its option, under a Sales and Distribution Agreement between Lilly and the Company dated July 15, 1992, to become the exclusive worldwide distributor of ReoPro(Trademark), and the Company and Lilly amended the Sales and Distribution Agreement to reflect such event. See "Business - Marketing and Sales." Pursuant to that amendment, Lilly has assisted the Company and will continue to assist the Company in the regulatory filings and continuing development of ReoPro(Trademark) for additional clinical indications.
Cancer Therapy. In December 1994, the Paul Ehrlich Institute, the -------------- German regulatory body for vaccines and antibodies, granted the Company marketing authorization for the use of Panorex(Registermark), an adjuvant therapy in the treatment of post-operative colorectal cancer, in Germany. Applications for marketing authorization have also been submitted in Austria, Switzerland, Finland and Sweden. The Company commenced commercial sales of Panorex(Registermark) in February 1995. During 1993, the Company and Wellcome plc ("Wellcome") entered into an alliance agreement for the development and marketing of certain of the Company's monoclonal antibody-based cancer therapeutic products, including Panorex(Registermark). See "Business - Marketing and Sales." Additional clinical studies with Panorex(Registermark) will be conducted by Wellcome and are expected to begin in Europe, Japan and the United States in 1995.
Autoimmune Disease Therapy. The Company is currently developing -------------------------- CenTNF(Trademark), a product targeted for the treatment of rheumatoid arthritis and inflammatory bowel diseases such as Crohn's disease. The Company is conducting multiple Phase II clinical trials of CenTNF(Trademark) in rheumatoid arthritis and Crohn's disease. The Company has entered into an agreement with Tanabe Seiyaku Co., Ltd. under which Tanabe will undertake the human clinical testing and distribution of CenTNF(Trademark) in Japan.
Infectious Disease Therapy. HA-1A(Registermark) -------------------------- ("Centoxin(Trademark)") is a product intended for the treatment of patients with severe sepsis. The Company filed product license applications in the United States, Europe, and other countries seeking approval to market HA-1A(Registermark). Regulatory approvals to market HA-1A(Registermark) were received in several European countries. In April 1992, the FDA advised the Company that there was insufficient evidence of efficacy for approval of HA-1A(Registermark] at that time. In June 1992, the Company initiated a second randomized, double-blinded, placebo-controlled, Phase III U.S. clinical trial of HA-1A(Registermark) in the treatment of patients with Gram-negative bacteremia and septic shock (the "CHESS trial"). The Company terminated this trial in 1993 after concluding that there was no reduction in the mortality rate among HA- 1A(Registermark) treated patients who did have Gram-negative bacteremia in comparison with placebo-treated patients in the same group. The Company and its principal distributor of HA-1A(Registermark), Lilly, also voluntarily suspended sales and conducted a recall of the drug in Europe and elsewhere where
the drug is authorized for sale. The regulatory approvals to market HA- 1A(Registermark) currently remain in effect pending the results of further clinical trials. The Company is currently conducting a randomized, double- blinded, placebo-controlled Phase III European clinical trial of the efficacy of HA-1A(Registermark) in the treatment of patients with fulminant meningococcemia. There can be no assurance that such trial will be successful or that any further trials of HA-1A(Registermark) will be initiated or will be successful.
The Company is supplying HA-1A(Registermark) on a limited compassionate-use basis in certain countries in Europe. There can be no assurance that any commercial sales of HA-1A(Registermark) will resume in Europe.
In-Vivo Diagnostic Products
The Company has developed techniques for modifying monoclonal antibodies so that they may be coupled with radioactive isotopes and used as contrast agents in diagnostic imaging procedures. After injection, antibodies labelled with a radioactive isotope travel to the disease site, allowing the site to be visualized or "imaged" with nuclear medicine equipment in a procedure similar to an X-ray. The Company's focus in this area is primarily on developing imaging agents for cardiovascular disease.
The Company has received marketing approvals for Myoscint(Registermark), a cardiac imaging agent, in several European countries. A product license application is under review in Japan. A United States product license application for Myoscint(Registermark) is expected to be submitted to the FDA in 1995. Revenues from the sale of Myoscint(Registermark) in Europe have not been significant. There can be no assurance that Myoscint(Registermark) will be approved by the FDA or that sales, if any, in the United States will be significant.
In-Vitro Diagnostic Products
In-vitro diagnostic products are used to test patient blood samples outside the body to detect or monitor disease. In this area, the Company has focused principally on developing cancer diagnostic assays, and other in-vitro diagnostic products for infectious disease, certain of which it now manufactures and sells, as follows:
CA 125(Trademark) II Ovarian Cancer Test. CA 125(Trademark) II, a ---------------------------------------- second generation assay which aids in the detection of residual epithelial ovarian cancer following first-line therapy, is sold for clinical use in the United States, certain European countries and Japan.
CAPTIA(Trademark) Syphilis G. In 1995, the Company received ----------------------------- clearance from the FDA to market CAPTIA(Trademark) Syphilis G, an infectious disease serology test for use as a primary screening method for the detection of Treponema pallidum antibodies in human serum or plasma, as performed in blood bank or plasma center testing laboratories. CAPTIA(Trademark) Syphilis G is offered for sale in the United States and certain European and South American countries.
CA 19-9(Trademark) Pancreatic Cancer Test. CA 19-9(Trademark), which ----------------------------------------- aids in the detection of pancreatic cancer, is sold for clinical use in certain European countries and Japan.
CA 15-3(Registermark) Breast Cancer Test. CA 15-3(Registermark), ---------------------------------------- which aids in the monitoring of breast cancer, is sold for clinical use in certain European countries and Japan.
CA 72-4(Registermark) Gastric Cancer Test. CA 72-4(Registermark), ----------------------------------------- which aids in the monitoring of gastrointestinal cancer, is sold for clinical use in certain European countries and Japan.
P-glycoCHEK(Registermark) Multidrug Resistance Test. --------------------------------------------------- P-glycoCHEK(Registermark), which detects a cellular protein associated with resistance to chemotherapeutic drugs, is sold for investigational use in certain European countries and Japan.
CYFRA(Trademark) 21-1 Non-Small Cell Lung Cancer Test. ----------------------------------------------------- CYFRA(Trademark) 21-1, which aids in the monitoring of non-small cell lung cancer, is sold for clinical use in certain European countries and Japan. CYFRA(Trademark) is a trademark of Boehringer Mannheim GmbH.
MARKETING AND SALES
In the in-vitro and in-vivo diagnostic areas, Centocor has distribution agreements with companies having established positions and distribution networks in applicable market segments. During 1992, the Company adopted a similar collaborative strategy in its pharmaceutical business. In conjunction with such marketing strategy, the Company eliminated its European pharmaceutical sales force in 1992 and eliminated its United States pharmaceutical sales force in 1993.
In July 1992, the Company and Lilly entered into a Sales and Distribution Agreement("the Agreement"). During the second quarter of 1993, Lilly exercised its option under the Agreement to become the exclusive worldwide distributor of ReoPro(Trademark) and the Company and Lilly amended the Agreement to reflect such event. Under that agreement, the Company is principally responsible for developing and manufacturing HA-1A(Registermark) and ReoPro(Trademark) and for securing regulatory approvals. Lilly is principally responsible for the marketing, selling and distribution of ReoPro(Trademark) and HA-1A(Registermark), if sales of HA-1A(Registermark) are resumed. The Agreement provides that the Company sells the product(s) to Lilly for Lilly's further sale to the end market. See Part II Item 8 "Financial Statements and Supplementary Data."
In November 1993, the Company and Wellcome entered into an alliance agreement for the development and marketing of certain of the Company's monoclonal antibody-based cancer therapeutic products, including Panorex(Registermark). In November 1994, the Company and Wellcome amended their alliance agreement and Wellcome became the exclusive worldwide distributor for Panorex(Registermark). Under that agreement, Wellcome is responsible for the continuing clinical development of Panorex(Registermark) and other potential drugs and for the marketing, sale and distribution of any approved drugs worldwide. The Company is principally responsible for manufacturing Panorex(Registermark) and securing regulatory approvals. See Part II Item 8 "Financial Statements and Supplementary Data."
During 1994, approximately 60 percent of the Company's total product sales were to four distributors: Abbott Laboratories, Boehringer Mannheim GmbH, CIS bio International and Toray-Fuji Bionics, Inc. During 1993, approximately 40 percent of the Company's total product sales were to three distributors: Boehringer Mannheim GmbH, CIS bio International and Toray-
Fuji Bionics, Inc. Additionally, prior to June 30, 1991, sales of in-vitro diagnostic products included investigational-use-only sales in the United States of certain products which have not been approved by the FDA. Effective June 30, 1991, the Company ceased sales in the United States of all diagnostic products which had not been approved by the FDA in order to remain in compliance with an earlier Consent Decree and applicable FDA regulations.
Certain financial information by geographic area as well as major customer information is set forth in Part II Item 8 "Financial Statements and Supplementary Data."
The Company has no significant product backlog.
MANUFACTURING
The Company currently maintains a biopharmaceutical manufacturing facility in Leiden, The Netherlands, for the production of monoclonal antibody- based products using a proprietary cell-culture system. See Item 2
Item 2. Properties -------------------
The Company owns four buildings in Malvern, Pennsylvania, and leases space in other buildings at this location. These buildings contain Centocor's corporate offices, research and development laboratories, marketing offices, and certain manufacturing facilities. Space is available in these buildings for future expansion. The acquisition costs of certain of these buildings were financed in part by mortgage loans which are still outstanding.
The Company owns a biopharmaceutical manufacturing facility in Leiden, The Netherlands, and also leases research and development laboratories and office space at such location. A portion of the construction cost of the Leiden facility was financed by a mortgage loan which is still outstanding. See Part II Item 8 "Financial Statements and Supplementary Data." The Company also leases an in-vitro diagnostic manufacturing facility in Surrey, the United Kingdom.
At the Company's present level of operations, portions of the Company's facilities and equipment in Malvern are idle. The Company continually evaluates the future needs for its facilities and equipment.
Item 3.
Item 3. Legal Proceedings --------------------------
On December 23, 1993, a purported class action captioned Peter Cordaro v. Hubert J.P. Schoemaker, Stelios Papadopoulos, Marc Feldmann, David Golden, Centocor, Inc., and Tocor II, Inc. was filed in the Court of Common Pleas of the Commonwealth of Pennsylvania, in and for Chester County. The complaint alleges that the defendants breached their fiduciary duties to Tocor II Unitholders by, among other things, making an offer to exchange shares of the Company's Common Stock for Tocor II Units, recommending acceptance of the exchange offer, and failing to maximize shareholder value. The complaint sought, among other relief, an injunction against consummation of the exchange offer, the establishment of a "truly independent" special committee and the retention of a financial advisor to consider the exchange offer, and an award of damages (including rescissionary damages), costs and plaintiff's counsel fees. No injunction was, in fact, sought, and the exchange offer was made and consummated. The defendants filed a motion to dismiss the complaint on the ground that the Pennsylvania court should not exercise jurisdiction over a matter relating to the internal affairs of a foreign corporation. On February 27, 1995, this motion was denied without prejudice to its subsequent renewal. The Company believes that the allegations set forth in the complaint are without merit and intends to vigorously defend the suit.
In January 1993, following suspension of the Company's CHESS trial of Centoxin(Trademark) ("HA-1A(Registermark)"), purported security holders of the Company and/or Tocor II filed complaints in the United States District Court for the Eastern District of Pennsylvania against the Company, Tocor II, and certain present and former directors and/or officers of the Company and/or Tocor II, and Lilly. The cases were consolidated pursuant to an order, and a Consolidated Class Action Complaint captioned In Re Centocor Securities Litigation II, No. 93-CV-0236 was filed in May
1993, based on alleged violations of securities laws and alleged breaches of common law duties. All claims against all defendants, except the Company and two of its officers/directors and a former director, were voluntarily dismissed when that Complaint was filed. In November 1994, a Corrected Consolidated Amended Class Action complaint was filed in which a number of the original defendants were dropped ("the Complaint"). The Complaint alleges that defendants knowingly or recklessly omitted certain material facts and made false and misleading statements of material facts about Centoxin(Trademark) and the CHESS trial in violation of Sections 10(b) and 20 of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and also alleges violations of the common law of negligent misrepresentation. The action has been conditionally certified as a class action on behalf of persons who purchased common stock and convertible subordinated debentures of the Company from April 21, 1992 through January 15, 1993 and who were allegedly damaged thereby. The Complaint seeks compensatory damages in unspecified amounts, counsel fees, interest, costs of suit, and such other relief that the court deems appropriate. Defendants have answered the Complaint and denied all material allegations therein. Discovery is in progress. The Company believes that the allegations set forth in the Complaint are without merit and intends to vigorously defend the suit.
