ITEM 1. BUSINESS Georgia-Pacific Corporation (together with its subsidiaries herein referred to as the "Corporation") was organized in 1927 under the laws of the State of Georgia.
Information pertaining to the Corporation's business, including industry segments, set forth under the captions "Building Products," "Pulp and Paper," "Management's Discussion and Analysis," Note 2 of the Notes to Financial Statements, "Sales and Operating Profits by Industry Segment," and "Operating Statistics" of the Corporation's 1995 Annual Report to Shareholders is incorporated herein by reference.
TIMBER RESOURCES Information pertaining to the Corporation's timber resources set forth under the captions "Building Products - Forest Resources" and "Operating Statistics" of the Corporation's 1995 Annual Report to Shareholders is incorporated herein by reference.
MINERAL RESOURCES Information pertaining to the Corporation's gypsum resources set forth under the caption "Building Products - Gypsum Products" of the Corporation's 1995 Annual Report to Shareholders is incorporated herein by reference.
ENVIRONMENT Information pertaining to environmental issues and the Corporation's expenditures for pollution control facilities and equipment set forth under the captions "Environment," "Management's Discussion and Analysis - Investment Activities" and Note 10 of the Notes to Financial Statements of the Corporation's 1995 Annual Report to Shareholders is incorporated herein by reference.
EMPLOYEES Information pertaining to persons employed by the Corporation set forth under the caption "Management's Discussion and Analysis - Other" of the Corporation's 1995 Annual Report to Shareholders is incorporated herein by reference.
ITEM 2.

ITEM 2. PROPERTIES Information pertaining to the number of manufacturing facilities as of December 31, 1995 and capacity and historical production volumes as of December 31, 1995 by plant type set forth under the caption "Operating Statistics" of the Corporation's 1995 Annual Report to Shareholders is incorporated herein by reference.
Information concerning the Corporation's timber and mineral resources is presented under Item 1 of this Form 10-K.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS The information contained in Note 10 of the Notes to Financial Statements of the Corporation's 1995 Annual Report to Shareholders ("Note 10") is incorporated herein by reference.
ENVIRONMENTAL PROCEEDINGS Pursuant to the rules of the Securities and Exchange Commission, the Corporation is required to describe environmental proceedings to which a governmental authority is a party and which involve potential monetary sanctions, exclusive of interest and costs, of at least $100,000. Following are descriptions of the legal proceedings meeting this criteria.
As last reported in the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, about July 20, 1992, the Corporation received from the Environmental Protection Agency ("EPA") a Notice of Violation ("NOV") alleging past violations of a construction permit regulating air emissions at the Corporation's Gaylord, Michigan facility. On March 31, 1993, the Corporation received a second NOV alleging past violations at the same facility. In addition, the State of Michigan has issued three letters alleging violations of the facility's opacity limits. The Corporation recently reached an agreement in principle with the U. S. Department of Justice, the EPA, and the State of Michigan to settle these claims and all others relating to the facility, which will entail payment of a $700,000 fine and the installation by the Corporation of air emission controls at the Gaylord facility. The Corporation is presently negotiating the final terms and conditions of the Consent Agreement.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1995, there were no matters submitted to a vote of security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information with respect to the Market for the Corporation's Common Equity and Related Stockholder Matters set forth under the captions "Highlights," Note 12 of the Notes to Financial Statements and "Investor Information" of the Corporation's 1995 Annual Report to Shareholders is incorporated herein by reference. As of the close of business on March 7, 1996, the Corporation's common stock price was $67.25, and there were approximately 42,900 record holders of its Common Stock.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA Information with respect to Selected Financial Data set forth under the captions "Selected Financial Data - Operations" and "Selected Financial Data - Financial Position, End of Year" of the Corporation's 1995 Annual Report to Shareholders is incorporated herein by reference.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information with respect to Management's Discussion and Analysis set forth under the caption "Management's Discussion and Analysis" of the Corporation's 1995 Annual Report to Shareholders is incorporated herein by reference.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information with respect to Financial Statements and Supplementary Data as set forth under the captions "Statements of Income," "Statements of Cash Flows," "Balance Sheets," "Statements of Shareholders' Equity," "Notes to Financial Statements" and "Report of Independent Public Accountants" of the Corporation's 1995 Annual Report to Shareholders is incorporated herein by reference.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with accountants on accounting and financial disclosure within the twenty-four months prior to the date of the most recent financial statements filed as part of the 1995 Annual Report on Form 10-K.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to Directors of the Corporation and disclosure pursuant to Item 405 of Regulation S-K is incorporated herein by reference to the Corporation's Notice of 1996 Annual Meeting of Shareholders and Proxy Statement expected to be dated March 22, 1996.
Executive Officers of the Registrant
The executive officers of the Corporation are as follows:
Alston D. Correll has been Chief Executive Officer of Georgia-Pacific since May 1993, and Chairman since December 1993. He served as President and Chief Operating Officer of the Corporation from August 1991 until May 1993, and President and Chief Executive Officer from May 1993 until December 1993. Mr. Correll served as Executive Vice President - Pulp and Paper from April 1989 through July 1991.
W. E. Babin has been Executive Vice President - Pulp and Paper since January 1993. Prior to that time, Mr. Babin served as Executive Vice President - Pulp and Paperboard from May 1992 to January 1993, Senior Vice President - Containerboard and Packaging from January 1991 to May 1992, and Group Vice President - Containerboard and Packaging from February 1990 to January 1991.
John F. McGovern has been Executive Vice President - Finance since September 1995, and Chief Financial Officer since February 1994. He served as Senior Vice President - Finance from January 1993 until September 1995, Vice President - Finance from 1983 until January 1993, and Treasurer from March 1992 to October 1993.
Davis K. Mortensen has been Executive Vice President - Building Products since 1989.
James E. Bostic, Jr. has been Senior Vice President - Environmental, Government Affairs and Communications since February 1995. Prior to that time, he served as Group Vice President - Communication Papers from April 1992 through January 1995, Group Vice President - Butler Paper and Mail-Well from January 1992 to April 1992, and Vice President - Butler Paper and Mail-Well from January 1991 to January 1992. In addition, Mr. Bostic was General Manager, Commercial Products and Systems Division, from 1990 to 1991.
Gerard R. Brandt has been Senior Vice President - Human Resources since February 1995. Prior to that time, he served as Group Vice President - Packaged Products from July 1993 through January 1995, Group Vice President - Butler Paper and Mail-Well from May 1992 to July 1993, Vice President - Butler Paper and Mail- Well from April 1992 to May 1993, and Vice President - Communication Papers Manufacturing from May 1990 to April 1992.
Donald L. Glass has been Senior Vice President - Building Products Manufacturing and Sales since 1991 and served as Senior Vice President - Building Products Manufacturing from 1989 to 1991.
James F. Kelley joined the Corporation as Senior Vice President - Law and General Counsel in December 1993. Prior to that time, he was a partner in the law firm of Jones, Day, Reavis & Pogue.
Clint M. Kennedy has been Senior Vice President - Pulp, Bleached Board and Logistics since February 1995. Prior to that time, he served as Group Vice President - Pulp and Bleached Board from July 1992 through January 1995 and Vice President - Sales and Marketing, Pulp and Bleached Board from May 1990 to July 1992.
Maurice W. Kring has been Senior Vice President - Containerboard and Packaging since February 1994. Prior to that time, he served as Group Vice President - Containerboard and Packaging from July 1993 until February 1994 and Group Vice President - Packaged Products from 1987 to July 1993.
George A. MacConnell has been Senior Vice President - Distribution and Millwork since February 1993 and served as Senior Vice President - Distribution and Specialty Operations from 1989 to February 1993.
John F. Rasor has been Senior Vice President - Forest Resources since February 1995. Prior to that time, he served as Group Vice President - Forest Resources from May 1992 through January 1995, Group Vice President - Timber from January 1992 to May 1992, Vice President - Forest Resources from 1991 to January 1992, and Vice President - Eastern Wood Products Manufacturing Division from 1989 to 1991.
David W. Reynolds has been Senior Vice President - Administration since February 1995. Prior to that time, he served as Senior Vice President - Human Resources and Administration from 1989 through January 1995.
Lee M. Thomas has been Senior Vice President - Paper since February 1995. Prior to that time, he served as Senior Vice President - Environmental, Government Affairs and Communications from February 1994 through January 1995, and Senior Vice President - Environmental and Government Affairs from March 1993 through January 1994. Prior to joining the Corporation in March 1993, Mr. Thomas served as Chairman and Chief Executive Officer of Law Companies Environmental Group, Inc. (an engineering and environmental services company) from 1989 until March 1993.
James E. Terrell was elected Vice President of the Corporation in January 1991 and has served as Controller since 1989.
