<PAGE> 1
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, 1996 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)
65 WILLIAM STREET
WELLESLEY, MASSACHUSETTS 02181
(Address of principle executive office) (Zip Code)
617 - 431 - 2200
(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 July
31, 1996.
<TABLE>
<CAPTION>
Class Number of Shares Outstanding
- -------------------------------------- ----------------------------
<S> <C>
Common Stock, par value $.01 per share 10,909,290
</TABLE>
- 1 -
<PAGE> 2
CHIREX INC.
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
June 30, 1996 and December 31, 1995
Consolidated Statements of Operations for the
three-month and six-month periods ended
June 30, 1996 and 1995. 4
Consolidated Statements of Cash flows for the
six-month period ended June 30, 1996 and
1995 5
Notes to Consolidated Interim Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURE 13
EXHIBIT INDEX 14
</TABLE>
This Quarterly Report on Form 10-Q contains forward-looking
statements. For this purpose, any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. The important factors discussed below under the caption "Certain
Factors that May Affect Future Operating Results," among others, could cause
actual results to differ materially from those indicated by forward-looking
statements made herein and presented elsewhere by management from time to time.
- 2 -
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
CHIREX INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands) JUNE 30 DECEMBER 31
1996 1995
----------- ---------------------------
(unaudited) (audited)
ChiRex Inc. Crossco(157) SepraChem
ASSETS Limited Inc.
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 5,812 $ 7,845 $ 0
Trade and other receivables 11,770 8,335 546
Inventories 20,124 18,547 193
Other current assets 2,283 366 1,646
-------- ------- -------
Total current assets 39,989 35,093 2,385
Property, plant and equipment, net 58,460 44,868 307
Intangible assets, net 28,556 0 0
-------- ------- -------
Total Assets $127,005 $79,961 $ 2,692
======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 9,413 $ 5,374 $ 0
Accrued expenses 10,769 7,881 0
Income taxes payable 1,279 996 0
Deferred income taxes 0 0 0
Current portion of long-term debt 0 660 0
-------- ------- -------
Total current liabilities 21,461 14,911 0
Long-term debt 11,625 40,304 0
Deferred income taxes 7,042 3,453 0
Deferred income 3,365 2,962 0
Accrued expenses 0 4,425 0
-------- ------- -------
Total liabilities 43,493 66,055 0
-------- ------- -------
Cumulative redeemable preferred stock
at redemption value 0 13,541 0
Stockholders' equity:
Common stock 108 173 80
Additional paid-in capital 94,745 1,560 5,064
Retained earnings (12,342) (1,201) (2,452)
Cumulative translation adjustment 1,001 (167) 0
-------- ------- -------
Total stockholders' equity 83,512 365 2,692
-------- ------- -------
Total liabilities and stockholders' equity $127,005 $79,961 $ 2,692
======== ======= =======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
- 3 -
<PAGE> 4
CHIREX INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
Three Months Ended
June 30
---------------------------------------
1996 1995
----------- ------------------------
ChiRex Inc. Sterling SepraChem
Organics Inc.
Limited
<S> <C> <C> <C>
Revenues:
Product sales $21,694 $21,554 $ 139
License fee and royalty income 282 0 141
------- ------- -------
Total revenues 21,976 21,554 280
Costs and expenses:
Cost of goods sold 18,015 19,272 118
Research and development 725 434 347
Write-off of in-process research and development 0 0 0
Selling, general and administrative 1,443 261 176
Compensation related to stock plans 0 0 0
------- ------- -------
Total operating expenses 20,183 19,967 641
Operating profit (loss) 1,793 1,587 (361)
Other (income) expense:
Interest expense - net 379 0 0
Equity (income) loss 350 0 0
Other - net 86 1 0
------- ------- -------
Income (loss) before income taxes 978 1,586 (361)
Provision for income taxes 814 516 (137)
------- ------- -------
Net income (loss) 164 1,070 (224)
------- ------- -------
Preferred & Series A stock dividends 0 0 0
Net income (loss) to common stockholders $ 164 $ 1,070 $ (224)
======= ======= =======
Net income (loss) per share: $ 0.01
Weighted average number of common
and common equivalent shares outstanding 11,216
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
Six Months Ended
June 30
----------------------------------------------------------
1996 1995
----------------------------- -------------------------
Crossco(157) ChiRex Inc. Sterling SepraChem
Limited Organics Inc.
