<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, 2000.
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.
----------
(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 96,477,872
--------------------------- ------------------------------------
Class Outstanding at June 30, 2000
<PAGE>
SICOR INC.
INDEX
PART I: FINANCIAL INFORMATION PAGE
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets at June 30, 2000 and
December 31, 1999 3
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the three and six months ended June 30,
2000 and 1999 4
Consolidated Statements of Cash Flows for the six months
Ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
Results of Operations for the three and six months ended
June 30, 2000 and 1999 11
Liquidity and Capital Resources 13
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 15
PART II: OTHER INFORMATION
ITEM 1: Legal Proceedings 21
ITEM 4: Submission of Matters to a Vote of Security Holders 21
ITEM 6: Exhibits and Reports on form 8-K 22
SIGNATURES 23
2
<PAGE>
SICOR INC.
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $54,067 $47,506
Accounts receivable, net 52,300 49,623
Inventories, net 50,914 47,716
Other current assets 9,737 9,514
-------- --------
Total current assets 167,018 154,359
Property and equipment, net 107,668 101,839
Other noncurrent assets 22,709 22,551
Intangibles, net 41,282 42,971
Goodwill, net 63,108 64,459
-------- --------
$401,785 $386,179
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 35,332 $ 35,363
Accrued payroll and related expenses 9,797 5,858
Other accrued liabilities 21,616 25,680
Short-term borrowings 31,789 36,685
Current portion of long-term debt 6,656 6,974
Current portion of capital lease obligations 1,262 1,521
-------- --------
Total current liabilities 106,452 112,081
Other long-term liabilities 10,877 9,599
Long-term debt, less current portion 16,282 35,661
Long-term capital lease obligations, less current portion 1,789 2,447
Deferred taxes 16,588 17,537
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, 96,478 and
88,848 shares issued and outstanding at June 30, 2000 and December 31,
1999, respectively 965 888
Additional paid-in capital 585,181 558,802
Accumulated deficit (332,903) (348,310)
Accumulated other comprehensive income loss (3,462) (2,542)
-------- --------
Total stockholders' equity 249,797 208,854
-------- --------
$401,785 $386,179
======== ========
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
2000 1999 2000 1999
-------- -------- --------- ----------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 71,774 $ 54,691 $ 139,319 $ 103,048
Contract research and license fees -- -- -- 5,303
--------- --------- --------- ---------
Total revenues 71,774 54,691 139,319 108,351
Costs and expenses:
Cost of sales 41,468 33,832 79,697 67,119
Research and development 5,012 3,605 8,916 8,927
Selling, general and administrative 11,702 10,644 22,143 20,267
Non-cash compensation -- -- 2,579 --
Amortization expense 1,482 1,524 2,980 3,052
Interest and other, net 1,762 1,896 3,956 4,491
Write-down of investment and divestiture
of business charge -- 1,777 -- 1,777
--------- --------- --------- ---------
Total costs and expenses 61,426 53,278 120,271 105,633
Net income before income taxes 10,348 1,413 19,048 2,718
Provision for income tax (expense)/benefit (2,080) 375 (3,641) (1,126)
--------- --------- --------- ---------
Net income before minority interest 8,268 1,788 15,407 1,592
Minority interest -- -- -- 31
--------- --------- --------- ---------
Net income 8,268 1,788 15,407 1,623
Dividends on preferred stock (1,504) (1,504) (2,992) (2,992)
--------- --------- --------- ---------
Net income (loss) applicable to common shares 6,764 284 12,415 (1,369)
Other comprehensive loss:
Foreign currency translation 83 (585) (920) (1,816)
--------- --------- --------- ---------
Comprehensive net income (loss) $ 6,847 $ (301) $ 11,495 $ (3,185)
========= ========= ========= =========
Net income (loss) per share
- Basic $ 0.07 $ -- $ 0.13 $ (0.02)
========= ========= ========= =========
- Diluted $ 0.07 $ -- $ 0.13 $ (0.02)
========= ========= ========= =========
Shares used in calculating per share amounts
- Basic 94,338 84,092 92,127 81,965
========= ========= ========= =========
- Diluted 101,244 84,223 100,855 81,965
========= ========= ========= =========
</TABLE>
See accompanying notes.
