SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000 Commission File number 0 - 27698
CHIREX INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3296309
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
300 Atlantic Street
Suite 402
Stamford, Connecticut 06901
(Address of principle executive office) (Zip Code)
(203) 351-2300
(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
filing requirements for the past 90 days.
Yes X No
----------- -----------
Number of shares outstanding of the issuer's classes of common stock as of
August 7, 2000
Class Number of Shares Outstanding
- ----------------------------------------- ----------------------------
Common Stock, par value $.01 per share 15,310,175
1
CHIREX INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
December 31, 1999 and June 30, 2000 3
Consolidated Statements of Operations
for the three-months and six-months ended June 30, 1999 and 2000 4
Consolidated Statements of Comprehensive Operations
for the three-months and six-months ended June 30, 1999 and 2000 4
Consolidated Statements of Cash Flows for the
six-months ended June 30, 1999 and 2000 5
Notes to Consolidated Interim Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders. 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURE 15
This Quarterly Report on Form 10-Q contains "forward-looking statements,"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, as amended. These forward-looking
statements are subject to a number of risks and uncertainties, many of which are
beyond the Company's control. Forward-looking statements are typcially
identified by the words "believe," "expect," "anticipate," "intend," "estimate,"
"plan" and similar expressions.
Actual results could differ materially from those contemplated by these
forward-looking statements as a result of factors ("Cautionary Statements") such
as product development and market acceptance risks, product manufacturing risks,
the impact of competitive products and pricing, the results of current and
future licensing and other collaborative relationships, the results of financing
efforts, developments regarding intellectual property rights and litigation,
risks of product non-approval or delays or post-approval reviews by the U.S.
Food and Drug Administration or foreign regulatory authorities and those
described under "Risk Factors" on page 26 of our Annual Report on Form 10-K for
the year ended December 31, 1999.
In light of these risks and uncertainties, there can be no assurance that
the results and events contemplated by the forward- looking information
contained in this Quarterly Report will in fact transpire. Readers are cautioned
not to place undue reliance on these forward-looking statements. ChiRex does not
undertake any obligation to update or revise any forward-looking statements. All
subsequent written or oral forward-looking statements attributable to ChiRex or
persons acting on behalf of ChiRex are expressly qualified in their entirety by
the Cautionary Statements.
2
PART I - FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
CHIREX INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND JUNE 30, 2000
(dollars in thousands except per-share amounts)
December 31, June 30,
1999 2000
---------------------- ----------------------
(unaudited)
ASSETS
- ------
Current assets:
Cash $ 4,480 $ 5,141
Trade and other receivables 31,096 20,203
Inventories 27,503 24,207
Other current assets 5,323 5,736
--------------------- ----------------------
Total current assets 68,402 55,287
Property, plant and equipment, net 163,147 161,002
Intangible assets, net 30,287 29,524
Other non-current assets 1,216 1,007
--------------------- ----------------------
Total assets $ 263,052 $ 246,820
===================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 8,763 $ 23,043
Accrued expenses 16,071 8,280
Current portion of long-term debt 9,720 9,060
Current portion of capital-lease obligations 1,683 1,500
Income taxes payable 1,530 -
--------------------- ----------------------
Total current liabilities 37,767 41,883
Long-term debt 38,880 31,710
Deferred income taxes 14,487 13,665
Capital-lease obligation 4,272 2,987
Deferred income 7,599 4,258
--------------------- ----------------------
Total liabilities 103,005 94,503
--------------------- ----------------------
Commitments and Contingencies - -
Stockholders' equity:
Preferred stock ($0.01 par value, 4,000,000 authorized
none issued and outstanding in 1999 and 2000) - -
Common stock ($0.01 par value, 30,000,000 shares authorized,
15,173,290 and 15,261,785 shares issued and outstanding on
December 31, 1999 and June 30, 2000, respectively) 152 153
Additional paid-in capital 158,453 159,514