pre-acquisition Limited
<S> <C> <C> <C> <C>
Revenues:
Product sales $15,212 $28,961 $ 45,387 $ 414
License fee and royalty income 0 605 0 281
------- ------- -------- --------
Total revenues 15,212 29,566 45,387 695
Costs and expenses:
Cost of goods sold 13,545 24,031 40,286 390
Research and development 387 1,016 909 589
Write-off of in-process research and development 0 5,790 0 0
Selling, general and administrative 443 1,801 703 902
Compensation related to stock plans 0 5,286 0 0
------- ------- -------- --------
Total operating expenses 14,375 37,924 41,898 1,881
Operating profit (loss) 837 (8,358) 3,489 (1,186)
Other (income) expense:
Interest expense - net 690 422 0 0
Equity (income) loss 0 350 0 0
Other - net 47 92 (339) 0
------- ------- -------- --------
Income (loss) before income taxes 100 (9,222) 3,828 (1,186)
Provision for income taxes 33 1,212 1,249 (450)
------- ------- -------- --------
Net income (loss) 67 (10,434) 2,579 (736)
------- ------- -------- --------
Preferred & Series A stock dividends 216 0 0 0
Net income (loss) to common stockholders $ (149) $(10,434) $ 2,579 $ (736)
======= ======== ======= =======
Net income (loss) per share: $ (1.31)
Weighted average number of common
and common equivalent shares outstanding 7,992
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
- 4 -
<PAGE> 6
CHIREX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands)
Six Months Ended
June 30
-----------------------------------------
1996 1995
----------- -------------------------
ChiRex Inc. Sterling SepraChem
Organics Inc.
Limited
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) to common stockholders $(10,434) $ 2,579 $ (736)
Add back: Depreciation & amortization 2,396 3,937 75
Goodwill 348 0 0
Amortization of fixed asset uplift 166 0 0
Inventory uplift release 1,792 0 0
Write-off of in-process research and development 5,790 0 0
Compensation related to stock plans 5,286 0 0
Changes in assets and liabilities:
Receivables (1,813) (2,788) 466
Inventories (84) (681) (251)
Other current assets (2,265) (251) (204)
Accounts payable and accrued liabilities 2,789 5,228 0
Income taxes payable 768 1,400 (450)
Other non current assets and liabilities (329) 210 0
-------- ------- -------
Net cash provided from operations 4,410 9,634 (1,100)
Cash flows from investing activities:
Capital expenditures (1,545) (6,259) 0
Acquisition of businesses (net of cash acquired) (35,047) 0 0
-------- ------- -------
Net cash (used in) investing activities (36,592) (6,259) 0
Cash flows from financing activities:
Increase in short-term debt 0 0 1,100
Long-term debt activity (including current portion):
Borrowings 11,475 0 0
Repayments (53,598) 0 0
Proceeds from the issuance of common stock 80,022 0 0
-------- ------- -------
Net cash provided from financing activities 37,899 0 1,100
Effect of exchange rate changes on cash 94 (47) 0
Net increase in cash 5,811 3,328 0
Cash at beginning of period 1 (622) 0
-------- ------- -------
Cash at end of period $ 5,812 $ 2,706 $ 0
======== ======= =======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
-5-
<PAGE> 7
CHIREX INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. Basis of presentation
The accompanying consolidated financial statements of ChiRex Inc. ("ChiRex" or
the "Company") are unaudited and have been prepared on a basis substantially
consistent with audited financial statements.
