<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter ended June 30, 1998.
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File No. 0-18549
-------
GENSIA SICOR INC.
----------------
(Exact name of registrant as
specified in its charter)
Delaware 33-0176647
---------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19 Hughes
Irvine, California 92618
-----------------------------------
(Address of principal executive offices and zip code)
(949) 455-4700
------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common stock $.01 par value 79,484,790
- --------------------------- -------------------------------
Class Outstanding at June 30, 1998
<PAGE>
GENSIA SICOR INC.
INDEX
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements PAGE
--------------------
Consolidated Balance Sheets at June 30, 1998 and
December 31, 1997 3
Consolidated Statements of Operations and Comprehensive
Loss for the three and six months ended June 30, 1998
and 1997 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
Results of Operations - for the three and six months
ended June 30, 1998 and 1997 10
Liquidity and Capital Resources 12
PART II OTHER INFORMATION
Item 1: Legal Proceedings 14
Item 4: Submission of Matters to a Vote of Security Holders 14
Item 6: Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
<PAGE>
GENSIA SECOR INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------------- ------------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 27,424 $ 41,624
Accounts receivable 50,685 45,532
Inventories 44,593 43,952
Other current assets 7,700 8,373
--------- ---------
Total current assets 130,402 139,481
Property and equipment, net 97,839 95,243
Other noncurrent assets 9,987 10,759
Intangibles, net 48,099 49,825
Goodwill, net 70,080 67,897
--------- ---------
$ 356,407 $ 363,205
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 37,471 $ 38,152
Accrued payroll and related expenses 4,458 4,094
Other accrued liabilities 15,885 18,454
Short-term borrowings 42,225 35,581
Current portion of long-term debt 3,735 3,487
Current portion of capital lease obligations 595 600
--------- ---------
Total current liabilities 104,369 100,368
Other long-term liabilities 4,949 6,547
Long-term debt, less current portion 41,808 42,668
Long-term capital lease obligations, less current portion 457 525
Deferred taxes 20,605 22,228
Minority interest -- 3,326
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares authorized,
1,600 issued and outstanding, liquidation preference of
$80,000 16 16
Common stock, $.01 par value, 125,000 shares authorized,
79,485 and 78,649 shares issued and outstanding
at June 30, 1998 and December 31, 1997, respectively 795 786
Additional paid-in capital 530,624 529,448
Accumulated deficit (346,229) (341,831)
Foreign currency translation adjustment (987) (876)
--------- ---------
Total stockholders' equity 184,219 187,543
--------- ---------
$ 356,407 $ 363,205
========= =========
</TABLE>
See accompanying notes.
3
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GENSIA SICOR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 44,515 $ 39,401 $ 85,786 $ 59,206
Contract research and license fees 3,477 1,847 5,810 4,410
--------- -------- -------- --------
Total revenues 47,992 41,248 91,596 63,616
Costs and expenses:
Cost of sales 30,187 28,090 58,323 44,547
Research and development 5,256 6,667 10,489 12,581
Selling, general and administrative 9,714 10,906 19,440 19,990
Amortization expense 1,498 1,237 2,886 1,645
Interest and other, net 1,239 1,032 2,941 473
Write-down of investment -- -- 1,130 --
Acquisition of in-process research
and development -- -- -- 29,200
--------- -------- -------- --------
Total costs and expenses 47,894 47,932 95,209 108,436
--------- -------- -------- --------
Net income (loss) before income taxes 98 (6,684) (3,613) (44,820)
Provision for income taxes (1,527) (2,166) (1,544) (2,793)
--------- -------- -------- --------
Net loss before minority interest (1,429) (8,850) (5,157) (47,613)
Minority interest 472 -- 759 --
--------- -------- -------- --------
Net loss before dividends (957) (8,850) (4,398) (47,613)
Dividends on preferred stock (1,504) (1,504) (2,992) (2,992)
--------- -------- -------- --------
Net loss applicable to common shares (2,461) (10,354) (7,390) (50,605)
Other comprehensive income (loss):
Foreign currency translation 385 303 (111) (181)
--------- -------- -------- --------
Comprehensive net loss $ (2,076) $(10,051) $ (7,501) $(50,786)
========= ======== ======== ========
Basic and diluted net loss per common share $(.03) $(.14) $(.09) $(.74)
========= ======== ======== ========
Basic and diluted comprehensive net loss per
common share $(.03) $(.14) $(.09) $(.75)
========= ======== ======== ========
Shares used in computing basic and diluted
net loss and comprehensive net loss per
common share 79,440 74,395 79,318 67,931
========= ======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
GENSIA SICOR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------------
1998 1997
