<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 September 30, 1999.
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
-------
SICOR Inc.
(formerly named 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 88,617,090
- --------------------------- -----------------------------
Class Outstanding at September 30, 1999
<PAGE>
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements Page
Consolidated Balance Sheets at September 30, 1999 (Unaudited) and
December 31, 1998 3
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the three and nine months ended September 30, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 and 1998 (Unaudited) 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 nine months ended
September 30, 1999 and 1998 10
Liquidity and Capital Resources 12
Impact of Year 2000 13
Item 2A: Quantitative and Qualitative Disclosures about Market Risk 15
PART II OTHER INFORMATION
Item 1: Legal Proceedings 21
Item 6: Exhibits and Reports on Form 8-K 21
SIGNATURES 22
</TABLE>
2
<PAGE>
SICOR Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------------- ---------------------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 34,793 $ 24,461
Accounts receivable, net 48,977 51,407
Inventories, net 47,152 52,746
Other current assets 10,445 11,926
-------- --------
Total current assets 141,367 140,540
Property and equipment, net 112,134 105,067
Other noncurrent assets 12,808 11,243
Intangibles, net 43,866 46,572
Goodwill, net 66,300 68,392
-------- --------
$376,475 $371,814
======== ========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Current liabilities:
<S> <C> <C>
Accounts payable $ 31,954 $ 46,552
Accrued payroll and related expenses 5,037 3,156
Other accrued liabilities 15,682 17,577
Short-term borrowings 38,070 49,625
Current portion of long-term debt 6,822 5,241
Current portion of capital lease obligations 1,539 1,057
--------- ---------
Total current liabilities 99,104 123,208
Other long-term liabilities 9,518 5,826
Long-term debt, less current portion 39,756 41,108
Long-term debt with related party -- 10,000
Long-term capital lease obligations, less current portion 2,747 1,210
Deferred taxes 20,519 21,453
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,
88,617 and 79,717 shares issued and outstanding
at September 30, 1999 and December 31, 1998, respectively 886 797
Additional paid-in capital 559,217 528,545
Accumulated deficit (353,937) (360,389)
Accumulated other comprehensive income (loss) (1,351) 40
--------- ---------
Total stockholders' equity 204,831 169,009
--------- ---------
$ 376,475 $ 371,814
========= =========
</TABLE>
See accompanying notes.
3
<PAGE>
SICOR Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- -----------------------
1999 1998 1999 1998
--------- --------- ---------- ----------
Revenues:
<S> <C> <C> <C> <C>
Product sales $55,419 $41,677 $158,467 $127,463
Contract research and license fees -- 1,803 5,303 7,613
------- ------- -------- --------
Total revenues 55,419 43,480 163,770 135,076
Costs and expenses:
Cost of sales 34,059 29,007 100,845 87,330
Research and development 3,396 5,822 12,323 16,311
Selling, general and administrative 9,957 3,420 30,224 22,860
Amortization expense 1,523 1,556 4,575 4,442
Interest and other, net 1,096 2,495 5,587 5,436
Write-down of investment and divestiture
of business charge -- -- 1,777 1,130
------- ------- -------- --------
Total costs and expenses 50,031 42,300 155,331 137,509
------- ------- -------- --------
Net income (loss) before income taxes 5,388 1,180 8,439 (2,433)
Provision for income taxes (776) (3,026) (2,018) (4,570)
------- ------- -------- --------
Net income (loss) before minority interest 4,612 (1,846) 6,421 (7,003)
Minority interest -- 36 31 795
------- ------- -------- --------
Net income (loss) before dividends 4,612 (1,810) 6,452 (6,208)
Dividends on preferred stock (1,504) (1,504) (4,496) (4,496)
------- ------- -------- --------
Net income (loss) applicable to common shares 3,108 (3,314) 1,956 (10,704)
Other comprehensive income (loss):
Foreign currency translation, net 465 1,230 (1,391) 1,119
------- -------- -------- -------
Comprehensive net income (loss) $ 3,573 $(2,084) $ 565 $ (9,585)
======= ======= ======== ========
Net income (loss) per share
- Basic $.04 $(.04) $.02 $(.13)
======= ======= ======== ========
- Diluted $.04 $(.04) $.02 $(.13)
======= ======= ======== ========
Shares used in calculating per share amounts
- Basic 88,606 79,606 84,203 79,415
======= ======= ======== ========
- Diluted 88,743 79,606 84,550 79,415
======= ======= ======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
SICOR Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------------
1999 1998
------------------- -----------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 6,452 $ (6,208)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 14,254 13,794
Minority interest (31) (795)
Net deferred income taxes (170) (1,649)
Inventory purchase price allocation adjustment 504 286
Write-down of investment and divestiture of business charge 1,777 1,130
Change in operating assets and liabilities, net of effects
from acquisitions and divestiture:
Accounts receivable 464 (806)
Inventories 2,640 (2,520)
Prepaid expenses and other assets 180 (2,131)
Accounts payable and accrued expenses (5,735) 3,529
-------- --------
Net cash provided by operating activities 20,335 4,630
Cash flows from investing activities:
Purchase of property and equipment (21,078) (12,974)
Divestiture of Metabasis Therapeutics, Inc. (4,911) --
Acquisitions of businesses, net of cash acquired -- (6,898)
Investment in other business -- (697)
Proceeds from short-term investments -- 2,000
Purchases of short-term investments -- (2,000)
-------- --------
Net cash used in investing activities (25,989) (20,569)
Cash flows from financing activities:
Payments of preferred stock dividends (4,496) (4,496)
Issuance of common stock and warrants, net 35,482 1,010
Funding from minority shareholder -- 972
Change in short-term borrowings (7,570) 1,188
Issuance of long-term debt and capital lease obligations, net 13,718 2,716
Principal payments on long-term debt from related party (10,000) --
Principal payments on long-term debt and capital lease obligations (9,424) (3,199)
-------- --------
Net cash provided by (used in) financing activities 17,710 (1,809)
-------- --------
Effect of exchange rate changes on cash (1,724) 1,262
-------- --------
Increase (decrease) in cash and cash equivalents 10,332 (16,486)
Cash and cash equivalents at beginning of period 24,461 41,624
-------- --------
Cash and cash equivalents at end of period $ 34,793 $ 25,138
======== ========
Supplemental schedule of noncash investing and financing
activities: $ -- $ 3,553
Common stock issued to settle accrued liabilities
</TABLE>
See accompanying notes.