Retained earnings (deficit) 60 (1,451)
Cumulative translation adjustment 1,382 (5,899)
--------------------- ----------------------
Total stockholders' equity 160,047 152,317
--------------------- ----------------------
Total liabilities and stockholders' equity $ 263,052 $ 246,820
===================== ======================
The accompanying notes are an integral part of the consolidated financial
statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS AND
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(unaudited)
(in thousands, except per-share amounts)
Three-Months Ended Six-Months Ended
June 30, June 30,
-------------------- --------------------
1999 2000 1999 2000
-------- -------- -------- --------
Revenues:
Manufacturing division $28,957 $27,205 $58,881 $50,690
Development division 7,667 5,497 11,923 8,121
-------- -------- -------- --------
Total revenues 36,624 32,702 70,804 58,811
Cost of goods sold (23,872) (24,038) (46,671) (46,982)
-------- -------- -------- --------
Gross profit 12,752 8,664 24,133 11,829
Selling, general and administrative 3,737 4,349 7,062 8,884
Research and development 1,642 1,511 2,964 2,707
Non-recurring charges and other expenses 1,733 - 1,733 -
-------- -------- -------- --------
Operating profit (loss) 5,640 2,804 12,374 238
Interest expense, net (1,272) (883) (3,293) (1,836)
Amortization of goodwill (334) (382) (625) (763)
-------- -------- -------- --------
Income (loss) before income taxes 4,034 1,539 8,456 (2,361)
(Provision) benefit for income taxes (1,343) (498) (2,858) 850
-------- -------- -------- --------
Net income (loss) $2,691 $1,041 $5,598 $(1,511)
======== ======== ======== ========
Weighted average common shares outstanding:
Basic 14,795 15,255 13,451 15,219
======== ======== ======== ========
Diluted 15,737 15,706 14,263 15,219
======== ======== ======== ========
Net income (loss) per common share:
Basic $0.18 $0.07 $0.42 $(0.10)
======== ======== ======== ========
Diluted $0.17 $0.07 $0.39 $(0.10)
======== ======== ======== ========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(unaudited)
Three-Months Ended Six-Months Ended
June 30, June 30,
-------------------- --------------------
1999 2000 1999 2000
-------- -------- -------- --------
Net income (loss) $2,691 $1,041 $5,598 $(1,511)
Change in cumulative translation adjustment (2,308) (5,310) (4,847) (7,281)
-------- -------- -------- --------
Comprehensive net income (loss) $383 $(4,269) $751 $(8,792)
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
4
CHIREX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 2000
(unaudited)
(in thousands)
Six-months ended
June 30,
----------------------------------------------
1999 2000
-------------------- --------------------
Cash flows from operating activities:
Net income (loss) $ 5,598 $ (1,511)
Adjustments to reconcile net income (loss) to cash provided
from operating activities:
Depreciation & amortization 7,716 7,595
Deferred tax provision 4,032 32
Non-cash charges 1,733 200
Changes in assets and liabilities:
Receivables (2,188) 9,933
Inventories 2,456 1,399
Other assets (327) 194
Accounts payable and accrued expenses (8,566) 8,098
Income taxes payable (1,499) (1,555)
Deferred income 847 (2,958)
-------------------- --------------------
Net cash provided from operating activities 9,802 21,427
-------------------- --------------------
Cash flows used in investing activities:
Capital expenditures (12,864) (15,292)
Acquisition of business (5,871) -
-------------------- --------------------
Net cash used in investing activities (18,735) (15,292)
-------------------- --------------------
Cash flows provided from (used in) financing activities:
Payments on revolving credit and term loan facilities, net (44,157) (4,635)
Proceeds from sale and leaseback, net 2,082 -
Payments on capital-lease obligations (389) (1,107)
Proceeds from exercise of stock options
and employee stock purchase plan 500 861
Issuance of common stock, net 51,129 -
-------------------- --------------------
Net cash provided from (used in) financing activities 9,165 (4,881)
-------------------- --------------------
Effect of exchange rate changes on cash (41) (593)
-------------------- --------------------
Net increase in cash 191 661
Cash at beginning of period 128 4,480
-------------------- --------------------
Cash at end of period $ 319 $ 5,141
==================== ====================
Noncash Activities:
Fair value of assets of acquired business $ 7,161
Liabilities assumed of acquired business (1,290)
--------------------
Cash paid for acquired business $ 5,871
====================
The accompanying notes are an integral part of the consolidated financial
statements.