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,398) $ (47,613)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 9,079 5,734
Loss on disposal of property and equipment -- 6
Minority interest (759) --
Net deferred income taxes (1,075) --
Inventory purchase price allocation adjustment 246 3,846
Write-down of investment 1,130 --
Charge for acquired in-process research and
development -- 29,200
Change in operating assets and liabilities, net of effects
from acquisitions:
Accounts receivable (5,379) (3,269)
Inventories (1,094) (1,980)
Prepaid expenses and other assets (18) 4,368
Accounts payable and accrued expenses (2,292) (385)
-------- ---------
Net cash used in operating activities (4,560) (10,093)
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (6,244) (8,868)
Investment in other business (405) --
Proceeds from short-term investments 2,000 8,253
Purchases of short-term investments (2,000) (9,653)
Purchase of property and equipment (8,240) (11,687)
Other -- 166
-------- ---------
Net cash used in investing activities (14,889) (21,789)
Cash flows from financing activities:
Payments of preferred stock dividends (2,992) (2,992)
Issuance of common stock and warrants, net 1,127 23,624
Funding from minority shareholder 972 --
Change in short-term borrowings 6,954 4,013
Issuance of long-term debt and capital lease obligations, net 1,137 15,675
Principal payments on long-term debt and capital lease
obligations (1,826) (1,460)
--------- ---------
Net cash provided by financing activities 5,372 38,860
--------- ---------
Effect of exchange rate changes on cash (123) (125)
--------- ---------
Increase (decrease) in cash and cash equivalents (14,200) 6,853
Cash and cash equivalents at beginning of period 41,624 16,271
--------- ---------
Cash and cash equivalents at end of period $ 27,424 $ 23,124
========= =========
Supplemental schedule of noncash investing and financing
activities:
Common stock issued to settle accrued liabilities $ 3,050 $ --
Common stock issued to acquire net assets of business:
Fair value of assets acquired, other than cash -- 207,914
Liabilities assumed -- 81,631
</TABLE>
See accompanying notes.
5
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GENSIA SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
ORGANIZATION
Gensia Sicor Inc. ("Gensia Sicor" or the "Company"), a Delaware
corporation, was incorporated November 17, 1986. On February 28, 1997, Gensia
Sicor completed the acquisition of Rakepoll Holding B.V. ("Rakepoll Holding")
from Rakepoll Finance N.V. ("Rakepoll Finance"). Rakepoll Holding is the parent
company of three specialty pharmaceutical businesses: SICOR-Societa Italiana
Corticosteroidi S.p.A. ("Sicor") of Milan, Italy, and two companies located in
Mexico: Lemery, S.A. de C.V. ("Lemery") and Sicor de Mexico, S.A de C.V. ("Sicor
de Mexico"). In addition, in December 1997, Sicor purchased a 50% equity
interest in Diaspa S.p.A. ("Diaspa"), an Italian company engaged in the
manufacture of certain raw materials used in Sicor's business. In June 1998,
Sicor purchased the remaining 50% of Diaspa. Also in December 1997, as part of a
restructuring, the Company completed the transfer of its licensed and
proprietary medical products into Gensia Automedics, Inc. ("Automedics") in
exchange for certain milestone and other contingent payments. Subsequently,
Automedics sold an equity interest representing approximately 81% of Automedics
to private investors. Gensia Sicor is a specialty pharmaceutical company focused
on the development, manufacture and marketing of products for worldwide oncology
and injectable pharmaceutical markets. The company is headquartered in Irvine,
California.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiary companies, all of which are wholly owned, except for
Metabasis Therapeutics, Inc ("Metabasis"), which is 92% owned. The five wholly-
owned subsidiaries are: Rakepoll Holding B.V., Gensia Sicor Pharmaceuticals,
Inc. (formerly Gensia Laboratories, Ltd. and herein referred to as "Gensia Sicor
Pharmaceuticals"), Aramed, Inc., Gensia Development Corporation and Genchem
Pharma Ltd. All significant intercompany accounts and transactions have been
eliminated. The accompanying consolidated balance sheets at June 30, 1998 and
December 31, 1997 include the assets, liabilities and stockholders' equity of
the combined companies. The consolidated statement of operations and statement
of cash flows for the six months ended June 30, 1997 include the results for
Rakepoll Holding from February 28, 1997 (the date of acquisition). Minority
interest at December 31, 1997 represents minority stockholders' proportionate
share of the equity in the Company's consolidated subsidiaries, Diaspa and
Metabasis. Minority interest at June 30, 1998 represents minority stockholders'
proportionate share of the equity in Metabasis only which is included in other
noncurrent assets. As noted above, the remaining 50% of Diaspa was acquired
during the second quarter, so that Diaspa is now a wholly owned subsidiary.