The consolidated 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 period ended June 30, 1996. The
results of operations for the interim period are not necessarily indicative of
the results of operations expected for the fiscal year.
On March 11, 1996 the Company completed the sale of 6,675,000 shares of its
Common Stock, $.01 par value per share, pursuant to an underwritten initial
public offering ( the "Offering"). Immediately prior to the Offering, the share
capital of Crossco (157) Limited ("Crossco"), a private company incorporated in
England and the sole shareholder of Sterling Organics Limited ("Sterling
Organics"), was recapitalized. Concurrently with the closing of the Offering the
shareholders of Crossco contributed to the Company all of the outstanding newly
recapitalized equity share capital of Crossco in exchange for Common Stock and
promissory notes of the Company (the "Notes"). As part of this contribution all
loan stock of Crossco was exchanged for a promissory note of the Company (the
"Loan Stock Note"). As a result of these transactions (the "Crossco
Acquisition") the Company holds all of the outstanding share capital of Crossco
which in turn holds all the outstanding share capital of Sterling Organics.
Certain shares held by the original shareholders of Crossco, the Notes and the
Loan Stock Note were redeemed by the Company concurrently with, and with the
proceeds from, the Offering. In addition, concurrently with the Offering,
SepraChem Inc. ("SepraChem") was contributed to the Company through a merger of
a newly formed and wholly owned subsidiary of the Company with and into
SepraChem.
The acquisition of Crossco by the Company was accounted for using the Purchase
Method of business combinations, and accordingly gave rise to Goodwill to be
amortized over 25 years. The calculation of Goodwill after the fair valuation of
assets is detailed below, along with the annual amortization charges to be
incurred as a result. Inventory represents the adjustment to fair value of
inventory held by Sterling Organics and has increased the charge to Cost of
Goods Sold over the period that the inventory turned.
<TABLE>
<CAPTION>
(in thousands) Charge during
six months
Acquisition Annual ended Balance at June
Value Amortization June 30, 1996 30, 1996
----- ------------ ------------- --------
<S> <C> <C> <C> <C>
Goodwill $28,904 $1,156 $348 $28,556
Purchase of in-process
research and development 5,325 0 5,325 0
Inventory 1,792 0 1,792 0
Deferred tax on inventory (591) 0 (591) 0
Land 1,146 0 0 1,146
Plant and equipment (depreciated
at 7.5% annually, straight 14,237 574 166 14,071
line)
Deferred tax on plant and
equipment (2,525) (189) (59) (2,466)
------- ----- ---- -------
Total $48,288 $1,541 $6,989 $41,307
======= ====== ====== =======
</TABLE>
<PAGE> 8
<TABLE>
<S> <C>
The excess purchase price is computed as follows (in thousands)
Aggregate purchase price (issuance of 3,739,206 shares
of ChiRex Common Stock at $13.00 per share) $48,610
Net book value of Crossco (consolidated with Sterling
Organics) at March 11, 1996 322
-------
Excess Purchase Price $48,288
=======
</TABLE>
Due to the relative recent nature of the above transactions, and lack of
historical information for comparison purposes, management regards the most
meaningful presentation of the consolidated financial statements as follows:
The consolidated balance sheet for the interim period ending June 30, 1996 is
shown with both the Crossco and SepraChem balance sheets for the period ending
December 31, 1995.
The consolidated statements of operations for the three months ending June 30,
1996 is shown with the consolidated statements of operations of Sterling
Organics and SepraChem for the corresponding interim period of the previous
year.
Similarly, the consolidated statements of operations for the six-month period
ending June 30, 1996 is shown with the consolidated statements of operations of
Sterling Organics and SepraChem for the corresponding interim period of the
previous year. In addition, and for completeness, the consolidated operating
statement of Crossco for the period from January 1, 1996 to the time of the
Crossco Acquisition is shown.