5
CHIREX INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. Nature of Operations and Principles of Consolidation
Nature of Operations
ChiRex Inc., The Drug Substance Company, is an integrated pharmaceutical
outsourcing company that provides a comprehensive range of services to
pharmaceutical and biopharmaceutical companies, primarily contract process
research and development and contract manufacturing of active pharmaceutical
ingredients. The Company operates through two operating divisions, the
development division and the manufacturing division. The development division
is engaged in every aspect of drug substance development including discovery,
development and manufacture of material for clinical trials. The manufacturing
division produces bulk active pharmaceutical ingredients. The range of services
provided by the company include:
. proprietary process research to create and produce previously unaffordable
chiral materials using the Company's patented process chemistry technologies,
and unique proprietary building blocks that simplify the drug discovery
process,
. customer-sponsored innovative process research to solve pre-clinical and
clinical process chemistry challenges such as route design, route development
and demonstration and route optimization using either traditional process
chemistry techniques or proprietary techniques,
. scale-up and supply of clinical trial quantities of active pharmaceutical
ingredients including validated process demonstration, analytical methods
development, hazard evaluation, and pilot plant production, and production of
commercial-scale active ingredients for launch and later for sale in all
markets globally.
ChiRex conducts its operations in four FDA cGMP facilities in Boston,
Massachusetts; Malvern, Pennsylvania; Dudley, England; and Annan, Scotland.
Principles of Consolidation
The interim financial statements, in the opinion of management, reflect all
adjustments (including normal recurring adjustments) necessary for a fair
presentation of the results for the interim periods ended June 30, 2000 and
1999. The results of operations for the interim period are not necessarily
indicative of the results of operations expected for the fiscal year.
2. Net Income (Loss) per Common Share
Basic income (loss) per common share for the second quarter ended June 30,
2000 and 1999 was computed by dividing the net income (loss) by the weighted
average shares outstanding during the period in accordance with Statement of
Financial Accounting Standards No. 128, Earnings per Share. Using the Treasury
Stock method, the Company calculates the potential dilution from stock options
at the average market stock price during the period based on the assumption that
all stock options are exercised whether vested or non-vested, and simultaneously
the proceeds of exercise are used to acquire the Company's stock at the average
market price during the period. Since the effect of the assumed exercise of
stock options of 476 thousand shares in the first six months of 2000 are anti-
dilutive, basic and diluted loss per common share as presented on the statement
of operations are the same. In the second quarter of 1999 and 2000, 942 thousand
and 451 thousand, respectively, of common stock equivalents related to share
options are included in diluted shares outstanding. In the first six months of
1999, 812 thousand of common stock equivalents related to stock options are
included in diluted shares outstanding.
6
3. Acquisition of Cauldron Process Chemistry Business
On May 17, 1999, the Company, through a subsidiary, purchased the Cauldron
Process Chemistry business in Malvern, Pennsylvania. The Company paid
approximately $6.9 million in cash including transaction costs. The acquisition
was accounted for as a purchase. Accordingly, the assets and liabilities
acquired and the results of operations and cash flows are included in the
consolidated financial statements from the date of acquisition. The Company
recorded goodwill of approximately $5.3 million associated with the acquisition,
which is being amortized on a straight-line basis over 15 years.
4. Segment Information
The Company operates through two operating divisions, the development division
and the manufacturing division. The Company's development division is engaged in
every aspect of drug substance development including discovery, development and
manufacture of material for clinical trials. The Company's manufacturing
division produces bulk active pharmaceutical ingredients.