5
<PAGE>
SICOR Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 1999
1. Organization and Principles of Consolidation
Organization
SICOR Inc. (formerly Gensia Sicor Inc.) ("SICOR" or the "Company"), a
Delaware corporation, was incorporated November 17, 1986. 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. On February 28, 1997, 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. During the second quarter of 1999,
the Company divested a 46% interest in Metabasis Therapeutics, Inc.
("Metabasis"), a proprietary research and development subsidiary.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiary companies, all of which are wholly owned. Affiliated
companies in which the Company does not have a controlling interest, or for
which control is expected to be temporary, are accounted for using the equity
method. The four wholly-owned subsidiaries are as follows: Rakepoll Holding
B.V., Gensia Sicor Pharmaceuticals, Inc. (formerly Gensia Laboratories, Ltd. and
herein referred to as "Gensia Sicor Pharmaceuticals"), Gensia Development
Corporation and Genchem Pharma Ltd. ("Genchem Pharma"). All significant
intercompany accounts and transactions have been eliminated. As noted above, the
remaining 50% of Diaspa was acquired during the second quarter of 1998, and
accordingly, Diaspa became a wholly-owned subsidiary in the second quarter of
1998. Subsequent to the divestiture of a 46% interest in Metabasis, the Company
retains a 46% equity interest in Metabasis. Accordingly, starting in the second
quarter of 1999, investment in Metabasis was accounted for using the equity
method.
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 nine-month periods ended September 30, 1999 and 1998 have been made.
The results of operations for the three and nine-month period ended September
30, 1999 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 statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998
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
accumulated other comprehensive income (loss), a separate component of
stockholders' equity. Income and expense items are translated at average
monthly rates of exchange.
6
<PAGE>
SICOR Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 1999
Use of estimates in the preparation of financial statements
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 date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
classifications used in 1999.
2. Earnings Per Share
Earnings per share is computed in accordance with Statement of Financial
Accounting Standards No. 128, Earnings per Share ("Statement No. 128").
Statement No. 128 replaces APB Opinion 15, Earnings per Share ("EPS"). Statement
No. 128 requires dual presentation of basic and diluted earnings per share.
Basic EPS includes no dilution and is computed by dividing net income, after
deducting preferred stock dividends, by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
of securities that could share in the earnings of the Company such as common
stock which may be issuable upon exercise of outstanding common stock options
and warrants.
Shares used in calculating basic and diluted earnings per share were as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 88,606 79,606 84,203 79,415
Effect of the assumed conversion of preferred shares -- -- -- --
Effect of the assumed conversion of convertible debentures -- -- -- --
------ ------ ------ ------
Shares used in calculating per share amount - Basic 88,606 79,606 84,203 79,415
Net effect of dilutive common share equivalents using the
treasury stock method 137 -- 347 --
Shares used in calculating per share amount - Diluted ------ ------ ------ ------
88,743 79,606 84,550 79,415
====== ====== ====== ======
</TABLE>
3. Comprehensive Net Income (Loss)
As of January 1, 1998, the Company adopted the Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("Statement No.
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 loss or stockholders' equity. Statement No.
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 (loss).
7
<PAGE>
SICOR Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 1999
4. Inventories
Inventories at September 30, 1999 and December 31, 1998 consisted of (in
thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Raw materials $20,765 $21,543
Work-in-process 8,985 11,154
Finished goods 20,892 22,247
------- -------
50,642 54,944
Less reserves (3,490) (2,198)
------- -------
$47,152 $52,746
======= =======
</TABLE>
5. Unit Offering
As a part of a unit offering (the "Unit Offering"), the Company sold an
aggregate of 8,675,000 units (the "Units") for $4.00 per Unit at closings which
occurred on May 20, 1999 and June 10, 1999. Each Unit consists of one share of
Common Stock of SICOR and a Warrant to purchase one-tenth of a share of Common
Stock of SICOR at an exercise price of $5.75 per share. The aggregate gross
proceeds of the Unit Offering were $34,700,000. After deducting expenses, the
Company received approximately $34,657,500. The Units were sold directly by
SICOR to private investors and there were no commissions or fees paid to third
parties in connection with the Unit Offering. The proceeds of the Unit Offering
were and are being used to retire short-term and long-term debt and for general
corporate purposes.
The Warrants will be issued if the holder sells no Common Stock or other
securities of the Company for a period commencing from the date of the purchase
of Units and ending on December 31, 2000.
In connection with the Unit Offering, the Company repaid a $10 million loan
made by Carlo Salvi, the Company's President, Chief Executive Officer, director
and principal stockholder, in December 1998, canceling $10 million in
convertible notes which were due in 2001. Mr. Salvi purchased 2.5 million Units
($10 million) in the Unit Offering.
6. Contingencies
In July 1998, the Company was named as a defendant in a complaint filed by
Protocol Systems, Inc. ("Protocol Systems"). The complaint alleged breach of a
supply agreement (the "Supply Agreement"). In August 1999, the Company reached
a settlement with Protocol Systems concerning the alleged breach of the Supply
Agreement. The resolution of the matter did not result in an adjustment to the
Company's consolidated financial position or results of operations as an
adequate provision was recorded in the fourth quarter of 1998.
In February 1999, a lawsuit was filed by Zeneca, Inc. ("Zeneca") in the
U.S. District Court in Baltimore, Maryland against the Food and Drug
Administration ("FDA") with regards to Gensia Sicor Pharmaceuticals' Abbreviated
New Drug Application ("ANDA") for propofol. In the suit, Zeneca alleged that the
FDA improperly approved Gensia Sicor Pharmaceuticals' propofol product. The
Company believes this lawsuit is without merit, and that it represents Zeneca's
continued legal maneuvering to stop the FDA approval of generic propofol. Gensia
Sicor Pharmaceuticals intervened in the lawsuit to protect its interest and
support the FDA in its defense of this lawsuit. The court denied Zeneca's motion
for a preliminary injunction on March 26, 1999, and on August 11, 1999, granted
Gensia
8
<PAGE>
SICOR Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 1999
Sicor Pharmaceuticals' and the FDA's motion for summary judgment and entered
judgment in favor of the defendants. In the event that Zeneca is
ultimately successful on appeal in its litigation against the FDA, it could have
a material adverse effect on the Company's financial position, results of
operations or cash flows.