4
<PAGE>
SICOR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
2000 1999
-------- --------
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 15,407 $ 1,623
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization 9,731 9,542
Loss on disposal of property & equipment 73 --
Non-cash compensation 2,699 --
Minority interest -- (31)
Deferred income tax (45) (137)
Inventory purchase price allocation adjustments 450 324
Write-down of investment and divestiture business charge -- 1,777
Change in operating assets and liabilities:
Accounts receivable (3,456) (5,064)
Inventories (4,862) (805)
Other current and noncurrent assets (1,847) (304)
Accounts payable and accrued expenses 752 2,297
-------- -------
Net cash provided by operating activities 18,902 9,222
Cash flows from investing activities:
Purchases of property and equipment (14,566) (15,804)
Divestiture of Metabasis Therapeutics, Inc. -- (4,911)
Proceeds from sale of property 118 --
-------- -------
Net cash used in investing activities (14,448) (20,715)
Cash flows from financing activities:
Payments of cash dividends on preferred stock (2,992) (2,992)
Issuance of common stock and warrants, net 10,342 35,268
Change in short-term borrowings (3,427) (3,011)
Issuance of long-term debt and capital lease obligations 2,451 11,563
Principal payments on long-term debt from related party -- (10,000)
Principal payments on long-term debt and capital lease obligations (3,977) (3,583)
-------- -------
Net cash provided by financing activities 2,397 27,245
Effect of exchange rate changes on cash (290) (2,082)
-------- -------
Increase in cash and cash equivalents 6,561 13,670
Cash and cash equivalents at beginning of period 47,506 24,461
-------- -------
Cash and cash equivalents at end of period $ 54,067 $ 38,131
======== =======
Supplemental schedule of non-cash financing activities:
Common stock issued to settle covertible debt $ 20,000 $ --
</TABLE>
See accompanying notes.
5
<PAGE>
SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 specialty 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 S.p.A.") 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 S.p.A. 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.p.A.'s business. In
June 1998, Sicor S.p.A. 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, after
which, taking into account certain additional financing obtained by Metabasis in
July 2000, the Company retains a 30% interest.
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. ("Gensia Sicor Pharmaceuticals"),
Gensia Development Corporation and Genchem Pharma Ltd. ("Genchem Pharma"). All
significant intercompany accounts and transactions have been eliminated.
Subsequent to the divestiture of a 46% interest in Metabasis and certain
additional financing obtained by Metabasis, the Company retains a 30% equity
interest in Metabasis. Accordingly, starting in the second quarter of 1999,
investment in Metabasis was accounted for using the equity method, as the
Company no longer had control of Metabasis.
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, 2000 and 1999 have been made.
The results of operations for the three and six-month periods ended June 30,
2000 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 1999 Form 10-K filed with the Securities and Exchange Commission.
FINANCIAL STATEMENT PREPARATION
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. Certain
prior year amounts have been reclassified to conform to the current year
presentation.
6
<PAGE>
SICOR INC.
2. FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's subsidiaries located
outside the United States, except for Mexico, are measured using the local
currency as the functional currency. Due to the nature of the business, the
operations in Mexico use the U.S. Dollar as their functional currency. Assets
and liabilities of these subsidiaries are translated at the rates of exchange
at the balance sheet date. Income and expense items are translated at average
monthly rates of exchange.
3. CHANGE IN ACCOUNTING PRINCIPLES
At the time of acquisition in 1997, Sicor S.p.A. used the LIFO
method to determine inventory valuation. Effective January 1, 1999, Sicor
S.p.A. changed to the FIFO method. The change in accounting principle, which
has been applied retroactively for the years 1999, 1998, and 1997 (from the
date of the Rakepoll acquisition), was made to conform the inventory
valuation method of Sicor S.p.A. to the method used by all of the Company's
other operations. At the time of acquisition, this change was considered but
delayed because of the relative insignificance of the accounting change.
Since the acquisition, the Company has become more fully integrated and
management believes consistency is preferable. Additionally, the Company has
been in a stable price environment where LIFO and FIFO are approximately the
same and prices are not expected to increase significantly in the foreseeable
future. As such, FIFO more closely represents current costs in the current
stable price environment.