On April 21, 1994, a complaint was filed against the Company in the United States District Court for the Northern District of California by Genentech, Inc., charging infringement of a patent held by Genentech. The complaint asked that the alleged infringement be enjoined preliminarily and permanently and sought damages and counsel fees in an unspecified amount. While the complaint did not identify any allegedly infringing product or conduct, it purportedly asserted claims regarding ReoPro(Trademark) and other of the Company's products. The Company filed a motion to dismiss for failure to state a claim, for summary judgment, or, in the alternative, for a more definite statement. In December 1994, before that motion was argued, the claims were settled through the grant of a license by Genentech to the Company relating to ReoPro(Trademark). The complaint was dismissed in January 1995.
In May 1993, the Company was served with a complaint filed earlier in the United States District Court for the Southern District of California at San Diego. The plaintiff, who allegedly had purchased shares of Corvas International, Inc. ("Corvas") in its initial public offering on January 30, 1992, brought suit against Corvas and certain of its directors, the Company, and one of the Company's directors and a former director (the "Centocor defendants"), on behalf of similarly situated investors. The complaint alleges the defendants violated the federal securities laws by disclosing to Corvas' investors that Centocor and Corvas had entered into a "strategic alliance" to develop one of Corvas' products, but failing to disclose that the Company allegedly would not be able to perform on that agreement because of events relating to Centoxin(Trademark) (HA-1A(Registermark)). The Complaint sought to proceed as a class action on behalf of all those who purchased Corvas common stock during the period from January 30, 1992 through January 15, 1993. A motion to dismiss the complaint in its entirety as to the Centocor defendants was filed in early June 1993. Corvas and its directors had also filed a motion to dismiss. In September 1993, the Court dismissed a number of plaintiff's claims including claims relating to the period after April 14, 1992 and, in effect, the claim brought against the Company under Section 10(b) of the Securities Exchange Act of 1934. As to the remaining claims, the Court conditionally certified a class of all purchasers of Corvas common stock during the period January 30, 1992 through April 14, 1992. An agreement has been reached by all parties which, if approved by the Court, would lead to the settlement and dismissal of this action. The Company would contribute to the
settlement 600,000 shares of the stock of Corvas which it holds, which, at December 31, 1994, had a quoted market price of $2.125 per share. In the fourth quarter of 1994, the Company recorded a charge to earnings of $1,275,000 reflecting the proposed terms of the settlement.
In October 1992, the Company was served with a complaint filed by the Velos Group, a Maryland partnership ("Velos"), in the United States District Court for the District of Maryland. The complaint alleges, principally, that the Company breached certain provisions of a license agreement between Velos and the Company pursuant to which the Company has exclusive rights to U.S. Patent No. 5,057,598, which includes claims relating to monoclonal antibodies used in treating manifestations of Gram-negative bacterial infections. The complaint seeks declaratory relief, monetary relief in excess of $100,000,000, and requests that the Company place in escrow one-half of the amounts received by the Company pursuant to its agreements with Lilly. The complaint does not seek to terminate or rescind any of the Company's rights under the license agreement. The Company answered the complaint and asserted affirmative defenses and counterclaims on January 7, 1993, but the counterclaims and certain affirmative defenses were dismissed with leave to replead on June 22, 1993. On July 28, 1993, the Court permitted plaintiff to file an amended complaint that updated some of the claims in the original complaint but otherwise reasserted the basic factual allegations and, with one minor exception, relied upon the same legal theories. On August 27, 1993, the Company filed its Answer, Affirmative Defenses and Counterclaim for Damages and Equitable Relief, to the amended complaint (the "Amended Answer"). In the Amended Answer, the Company again denied all of the allegations made by Velos and stated certain affirmative defenses and counterclaims against Velos with respect to the license agreement, based on theories of (i) failure of consideration, (ii) fraud in the inducement, and (iii) unilateral mistake as to facts, which mistake was induced by the fraudulent misrepresentation of Velos. On September 22, 1993, plaintiff moved to dismiss the Company's counterclaims and to strike certain of the Company's affirmative defenses. On February 6, 1995, the motion was denied. Discovery has now been resumed and trial is fixed for January 1996. The Company believes that the allegations of Velos are without merit and intends to vigorously defend the suit.
The Company has been informed by PaineWebber Development Corporation ("PaineWebber"), which acted as the sales agent for the limited partnership interests in CPII and CPIII and which also manages partnerships which hold limited partnership interests in CPII and CPIII, that it has retained counsel to represent the partnerships which it manages. Counsel are investigating possible claims which the limited partners may have for additional royalties in connection with the funds received by Centocor in the transactions with Lilly in July 1992 and June 1993 relating to HA-1A(Registermark) and ReoPro(Trademark). PaineWebber has stated that the fact that counsel have been retained for these purposes does not constitute a representation that either partnership has a claim or that any claim will be brought.
While it is not possible to predict accurately or determine the eventual outcome of these matters, the Company believes that the foregoing proceedings and investigations will not have a material adverse effect on the financial position of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders ------------------------------------------------------------
Not applicable.
Part II
Item 5.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters ----------------------------------------------------------------------------- Centocor's Common Stock is traded on the Nasdaq National Market under the symbol CNTO. Set forth below for the indicated periods are the high and low sale prices for Centocor's Common Stock:
The number of shareholders of record on March 1, 1995 was 5,015.
No dividends have been paid on the Common Stock to date, and the Company does not expect to pay cash dividends in the foreseeable future.
Item 6.
Item 6. Selected Financial Data -------------------------------- (in thousands except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
No dividends have been declared or paid during any of the periods presented.
*Costs and expenses include the following: (a) charges for acquired research and development of $36,966, $70,147 and $115,475 in 1994, 1991 and 1990, respectively, (b) charges of $3,500, $64,877 and $3,518 in 1993, 1992 and 1990, respectively, related to HA-1A inventory, (c) restructuring charges of $9,387, $15,266 and $3,548 in 1993, 1992 and 1990, respectively, (d) a royalty buyout of $17,098 in 1994, and (e) a write-down of facilities and equipment of $7,870 in 1994.
**Other income (expenses) include charges of $1,275 and $11,245 in 1994 and 1992, respectively, related to the settlement of certain litigation and gains of $12,976 in 1990 from the sale of certain investments.
***Cash and investments at December 31, 1994 included equity investments of $2,919. Additionally, the Company maintained $27,000 of investments at certain banks as collateral for certain debt outstanding at December 31, 1994.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results ------- ----------------------------------------------------------------------- of Operations -------------
Financial Condition
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating expenses attempting to develop pharmaceutical products. The Company's product sales through 1994 were almost exclusively generated by in-vitro diagnostic products. Consequently, excluding the impact of significant contract revenues through collaborative alliances with pharmaceutical companies and financing activities, the Company experienced substantial net cash outflows through 1994.
The Company's future financial condition is highly dependent upon the reduction of the Company's rate of net cash outflows and, ultimately, upon the achievement of significant and sustained levels of pharmaceutical product sales. The Company commenced the commercial sale of two pharmaceutical products - ReoPro(Trademark) in January 1995 and Panorex(Registermark) in February 1995. During the year ending December 31, 1995, sales of those two products alone are not expected to generate sufficient revenue to enable the Company to avoid a net cash outflow for the year. Under the Company's collaborative strategy of entering into alliances with established pharmaceutical companies, the Company generally shares sales revenues from products covered by such arrangements with its partners. There can be no assurance that those products, in conjunction with the Company's pharmaceutical product candidates under development and in- vitro diagnostic products, will achieve a level of sales sufficient to generate positive cash flow from operations for the Company, given the current and currently anticipated future scope of the Company's operations. The level of future sales of both diagnostic and pharmaceutical products will be dependent upon several factors including, but not limited to, the timing and extent of future regulatory approvals of the Company's products, approval and commercialization of competitive products and the degree of acceptance of the Company's products in the marketplace. There can be no assurance that FDA or other regulatory approvals expanding the authorized use of ReoPro(Trademark) and Panorex(Registermark) or permitting the commercial sale of any of the Company's product candidates under development will be obtained. Failure to obtain additional timely FDA or other regulatory approvals for the use of ReoPro(Trademark) and Panorex(Registermark) or other product candidates will have a material adverse effect on the Company.
The Company will need to secure significant additional funding in the future from collaborative arrangements with pharmaceutical companies or from the capital markets until significant and sustained levels of pharmaceutical sales are achieved. There can be no assurance that significant additional funding will be available to the Company or that the Company can obtain additional collaborations with established pharmaceutical companies and receive payments for product rights and/or the achievement of milestones under such collaborative agreements. Even if the Company obtains such funding, there can be no assurance that such funding will be sufficient to produce positive cash flows from operations.
At December 31, 1994, the Company had cash, cash equivalents, and investments of $184,507,000 including equity investments of $2,919,000. During the year ended December
31, 1994, the Company had negative cash flows from operations of $64,520,000, including a payment of $17,098,000 representing a royalty buyout relating to ReoPro(Trademark). The Company's total cash flows in 1994 included the receipt of $50,124,000 as a result of an exchange offer and $71,633,000 from the exercise of warrants and options to purchase shares of the Company's Common Stock. The extent and timing of future warrant and option exercises, if any, are primarily dependent upon the market price of the Company's Common Stock and general financial market conditions, as well as the exercise prices and expiration dates of the warrants and options.
At December 31, 1993, the Company had cash, cash equivalents, and investments of $140,028,000, including equity investments of $11,230,000. During the year ended December 31, 1993, the Company had negative cash flows from operations of $42,297,000. The Company's total cash flows in 1993 included $30,000,000 received from Wellcome of which $20,000,000 was received for the purchase of 2,000,000 shares of the Company's Common Stock. Additionally, cash flows in 1993 included the proceeds of $11,900,000 from the sale of the Company's St. Louis facility and the repayment of $5,800,000 of mortgage debt related to that facility.
At December 31, 1992, the Company had cash, cash equivalents, and investments of $163,083,000, including equity investments of $12,924,000. During the year ended December 31, 1992, the Company had negative cash flows from operations of $109,818,000 and acquired $23,309,000 of fixed assets. Cash flows from operations for the year ended December 31, 1992 included $50,000,000 received from Lilly primarily for reimbursement of expenses associated with HA- 1A(Registermark). Additionally, during 1992, the Company expended $12,375,000 to purchase the limited partnership interests in CPII, $8,700,000 to acquire all the outstanding shares of capital stock of Mercia Diagnostics Limited ("Centocor U.K."), a European diagnostics manufacturing and sales company, and $10,000,000 in connection with the settlement of certain class action securities litigation. These cash outflows were partially offset by cash inflows which included the receipt of $50,000,000 from Lilly for the purchase of 2,000,000 shares of the Company's Common Stock and $15,931,000 from borrowings under loan agreements and $17,726,000 from the exercise of warrants and options to purchase shares of the Company's Common Stock.
Agreements covering $19,722,000 of the Company's outstanding debt balances contain certain financial and non-financial covenants, including the maintenance of minimum equity and cash balances and compliance with certain financial ratios. The Company has obtained waivers of certain of such covenants on the condition that it maintain certain investments at the lending bank, which at December 31, 1994 totalled $20,000,000. There can be no assurance that the Company will be able to continue to collateralize such loans and, accordingly, the Company has classified $19,722,000 of debt as short-term. Additionally, $6,897,000 of the Company's short-term debt is secured by investments at the lending bank of $7,000,000. If cash flows continue to be negative, the Company's ability to service its debt may be impaired.