In March 1998, Genchem Pharma Ltd. acquired a research and development
branch ("Genchem Vacallo") in Vacallo, Switzerland for $1.9 million. For
financial reporting purposes, the acquisition was accounted for using the
purchase method and the excess of the purchase price over the fair value of
identified assets and liabilities of $1.5 million was recorded as goodwill. The
financial position and results of operations of the acquired company are not
material. Pro forma information has been omitted as the amounts are not
significant.
In the opinion of the Company, all adjustments, consisting only of normal
recurring adjustments, necessary for the fair statement of the results for the
three and six-month periods ended June 30, 1998 and 1997 have been made. The
results of operations for the three and six-month period ended June 30, 1998 are
not necessarily indicative of the results to be expected for the full fiscal
year.
The accompanying consolidated financial statements should be read in
conjunction with the audited financial
6
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GENSIA SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
statements and notes thereto included in the Company's 1997 Form 10-K filed with
the Securities and Exchange Commission.
FOREIGN CURRENCY TRANSLATION
The financial statements of subsidiaries outside the United States, except
those subsidiaries located in highly inflationary economies, are generally
measured using the local currency as the functional currency. Assets and
liabilities of these subsidiaries are translated at the rates of exchange at the
balance sheet date. The resulting translation adjustments are included in the
cumulative translation adjustment, a separate component of stockholders' equity.
Income and expense items are translated at average monthly rates of exchange.
The functional currency of Lemery has been the Mexican peso. In accordance with
SFAS 52, the net assets of Lemery were remeasured to the U.S. dollar during the
second quarter of 1997 as a result of a hyper-inflationary economy in Mexico
and, accordingly, gains and losses from balance sheet translation adjustments
are included in net earnings. The functional currency of Sicor de Mexico is the
U.S. dollar.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
classifications used in 1998. These reclassifications are not considered
material to the financial statements presented, either as individual adjustments
or the combined effect of all classifications made.
2. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding during the period.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" ("SFAS 128"). The new Standard is effective for
financial statements for periods ending after December 15, 1997, and must be
applied retroactively. SFAS 128 simplifies the standards for computing earnings
per share and requires presentation of two new amounts, basic and diluted
earnings per share. The Company adopted SFAS 128 in the fourth quarter of 1997
and such adoption has had no effect on the previously reported earnings per
share. Diluted loss per share, including shares issuable upon exercise of
outstanding stock options and warrants, has not been presented since the effects
of such conversions and exercises would be anti-dilutive due to the Company's
net loss position.
3. COMPREHENSIVE NET INCOME
As of January 1, 1998, the Company adopted the Financial Accounting
Standards Board Statement No. 130, "Reporting Comprehensive Income" ("SFAS
130"). The new Standard established new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this Statement
had no impact on the Company's net income or stockholders' equity. SFAS 130
requires unrealized gains or losses on the Company's available-for-sale
securities and foreign currency translation adjustments, which prior to adoption
were reported separately in stockholders' equity, to be included in other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of SFAS 130.
7
<PAGE>
GENSIA SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
4. INVENTORIES
Inventories at June 30, 1998 and December 31, 1997 consisted of (in
thousands):
June 30, December 31,
1998 1997
-------- ------------
Raw materials $ 16,551 $ 16,332
Work-in-process 10,710 6,182
Finished goods 19,538 23,363
-------- ------------
46,799 45,877
Less reserves (2,206) (1,925)
-------- ------------
$ 44,593 $ 43,952
======== ============
Inventories are presented using a first in first out reporting basis (FIFO),
with the exception of inventories held at Sicor, where the last in first out
(LIFO) method is used. The difference in restating Sicor's inventory using FIFO
basis is immaterial, as is the excess of replacement or current cost over stated
LIFO value.
