<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, 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 96,744,035
--------------------------- ---------------------------------
Class Outstanding at September 30, 2000
<PAGE>
SICOR INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets at September 30, 2000 and
December 31, 1999 3
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the three and nine months ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the nine months
Ended September 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
Results of Operations for the three and nine months ended September 30, 2000 and 1999 10
Liquidity and Capital Resources 12
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14
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,
2000 1999
--------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 55,872 $ 47,506
Accounts receivable, net 57,141 49,623
Inventories, net 51,725 47,716
Other current assets 10,745 9,514
--------------- ---------------
Total current assets 175,483 154,359
Property and equipment, net 108,830 101,839
Other noncurrent assets 20,407 22,551
Intangibles, net 40,450 42,971
Goodwill, net 62,454 64,459
--------------- ---------------
$ 407,624 $ 386,179
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 31,915 $ 35,363
Accrued payroll and related expenses 11,045 5,858
Other accrued liabilities 24,648 25,680
Short-term borrowings 34,293 36,685
Current portion of long-term debt 6,471 6,974
Current portion of capital lease obligations 1,099 1,521
--------------- ---------------
Total current liabilities 109,471 112,081
Other long-term liabilities 8,907 9,599
Long-term debt, less current portion 13,864 35,661
Long-term capital lease obligations, less current portion 1,476 2,447
Deferred taxes 16,051 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,
96,744 and 88,848 shares issued and outstanding
at September 30, 2000 and December 31, 1999, respectively 967 888
Additional paid-in capital 584,927 558,802
Accumulated deficit (322,958) (348,310)
Accumulated other comprehensive loss (5,097) (2,542)
--------------- ---------------
Total stockholders' equity 257,855 208,854
--------------- ---------------
$ 407,624 $ 386,179
=============== ===============
</TABLE>
See accompanying notes.
3
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SICOR,INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenues:
Product sales $71,694 $55,419 $211,013 $158,467
Contract research and license fees - - - 5,303
------------ ------------ ------------ ------------
Total revenues 71,694 55,419 211,013 163,770
Costs and expenses:
Cost of sales 39,340 34,233 119,037 101,352
Research and development 3,539 3,396 12,455 12,323
Selling, general and administrative 15,203 9,957 37,346 30,224
Non-cash compensation - - 2,579 -
Amortization expense 1,481 1,523 4,461 4,575
Interest and other, net 797 1,096 4,753 5,587
Write-down of investment and divestiture
of business charge - - - 1,777
------------ ------------ ------------ ------------
Total costs and expenses 60,360 50,205 180,631 155,838
Net income before income taxes 11,334 5,214 30,382 7,932
Provision for income tax expense (1,389) (715) (5,030) (1,841)
------------ ------------ ------------ ------------
Net income before minority interest 9,945 4,499 25,352 6,091
Minority interest - - - 31
------------ ------------ ------------ ------------
Net income 9,945 4,499 25,352 6,122
Dividends on preferred stock (1,504) (1,504) (4,496) (4,496)
------------ ------------ ------------ ------------
Net income applicable to common shares 8,441 2,995 20,856 1,626
Other comprehensive (loss) income:
Foreign currency translation (1,635) 465 (2,555) (1,351)
------------ ------------ ------------ ------------
Comprehensive net income $6,806 $3,460 $18,301 $ 275
============ ============ ============ ============
Net income per share
- Basic $ 0.09 $ 0.03 $ 0.22 $ 0.02
============ ============ ============ ============
- Diluted $ 0.08 $ 0.03 $ 0.21 $ 0.02
============ ============ ============ ============
Shares used in calculating per share amounts
- Basic 96,655 88,606 93,648 84,203
============ ============ ============ ============
- Diluted 101,732 88,743 101,167 84,550
============ ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE>
SICOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2000 1999
------------- -------------
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Net income $25,352 $ 6,122
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization 14,323 14,254
Loss on disposal of property & equipment 72 -
Non-cash compensation 2,699 -
Minority interest - (31)
Deferred income tax (427) (347)
Inventory purchase price allocation adjustments 450 504
Write-down of investment and divestiture business charge - 1,777
Change in operating assets and liabilities:
Accounts receivable (9,718) 464
Inventories (7,543) 3,147
Other current and noncurrent assets (1,698) 180
Accounts payable and accrued expenses 1,655 (5,735)
------------- -------------
Net cash provided by operating activities 25,165 20,335
Cash flows from investing activities:
Purchases of property and equipment (22,016) (21,078)
Divestiture of Metabasis Therapeutics, Inc. - (4,911)
Proceeds from sale of property 119 -
Other noncurrent assets 43 -
------------- -------------
Net cash used in investing activities (21,854) (25,989)
Cash flows from financing activities:
Payments of cash dividends on preferred stock (4,496) (4,496)
Issuance of common stock and warrants, net 11,595 35,482
Change in short-term borrowings 1,675 (7,570)
Issuance of long-term debt and capital lease obligations 3,413 13,718
Principal payments on long-term debt from related party - (10,000)
Principal payments on long-term debt and capital lease obligations (6,144) (9,424)
------------- -------------
Net cash provided by financing activities 6,043 17,710
Effect of exchange rate changes on cash (988) (1,724)
------------- -------------
(Decrease) Increase in cash and cash equivalents 8,366 10,332
Cash and cash equivalents at beginning of period 47,506 24,461
------------- -------------
Cash and cash equivalents at end of period $55,872 $34,793
============= =============
Supplemental schedule of non-cash financing activities:
Common stock issued to settle convertible 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 of normal
recurring adjustments, necessary for the fair statement of the results for the
three and nine-month periods ended September 30, 2000 and 1999 have been made.