See Item 8
Item 8. Financial Statements and Supplementary Data ---------------------------------------------------
CENTOCOR, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands)
See accompanying Notes to Consolidated Financial Statements.
CENTOCOR, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONT'D.) (In thousands)
See accompanying Notes to Consolidated Financial Statements.
CENTOCOR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
See accompanying Notes to Consolidated Financial Statements.
CENTOCOR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying Notes to Consolidated Financial Statements.
CENTOCOR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands)
See accompanying Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies
Basis of Presentation ---------------------
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries and joint ventures.
Reclassification ----------------
Certain amounts have been reclassified to conform to current year presentation.
Investments -----------
The Company classifies investments with original maturities of three months or less as cash equivalents. Investments with maturities of one year or less are classified as short-term.
Short-term marketable securities are carried at cost, which approximates market value. Long-term debt securities which the Company has the ability and intent to hold until maturity are carried at cost. Long-term marketable equity securities are carried at the lower of cost or market value.
Inventory ---------
Inventory is stated at the lower of cost or market value using the first-in, first-out method for diagnostic product inventories and the average cost method for pharmaceutical product inventories.
Inventories have various expiration dates. Reserves are provided for inventories which are likely to expire prior to sale or are likely to otherwise not be available for sale.
Fixed Assets and Depreciation -----------------------------
Fixed assets are stated at cost. Depreciation is provided using the straight- line method over the estimated useful lives of the assets, which range from 3 to 31 years. Leasehold improvements are amortized over the applicable lease period or their estimated useful lives, whichever is shorter. Maintenance and repairs are charged to expense, and major renewals and improvements are capitalized.
Intangible Assets -----------------
Intangible assets are stated at cost, net of accumulated amortization. Amortization is provided using the straight-line method over the estimated useful lives of the assets, generally 10 to 20 years. Intangible assets at December 31, 1994 and 1993 were $9,653,000 and $9,364,000, respectively, net of accumulated amortization of $4,229,000 and $3,666,000 at December 31, 1994 and 1993, respectively.
Notes to Consolidated Financial Statements
Revenue Recognition -------------------
For contracts under which the Company is reimbursed for expenses, revenue is recognized as the related expenses are incurred. Non-refundable fees or milestone payments in connection with research and development or commercialization agreements are recognized when they are earned in accordance with the applicable performance requirements and contractual terms. Payments received which are related to future performance are deferred and recognized as revenue over the specified future performance periods.
Sales revenues are recognized at the time the goods are shipped or when title to the goods passes to the buyer.
Income Taxes ------------
The Company has not recorded any deferred tax benefits since there can be no assurance as to their future realizability.
Per Share Data --------------
Per share data are calculated using the weighted average number of outstanding shares of Common Stock. Common Stock issuable upon the exercise of stock options or warrants and upon the vesting of restricted stock awards are included in the per share calculations only to the extent their inclusion would have an aggregate dilutive effect. Common Stock issuable upon conversion of convertible debt securities are included only in the fully diluted per share calculations to the extent their inclusion would have a dilutive effect.
Foreign Currency Translation ----------------------------
Assets and liabilities of subsidiaries denominated in foreign currencies are translated at rates in effect at the appropriate year-end. The revenues and expenses of such subsidiaries are translated at average rates for the period of operation. The differences resulting from such translation as compared to the equity of such subsidiaries translated at historical rates are included in cumulative foreign currency translation adjustments, a separate component of shareholders' equity.
Note 2 Commitments and Contingencies
Liquidity and Capital Resources -------------------------------
The Company has incurred significant operating expenses attempting to develop pharmaceutical products. The Company's product sales through 1994 were almost exclusively generated by in-vitro diagnostic products. Consequently, excluding the impact of significant contract revenues through collaborative alliances with pharmaceutical companies and financing activities, the Company experienced substantial net cash outflows through 1994.
Notes to Consolidated Financial Statements
The Company's future financial condition is highly dependent upon the reduction of the Company's rate of net cash outflows and, ultimately, upon the achievement of significant and sustained levels of pharmaceutical product sales. The Company commenced the commercial sale of two pharmaceutical products - ReoPro(Trademark) in January 1995 and Panorex(Registermark) in February 1995. During the year ending December 31, 1995, sales of those two products alone are not expected to generate sufficient revenue to enable the Company to avoid a net cash outflow for the year. Under the Company's collaborative strategy of entering into alliances with established pharmaceutical companies, the Company generally shares sales revenues from products covered by such arrangements with its partners. There can be no assurance that those products, in conjunction with the Company's pharmaceutical product candidates under development and in- vitro diagnostic products, will achieve a level of sales sufficient to generate positive cash flow from operations for the Company, given the current and currently anticipated future scope of the Company's operations. The level of future sales of both diagnostic and pharmaceutical products will be dependent upon several factors including, but not limited to, the timing and extent of future regulatory approvals of the Company's products, approval and commercialization of competitive products and the degree of acceptance of the Company's products in the marketplace. There can be no assurance that FDA or other regulatory approvals expanding the authorized use of ReoPro(Trademark) and Panorex(Registermark) or permitting the commercial sale of any of the Company's product candidates under development will be obtained. Failure to obtain additional timely FDA or other regulatory approvals for the use of ReoPro(Trademark) and Panorex(Registermark) or other product candidates will have a material adverse effect on the Company.
The Company will need to secure significant additional funding in the future from collaborative arrangements with pharmaceutical companies or from the capital markets until significant and sustained levels of pharmaceutical sales are achieved. There can be no assurance that significant additional funding will be available to the Company or that the Company can obtain additional collaborations with established pharmaceutical companies and receive payments for product rights and/or the achievement of milestones under such collaborative agreements. Even if the Company obtains such funding, there can be no assurance that such funding will be sufficient to produce positive cash flows from operations.
Legal Proceedings -----------------
On December 23, 1993, a purported class action captioned Peter Cordaro v. Hubert J.P. Schoemaker, Stelios Papadopoulos, Marc Feldmann, David Golden, Centocor, Inc., and Tocor II, Inc. was filed in the Court of Common Pleas of the Commonwealth of Pennsylvania, in and for Chester County. The complaint alleges that the defendants breached their fiduciary duties to Tocor II Unitholders by, among other things, making an offer to exchange shares of the Company's Common Stock for Tocor II Units, recommending acceptance of the exchange offer, and failing to maximize shareholder value. The complaint sought, among other relief, an injunction against consummation of the exchange offer, the establishment of a "truly independent" special committee and the retention of a financial advisor to consider the exchange offer, and an award of damages (including rescissionary damages), costs and plaintiff's counsel fees. No injunction was, in fact, sought, and the exchange offer was made and consummated. The defendants filed a motion to dismiss the complaint on the ground that the Pennsylvania court
Notes to Consolidated Financial Statements
should not exercise jurisdiction over a matter relating to the internal affairs of a foreign corporation. On February 27, 1995, this motion was denied without prejudice to its subsequent renewal. The Company believes that the allegations set forth in the complaint are without merit and intends to vigorously defend the suit.
In January 1993, following suspension of the Company's CHESS trial of Centoxin(Trademark) ("HA-1A(Registermark)"), purported security holders of the Company and/or Tocor II filed complaints in the United States District Court for the Eastern District of Pennsylvania against the Company, Tocor II, and certain present and former directors and/or officers of the Company and/or Tocor II, and Lilly. The cases were consolidated pursuant to an order, and a Consolidated Class Action Complaint captioned In Re Centocor Securities Litigation II, No. 93-CV-0236 was filed in May 1993, based on alleged violations of securities laws and alleged breaches of common law duties. All claims against all defendants, except the Company and two of its officers/directors and a former director, were voluntarily dismissed when that complaint was filed. In November 1994, a Corrected Consolidated Amended Class Action complaint was filed in which a number of the original defendants were dropped ("the Complaint"). The Complaint alleges that defendants knowingly or recklessly omitted certain material facts and made false and misleading statements of material facts about Centoxin(Trademark) and the CHESS trial in violation of Sections 10(b) and 20 of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and also alleges violations of the common law of negligent misrepresentation. The action has been conditionally certified as a class action on behalf of persons who purchased common stock and convertible subordinated debentures of the Company from April 21, 1992 through January 15, 1993 and who were allegedly damaged thereby. The Complaint seeks compensatory damages in unspecified amounts, counsel fees, interest, costs of suit, and such other relief that the court deems appropriate. Defendants have answered the Complaint and denied all material allegations therein. Discovery is in progress. The Company believes that the allegations set forth in the Complaint are without merit and intends to vigorously defend the suit.
On April 21, 1994, a complaint was filed against the Company in the United States District Court for the Northern District of California by Genentech, Inc., charging infringement of a patent held by Genentech. The complaint asked that the alleged infringement be enjoined preliminarily and permanently and sought damages and counsel fees in an unspecified amount. While the complaint did not identify any allegedly infringing product or conduct, it purportedly asserted claims regarding ReoPro(Trademark) and other of the Company's products. The Company filed a motion to dismiss for failure to state a claim, for summary judgment, or, in the alternative, for a more definite statement. In December 1994, before that motion was argued, the claims were settled through the grant of a license by Genentech to the Company relating to ReoPro(Trademark). The complaint was dismissed in January 1995.
In May 1993, the Company was served with a complaint filed earlier in the United States District Court for the Southern District of California at San Diego. The plaintiff, who allegedly had purchased shares of Corvas International, Inc. ("Corvas") in its initial public offering on January 30, 1992, brought suit against Corvas and certain of its directors, the Company, and one of the Company's directors and a former director (the "Centocor defendants"), on behalf of similarly situated investors. The complaint alleges the defendants violated the federal securities laws by disclosing to Corvas' investors that Centocor and Corvas had entered into a "strategic
Notes to Consolidated Financial Statements
alliance" to develop one of Corvas' products, but failing to disclose that the Company allegedly would not be able to perform on that agreement because of events relating to Centoxin(Trademark) (HA-1A(Registermark)). The Complaint sought to proceed as a class action on behalf of all those who purchased Corvas common stock during the period from January 30, 1992 through January 15, 1993. A motion to dismiss the complaint in its entirety as to the Centocor defendants was filed in early June 1993. Corvas and its directors had also filed a motion to dismiss. In September 1993, the Court dismissed a number of plaintiff's claims including claims relating to the period after April 14, 1992 and, in effect, the claim brought against the Company under Section 10(b) of the Securities Exchange Act of 1934. As to the remaining claims, the Court conditionally certified a class of all purchasers of Corvas common stock during the period January 30, 1992 through April 14, 1992. An agreement has been reached by all parties which, if approved by the Court, would lead to the settlement and dismissal of this action. The Company would contribute to the settlement 600,000 shares of the stock of Corvas which it holds, which, at December 31, 1994, had a quoted market price of $2.125 per share. In the fourth quarter of 1994, the Company recorded a charge to earnings of $1,275,000 reflecting the proposed terms of the settlement.
In October 1992, the Company was served with a complaint filed by the Velos Group, a Maryland partnership ("Velos"), in the United States District Court for the District of Maryland. The complaint alleges, principally, that the Company breached certain provisions of a license agreement between Velos and the Company pursuant to which the Company has exclusive rights to U.S. Patent No. 5,057,598, which includes claims relating to monoclonal antibodies used in treating manifestations of Gram-negative bacterial infections. The complaint seeks declaratory relief, monetary relief in excess of $100,000,000, and requests that the Company place in escrow one-half of the amounts received by the Company pursuant to its agreements with Lilly. The complaint does not seek to terminate or rescind any of the Company's rights under the license agreement. The Company answered the complaint and asserted affirmative defenses and counterclaims on January 7, 1993, but the counterclaims and certain affirmative defenses were dismissed with leave to replead on June 22, 1993. On July 28, 1993, the Court permitted plaintiff to file an amended complaint that updated some of the claims in the original complaint but otherwise reasserted the basic factual allegations and, with one minor exception, relied upon the same legal theories. On August 27, 1993, the Company filed its Answer, Affirmative Defenses and Counterclaim for Damages and Equitable Relief, to the amended complaint (the "Amended Answer"). In the Amended Answer, the Company again denied all of the allegations made by Velos and stated certain affirmative defenses and counterclaims against Velos with respect to the license agreement, based on theories of (i) failure of consideration, (ii) fraud in the inducement, and (iii) unilateral mistake as to facts, which mistake was induced by the fraudulent misrepresentation of Velos. On September 22, 1993, plaintiff moved to dismiss the Company's counterclaims and to strike certain of the Company's affirmative defenses. On February 6, 1995, the motion was denied. Discovery has now been resumed and trial is fixed for January 1996. The Company believes that the allegations of Velos are without merit and intends to vigorously defend the suit.