5. WRITE-DOWN OF INVESTMENT
In December 1997, Gensia Sicor completed the transfer of its medical
products business, including the GenESA(R) System, to Automedics. As part of the
Automedics divestiture, obligations under the Gensia Clinical Partners, L.P.
(the "Partnership") agreements and the Protocol Systems, Inc. ("Protocol
Systems") supply agreement (the "Supply Agreement") were assigned to Automedics
as part of this transaction; however, Gensia Sicor remains liable for these
obligations and has agreed to indemnify Automedics under certain circumstances.
In April 1998, Gensia Sicor and Automedics announced that they had
determined not to exercise an option granted by the Partnership to repurchase
the technology associated with the GenESA System (the "Partnership Purchase
Option") and had informed Gensia Development Corporation, the general partner of
the Partnership, of this decision. The decision was based on, among other
things, the lack of market acceptance of the GenESA System since its U.S. market
introduction in October 1997 and its European market introduction in the second
quarter of 1995. Automedics has discontinued the promotion of the GenESA
System in the U.S. and Europe.
Gensia Sicor and Automedics also informed Protocol Systems that no
additional GenESA System devices would be purchased under the Supply Agreement.
As noted above, pursuant to the Automedics divestiture, the Company assigned its
rights and obligations under the Supply Agreement to Automedics. This assignment
resulted in transferring the Company's obligation to purchase a minimum number
of GenESA System devices from Protocol Systems totaling approximately $3.4
million in 1998, and $4.3 million every year for the years 1999 to 2002. The
Company remained liable for these obligations. In July 1998, the Company was
named as a defendant in a complaint filed by Protocol Systems. The complaint
alleges breach of the Supply Agreement, and damages estimated at approximately
$10.8 million, plus any amounts which Protocol Systems may owe to a third-party
vendor. Gensia Sicor believes that this claim fails to take into consideration a
number of matters, including Protocol Systems' contractual obligations, the
risks inherent in the introduction of a new medical device into the marketplace
and the five-year time period over which the devices were to be delivered, among
others. Gensia Sicor intends to vigorously defend this litigation. The ultimate
outcome with respect to the lawsuit could have a material effect on the
Company's financial position, results of operations or cash flows. Management is
unable to
8
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GENSIA SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
reasonably estimate the financial impact of its dispute with Protocol Systems at
this time, and has not recorded any liabilities pertaining to this matter. In
accordance with the FAS 5, a contingent liability will be recorded for the
Protocol Systems matter, when a reasonable range of possible liability has been
established.
As a result of the lack of market acceptance of the GenESA System, Gensia
Sicor management reevaluated the carrying value of the Company's investment in
Automedics and recorded a write-down during the first quarter of 1998 of $1.1
million.
6. CONTINGENCIES
During 1995, Sicor received claims from certain of its customers in
connection with shipments of a contaminated product. While to the best of
Sicor's knowledge no customer lawsuits have been filed against Sicor with
respect to this matter, Sicor has a reserve of approximately $1.1 million at
June 30, 1998, which represents management's best estimate of attorneys' costs
and other settlement costs. The reserve balance decreased from $2.5 million
at the end of March 31, 1998 due primarily to various settlements reached
with Sicor customers during the quarter. Actual costs to be incurred in
relation to the ultimate settlement may vary from the amount estimated.
In a lawsuit related to the contaminated product, entitled Pharmacia &
Upjohn Company v. Great Lakes Chemical Corporation in the State of Michigan,
Kalamazoo County Circuit Court, No. E96-188 NZ, Pharmacia & Upjohn, which
supplied Sicor with certain of the contaminated materials and agreed to
indemnify Sicor under certain conditions, has sued Sicor for declaratory relief
regarding their respective duties and rights. The Company is continuing to have
ongoing discussions with both Great Lakes and Pharmacia & Upjohn to reach a
settlement. Management believes the outcome of this case will not have a
material negative impact on the Company's financial situation.
The Company is also a defendant in various actions, claims, and legal
proceedings arising from its normal business operations. Management believes
the Company has meritorious defenses and intends to vigorously defend against
all allegations and claims. As the ultimate outcome of these matters is
uncertain, no contingent liabilities or provisions have been recorded in the
accompanying financial statements for such matters. However, in management's
opinion, liabilities arising from the matters described in this paragraph, if
any, will not have a material adverse effect on consolidated financial position,
results of operations or cash flows.