The effect of this change in 1999 was to decrease net income by $0.9
million ($0.01 per share), as follows (in thousands):
<TABLE>
<CAPTION>
Adjustment to 1999 Net Income
----------------------------------------------
Quarter Total Per Share
------- ------- -----------
<S> <C> <C>
First $ - $ -
Second (217) -
Third (113) -
Fourth (617) (0.01)
------- -------
$(947) $(0.01)
======= =======
</TABLE>
4. NON-CASH COMPENSATION
In September 1997, the stockholders approved the Chairman's Options (the
"Chairman's Options"). Under the Chairman's Options, the Company's Chairman of
the Board was issued 500,000 shares of common stock of which 200,000 shares were
fully vested at the time of grant, with the remaining 300,000 shares to vest in
increments of 100,000 shares subject to meeting certain performance conditions.
During the first quarter of 2000, the remaining 300,000 shares vested upon
attainment of the stipulated conditions. As part of the agreement, the Company
recorded $1.6 million in compensation expense from the vesting of such options
in the first quarter of 2000. An additional incentive compensation expense of $1
million relating to the Company's chairman was also recorded in the first
quarter of 2000, upon the Company having reached a market capitalization of $1
billion in accordance with the terms of an agreement between the Company and the
Chairman of the Board. Payments will be made through the issuance of common
stock.
7
<PAGE>
SICOR INC.
5. NET INCOME (LOSS) 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
dilutive effect of additional common shares that are issuable upon exercise of
outstanding stock options, warrants, and other dilutive securities. The
calculations of basic and diluted weighted average shares outstanding are as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
BASIC:
Net income (loss) applicable to common shares $ 6,764 $ 284 $ 12,415 $ (1,369)
Basic weighted average common shares outstanding 94,338 84,092 92,127 81,965
-------- -------- -------- --------
Basic net income (loss) per share $ 0.07 $ - $ 0.13 $ (0.02)
======== ======== ======== ========
DILUTED:
Net income (loss) applicable to common shares $ 6,764 $ 284 $ 12,415 $ (1,369)
Add 2.675% interest expense on subordinated
convertible notes 98 - 394 -
-------- -------- -------- --------
Net income (loss) applicable to diluted shares $ 6,862 $ 284 $ 12,809 $ (1,369)
======== ======== ======== ========
Basic weighted average common shares outstanding 94,338 84,092 92,127 81,965
Net effect of dilutive stock options - based on
the treasury stock method 2,386 130 2,491 -
Net effect of dilutive warrants - based on the
treasury stock method 2,674 1 2,618 -
Net effect of potential shares issuable in connection
with stock compensation expense 102 - 102 -
Assumed conversion of 2.675% subordinated
convertible notes 1,744 - 3,518 -
-------- -------- -------- --------
Diluted weighted average common shares outstanding 101,244 84,223 100,855 81,965
======== ======== ======== ========
Diluted net income (loss) per share $ 0.07 $ - $ 0.13 $ (0.02)
======== ======== ======== ========
</TABLE>
The net effect of dilutive shares has not been included in the
computation of diluted net loss per share for the six months ended June 30,
1999 since the effects of such conversions and exercises would have
been anti-dilutive.
6. COMPREHENSIVE NET INCOME (LOSS)
SFAS No. 130, "Reporting Comprehensive Income," requires the
reporting and display of comprehensive income and its components, which
for the Company includes net income (loss) and foreign currency
translation adjustments. In accordance with SFAS No. 130, the accumulated
balance of other comprehensive income (loss) is disclosed as a separate
component of stockholders' equity.
8
<PAGE>
SICOR INC.
7. INVENTORIES
Inventories at June 30, 2000 and December 31, 1999 consisted of (in
thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- -----------
<S> <C> <C>
Raw Materials $ 23,656 $ 24,767
Work-in-process 11,393 9,421
Finished goods 20,499 17,904
--------- -----------
55,548 52,092
Less reserves (4,634) (4,376)
--------- -----------
$ 50,914 $ 47,716
========= ===========
</TABLE>
8. CONVERTIBLE DEBT
On April 25, 2000, the holders of $20 million of 2.675% subordinated
convertible notes elected to convert all outstanding principal into 5,291,005
shares of the Company's common stock at a conversion price of $3.78 per share.
Common shares pursuant to the conversion were issued on May 1, 2000.