The consolidated statements of cash flows for the interim period ending June 30,
1996 is shown with the consolidated statements of cash flow for Sterling
Organics and SepraChem for the corresponding interim period of the previous
year.
Net loss per common share is computed based upon the weighted average number of
common and common equivalent shares. Common equivalent shares are not included
in the per share calculations where the effect of their inclusion would be
anti-dilutive, except that, in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 83, all common and common equivalent
shares issued during the twelve-month period prior to the effective date of the
Offering have been included in the calculation, as if they were outstanding, for
all periods prior to the Offering.
2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
(in thousands) Crossco (157)
ChiRex Inc. Limited. SepraChem Inc.
June 30, 1996 December 31, 1995 December 31, 1995
------------- ----------------- -----------------
<S> <C> <C> <C>
Raw materials $2,565 $1,792 $46
Work in progress 5,546 5,024 0
Finished goods 8,687 8,704 147
Stores and replacement parts 3,326 3,027 0
----- ----- ----
Total $20,124 $18,547 $193
======= ======= ====
</TABLE>
<PAGE> 9
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a newly formed corporation that is a combination of Crossco (157)
Limited (including its subsidiary Sterling Organics Limited), a fine chemicals
manufacturer, and SepraChem Inc., a chiral chemistry business. The Company is
undertaking a new business strategy designed to take advantage of this
combination by leveraging its proprietary technology and manufacturing
capabilities.
On March 11, 1996, ChiRex issued and sold 6,675,000 shares of its common stock,
$.01 par value per share, in an initial public offering and used the proceeds,
among other things, to reduce outstanding debt by $25.4 million and to redeem
the entire issue of $13.5 million 5% preferred stock of Crossco.
ChiRex specializes in the development, manufacture and marketing of
pharmaceutical fine chemicals and, through its joint venture, InNova
Pharmaceuticals SRL ("InNova"), formulated generic drugs. ChiRex currently
produces over 50 pharmaceutical chemicals in its world-class c GMP manufacturing
facilities and is a leader in chiral chemical technology.
RESULTS OF OPERATIONS
In order to make the comparison of financial information for the three and
six-month periods ending June 30, 1996 comparable with the same periods of 1995,
1996 information is shown below as adjusted to exclude one-time charges
resulting from the Offering, consisting of an adjustment for fair value of
inventory, write-off of in-process research and development and compensation
relating to stock option plans, and is compared to the combined operating
statements for the two pre-Offering companies of Sterling Organics and SepraChem
for the same periods of 1995. In addition, and for completeness, information for
the six-month period ending June 30, 1996 includes the consolidated statement
for Crossco for the period from January 1, 1996 to the time of the Crossco
Acquisition.
COMPARATIVE OPERATING RESULTS FOR THREE MONTHS ENDED JUNE 30, 1996
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS OFFERING THREE MONTHS STERLING ORGANICS
ENDED JUNE 30, RELATED ENDED JUNE 30, AND SEPRACHEM
1996 ACTUAL ADJUSTMENTS 1996 AS ADJUSTED COMBINED 1995
-------------- ----------- ---------------- -------------
<S> <C> <C> <C> <C>
Net Revenues $21,976 $ 0 $21,976 $21,834
Operating Expenses:-
Cost of Goods Sold 18,015 929 (1) 17,086 19,390
Research and Development 725 0 725 781
Selling, General and Administrative 1,443 0 1,443 437
------- ----- ------- -------
Total Operating Expenses 20,183 929 19,254 20,608
Operating Profit (loss) 2,722 (929) 2,722 1,226
Other expenses (income):
Interest expense 379 0 379 0
Equity loss 350 0 350 0
Other - Net 86 0 86 1
Income before income taxes 978 (929) 1,907 1,225
Provision for income taxes 814 0 814 379
Net income (loss) $ 164 (929) 1,093 846
Preference Stock dividend 0 0 0 0
Net income (loss) to
Common Stockholders $ 164 $(929) $ 1,093 $ 846
======= ===== ======= =======
</TABLE>
<PAGE> 10
COMPARATIVE OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1996