9
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GENSIA SICOR INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Gensia Sicor has been unprofitable on an annual basis since its inception
in 1986. For the period from its inception to June 30, 1998, the Company has
incurred a cumulative net loss of $346.2 million.
When used in this Form 10-Q, the words "expects", "anticipates",
"estimates" and similar expressions are intended to identify forward-looking
statements. Such statements involve risks and uncertainties, including the
timely development, regulatory approval, and successful marketing of new
products and acceptance of new products, the impact of competitive products,
product costs and pricing, changing market conditions and other risks described
in this Form 10-Q and in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997. Actual results may differ materially from those
projected. These forward-looking statements represent the Company's judgment
only as of the date of the filing of this Form 10-Q. The Company disclaims,
however, any intent or obligation to update these forward-looking statements.
RESULTS OF OPERATIONS
The Company reported a net loss of $2.5 million, or $.03 per common share
(after dividends on preferred stock of $1.5 million), in the second quarter
ended June 30, 1998 compared to a net loss of $10.4 million, or $.14 per common
share (after dividends on preferred stock of $1.5 million), in the second
quarter of 1997. The Company reported a net loss of $7.4 million, or $.09 per
common share (after dividends of preferred stock of $3.0 million), for the six
months ended June 30, 1998 compared to a net loss of $50.6 million, or $.74 per
common share (after dividends of preferred stock of $3.0 million), for the six
months ended June 30, 1997. The results for the first six months of 1997
include the results of operations for Rakepoll Holding from February 28, 1997,
the date of its acquisition, a $29.2 million write-off of in-process research
and development associated with the acquisition of Rakepoll Holding, and a $3.8
million charge to cost of sales for the write-up of purchased inventory.
Product sales in the second quarter of 1998 increased to $44.5 million from
$39.4 million in the second quarter of 1997. Product sales in the first six
months of 1998 increased to $85.8 million from $59.2 million in the same period
of 1997. The increase in product sales for the three months ended June 30, 1998
is primarily due to increased sales at Lemery, Sicor de Mexico, and Genchem
Pharma of certain newer multisource injectable products and as a result of
acquisition of Diaspa in December 1997. Diaspa and the Company's Mexican
subsidiaries, Lemery and Sicor de Mexico had combined sales increases of $9.1
million in second quarter sales. The increase at Lemery and Sicor de Mexico was
primarily due to epirubicin and megestrol product sales (Sicor de Mexico
successfully completed its initial FDA facility inspection in the second quarter
of 1998 and commenced shipments of megestrol to U.S. customers). Partially
offsetting these increases was the termination of the Company's distribution
agreement for the Laryngeal Mask Airway ("LMA") effective January 1, 1998. In
the second three months of 1997, the LMA accounted for approximately $2.9
million in product sales.
The increase in product sales for the six months ended June 30, 1998 is
primarily due to the inclusion of operating results for Rakepoll Holding for the
full six months in 1998 as opposed to from February 28, 1997, the date of its
acquisition, for the four months period ended June 30, 1997, and increased sales
at Gensia Sicor Pharmaceuticals, offset by termination of LMA sales. In the
first six months of 1997, the LMA accounted for approximately $5.8 million in
product sales.
Cost of sales for the second quarter of 1998 was $30.2 million which
yielded a gross margin of 32%, compared to a cost of sales of $28.1 million for
the second quarter of 1997 which yielded a gross margin of 29%. Cost of sales
for the first six months of 1998 was $58.3 million which yielded a gross margin
of 32%, compared to a cost of sales of $44.5 million in the same period of 1997
which yielded a gross margin of 25%. The gross margin for the three and
10
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GENSIA SICOR INC.
six months of 1998 increased compared to the same periods of 1997 primarily due
to the inclusion of a purchase accounting charge to 1997 cost of sales for
Rakepoll Holding products resulting from the write-up of inventory associated
with the acquisition as well as improved margins at Lemery, Sicor de Mexico and
Gensia Sicor Pharmaceuticals.