The Corporation's Board of Directors elects officers of the Corporation who hold the offices to which they are elected until the next annual organizational meeting of the Board. The Compensation Committee determines the compensation of officers who are also directors of the Corporation, and makes recommendations to the Board of Directors regarding compensation for all other officers of the Corporation. The amount of compensation is then determined by the Board of Directors based on such recommendation. There are no other arrangements or understandings between the respective officers and any other person pursuant to which such officers are elected.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION Information with respect to Executive Compensation is incorporated herein by reference to the Corporation's Notice of 1996 Annual Meeting of Shareholders and Proxy Statement expected to be dated March 22, 1996.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to Security Ownership of Certain Beneficial Owners and Management is incorporated herein by reference to the Corporation's Notice of 1996 Annual Meeting of Shareholders and Proxy Statement expected to be dated March 22, 1996.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to Certain Relationships and Related Transactions is incorporated herein by reference to the Corporation's Notice of 1996 Annual Meeting of Shareholders and Proxy Statement expected to be dated March 22, 1996.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Annual Report for Georgia-Pacific Corporation and subsidiaries:
(1) The Financial Statements, Notes to Financial Statements and the Report of Independent Public Accountants dated February 9, 1996 listed below are incorporated herein by reference to the Corporation's 1995 Annual Report to Shareholders:
Statements of Income for the years ended December 31, 1995, 1994 and 1993.
Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993.
Balance Sheets as of December 31, 1995 and 1994.
Statements of Shareholders' Equity for the years ended December 31, 1995, 1994 and 1993.
Notes 1 through 12 of the Notes to Financial Statements
Report of Independent Public Accountants
(2) Financial Statement Schedules:
Report of Independent Public Accountants as to Schedule
II Valuation and Qualifying Accounts for the years ended December 31, 1995, 1994 and 1993.
Schedules other than that listed above are omitted because they are not required, are inapplicable or the information is otherwise shown in the financial statements or notes thereto.
(3) Exhibits
The exhibits required to be filed as part of this Annual Report on Form 10-K are as follows:
NUMBER DESCRIPTION
2.1 Asset Purchase Agreement between Domtar Inc. and Georgia-Pacific Corporation dated November 8, 1995 (Filed as Exhibit 2.1 to the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, and incorporated herein by this reference thereto).
2.2 Share Purchase Agreement between Domtar Industries Inc., Domtar Gypsum Inc., Domtar Inc. and Georgia- Pacific Corporation dated November 8, 1995 (Filed as Exhibit 2.2 to the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, and incorporated herein by this reference thereto).
3.1 Articles of Incorporation, restated as of October 30, 1989 (Filed as Exhibit 3.1 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by this reference thereto).
3.2 Bylaws as amended to date (Filed as Exhibit 3.2 to the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, and incorporated herein by this reference thereto).
4.1(i) Credit Agreement, dated as of June 30, 1993, among Georgia-Pacific Corporation, as borrower, the lenders named therein, and Bank of America National Trust and Savings Association, as agent (Filed as Exhibit 4.1(i) to the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, and incorporated herein by this reference thereto).
4.1(ii) Amendment No. 1 to Credit Agreement, dated as of November 30, 1994, among Georgia-Pacific Corporation, the lenders named therein and Bank of America National Trust and Savings Association, as agent (Filed as Exhibit 4.1(ii) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by this reference thereto).
4.2 In reliance upon Item 601(b)(4)(iii) of Regulation S-K, various instruments defining the rights of holders of long-term debt of the Corporation are not being filed herewith because the total of securities authorized under each such instrument does not exceed 10% of the total assets of the Corporation. The Corporation hereby agrees to furnish a copy of any such instrument to the Commission upon request.
4.3 Rights Agreement, dated as of July 31, 1989, between Georgia-Pacific Corporation and First Chicago Trust Company of New York, with form of Rights Certificate attached as Exhibit A (Filed as Exhibit 4.3 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by the reference thereto).
4.4(i) Indenture, dated as of March 1, 1983, between Georgia- Pacific Corporation and The Chase Manhattan Bank (National Association), Trustee (Filed as Exhibit 4(a) to the Corporation's Registration Statement on Form S-3 dated May 9, 1990, and incorporated herein by this reference thereto).
4.4(ii) First Supplemental Indenture, dated as of July 27, 1988, among Georgia-Pacific Corporation, The Chase Manhattan Bank (National Association), Trustee, and Morgan Guaranty Trust Company of New York (Filed as Exhibit 4.4(ii) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated herein by this reference thereto).
10.1 Directors Group Life Insurance Program (Filed as Exhibit 10.1 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by this reference thereto).*
10.2(i) Executive Retirement Agreement (Officers Retirement Plan) (Filed as Exhibit 10.2(i) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by this reference thereto).*
10.2(ii) Amendment No. 1 to Executive Retirement Agreement (Officers Retirement Plan) (Filed as Exhibit 10.2(ii) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by this reference thereto).*
10.2(iii) Executive Retirement Agreement (Officers Retirement Plan), as amended, as in effect after January 1, 1992 (Filed as Exhibit 10.2(iii) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated herein by this reference thereto).*
*Management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of this Annual Report on Form 10-K.
10.2(iv) Executive Retirement Agreement of James F. Kelley (entered into December 6, 1993). (Filed as Exhibit 10.2 (v) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by this reference thereto).*
10.3(i) Key Salaried Employees Group Insurance Plan - Pre-1987 Group (As Amended and Restated Effective January 1, 1987) (Filed as Exhibit 10.3(i) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by this reference thereto).*
10.3(ii) Amendment No. 1 (Effective January 1, 1991) to the Key Salaried Employees Group Insurance Plan - Pre-1987 Group (As Amended and Restated Effective January 1, 1987) (Filed as Exhibit 10.3(ii) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by this reference thereto).*
10.3(iii) Key Salaried Employees Group Insurance Plan - Post-1986 Group (Effective January 1, 1987) (Filed as Exhibit 10.3(iii) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by this reference thereto).*
10.3(iv) Amendment No. 1 (Effective January 1, 1991) to the Key Salaried Employees Group Insurance Plan - Post-1986 Group (Effective January 1, 1987) (Filed as Exhibit 10.3(iv) to the Corporation's Annual Report on Form 10- K for the year ended December 31, 1991, and incorporated herein by this reference thereto).*
10.3(v) Amendment No. 2 to the Key Salaried Employees Group Insurance Plan - Post-1986 Group (effective January 1, 1987) (Filed as Exhibit 10.3(v) to the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, and incorporated herein by this reference thereto).*
*Management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of this Annual Report on Form 10-K.
10.3(vi) Amendment No. 3 to the Key Salaried Employees Group Insurance Plan - Post-1986 Group (effective August 1, 1994) (Filed as Exhibit 10.3(vi) to the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, and incorporated herein by this reference thereto).*
10.4 Directors Retirement Program (Filed as Exhibit 10.4 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by this reference thereto).*
10.5(i) 1990 Long-Term Incentive Plan (Filed as Exhibit 10.8 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, and incorporated herein by this reference thereto).*
10.5(ii) Amendment No. 1 to 1990 Long-Term Incentive Plan (Filed as Exhibit 10.8(ii) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by this reference thereto).*
10.6 1994 Management Incentive Plan (Filed as Exhibit 10.11 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by this reference thereto).*
10.7 1995 Economic Value Incentive Plan (Filed as Exhibit 10.10 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by this reference thereto).*
10.8(i) 1995 Shareholder Value Incentive Plan (Filed as Exhibit 10.11(i) to the Corporation's Annual Report on Form 10- K for the year ended December 31, 1994, and incorporated herein by this reference thereto).*
10.8(ii) Amendment No. 1 to 1995 Shareholder Value Incentive Plan.*
10.8(iii) Form of Shareholder Value Incentive Stock Option (Filed as Exhibit 10.11(ii) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by this reference thereto).*
*Management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of this Annual Report on Form 10-K.
10.9(i) Outside Directors Stock Plan, adopted March 17, 1995 (Filed as Exhibit 10.12 to the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, and incorporated herein by this reference thereto).*
10.9(ii) Receivables Purchase Agreement dated as of June 1, 1990, among Georgia-Pacific Corporation, as the Seller, and Asset Securitization Cooperative Corporation, Corporate Asset Funding Company, Inc., Falcon Asset Securitization Corporation and Matterhorn Capital Corporation, as the Purchasers, and Canadian Imperial Bank of Commerce, as the Administrative Agent (Filed as Exhibit 10.17(i) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, and incorporated herein by this reference thereto).
10.9(iii) Receivables Purchase Agreement dated as of June 1, 1990, among Georgia-Pacific Corporation, as the Seller, and Canadian Imperial Bank of Commerce, Citibank, N.A. and The First National Bank of Chicago, as the Secondary Purchasers, and Matterhorn Capital Corporation and Canadian Imperial Bank of Commerce, as the Administrative Agent (Filed as Exhibit 10.17(ii) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, and incorporated herein by this reference thereto).
10.10(i) Agreement, effective as of March 15, 1993, among Georgia-Pacific Corporation, Hercules Incorporated, and Lee M. Thomas (Filed as Exhibit 10.13 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by this reference thereto).
10.10(ii) First Addendum to Agreement, effective as of February 1, 1995, among Georgia-Pacific Corporation, Hercules Incorporated, and Lee M. Thomas (Filed as Exhibit 10.13(ii) to the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, and incorporated herein by this reference thereto).
11 Statements of Computation of Per Share Earnings.
12 Statements of Computation of Ratio of Earnings to Fixed Charges.
*Management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of this Annual Report on Form 10-K.
13 Portions of Georgia-Pacific Corporation's 1995 Annual Report to Shareholders. Such Report is not deemed to be filed with the Commission as part of this Annual Report on Form 10-K, except for the portions thereof expressly incorporated by reference.