The Company has been informed by PaineWebber Development Corporation ("PaineWebber"), which acted as the sales agent for the limited partnership interests in CPII and CPIII and which also manages partnerships which hold limited partnership interests in CPII and CPIII, that it has retained counsel to represent the partnerships which it manages. Counsel are
Notes to Consolidated Financial Statements
investigating possible claims which the limited partners may have for additional royalties in connection with the funds received by Centocor in the transactions with Lilly in July 1992 and June 1993 relating to HA-1A(Registermark) and ReoPro(Trademark). PaineWebber has stated that the fact that counsel have been retained for these purposes does not constitute a representation that either partnership has a claim or that any claim will be brought.
While it is not possible to predict accurately or determine the eventual outcome of these matters, the Company believes that the foregoing proceedings and investigations will not have a material adverse effect on the financial position of the Company.
Partnerships ------------
The Company has licensed certain technology related to ReoPro(Trademark) and a certain cardiovascular imaging product to CPIII and performs research and development with respect to such technology on CPIII's behalf. CPIII holds the rights to the licensed technology and results of the research and development efforts related thereto. The Company has the option to acquire such rights through its option to purchase the limited partnership interests in CPIII. The Company's option to purchase the limited partnership interests in CPIII is exercisable upon the earlier of (a) each limited partner having received distributions related to sales of the CPIII products equal to $15,000 per full limited partnership interest and the expiration of at least 24 months after the first commercial sale of a CPIII product or (b) the expiration of at least 48 months after the first commercial sale of a CPIII product; but, in any event, not prior to the expiration of the then applicable long-term capital gains holding period after the expenditure by the Company of all funds paid to it pursuant to the Development Agreement with CPIII. The Company commenced commercial sales of ReoPro(Trademark) in January 1995. If the Company elects to exercise its option to purchase the limited partnership interests in CPIII, the Company must make an advance payment of approximately $13,598,000 in cash or, at the Company's election, approximately $15,229,000 in the Company's Common Stock, and future payments generally of six percent of sales of products developed by CPIII. The Company and CPIII have formed a joint venture for the purpose of commercializing ReoPro(Trademark). Joint venture profits, if any, are allocated 75 percent to the Company and 25 percent to CPIII. The joint venture will terminate upon the occurrence of certain events including the exercise or expiration of the purchase option. See Note 3 for a discussion of the option that Lilly has exercised to become the exclusive distributor for ReoPro(Trademark).
The Company has entered into indemnity agreements with CPIII and the former limited partners of CCIP and CPII pursuant to which the Company would be obligated, under certain circumstances, to compensate these parties for the fair market value of their respective interests under any license agreements with the Company relating to their respective products which are lost through the exercise by the United States Government of any of its rights relating to the licensed technology. The amount of any such loss would be determined annually by independent appraisal.
Notes to Consolidated Financial Statements
Royalties ---------
The Company is required to make certain future payments to the former limited partners of CCIP and CPII based on sales of products developed by each of the respective partnerships. Upon any exercise by the Company of its option to acquire the limited partnership interests in CPIII, the Company would be required to make future payments to the former limited partners of CPIII, including payments based on any sales of ReoPro(Trademark). Additionally, pursuant to its agreements with Lilly, the Company may be required to make royalty payments on sales of ReoPro(Trademark).
The Company has entered into agreements to support research at certain research institutions. These agreements, which grant the Company licenses and/or options to license certain technology resulting from the research, generally require the Company to pay royalties to such institutions on the sales of any products that utilize the licensed technology. Further, the Company has licenses under certain patents, patent applications and technology and pays the licensors or their licensees royalties under such agreements.
All royalties are reflected in cost of sales as incurred. Royalty costs represent a significant percentage of sales.
Product Liability -----------------
The testing and marketing of medical products entails an inherent risk of product liability. The Company maintains limited product liability insurance coverage. Such insurance is becoming increasingly difficult and expensive to obtain. The Company's business may be adversely affected by a successful product liability claim in excess of its insurance coverage.
Under various contractual agreements, the Company has agreed to indemnify third parties against certain losses, including losses arising from product liability and patent infringement claims pertaining to the Company's products.
Note 3 Collaborative Arrangements
Relationship with Eli Lilly and Company ---------------------------------------
During the second quarter of 1993, Lilly exercised its option under the Sales and Distribution Agreement to become the exclusive worldwide distributor of ReoPro(Trademark). Under the Agreement, the Company is principally responsible for developing and manufacturing HA-1A(Registermark) and ReoPro(Trademark). Lilly is principally responsible for the marketing, sale and distribution of HA-1A(Registermark) and ReoPro(Trademark).
Under agreements with Lilly, the Company and Lilly share equally in the profits from ReoPro(Trademark) and the Company may be required to pay Lilly royalties on sales of ReoPro(Trademark). The Company may be required to make a payment to Lilly of $50 million through December 31, 1995, or decreasing amounts through December 31, 1999, in the event of any change in control
Notes to Consolidated Financial Statements
of the Company or in the event of any governmental action or determination which results in the Sales and Distribution Agreement not being in full force and effect in all material respects in major jurisdictions, excluding the United States, and the subsequent termination of the Sales and Distribution Agreement by Lilly based solely on such events.
Relationship with Wellcome plc ------------------------------
In 1993, the Company and Wellcome entered into an alliance agreement for the development and marketing of certain of the Company's monoclonal antibody-based cancer therapeutic products, including Panorex(Registermark). Under the alliance agreement, the Company and Wellcome share revenues from the sale of the products, including Panorex(Registermark). Centocor is principally responsible for the manufacture of Panorex(Registermark) and for securing regulatory approvals for Panorex(Registermark). Wellcome is principally responsible for the clinical development, marketing, sale and distribution of such drugs, including Panorex(Registermark), on a worldwide basis.
Note 4 Cash Equivalents and Investments
Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standard No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"), which establishes a new accounting principle for the valuation and classification of investments. The impact of the adoption of SFAS 115 was not significant to the Company's Consolidated Financial Statements.
During 1994, the Company recorded unrealized losses associated with its equity investment portfolio as a charge to earnings of $3,649,000 compared to $2,477,000 and $1,126,000 for the years ended 1993 and 1992, respectively, due to other than temporary reductions in the market value of marketable equity investments below the Company's cost for such investments. There can be no assurance that additional reductions in the carrying value of such investments through a charge to earnings will not be required in the future.
The Company's equity investments classified as available for sale are carried at the lower of estimated fair value or adjusted cost. The Company's investments in U.S. treasury securities and corporate bonds which the Company has the ability and intent to hold to maturity are carried at amortized cost.
Notes to Consolidated Financial Statements
At December 31, 1994, securities classified as available for sale and held to maturity are summarized below (in thousands).
The Company has agreed to maintain investments of $27,000,000 as of December 31, 1994 at certain banks as collateral for loans from those banks. See Note 7.
Note 5 Inventory
Inventory consists of the following (in thousands):
Inventories have various expiration dates. The Company continually evaluates the extent of inventory reserves considered necessary based upon the future regulatory and commercial status of such products. There can be no assurance that reserves for inventories will not be required in the future.
Notes to Consolidated Financial Statements
Note 6 Accrued Expenses
Accrued expenses consist of the following (in thousands):
Note 7 Debt
Note Payable
Note payable at December 31, 1994 and 1993 consists of $6,897,000 and $6,186,000, respectively, of borrowings under short-term notes at an interest rate of 5.67 percent per annum at December 31, 1994, payable in Dutch guilders no later than March 28, 1995. These borrowings are secured by investments at the lending bank of $7,000,000 (see "Loan Covenants").
Long-term debt
Long-term debt consists of the following (in thousands):
Notes to Consolidated Financial Statements
7-1/4 Percent Notes
On January 28, 1991, the Company issued $106,645,000 principal amount of 7-1/4 percent Convertible Subordinated Notes (the "7-1/4 percent Notes") due February 1, 2001. The 7-1/4 percent Notes are convertible by the holders into approximately 3,843,000 shares of the Company's Common Stock at a conversion price of $27.75 per share at any time prior to redemption or maturity. The 7- 1/4 percent Notes are subordinated in right of payment to senior indebtedness at December 31, 1994 of $33,079,000 and all future senior indebtedness of the Company, and rank pari passu with the 6-3/4 percent Debentures described below. The 7-1/4 percent Notes are redeemable by the Company for cash in whole or in part until February 1, 2001 at amounts ranging up to 105 percent of the principal amount of the 7-1/4 percent Notes. The Company may be required to redeem the 7-1/4 percent Notes at their principal amount at the option of the holders of the 7-1/4 percent Notes in certain limited circumstances, including a change in control of the Company.
6-3/4 Percent Debentures
On October 16, 1991, the Company issued $125,000,000 principal amount of 6-3/4 percent Convertible Subordinated Debentures (the "6-3/4 percent Debentures") due October 16, 2001. The 6-3/4 percent Debentures are convertible by the holders into approximately 2,049,000 shares of the Company's Common Stock at a conversion price of $61.00 per share at any time prior to redemption or maturity. The 6-3/4 percent Debentures are subordinated in right of payment to senior indebtedness at December 31, 1994 of $33,079,000 and all future senior indebtedness of the Company, and rank pari passu with the 7-1/4 percent Notes. The 6-3/4 percent Debentures are redeemable by the Company for cash in whole or in part until October 16, 2001 at amounts ranging up to 104 percent of the principal amount of the 6-3/4 percent Debentures. The Company may be required to redeem the 6-3/4 percent Debentures at their principal amount at the option of the holders of the 6-3/4 percent Debentures in certain limited circumstances, including a change in control of the Company.
Mortgage Debt
Mortgage loans have been used to finance a portion of the acquisition and expansion of certain of the Company's facilities in the United States and The Netherlands. These loans are generally secured by the related land and buildings. In the United States, the Company has such a loan outstanding with a balance of approximately $6,460,000 at December 31, 1994 which bears interest at an annual rate of 10 percent through its maturity date of May 1, 1995. A Netherlands loan, with an outstanding balance of approximately $5,632,000 at December 31, 1994, is payable in Dutch guilders, bears interest at an annual rate of 8-1/4 percent through its final maturity date of September 30, 2011, and is secured by certain equipment, inventories, and accounts receivable. At December 31, 1994, both of these loans are classified as short-term (see "Loan Covenants").
In July 1993, the Company completed the sale of its St. Louis facility for $11,900,000 and in connection therewith, repaid $5,800,000 of debt related to this facility.
Notes to Consolidated Financial Statements
Long-term Note
The Company borrowed $10,241,000 under a 9-1/2 percent long-term note which is payable in Dutch guilders. This loan is secured by the same assets as the Netherlands loan discussed above. At December 31, 1994, this loan is classified as short-term (see "Loan Covenants").
Loan Covenants
Agreements covering $19,722,000 of the Company's outstanding debt balances contain certain financial and non-financial covenants, including the maintenance of minimum equity and cash balances and compliance with certain financial ratios. The Company has obtained waivers of certain of such covenants on the condition that it maintains certain investments at the lending bank, which at December 31, 1994 totalled $20,000,000. There can be no assurance that the Company will be able to continue to collateralize such loans and, accordingly, the Company has classified $19,722,000 of debt as short-term. Additionally, $6,897,000 of the Company's short-term debt is secured by investments at the lending bank of $7,000,000. If cash flows continue to be negative, the Company's ability to service its debt may be impaired.
Other
Scheduled repayments on the mortgage debt and long-term note pursuant to the terms of the related loan agreements are $8,949,000 for 1995, $2,488,000 for 1996, $2,595,000 for 1997, $2,600,000 for 1998, $2,605,000 for 1999 and $6,951,000 due thereafter.