In April 1999, the Company's wholly-owned subsidiary, Gensia Sicor
Pharmaceuticals, filed a lawsuit in the Superior Court of California for Orange
County against American Pharmaceutical Partners ("APP") for breach of contract,
breach of the implied covenant of good faith and fair dealing, unfair
competition and declaratory relief. The suit alleges that APP has breached a
distributorship agreement for some of Gensia Sicor Pharmaceuticals' products by,
among other things, acquiring and operating a business which competes with
Gensia Sicor Pharmaceuticals with respect to some of the same products. The
Company is seeking damgages in addition to a declaration that the Company has no
obligation or liability to APP.
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 such matters, if any, will not have a material
adverse effect on consolidated financial position, results of operations or cash
flows.
9
<PAGE>
SICOR Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 whether
new products will be timely developed, approved, and successfully marketed, 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, 1998. 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
With the exception of the first nine months of 1999, SICOR has been
unprofitable on an annual basis since its inception in 1986. For the period from
its inception to September 30, 1999, the Company has incurred a cumulative net
loss of $353.9 million.
The Company reported a net income of $3.1 million, or $.04 per common share
(after dividends of $1.5 million on preferred stock), in the third quarter ended
September 30, 1999 compared to a net loss of $3.3 million, or $.04 per common
share (after dividends of $1.5 million on preferred stock), in the third quarter
of 1998. The Company reported a net income of $2.0 million, or $.02 per common
share (after dividends of $4.5 million on preferred stock), for the nine months
ended September 30, 1999 compared to a net loss of $10.7 million, or $.13 per
common share (after dividends of $4.5 million on preferred stock), for the nine
months ended September 30, 1998. The results for the nine-month period ended
September 30, 1999 include a $1.8 million charge related to the divestiture of a
46% interest in Metabasis. As a result of the divestiture, the operating results
of Metabasis are included in the Company's consolidated results through the
quarter ended March 31, 1999. Starting in the second quarter of 1999, Metabasis
has been accounted for under the equity method.
Product sales in the third quarter of 1999 increased to $55.4 million from
$41.7 million in the third quarter of 1998. Product sales in the first nine
months of 1999 increased to $158.5 million from $127.5 million in the same
period of 1998. The increase in product sales for the three months ended
September 30, 1999 is primarily due to increased sales by Gensia Sicor
Pharmaceuticals mainly from the sale of its new product, propofol. Pursuant to
the Drug Price Competition and Patent Term Restoration Act of 1984 (the
"Waxman/Hatch Act"), the Company had a 180 day exclusive period in which to sell
propofol without other generic competition. The 180 day exclusivity period was
initiated in the second quarter of 1999 with the commercial launch of propofol
and expired on October 15, 1999. The Company's propofol product is being sold in
the U.S. through Baxter Pharmaceutical Products, Inc. ("Baxter"), which is the
Company's marketing partner for a variety of products in the U.S. The increase
in product sales for the nine months ended September 30, 1999 is primarily due
to increased sales at Gensia Sicor Pharmaceuticals from the launch of propofol
and from the sale of oncology finished goods inventory to Abbott Laboratories
("Abbott") as a result of the Sales and Distribution Agreement entered into with
Abbott in January 1999. Product sales also increased in the international
operations for the nine months ended September 30, 1999 mainly as the result of
sales of new products.
Cost of sales for the third quarter of 1999 was $34.1 million which yielded
a gross margin of 39%, compared to a cost of sales of $29.0 million for the
third quarter of 1998 which yielded a gross margin of 30%. Cost of sales for
the first nine months of 1999 was $100.8 million which yielded a gross margin of
36%, compared to a cost of sales of $87.3 million in the same period of 1998
which yielded a gross margin of 31%. The gross margin for the three and nine
months of 1999 increased compared to the same periods of 1998 primarily due to a
more profitable product mix. This mix was positively impacted by the U.S. launch
of three new products during the second quarter of 1999, propofol, haloperidol
and alprostadil.
10
<PAGE>
SICOR Inc.
There were no contract research and license fees in the third quarter of
1999 compared to $1.8 million for the same period of 1998. Contract research
and license fees for the first nine months of 1999 were $5.3 million compared to
$7.6 million for the same period of 1998. The decreases are primarily due to
the divestiture of Metabasis during the second quarter of 1999 and an up-front
non-refundable license fee commitment received in June 1998 from a U.S.
pharmaceutical company for the development of a bulk drug substance. This
decrease was partially offset by a $3.5 million reimbursement received in March
1999 from Baxter for Gensia Sicor Pharmaceuticals' expenses incurred for
propofol research and development.
Research and development expenses in the third quarter of 1999 decreased to
$3.4 million from $5.8 million in the third quarter of 1998. Research and
development expenses for the first nine months of 1999 decreased to $12.3
million from $16.3 million for the same period of 1998. The decreases are
primarily due to the exclusion of Metabasis' expenses as a result of the
divestiture of a 46% interest in Metabasis in the second quarter of 1999 and
research related milestone payments made in the third quarter of 1998.
Selling, general and administrative expenses in the third quarter of 1999
increased to $10.0 million from $3.4 million in the third quarter of 1998.
Selling, general and administrative expenses for the first nine months of 1999
increased to $30.2 million from $22.9 million in the same period of 1998. The
increases are mainly due to a cash payment received from the settlement of a
lawsuit in the third quarter of 1998, and higher legal expenses related to the
propofol litigation and other patent litigation, partially offset by the
exclusion of Metabasis' expenses in the third quarter of 1999.
The Company had amortization expenses of $1.5 million in the third quarter
of 1999 and $1.6 million for the same period of 1998. Amortization expenses for
the first nine months of 1999 were $4.6 million compared to $4.4 million in the
same period of 1998. The increase is due to the amortization of goodwill
resulting from the acquisition of the remaining 50% of Diaspa in June 1998 and
the acquisition of a research and development operation by the Company's
subsidiary, Genchem Pharma, in March 1998.