21 Subsidiaries.
23 Consent of Independent Public Accountants.
24 Powers of Attorney.
27 Financial Data Schedule.
99 Parts 2 and 3 of Article 11 of the Georgia Business Corporation Code (successor to Articles 11 and 11A of the Georgia Business Corporation Code and Section 14-2- 230 through 14-2-235 and 14-2-235 through 14-2-238 of the Official Code of Georgia Annotated) (Filed as Exhibit 28 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, and incorporated herein by this reference thereto).
(b) Reports on Form 8-K
The Corporation filed Current Reports on Form 8-K dated October 20, 1995, in which it reported under Item 5 - "Other Events," December 8, 1995, in which it reported under Item 5 - "Other Events" and Item 7 - "Financial Statements, Pro Forma Financial Information and Exhibits," and December 12, 1995, in which it reported under Item 5 - "Other Events."
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.
GEORGIA-PACIFIC CORPORATION (Registrant)
By: /s/ A. D. Correll -------------------------- (A. D. Correll, Chairman and Chief Executive Officer)
Date: March 12, 1996
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 and in the capacities and on the dates indicated.
*As Attorney-in-Fact for the Directors or Officers by whose names an asterisk appears.
Report of Independent Public Accountants as to Schedule
To the Shareholders and the Board of Directors of Georgia-Pacific Corporation:
We have audited in accordance with generally accepted auditing standards, the financial statements of Georgia-Pacific Corporation incorporated by reference in this Form 10-K, and have issued our report thereon dated February 9, 1996. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is the responsibility of the Corporation's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/S/ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Atlanta, Georgia February 9, 1996
GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
(Millions)
(1)Includes $2 million deducted with the sale of Butler Paper Company assets and $9 million of accounts written off. (2)Recoveries of accounts previously written off. (3)Accounts written off.
GEORGIA-PACIFIC CORPORATION
INDEX TO EXHIBITS FILED WITH THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995
NUMBER DESCRIPTION
2.1 Asset Purchase Agreement between Domtar Inc. and Georgia-Pacific Corporation dated November 8, 1995 (Filed as Exhibit 2.1 to the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, and incorporated herein by this reference thereto).
2.2 Share Purchase Agreement between Domtar Industries Inc., Domtar Gypsum Inc., Domtar Inc. and Georgia-Pacific Corporation dated November 8, 1995 (Filed as Exhibit 2.2 to the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, and incorporated herein by this reference thereto).
3.1 Articles of Incorporation, restated as of October 30, 1989 (Filed as Exhibit 3.1 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by this reference thereto).
3.2 Bylaws as amended to date (Filed as Exhibit 3.2 to the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, and incorporated herein by this reference thereto).
4.1(i) Credit Agreement, dated as of June 30, 1993, among Georgia-Pacific Corporation, as borrower, the lenders named therein, and Bank of America National Trust and Savings Association, as agent (Filed as Exhibit 4.1(i) to the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, and incorporated herein by this reference thereto).
4.1(ii) Amendment No. 1 to Credit Agreement, dated as of November 30, 1994, among Georgia-Pacific Corporation, the lenders named therein and Bank of America National Trust and Savings Association, as agent (Filed as Exhibit 4.1(ii) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by this reference thereto).
4.2 In reliance upon Item 601(b)(4)(iii) of Regulation S-K, various instruments defining the rights of holders of long-term debt of the Corporation are not being filed herewith because the total of securities authorized under each such instrument does not exceed 10% of the total assets of the Corporation. The Corporation hereby agrees to furnish a copy of any such instrument to the Commission upon request.
4.3 Rights Agreement, dated as of July 31, 1989, between Georgia-Pacific Corporation and First Chicago Trust Company of New York, with form of Rights Certificate attached as Exhibit A (Filed as Exhibit 4.3 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by the reference thereto).
4.4(i) Indenture, dated as of March 1, 1983, between Georgia-Pacific Corporation and The Chase Manhattan Bank (National Association), Trustee (Filed as Exhibit 4(a) to the Corporation's Registration Statement on Form S-3 dated May 9, 1990, and incorporated herein by this reference thereto).
4.4(ii) First Supplemental Indenture, dated as of July 27, 1988, among Georgia-Pacific Corporation, The Chase Manhattan Bank (National Association), Trustee, and Morgan Guaranty Trust Company of New York (Filed as Exhibit 4.4(ii) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated herein by this reference thereto).
10.1 Directors Group Life Insurance Program (Filed as Exhibit 10.1 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by this reference thereto).
10.2(i) Executive Retirement Agreement (Officers Retirement Plan) (Filed as Exhibit 10.2(i) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by this reference thereto).
10.2(ii) Amendment No. 1 to Executive Retirement Agreement (Officers Retirement Plan) (Filed as Exhibit 10.2(ii) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by this reference thereto).
10.2(iii) Executive Retirement Agreement (Officers Retirement Plan), as amended, as in effect after January 1, 1992 (Filed as Exhibit 10.2(iii) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated herein by this reference thereto).
10.2(iv) Executive Retirement Agreement of James F. Kelley (entered into December 6, 1993). (Filed as Exhibit 10.2(v) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by this reference thereto).
10.3(i) Key Salaried Employees Group Insurance Plan - Pre-1987 Group (As Amended and Restated Effective January 1, 1987) (Filed as Exhibit 10.3(i) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by this reference thereto).
10.3(ii) Amendment No. 1 (Effective January 1, 1991) to the Key Salaried Employees Group Insurance Plan - Pre-1987 Group (As Amended and Restated Effective January 1, 1987) (Filed as Exhibit 10.3(ii) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by this reference thereto).
10.3(iii) Key Salaried Employees Group Insurance Plan - Post-1986 Group (Effective January 1, 1987) (Filed as Exhibit 10.3(iii) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by this reference thereto).
10.3(iv) Amendment No. 1 (Effective January 1, 1991) to the Key Salaried Employees Group Insurance Plan - Post-1986 Group (Effective January 1, 1987) (Filed as Exhibit 10.3(iv) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by this reference thereto).
10.3(v) Amendment No. 2 to the Key Salaried Employees Group Insurance Plan - Post-1986 Group (effective January 1, 1987) (Filed as Exhibit 10.3(v) to the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, and incorporated herein by this reference thereto).
10.3(vi) Amendment No. 3 to the Key Salaried Employees Group Insurance Plan - Post-1986 Group (effective August 1, 1994) (Filed as Exhibit 10.3(vi) to the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, and incorporated herein by this reference thereto).
10.4 Directors Retirement Program (Filed as Exhibit 10.4 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by this reference thereto).
10.5(i) 1990 Long-Term Incentive Plan (Filed as Exhibit 10.8 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, and incorporated herein by this reference thereto).
10.5(ii) Amendment No. 1 to 1990 Long-Term Incentive Plan (Filed as Exhibit 10.8(ii) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by this reference thereto).
10.6 1994 Management Incentive Plan (Filed as Exhibit 10.11 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by this reference thereto).
10.7 1995 Economic Value Incentive Plan (Filed as Exhibit 10.10 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by this reference thereto).
10.8(i) 1995 Shareholder Value Incentive Plan (Filed as Exhibit 10.11(i) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated therein by this reference thereto).
10.8(ii) Amendment No. 1 to 1995 Shareholder Value Incentive Plan. (1)
10.8(iii) Form of Shareholder Value Incentive Stock Option (Filed as Exhibit 10.11(ii) to the Corporation's Annual Report Form 10-K for the year ended December 31, 1994, and incorporated herein by this reference thereto).
10.9(i) Outside Directors Stock Plan, adopted March 17, 1995 (Filed as Exhibit 10.12 to the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, and incorporated herein by this reference thereto).
10.9(ii) Receivables Purchase Agreement dated as of June 1, 1990, among Georgia-Pacific Corporation, as the Seller, and Asset Securitization Cooperative Corporation, Corporate Asset Funding Company, Inc., Falcon Asset Securitization Corporation and Matterhorn Capital Corporation, as the Purchasers, and Canadian Imperial Bank of Commerce, as the Administrative Agent (Filed as Exhibit 10.17(i) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, and incorporated herein by this reference thereto).
10.9(iii) Receivables Purchase Agreement dated as of June 1, 1990, among Georgia-Pacific Corporation, as the Seller, and Canadian Imperial Bank of Commerce, Citibank, N.A. and The First National Bank of Chicago, as the Secondary Purchasers, and Matterhorn Capital Corporation and Canadian Imperial Bank of Commerce, as the Administrative Agent (Filed as Exhibit 10.17(ii) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, and incorporated herein by this reference thereto).
10.10(i) Agreement, effective as of March 15, 1993, among Georgia-Pacific Corporation, Hercules Incorporated, and Lee M. Thomas (Filed as Exhibit 10.13 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by this reference thereto).
10.10(ii) First Addendum to Agreement, effective as of February 1, 1995, among Georgia-Pacific Corporation, Hercules Incorporated, and Lee M. Thomas (Filed as Exhibit 10.13(ii) to the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, and incorporated herein by this reference thereto).