Contract research and license fees in the second quarter of 1998 increased
to $3.5 million from $1.8 million in the second quarter of 1997. Contract
research and license fees for the first six months of 1998 were $5.8 million
compared to $4.4 million in the same period of 1997. The increases are
primarily due to an up-front non-refundable license fee commitment received in
June 1998 from a major U.S. pharmaceutical company involving bulk drug
substance. The Company continued to receive contract research revenues through
its research collaboration with Pfizer Inc. in the areas of pain and
inflammation research and with Sanyo Co., Ltd. in the areas of diabetes.
Metabasis is engaged in discussions with other pharmaceutical companies
concerning collaborations under which these companies would fund additional
Metabasis' research and development efforts; however, these discussions are at
an early stage and there is no assurance that any such collaborations will be
completed.
Research and development expenses in the second quarter of 1998 decreased
to $5.3 million from $6.7 million in the 1997 second quarter primarily due to
the exclusion of Automedics' expenses as a result of the divestiture of an 81%
interest in Automedics in the fourth quarter of 1997. Research and development
expenses for the first six months of 1998 decreased to $10.5 million from $12.6
million for the same period of 1997. The decrease is mainly due to the
divestiture of Automedics offset by increased expenses by the Rakepoll
Holding companies as a result of the inclusion of operating results for Rakepoll
Holding for the full six months period ended June 30, 1998. The Company is
continuing to pursue plans to establish Metabasis as an independent company,
which if accomplished would eliminate ongoing expenses from its Metabasis
research operation, causing future research and development expenses to decrease
from current levels. Gensia Sicor may not be able to establish Metabasis as an
independent company.
Selling, general and administrative expenses in the second quarter of 1998
decreased to $9.7 million from $10.9 million in the second quarter of 1997
primarily due to the divestiture of Automedics. Selling, general and
administrative expenses for the first six months of 1998 decreased to $19.4
million from $20.0 million in the same period of 1997. The decrease is mainly
due to the divestiture of Automedics offset by increased expenses by the
Rakepoll Holding companies as a result of the inclusion of operating results for
Rakepoll Holding for the full six months period ended June 30, 1998.
The Company had amortization expense of $1.5 million in the second quarter
of 1998 compared to $1.2 million in the same period of 1997. Amortization
expense for the first six months of 1998 was $2.9 million compared to $1.6
million in the same period of 1997. The increases are due to the amortization of
goodwill resulting from the acquisition of 50% of Diaspa in December 1997 and
Genchem Vacallo in March 1998. The increase in expenses for the first six months
of 1998 is also due the inclusion of expenses related to the identified
intangibles and goodwill resulting from the acquisition of Rakepoll Holding.
The Company had interest and other expenses of $1.2 million in the second
quarter of 1998 compared to $1.0 million in the second quarter of 1997.
Interest and other expenses for the first six months of 1998 increased to $2.9
million from $0.5 million in the same period of 1997 mainly due to the inclusion
of operating results for Rakepoll Holding for the full six months period ended
June 30, 1998.
As discussed in Note 5, due to, among other things, the lack of market
acceptance of the GenESA System, Gensia Sicor elected to write-down the
investment value of its 19% interest in Automedics from $1.8 million to $0.7
million.
11
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GENSIA SICOR INC.
In connection with the Rakepoll Holding acquisition in 1997, the assets and
liabilities of Rakepoll Holding were adjusted to their estimated fair values,
and the Company incurred a one-time $29.2 million write-off related to the value
assigned to the acquired in-process research and development. This charge is
not deductible for income tax purposes. The determination of acquired in-
process research and development took under consideration both the costs and
internal resources necessary to advance the in-process technology to clinical
development and eventual approval by regulatory agencies. Management also
considered the risks of possible negative outcomes during clinical development,
as well as changes in the market place with respect to competing technologies.
The Company currently estimates that it will need to expend over $5 million to
develop this in-process technology. The in-process technology may never be
successfully developed.
Income tax expense in the second quarter of 1998 decreased to $1.5 million
from $2.2 million for the same period of 1997. Income tax expense for the
first six months of 1998 decreased to $1.5 million from $2.8 million for the
same period of 1997. The decreases are primarily due to the impact of the
Rakepoll Holding acquisition purchase price allocation for deferred income taxes
that was completed in the third quarter of 1997. The decrease in income tax
expense for the first six months of 1998 is also due to reduced earnings in the
foreign operations compared to the same period of 1997.