The fair market value of the Company's long-term debt at December 31, 1994, principally determined by quoted market prices, was $186,316,000 as compared to its carrying value of $231,640,000. The carrying amount of the Company's debt classified as short-term at December 31, 1994 approximates its fair market value.
Note 8 Shareholders' Equity
Capital Stock
In 1994, the Company issued 7,014,000 shares of its Common Stock pursuant to the terms of an exchange offer as described in Note 11, 6,151,000 shares of its Common Stock in connection with the exercise of options and warrants and 140,000 shares pursuant to the terms of the extension of the alliance agreement with Wellcome. In 1993, the Company issued 2,000,000 shares of its Common Stock pursuant to the terms of an agreement with Wellcome. Additionally, in 1992, the Company issued 2,000,000 shares of its Common Stock pursuant to the terms of an Investment Agreement with Lilly. At December 31, 1994, approximately 17,318,000 shares of Common Stock were reserved for issuance upon exercise of warrants and stock options, pursuant to employee retirement savings and stock award plans and agreements, and upon conversion of convertible debt securities. Additionally, at December 31, 1994,
Notes to Consolidated Financial Statements
approximately 372,000 shares of preferred stock were reserved for issuance under a shareholder rights plan which is further described below.
Warrants
At December 31, 1994, warrants to purchase approximately 3,088,000 shares of the Company's Common Stock were outstanding. The specific exercise prices per share and exercise periods of such warrants are set forth below (in thousands except per share amounts):
Shares Issuable Upon Exercise Exercise Period Exercise Price Per Share --------------- --------------- ------------------------
Stock Option and Restricted Stock Award Plans
The Company maintains stock option plans pursuant to which options to purchase a total of approximately 8,650,000 shares of its Common Stock have been authorized for grant to the Company's employees and to its non-employee directors. Under the terms of these plans, the option exercise price may not be less than the fair market value of the underlying stock at the time the option is granted. The options granted under these plans generally expire upon the earlier of the termination of the optionee's employment or service or ten years from the date of the grant. Additionally, non-qualified stock options have been granted to certain directors and employees of, and certain consultants to, the Company pursuant to non-qualified stock option agreements with terms similar to those set forth in the plans. The following table summarizes the activity with respect to the Company's stock options (in thousands except per share amounts):
During 1993 and 1992, a substantial number of outstanding options were canceled in exchange for the grant of fewer options with an exercise price equal to the fair market value at date of grant of $7.125 per share in 1993 and $12.625 in 1992. At December 31, 1994, options
Notes to Consolidated Financial Statements
to purchase a total of approximately 2,719,000 shares of Common Stock were exercisable, and approximately 2,239,000 options become exercisable as follows (in thousands):
The Company maintains a Restricted Common Stock Award Plan, pursuant to which a total of approximately 2,000,000 shares of the Company's Common Stock have been authorized for award to eligible employees. The number of shares awarded in each year and the terms under which such shares vest are determined by the Board of Directors at the time of the award. Generally, a portion of the shares awarded vests annually over a period of five years from the date of the award. As of December 31, 1994, awards of approximately 229,000 shares of the Company's Common Stock were outstanding and are scheduled to vest in the following periods (in thousands):
The terms of options unexercisable as of December 31, 1994 for an aggregate of approximately 1,450,066 shares and restricted stock awards unvested as of December 31, 1994 for an aggregate of approximately 119,185 shares provide for the acceleration of the exercisability of such options and the vesting of such restricted stock awards upon the occurrence of certain events constituting a change in control of the Company. Further, in such event, the holders of approximately 2,424,000 options may then choose to receive cash through the exercise of a limited stock appreciation right in lieu of exercising their options.
Qualified Savings and Retirement Plan
The Company maintains a Qualified Savings and Retirement Plan for the benefit of its employees. Employees' benefits are based solely on the employees' discretionary contributions and the Company's discretionary matching contributions, which the Company generally makes in its Common Stock. Employee contributions to the Plan may be invested in various instruments, including the Company's Common Stock, at the discretion of the employee.
Shareholder Rights Plan
The Company maintains a Shareholder Rights Plan ("Rights Plan"). Under the Rights Plan, each common shareholder receives one-half of one Right (a "Right") for each share of
Notes to Consolidated Financial Statements
Common Stock held. Each Right entitles the holder to purchase from the Company one one-hundredth of a share of Series A Preferred Stock at an exercise price of $170. The Rights will become exercisable and will detach from the Common Stock in the event any individual or group acquires 20 percent or more of the Common Stock, or announces a tender or exchange offer which, if consummated, would result in the ownership by that person or group of at least 30 percent of the Common Stock.
If, following an acquisition of 20 percent or more of the Common Stock, the Company is acquired by any person in a merger or other business combination transaction or sells more than 50 percent of its assets or earning power to any person, each Right will entitle the holder to purchase, for the exercise price, common stock of the acquiring company with a value of twice the exercise price. In addition, if any person acquires 30 percent or more of the Common Stock, each Right will entitle the holder, other than an acquiring person, to purchase Common Stock of the Company with a value of twice the exercise price. The Rights also provide for protection against self-dealing transactions by a 20 percent shareholder.
The Company may redeem the Rights at $.02 per Right at any time until the tenth day after the acquisition by a person or group beneficially owning 20 percent or more of its Common Stock. The Rights will expire on September 26, 1998 unless earlier redeemed.
Note 9 Geographic and Customer Information
In January 1992, the Company acquired, for approximately $8,700,000 in cash, all of the outstanding shares of Centocor U.K. The transaction was recorded as a purchase and resulted in $6,711,000 of goodwill which is being amortized over a 20-year period. The totals for Europe in the above table include the operations of Centocor U.K. from January 1992.
Notes to Consolidated Financial Statements
Customer Information
Sales to four distributors of the Company's diagnostic products in 1994 accounted for 61 percent of total product sales in 1994, and sales to three distributors accounted for 42 percent, and 40 percent of total product sales in 1993, and 1992, respectively. Approximately 86 percent, 88 percent, and 90 percent of total product sales in 1994, 1993, and 1992, respectively, are attributable to shipments to customers outside of the United States.
Note 10 Contract Revenues
Lilly Related -------------
Pursuant to the Company's agreements with Lilly, the Company recognized $9,500,000, $5,000,000 and $50,000,000 for the years ended December 31, 1994, 1993 and 1992, respectively, related to the achievement of ReoPro(Trademark) milestones in 1994 and 1993 and principally related to reimbursement of expenses associated with HA-1A(Registermark) in 1992. Lilly may make certain future payments based on the achievement of certain milestones related to ReoPro(Trademark).
Wellcome Related ----------------
Pursuant to the Company's agreements with Wellcome, the Company recognized $14,000,000 and $10,000,000 for the years ended December 31, 1994 and 1993, respectively, principally related to the reimbursement of prior expenses and achievement of milestones associated with Panorex(Registermark). Wellcome may make certain future payments to the Company based on the achievement of certain milestones related to Panorex(Registermark).
Related Party Research & Development ------------------------------------
During 1994, 1993 and 1992, the Company conducted research and development under a contract with Tocor II. Under the contract, the Company received reimbursement of its costs plus a management fee. Such revenues were recorded net of amortization of deferred costs resulting from the issuance of warrants to Tocor II Unitholders. Additionally, the Company recorded revenue of $2,500,000 in 1992 representing a non-refundable fee from Tocor II in connection with the license of certain technology by the Company to Tocor II. See Note 11 for a discussion of an exchange offer which resulted in the termination of the research and development contract and services agreement.
For the years ended December 31, 1994, 1993 and 1992, revenues related to the Tocor II research program were $1,652,000, $10,109,000 and $16,071,000 respectively. Expenses incurred, including general and administrative expenses for the years ended December 31, 1994, 1993 and 1992 were $1,915,000, $11,741,000 and $15,047,000 respectively.
Additionally, the Company incurred expenses of $22,850,000, $19,389,000, and $27,675,000, for the years ended December 31, 1994, 1993 and 1992, respectively, representing aggregate CPIII research costs funded by the Company in order to continue the
Notes to Consolidated Financial Statements
progress of the research program and to preserve the value of its purchase options (see Note 2).
Other -----
The Company has entered into various commercialization agreements under which it has recognized revenues from non-refundable fees or milestone payments in support of its research and development efforts. Revenues recorded under these agreements amounted to $2,090,000, $2,750,000, and $1,767,000, for the years ended December 31, 1994, 1993 and 1992, respectively.
Note 11 Charge for Acquired Research and Development
In February 1994, the Company initiated the exchange offer pursuant to which the Company offered to exchange 3.2 shares of its Common Stock for each of the 2,250,000 outstanding Tocor II Units tendered. Each Unit consisted of one share of callable common stock of Tocor II, one callable warrant to purchase one share of Centocor Common Stock and one Series T warrant to purchase one share of Centocor Common Stock (the "Warrants"). The exchange offer expired at the close of business on March 11, 1994, at which time the Company accepted all of the 94 percent of the Tocor II Units tendered in exchange for approximately 6,793,000 shares of its Common Stock, thereby increasing shareholders equity by $81,607,000. The transaction was accounted for as a purchase and the Company allocated the excess of the consideration paid over the net assets of Tocor II to the value of the acquired research and development. The Company recorded a charge to earnings in the first quarter of 1994 of $36,966,000 representing principally the cost allocated to the acquired research and development. In connection with the transaction, the Company acquired $50,124,000 of cash and short-term investments and warrants with a value of $8,492,000 which were retired. The unaudited comparative statement of operations data excluding the charge for acquired research and development, assuming the exchange offer was consummated as of January 1, 1993, would have been as follows(in thousands except per share amounts):
Effective March 30, 1994, each remaining share of Tocor II callable Common Stock ("Tocor II Shares") was converted into 2.88 shares of the Company's Common Stock through a merger of Tocor II into a wholly-owned subsidiary of the Company. Pursuant to the terms of the merger, holders of Tocor II Shares at the time of the merger were required to surrender the certificates representing Tocor II Shares to an exchange agent in exchange for certificates representing Common Stock of the Company. Through December 31, 1994, stock certificates representing 221,000 shares of the Company's Common Stock had been delivered by the exchange agent in connection with the merger. If all of the remaining Tocor II Shares are surrendered to the exchange agent, stock certificates representing an additional 146,000 shares
Notes to Consolidated Financial Statements
of the Company's Common Stock will be delivered. Shares of the Company's Common Stock into which the Tocor II Shares were converted by the merger are not classified as issued and outstanding until the delivery by the exchange agent of the stock certificate representing such shares. Warrants not tendered as part of Units in the exchange offer remain outstanding.
Note 12 Other Income (Expenses)
The Company recorded a charge to earnings of $1,275,000 and $11,245,000 for the years ended December 31, 1994 and December 31, 1992, respectively, in connection with the settlement of certain litigation (see Note 2). During 1994, 1993 and 1992, respectively, the Company recorded a charge to earnings of $3,649,000, $2,477,000 and $2,296,000 representing an unrealized loss due to the other than temporary decline in the market value of marketable equity investments below the Company's cost for such investments. Other income (expenses) for 1992 includes gains of $1,170,000 from sales of the Company's investments. Other income (expenses) also includes the Company's equity share of the losses of an unconsolidated entity.
Note 13 Income Taxes
Differences between the Company's (benefit) for income taxes for 1994, 1993, and 1992 and that computed by applying the statutory U.S. Federal income tax rate consist of the following (in thousands):
The Company recorded a charge for acquired research and development of $36,966,000 in 1994, which was not deductible for U.S. tax purposes. At December 31, 1994, the tax effect of the Company's net tax loss carryforward was $173,486,000 with expiration dates ranging from 2005 to 2009. Additionally, at December 31, 1994, the Company had research and development tax credits and other tax credits of $5,424,000 substantially all with expiration dates ranging from 1999 to 2008.
Realization of net deferred tax assets related to these items is dependent on future earnings, which are uncertain. Accordingly, a valuation reserve was recorded by the Company and, therefore, the Company had no net deferred tax assets at December 31, 1994.
Notes to Consolidated Financial Statements
Note 14 Leases
The Company is lessee under various non-cancelable operating leases, covering certain of the Company's facilities and equipment. The facility leases generally provide for the Company to pay all taxes and operating costs associated with the facility.