11 Statements of Computation of Per Share Earnings. (1)
12 Statements of Computation of Ratio of Earnings to Fixed Charges. (1)
13 Portions of Georgia-Pacific Corporation's 1995 Annual Report to Shareholders. Such Report is not deemed to be filed with the Commission as part of this Annual Report on Form 10-K, except for the portions thereof expressly incorporated by reference.(1)
21 Subsidiaries. (1)
(1) Filed via EDGAR
23 Consent of Independent Public Accountants. (1)
24 Powers of Attorney. (1)
27 Financial Data Schedule. (1)
99 Parts 2 and 3 of Article 11 of the Georgia Business Corporation Code (successor to Articles 11 and 11A of the Georgia Business Corporation Code and Section 14-2-230 through 14-2-235 and 14-2-235 through 14-2- 238 of the Official Code of Georgia Annotated) (Filed as Exhibit 28 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, and incorporated herein by this reference thereto).
(1) Filed via EDGAR


Item 2. Properties
The Company leases space in all of one and a portion of two other facilities in Princeton, New Jersey and owns a manufacturing facility in Indianapolis, Indiana.
The Company currently leases a building of approximately 50,000 square feet that houses its scientific laboratories, manufacturing facilities and certain offices in the Princeton Forrestal Center located near Princeton, New Jersey. The lease, with an initial term of twelve years, commenced January 1, 1995, and the Company has options to renew for up to an additional ten years. Lease payments for the year ended December 31, 1995 totaled approximately $568,000. Future lease payments are subject to certain contractual escalations. The Company also leases approximately 28,500 square feet of office space located in the Princeton Forrestal Center. The lease commenced March 1, 1993, with an initial lease term of ten years. Payments under this lease for the year ended December 31, 1995 totaled approximately $597,000. In January, 1995, the Company entered into a three year lease for approximately 13,200 square feet of office/warehouse space near its corporate offices. The Company also rents office space in London, England and Paris, France.
In July, 1992, the Company purchased a pharmaceutical manufacturing facility of approximately 55,000 square feet located on 26 acres of land located in Indianapolis, Indiana. The Company is retrofitting and equipping certain portions of the facility to manufacture ABELCETTM. See "Manufacturing" and "Management's Discussion and Analysis of Financial Condition and Results of Operations ---- Liquidity and Capital Resources."
Item 3.

Item 3. Legal Proceedings
Recent intellectual property litigation is described under "Business-Patents and Proprietary Technology".
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 Equity and Related Stockholder Matters
(a) Market Information
The Company's Common Stock is traded on the Nasdaq National Market System under the symbol LIPO. The following table sets forth for the periods indicated the high and low sale price for the Common Stock:
HIGH LOW 4th Quarter $21.750 $13.000 3rd Quarter 17.750 10.125 2nd Quarter 11.500 8.375 1st Quarter 13.375 7.875
4th Quarter 10.750 6.375 3rd Quarter 8.125 4.750 2nd Quarter 6.500 4.875 1st Quarter 7.750 5.875
(b) Holders
At December 31, 1995, there were approximately 1401 stockholders of record of the Company's Common Stock.
(c) Dividends
The Company has not paid any cash dividends on its Common Stock since its inception and does not anticipate paying any cash dividends on the Company's Common Stock in the foreseeable future. The declaration and payment of Common Stock dividends, if any, is within the discretion of the Board of Directors and will depend, among other things, upon future earnings, the operating and financial condition of the Company, its capital requirements, and general business conditions.
Item 6.

Item 6. Selected Financial Data
The following table sets forth consolidated financial data with respect to the Company for each of the five years in the period ending December 31, 1995. The information set forth below should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes included elsewhere herein.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Year Ended December 31, 1995 1994 1993 1992 1991 (In thousands, except per share figures) Product Sales $ 6,164 $ -- $ -- $ -- $ -- Collaborative research and development revenues 6,589 5,831 4,877 5,767 5,938 Licensing and other fees -- 50 541 312 319 Interest and investment income 2,964 4,559 7,624 4,810 2,575
Total revenues 15,717 10,440 13,042 10,889 8,832
Cost of goods sold 2,304 -- -- -- -- Research and development expenses 30,149 31,713 25,072 15,000 9,326 Selling, general and administrative expenses 18,631 12,072 10,193 5,488 3,586 Interest expense 294 308 254 76 6
Total expenses 51,378 44,093 35,519 20,564 12,918
Net loss (35,661) (33,653) (22,477) (9,675) (4,086)
Preferred Stock dividends (5,348) (5,348) (5,348) -- --
Net loss applicable to Common Stock $(41,009) $(39,001) $(27,825)$ (9,675)$ (4,086)
Net loss per share applicable to Common Stock $ (1.50) $ (1.64) $ (1.18)$ (.43)$ (.22)
Weighted average number of ommon shares outstanding 27,293 23,850 23,536 22,384 18,221
CONSOLIDATED BALANCE SHEETS DATA: December 31, 1995 1994 1993 1992 1991 (In thousands)
Cash and marketable securities(1) $72,333 $ 72,157 $119,743 $76,399 $45,678 Working capital 53,119 51,7463 102,139 71,910 43,604 Total assets 105,926 93,196 139,632 92,756 50,803 Total long-term liabilities 4,104 5,917 7,696 2,986 607 Accumulated deficit (144,520) (108,859) (75,206) (52,729) (43,054) Total stockholders' equity(2) 89,832 78,353 122,347 83,200 46,861
(1)Includes restricted cash of $6,642, $4,880 and $4,748 in 1995, 1994 and 1993, respectively. See Note 1 of Notes to Consolidated Financial Statements. (2)In 1993, the Company adopted the provisions of Financial Accounting Standard 115 "Accounting for Certain Investments in Debt and Equity Securities." The effect of this adoption was to increase Total stockholders' equity by $650 in 1993 and reduce Total stockholders' equity by $5,033 and $543 in 1994 and 1995 respectively.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
The Liposome Company, Inc. (the "Company") is a leading biotechnology company engaged in the discovery, development and commercialization of proprietary lipid and liposome-based pharmaceuticals for the treatment, prevention and diagnosis of inadequately treated, life-threatening illnesses. ABELCETTM (amphotericin B lipid complex injection), the Company's first commercialized product, has been approved for marketing for certain indications in the United States, United Kingdom, Spain, Luxembourg and Iceland and is the subject of marketing application filings in several other countries. In addition to ABELCETTM, the Company's other lead products are TLC C-53 and TLC D-99. TLC C-53, liposomal prostaglandin E1, is being developed primarily for the treatment of acute respiratory distress syndrome ("ARDS"). Patients are being accrued into a pivotal Phase III clinical study for the treatment of ARDS. TLC D-99, liposomal doxorubicin, is being developed in conjunction with a corporate sponsor primarily as a first line treatment for metastatic breast cancer. TLC D-99 is currently being studied in two Phase III clinical trials. The Company also has a continuing discovery research program which concentrates primarily on the treatment of cancer and inflammatory conditions.
RESULTS OF OPERATIONS
Revenues
Total revenues for the year ended December 31, 1995 were $15,717,000, an increase of $5,277,000 or 50.5% as compared to the year ended December 31, 1994. Revenues in 1994 were $10,440,000, a decrease of $2,602,000 or 20.0% compared to the 1993 level. The primary components of revenues for the Company are collaborative research and development revenues, interest and investment income and commencing in 1995, product sales.
In May, 1995 the Company filed a New Drug Application ("NDA") with the U.S. Food and Drug Administration ("FDA") for ABELCET. The application was given a priority review, and in November, ABELCET was cleared for marketing by the FDA for the treatment of aspergillosis in patients who have failed on or who are intolerant of conventional amphotericin B. Initial U.S. shipments of ABELCET were made in December. In February, 1995, the Company received approval from the Medicines Control Agency of the United Kingdom to market ABELCET for the second line treatment of severe systemic fungal infections. During 1995, the Company received similar approvals in Spain, Luxembourg and Iceland. In the U.S. as well as the U.K., the Company is marketing ABELCET with its own sales force as it intends to do in several other countries. Product sales for 1995 amounted to $6,164,000 of which sales to international customers totaled $3,010,000. There were no product sales in 1994 or 1993.
Collaborative research and development and other revenues were $6,589,000 for 1995, which was $708,000 or 12.0% higher than 1994 revenues. Collaborative research and development and other revenues were $5,881,000 for 1994, which was $463,000 or 8.5% higher than 1993. The Company earned its collaborative research and development revenues from two corporate sponsors, Pfizer, Inc ("Pfizer") and Schering A.G. (Berlin), in 1995, 1994 and 1993. The Company is continuing development of its liposomal doxorubicin product TLC D-99 with Pfizer as its corporate sponsor. The agreement between the Company and Schering A.G. was terminated on March 29, 1995.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Interest and investment income for the years ended December 31, 1995, 1994, and 1993 was $2,964,000, $4,559,000, and $7,624,000, respectively. Interest and investment income in 1995 decreased by $1,595,000 or 35.0% from 1994. Interest and investment income in 1994 was $3,065,000 or 40.2% less than that in 1993. During the second and third quarters of 1995 and the first quarter of 1993 the Company raised capital through the sale of equity securities. Net proceeds to the Company from these sales were $43,191,000 and $65,735,000, respectively. No significant amounts of capital were raised during 1994. Fluctuations in interest and investment income are primarily due to the significant changes in the level of cash balances the Company had available for investment as a result of these financings, the operating losses and dividend and capital expenditures incurred and the rates of interest earned on the investment portfolio.