The results of operations for the three and nine-month periods ended September
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
6
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SICOR,INC.
prior year amounts have been reclassified to conform to the current year
presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements ("SAB No. 101"). SAB No. 101, as amended by Staff Accounting
Bulletin No. 101B, sets forth the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB No.
101 provides that specific facts and circumstances may require that
nonrefundable fees received pursuant to certain collaborative agreements not
be recognized as revenue when received, but instead recognized as revenue
over future periods. Implementation of SAB No. 101 is required no later than
the fourth quarter of 2000. Company management is presently evaluating the
impact of SAB No. 101 and expects to record deferred revenue and a charge to
income of approximately $1 million net of taxes, which will be reported as a
change in accounting principle. The cumulative effect of this accounting
change will be recorded as of January 1, 2000.
In March 2000, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 44 ("FIN 44"), Accounting for Certain
Transactions Involving Stock Compensation Interpretation of Accounting
Principles Board Opinion No. 25. FIN 44 is effective July 1, 2000. The
Company does not expect the application of FIN 44 to have an effect on its
consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which will be effective January 1, 2001.
This statement establishes accounting and reporting standards requiring that
every derivative instrument, including certain derivative instruments imbedded
in other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. The Company has not completed its determination of
the impact of the adoption of this new accounting standard on its consolidated
financial position or results of operations.
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 its 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 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 its acquisition
of Sicor S.p.A., 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 Company's 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 $1.0 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 $1.0 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
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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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
BASIC:
Net income (loss) applicable to common shares $ 8,441 $ 2,995 $ 20,856 $ 1,626
Basic weighted average common shares outstanding 96,655 88,606 93,648 84,203
------------ ------------ ------------ ------------
Basic net income (loss) per share $ 0.09 $ 0.03 $ 0.22 $ 0.02
============ ============ ============ ============
DILUTED:
Net income (loss) applicable to common shares $ 8,441 $ 2,995 $ 20,856 $ 1,626
Interest expense on subordinated convertible
notes prior to conversion on May 1, 2000 - - 394 -
------------ ------------ ------------ ------------
Net income (loss) applicable to diluted shares $ 8,441 $ 2,995 $ 21,250 $ 1,626
============ ============ ============ ============
Basic weighted average common shares outstanding 96,655 88,606 93,648 84,203
Net effect of dilutive stock options - based on
the treasury stock method 2,260 136 2,448 228
Net effect of dilutive warrants - based on the
treasury stock method 2,715 1 2,632 119
Net effect of potential shares issuable in connection
with non-cash compensation (see Note 4) 102 - 102 -
Potential shares issuable in connection
with convertible notes prior to conversion
on May 1, 2000 - - 2,337 -
------------ ------------ ------------ ------------
Diluted weighted average common shares outstanding 101,732 88,743 101,167 84,550
============ ============ ============ ============
Diluted net income (loss) per share $ 0.08 $ 0.03 $ 0.21 $ 0.02
============ ============ ============ ============
</TABLE>
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
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SICOR,INC.
7. INVENTORIES
Inventories at September 30, 2000 and December 31, 1999 consisted of
(in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---------------- ----------------
<S> <C> <C>
Raw Materials $ 24,983 $ 24,767
Work-in-process 11,808 9,421
Finished goods 19,882 17,904
---------------- ----------------
56,673 52,092
Less reserves (4,948) (4,376)
---------------- ----------------
$ 51,725 $ 47,716
================ ================
</TABLE>
8. CONVERTIBLE DEBT
On April 25, 2000, the holders of $20.0 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
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 discussions with representatives of the federal
and state governments. While these discussions are still at the preliminary
stage, Sicor has established a reserve of $2.5 million in the current year
third quarter financial statements, which represents management's estimate of
costs which could be incurred in connection with the defense of this matter.