Interest and other expenses in the third quarter of 1999 decreased to $1.1
million from $2.5 million in the third quarter of 1998 mainly due to lower
exchange and translation losses, and other expenses from donated products in the
third quarter of 1998. Interest and other expenses for the first nine months of
1999 increased to $5.6 million from $5.4 million in the same period of 1998
mainly due to higher net interest expense from increased debt and other expenses
as a result of Gensia Sicor Pharmaceuticals' restructuring of its sales force in
connection with its alliance with Abbott Laboratories offset by donated products
in the third quarter of 1998.
During the second quarter of 1999, the Company divested a 46% interest in
Metabasis, a proprietary research and development subsidiary to Metabasis
management. Following this transaction, the Company retains a 46% equity
interest in Metabasis. Subsequently, due to the uncertain value of the
remaining interest, the Company elected to write off $1.8 million related to its
remaining investment in Metabasis.
The Company elected in January 1998 to write down the investment value of
its 19% interest in Gensia Automedics, Inc. from $1.8 million to $0.7 million,
due to, among other things, the lack of market acceptance of the GenESA System.
Accordingly, the difference in investment balance of $1.1 million was reflected
as a current period charge to write-down of investment in the first quarter of
1998. The Company subsequently wrote off the remaining balance of $0.7 million
in the fourth quarter of 1998.
Income tax expense in the third quarter of 1999 decreased to $0.8 million
from $3.0 million for the same period of 1998. Income tax expense for the first
nine months of 1999 decreased to $2.0 million from $4.6 million for the same
period of 1998. The decreases are primarily due to reduced earnings in the
Company's Italian subsidiaries compared to the same period of 1998.
11
<PAGE>
SICOR Inc.
The Company had no minority interest accounting for the quarter ended
September 30, 1999 due to the divestiture of Metabasis. For the nine months
ended September 30, 1999, the Company recorded minority interest income of
$31,000, which represents the minority stockholders' proportionate share of the
loss in Metabasis. The results of operations of Metabasis were consolidated up
through the quarter ended March 31, 1999. Minority interest income for the three
and nine months ended 1998 were $36,000 and $0.8 million, respectively which
represented the minority stockholders' proportionate share of the loss in
Metabasis for the three months ended 1998, and the loss in Metabasis and Diaspa
for the nine months ended 1998. In June 1998, Sicor purchased the remaining 50%
interest in Diaspa.
Liquidity and Capital Resources
As of September 30, 1999, the Company had cash and cash equivalents of
$34.8 million and working capital of $42.3 million compared to $24.5 million and
$17.3 million, respectively, as of December 31, 1998. The increase in cash and
working capital resulted from $20.3 million of cash provided by operations and
$17.7 million of cash from financing activities, offset by investment activities
of $26.0 million and $1.7 million of exchange rate changes.
Significant cash flow changes in operating assets and liabilities during
the first nine months of 1999 included a $2.6 million decrease in inventories
and a $5.7 million decrease in accounts payable and accrued expenses. The
decrease in inventory reflects the Company's successful launch of new products
and completion of the marketing transition with its alliance partners, Abbott
and Baxter. The decrease in accounts payable and accrued expenses reflects the
Company's improved operating cash flows for the first nine months of 1999.
Gensia Sicor Pharmaceuticals entered into a Sales and Distribution
Agreement with Abbott in January 1999, under which the two companies formed a
strategic alliance for marketing and distribution of oncology products in the
United States. Under this agreement, the Company received $5.6 million in the
first quarter of 1999 representing an initial commitment fee by Abbott to help
finance the Company's future development of generic oncology drugs. Given the
nature of this commitment, the Company has elected to recognize these commitment
fees over the life of the agreement, through the year 2005.
Gensia Sicor Pharmaceuticals also entered into an amendment to an earlier
agreement with Baxter under which a fee of approximately $3.5 million was
received in March 1999 from Baxter to reimburse Gensia Sicor Pharmaceuticals for
its expenses incurred for propofol research and development. The Company,
through Baxter, launched its generic propofol product in April 1999. The
revenues and cash flow resulting from this product are significant to the
Company's U.S. operations and contributed to the Company's overall profitability
for the second and third quarter of 1999.
During the first nine months of 1999, the Company expended approximately
$21.1 million on property and equipment primarily for the expansion of the
production facilities at Sicor and Lemery.
In the first nine months of 1999, the Company paid cash dividends on its
preferred stock totaling $4.5 million. At September 30, 1999, the Company had
five cumulative quarters, or approximately $7.5 million, in undeclared
cumulative preferred dividends. If the Company chooses to not declare dividends
for six cumulative quarters, the holders of the preferred stock, voting
separately as a class, will be entitled to elect two additional directors until
the dividend in arrears has been paid.
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SICOR Inc.
During the second quarter of 1999, the Company raised approximately $35
million through a private placement of SICOR units for $4.00 per unit. Each
unit consists of one share of Common Stock and a warrant to purchase one-tenth
of one share of the Company's Common Stock for $5.75 per share. In connection
with this transaction, the Company repaid the loan of $10 million made in the
fourth quarter of 1998 to Carlo Salvi, the Company's President, Chief Executive
Officer, director and principal stockholder.
The Company had a net reduction of $7.6 million in short-term borrowings,
proceeds of $13.7 million from the issuance of long-term debt and capital lease
obligations, and payments of $9.4 million in long-term debt and capital lease
obligations during the first nine months of 1999. These changes reflect the
expansion of operations and the pay down of higher cost borrowings.
The Company has significantly improved its cash flow results. For the first
nine months of 1999, net cash provided by operating activities was $20.3 million
compared to $4.6 million for the same period of 1998. The Company anticipates
that its operating cash flows, combined with its current cash and cash
equivalents on hand at September 30, 1999 of $34.8 million, and commitments from
third parties, will enable it to maintain its current and planned operations
through at least 2000. 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 will continue to evaluate the need to raise additional
capital and, if appropriate, pursue equity, debt and lease financing, or a
combination of these, for its capital needs. 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.
As discussed in Note 6, the Company was named as a defendant in a complaint
filed by Protocol Systems. In August 1999, the Company reached a settlement
with Protocol Systems. The resolution of the matter did not result in an
adjustment to the Company's consolidated financial position or results of
operations as an adequate provision was recorded in the fourth quarter of 1998.