The components of revenue can increase or decrease significantly based upon the level of product sales and the level of cost reimbursement under research collaborations, the possible initiation of new licensing agreements and, in the case of interest and investment income, the level of cash balances available for investment and the rate of interest earned and gains and losses, if any, realized on the sale of such investments.
Expenses
Total expenses for 1995, 1994 and 1993 were $51,378,000, $44,093,000 and $35,519,000, respectively. Expenses in 1995 increased 16.5% compared to 1994 and expenses in 1994 were 24.1% greater than in 1993. The Company's expenses consist primarily of research and development expenditures to perform basic research, conduct pre-clinical and clinical studies and other related product development activities, manufacture supplies of product for such testing, and prosecute applications to test and market products before various government regulatory authorities. General and administrative expenses are incurred to support the Company's operating activities. Selling expenses are incurred to market and sell the Company's commercial products. In 1995, cost of sales were incurred for the manufacture and distribution of ABELCETTM. The Company expects its aggregate expenses to continue to increase due to increased product sales as well as increased clinical trial and development costs associated with the progression of its lead proprietary products through late stage development.
Research and development expenses of $30,149,000 for 1995 decreased $1,564,000 or 4.9% over 1994. This decrease is primarily attributable to the shift in certain manufacturing costs from research and development (to manufacture clinical supplies of ABELCETTM) to cost of sales and product inventory. This decline was partially offset by increased spending for TLC C-53 as this product progressed into phase III clinical trials during 1995. As in prior years, costs associated with the development of TLC D-99 were reimbursed by Pfizer.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Research and development expenses of $31,713,000 for 1994 increased $6,641,000 or 26.5% over 1993. The primary components of this increase were the costs related to ABELCETTM, TLC C-53 and TLC D-99, reflecting higher expenditures associated with the Company's products progressing to late stages of development; increased staffing levels to support the manufacturing facility located in Princeton, which began operations in early 1994; and the expansion of the Company's medical, regulatory, and biostatistical departments to develop and conduct increased clinical trial activity. In February, 1994, the Company announced that it had suspended further development of Maitec(R), its liposomal gentamicin product, in order to focus its resources on its other products.
Selling, general and administrative expenses in 1995 were $18,631,000, an increase of $6,559,000 or 54.3% over 1994. The primary components of the increase were costs attributable to expanding the Company's international sales and marketing programs as well as preparation for the commencement of U.S. marketing activities. By year-end 1994, the Company had filed applications to market ABELCET in seventeen countries, and approval to market in the United Kingdom was received in February, 1995. Approval to market ABELCETTM in the U.S. was received in November, 1995.
Selling, general and administrative expenses in 1994 were $12,072,000, an increase of $1,879,000 or 18.4% over 1993. The primary component of the increase were costs associated with the start up of the international sales and marketing operations in anticipation of launching ABELCET.
Interest expense for 1995, 1994, and 1993 was $294,000, $308,000, and $254,000, respectively. Interest expense is mainly comprised of the costs associated with capital leases that funded machinery and construction costs at the Princeton manufacturing facility and mortgage interest related to the Indianapolis, Indiana, manufacturing facility.
Preferred Stock Dividends
In January 1993, the Company completed the issuance of 2,760,000 Depositary Shares representing 276,000 shares of Series A Cumulative Convertible Exchangeable Preferred Stock with a cumulative dividend of 7.75%. The Company has declared and paid in arrears dividends of $5,348,000 on such Preferred Stock annually since issuance. These dividends are included as part of the Company's net loss applicable to Common Stock and net loss per share of Common Stock.
Net Loss, Net Loss Applicable to Common Stock and Net Loss Per Share of Common Stock
The net loss of $35,661,000 for 1995 increased by $2,008,000 or 6.0% compared to 1994. This increase in net loss was due to the increases in total expenses of $7,285,000, and total revenues of $5,277,000. The net loss applicable to Common Stock was $41,009,000 in 1995 and $39,001,000 in 1994 as a result of the operational factors discussed above and the declaration of $5,348,000 of Preferred Stock dividends in each year. The net loss per common share was $1.50 per share for 1995 compared to $1.64 in 1994. The total loss per share of $1.50 comprises $.20 for Preferred Stock dividends and the remainder, $1.30, for the current year net loss.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Although the net loss applicable to Common Stock increased in 1995 compared to 1994, the net loss per share decreased as the Company, during 1995, sold an aggregate of 4,950,000 shares of Common Stock. The impact of these sales increased the weighted average shares outstanding by 3,021,000.
The net loss of $33,653,000 for 1994 increased by $11,176,000 or 49.7% compared to 1993. This increase in net loss was due to the increase in total expenses of $8,574,000, in conjunction with a decrease in total revenues of $2,602,000. The net loss applicable to Common Stock was $39,001,000 in 1994 and $27,825,000 in 1993 as a result of the operational factors discussed above and the declaration of $5,348,000 of Preferred Stock dividends in each year. The net loss per common share increased by $.46 per share to $1.64 per share for 1994. The total loss per share of $1.64 comprises $.23 for Preferred Stock dividends and the remainder, $1.41, for the current year net loss.
Liquidity and Capital Resources
The Company had $72,333,000 in cash reserves as of December 31, 1995. The cash reserves include cash and cash equivalents of $3,937,000, short-term investments of $50,451,000, long-term investments of $11,303,000 and restricted cash of $6,642,000. The cash reserves increased $176,000 from 1994 due to capital raised during the year, reduced by the use of funds for operations, capital acquisitions, Preferred Stock dividend payments and the current market value adjustment to investments to comply with the Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities. The cumulative effect at December 31, 1995 of SFAS No. 115 was a net unrealized loss of $543,000. In connection with certain financing arrangements, the Company is required to maintain minimum cash balances, of which the largest requirement is $20,000,000. The Company invests its excess cash in a diversified portfolio of high-grade marketable and United States Government-backed securities.
During 1995, cash used by operations increased to $37,020,000 as compared to $32,407,000 in 1994. The 1995 change in cash used was primarily due to the increase in net loss versus 1994 combined with the increase in other current assets, primarily inventory of marketable product and receivables from product sales. This was partially offset by increases in depreciation and amortization, along with accrued expenses and accounts payable. Funding required for operating activities during 1995 was derived from cash raised from the sale of Common Stock, existing cash balances and the sales of investments as well as from product sales, revenues from corporate sponsors, interest income, and the exercise of stock options. Facility and equipment expenditures increased in 1995 compared to 1994, reflecting funds expended to retrofit the Indianapolis facility to manufacture ABELCETTM. The Company expects the total cost of this project to be approximately $13,000,000.
At December 31, 1995, the Company had approximately $134,000,000 of operating loss carryforwards, $3,200,000 of research and development credit carryforwards and $45,000 of investment tax credit carryforwards. These carryforwards expire in the years 1996 through 2010. The timing and manner in which these losses are used may be limited as a result of certain ownership changes that occurred pursuant to Internal Revenue Service regulations under Section 382.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The Company expects to finance its operations from, among other things, the commercial sale of ABELCETTM, the proceeds received from payments under research and development agreements, interest earned on investments and the liquidation of certain investments. Funds may also be provided to the Company by leasing arrangements for capital expenditures. The Company expects to fund Preferred Stock dividends from existing cash reserves. The Company believes that its available cash and marketable securities, revenues from product sales, research and development reimbursements and interest income will be sufficient to meet its expected operating, cash flow and capital expenditures requirements for the intermediate term.
The Company has called for redemption 50% of its Series A Cumulative Convertible Exchangeable Preferred Stock represented by Depositary Shares effective March 25, 1996 at a price of $26.40 per Depositary Share plus accrued and unpaid dividends. It is also possible that the Company will in the future, call the remaining 50% of the Preferred Stock. Each Depositary Share represents 1/10 of a share of Preferred Stock and is convertible into 1.9455 shares of Common Stock. Should the price of the Company's Common Stock on the redemption date exceed $13.57 plus an amount equal to unpaid dividends (the "trigger price") the Company would expect substantially all of the holders of Depositary Shares called for redemption to convert such Depositary Shares into Common Stock. However, should the value of the Common Stock be below the trigger price on the redemption date, substantially all of the holders of redeemed Depositary Shares would be expected to surrender such shares for redemption. Approximately $36.4 million, plus unpaid dividends, would be required to satisfy redemption requirements of the shares called for redemption should all of such shares be submitted for redemption.
In connection with the call of the Preferred Stock, the Company has entered into a standby purchase agreement for Depositary Shares that are submitted for redemption, if any. Should Depositary Shares be submitted for redemption, the standby purchasers would purchase from the Company, subject to certain conditions, the number of shares of Common Stock that would have been issuable upon conversion of such redeemed Depositary Shares. The purchase price received from the standby purchasers will reimburse the Company for the redemption price paid for the redeemed Depositary Shares. The Company expects to fund such redemption requirements not satisfied by the standby purchase agreement, if any, from its cash and marketable securities portfolio.
The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation" ("SFAS 123"). In October 1995, SFAS 123 established financial and reporting standards for stock based compensation plans. The Company anticipates adopting the disclosure only provision of this standard during 1996.
The Financial Accounting Standards Board, has issued SFAS No. 121 "Accounting for the Impairment of Assets to be Disposed of" which is required to be implemented in 1996. The Company does not anticipate any material impact for the adoption of this standard.
Item 8.