Actual costs to be incurred may vary from the amount estimated. 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.
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
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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 NINE MONTHS ENDED SEPTEMBER 30, 2000
AND 1999
The Company reported net income of $8.4 million, or $.08 per common
share on a diluted basis (after dividends on preferred stock of $1.5 million),
in the third quarter ended September 30, 2000 compared to a net income of $3.0
million, or $.03 per common share on a diluted basis (after dividends on
preferred stock of $1.5 million), in the third quarter of 1999. For the nine
months ended September 30, 2000, the Company reported net income of $20.9
million, or $.21 per common share on a diluted basis (after dividends on
preferred stock of $4.5 million), compared to net income of $1.6 million, or
$.02 per common share on a diluted basis (after dividends on preferred stock of
$4.5 million), for the nine months ended September 30, 1999.
Product sales in the third quarter of 2000 increased to $71.7
million from $55.4 million in the third quarter of 1999. For the first nine
months of 2000, product sales increased to $211.0 million from $158.5 million
for the same period in 1999. Combined product sales from the Company's
international units increased by $6.5 million in the third quarter of 2000
over the third quarter of 1999, and by $16.7 million for the nine months of
2000 relative to the same periods in 1999. The worldwide increase in product
sales for the three and nine months ended September 30, 2000 was due
primarily to increased propofol sales by Gensia Sicor Pharmaceuticals in the
United States and increased product sales of paclitaxel by Lemery to the
Mexican government's public hospital programs. Also contributing to the
Company's higher sales during the nine months ended September 30, 2000 were
increased sales of fermentation products by Diaspa. Unit demand for propofol
increased substantially during both the three-and nine-month periods ended
September 30, 2000, relative to the same periods in 1999 while experiencing
modest 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. See "Risk Factors That May
Affect Results - Competition". Propofol is being sold in the United States
through Baxter Pharmaceutical Products, Inc. ("Baxter"), the Company's
marketing partner for a variety of the products sold in the United States.
Offsetting the increase in sales for the nine months ended September 30,
2000, was a one-time sale of oncology finished goods inventory to Abbott
Laboratories ("Abbott") in January 1999 resulting from a Sales and
Distribution Agreement entered into with Abbott at that time.
Cost of sales for the third quarter of 2000 was $39.3 million which
yielded a product gross margin of 45%, compared to a cost of sales of $34.2
million for the third quarter of 1999 which yielded a gross margin of 38%. Cost
of sales for the first nine months of 2000 was $119.0 million which yielded a
product gross margin of 44%, compared to a cost of sales of $101.4 million for
the same period of 1999 which yielded a gross margin of 36%. The increase in
gross margin for the three and nine months ended September
10
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SICOR,INC.
30, 2000, was due primarily to sales of propofol in the United States, sales
of steroid products by Sicor S.p.A., as well as increased production
efficiencies due to upgrading of equipment at Lemery.
The Company did not record contract research and license fees during
the first nine months of 2000 as compared to $5.3 million recorded during the
first half of 1999. The decrease was mainly due to a $3.5 million non-recurring
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, and has since that time not been
reflected in the consolidated financial results of SICOR.
Research and development expenses in the third quarter of 2000 were
$3.5 million compared to $3.4 million in the third quarter of 1999. For the
first nine months of 2000, research and development expenses were $12.5 million
compared to $12.3 million for the same period in 1999. Research and development
expenses rose slightly during the third quarter of 2000 relative to 1999 due
mainly to increased stability work on new and existing products at the Company's
Mexican operations, as well as pre-operative costs associated with the
development of a biotech facility located in Mexico. For the nine months ended
September 30, 2000, research and development expenses did not change
significantly as a $1.3 million charge for technology acquisition during the
second quarter of 2000 was more than offset by the absence of $2.0 million in
research and development expenses incurred by Metabasis in the first quarter of
1999. The technology acquisition charge related to a development agreement with
Aesgen, Inc. entered into during the second quarter of 2000. Metabasis was
partially divested by the Company in the second quarter of 1999, and has since
that time not been reflected in the consolidated financial results of SICOR.
Selling, general and administrative expenses in the third quarter of
2000 were $15.2 million compared to $10.0 million in the third quarter of 1999.