The Company had minority interest income of $0.5 million and $0.8 million
for the three and six months ended June 30, 1998, respectively which represent
minority stockholders' proportionate share of the loss in the Company's
consolidated subsidiaries, Diaspa and Metabasis. In June 1998, Sicor purchased
the remaining 50% interest in Diaspa.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had cash and cash equivalents of $27.4
million.
The Company anticipates that its efforts to reduce overall costs and
expenses and working capital requirements, combined with its current cash and
cash equivalents on hand at June 30, 1998 of $27.4 million, and commitments from
third parties, will enable it to maintain its current and planned operations
through at least 1998. In connection with its plans for expanding its business,
to accomplish its core strategy of being a leading fully-integrated provider of
injectable pharmaceutical products and services, the Company's management and
Board of Directors are evaluating plans to raise required additional capital.
The Company will continue to pursue equity, debt and lease financing, or a
combination of these, for its capital needs. In addition, the Company may seek
equity funds to finance Metabasis. Such financings may not be available on
acceptable terms, or at all. If financing is not available, the Company may have
to reduce planned expenditures, discontinue certain operations, or otherwise
restructure to continue operations.
Significant changes in operating assets and liabilities during the first
six months of 1998, excluding the net assets acquired from the Genchem Vacallo
acquisition (see Note 1), included a $5.4 million increase in accounts
receivable, a $2.3 million decrease in accounts payable and accrued expenses and
a $1.1 million increase in inventories. Other significant cash flows in the
first six months of 1998 included $7.0 million net proceeds from short-term
borrowings, $6.2 million in payments for the remaining 50% interest in Diaspa
and acquisition of Genchem Vacallo, and $8.2 million expended on property and
equipment.
As discussed in Note 5, the Company has an obligation to Protocol Systems
under the Supply Agreement to purchase GenESA System devices, which the Company
assigned to Automedics pursuant to the Automedics divestiture in December 1997.
This assignment resulted in transferring the Company's obligation to purchase a
minimum number of GenESA System devices from Protocol Systems totaling
approximately $3.4 million in 1998, and $4.3 million every year for the years
1999 to 2002. The Company remained liable for these obligations. In July
1998, the Company was named as a defendant in a complaint filed by Protocol
Systems. The complaint alleges breach of the Supply Agreement, and damages
estimated at approximately $10.8 million, plus any amounts which Protocol
Systems may owe to
12
<PAGE>
GENSIA SICOR INC.
a third-party vendor. Gensia Sicor believes that this claim fails
to take into consideration a number of important matters (as discussed in Note
5), and thus Gensia Sicor intends to vigorously defend this litigation. In
addition, the Company assigned certain agreements with Gensia Clinical Partners,
L.P. to Automedics during the divestiture. If Automedics fails to comply with
its obligations, under these agreements (which include, inter alia, obligations
to use its best efforts to market the GenESA System and to pay royalties on
sales of the GenESA System to Gensia Clinical Partners, L.P.), the Company
remains liable for such obligations. The Company's obligation with respect to
Gensia Clinical Partners, L.P. cannot be readily quantified as they relate to
royalties on future sales, and to potential damages should Automedics be held
not to have fulfilled its best efforts obligation, both of which are unknown.
The Company's foreign subsidiaries use foreign exchange currency contracts
to reduce the negative financial impact of currency fluctuations. In March 1998,
the Company's Italian subsidiary entered into ten monthly $1 million Lira call
options at 1700 Italian Lira per U.S. dollar strike price. As of June 30, 1998,
no expiring contracts have been exercised.
In May 1998, the Company's Sicor subsidiary received notification from the
Italian Ministry of University, Scientific & Technological Research that it has
been awarded approximately $8.8 million in a grant and subsidized loan package
for a research program in process development with anthracyclines. The receipt
of funding for the research program is contingent upon presentation of a
statement of progress at established "Checkpoints", the first of which is
expected in early 1999.
The Company made quarterly cash dividend payments of approximately $1.5
million per quarter on its outstanding preferred stock from June 1, 1993 through
March 1, 1995. Subsequent to March 1995, as a measure to reduce cash outflows,
the Company's Board of Directors suspended quarterly cash dividend payments on
its outstanding preferred stock. The Company resumed quarterly payment of the
Preferred Stock dividend in September 1996. At June 30, 1998, the Company had
approximately $7.5 million in undeclared cumulative preferred dividends. If the
Company chooses to not declare dividends for six cumulative quarters, the
holders of this preferred stock, voting separately as a class, will be entitled
to elect two additional directors until the dividend in arrears has been paid.