As also discussed in Note 6, Gensia Sicor Pharmaceuticals intervened in
Zeneca's lawsuit against the FDA for improper approval of Gensia Sicor
Pharmaceuticals' generic propofol. The Company believes this lawsuit is without
merit, and that it represents legal maneuvering by a big pharmaceutical company
in an attempt to prevent generic competition for propofol. The court denied
Zeneca's request for a preliminary injunction and on August 11, 1999, granted
Gensia Sicor Pharmaceuticals' and the FDA's motion for summary judgment and
entered judgment in favor of the defendants. In the event that Zeneca is
ultimately successful on appeal in its litigation against the FDA, it could have
a material adverse effect on the Company's financial position, results of
operations or cash flows.
Most of the Company's foreign subsidiaries use foreign exchange currency
contracts to reduce the negative financial impact of currency fluctuations. In
March 1999, the Company's Italian subsidiary, Sicor, entered into twenty monthly
U.S. $1 million U.S. Dollar put/Lira call options, ten at a strike price of Lira
1,696 per U.S. $1 and an additional ten at a strike price of Lira 1,750 per U.S.
$1. Additionally, in September 1999, the Company entered into sixteen monthly
U.S. Dollar put/Lira call options, the four contracts were for U.S. $0.5 million
and the next twelve contracts were for U.S. $1 million at a strike price of Lira
1,800 per U.S. $1. As of September 30, 1999, no contracts have been exercised.
Impact of Year 2000
The Company has taken actions to understand the nature and extent of the
work required to make its systems and infrastructure Year 2000 compliant. System
hardware, software and microprocessor controlled equipment that support the
Company's infrastructure have been inventoried and assessed for Year 2000
compliance. To the extent necessary to address material Year 2000 issues, the
Company is in the process of obtaining and installing current releases or
upgrades from software vendors. All domestic business systems have been upgraded
and are believed to be compliant. Work is continuing with certain research and
development and manufacturing systems, which is expected to be completed by the
end of November 1999.
Work continues on the Company's international facilities systems. Upgrades
and conversions have been completed on the Italian business systems, and are
believed to be compliant. Some work remains to be completed in Italy on various
technical, non-business systems. A third-party contractor has been engaged to
upgrade and verify Year 2000 compliance with Italy's technical systems which is
to be completed by the end of November 1999. In Mexico, a new business
manufacturing system is being implemented and the core system was operational
starting in October 1999. Implementation of certain manufacturing applications
will be completed by the first quarter of 2000 and are not considered to have
any Year 2000 impact.
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SICOR Inc.
There are many factors outside the Company's control that could cause the
Year 2000 problem to seriously disrupt its operations. There are risks, however,
for which the Company is preparing and, in so doing, seeking to reduce its
exposure. The scope of the Company's efforts regarding each risk is limited to
the Company's key products, key compounds, subsidiaries, critical suppliers, and
major customers. The most critical of these risks are: a disruption in the
supply of product with particular emphasis on failures of raw material
suppliers, commercial partners, and external distribution channels; internal
infrastructure failures such as utilities, communications, internal information
technology services and integrated information technology systems; government
failures, especially as they impact import and export activity; interruption of
the product regulatory filing process; and a major customer failure or
interruption.
In general, the Company's management is satisfied with its efforts to be Year
2000 prepared; however, in the unlikely event the international projects are not
completed before the Year 2000, the result could have a material adverse effect
on the Company's business.
Because third party failures could have a material adverse impact on the
Company's ability to conduct business, the Company is attempting to obtain
written assurances from all material customers and vendors that their systems
are or will be Year 2000 compliant. The Company has received such assurances
from its domestic material customers and vendors as well as many of its
international customers and vendors. The Company's total sales to international
customers in the nine months ended September 30, 1999 were approximately $72.7
million, which represented approximately 46% of the Company's total sales in
such period. The Mexican government public hospital program accounted for
approximately $14.1 million of the Company's sales in the nine months ended
September 30, 1999. If either the Company or any material customer or vendor
experiences a failure of any critical system, such failure could have a material
adverse impact on the Company's business or require the Company to incur
unanticipated expenses.
The Company has received numerous assurances from critical customers and
material vendors regarding their Year 2000 compliance, and this process is still
being completed with the international businesses. The Company is implementing
alternatives, including the replacement of vendors, the building of safety
stocks and year-end coordination of major cash flow transactions, to eliminate
risk during the early part of 2000, and other contingency plans based on the
information collected to date. The business interruption of any of the Company's
significant customers, resulting from their Year 2000 issues, could have a
material adverse impact on the Company's revenues and results of operations.
The Company is completing a formal worldwide contingency plan for non-
compliance and will be reviewing this with the Audit Committee of the Board of
Directors in December 1999. Action plans are being implemented currently based
on the information obtained from third parties and an on-going evaluation of the
Company's own systems. The Company's contingency plan will be in place by the
end of November 1999 and will include backup procedures, identification of
alternate suppliers, increases in inventory levels and other procedures. The
Company is identifying its most reasonably likely worst case scenario with
respect to possible losses in connection with Year 2000 related problems.
The cost incurred through September 30, 1999, for the Year 2000 transition
was approximately $1.3 million, which includes software and hardware upgrades
that would have been purchased in the normal course of business to accommodate
future growth and worldwide integration. The Company estimates that the
remaining costs to be incurred on upgrading systems, including the Year 2000
transition, will be approximately $0.7 million, and as such, will not have a
significant impact on the Company's financial position or operating results.
Based on available information, including assurances from software vendors that
their products are compliant, the Company believes that, barring critical
failures arising from factors beyond the Company's direct control, it will be
able to manage its total Year 2000 transition without any material adverse
effect on its business operations, products, operating results or financial
condition.
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SICOR Inc.