The following table shows data for the Company by segment for the three months
and six months ending June 30 (in thousands):
Three-Months Ended Six-Months Ended
June 30, June 30,
1999 2000 1999 2000
-------------- -------------- -------------- ---------------
Revenues:
Manufacturing division $28,957 $27,205 $58,881 $50,690
Development division 7,667 5,497 11,923 8,121
-------------- -------------- -------------- ---------------
Total $36,624 $32,702 $70,804 $58,811
============== ============== ============== ===============
Operating income:
Manufacturing division $10,866 $ 6,402 $19,674 $ 7,943
Development division 437 326 959 (410)
-------------- -------------- -------------- ---------------
Subtotal 11,303 6,728 20,633 7,533
Management, sales & administration (2,288) (2,413) (3,562) (4,588)
Research & development (1,642) (1,511) (2,964) (2,707)
Non-recurring charges and other expenses (1,733) - (1,733) -
-------------- -------------- -------------- ---------------
Total $ 5,640 $ 2,804 $12,374 $ 238
============== ============== ============== ===============
5. Change in Depreciable Lives
As a result of a review of the Company's fixed asset depreciable lives, the
Company increased the useful life of certain equipment with a value of $54.8
million in 2000 from 7-10 years to 15 years. The change in depreciable lives
principally relates to capital spent in 1998 and 1999. The equipment in
question is permanent capital: vessels, filters, dryers, and the new process
control system and process heat/cooling systems at Annan. The Company's has
experience with equipment of this type that is currently in use for over 30
years and still running well. In addition, a 15-year life is more in line with
industry practice of depreciating this type of equipment for 15-20 years.
7
The decision to change depreciable life represents a change in estimate which
will impact the financial statements on a prospective basis and which resulted
in $0.7 million less depreciation expense in the current quarter than would have
been recorded using the prior depreciable lives. The impact on the remaining
fiscal 2000 quarters is expected to be approximately $0.7 million per quarter
compared to 1999.
6. Subsequent Event
On July 24, 2000, the Company and Rhodia, one of the world's leading specialty
chemicals companies, announced that they have entered into a definitive
agreement under which Rhodia will acquire ChiRex. The ChiRex Board of Directors
has unanimously recommended acceptance of the Rhodia offer. ChiRex shareholders
will receive $31.25 per share in cash. The transaction is valued at
approximately $510 million plus assumption of debt ($35.6 million net of cash at
June 30, 2000), and will be accomplished through a cash tender offer in the
United States, followed by a cash merger at the same price. Rhodia commenced the
offer on August 4, 2000. The offer and the merger are conditioned, among other
things, on a majority of ChiRex outstanding shares being tendered into the offer
and clearance under the Hart-Scott-Rodino Act.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
historical consolidated financial statements and the notes thereto included
elsewhere herein.
Introduction
ChiRex Inc., The Drug Substance Company, is an integrated pharmaceutical
outsourcing company that provides a comprehensive range of services to
pharmaceutical and biopharmaceutical companies, primarily contract process
research and development and contract manufacturing of active pharmaceutical
ingredients. The Company operates through two operating divisions, the
development division and the manufacturing division. The development division
is engaged in every aspect of drug substance development including discovery,
development and manufacture of material for clinical trials. The manufacturing
division produces bulk active pharmaceutical ingredients. The range of services
provided by the company include:
. proprietary process research to create and produce previously unaffordable
chiral materials using the Company's patented process chemistry technologies,
and unique proprietary building blocks that simplify the drug discovery
process,
. customer-sponsored innovative process research to solve pre-clinical and
clinical process chemistry challenges such as route design, route development
and demonstration and route optimization using either traditional process
chemistry techniques or proprietary techniques,
. scale-up and supply of clinical trial quantities of active pharmaceutical
ingredients including validated process demonstration, analytical methods
development, hazard evaluation, and pilot plant production, and production of
commercial-scale active ingredients for launch and later for sale in all
markets globally.
ChiRex conducts its operations in four FDA cGMP facilities in Boston,
Massachusetts; Malvern, Pennsylvania; Dudley, England; and Annan, Scotland.
A significant portion of the Company's revenues and expenses are denominated
in Great Britain pounds sterling, and to prepare the Company's financial
statements such amounts are translated into US Dollars at average exchange rates
in accordance with generally accepted accounting principles. The average
exchange rate used to make this translation in the second quarter of 1999 and
2000 was $1.61 per (Pounds)1.00 and $1.53 per (Pounds)1.00, respectively. For
the six months to June 30, 1999 and 2000 the average exchange rate used was
$1.62 per (Pounds)1.00 and $1.56 per (Pounds)1.00, respectively. Period-to-
period changes in exchange rates can affect the comparability of the Company's
financial statements.