9. CONTINGENCIES
In February 1999, a lawsuit was filed by AstraZeneca plc (formerly Zeneca
Limited) ("AstraZeneca") in the U.S. District Court in Baltimore, Maryland
against the Food and Drug Administration ("FDA") with regard to Gensia Sicor
Pharmaceuticals' Abbreviated New Drug Application ("ANDA") for propofol. In the
suit, AstraZeneca alleged that the FDA improperly approved Gensia Sicor
Pharmaceuticals' propofol product. The Company believes this lawsuit is without
merit, and that it illustrates AstraZeneca'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 AstraZeneca's motion for a preliminary injunction on
March 26, 1999, 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. On May 17, 2000 the United States Court of Appeals for the Fourth
Circuit denied AstraZeneca's appeal of this judgement, and on July 14, 2000 the
Court of Appeals denied AstraZeneca's petition for rehearing. AstraZeneca has
until October 12, 2000 to file a petition for review by the United States
Supreme Court. Should AstraZeneca ultimately succeed on appeal in its litigation
against the Company and the FDA, it could have a material adverse effect on the
Company's financial position, results of operations or cash flows.
It has been reported that certain federal and state governmental agencies,
including the United States Department of Justice and the United States
Department of Health and Human Services, have been investigating issues
surrounding pricing information reported by drug manufacturers and used in the
calculation of reimbursements under the Medicaid program administered jointly by
the federal government and the states. The Company has supplied and is
continuing to supply documents in connection with these investigations and has
had preliminary discussions with representatives of the federal and state
governments, but is unable to estimate at this time what effect, if any, these
investigations will have on the Company's pricing policies or its financial
statements. There can be no assurance that these investigations will not result
in changes to the Company's pricing policies or other actions which might have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
9
<PAGE>
SICOR INC.
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.
10
<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 the
timely development, regulatory approvals, successful marketing, and acceptance
of new products, the impact of competitive products, product costs and pricing,
changing market conditions and the other risks detailed throughout this Form
10-Q and in the Company's Annual Report on Form 10-K for the year ended December
31, 1999, including those listed under "RISK FACTORS THAT MAY AFFECT RESULTS."
Actual results may differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements, which represent
the Company's judgment 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 FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
The Company reported net income of $6.8 million, or $.07 per common
share (after dividends on preferred stock of $1.5 million), in the second
quarter ended June 30, 2000 compared to a net income of $0.3 million, or $.00
per common share (after dividends on preferred stock of $1.5 million), in the
second quarter of 1999. For the six months ended June 30, 2000, the Company
reported net income of $12.4 million, or $.13 per common share (after dividends
on preferred stock of $3.0 million), compared to a net loss of $1.4 million, or
$.02 per common share (after dividends on preferred stock of $3.0 million), for
the six months ended June 30, 1999.
Product sales in the second quarter of 2000 increased to $71.8 million
from $54.7 million in the second quarter of 1999. For the first six months of
2000, product sales increased to $139.3 million from $103.0 million for the same
period in 1999. The increase in product sales for the three and six months ended
June 30, 2000 was due primarily to propofol sales in the U.S. and increased
product sales to the Mexican government's public hospital programs. Unit demand
for propofol increased substantially during both the three and six-month periods
ended June 30, 2000 while experiencing relatively low price degradation. The
Company anticipates current volume and price trends for propofol to continue
through year-end, but cannot reliably assess the sustainability of these trends
thereafter. Propofol is being sold in the U.S. through Baxter Pharmaceutical
Products, Inc. ("Baxter"), which is the Company's marketing partner for a
variety of the products sold in the U.S. For the six months ended June 30, 2000,
the increase in product sales was offset by a one-time sale of oncology finished
goods inventory to Abbott Laboratories ("Abbott") in January 1999 resulting from
the Sales and Distribution Agreement entered into with Abbott. Product sales
from the Company's international units increased by $5.0 million in the second
quarter of 2000 over the second quarter of 1999, and by $10 million for the
first half of 2000 relative to the same period in 1999, due primarily to
increased sales of paclitaxel, pentoxifylline, and megestrol in Mexico, and
fermentation products (DM CTC and pleuromutiline) in Italy.
Cost of sales for the second quarter of 2000 was $41.5 million which
yielded a product gross margin of 42%, compared to a cost of sales of $33.8
million for the second quarter of 1999 which yielded a gross margin of 38%. Cost
of sales for the first six months of 2000 was $79.7 million which yielded a
product gross margin of 43%, compared to a cost of sales of $67.1 million for
the same period of 1999 which yielded a gross margin of 35%. The increase in
gross margin for the three and six months ended June 30, 2000, was primarily due
to sales of propofol in the U.S. as well as a more profitable mix of existing
products, including the products in Mexico and Italy referred to above.