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk with respect to its debt outstanding
and foreign currency transactions. Most of the Company's long-term borrowings
are based on fixed interest rates and therefore are not subject to material risk
from changes in interest rates. Short-term borrowings, however, are based on
prime or other indicative base rates plus a premium. If these indicative base
rates increase, the Company will incur higher relative interest expense and
similarly, a decrease in the rates will reduce relative interest expense. In
recent years, there have not been significant fluctuations in the prime or other
indicative base rates. A 1.0% change in the prime rate or other indicative base
rates would not materially change interest expense assuming levels of debt
consistent with historical amounts. Due to the Company's international
operations, certain transactions are conducted in foreign currencies. The
Company's Italian operations hedge against transactional risks by borrowing
against its receivables and against economic risk by buying monthly U.S. Dollar
put/Lira call options to strike at a rate equal to or above the budgeted
exchange rates.
RISK FACTORS THAT MAY AFFECT RESULTS
This report includes forward-looking statements about the Company's
business and results of operations which are subject to risks and uncertainties
that could cause the Company's actual results to vary materially from those
indicated in such forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere in this Form 10-Q and in the Company's Annual Report on Form
10-K for the year ended December 31, 1998. The factors discussed below should
be read in conjunction with the risk factors discussed in the Company's Annual
Report on Form 10-K, which are incorporated by reference.
Future Capital Needs; Uncertainty of Additional Funding
The Company anticipates that its operating cash flows, combined with its
current cash and cash equivalents on hand at September 30, 1999 of $34.8
million, and commitments from third parties, will enable it to maintain its
current and planned operations through at least 2000. The Company will
continue to evaluate the need for additional capital and, if appropriate,
pursue equity, debt and lease financing, or a combination of these, for its
capital needs. Such financings may not be available on acceptable terms, or at
all. If the Company is unable to obtain additional financing, the Company may
have to reduce its capital expenditures, spending for the development of new
products, and its workforce. Such reductions would have a material adverse
effect on the Company. In addition, at September 30, 1999, approximately $110
million of the Company's $376 million in assets consisted of either
intangibles or goodwill. The Company may not be able to realize any value from
these intangible assets. The Company routinely assesses the recoverability of
long-lived assets by determining whether the carrying value of such assets can
be recovered through undiscounted future operating cash flows. If impairment
is indicated, the Company will measure the amount of such impairment by
comparing the carrying value of the asset to the present value of the expected
future cash flows associated with the use of the asset.
Uncertainty of Outcome of Legal Proceedings
The Company is involved in various actions, claims, and legal proceedings
arising from its business operations. The ultimate outcome of these matters is
uncertain and could have a material adverse effect on the Company's financial
position, results of operations or cash flows. See Note 6.
Limited History of Profitability; Potential Quarterly Fluctuations in Future
Operating Results
With the exception of the first nine months of 1999, the Company has been
unprofitable on an annual basis since its inception in 1986. As of September
30, 1999, the Company had an accumulated deficit of approximately $353.9
million. The Company may not be profitable on a quarterly or annual basis in
the future. The Company believes that future operating results will be subject
to quarterly fluctuations due to a variety of factors, including whether and
when new products are successfully developed and introduced by the Company,
market acceptance of current or new products, regulatory delays, product
recalls, manufacturing delays or inefficiencies, shipment problems, seasonal
customer demand, the timing of significant orders, changes in reimbursement
policies, competitive pressures on average selling prices, changes in the mix
of products sold and possible defense and resolution of patent matters.
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SICOR Inc.
Competition
SICOR is engaged in a rapidly evolving field. Competition from large
pharmaceutical companies, biotechnology companies, and other companies is
intense. Many of these companies have substantially greater resources and
experience in developing, manufacturing and marketing pharmaceutical products
than SICOR. There can be no assurance that competitors will not succeed in
developing technologies and products that are more effective or that would
render the technology and products of SICOR obsolete or noncompetitive.
SICOR competes in the highly competitive multisource (generic) injectable
drug industry with numerous other pharmaceutical manufacturers, many of which
are established companies with greater financial and other resources than SICOR.
The Company may not be able to continue to compete effectively in this market.
Because selling prices of multisource injectable drug products typically decline
as competition intensifies, the profitability of SICOR will depend in part on
its ability to develop and introduce new products to the market in a timely
manner, to obtain raw materials at competitive prices and to improve the
efficiency of its production capability
A significant portion of SICOR's business is dependent on winning bids from
the Mexican government public hospital program. The bidding for this program is
highly competitive with numerous other pharmaceutical manufacturers
participating, many of which are established companies with greater financial
and other resources than SICOR. The Company may not be able to continue to
compete effectively with respect to this program.
Government Regulation; No Assurance of Obtaining Regulatory Approvals
The testing, manufacture and marketing of SICOR's products are subject to
regulation by numerous federal, state and local governmental authorities in the
United States, and by similar agencies in other countries in which SICOR
develops, manufactures and markets drugs. SICOR must receive approval for each
of its drugs from the applicable regulatory agencies before it may be marketed
as a drug in a particular country. The regulatory process can take many years
and may require SICOR to expend substantial resources. In addition, SICOR may
encounter delays or rejections based on changes in regulatory agency policies
during the period in which a potential drug is being developed and/or the period
required for review of any application for regulatory agency approval. Delays
in obtaining regulatory agency approvals could negatively affect the marketing
of any potential drug, result in the imposition of costly procedures on SICOR's
activities, and negatively affect SICOR's ability to receive royalties. SICOR
may not obtain regulatory approvals for potential drugs.
Moreover, if SICOR obtains regulatory agency approval for a drug, such
approval may be limited regarding the indicated uses for which the drug may be
marketed and this would limit SICOR's potential market for the drug.
Furthermore, the marketing and manufacture of drug products remain subject to
extensive regulatory requirements. The discovery of previously unknown problems
with any of SICOR's drugs could result in restrictions on such drug including
withdrawal of the drug from the market. If SICOR fails to comply with
regulatory requirements, it could be fined, its regulatory approvals suspended,
its operations restricted, and it could be involved in criminal prosecution. In
addition, regulatory agency approval of pricing is required in many countries
and may be required for the marketing in such countries of any drug SICOR
develops.
Dependence on Key Personnel
The success of SICOR depends in large part upon its ability to attract and
retain qualified scientific, manufacturing, marketing and management personnel.
SICOR faces competition for such personnel from other companies, academic
institutions, government entities and other organizations. In addition, the
success of SICOR will be dependent upon key personnel, the loss of which may
have a material adverse effect on the Company's business.
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SICOR Inc.