The aggregate minimum rental commitments of leases are as follows (in thousands):
Rent expense was $3,189,000, $5,428,000, and $9,665,000, for the years ended December 31, 1994, 1993, and 1992, respectively.
Note 15 Supplemental Information on Cash Flows
Interest paid, net of amounts capitalized, was $19,192,000, $19,421,000, and $19,703,000, in 1994, 1993, and 1992, respectively.
Income tax payments of $19,000, $46,000, and $70,000 were made in 1994, 1993, and 1992, respectively.
Cash used for the purchases of investments as well as the cash received upon the maturities and sales of investments were as follows (in thousands):
During 1994, the Company issued 7,014,000 shares of Common Stock, resulting in a noncash increase to additional paid-in capital of $25,643,000 in connection with an exchange offer more fully described in Note 11.
During the first quarter of 1994, the Company acquired cash and short-term investments of $50,124,000 in connection with an exchange offer more fully described in Note 11.
Notes to Consolidated Financial Statements
During 1992, the Company issued warrants to purchase 4,500,000 shares of Common Stock, resulting in a noncash increase to additional paid-in capital of $14,625,000. During 1992, the Company acquired $2,134,000 of fixed assets by assuming the related debt obligation.
Note 16 Quarterly Financial Data (unaudited)
(1) During the first quarter of 1994, the Company recorded a charge for acquired research and development of $36,966,000 in connection with the exchange offer as discussed in Note 11.
(2) During the fourth quarter of 1994, the Company recorded a charge of $17,098,000 representing a royalty buyout related to ReoPro(Trademark). Additionally, the Company recorded charges of $7,870,000 in connection with the writedown of certain facilities and equipment, and $1,275,000 in connection with the settlement of certain litigation. See Notes 2 and 17.
(3) During the first and second quarters of 1993, the Company recorded restructuring charges of $4,273,000 representing reserves for fixed assets no longer used or subsequently disposed of and $5,114,000, representing severance related costs, respectively. See Note 17.
(4) During the fourth quarter of 1993, the Company recorded reserves of $3,500,000, relating to HA-1A(Registermark) inventories.
Note 17 Other Charges
The Company had an agreement which required it to make certain future royalty payments depending on the level of ReoPro(Trademark) sales. In 1994, the Company elected to buyout such future royalty obligation and, as a result, recorded a charge of $17,098,000 representing such buyout. Additionally, the Company recorded a charge of $7,870,000 in connection with the write-down of certain facilities and equipment. For the years ended December 31, 1993 and
Notes to Consolidated Financial Statements
1992, the Company recorded restructuring charges of $9,387,000 and $15,266,000, respectively, consisting principally of severance related costs incurred in connection with the further downsizing of its work force, and reserves for certain fixed assets which are no longer used or have been subsequently disposed. At the Company's present level of operations, the Company currently maintains idle facilities and equipment. The Company continually evaluates the future needs for its facilities and equipment. There can be no assurance that reserves to further reduce the carrying value of certain fixed assets, other royalty buyout arrangements, or other charges will not be required in the future.
For the years ended December 31, 1993 and 1992, the Company recorded charges related to HA-1A(Registermark) inventory of $3,500,000 and $64,877,000, respectively. The Company continually evaluates the extent of inventory reserves considered necessary based upon the future regulatory and commercial status of such products. There can be no assurance that reserves for inventories will not be required in the future.
REPORT OF MANAGEMENT
The consolidated financial statements presented in this report have been prepared by the Company's management in conformity with generally accepted accounting principles from the Company's financial records. The Company's management is responsible for all information and representations made in those financial statements and for their integrity and objectivity. In those cases where judgment and best estimates are necessary, appropriate consideration is given to materiality in the preparation of the financial statements. The Company's management has also prepared the other information in this report and is responsible for its accuracy and consistency with the financial statements.
The Company's management has designed systems of internal accounting controls to provide reasonable, but not absolute, assurance that assets are safeguarded from unauthorized use or disposition, and that transactions are recorded according to management's policies and procedures. The concept of reasonable assurance is based on the recognition that there are inherent limitations in all systems of internal accounting control and that the costs of such systems should not exceed the benefits to be derived. These systems are continually reviewed and modified, where appropriate, to maintain such assurance. Additionally, in connection with their annual audit, independent auditors perform examinations in accordance with generally accepted auditing standards, which include a review of the system of internal accounting controls to the extent necessary in order to determine the nature, timing, and extent of audit tests to be applied on the financial statements. The Company's management believes that the Company's system of internal accounting controls is adequate to accomplish the objectives discussed herein.
The selection of the Company's independent auditors, KPMG Peat Marwick LLP, has been approved by the Company's Board of Directors. An Audit Committee of the Board of Directors, composed of three non-management directors, meets with, and reviews the activities of, corporate financial management and the independent auditors to ascertain that each is properly discharging its responsibilities. The independent auditors also meet separately with the Audit Committee without management present, to discuss the results of their work, the adequacy of internal accounting controls, and the quality of financial reporting.
Independent Auditors' Report
The Board of Directors and Shareholders, Centocor, Inc.:
We have audited the accompanying consolidated balance sheets of Centocor, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1994. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Centocor, Inc. and subsidiaries as of December 31, 1994 and 1993 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania February 24, 1995
Item 9.
Item 9. Changes in and Disagreements with Accountants on --------------------------------------------------------- Accounting and Financial Disclosure -----------------------------------
Not Applicable.
Part III
Item 10.
Item 10. Directors and Executive Officers of the Registrant ------------------------------------------------------------
DIRECTORS OF THE REGISTRANT
The following table sets forth, as of March 1, 1995, information as to the directors of the Company, including their recent employment, positions with the Company, other directorships and age. Directors are elected to serve one-year terms.
Name, Principal Occupations and Year First Businesses During Last Five Years Elected and Other Current Directorships Age Director ------------------------------- --- --------
Anthony B. Evnin 53 1980
General Partner of Venrock Associates, a venture capital limited partnership. Director, AgriDyne Technologies Inc., Arris Pharmaceutical Corporation, Athena Neurosciences, Inc., Genetics Institute, Inc., IDEXX Laboratories, Inc., Intelligent Surgical Lasers, Inc., Kopin Corporation, Opta Food Ingredients, Inc. and Sugen, Inc.
William F. Hamilton 55 1985
Landau Professor of Management and Technology at the Wharton School of the University of Pennsylvania. Director, Hunt Manufacturing Co., Marlton Technologies, Inc. and Neose Pharmaceuticals, Inc.
Name, Principal Occupations and Year First Businesses During Last Five Years Elected and Other Current Directorships Age Director ------------------------------- --- --------
David P. Holveck 49 1994
President and Chief Executive Officer of the Company since November 1992; President and Chief Operating Officer from April 1992 to October 1992; and Executive Vice President and President - Diagnostics Division from December 1988 to April 1992.
Antonie T. Knoppers 80 1986
Self-employed business consultant. Former President, Chief Operating Officer and Vice Chairman, Merck & Co., Inc., a research-based health products company. Trustee, The Salk Institute. Director, Agouron Pharmaceuticals, Inc.
Ronald A. Matricaria 52 1994
President and Chief Executive Officer of St. Jude Medical, Inc., a medical device company, since April 1993 and Chairman of the Board since 1995. From 1970 to 1993, Mr. Matricaria was employed by Eli Lilly and Company, Inc., a research-based pharmaceutical company, where he served in a variety of capacities, including President of the Medical Devices and Diagnostics Division and Executive Vice President of the Pharmaceutical Division and President of its North American operations. Director, St. Jude Medical, Inc., Diametrics Medical, Inc., InControl, Inc. and the Health Industry Manufacturers Association.
Name, Principal Occupations and Year First Businesses During Last Five Years Elected and Other Current Directorships Age Director ------------------------------- --- --------
Hubert J.P. Schoemaker 44 1983
Chairman of the Board since November 1987; Chief Executive Officer of the Company from November 1987 to October 1992; President of the Company from 1983 to 1987. Director, Apollon, Inc., Applied Technology Genetics Corporation, Myco Pharmaceuticals, Inc. and Safeguard Scientifics Inc.
Richard D. Spizzirri 62 1994
Senior Counsel to the law firm of Davis Polk & Wardwell since January 1995; Partner, Davis Polk & Wardwell from 1967 to 1994. Director, Sugen, Inc. and Broadcast Partners, Inc.
Lawrence Steinman 47 1991
Professor of Immunology, Weizmann Institute of Science, Rehovot, Israel since 1994; Professor of Neurology and Neurological Sciences and Pediatrics, Stanford University School of Medicine since 1991 and Associate Professor of Neurology, Pediatrics and Genetics, Stanford University School of Medicine from 1985 to 1991.
Name, Principal Occupations and Year First Businesses During Last Five Years Elected and Other Current Directorships Age Director ------------------------------- --- --------
Jean C. Tempel 51 1993
General Partner of Technology Leaders L.P., a venture capital affiliate of Safeguard Scientifics Inc., an entrepreneurial technology company since November 1993; President and Chief Operating Officer of Safeguard Scientifics Inc. from January 1992 to November 1993; Principal, Tempel Partners Inc., a management consulting firm, from 1991 to January 1992; Executive Vice President and Chief Operations Officer, The Boston Company, a bank trust company, from 1988 to 1990. Director, Cambridge Technology Partners Inc., Safeguard Scientifics Inc. and Trustee, Scutter Family of Mutual Funds.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, who are elected to serve at the discretion of the Board of Directors, are as follows:
Mr. Holveck has been associated with Centocor since June 1983, as President and Chief Executive Officer since November 1992, as President and Chief Operating Officer from April 1992 to October 1992, and as Executive Vice President and President - Diagnostics Division from December 1988 to April 1992.
Mr. Venkatadri has been associated with Centocor since March 1992, as Executive Vice President - Pharmaceutical Division since August 1992, and as Vice President - Pharmaceutical Manufacturing from March 1992 to August 1992. Previously, Mr. Venkatadri was Senior Director of Pharmaceutical Operations for Warner-Lambert Puerto Rico, Inc., a division of Warner-Lambert Company, from October 1990 to February 1992, and President and Director of P. T. Warner- Lambert Indonesia, an affiliate of Warner-Lambert Company, from March 1988 to October 1990.
Mr. Cost has been associated with Centocor since January 1994, as Senior Vice President - Investor Relations and Strategic Operations. Previously, Mr. Cost was Director of Investor Relations for Eastman Kodak Company from October 1991 to December 1993, and Director of Strategic Planning for Worldwide Manufacturing for Eastman Kodak Company from June 1989 to October 1991.
Mr. Page has been associated with Centocor since September 1987, as Senior Vice President - Regulatory Affairs and Quality Assurance since March 1994, as Senior Vice
President - Worldwide Regulatory Affairs from August 1992 to March 1994, as Vice President - Worldwide Regulatory Affairs from June 1990 to August 1992, and as Vice President -International Regulatory Affairs from September 1987 to June 1990.
Dr. Woody has been associated with Centocor since August 1991, as Chief Scientific Officer since August 1992, and as Senior Vice President - Research and Development since August 1991. Previously, Dr. Woody served as Commanding Officer of the U.S. Navy Medical Research and Development Command from 1988 to 1991.
Item 11.
Item 11. Executive Compensation -------------------------------- Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management ------------------------------------------------------------------------ Item 13.
Item 13. Certain Relationships and Related Transactions --------------------------------------------------------
In accordance with General Instruction G(3), the information called for by Items 11, 12 and 13 of Part III are incorporated herein by reference from the Company's definitive Proxy Statement for the Centocor Annual Meeting of Shareholders to be held on May 17, 1995, which definitive Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A.
Part IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports -------------------------------------------------------------- on Form 8-K -----------
(a) Documents filed as part of the Report:
(1) (i) Financial Statements of Centocor Partners III, L.P.:
Balance Sheets, December 31, 1994 and 1993.
Statements of Operations for the Years Ended December 31, 1994, 1993 and 1992.
Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992.
Statements of Partners' Capital for the Years Ended December 31, 1994, 1993 and 1992.
Notes to Financial Statements.