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS OFFERING SIX MONTHS STERLING ORGANICS
ENDED JUNE 30,1996 RELATED ENDED JUNE 30, AND SEPRACHEM
ACTUAL ADJUSTMENTS 1996 AS ADJUSTED COMBINED 1995
------------------ ----------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net Revenues $ 44,778 $ 0 $44,778 $46,083
Operating Expenses:-
Cost of Goods Sold 37,576 1,204 (1) 36,372 40,676
Research and Development 7,193 5,790 (2) 1,403 1,498
Selling, General and Administrative 7,530 5,286 (3) 2,244 1,605
-------- -------- ------- -------
Total Operating Expenses 52,299 12,280 40,019 43,779
-------- -------- ------- -------
Operating Profit (loss) (7,521) (12,280) 4,759 2,304
Other expenses (income):
Interest expense 1,111 0 1,111 0
Equity loss 350 0 350 0
Other - Net 139 0 139 (339)
-------- -------- ------- -------
Income before income taxes (9,122) (12,280) 3,159 2,643
Provision for income taxes 1,245 0 1,245 799
Net income (loss) (10,367) (12,280) 1,914 1,844
Preference Stock dividend 216 0 217 0
Net income (loss) to
Common Stockholders $(10,583) $(12,280) $ 1,697 $ 1,844
======== ======== ======= =======
</TABLE>
(1) Adjustment for fair value of inventory.
(2) Write-off of in-process research and development.
(3) Compensation related to stock plans.
Revenues. Net revenues for the three months ended June 30, 1996 were $22.0
million, an increase of 0.7% compared to the $21.8 million in the same period in
1995. This increase is due primarily to the replacement of low-margin customer
supply arrangements with higher-margin sales. Net Revenues for the six months
ended June 30, 1996 were $44.8 million compared to $46.1 million for the same
period in 1996, due primarily to selective elimination of low-margin customer
supply arrangements in the first quarter of 1996.
Cost of Goods Sold. Cost of goods sold decreased from $19.4 million and $40.7
million for the three and six months ended June 30, 1995, respectively, to
$18.0 million and $37.6 million for the three and six months ended June 30,
1996, respectively. These decreases were due primarily to selective elimination
of low-margin customer supply arrangements in the first quarter of 1996. Cost
of goods sold, excluding the fair value of inventory adjustment, as a percentage
of sales for the three months ended June 30, 1996 was 77.7%, a reduction from
88.8% in the same period of 1995. Similarly, cost of goods sold, excluding the
fair value of inventory adjustment, as a percentage of sales for the six months
ended June 30, 1996 was 81.2%, a reduction from 88.2% in the same period in
1995. This was a result primarily of the elimination of high cost, low margin
products, reduced fixed costs following structural changes, process improvements
and the release of surplus inventory provisions in June 1996 of $440,000.
Research and Development Expenses. Research and development expenses were
$725,000 for the three months ended June 30, 1996, a 7.2% decrease compared to
$781,000 for the same period of 1995. Research and development expenses,
excluding the write-off of in-process research and development, were $1,403,000
for the six months ended June 30, 1996, a 6.3% decrease compared to the
$1,498,000 for the same period of 1995. The primary reason for the decrease was
the elimination of the expense from a former affiliate as research and
development activity is transferred internally and carried out within ChiRex.
<PAGE> 11
Selling, General and Administrative Expenses. Selling general and administrative
expenses were $1,443,000 for the three months ended June 30, 1996, a $1,006,000
increase compared to the $437,000 in the same period in 1995 and $2,244,000,
excluding compensation relating to stock plans, for the six months ending June
30, 1996 compared to the $1,605,00 for the same period in 1995. Figures for 1996
include a charge for goodwill amortization as a result of the acquisition of
Crossco of $288,000 for the three-month period and $348,000 for the six-month
period ending June 30, 1996. The increase in selling, general and administration
expenses in 1996 is also a result of the increased corporate governance required
for the Company's public ownership, and increased sales and marketing
initiative.