Uncertainty of Ability to Operate without Infringing on Patents and Proprietary
Technology of Others
The success of SICOR will depend, in part, on its ability to maintain trade
secret protection and operate without infringing on the proprietary rights of
third parties. The patents others have, or may acquire, may have an adverse
effect on the ability of SICOR to commercialize its products. Litigation, which
could result in substantial costs to the Company, may be necessary to determine
the scope and validity of the proprietary rights of third parties. If any of
the Company's products are found to infringe upon the patents or other rights
owned by third parties, SICOR may be subject to significant liabilities to third
parties and may be required to obtain licenses to patents or other proprietary
rights of third parties which may not be available on acceptable terms. If
SICOR does not obtain such licenses, product introductions could be delayed or
foreclosed. SICOR may not have sufficient funds to obtain licenses that may be
required in order to develop and commercialize its products, to contest patents
obtained by third parties, or to defend against suits brought by third parties.
SICOR also relies on protecting its proprietary technology in part through
confidentiality agreements with its corporate collaborators, employees,
consultants and certain contractors. These agreements may be breached and SICOR
may not have adequate remedies of any breach. In addition, SICOR's trade
secrets may otherwise become known or independently discovered by its
competitors.
Potential Inability to Obtain Raw Materials or Manufacture Products
SICOR depends on third party manufacturers for bulk raw materials for many
of its products. These raw materials are generally available from a limited
number of sources, and certain raw materials are available only from foreign
sources. In addition, Gensia Sicor Pharmaceuticals utilizes sole sources of
supply for certain raw materials used in the manufacture of its products and
certain packaging components. Any disruption in one or more of these supply
sources could have a material adverse effect on SICOR.
Uncertainty of Pharmaceutical Pricing, Reimbursement and Related Matters
The levels of revenues and profitability of pharmaceutical companies will
be affected by the continuing efforts of governmental and third party payors to
contain or reduce the costs of health care through various means. For example,
in certain foreign markets pricing or profitability of prescription
pharmaceuticals is subject to government control. Domestically and
internationally, there have been, and SICOR expects that there will continue to
be, a number of legislative proposals to implement government controls. While
SICOR cannot predict whether any such legislative or regulatory proposals or
reforms will be adopted or the effect such proposals or reforms may have on its
businesses, the announcement of such proposals or reforms could have a material
adverse effect on SICOR's ability to raise capital and the adoption of such
proposals or reforms could have a material adverse effect on SICOR's business,
financial condition and profitability.
In addition, in both the United States and elsewhere, sales of prescription
pharmaceuticals are dependent in part on the availability of reimbursement to
the consumer from third party payors, such as government and private insurance
plans. Third party payors are increasingly challenging the prices charged for
medical products and services. The products of SICOR may not be considered cost
effective and reimbursement to the consumer may not be available or may not be
sufficient to allow SICOR to sell its products on a competitive basis. If
purchasers or users of SICOR's products are not able to obtain adequate
reimbursement for the cost of using SICOR's products, they may forego or reduce
their use. Significant uncertainty exists as to the reimbursement status of
newly approved health care products, and whether adequate third party coverage
will be available.
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SICOR Inc.
Product Liability Exposure; Inadequacy or Unavailability of Product Liability
Insurance
SICOR, as a manufacturer of finished drug products, faces an inherent
exposure to product liability claims in the event that the use of any of its
technology or products is alleged to have resulted in adverse effects. This
exposure exists even with respect to those products that receive regulatory
approval for commercial sale, as well as those undergoing clinical trials.
While SICOR has taken and will continue to take what it believes are appropriate
precautions, there can be no assurance that it will avoid significant product
liability exposure.
In addition, as a manufacturer of bulk drug substances, SICOR supplies
other pharmaceutical companies with active ingredients, which are contained in
finished products. The ability of SICOR to avoid significant product liability
exposures depends in part upon its ability to negotiate appropriate commercial
terms and conditions with its customers and its customers' manufacturing,
quality control and quality assurance practices. SICOR may not be able to
negotiate satisfactory terms and conditions with its customers. Although SICOR
maintains insurance for product liability claims, which the Company believes is
in line with the insurance coverage carried by other companies in its industry,
the insurance coverage may not be sufficient. In addition, adequate insurance
coverage might not continue to be available at acceptable costs, if at all, and
product liability claims could adversely affect the business or financial
condition of SICOR.
Uncertainty Regarding Mexican Economic Factors, Government Policies and
Inflation
The Mexican government has exercised and continues to exercise significant
influence over many aspects of the Mexican economy. Accordingly, Mexican
government actions could have a significant effect on Lemery and Sicor de
Mexico, and on market conditions and prices in Mexico. A large portion of the
finished multisource drug products manufactured by Lemery is sold to the
government public hospital program in Mexico. Sales to the government public
hospital program in Mexico may not continue in the future. In addition,
although the Mexican government has paid Lemery on a timely basis, this payment
pattern may not continue in the future. Further, as recently as 1995, Mexico
experienced high double-digit inflation and it may experience similar high
inflation in the future. Actions by the Mexican government, future developments
in the Mexican economy and Mexico's political, social or economic situation may
adversely affect the operations of Lemery and Sicor de Mexico.
Risks Related to International Operations
For the three and nine months ended September 30, 1999, percentage of total
product sales to customers outside of Canada, Western Europe, Japan and the
United States was approximately 24% and 28%, respectively. Operations outside
of Canada, Western Europe, Japan and the United States are subject in varying
degrees to greater risks involved in doing business abroad such as war, civil
disturbances, adverse governmental actions (which may disrupt or impede
operations and markets, restrict the movement of funds, impose limitations on
foreign exchange transactions or result in the expropriation of assets) and
economic and governmental instability. SICOR may experience material adverse
developments with respect to its operations outside of Canada, Western Europe,
Japan and the United States and such developments, if they were to occur, may
have a material adverse effect on the results of operations and financial
condition of SICOR.
Environmental Matters
SICOR's business involves the controlled storage, use and disposal of
hazardous materials and biological hazardous materials. SICOR is subject to
numerous environmental regulations in the jurisdictions in which it operates.