Item 8. Financial Statements and Supplementary Data
Reference is made to the Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Stockholders' Equity, Consolidated Statements of Cash Flow, Notes to Consolidated Financial Statements, Financial Statement Schedule and Independent Accountants Reports appearing in Item l4(a) of this Form l0-K.
Item 9.

Item 9. Disagreements on Accounting and Financial Disclosure
None.
PART III
Item l0. Directors and Executive Officers of the Registrant
Information required under this Item relating to executive officers of the Company is included in a separate item captioned "Executive Officers" contained in Part I of this report. Information required under this Item relating to the directors of the Company will be contained in the Company's Proxy Statement for the l996 Annual Meeting, the relevant portions of which are incorporated herein by reference.
Item ll. Executive Compensation
Information required under this Item will be contained in the Company's Proxy Statement for the l996 Annual Meeting, the relevant portions of which are incorporated herein by reference.
Item l2. Security Ownership of Certain Beneficial Owners and Management
Information required under this Item will be contained in the Company's Proxy Statement for the l996 Annual Meeting, the relevant portions of which are incorporated herein by reference.
Item l3. Certain Relationships and Related Transactions
Information required under this Item will be contained in the Company's Proxy Statement for the l996 Annual Meeting, the relevant portions of which are incorporated herein by reference.
PART IV
Item l4. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) l. Financial Statements
Consolidated financial statements and financial statement schedule listed in the accompanying index are filed herewith.
2. Exhibits
See Exhibit Index included elsewhere in this Report.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the last quarter of the period covered by this report.
(Item l4(a)1 and 14(a)2)
Page
Consolidated Financial Statements
Report of independent accountants 31
Consolidated balance sheets at December 3l, l995 and l994 32
Consolidated statements of operations for each of the three years in the period ended December 3l, l995 33
Consolidated statements of stockholders' equity for each of the three years in the period ended December 3l, l995 34
Consolidated statements of cash flows for each of the three years in the period ended December 3l, l995 35
Notes to consolidated financial statements 36-47
Report of independent accountants on financial statement schedule 48
Financial statement schedule 49
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of The Liposome Company, Inc.:
We have audited the consolidated balance sheets of The Liposome Company, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company'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 consolidated financial position of The Liposome Company, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1993 the Company changed its method of accounting for certain investments in debt and equity securities.
Princeton, New Jersey February 2, 1996
Coopers & Lybrand L.L.P.
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (In thousands except share data)
ASSETS December 31, Current assets: 1995 1994 Cash and cash equivalents $ 3,937$ 2,369 Short-term investments 50,451 55,487 Accounts receivable, net of allowance for doubtful accounts ($200,000 for 1995) 6,799 1,618 Inventories 3,543 748 Prepaid Expenses 333 419 Other current assets 46 31 Total current assets 65,109 60,672
Long-term investments 11,303 9,421 Property, plant and equipment, net 22,400 17,686 Restricted cash 6,642 4,880 Intangibles, net 472 537
Total assets $105,926$ 93,196
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,839$ 1,112 Accrued expenses and other current liabilities 7,002 4,698 Current obligations under capital leases 1,509 1,476 Current obligations under note payable 303 303 Preferred Stock dividends payable 1,337 1,337 Total current liabilities 11,990 8,926
Long-term obligations under capital leases 2,616 4,126 Long-term obligations under note payable 1,488 1,791 Total liabilities 16,094 14,843
Commitments and contingencies
Stockholders' equity: Capital stock: Preferred Stock, par value $.0l; 2,400,000 authorized; 275,700 shares of Series A Cumulative Convertible Exchangeable Preferred Stock outstanding (liquidation preference of $68,925,000) 3 3 Common Stock, par value $.0l; 60,000,000 shares authorized; 29,950,031 and 23,982,849 shares issued and outstanding 299 240 Additional paid-in capital 234,545 192,003 Net unrealized investment loss (543) (5,033) Foreign currency translation adjustment 48 (1) Accumulated deficit (144,520)(108,859) Total stockholders' equity 89,832 78,353
Total liabilities and stockholders' equity $105,926$ 93,196
See accompanying notes.
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share figures)
Year Ended December 31,
1995 1994 1993
Product Sales $ 6,164 $ -- $ --
Collaborative research and development and other revenues 6,589 5,881 5,418
Interest and investment income, net 2,964 4,559 7,624
Total revenues 15,717 10,440 13,042
Cost of Goods Sold 2,304 -- --
Research and development expense 30,149 31,713 25,072
Selling, general and administrative expense 18,631 12,072 10,193
Interest expense 294 308 254
Total expenses 51,378 44,093 35,519
Net loss (35,661) (33,653) (22,477)
Preferred Stock dividends (5,348) (5,348) (5,348)
Net loss applicable to Common Stock $(41,009) $(39,001) $(27,825)
Net loss per share applicable to Common Stock $ (1.50) $ (1.64) $ (1.18)
Weighted average number of common shares outstanding 27,293 23,850 23,536
See accompanying notes.
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands except share figures)
Shares Additional Preferred Common Par Stock Stock Value Balance, December 3l, l992 -- 23,478,410 $ 235
Issuance of stock: For cash 276,000 -- 3 To 401K plan -- 24,390 -- Exercise of stock options -- 202,634 2 Dividends on Preferred Stock -- -- Net unrealized investment gain -- -- -- Foreign currency translation adjustment -- -- -- Net loss for 1993 -- -- -- Balance, December 31, 1993 276,000 23,705,434 240 196,655
Issuance of stock: To 401K plan -- 31,254 -- Exercise of stock options -- 246,161 3 Dividends on Preferred Stock -- -- Net unrealized investment loss -- -- -- Foreign currency translation adjustment -- -- -- Net loss for 1994 -- -- -- Balance, December 31, 1994 276,000 23,982,849 243
Issuance of stock: For cash -- 4,950,000 49 To 401K plan -- 23,672 -- Exercise of stock options -- 987,674 10 Conversion of Preferred Stock (300) 5,836 -- Dividends on Preferred Stock -- -- Net unrealized investment gain -- -- -- Foreign currency translation adjustment -- -- -- Net loss for 1995 -- -- -- Balance, December 31, 1995 275,700 29,950,031 $ 302
Total Paid-in Accumulated Stockholders' Capital Other Deficit Equity $135,687 $ 7 $ (52,729) $ 83,200 65,732 -- -- 65,735 182 -- -- 182 402 -- -- 404 (5,348) -- -- (5,348) - -- 650 -- 650 - -- 1 -- 1 - -- -- (22,477) (22,477) 658 (75,206) 122,347 196 -- -- 196 500 -- -- 503 (5,348) -- -- (5,348) - -- (5,683) -- (5,683) - -- (9) -- (9) - -- -- (33,653) (33,653) 192,003 (5,034) (108,859) 78,353 43,143 -- -- 43,192 199 -- -- 199 4,548 -- -- 4,558 - -- -- -- -- (5,348) -- -- (5,348) - -- 4,490 -- 4,490 - -- 49 -- 49 - -- -- (35,661) (35,661) $234,545 $ (495) $(144,520) $ 89,832
See accompanying notes.
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 1995 1994 1993 Cash flows from operating activities: Net loss $(35,661) $(33,653)$(22,477) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 3,409 3,145 1,622 Other 199 196 222 Changes in assets and liabilities: Accounts receivable, net (5,181) (983) (542) Inventory (2,795) (534) (170) Prepaid expenses 86 238 455 Other current assets (15) (11) 341 Accounts payable 634 (2,195) 880 Accrued expenses and other current liabilities 2,304 1,390 721
Net cash used by operating activities (37,020) (32,407) (18,948)
Cash flows from investing activities: Purchases of short and long-term investments (51,990) (38,284)(205,982) Sales of short and long-term investments 59,634 78,019 170,067 Restricted cash (1,762) (132) (4,748) Purchases of property, plant and equipment (7,965) (2,896) (7,651)
Net cash (used)/provided by investing activities (2,083) 36,707 (48,314)
Cash flows from financing activities: Net proceeds from issuance of stock 43,192 -- 65,735 Exercises of stock options 4,558 503 404 Principal payments under note payable (303) (303) (302) Receipt of proceeds from capital lease obligations -- -- 7,496 Principal payments under capital lease obligations (1,477) (1,444) (450) Preferred Stock dividend payments (5,348) (5,348) (4,011)
Net cash provided/(used) by financing activities 40,622 (6,592) 68,872
Effects of exchange rate changes on cash 49 (9) 1
Net (decrease)/increase in cash and cash equivalents 1,568 (2,301) 1,611
Cash and cash equivalents at beginning of year 2,369 4,670 3,059
Cash and cash equivalents at end of year $ 3,937 $ 2,369 $ 4,670
See accompanying notes.
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS:
The Liposome Company, Inc. (the "Company") is a leading biotechnology company engaged in the discovery, development and commercialization of proprietary lipid and liposome-based pharmaceuticals for the treatment, prevention and diagnosis of inadequately treated, life-threatening illnesses. ABELCETTM (amphotericin B lipid complex injection), the Company's first commercialized product, has been approved for marketing for certain indications in the United States, United Kingdom, Spain, Luxembourg and Iceland and is the subject of marketing application filings in several other countries. In addition to ABELCETTM, the Company's other lead products are TLC C-53 and TLC D-99. TLC C-53, liposomal prostaglandin E1, is being developed primarily for the treatment of acute respiratory distress syndrome ("ARDS"). Patients are being accrued into a pivotal Phase III clinical study for the treatment of ARDS. TLC D-99, liposomal doxorubicin, is being developed in conjunction with a corporate sponsor primarily as a first line treatment for metastatic breast cancer. TLC D-99 is currently being studied in two Phase III clinical trials. The Company also has a continuing discovery research program which concentrates primarily on the treatment of cancer and inflammatory conditions.