The Company recorded no contract research and license fees for the
first six months of 2000 compared to $5.3 million in the first half of 1999. The
decrease was mainly due to a non-recurring
11
<PAGE>
SICOR INC.
reimbursement received in March 1999 from Baxter for expenses incurred by the
Company for propofol research and development. Also contributing to the decrease
was the absence of license fees paid to Metabasis, which was partially divested
by the Company in the second quarter of 1999.
Research and development expenses in the second quarter of 2000 were
$5.0 million compared to $3.6 million in the second quarter of 1999. For the
first six months of 2000, research and development expenses were $8.9 million
compared to $8.9 million for the same period in 1999. Included in the research
and development expenses in the second quarter of 2000 was a $1.3 million
technology acquisition charge resulting from a development, manufacturing and
marketing agreement with Aesgen, Inc. ("Aesgen") entered into during the second
quarter of 2000. For the six months ended June 30, 2000, research and
development expenses were unchanged as higher expenses from the signing of the
Aesgen agreement were offset by the absence of research and development expenses
incurred by Metabasis in 1999. Metabasis was partially divested by the Company
in the second quarter of 1999.
Selling, general and administrative expenses in the second quarter of
2000 were $11.7 million compared to $10.6 million in the second quarter of 1999.
Selling, general and administrative expenses for the first half of 2000 were
$22.1 million compared to $20.3 million in the same period of 1999. The increase
in selling, general and administrative expenses for the three and six month
periods ended June 30, 2000 compared to the corresponding periods in 1999 was
primarily due to variable expenses associated with increased product sales.
Offsetting the increase was the absence of Metabasis' selling, general and
administrative expense due to its partial divestiture in the second quarter of
1999.
The Company recognized non-cash compensation expense of $2.6 million in
the first quarter of 2000 for performance incentives earned by Mr. Donald Panoz
under the terms of his agreement to serve as SICOR's non-executive Chairman of
the Board. As part of the agreement, the Company recorded $1.6 million in
compensation expense from the vesting of stock options in the first quarter of
2000. An additional incentive compensation expense of $1 million relating to the
Company's chairman was also recorded in the first quarter of 2000 upon the
Company having reached a market capitalization of $1 billion in accordance with
the agreement. Payments will be made through the issuance of common stock.
Amortization expense did not change significantly during the three
and six month periods ended June 30, 2000 compared to the corresponding
periods in 1999. Interest and other expenses in the second quarter of 2000
decreased to $1.8 million from $1.9 million in the second quarter of 1999.
Interest and other expenses for the first six months of 2000 decreased to
$4.0 million from $4.5 million in the same period of 1999. The decrease in
interest and other expenses for the three and six months ended June 30, 2000,
as compared to the corresponding periods in 1999 was mainly due to increased
interest income earned on higher cash balances, and reduced interest expenses
due to the reduction of debt. On April 25, 2000, the holders of $20 million
of 2.675% subordinated convertible notes elected to convert all outstanding
principal into 5,291,005 shares of the Company's common stock at a conversion
price of $3.78 per share. In connection with the conversion of the
subordinated convertible notes, the Company avoided approximately $0.3
million in interest expense in the second quarter of 2000 compared to the
same period in 1999. Offsetting the decrease in net interest expense were
higher foreign exchange losses incurred by the Company's international
operations.
The Company recorded income tax expense of $2.1 million in the second
quarter of 2000 compared to income tax benefit of $0.4 million in the second
quarter of 1999. Income tax expense for the first six months of 2000 was $3.6
million compared to income tax expense of $1.1 million in the same period of
1999. The increase in income tax expense for the three and six months ended June
30, 2000, as compared to the corresponding periods in 1999 was primarily due to
increased earnings of Sicor S.p.A. and Gensia Sicor Pharmaceuticals. The
increase in U.S. earnings was substantially offset by the application of the
Company's net operating loss carryfowards, for which a benefit had not
previously been claimed.
12
<PAGE>
SICOR INC.
The Company recorded no minority interest in the operations of
Metabasis for the first six months of 2000 compared to $31 thousand in the first
six months of 1999 as Metabasis was partially divested in the second quarter of
1999, and the remaining book value of the Company's investment in Metabasis was
written down to zero at that time.