Results of Operations
Three-month period ended June 30, 2000 and 1999
The table below sets forth the revenues by segment for the Company for the
three months ended June 30, 1999 and 2000 (in thousands):
Revenue by Segment 1999 % 2000 %
---- - ---- -
Manufacturing division $28,957 79.1% $27,205 83.2%
Development division 7,667 20.9% 5,497 16.8%
------- -------
Total $36,624 $32,702
======= =======
Total revenues decreased $3.9 million to $32.7 million in the second quarter
of 2000, from $36.6 million in the comparable period in 1999. Approximately
$1.6 million of the decline is attributable to a decline in the British pound
sterling exchange rate in 2000, which reduced US dollar denominated revenues.
Manufacturing division revenues decreased $1.7 million to $27.2 million from
$28.9 million in the comparable period in 1999 because of lower shipments
9
to GlaxoWellcome reflecting the previously announced supply agreement shortfall,
and the anticipated decline in shipments to Sanofi. This shortfall was mitigated
to a degree by increased sales to Wrigley and Rohm & Haas as these customers
increased their demand requirements. Development division revenues decreased
$2.2 million to $5.5 million from $7.7 million in the comparable period in 1999.
Process chemistry revenues from the Company's Dudley, Malvern and Boston
facilities were 150% higher than last year. This is due to an increase in the
number of development projects and the inclusion of the Malvern facility,
acquired in May 1999, for the full quarter. This increase was more than offset
by lower development division materials and validation revenues because last
year's results included the completion of a significant validation campaign.
Cost of goods sold increased $0.1 million to $24.0 million in the second
quarter of 2000 from $23.9 million in 1999, and gross margin percentage
decreased to 26.5% of total revenues in the second quarter of 2000 from 34.8% in
1999. This decline is due to the impact of lower sales volume and reduced
capacity utilization in the manufacturing division and the additional investment
in the development division to increase capacity.
Selling, general and administrative expenses increased $0.6 million to $4.3
million in the second quarter of 2000 from $3.7 million last year. This
increase is due primarily to expenses associated with the formation and
expansion of the development division, increased business development efforts
and the cost of company-wide information systems implemented in the third
quarter of 1999.
Research and development expenses decreased $0.1 million to $1.5 million in
the second quarter of 2000 from $1.6 million in 1999. This decrease is due to
research projects being customer sponsored versus Company sponsored.
Amortization of goodwill increased marginally in the second quarter of 2000
from the comparable prior-year period as a result of the acquisition of the
Cauldron Process Chemistry business in May 1999.
Interest expense, net of interest income, was $0.9 million in the second
quarter of 2000 compared to $1.3 million in the second quarter of 1999. This
was due to lower borrowing levels and higher interest income generated from
overnight investments of cash balances, partly offset by higher interest rates.
Provision for income taxes was $0.5 million in the second quarter of 2000, an
effective tax rate of 32.4%, compared to an effective tax rate of 33.3% in the
comparable period in 1999.
As a result of the factors described above, the Company reported net income of
$1.0 million in the second quarter of 2000 compared to net income of $2.7
million for the comparable prior-year period.
Six-month period ended June 30, 2000 and 1999
The table below sets forth the revenues by segment for the Company for the six
months ended June 30, 1999 and 2000 (in thousands):
Revenue by Segment 1999 % 2000 %
---- - ---- -
Manufacturing division $58,881 83.2% $50,690 86.2%
Development division 11,923 16.8% 8,121 13.8%
------- -------
Total $70,804 $58,811
======= =======
Total revenues decreased $12.0 million to $58.8 million in the first half of
2000, from $70.8 million in the comparable period in 1999. Approximately $2.0
million of the decline is attributable to a decline in the British pound
sterling exchange rate in 2000, which reduced US dollar denominated revenues.
Manufacturing division revenues decreased $8.2 million to $50.7 million from
$58.9 million in the comparable period in 1999 because of lower shipments to
GlaxoWellcome reflecting the previously announced supply agreement shortfall,
and the anticipated decline in shipments to Sanofi. Development division
revenues decreased $3.8 million to $8.1 million from $11.9 million in the
comparable period in 1999. Process chemistry revenues from the Company's Dudley,
Malvern and Boston facilities were 91% higher
10
than last year due to an increase in the number of development projects and the
acquisition of the Cauldron Process Chemistry business in the second quarter of
1999 and the opening of the Boston facility in April 1999. This increase was
more than offset by lower development division materials and validation revenues
because last year's results included the completion of a significant validation
campaign.