Interest Expense. Interest expense of $379,000 for the three-month period and
$1,111,000 for the six-month period ended June 30, 1996, compared to zero in
the same periods in 1995, is a result of interest paid on bank loans following
the acquisition of Crossco.
Equity Loss. Equity loss represents ChiRex' portion of the loss in the
three-month and six-month periods ended June 30, 1996 recorded by its joint
venture company, InNova. These losses are primarily a result of process
development and ANDA preparation costs incurred by InNova in the period.
Income Tax Expense. Income tax expense of $814,000 for the three-month period
and $1,245,000 for the six-month period ended June 30, 1996 show consistently an
effective tax rate of 33% in the U.K. and 38% in the U.S., compared to $379,000
and $799,000 for the same periods in 1995, respectively.
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The Company is a newly formed combination of SepraChem and Sterling Organics
and, as such, has very little operating history as a combined entity. There can
be no assurance that the integration of SepraChem and Sterling Organics can be
accomplished successfully or on a timely basis or that the Company's business
strategy can be successfully implemented.
The Company's revenues are dependent upon the continuing operation of the
Company's only manufacturing facility, located in Dudley, England. In addition,
the Company has not yet manufactured any products at its Dudley facility using
the proprietary technology of SepraChem. There can be no assurance that
manufacturing problems will not arise as the Company begins manufacturing such
products at the Dudley facility or that manufacturing can be scaled-up in a
timely manner to allow production in sufficient quantities to meet the needs of
the Company's customers.
The Company's largest customers account for a significant percentage of its
revenues. In 1995, Sanofi S.A. and its subsidiaries ("Sanofi"), SmithKline
Beecham PLC ("SmithKline Beecham") and Rohm and Haas Company accounted for 34%,
21% and 14%, respectively, of the Company's total pro forma revenues. The
Company expects to continue to rely on a limited number of customers for a
significant portion of its revenues. Also, many of the Company's supply
agreements including those with certain of its largest customers, are for a
limited duration and will expire over the next few years, and certain supply
arrangements are with sole source suppliers.
InNova, a fifty percent owned joint venture, has a very limited operating
history and has not yet manufactured paclitaxel or any other generic drug
product. InNova expects to encounter intense competition in the generic drug
market, including the paclitaxel market, and such competition could require
price reductions or increased spending on research and development and marketing
and sales, any of which could materially adversely affect the results of
operations of InNova, or could render the products or technologies of InNova
obsolete or non-competitive.
Acetaminophen (paracetamol), an OTC analgesic, is the largest volume product
manufactured by the company, representing approximately 34% of the Company's
1995 pro forma revenues. Substantially all of the acetaminophen sold by the
Company is supplied under contracts with SmithKline Beecham and Sanofi that
initially expire in 1998 and 2001, respectively. ChiRex continues to examine
strategic alternatives with respect to its acetaminophen business, in
particular, disposition of the business. ChiRex is pursuing this course of
action because of the market price erosion in the acetaminophen business, and
its dominance by high volume, low cost manufacturers. Primarily, however,
disposition of this business will allow ChiRex to focus on its core business of
the supply of pharmaceutical fine chemicals and chiral technology.
<PAGE> 12
The successful implementation of the company's business strategy will depend in
large part on the commercial viability of new pharmaceutical products being
developed by its customers, and the ability of such pharmaceutical companies to
conduct clinical trials, obtain required regulatory approvals and successfully
market such products. There can be no assurance that product development efforts
will be successful, that required regulatory approvals can be obtained on a
timely basis, if at all, that products can be manufactured at acceptable cost
and with appropriate quality or that any products, if approved, can be
successfully marketed.