FINANCIAL STATEMENT PRESENTATION:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances are eliminated in consolidation.
REVENUE RECOGNITION:
Revenue from product sales is recognized upon transfer of title to unrelated third parties. Payments for collaborative research and development are generally received in advance and are recognized as revenue, ratably, as the research and development is performed. Licensing fees, royalty and hurdle payments are recognized in the period earned.
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)
DEPRECIATION AND AMORTIZATION:
Building and building improvements, furniture and fixtures, and machinery and equipment are depreciated by the straight-line method over their estimated useful lives ranging from three to twenty years. Leasehold improvements and machinery and equipment under capital leases are amortized by the straight-line method over the lesser of their estimated useful lives or the terms of the related leases. Purchased patents are amortized by the straight-line method over their life as determined by the country of issuance. The Company periodically reviews the realizability of its patents.
CASH EQUIVALENTS:
The Company considers all highly liquid investments with maturities of three months or less as cash equivalents.
INVESTMENTS:
On December 31, 1993, the Company adopted the provisions of the Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities. This Statement requires certain investments in debt and equity securities to be reported at current fair value.
Short-term investments represent marketable securities available for current operations, all of which have been classified as available for sale, while long- term investments represent marketable securities available for expected capital acquisitions. These investments, which are all investment grade, are stated at fair value, determined at December 31, 1995.
For the years ended December 31, 1995 and 1994, investment income includes gross realized gains of $0 and $150,000, and realized losses of $489,000 and $0, respectively. At December 31, 1995 and 1994, investments included gross unrealized gains of $6,500 and $7,000 and losses of $549,000 and $5,040,000, respectively. The fair values of debt securities maturing within one year and after one year but less than five years, amounted to approximately $5,800,000 and $45,000,000, respectively. Gains and losses are calculated on the specific identification method.
RESTRICTED CASH:
The Company has entered into certain financing arrangements that require the issuance of letters of credit that are partially collateralized by certain securities. The aggregate amount of these securities are segregated and identified as restricted cash. The Company is also required to maintain minimum cash balances in connection with certain of these financings.
INVENTORIES:
Inventories are carried at the lower of actual cost or market and cost is accounted for on the first-in first-out (FIFO) basis.
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)
CONCENTRATION OF CREDIT RISK:
The Company's significant concentrations of credit risk are with its cash and investments and its accounts receivable. The investment portfolio consists of investment grade securities or better as defined by the appropriate rating institution. Product related accounts receivable in the United States are generally with major distributors and internationally with hospitals. The Company provides credit to its customers on an uncollateralized basis after evaluating their credit status.
NET LOSS PER SHARE APPLICABLE TO COMMON STOCK:
Net loss per share applicable to Common Stock is computed based on the weighted average of the Common Stock shares outstanding using the treasury method. Common Stock equivalents are not included in the computation of weighted average shares outstanding since the effect would be anti-dilutive.
RECLASSIFICATION:
Certain reclassifications have been made to the prior year financial statement amounts to conform with the presentation in the current year financial statements.
FOREIGN CURRENCY TRANSACTIONS:
Generally Consolidated Balance Sheet amounts have been translated using exchange rates in effect at the balance sheet dates and the translation adjustments have been included in the foreign currency translation adjustment as a separate component of Consolidated Stockholders' Equity. Amounts related to transactions in the Consolidated Statements of Operations have been translated using the average exchange rates in effect each year and transaction gains and losses have been included therein. During 1995 the Company realized $49,000 in foreign currency transaction losses. There was no gain or loss realized in 1994 or 1993.
RESEARCH AND DEVELOPMENT EXPENSES:
The research and development expenses of the Company, which are expensed as incurred, include those efforts related to collaborative research and development agreements, development of the Company's proprietary products and general research. The expenses include, but are not limited to, medical, biostatistical, regulatory, manufacturing of clinical products and scientific support costs.
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)
2. STOCKHOLDERS' EQUITY:
PREFERRED STOCK:
In January 1993, the Company completed an offering of 2,760,000 Depositary Shares, each of which represents one-tenth of a share of Series A Cumulative Convertible Exchangeable Preferred Stock carrying a 7 3/4% dividend rate. The liquidation value is $25.00 per Depositary Share, plus accrued and unpaid dividends. Each Depositary Share is convertible at any time into shares of the Company Common Stock at a conversion price of $12.85 per share of Common Stock, which is equivalent to a conversion rate of 1.9455 shares of Common Stock for each Depositary Share. At December 31, 1995, 2,757,000 shares of Preferred Stock remained outstanding and 5,363,744 shares of Common Stock have been reserved for conversion of Depositary Shares into Common Stock. The Preferred Stock is redeemable at the option of the Company, in whole or in part, on and after January 15, 1996 initially at an amount equivalent to $26.40 per Depositary Share and thereafter at prices declining to an amount equivalent to $25.00 per Depositary Share on and after January 15, 2003, plus, in each case, all accrued and unpaid dividends thereon. Proceeds to the Company from this offering were $66,240,000, net of underwriter fees. Additional stock issuance costs, including professional, registration, filing and printing fees of approximately $505,000 were also incurred in connection with this offering.
PREFERRED STOCK DIVIDENDS:
Since issuance, the Board of Directors of the Company has declared and paid quarterly cash dividends on the Series A Cumulative Convertible Exchangeable Preferred Stock at a prorated dividend rate of $.484375 per Depositary Share. Dividend payments in 1995, 1994 and 1993 totaled $5,348,000, $5,348,000 and $4,011,000, respectively. An additional dividend payment of $1,337,000 was paid on January 15, 1996 to stockholders of record on January 2, 1996.
COMMON STOCK:
In April, 1995 the Company sold 3,450,000 shares of its Common Stock pursuant to an underwritten offering. Proceeds received pursuant to the offering were $28,762,000, net of underwriters' fees, professional, registration, filing and printing fees.
In August, 1995 the Company sold 1,500,000 shares of Common Stock to an institutional investor. Gross proceeds received were $15,000,000. Stock issuance costs, including financial advisory, professional, registration and filing fees of approximately $571,000 were incurred in connection with the sale.
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)
3. STOCK OPTION PLANS:
The Company has several stock option plans available for the issuance of incentive stock options and non-qualified stock options (''NQSO''). These options are designed to attract and retain key employees, directors and consultants. As of December 31, 1995, the Company had outstanding grants of 4,139,921 shares and 1,541,818 shares available for grants, totaling 5,681,739 shares of Common Stock reserved for stock option grants.
Options are granted at fair market value. These options generally become exercisable in ratable installments over a five-year period and are exercisable over ten years. Options under the 1991 Non-Employee Directors NQSO Plan ("Directors' Plan") are automatically granted upon appointment to the Board of Directors and annually on July 1 of each year to such non-employee Directors. Such initial grants vest over a five year period and subsequent annual grants vest in one year. Activity under all stock option plans for 1993, 1994 and 1995 is summarized as follows:
NUMBER OF SHARES PRICE RANGE PER SHARE Outstanding December 31, 1992 3,088,641 Granted 1,243,587 $ 5.75---- $11.75 Exercised (202,634) .75---- 3.625 Forfeited (261,339) 1.0625---- 16.50
Outstanding December 31, 1993 3,868,255 Granted 1,049,370 5.75----10.1875 Exercised (246,161) 2.036---- 8.00 Forfeited (446,641) .85---- 21.25
Outstanding December 31, 1994 4,224,823 Granted 1,124,775 8.25---- 20.875 Exercised (987,674) 8.75----20.9375 Forfeited (222,003) 1.0625---- 17.00
Outstanding at December 31, 1995 4,139,921
Exercisable at December 31, 1995 1,790,4391.03 ---- 20.875
The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation" ("SFAS 123"). In October 1995, SFAS 123 established financial and reporting standards for stock based compensation plans. The Company anticipates adopting the disclosure only provision of this standard during 1996.
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following: 1995 1994 Building and building improvements $ 2,778,000$ 2,778,000 Land and land improvements 423,000 423,000 Furniture and fixtures 1,581,000 1,574,000 Machinery and equipment 11,462,000 9,082,000 Leasehold improvements and other 4,999,000 4,597,000 Construction in process 7,539,000 2,269,000 Machinery and equipment under capital lease 7,496,000 7,496,000 Total property, plant and equipment 36,278,000 28,219,000 Less: Accumulated depreciation and amortization (13,878,000)(10,533,000) Net property, plant and equipment $22,400,000$17,686,000
5. INVENTORIES:
The components of inventory are as follows: 1995 1994 Finished goods $2,273,000 $ 0 Work in process 139,000 0 Raw Materials 761,000 611,000 Supplies 370,000 137,000 $3,543,000 $748,000
6. COMMITMENTS AND CONTINGENCIES:
Operating Leases:
Total rental expense for property, plant and equipment was approximately $1,449,000, $1,618,000 and $1,139,000 for 1995, 1994 and 1993, respectively.