Cost of goods sold increased $0.3 million to $47.0 million in the first six
months of 2000 from $46.7 million in 1999, and gross margin percentage decreased
to 20.1% of total revenues in the first six months of 2000 from 34.1% in 1999.
This decline is due to the impact of lower sales volume and reduced capacity
utilization in the manufacturing division and the additional investment in the
development division to increase capacity.
Selling, general and administrative expenses increased $1.8 million to $8.9
million in the first six months of 2000 from $7.1 million last year. This
increase is due primarily to expenses associated with the formation and
expansion of the development division, increased business development efforts
and the cost of company-wide information systems implemented in the third
quarter of 1999.
Research and development expenses decreased $0.2 million to $2.7 million in
the first six months of 2000 from $2.9 million in 1999. This decrease is due to
research projects being customer sponsored versus Company sponsored.
Amortization of goodwill increased $0.1 million to $0.7 million in the first
six months of 2000 from $0.6 million in the comparable prior-year period as a
result of the acquisition of the Cauldron Process Chemistry business in May
1999.
Interest expense, net of interest income decreased $1.5 million to $1.8
million in the first six months of 2000 compared to $3.3 million in 1999. This
was due to lower borrowing levels as proceeds from the stock offering in March
1999 were utilized to reduce borrowings, and higher interest income generated
from overnight investments of cash balances.
Income tax was a benefit of $0.9 million in the first six months of 2000, an
effective tax rate of 36.0%, compared to an effective tax rate of 33.8% in the
comparable period in 1999.
As a result of the factors described above, the Company reported a net loss of
$1.5 million in the first six months of 2000 compared to net income of $5.6
million for the comparable prior-year period.
Acquisition of Cauldron Process Chemistry Business
In May 1999, the Company purchased the Cauldron Process Chemistry business in
Malvern, Pennsylvania, a leader in the provision of rapid-response process
research and development for the pharmaceutical industry. The Cauldron business
significantly expands the Company's process research and development
capabilities in the United States, adds to its customer base and provides a
critically important customer service. The Company paid approximately $6.9
million in cash including transaction costs. The acquisition was accounted for
as a purchase. Accordingly, the assets and liabilities acquired are included in
the consolidated balance sheet as of June 30, 2000 and the results of operations
and cash flows from the date of acquisition. The Company recorded goodwill of
approximately $5.3 million associated with the acquisition, which is being
amortized on a straight-line basis over 15 years.
Liquidity and Capital Resources
Historically, the Company's primary sources of funding have been cash flow
from operations, sales of its common stock and borrowings under its revolving-
credit and term-loan facilities. In March 1999, the Company consummated the
sale of 2,875,000 shares of its common stock issued to the public. This
resulted in net proceeds to the Company of approximately $51.1 million. The
Company used the proceeds from the stock offering to repay bank borrowings
outstanding under the Facilities Agreement.
Cash provided from operating activities was $21.4 million in the six months
ended June 30, 2000, compared to $9.8
11
million in the comparable period in 1999 as decreased profitability was more
than offset by cash generated from a reduction in working capital.
Net cash used in investing activities in the first six months of 2000 was
$15.3 million, compared to $18.7 million in same period of 1999. Capital
spending in 2000 consists of expenditures to complete the expansion of the
Boston facility and building of the pilot plant at Annan in the development
division, plant maintenance at both the Annan and Dudley manufacturing division
sites, and spending to accommodate new product introductions. Investing cash
flows in 1999 included $5.9 million for the purchase of Cauldron Process
Chemistry in May 1999.
Net cash used in financing activities for the first six months of 2000 of $4.9
million is comprised of the scheduled repayment of $4.6 million of borrowings
outstanding under the Company's term-loan facility, payments of $1.1 million on
capital lease obligations, offset by $0.8 million of net proceeds from exercise
of stock options and employee stock purchase plan.
The Company expects to satisfy its cash requirements, including the
requirements of its subsidiaries, through internally generated cash and
borrowings. As of June 30, 2000 the Company had approximately $5.1 million in
cash and cash equivalents and $37.8 million ((Pounds)25.0 million) of
availability under its revolving-credit facility.