The Company encounters, and expects to continue to encounter, intense
competition in obtaining contracts for the sale of its products from major
chemical and pharmaceutical companies (including a number of the Company's
customers) that have substantially greater financial resources, technical skills
and marketing experience than the Company. There can be no assurance that the
company will, in the future, be successful in obtaining customer contracts on
commercially favourable terms, if at all.
The Company is subject to laws and regulations governing the use, manufacture,
storage, handling and disposal of hazardous materials and certain waste products
in both the United States and the United Kingdom. The Company may, in the
future, be required to incur significant costs to comply with current and future
environmental laws and regulations.
The Company's research, development and clinical programs as well as the
operations of its third-party manufacturers and the marketing operations of its
corporate partners, are subject to extensive regulation by numerous governmental
authorities in the United States, the United Kingdom and other countries. There
can be no assurance that the Company will be able to obtain all necessary
permits or renew all existing permits, or that material changes in permit
conditions will not be imposed.
A substantial portion of the Company's operations are conducted outside the
United States. As a result of its international operations, the Company is
subject to risks associated with operating in foreign countries, including
devaluations and fluctuations in currency exchange rates, trade barriers,
political risks, hyperinflation and increases of trade or regulatory
restrictions by foreign governments. Because a majority of the Company's current
sales and operating expenses are denominated in Pounds Sterling, the Company's
revenues, cash flows and earnings are directly and materially affected by
fluctuations in the exchange rate between the Pound Sterling and the U.S.
Dollar.
Because of these and other factors, past financial performance should not be
considered an indication of future performance. The Company's quarterly
operating results may vary significantly, depending on factors such as the
timing of substantial orders and new product introductions by the Company or its
competitors. Investors should not use historical trends to anticipate future
results and should be aware that the trading price of the Company's common stock
may be subject to wide fluctuations in response to quarterly variations in
operating results and other factors, including those discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The net cash inflow from operations for the six months ended June 30 1996
reflects the overall profitability in the period since the acquisition of
Crossco on March 11, 1996.
There was no significant change in working capital from December 31, 1995 to
June 30, 1996 other than an increase of $1,813,000 in receivables reflecting
increased sales volumes and an increase in payables of $2,789,000, reflecting
improved working capital management.
Cash flow from financing activities reflects the issuance of Common Stock to
acquire Crossco and to redeem existing securities.
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
a. The exhibits listed in the Exhibit index files as part of this
report are filed as part of or are included in this report.
b. The Company filed no reports on Form 8-K during the quarter for
which this report is filed.
<PAGE> 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 14, 1996 By: /s/ Michael A. Griffith
-----------------------------
Michael A. Griffith
Vice President-Finance
Treasurer and Chief
Financial Officer
(Principal Financial Officer)
<PAGE> 15
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE COMPANY'S
FINANCIAL STATEMENTS INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001005407
<NAME> CHIREX INC
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 5,812
<SECURITIES> 0
<RECEIVABLES> 11,770
<ALLOWANCES> 0
<INVENTORY> 20,124
<CURRENT-ASSETS> 2,283
<PP&E> 127,874
<DEPRECIATION> 69,414
<TOTAL-ASSETS> 127,005
<CURRENT-LIABILITIES> 21,461
<BONDS> 0
0
0
<COMMON> 108
<OTHER-SE> 83,512
<TOTAL-LIABILITY-AND-EQUITY> 127,005
<SALES> 28,961
<TOTAL-REVENUES> 29,566
<CGS> 24,031
<TOTAL-COSTS> 24,031
<OTHER-EXPENSES> 13,893
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 422
<INCOME-PRETAX> (9,222)
<INCOME-TAX> 1,212
<INCOME-CONTINUING> (10,434)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,434)
<EPS-PRIMARY> (1.31)
<EPS-DILUTED> 0.00
</TABLE>