Selling, general and administrative expenses for the nine months ended September
30, 2000 were $37.3 million compared to $30.2 million in the same period of
1999. The increase in selling, general and administrative expenses for the three
and nine month periods ended September 30, 2000 compared to the corresponding
periods in 1999 was primarily due to a one-time charge of $2.5 million
recognized during the third quarter of 2000. The one-time charge represented the
Company's estimate of costs that could be incurred in connection with the
defense of an ongoing governmental investigation of reimbursements made under
Medicaid. See "Notes to Consolidated Financial Statements - Contingencies". Also
contributing to the increase in selling, general and administrative expenses in
2000 relative to 1999 were higher management incentive compensation costs
associated with increased net income, as well as additional expenses associated
with the development of a private sector sales force in Mexico. Offsetting the
increase in selling, general and administrative expenses for the first nine
months of the current year relative to the first nine months of 1999 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 Donald E. Panoz
under the terms of his agreement (the "Chairman's Agreement") to serve as
SICOR's non-executive Chairman of the Board. The Company recorded $1.6 million
in compensation expense from the vesting of Mr. Panoz's stock options in the
first quarter of 2000 as provided by the Chairman's Agreement. An additional
incentive compensation expense of $1.0 million relating to Mr. Panoz was also
recorded in the first quarter of 2000 upon the Company having reached a market
capitalization of $1.0 billion in accordance with the terms of the Chairman's
Agreement. As provided in the terms of the Chairman's Agreement, payments to Mr.
Panoz will be made in the form of common stock to be issued by the Company.
11
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SICOR,INC.
Interest and other expenses in the third quarter of 2000 decreased to
$0.8 million from $1.1 million in the third quarter of 1999. Interest and other
expenses for the first nine months of 2000 decreased to $4.8 million from $5.6
million in the same period of 1999. The decrease in net interest expense and
other expenses for the three and nine months ended September 30, 2000, as
compared to the corresponding periods in 1999, was largely due to increased
interest income earned on higher cash balances and reduced interest expense due
to the conversion of long-term debt to equity in the second quarter of this
year. For the nine months ended September 30, 2000, the decrease in net interest
expense was offset by higher foreign exchange losses incurred by the Company's
international operations.
The Company recorded income tax expense of $1.4 million in the third
quarter of 2000 compared to income tax expense of $0.7 million in the third
quarter of 1999. Income tax expense for the first nine months of 2000 was
$5.0 million compared to income tax expense of $1.8 million in the same
period of 1999. The increase in income tax expense for the three and nine
months ended September 30, 2000, as compared to the corresponding periods in
1999 was due to increased worldwide earnings, principally Gensia Sicor
Pharmaceuticals in the United States. The increase in United States taxable
income due to higher earnings at Gensia Sicor Pharmaceuticals was
substantially offset by the application of the Company's net operating loss
carryfoward.
The Company recorded no minority interest in the operations of
Metabasis for the first nine 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 30% investment
in Metabasis was written down to zero at that time.
Dividends relate to the Company's $3.75 Convertible Exchangeable
Preferred Stock, $.01 par value ("Convertible Preferred Stock") issued in
February 1993. The Company paid cash dividends on its preferred stock
totaling $1.5 million in the third quarter of 2000 compared to $1.5 million
in the third quarter of 1999. For the first nine months of 2000, the Company
paid $4.5 million in cash dividends compared to $4.5 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 Convertible Preferred Stock quarterly
dividend payments for June, September and December 1995 and March and June
1996. The Company resumed payments of Convertible Preferred Stock dividends
in September 1996. Through September 2000, the Company has approximately $7.5
million in undeclared cumulative Convertible Preferred Stock dividends. If
the Company chooses not to declare dividends for six cumulative quarters, the
holders of the 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 September 30, 2000, SICOR had cash and cash equivalents of $55.9
million and working capital of $66.0 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 $25.2 million of cash from
operations and $6.0 million in financing activities primarily from the exercise
of stock options and warrants, offset by the net investment of $21.9 million in
property and equipment.
Significant changes in the Company's operating cash flow during the
first nine months of 2000 included a $9.7 million increase in accounts
receivable and a $7.5 million increase in inventory. The increase in accounts
receivable was primarily attributable to higher sales worldwide and a decline
in collections at
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SICOR,INC.
Lemery. The majority of Lemery's sales are to the Mexican government's public
hospital programs and, as a result of the recent 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 growth in inventory reflected anticipated sales growth in
worldwide operations.