Although SICOR believes that its safety procedures for handling and disposing of
these hazardous materials comply with the standards prescribed by law and
regulation, the risk of accidental contamination or injury from hazardous
materials cannot be completely eliminated. In the event of an accident, SICOR
could be held liable for any damages
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SICOR Inc.
that result, and such liability could exceed the Company's resources. SICOR's
operations, business and assets may be substantially and detrimentally affected
by current or future environmental laws or regulations. In addition, SICOR
maintains liability insurance for some environmental risks which the Company's
management believes to be appropriate and in accordance with industry practice.
SICOR may incur liabilities beyond the limits or outside the coverage of its
insurance and my not be able to maintain insurance on acceptable terms, or at
all.
Currency Fluctuations
SICOR has significant operations in several countries, including the United
States, Italy, Mexico and Switzerland. In addition, purchases and sales are
made in a large number of other countries. As a result, its business is subject
to the risk and uncertainties of foreign currency fluctuations. While SICOR has
policies and strategies to minimize this risk, there can be no assurance that
such policies and strategies will be effective in preventing significant
negative financial adjustments in the future.
Control by Principal Stockholder
Carlo Salvi, the Company's President, Chief Executive Officer and a
director beneficially owns approximately 37% of the Company's Common Stock. In
addition, pursuant to a shareholder's agreement, dated as of November 12, 1996,
as amended (the "Shareholder's Agreement") Rakepoll Finance, an entity
controlled by Mr. Salvi, is entitled to designate three of SICOR's directors,
who in turn are entitled to designate (jointly with two executive officer
directors of SICOR) five additional directors. In addition, the consent of the
Rakepoll Finance designated directors is required for SICOR to take certain
actions, such as a merger or sale of all or substantially all of the business or
assets of SICOR and certain issuances of securities. As a result of his
ownership of SICOR Common Stock, Mr. Salvi may be able to control substantially
all matters requiring approval by the stockholders of SICOR, including the
election of directors and the approval of mergers or other business combination
transactions.
Possible Volatility of Stock Price; Dividend Policy
The market price of the shares of SICOR Common Stock, like that of the
common stock of many other pharmaceutical companies, has been and is likely to
continue to be highly volatile, and the market for securities of such companies
has from time to time experienced significant price and volume fluctuations that
are unrelated to the operating performance of particular companies. The market
price of SICOR Common Stock could be subject to significant fluctuations in
response to variations in SICOR's anticipated or actual operating results, sales
of substantial amounts of SICOR Common Stock, other issuances of substantial
amounts of SICOR Common Stock pursuant to pre-existing obligations,
announcements concerning SICOR or its competitors, including the results of
testing, technological innovations or new commercial products or services,
developments with SICOR's collaborators, developments in patent or other
proprietary rights of SICOR or its competitors, including litigation, conditions
in the pharmaceuticals industry, governmental regulation, health care
legislation, public concern as to the safety of SICOR's products, changes in
estimates of SICOR's performance by securities analysts, market conditions for
pharmaceutical stocks in general, and other events or factors not within SICOR's
control.
SICOR has never paid cash dividends on SICOR Common Stock. SICOR presently
intends to retain earnings, if any, for the development of its businesses and
does not anticipate paying any cash dividends on SICOR Common Stock in the
foreseeable future. Unless full cumulative dividends are paid on SICOR's
outstanding $3.75 Convertible Exchangeable Preferred Stock, $.01 par value
("Convertible Preferred Stock"), cash dividends may not be paid or declared and
set aside for payment on SICOR Common Stock. At September 30, 1999, SICOR had
approximately $7.5 million in undeclared cumulative preferred dividends on
such Convertible Preferred Stock. If SICOR chooses not to declare dividends
for six cumulative quarters, the holders of Convertible Preferred Stock,
voting separately as a class, will be entitled to elect two additional
directors until the dividend in arrears has been paid.
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Subordination of Common Stock to Notes and Preferred Stock
SICOR's Common Stock is expressly subordinate to $20 million of 2.675%
subordinated convertible notes due May 1, 2004, and to the series A preferred
stock into which the notes are convertible, in the event of liquidation,
dissolution or winding up. SICOR's Common Stock is also subordinate to the
approximately $80 million (plus accrued and unpaid dividends) liquidation
preference of SICOR's outstanding $3.75 convertible exchangeable preferred
stock. If SICOR was to cease operations and liquidate its assets, there may not
be any remaining value available for distribution to the holders of common stock
after providing for the above liquidation preferences.
Effect of Certain Anti-Takeover Provisions
SICOR's Certificate of Incorporation and Bylaws include provisions that
could discourage potential takeover attempts and make attempts by its
stockholders to change management more difficult. The approval of 66-2/3% of
SICOR's voting stock is required to approve certain transactions and to take
certain stockholder actions, including the calling of a special meeting of
stockholders and the amendment of any of the anti-takeover provisions contained
in SICOR's Certificate of Incorporation. SICOR also has a stockholder rights
plan, the effect of which may also deter or prevent takeovers. These rights
will cause a substantial dilution to a person or group that attempts to acquire
SICOR on terms not approved by the SICOR Board of Directors and may have the
effect of deterring hostile takeover attempts.
Impact of Year 2000 Issue
The Year 2000 issue could have a material adverse impact on the operations
of the Company. Additionally, the systems of other companies on which SICOR's
systems rely may not be timely converted, which may have an adverse effect on
the Company's systems. For example, to the extent that customers would be
unable to order products or pay invoices or suppliers would be unable to
manufacture or deliver product, the Company's operations would be adversely
affected.
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SICOR Inc.
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
On August 6, 1999, the Company reached a settlement with Protocol Systems
concerning alleged breach of a supply agreement. The resolution of the matter
did not result in an adjustment to the Company's consolidated financial position
or results of operations as an adequate provision was recorded in the fourth
quarter of 1998. See Note 6.
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 third quarter
None.
21
<PAGE>
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.
SICOR Inc.
Date: November 12, 1999 By: /s/ Carlo Salvi
---------------------------------
Carlo Salvi, President and
Chief Executive Officer
Date: November 12, 1999 By: /s/ John W. Sayward
---------------------------------
John W. Sayward, Executive Vice
President, Finance, Chief Financial
Officer and Treasurer
22
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<FISCAL-YEAR-END> DEC-31-1999
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0
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