Dividends relate to the Company's convertible exchangeable preferred stock
issued in February 1993. The Company paid cash dividends on its preferred stock
totaling $1.5 million in the second quarter of 2000 compared to $1.5 million in
the first quarter of 1999. For the first six months of 2000, the Company paid
$3.0 million in cash dividends compared to $3.0 million in the same period of
1999. In order to reduce its cash usage, the Company's Board of Directors
determined not to declare the preferred stock quarterly dividend payments for
June, September and December 1995 and March and June 1996. The Company resumed
payments of preferred stock dividends in September 1996. Through June 2000, the
Company has approximately $7.5 million in undeclared cumulative preferred
dividends. If the Company chooses not to declare dividends for six cumulative
quarters, the holders of $3.75 Convertible Exchangeable Preferred Stock, $.01
par value ("Convertible Preferred Stock"), voting separately as a class, will be
entitled to elect two additional directors until the dividend in arrears has
been paid.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, SICOR had cash and cash equivalents of $54.1
million and working capital of $60.5 million compared to $47.5 million and $42.3
million, respectively, as of December 31, 1999. The increase in cash was
primarily the result of the Company generating $18.9 million of cash from
operations and $2.4 million in financing activities primarily from the exercise
of stock options and warrants, offset by the net investment of $14.5 million in
property and equipment.
Significant changes in operating assets and liabilities during the
first six months of 2000 included a $4.9 million increase in inventory, a $3.5
million increase in accounts receivable, and a $1.8 million increase in other
current and noncurrent assets. The growth in inventory reflected anticipated
sales growth in both domestic and international operations, and was largely due
to a build-up of inventory at the Italian operations in advance of a routine
facility shutdown in August. The increase in accounts receivable was primarily
attributable to a temporary decline in collections at Lemery in Mexico. The
majority of Lemery's sales are to the Mexican government's public hospital
programs and, as a result of the presidential election and ensuing transition of
power, the Mexican government's public hospital programs have been slow to pay
trade liabilities, including those due to Lemery. The Company anticipates that
the government will pay its trade liabilities due to Lemery in full. The
increase in other current and non-current assets was primarily due to an
increase in Value Added Tax (VAT) receivable related to the purchase of
inventory at the Company's Italian operations.
The Company's financing activities during the first six months of 2000
primarily consisted of cash proceeds of $10.3 million from the exercise of stock
options and warrants, offset by the net reduction of $3.4 million in short-term
borrowings, the net reduction of $1.5 million in long-term debt and capital
lease obligations, and the payment of $3.0 million in cash dividends to the
Company's preferred stockholders.
On April 25, 2000, the holders of $20 million of 2.675% subordinated
convertible notes elected to convert all outstanding principal into 5,291,005
shares of the Company's common stock at a conversion price of $3.78 per share.
The conversion transaction was a non-cash event for the Company and, as such,
has been excluded from the Company's consolidated statement of cash flows for
the six months ended June 30, 2000. In connection with the conversion of the
subordinated convertible notes, the Company avoided approximately $0.3 million
in interest expense in the second quarter of 2000 as compared to the same period
in 1999.
13
<PAGE>
SICOR INC.
During the first six months of 2000, the Company paid cash dividends on
its preferred stock totaling $3.0 million. At June 30, 2000, 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.
The Company expects to incur additional costs, including manufacturing and
marketing costs, to support existing products, as well as anticipated product
launches. Planned spending on sales and marketing activities during 2000 related
to product promotion is approximately $14 to $17 million. Management also plans
to invest in plant and equipment to increase and improve existing manufacturing
capacity. In Italy, the Company anticipates further expenditures necessary to
complete a manufacturing facility located in Santhia, Italy. In Mexico, the
Company plans to invest in production capability for biogeneric and
cephalosporine products. In the U.S., the Company intends to continue to make
further investments in manufacturing capacity at Gensia Sicor Pharmaceuticals,
including completion of a dedicated compounding and packaging facility for
propofol. Worldwide spending relating to the planned capital expenditures in
Italy, Mexico and the U.S. is estimated to total $32 to $34 million during 2000.
The Company plans to fund capital spending through cash flow from operations and
new lease agreements.
The Company anticipates that its operating cash flows, combined with its
current cash and cash equivalents on hand at June 30, 2000 of $54.1 million and
commitments from third parties, will enable it to maintain its current and
planned operations. In connection with the Company's plans for expanding its
business to accomplish its core strategy of being a leading fully-integrated
provider of specialty 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 or lease financing,
or a combination of these, for its capital and investment needs. Such financing
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 9, it has been reported that certain federal and
state governmental agencies, including the United States Department of Justice
and the United States Department of Health and Human Services, have been
investigating issues surrounding pricing information reported by drug
manufacturers and used in the calculation of reimbursements under the Medicaid
program administered jointly by the federal and state governments. There can be
no assurance that these investigations will not result in changes to the
Company's pricing policies or other actions which might have a material adverse
effect on the Company's financial position, results of operations or cash flows.