The Company's cash flow from financing activities during the first nine
months of 2000 primarily consisted of cash proceeds of $11.6 million from the
exercise of stock options and warrants, a $1.7 million increase in short-term
borrowings, offset by the net reduction of $2.7 million in long-term debt and
capital lease obligations, and the payment of $4.5 million in cash dividends to
the Company's preferred stockholders.
On April 25, 2000, the holders of $20.0 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 nine months ended September 30, 2000. In connection with the conversion of
the subordinated convertible notes, the Company avoided approximately $0.6
million in interest expense in the second and third quarter of 2000 as compared
to the same periods in 1999.
The Company expects to incur additional costs, including
manufacturing and marketing costs, to support existing products, as well as
anticipated launches of new products. Planned spending on sales and marketing
activities during the current year is projected to be approximately $16
million. Management also plans to invest $38 million through the end of the
current year in plant and equipment to increase and improve existing
manufacturing capacity worldwide. 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 generic biological products. In the United States, the Company
intends to continue to make further investments in manufacturing capacity at
Gensia Sicor Pharmaceuticals primarily for propofol. 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 September 30, 2000 of $55.9
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.
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 1,696 Lira per U.S. $1 and an
additional ten at a strike price of 1,750 Lira 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 1,800 Lira per U.S. $1. 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 1,800 Lira per U.S. $1,
exercisable starting in January 2000. In September 2000, Sicor S.p.A. entered
into twelve monthly U.S. $1.75 million U.S. Dollar put/Lira call options at a
strike price of 2,100 Lira per U.S. $1, exercisable starting in
13
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SICOR,INC.
January 2001. As of September 30, 2000, none of these contracts have been
exercised.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements ("SAB No. 101"). SAB No. 101, as amended by Staff Accounting
Bulletin No. 101B, sets forth the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB No.
101 provides that specific facts and circumstances may require that
nonrefundable fees received pursuant to certain collaborative agreements not
be recognized as revenue when received, but instead recognized as revenue
over future periods. Implementation of SAB No. 101 is required no later than
the fourth quarter of 2000. Company management is presently evaluating the
impact of SAB No. 101 and expects to record deferred revenue and a charge to
income of approximately $1 million net of taxes, which will be reported as a
change in accounting principle. The cumulative effect of this accounting
change will be recorded as of January 1, 2000.
In March 2000, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 44 ("FIN 44") Accounting for Certain
Transactions Involving Stock Compensation Interpretation of Accounting
Principles Board Opinion No. 25. FIN 44 is effective July 1, 2000. The
Company does not expect the application of FIN 44 to have an effect on its
consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which will
be effective January 1, 2001. This statement establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments imbedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement also requires that changes in the derivative's fair value be
recognized in earnings unless specific hedge accounting criteria are met. The
Company has not completed its determination of the impact of the adoption of
this new accounting standard on its consolidated financial position or results
of operations.
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 U.S. Dollar put/Lira 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
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SICOR,INC.
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 herein 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, 2000 of $55.9
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. In addition, at September 30,
2000, approximately $103 million of the Company's $408 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 September 30, 2000, the Company had an accumulated
deficit of approximately $323 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 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
15
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SICOR,INC.
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 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.
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SICOR,INC.
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 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.
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 drug 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 comparable to the insurance
coverage carried by other companies in its industry, such insurance coverage may
not be sufficient to protect the Company from all risks associated with product
liability claims. In addition, adequate insurance coverage might not continue
17
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SICOR,INC.
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.
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 "Notes to
Consolidated Financial Statements - Contingencies".
CURRENCY FLUCTUATIONS
SICOR has significant operations in several countries, including the
United States, Italy, Mexico and
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SICOR,INC.
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.
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 September 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 Preferred Stock. If SICOR were to cease operations and
liquidate its assets, there might not be any remaining value available for
distribution to the holders of common stock after providing for such liquidation
preference.
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SICOR,INC.
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.
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SICOR,INC.
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company recognized a $2.5 million charge in the third quarter of
2000 representing an estimate of costs that could be incurred in connection with
the defense of an ongoing governmental investigation of reimbursements made
under Medicaid. See "Notes to Consolidated Financial Statements -
Contingencies".
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 first quarter
None.
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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: November 14, 2000 By: /s/ CARLO SALVI
--------------------------------------
Carlo Salvi, President
and Chief Executive Officer
Date: November 14, 2000 By: /s/ JOHN W. SAYWARD
--------------------------------------
John W. Sayward, Executive Vice
President, Finance, Chief Financial
Officer and Treasurer
Date: November 14, 2000 By: /s/ DAVID C. DREYER
--------------------------------------
David C. Dreyer, Vice President,
Corporate Controller and Chief
Accounting Officer
22