Independent Auditors' Report.
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
Schedules, other than those listed above, have been omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or the notes thereto.
(3) Exhibits:
2.1 Exchange Offer for Units of Tocor II, Inc., as described in the Registrant's Schedule 14D-1 dated March 4, 1994, as amended by Amendment No. 1 thereto dated March 7, 1994 and Amendment No. 2 thereto dated March 18, 1994 (incorporated by reference to the Registrant's Schedule 14D-1 dated March 4, 1994, as amended by Amendment No. 1 thereto dated march 7, 1994 and Amendment No. 2 thereto dated March 18, 1994.)
3.1 Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Form S-1 Registration Statement, File No. 2-80098).
3.2 Statement of Reduction of Authorized Shares filed September 19, 1983 (incorporated by reference to Exhibit 3.2 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1986).
3.3 Statement of Reduction of Authorized Shares filed January 19, 1984 (incorporated by reference to Exhibit 3.3 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1986).
3.4 Articles of Amendment filed April 18, 1984 (incorporated by reference to Exhibit 3.4 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1986).
3.5 Statement of Reduction of Authorized Shares filed February 25, 1985 (incorporated by reference to Exhibit 3.5 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1986).
3.6 Statement of Reduction of Authorized Shares filed May 6, 1985 (incorporated by reference to Exhibit 3.6 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1986).
3.7 Statement of Reduction of Authorized Shares filed October 23, 1985 (incorporated by reference to Exhibit 3.7 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1986).
3.8 Articles of Amendment filed April 16, 1987 (incorporated by reference to Exhibit 3.8 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987).
3.9 Articles of Amendment filed April 21, 1988 (incorporated by reference to Exhibit 3.9 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988).
3.10 Articles of Amendment filed April 26, 1988 (incorporated by reference to Exhibit 3.10 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988).
3.11 Statement Re Series A Preferred Stock filed October 11, 1988 (incorporated by reference to Exhibit 3.11 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988).
3.12 Articles of Amendment filed April 13, 1990 (incorporated by reference to Exhibit 3.12 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990).
3.13 Articles of Amendment filed April 26, 1991 (incorporated by reference to Exhibit 3.13 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991).
3.14 Statement of Correction filed October 16, 1991 to Articles of Amendment filed April 26, 1991 (incorporated by reference to Exhibit 3.14 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991).
3.15 By-Laws of Centocor, Inc. as amended October 30, 1992 (incorporated by reference to Exhibit 3.15 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992).
4.1 Specimen Certificate for Common Stock (incorporated by reference to Exhibit 4 to Amendment No. 1 to Form S-1 Registration Statement, File No. 2-80098).
4.2 Form of Warrant Issued to Purchasers of Limited Partnership Interests in CPIII (incorporated by reference to Exhibit 4.5 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987).
4.3 Rights Agreement between Centocor, Inc. and the First National Bank of Boston as Rights Agent dated September 26, 1988 (incorporated by reference to Exhibit 4 to Registrant's Current Report on Form 8-K dated September 26, 1988).
4.4 Form of Indenture between Centocor, Inc. and CoreStates Bank, N.A. as Trustee Dated as of January 18, 1991 (incorporated by reference to Exhibit 4.3 to Amendment No. 1 to Form S-3 Registration Statement, Reg. No. 33-38110).
4.5 Form of Note Issued to Purchasers of 7 1/4% Convertible Subordinated Notes Due February 1, 2001 (incorporated by reference to Exhibit 4.4 to Amendment No. 1 to Form S-3 Registration Statement, Reg. No. 33-38110).
4.6 Form of Indenture between Centocor, Inc. and Chase Manhattan Trustees Limited as Trustee Dated as of October 16, 1991 (incorporated by reference to Exhibit 4.3 to Form S-3 Registration Statement, Reg. No. 33-44231).
4.7 Form of Debenture Issued to Purchasers of 6-3/4% Convertible Subordinated Debentures Due October 16, 2001 (included in Exhibit 4.9) (incorporated by reference to Exhibit 4.3 to Form S-3 Registration Statement, Reg. No. 33-44231).
4.8 Form of Series T Warrant Issued to Purchasers of Units, each Unit consisting of one share of Tocor II Callable Common Stock, one Series T warrant to purchase one share of Centocor Common Stock, and one Callable warrant to purchase one share of Centocor Common Stock (incorporated by reference to Exhibit 4.2 to Amendment No. 4 to Form S-1/S-3
Registration Statement of Tocor II and Centocor, Reg. No. 33- 44072).
4.9 Form of Callable Warrant Issued to Purchasers of Units, each Unit consisting of one share of Tocor II Callable Common Stock, one Series T warrant to purchase one share of Centocor Common Stock, and one Callable warrant to purchase one share of Centocor Common Stock (incorporated by reference to Exhibit 4.3 to Amendment No. 4 to Form S-1/S-3 Registration Statement of Tocor II and Centocor, Reg. No. 33-44072).
10.1* Form of Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.01 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987).
10.2* Incentive Stock Option Plan, as amended (incorporated by reference to Exhibit 10.03 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1986).
10.3* 1983 Incentive Stock Option Plan, as amended (incorporated by reference to Exhibit 10.04 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1986).
10.4* 1983 Restricted Common Stock Award Plan, as amended and restated (incorporated by reference to Exhibit 10.04 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993).
10.5* 1987 Non-Qualified Stock Option Plan, as amended and restated (incorporated by reference to Exhibit 10.05 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990).
10.6* 1989 Non-Employee Directors' Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 10.06 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989).
10.7 Lease Agreement for property located at Great Valley Parkway, Malvern, PA 19355 (incorporated by reference to Exhibit 10.07 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989).
10.8 Partnership Purchase Option Agreement among Centocor, Inc., CCIP, Centocor Development Corporation I, each Class A limited partner and the Class B limited partner, dated September 12, 1985 (incorporated by reference to Exhibit 10.53 to Registrant's Post Effective Amendment No. 1 to Form S-1 Registration Statement, File No. 2-95057).
10.9 Indemnity Agreement between Centocor, Inc. and CCIP, dated September 12, 1985 (incorporated by reference to Exhibit 10.71 to Registrant's Post Effective Amendment No. 1 to Form S-1 Registration Statement, File No. 2-95057).
10.10* Qualified Savings and Retirement Plan, as amended and restated (incorporated by reference to Exhibit 10.14 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989).
10.11 Partnership Purchase Option Agreement among Centocor, Inc., CPII, Centocor Development Corporation II, each Class A limited partner and the Class B limited partner, dated December 17, 1986 (incorporated by reference to Exhibit 10.23 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1986).
10.12 Indemnity Agreement between Centocor, Inc. and CPII, dated December 17, 1986 (incorporated by reference to Exhibit 10.26 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1986).
10.13 Consent Decree of Permanent Injunction in U.S. v. Centocor, Inc. et al., Civil Action No. 85-5613, in the United States District Court for the Eastern District of Pennsylvania (incorporated by reference to Exhibit 10.60 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1985).
10.14 CPIII Agreement of Limited Partnership, dated December 23, 1987 as amended and restated on January 15, 1988 and March 23, 1988 (incorporated by reference to Exhibit 10.26 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988).
10.15 Cross License Agreement between CPIII and Centocor, Inc., dated December 23, 1987 (incorporated by reference to Exhibit
10.38 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987).
10.16 Amendment dated March 23, 1988 to Cross License Agreement between CPIII and Centocor, Inc. dated December 23, 1987 (incorporated by reference to Exhibit 10.28 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988).
10.17 Development Agreement between CPIII and Centocor, Inc., dated December 23, 1987 (incorporated by reference to Exhibit 10.39 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987).
10.18 Amendment dated March 23, 1988 to Development Agreement between CPIII and Centocor, Inc. dated December 23, 1987 (incorporated by reference to Exhibit 10.30 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988).
10.19 Joint Venture Agreement between CPIII and Centocor, Inc., dated December 23, 1987 (incorporated by reference to Exhibit 10.40 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987).
10.20 Amendment dated March 23, 1988 to Joint Venture Agreement between CPIII and Centocor, Inc. dated December 23, 1987 (incorporated by reference to Exhibit 10.32 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988).
10.21 Indemnity Agreement between CPIII and Centocor, Inc., dated December 23, 1987 (incorporated by reference to Exhibit 10.41 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987).
10.22 Inducement Agreement among Centocor, Inc., CPIII, Centocor Development Corporation III, PaineWebber Development Corporation, PaineWebber, Inc. and PaineWebber R&D Partners II, L.P., dated December 23, 1987 (incorporated by reference to Exhibit 10.42 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987).
10.23 Amendment dated March 23, 1988 to Inducement Agreement among Centocor, Inc., CPIII, Centocor Development Corporation III, PaineWebber Development Corporation, PaineWebber, Inc. and PaineWebber R&D Partners II, L.P. dated December 23, 1987 (incorporated by reference to Exhibit 10.35 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988).
10.24 Partnership Purchase Option Agreement among Centocor, Inc., CPIII, Centocor Development Corporation III, and the Class C limited partner, dated December 23, 1987 (incorporated by reference to Exhibit 10.43 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987).
10.25 Amendment dated March 23, 1988 to Partnership Purchase Option Agreement among Centocor, Inc., CPIII, Centocor Development Corporation III and the Class C limited partner dated December 23, 1987 (incorporated by reference to Exhibit 10.37 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988).
10.26 Purchase Option Agreement by and among Centocor, Inc., PaineWebber Incorporated, The First Boston Corporation, Hambrecht & Quist Incorporated and J. P. Morgan Securities Inc. dated January 21, 1992 (incorporated by reference to Exhibit 10.3 to Amendment No. 5 to Form S-1/S-3 Registration Statement of Tocor II and Centocor, Reg. No. 33-44072).
10.27 Series E, F and G Preferred Stock Purchase Agreement dated as of November 20, 1991 between Centocor Delaware, Inc. and Corvas International, Inc. (incorporated by reference to Exhibit 10.28 to Form S-1 Registration Statement of Corvas International, Inc. Reg. No. 33-44555).
10.28 Sales and Distribution Agreement between Centocor, Inc. and Eli Lilly and Company dated July 15, 1992. (The Registrant has requested confidential treatment from the Securities and Exchange Commission for portions of this Agreement.) (incorporated by reference to Exhibit 10.32 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992).
10.29 Reimbursement Agreement between Centocor, Inc. and Eli Lilly and Company dated July 15, 1992. (The Registrant has requested confidential treatment from the Securities and Exchange Commission for portions of this Agreement.) (incorporated by reference to Exhibit 10.33 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992).
10.30 Investment Agreement between Centocor, Inc. and Eli Lilly and Company dated July 15, 1992. (The Registrant has requested confidential treatment from the Securities and Exchange Commission for portions of this Agreement.) (incorporated by reference to Exhibit 10.34 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992).
10.31 Amendment to Sales and Distribution Agreement among Centocor, Inc., Centocor B.V. and Eli Lilly and Company dated June 27, 1993. (The Registrant has requested confidential treatment from the Securities and Exchange Commission for portions of this Agreement.) (incorporated by reference to Exhibit 10.35 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993).
10.32 Option Agreement between Centocor B.V. and Eli Lilly Nederland B.V. dated August 20, 1993. (The Registrant has requested confidential treatment from the Securities and Exchange Commission for portions of this Agreement.) (incorporated by reference to Exhibit 10.36 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993).
10.33 Deed of Mortgage from Centocor B.V. to Eli Lilly Nederland B.V. dated August 26, 1993 (incorporated by reference to Exhibit 10.37 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993).
10.34 Deed of Pledge from Centocor B.V. to Eli Lilly Nederland B.V. dated August 26, 1993 (incorporated by reference to Exhibit 10.38 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993).
10.35 Stock Purchase Agreement made as of December 16, 1993 by and between Centocor, Inc. and The Wellcome Foundation
Limited (incorporated by reference to Exhibit 10(a) to the Registrant's Current Report on Form 8-K dated December 16, 1993).
10.36 Supply, Distribution and Sales Agreement dated December 16, 1993 by and among Centocor, Inc.., Centocor B.V., The Wellcome Foundation Limited and Burroughs Wellcome Co. (The Registrant has requested confidential treatment from the Securities and Exchange Commission for portions of this Agreement.) (Incorporated by reference to Exhibit 10(b) to the Registrant's Current Report on Form 8-K dated December 16, 1993).