In March 1999, the Company's Italian subsidiary, Sicor S.p.A., entered
into twenty monthly U.S. $1 million U.S. Dollar put/Lira call options
exercisable in 1999, 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, Sicor S.p.A. entered into sixteen monthly U.S. Dollar put/Lira
call options. The first four contracts, exercisable in 1999, were for U.S. $0.5
million and the next twelve contracts, exercisable starting in January 2000,
were for U.S. $1 million at a strike price of Lira 1,800 per U.S. $1. In
addition, in November 1999, Sicor S.p.A. entered into twelve monthly U.S. $1
million U.S. Dollar put/Lira call options at a strike price of Lira 1,800 per
U.S. $1, exercisable starting in January 2000. As of June 30, 2000, no contracts
have been exercised.
NEW ACCOUNTING PRONOUNCEMENT
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements". SAB No. 101 provides guidance in applying generally accepted
accounting principles to revenue recognition in financial statements, including
14
<PAGE>
SICOR INC.
the recognition of nonrefundable up-front fees received in conjunction with a
research and development arrangement. The evaluation of the impact of SAB No.
101 has not been completed. However, to the extent SAB No. 101 would be
applicable and have a material impact to the Company, management would implement
this new pronouncement upon its effective date, which is currently scheduled to
be the fourth quarter of 2000.
ITEM 3: 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 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 call options
to strike at a rate equal to or above the budgeted exchange rate.
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, 1999. 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 June 30, 2000 of $54.1 million, and
commitments from third parties, will enable it to maintain its current and
planned operations. The Company will continue to evaluate the need for
additional capital and, if appropriate, pursue equity, debt or lease financing,
or a combination of these, for its capital needs. Such financing 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 June 30,
2000, approximately $104 million of the Company's $402 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 reviews long-lived
assets and certain identifiable intangibles for impairment whenever events or
changes in circumstances indicate that the total amount of an asset may not be
recoverable. An impairment loss is recognized when estimated future cash flows
expected to result from the use of the asset and its eventual disposition are
less than its carrying amount.
LOSS HISTORY; UNCERTAINTY OF FUTURE PROFITABILITY
Until 1999, the Company had been unprofitable on an annual basis since its
inception in 1986. As of June 30, 2000, the Company had an accumulated deficit
of approximately $332.9 million. The Company may not be profitable on a
quarterly or annual basis in the future. The Company believes that future
operating results
15
<PAGE>
SICOR INC.
will be subject to quarterly and annual 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 uncertainty with
respect to patent matters.
COMPETITION
SICOR operates in a rapidly evolving business environment. 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.
A significant portion of SICOR's business is dependent on winning bids
from the Mexican government's public hospital programs. The bidding for these
programs 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 these programs.
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 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 drugs including
withdrawal of the drugs 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
16
<PAGE>
SICOR INC.
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.
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 for 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. Additionally, 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
17
<PAGE>
SICOR INC.
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.
It has been reported that certain federal and state governmental agencies,
including the United States Department of Justice and the United States
Department of Health and Human Services, have been investigating issues
surrounding pricing information reported by drug manufacturers and used in the
calculation of reimbursements under the Medicaid program administered jointly by
the federal government and the states. The Company has supplied and is
continuing to supply documents in connection with these investigations and has
had preliminary discussions with representatives of the federal and state
governments, but is unable to estimate at this time what effect, if any, these
investigations will have on the Company's pricing policies or its financial
statements. There can be no assurance that these investigations will not result
in changes to the Company's pricing policies or other actions which might have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
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 active pharmaceutical ingredients and
intermediates, SICOR supplies other pharmaceutical companies with such
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. The majority of the
finished multisource drug products manufactured by Lemery are sold to the
Mexican government's public hospital programs. Sales to the Mexican government's
public hospital programs may not continue in the future. In addition, although
the Mexican government has historically 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. Future actions by the Mexican government, or
developments in the Mexican economy and changes in Mexico's political, social or
economic situation may adversely affect the operations of Lemery and Sicor de
Mexico.
18
<PAGE>
SICOR INC.