Year 2000 Disclosure
The Company has dedicated internal resources to identify and resolve "Year
2000" compliance issues with respect to computer systems and applications
utilized by the Company. The Company has also engaged external resources,
including hiring an independent consulting firm, and has purchased necessary
computer software upgrades to become year 2000 compliant. The Company developed
and performed comprehensive testing procedures once necessary software and
equipment had been installed to validate year 2000 compliance. The Company
implemented a year 2000 compliant management information system at all locations
in 1999. The Company has spent approximately $7.1 million on systems and
equipment, which are year 2000 compliant and will account for these costs in
accordance with current accounting guidance.
The Company believes that the systems at two of the three production
facilities at Annan are year 2000 compliant. The Company has spent approximately
$1.7 million in 2000 upgrading the third production facility's computer systems
and applications and will account for these costs in accordance with current
accounting guidance.
The Company experienced no significant Year 2000 issues in 2000. No assurance
can be given that Year 2000 compliance issues will not materialize and be
resolved without future disruption or that the Company will not incur
significant additional expense. In addition, the failure of certain of the
Company's significant suppliers and customers to address the Year 2000
compliance issues could have a material adverse effect on the Company.
Foreign Currency
The Company currently expects revenues from its products outside the United
States will continue to be a substantial percentage of its net revenues. The
Company believes it has a natural cash currency hedge because its operating
expenses and revenues tend to be denominated in matched currencies. Also the
Company has partly offset foreign currency-denominated assets with foreign
currency-denominated liabilities.
Financial results of the Company could be adversely or beneficially affected
by fluctuations in foreign exchange rates. Fluctuations in the value of foreign
currencies will affect the U. S. dollar value of the Company's net investment in
its foreign subsidiaries, with related effects included in a separate component
of stockholders' equity titled cumulative translation adjustment. In 2000, the
cumulative translation adjustment declined $7.3 million due to the reduction in
the Great Britain pounds sterling exchange rate to $1.51 to (Pounds)1.00 at June
30, 2000 from $1.62 to (Pounds)1.00 at December 31, 1999. Operating results of
foreign subsidiaries are translated into U.S. dollars at average monthly
exchange rates and balance sheet amounts are translated at period-end exchange
rates. In addition, the U.S. dollar value of transactions based in
12
foreign currency also fluctuates with exchange rates. The Company expects that
the largest foreign currency exposure will result from activity in Great Britain
Pounds Sterling, Euros, and U.S. Dollars.
13
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
-NONE-
ITEM 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Form 8-A/A filed July 26, 2000
Amendment No. 1 to Rights Agreement dated July 23, 2000
ITEM 3. Defaults Upon Senior Securities
-------------------------------
-NONE-
ITEM 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
On April 18, 2000, the Company held its Annual Meeting of
Stockholders at 300 Atlantic Street, Stamford, Connecticut. The
matters voted on are described below:
1. The election of Michael A. Griffith as a Class I Director:
For Nominee Against Nominee Withheld
----------- --------------- --------
13,520,751 None 49,975
2. The election of W. Dieter Zander as a Class I Director:
For Nominee Against Nominee Withheld
----------- --------------- --------
13,512,530 None 58,196
3. The election of David K. Stevenson as a Class III Director:
For Nominee Against Nominee Withheld
----------- --------------- --------
13,521,660 None 49,066
The terms of office of Directors Dirk Detert, Ph.D. and Eric N. Jacobsen, Ph.D. continued after
the Annual Meeting.
4. Ratification of Arthur Andersen LLP as independent auditors of the Company for fiscal 2000:
For Nominee Against Nominee Withheld
----------- --------------- --------
13,546,820 9,680 141,916
ITEM 5. Other Information
-----------------
-NONE-
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
Form 8-K filed July 26, 2000
Announcement of Agreement and Plan of Merger dated July 24, 2000,
Ammendment No. 1 to Rights Agreement date July 23, 2000 and Press
Release dated July 24, 2000
14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHIREX INC.
Date: August 10, 2000 By: /s/ Jon E. Tropsa
----------------------------------------
Jon E. Tropsa
Vice President, Finance
15
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
27 Financial Data Schedule.