The Company's future minimum lease payments under noncancelable operating leases at December 31, 1995 are as follows:
1996 $1,443,000 1997 1,412,000 1998 764,000 1999 568,000 2000 568,000 2001 and thereafter 4,028,000 Total $8,783,000
CAPITAL LEASES:
On July 1, 1993 the Company entered into an agreement which provided for equipment lease financing of $7,496,000. The lease is collaterized by $4,310,000 in standby letters of credit provided under a letter of credit agreement which is collaterized by AAA rated securities owned by the Company. The Company is required to maintain a minimum balance of $20,000,000 in cash and marketable securities, including those securities securing the letters of credit, in connection with the lease financing.
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)
The following is a schedule by year of future minimum payments under capital leases together with the present value of the minimum lease payments and the capital lease portion of certain classes of property as of December 31, 1995:
1996 $1,584,000 1997 1,584,000 1998 1,085,000 1999 -- 2000 -- 2001 and thereafter -- Total minimum lease payments 4,253,000 Less: Amount representing interest (128,000) Present value of minimum lease payments $4,125,000
CLASSES OF PROPERTY:
Machinery $4,205,000 Leasehold improvements 3,291,000 Total machinery and leasehold improvements 7,496,000 Less: Accumulated amortization (3,613,000) Net machinery and leasehold improvements $3,883,000
7. LONG-TERM DEBT:
On July 24, 1992, The Liposome Manufacturing Company, Inc., a wholly-owned subsidiary of The Liposome Company, Inc., entered into a mortgage-backed note to partially fund the purchase of a pharmaceutical manufacturing facility in Indianapolis, Indiana. The principal will be paid in equal installments of $25,225 each month plus accrued interest. The note payments will be completed on November 1, 2001. The interest rate, based on the prime rate plus 1/2%, has a floor and ceiling of 6% and 10%, and was 9.25% at December 31, 1995. The note is guaranteed by The Liposome Company, Inc. and the mortgage lending institution is holding a $1,000,000 AAA rated security owned by The Liposome Company, Inc. as collateral for the note. The Company is required to maintain a minimum balance of $10,000,000 in cash and marketable securities, including those securities collaterizing the letter of credit in connection with the financing.
The Liposome Manufacturing Company's principal repayment obligations as of December 31, 1995 are as follows:
1996 $ 303,000 1997 303,000 1998 303,000 1999 303,000 2000 303,000 2001 and thereafter 276,000 Subtotal 1,791,000 Less: Current portion (303,000) Total $1,488,000
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)
8. SUPPLEMENTAL INFORMATION:
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES: The components of accrued expenses and other current liabilities are as follows:
1995 1994 Accrued expenses for preclinical and clinical programs $2,871,000$2,068,000 Accrued legal fees 284,000 344,000 Accrued wages and vacation 909,000 433,000 Taxes payable 468,000 -- Unearned contract income 183,000 -- Other 2,287,000 1,853,000 Total $7,002,000 $4,698,000
STATEMENT OF CASH FLOW:
1995 1994 1993 Supplemental disclosure of cash flow information: Cash paid during the year for interest $291,000$310,000$251,000
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)
9. INCOME TAXES:
The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company provides a valuation allowance against the net deferred tax debits due to the uncertainty of realization. The increase in the valuation allowance for the year ended December 31, 1995 was $12,010,000.
Temporary differences and carryforwards which gave rise to the deferred tax assets and liabilities at December 31, 1995 are as follows:
Deferred Tax Deferred Tax Assets Liabilities Depreciation $655,000 -- Net unrealized investment loss 185,000 -- State taxes (net of Federal benefit) 6,861,000 -- Amortization 1,084,000 -- Net operating losses - Federal 45,640,000 -- Other 593,000 -- Tax credits 3,202,000 --
Subtotal 58,220,000 --
Valuation allowance - Federal (51,358,000) -- Valuation allowance - State (6,862,000) --
Total deferred taxes $ -- $ --
Temporary differences and carryforwards which gave rise to the deferred tax assets and liabilities at December 31, 1994 are as follows:
Deferred Tax Deferred Tax Assets Liabilities Depreciation $ 517,000 -- Net unrealized investment loss 1,711,000 -- State taxes (net of Federal benefit) 5,533,000 -- Amortization 709,000 -- Net operating losses - Federal 34,480,000 -- Other 355,000 -- Tax credits 2,905,000 --
Subtotal 46,210,000 --
Valuation allowance - Federal (40,677,000) -- Valuation allowance - State (5,533,000) --
Total deferred taxes $ -- $ --
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)
At December 31, 1995, the Company had approximately $134,000,000 of net operating loss carryforwards, $45,000 of investment tax credit carryforwards, and $3,200,000 of research and development credit carryforwards. These carryforwards expire in the periods 1996 through 2010. The timing and manner in which these losses are used may be limited as a result of certain ownership changes which occurred as provided by IRS Regulations under Section 382.
10. GEOGRAPHIC SEGMENT DATA
The Company's operations are classified into two geographic areas: Domestic (United States) and International (primarily Western Europe). Financial Data (in thousands of dollars) for the years 1995, 1994, and 1993 is as follows:
Year Ended December 31, 1995
Domestic International Total Sales to unaffiliated Customers $ 3,154 $ 3,010 $ 6,164 Collaborative research and development revenues 6,589 -- 6,589 Interest and investment income, net 2,959 5 2,964 Total Revenue 12,702 3,015 15,717
Net loss (34,407) (1,254) (35,661)
Identifiable assets at December 31, 1995 104,817 $ 1,109 105,926
Year Ended December 31, 1994
Sales to unaffiliated Customers -- -- -- Collaborative research and development revenues 5,831 -- 5,831 Interest and investment income, net 4,609 -- 4,609 Total Revenue 10,440 -- 10,440
Net loss (33,653) -- (33,653)
Identifiable assets at December 31, 1995 92,909 287 93,196
Year Ended December 31, 1993 Sales to unaffiliated Customers -- -- -- Collaborative research and development revenues 4,877 -- 4,877 Interest and investment income, net 8,165 -- 8,165 Total Revenue 13,042 -- 13,042
Net loss (22,477) -- (22,477)
Identifiable assets at December 31, 1995$139,632$ -- $139,632
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)
11. SAVINGS AND INVESTMENT RETIREMENT PLAN:
Effective January 1, 1988, the Company adopted a 401(k) Profit Sharing Plan and Trust ("401(k) Plan") for eligible employees and their beneficiaries. All employees are eligible to participate in the plan once they become full-time employees and work a minimum of 1,000 hours per plan year. The 401(k) Plan provides for employee contributions through a salary reduction election. Employer discretionary matching contributions are determined annually by the Company and vest over a maximum of a five year period of service. For the plan years ended December 31, 1995, 1994 and 1993 the Company's discretionary matching was based on a percentage of salary reduction elections in the form of the Company's Common Stock.
12. MAJOR CUSTOMER AND RESEARCH AND DEVELOPMENT REVENUE DATA
In the United States, the Company sells ABELCETTM to national and regional wholesalers who, in turn resell the product to hospitals and other service providers. Internationally, sales are primarily made directly to hospitals.
For the years ended December 31, 1995, 1994 and 1993, sales to wholesalers or other customers in excess of 10% of the Company's product revenues in any year were as follows:
1995 1994 1993 Customer A 17% -- -- Customer B 14% -- -- Customer C 12% -- --
The Company has entered into various collaborative research and development contracts. The Company earned substantially all of its research and development revenues from two corporate sponsors in 1995, 1994 and 1993. Corporate sponsors who contributed 10% or more of the Company's total revenues, pursuant to collaborative agreements and licensing and other fees as reported in the statements of operations, in any year were as follows:
1995 1994 1993 A $5,743,000 $4,694,000 $4,497,000 B 753,000 1,116,000 333,000
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)
13. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data (in thousands of dollars, except for per share data for the years ended December 31, 1995, and 1994 is as follows:
Quarter
First Second Third Fourth
Total revenues $ 1,853 $ 3,717 $ 3,496 $ 6,651
Total expenses 12,186 12,544 12,223 14,425
Net loss (10,333) (8,827) (8,727) (7,774)
Preferred Stock dividends (1,337) (1,337) (1,337) (1,337)
Net loss applicable to Common Stock...............$(11,670)$(10,164)$(10,064) $(9,111)
Net loss per share applicable to Common Stock $ (.49) $ (.38) $ (.35) $ (.31)
Weighted average shares outstanding 24,050 26,407 28,959 29,676
Quarter
First Second Third Fourth
Total revenues $ 3,036 $ 2,941 $ 2,446 $ 2,017
Total expenses 9,874 11,084 11,127 12,008
Net loss (6,838) (8,143) (8,681) (9,991)
Preferred Stock dividends (1,337) (1,337) (1,337) (1,337)
Net loss applicable to Common Stock...............$(8,175)$(9,480) $(10,018) $(11,328)
Net loss per share applicable to Common Stock $ (.34) $ (.40) $ (.42) $ (.48)
Weighted average shares outstanding 23,715 23,812 23,916 23,958
Net loss per share of Common Stock amounts are calculated independently for each of the quarters presented. The sum of the quarters may not equal the full year amounts.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of The Liposome Company, Inc.:
Our report on the consolidated financial statements of The Liposome Company, Inc. and Subsidiaries is included in Item 14