RISKS RELATED TO INTERNATIONAL OPERATIONS
Operations outside of Canada, Western Europe, Japan and the United States
are subject in varying degrees to greater business risks 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
financial results with respect to its business in these markets if such events
were to occur.
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 in each of its locations, 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 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. SICOR maintains liability insurance for some
environmental risks which the Company's management believes to be appropriate
and in accordance with industry practice. However, SICOR may incur liabilities
beyond the limits or outside the coverage of its insurance and may not be able
to maintain insurance on acceptable terms.
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 9.
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 35% 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. 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.
19
<PAGE>
SICOR INC.
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. 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 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 Convertible Preferred Stock, cash dividends may not be paid or
declared and set aside for payment on SICOR Common Stock. At June 30, 2000,
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.
SUBORDINATION OF COMMON STOCK TO PREFERRED STOCK
SICOR's Common Stock is expressly subordinate to the approximately $80
million (plus accrued and unpaid dividends) liquidation preference of SICOR's
outstanding 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 preference.
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.
20
<PAGE>
SICOR INC.
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On May 17, 2000 the United States Court of Appeals for the Fourth
Circuit denied AstraZeneca's appeal of judgement in favor of Gensia Sicor
Pharmaceuticals and the FDA concerning Gensia Sicor Pharmaceuticals' Abbreviated
New Drug Application ("ANDA") for propofol, and on July 14, 2000, the Court of
Appeals denied AstraZeneca's petition for rehearing. AstraZeneca has until
October 12, 2000 to file a petition for review by the United States Supreme
Court. Should AstraZeneca ultimately succeed on appeal in its litigation against
the Company and the FDA, it could have a material adverse effect on the
Company's financial position, results of operations or cash flows. See Note 9.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 27, 2000, the Company held its Annual Meeting of Stockholders. The
following actions were taken at the meeting:
1. The following three class II directors were elected:
a. Carlos A. Ferrer. 79,144,296 shares were voted in favor of the
nominee, 1,200,991 shares withheld their vote and 10,249,913
shares were not voted or were broker non-votes.
b. Carlo Salvi. 76,058,266 shares were voted in favor of the
nominee, 4,287,021 shares withheld their vote and 10,249,913
shares were not voted or were broker non-votes.
c. Carlo Ruggeri. 79,954,527 shares were voted in favor of the
nominee, 390,760 shares withheld their vote and 10,249,913 shares
were not voted or were broker non-votes.
The following directors continue in office for their existing terms:
Frank C. Becker, Herbert J. Conrad, Michael D. Cannon, Gianpaolo
Colla, Donald E. Panoz, and John W. Sayward.
2. A proposal to amend and restate the SICOR Inc. Employee Stock Purchase
Plan (the "ESPP") was approved. The proposal increased by 10,000 the
aggregate number of shares of common stock reserved for issuance under
the ESPP.
76,514,221 shares were voted in favor of the proposal,
3,734,065 shares were voted against the proposal, 97,001 shares
abstained and 10,249,913 shares were not voted or were broker
non-votes.
3. A proposal to amend and restate SICOR Inc. Long-Term Incentive Plan
was approved. The proposal increased by 600,000 the aggregate number
of shares of common stock reserved for issuance under the Long-Term
Incentive Plan.
69,097,292 shares were voted in favor of the proposal,
11,134,583 shares were voted against the proposal, 113,412 shares
abstained and 10,249,913 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.
21
<PAGE>
SICOR INC.
80,263,130 shares were voted in favor of the proposal, 36,040 shares
were voted against the proposal, 46,117 shares abstained and
10,249,913 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
-------- -----------------------
10.1 Development, Manufacturing and Marketing Agreement between
SICOR Inc. and Aesgen Inc. dated June 7, 2000 *
27.1 Financial Data Schedule
* Certain portions of this exhibit have been omitted pursuant to a
request for confidential treatment.
-------------------
(b) Reports on Form 8-K during the first quarter
None.
22
<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.
Date: August 14, 2000 By: /s/ Carlo Salvi
-----------------------------------
Carlo Salvi, President
and Chief Executive Officer
Date: August 14, 2000 By: /s/ John W. Sayward
-----------------------------------
John W. Sayward, Executive Vice
President, Finance, Chief Financial
Officer and Treasurer
Date: August 14, 2000 By: /s/ David C. Dreyer
-----------------------------------
David C. Dreyer, Vice President,
Corporate Controller and Chief
Accounting Officer
23