IMPACT OF YEAR 2000
The Company is currently developing a plan to insure that its systems and
software infrastructure are Year 2000 compliant. Key financial, information and
operational systems will be assessed and plans will be developed to address
required systems modifications. Given the size of the Company's systems and the
relative age of the hardware, software and operating systems, management does
not anticipate any significant delays in becoming Year 2000 compliant. However,
the Company is unable to control whether its current and future partners'
systems are Year 2000 compliant. To the extent that partners would be unable to
order products or pay invoices or suppliers would be unable to manufacture and
ship product, the Company's operations could be affected. However, management
does not believe that Year 2000 changes will have a material impact on the
Company's business, financial condition or results of operations.
13
<PAGE>
GENSIA SICOR INC.
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
In July 1998, the Company was named as a defendant in a complaint filed by
Protocol Systems, Inc ("Protocol Systems"). The complaint alleges breach of a
supply agreement (the "Supply Agreement"). Protocol Systems alleges damages
estimated at approximately $10.8 million, plus any amounts which it may owe to a
third-party vendor. Gensia Sicor believes that this claim fails to take into
consideration a number of matters, including Protocol Systems' contractual
obligations, the risks inherent in the introduction of a new medical device into
the marketplace and the five-year time period over which the devices were to be
delivered, among others. Gensia Sicor intends to vigorously defend this
litigation. The ultimate outcome with respect to the lawsuit could have a
material effect on the Company's financial position, results of operations or
cash flows. Management is unable to reasonably estimate the financial impact of
its dispute with Protocol Systems at this time, and has not recorded any
liabilities pertaining to this matter. In accordance with the FAS 5, a
contingent liability will be recorded for the Protocol Systems matter, when a
reasonable range of possible liability has been established.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 15, 1998, the Company held a Special Meeting of Stockholders. The
following actions were taken at the meeting:
1. The following four class III directors were elected:
a. 68,360,262 shares were voted in favor of Frank C. Becker, 573,446 shares
were voted against and 10,478,089 shares were not voted or were broker
non-votes.
b. 68,360,444 shares were voted in favor of Herbert J. Conrad, 573,264
shares were voted against and 10,478,089 shares were not voted or were
broker non-votes.
c. 68,272,115 shares were voted in favor of David F. Hale, 661,593 shares
were voted against and 10,478,089 shares were not voted or were broker
non-votes.
d. 68,342,886 shares were voted in favor of John W. Sayward, 590,822 shares
were voted against and 10,478,089 shares were not voted or were broker
non-votes.
The following directors continue in office for their existing terms:
Carlos A. Ferrer; Carlo Salvi; Donald E. Panoz; Michael D. Cannon.
2. A proposal to amend and restate the Gensia Sicor Inc. Employee Stock
Purchase Plan (the "ESPP") was approved. The proposal increased by
100,000 the aggregate number of shares of common stock reserved for
issuance under the ESPP.
64,376,939 shares were voted in favor of the proposal, 4,412,153 shares
were voted against the proposal, 144,616 shares abstained and 10,478,089
shares were not voted or were broker non-votes.
3. A proposal to amend and restate Gensia Sicor Inc. Long-Term Incentive Plan
was approved.
58,359,525 shares were voted in favor of the proposal, 10,325,348 shares were
voted against the proposal,
14
<PAGE>
GENSIA SICOR INC.
248,835 shares abstained and 10,478,089 shares were not voted or were broker
non-votes.
4. The selection of Ernst and Young LLP as the Company's independent auditors
was ratified. 68,840,926 shares were voted in favor of the proposal,
72,557 shares were voted against the proposal, 20,225 shares abstained
and 10,478,089 shares were not voted or were broker non-votes.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Document
------ -----------------------
27.1 Financial Data Schedule
--------
(b) Reports on Form 8-K during the second quarter
None
15
<PAGE>
GENSIA SICOR INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENSIA SICOR INC.
Date: August 14, 1998 By: /s/ Carlo Salvi
------------------------------------------
Carlo Salvi, President
and Chief Executive Officer
Date: August 14, 1998 By: /s/ John W. Sayward
------------------------------------------
John W. Sayward, Executive Vice President,
Finance, Chief Financial Officer
and Treasurer
16
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