10.37 Clinical and Regulatory Development Agreement dated December 16, 1993 among Centocor, Inc.., Centocor B.V., The Wellcome Foundation Limited and Burroughs Wellcome Co. (The Registrant has requested confidential treatment from the Securities and Exchange Commission for portions of this Agreement.) (Incorporated by reference to Exhibit 10(c) to the Registrant's Current Report on Form 8-K dated December 16, 1993).
10.38 Centocor Technology License Agreement dated as of December 16, 1993 among Centocor, Inc., Centocor B.V., The Wellcome Foundation Limited and Burroughs Wellcome Co. (The Registrant has requested confidential treatment from the Securities and Exchange Commission for portions of this Agreement.) (incorporated by reference to Exhibit 10(e) to the Registrant's Current Report on Form 8-K dated December 16, 1993).
10.39 Relicense Agreement dated as of December 16, 1993 among Centocor, Inc., Centocor B.V., The Wellcome Foundation Limited and Burroughs Wellcome Co. (incorporated by reference to Exhibit 10(f) to the Registrant's Current Report on Form 8-K dated December 16, 1993).
10.40 Appendix A - Glossary of Terms to each of the Agreements dated as of December 16, 1993 by and among Centocor, Inc., Centocor B.V., The Wellcome Foundation Limited and Burroughs Wellcome Co. (The Registrant has requested confidential treatment from the Securities and Exchange Commission for portions of this Agreement.) (incorporated by
reference to Exhibit 10(g) to the Registrant's Current Report on Form 8-K dated December 16, 1993).
10.41 First Supplemental Agreement dated as of November 15, 1994 among Centocor, Inc., Centocor B.V., The Wellcome Foundation Limited and Burroughs Wellcome Co. (The Registrant has requested confidential treatment from the Securities and Exchange Commission for portions of this Agreement.) (Incorporated by reference to Exhibit 10(a) to the Registrant's Current Report on Form 8-K dated November 15, 1994).
10.42 Wellcome Clinical Development Agreement dated as of November 15, 1994 among Centocor, Inc., Centocor B.V., The Wellcome Foundation Limited and Burroughs Wellcome Co. (The Registrant has requested confidential treatment from the Securities and Exchange Commission for portions of this Agreement.) (incorporated by reference to Exhibit 10(b) to the Registrant's Current Report on Form 8-K dated November 15, 1994).
12 Statement re: Computation of Ratios.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
*These exhibits constitute compensatory plans.
(b) The Registrant has filed the following reports on Form 8-K since the beginning of the quarter ended December 31, 1994:
Date of Report Item Covered -------------- ------------
November 15, 1994 5, 7 December 22, 1994 5, 7
For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8, Nos. 2- 86486, 33-16285, 33-00167, 33-35731, 33-23480, 33-16284, and 33-35730.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
Centocor Partners III, L.P. Balance Sheets -------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
Centocor Partners III, L.P. Statements of Operations
See accompanying Notes to Financial Statements.
Centocor Partners III, L.P. Statements of Cash Flows
See accompanying Notes to Financial Statements
Centocor Partners III, L.P. Statements of Partners' Capital ----------------------------------------------------------------------
See accompanying Notes to Financial Statements.
Centocor Partners III, L.P. Notes to Financial Statements -------------------------------------------------------------------------------
1. Organization and Business Operations ------------------------------------
Centocor Partners III, L.P. (the "Partnership"), was formed in December 1987, and is managed by its general partner, Centocor Development Corporation III, a wholly owned subsidiary of Centocor, Inc. ("Centocor"), a Pennsylvania corporation, which is subject to the reporting requirements of the Securities Exchange Act of 1934. The Partnership was organized to develop and derive income from the sale of one therapeutic product (ReoPro(Trademark), formerly CentoRx(Registermark)) and one imaging product (Capiscint) which are expected to be used in the treatment and diagnosis, respectively, of two different types of cardiovascular disease.
In 1987 and 1988, the Partnership and Centocor sold (a) 542.25 units, consisting of 111 Class C limited partnership interests and 431.25 Class A limited partnership interests each together with warrants to purchase shares of Centocor common stock, and (b) one Class B limited partnership interest, together with warrants to purchase shares of Centocor common stock. The purchase prices were $90,000 for each of the Class C interests, $100,000 for each of the Class A interests and $150,000 for the Class B interest.
The net proceeds from the sale of limited partnership interests were used primarily to pay expenses incurred under the Partnership's agreement with Centocor (the "Development Agreement") to perform research and development for the Partnership (see Note 5).
The Partnership also entered into a Cross License Agreement pursuant to which Centocor granted to the Partnership an exclusive license to use all patent rights, know-how, technical information and biological materials owned or controlled by Centocor within the Partnership's field of activity. Under the Cross License Agreement, the Partnership agreed to grant to Centocor an exclusive royalty-free license to all patent rights, know-how, technical information and biological materials arising from research and development conducted under the Development Agreement for all purposes outside of the Partnership's field of activity.
The profits and losses of the Partnership are generally allocated 1 percent to the general partner and 99 percent to the limited partners. Losses in excess of the limited partners' capital contributions are allocated to the general partner. The general partner is permitted but not required to make additional capital contributions for the working capital of the partnership (see Note 5).
2. Summary of Significant Accounting Policies ------------------------------------------
Investment in Joint Venture ---------------------------
The Partnership accounts for its investment in the joint venture (see Note 4) under the equity method of accounting.
Centocor Partners III, L.P. Notes to Financial Statements -------------------------------------------------------------------------------
Income Taxes ------------
Income or loss credited to the partners' capital accounts is reportable for income tax purposes by the partners; therefore, no provision for income taxes has been made in the accompanying financial statements. The Partnership's tax returns are subject to examination by federal and state taxing authorities. Because many types of transactions are susceptible to varying interpretations under federal and state income tax laws and regulations, certain amounts may be subject to change at a later date upon final determination by the respective taxing authorities.
3. Partnership Purchase Option ---------------------------
Centocor has entered into a Partnership Purchase Option Agreement with each of the limited partners. Under its terms, Centocor has the option to purchase each limited partnership interest upon the earlier of (a) the limited partners having received distributions from the joint venture (see Note 4) equal to 15 percent of their capital contributions to the Partnership and the expiration of at least 24 months after the first commercial sale of products by the joint venture or (b) the expiration of at least 48 months after the first commercial sale of products by the joint venture; but, in any event, not prior to the expiration of the then applicable long-term capital gains holding period after the expenditure by Centocor of all funds paid to it pursuant to the Development Agreement. Through the joint venture, Centocor commenced sales of ReoPro(Trademark) to Lilly in February 1995. The ability of Centocor to exercise this option is highly dependent upon the future financial condition of Centocor.
If Centocor exercises the Partnership Purchase Option, each limited partner will enter into a Partnership Purchase Agreement with Centocor which sets forth the terms under which Centocor will purchase the limited partnership interests. Under the terms of the Partnership Purchase Agreement, the aggregate purchase price for the limited partnership interests would be payable as follows: (a) an advance payment of $13,598,000 in cash (or, at Centocor's option, $15,229,000 in Centocor common stock), and (b) quarterly payments equal to certain percentages of revenue to Centocor from sales of the Partnership's products, or products of Centocor or its affiliates which are competitive, or sold in combination, with the Partnership's products. Beginning with the 12th calendar quarter after the calendar quarter in which the advance payment is made, Centocor's payment to the limited partners will be reduced by 25 percent of the amount which the limited partners would otherwise have received until Centocor has recouped the amount of the advance payment.
Centocor Partners III, L.P. Notes to Financial Statements -------------------------------------------------------------------------------
4. Joint Venture -------------
The Partnership and Centocor have formed a joint venture for the purpose of commercializing any products developed within the Partnership's field of activity. The joint venture agreement provides that Centocor shall manufacture the products on behalf of the joint venture for its actual costs of manufacturing. Under the joint venture agreement, Centocor also provides marketing services for the joint venture for a commission of 17 percent of joint venture sales and receives 10 percent of joint venture sales as reimbursement for its management and administrative services. The profits and losses of the joint venture are to be allocated 75 percent to Centocor and 25 percent to the Partnership.
The joint venture will terminate upon the occurrence of certain events, principally related to the exercise or expiration of the purchase option granted to Centocor (see Note 3).
On July 15, 1992, Centocor and Eli Lilly and Company ("Lilly") entered into a Sales and Distribution Agreement, pursuant to which Lilly was granted the option to be the exclusive worldwide distributor for ReoPro(Trademark). Pursuant to the Agreement, the Joint Venture recognized $500,000 of revenue in 1992 related to the ReoPro(Trademark) option. During the second quarter of 1993, Lilly exercised its option to become the exclusive worldwide distributor for ReoPro(Trademark) and Centocor and Lilly amended their Sales and Distribution Agreement. As part of the amendment, Lilly has assisted Centocor and will continue to assist Centocor in the regulatory filings and continued development of ReoPro(Trademark) for various clinical indications.
Status of ReoPro(Trademark) ---------------------------
In December 1994, the U.S. Food and Drug Administration ("FDA") granted Centocor a product license for ReoPro(Trademark), a product indicated for the reduction of acute ischemic cardiac complications in patients undergoing angioplasty procedures who are high risk for abrupt artery closure, and the Committee for Proprietary Medicinal Products ("CPMP") issued a positive opinion regarding the granting of marketing authorization in 11 of the 12 member states for ReoPro(Trademark). Belgium, the only dissenting country in the European Union ("EU"), will require additional clinical trial results. For products recommended for approval by the CPMP prior to January 1, 1995, each EU member state issues its own national licenses. In addition, some countries require approvals for pricing and reimbursement. ReoPro(Trademark) has been approved for sale in Norway, Sweden, The U.K., and The Netherlands. Through the joint venture, Centocor commenced sales of ReoPro(Trademark) to Lilly in January 1995. The level of sales of ReoPro(Trademark) will depend upon a number of factors, including the timing and extent of additional regulatory approvals for ReoPro(Trademark), approval and commercialization of competitive products, the degree of acceptance of ReoPro(Trademark) in the marketplace, and the strength of Centocor's patent position and that of others.
Centocor Partners III, L.P. Notes to Financial Statements -------------------------------------------------------------------------------
5. Research Funding ----------------
The initial funding by the limited partners for the Partnership's research program pursuant to the Development Agreement with Centocor was exhausted in 1990. In order to continue the research program, the Partnership extended the terms of the Development Agreement with Centocor. Approximately $91,224,000 of the Partnership's research costs through December 31, 1994 were funded by the general partner. At December 31, 1994 and December 31, 1993, approximately $6,997,000 and $4,134,000, respectively, was due to Centocor for expenditures under the Development Agreement. The general partner may continue to provide funding but is under no obligation to do so. The ability of the general partner to continue to fund, and the ability of Centocor to perform under, the Development Agreement is highly dependent upon the future financial condition of Centocor.
INDEPENDENT AUDITORS' REPORT
The Partners of Centocor Partners III, L.P.:
We have audited the accompanying balance sheets of Centocor Partners III, L.P. as of December 31, 1994 and 1993, and the related statements of operations, partners' capital and cash flows for each of the years in the three-year period ended December 31, 1994. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Centocor Partners III, L.P. at December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles.
Continuation of the product research programs by the Partnership is dependent upon the general partner continuing to provide funding and/or the ability of the Partnership to obtain funding from another source. See Note 5 to the financial statements.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania March 24, 1995
Schedule II
CENTOCOR, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 1994 (IN THOUSANDS)
(1) The Company recorded reserves for HA-1A inventories of $3,500,000 and $64,877,000 in 1993 and 1992, due to the uncertainties regarding future HA-1A sales resulting from the current regulatory and commercial status of HA-1A.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CENTOCOR, INC.
March 30, 1995 By: /s/David P. Holveck -------------------------- David P. Holveck (President and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Exhibit Index -------------
Exhibit Number ------- 12 Statement re: Computation of Ratios.
21 Subsidiaries of The Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule.