CHIREX INC, 10-K405, 1997-03-10

CHIREX INC
10-K405, 1997-03-10
PHARMACEUTICAL PREPARATIONS

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 10, 1997
================================================================================

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

------------------------

FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER 0-27698

CHIREX INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
DELAWARE 04-3296309
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

65 WILLIAM STREET
WELLESLEY, MASSACHUSETTS 02181
(ADDRESS OF PRINCIPLE EXECUTIVE OFFICE) (ZIP CODE)
</TABLE>

617-431-2200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) NAME OF TRADING SYSTEM
OF THE SECURITIES EXCHANGE ACT OF 1934 ON WHICH LISTED
- --------------------------------------------- ---------------------------------------------
<S> <C>
Common Stock, $.01 par value The Nasdaq Stock Market's National Market
</TABLE>

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE SECURITIES EXCHANGE
ACT OF 1934: none.

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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $81,998,147 as of March 6, 1997.

APPLICABLE ONLY TO CORPORATE REGISTRANTS

As of March 6, 1997 there were 10,943,678 shares outstanding (excluding as
of such date 840,798 shares of Common Stock issuable upon exercise of options
with a weighted average price of $6.95 per share).
================================================================================
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CHIREX INC.

INDEX

<TABLE>
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PAGE
SECTION NUMBER
- --------- ------
<S> <C> <C>
PART I
Item 1. Business................................................................. 3
Item 2. Properties............................................................... 12
Item 3. Legal Proceedings........................................................ 12
Item 4. Submissions of Matters to a Vote of Security Holders..................... 12

PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.... 13
Item 6. Selected Historical Financial Data....................................... 14
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
of Operations............................................................ 16
Item 8. Financial Statements and Supplementary Data.............................. 22
Item 9. Changes in and Disagreements with accountants on Accounting and Financial
Disclosure............................................................... 86

PART III
Item 10. Directors and Executive Officers of the Registrant....................... 86
Item 11. Executive Compensation................................................... 86
Item 12. Security Ownership of Certain Beneficial Owners and Management........... 86
Item 13. Certain Relationships and Related Transactions........................... 86

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......... 86
</TABLE>

This Annual Report on Form 10-K includes certain forward-looking statements
with the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
facts included in this Annual Report on Form 10-K, including without limitation,
the statements under "Item 1. Business" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and located elsewhere
herein regarding industry prospects and the Company's results of operations or
financial position are forward looking statements. Such forward looking
statements represent management's current expectations and are inherently
uncertain. Investors are warned that actual results may differ from management's
expectations.

DOCUMENT INCORPORATED BY REFERENCE

The required information under "Part III -- Item 10. Directors and
Executive Officers of the Registrant," "-- Item 11. Executive Compensation,"
"-- Item 12. Security Ownership of Certain Beneficial Owners and Management" and
"-- Item 13. Certain Relationships and Related Transactions" is hereby
incorporated by reference from the Company's Proxy Statement for the 1997 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
by April 30, 1997.

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PART I

ITEM 1. BUSINESS

GENERAL

ChiRex Inc. (the "Company" or "ChiRex") is a contract manufacturing
organization ("CMO") serving the outsourcing needs of the pharmaceutical
industry through its extensive pharmaceutical fine chemical manufacturing and
process development capabilities and proprietary technologies. The Company
supports and supplements the in-house development and manufacturing capabilities
of its pharmaceutical and biotechnology customers with a broad range of
fully-integrated services, accelerating the time from drug discovery to
commercialization. The Company currently manufactures 54 products, of which 29
are core products. The Company's customers include Cell Therapeutics Inc., ACS
Dobfar SpA, Glaxo Wellcome PLC, Pfizer Inc., Pharmacia & Upjohn Inc., Procter &
Gamble Company, Rohm and Haas Company, Sanofi S.A. and SmithKline Beecham plc.

The Company was created simultaneously with its initial public offering in
March 1996 (the "IPO") through the combination of a U.S.-based chiral chemistry
business, SepraChem Inc., and a U.K-based pharmaceutical fine chemical
manufacturing business, Sterling Organics Limited. Since the IPO, the Company
has integrated these operations and further developed its advanced manufacturing
facilities, commercial development process and technology base. During this
time, the Company has entered into an exclusive agreement for the supply of
clinical and commercial requirements for Cell Therapeutics' new cytoprotective
drug, lisofylline, established a new supply relationship with Pfizer and
scaled-up production of three pharmaceutical intermediates using the Company's
proprietary ChiRex Technologies for three customers. In addition, the Company
recently entered into an exclusive license agreement with Harvard University for
kinetic resolution technology applicable to the manufacture of single-isomer
forms of certain chiral intermediates, which the Company believes has
significant commercial potential.

Since the IPO, management has reviewed the Company's product portfolio and
identified 29 of the 54 products it manufactured in 1996 as "core products"
which the Company believes offer superior long-term growth potential, higher
margins or strategic customer relationship benefits. The Company intends to
focus on developing additional revenues from existing core products and through
adding new core products to the Company's portfolio while phasing out non-core
products to release capacity and improve profitability. In particular, the
Company is actively negotiating the disposition of its acetaminophen business.

The Company believes that its efforts to integrate its proprietary
technologies with its manufacturing capabilities, along with its ongoing efforts
to strengthen its core competencies, will secure and enhance its position as a
leading CMO to the pharmaceutical industry.

RECENT DEVELOPMENTS

The Company has agreed in principle with Dabur India Ltd. ("Dabur") to
dissolve their joint venture, InNova Pharmaceuticals SRL ("InNova"). The Company
originally sought to utilize InNova as a secure supply source of starting
material for semi-synthetic paclitaxel, a compound used in the treatment of
breast and ovarian cancer. Recently, however, new suppliers of this raw material
have emerged, mitigating InNova's competitive advantage. Moreover, the Company
is committed to focusing on its core business of developing, manufacturing and
supplying pharmaceutical fine chemicals, whereas Dabur wanted to change the
mission of

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InNova from one of a single product joint venture to one of a multi-product
generic oncology drug business. The Company believes that its low cost
proprietary process technology for producing semi-synthetic paclitaxel will
allow it to sell either exclusively to a major generic drug marketing company or
non-exclusively to several market participants. The Company is currently
pursuing these options with several major companies.

INDUSTRY

CMOs have evolved from providing limited third-party manufacturing services
to offering a full range of drug development and manufacturing capabilities.
CMOs currently offer research and development and hazard evaluation
capabilities, scale-up facilities, state-of-the-art analytical departments,
documentation expertise, large, multi-purpose, FDA-inspected current Good
Manufacturing Practices ("cGMP") facilities and efficient waste treatment
facilities. The development and scale-up of customers' products requires CMOs to
interact with their customers on many levels. In many cases, the customers'
technical personnel work closely with the CMOs staff to scale-up new products,
monitor manufacturing and assist with regulatory compliance. This process
necessitates a high degree of confidence in the CMO's technical expertise as
well as its ability to safeguard confidential information.

Due to the interactive nature of their services, a CMO's success depends on
the strength of its relationships with customers. Critical success factors for
CMOs in developing outsourcing relationships with major life science companies
include:

- An established reputation and proven track record

- Flexible cGMP manufacturing capacity

- Technical competence and a broad technology base

- Financial stability

- Secure management of trade secrets and intellectual property rights

According to A.D. Little, in 1996 the global market for the manufacture of
pharmaceutical fine chemical intermediates and bulk actives and custom synthesis
was approximately $12.0 billion. In recent years, outsourcing of drug
development and manufacturing activities by pharmaceutical and biotechnology
companies has increased for the following reasons:

Cost Containment Pressures. Recently, drug companies have been focusing on
more efficient ways of conducting business because of margin pressures stemming
from patent expirations, market acceptance of generic drugs and pressure from
regulators and payors to reduce drug prices. In addition, managed care
organizations are beginning to limit the selection of drugs that affiliated
physicians may prescribe, thereby further increasing competition among
pharmaceutical and biotechnology companies. The Company believes that the
pharmaceutical industry is responding by focusing its resources on new drug
discovery, regulatory compliance and sales and marketing while outsourcing
process development and supply of pharmaceutical intermediates and active
ingredients.

Reducing Drug Development Time. Pharmaceutical and biotechnology companies
face increased pressure to deliver new drugs to market in the shortest possible
time in order to capture market share, accelerate realization of revenue and
make full use of patent protection. By working in collaboration with CMOs like
the Company, pharmaceutical and biotechnology companies can focus on their core
competencies of drug discovery and marketing activities. The Company believes
that CMOs are often able to perform essential services with a higher level of
expertise and specialization, and in less time than its customers could perform
such services in-house, resulting in reduced new drug development times.

Increasingly Complex Drug Manufacturing Processes. The Company believes an
increasing proportion of drugs under development are single-isomer
pharmaceuticals, which for certain drugs may have advantages over racemic
mixtures, including reduced side effects, increased safety and higher potency.
The ability to determine the biological activity of each isomer has led to
increasing regulatory pressure to develop drugs in single-isomer form. Current
FDA guidelines require a demonstration of biological activity for each isomer,

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including therapeutic benefits and side effects. As a result, the cost and time
of development are significantly greater for compounds developed as racemic
mixtures as compared to single-isomers, creating a demand for new processes and
process technologies that can produce single-isomer drugs and intermediates cost
effectively. Rather than develop complex manufacturing processes in-house,
pharmaceutical companies are moving towards outsourcing these functions to CMOs
with demonstrated process technology expertise.

Growth of Biotechnology Industry. The biotechnology industry and the
number of drugs produced by it have grown substantially over the past decade.
Many biotechnology companies have chosen not to expend the substantial capital
resources necessary to invest in a cGMP manufacturing facility, but utilize CMOs
to perform these functions both during product development and
commercialization.

Although these trends will result in increased competition, the Company
believes there are significant entry barriers to the high value-added CMO
industry, including the need for cGMP commercial scale manufacturing capacity
and world-class pilot plant facilities, access to and expertise in leading
manufacturing and process technologies and the ability to manage the complex
regulatory regime governing new product development.

BUSINESS STRATEGY

The Company's goal is to be a preferred partner to major pharmaceutical and
life sciences companies in the development of manufacturing processes and to
supply on a commercial scale pharmaceutical intermediates and active ingredients
for leading proprietary and generic drugs. The Company's strategy for achieving
this objective is to:

- leverage its research and development expertise to develop and maintain
its process technologies for the manufacture of a broad spectrum of
complex chemicals and extend its relationship with leading academic
institutions to capture next generation process technologies;

- expand cGMP manufacturing capacity at its Dudley facility and explore
opportunities to acquire additional facilities or complementary
businesses;

- provide clinical scale manufacturing capacity with safe, efficient scale
up for its customers' products in its state-of-the art pilot plant
facility;

- apply its proprietary technologies to the development and manufacture of
a range of chiral intermediates which the Company intends to market at
higher margins than those achievable using non-proprietary technologies;
and

- identify opportunities to develop and market complex, generic drugs where
its technologies provide process and cost advantages.

CORE COMPETENCIES

The Company offers a full range of manufacturing and process development
services to its clients. These services include process research and
development, clinical quantity production capability and commercial-scale
manufacturing, as well as hazard evaluation capabilities, sophisticated chemical
analysis services and regulatory and documentation expertise. The Company
provides all or any portion of its service capabilities to its customers and
works with its customers to tailor the range of services provided based on the
customer's needs. The Company has developed the following core competencies.

Advanced Manufacturing

Over the last 30 years, the Company has developed expertise in the
synthesis, scale-up and manufacture of complex pharmaceutical intermediates and
active ingredients at its Dudley site. This 42-acre site was originally
constructed by Sterling Winthrop Inc. in the late 1960's and became its primary
pharmaceutical chemical manufacturing facility. With a production capacity of
770 cubic meters (over 200,000 gallons), the Dudley facility is one of the
largest independent pharmaceutical chemical manufacturing facilities in the
world. Since 1992, the Company has invested over $50 million at the site,
including major expenditures on waste water treatment facilities and a new cGMP
pilot plant and development center.

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There are three main production buildings at the Dudley site which have a
variety of advanced equipment to provide a flexible FDA-inspected, cGMP and ISO
9002 certified manufacturing base. Two of the buildings provide multi-process
facilities (including a segregated bulk pharmaceutical purification suite fitted
with reactors, isolation and finishing equipment) capable of performing an
extensive range of chemical transformations. The third building is a plant
dedicated for the manufacture of acetaminophen. The combination of the three
main production buildings and the state-of-the-art pilot plant and development
center enable the Company to manufacture efficiently products in quantities from
laboratory samples to commercial scale.

The Company's quality assurance department consists of approximately 40
personnel with experience in the analysis, quality assurance, validation and
registration of bulk pharmaceutical and fine chemicals. The Company's analytical
laboratories contain fully-automated equipment with extensive data handling
capabilities, spectroscopic systems and variable wavelength and diode-array UV
capabilities designed to ensure that the Company's products comply with all
pharmacopeia and regulatory requirements.

Process Development

The Company possesses significant expertise in manufacturing process
research and development. These skills are critical to advancing a product from
the laboratory to pilot plant and finally commercial scale manufacturing in a
timely and cost effective manner. Following an initial inquiry, the Company
provides feasibility studies and cost estimates to the customer. The Company
engages in initial process research and development and produces laboratory
samples. In connection with process development, the Company utilizes computer
controlled reaction calorimeters and analytical equipment, and is assisted by
its Scientific Advisory Board, which includes leading academics in various
fields of chemistry. During 1996, the Company increased its professional process
development staff by 25% to 28. Ultimately, a pilot plant product which receives
regulatory approval and is deemed commercially viable is scaled-up to commercial
manufacture. Historically, approximately 80% of products that reach the pilot
plant result in full commercial manufacturing arrangements.

Process development serves an important marketing function. As a result of
the regulatory requirements associated with certifying a new manufacturing
source, it is often advantageous for a pharmaceutical company to maintain its
relationship with a CMO once the CMO is certified for the product by regulatory
authorities. Consequently, the Company promotes its process research and
development capabilities aggressively in an effort to establish relationships
with a customer early in the product development timeline and consequently
secures long-term commercial-scale supply arrangements.

Technology

The Company's expertise in applying a wide range of sophisticated process
technologies to large scale classical chemical transformations enables it to
provide its customers with safe and cost efficient commercial scale
manufacturing capacity. In addition, the Company has a wide spectrum of
proprietary synthesis and separation technologies for application in the
manufacture of single-isomer products (the "ChiRex Technologies"). The Company
is manufacturing products in the pilot plant using four of its ChiRex
Technologies. Additionally, in January 1997, the Company added to this
technology platform by licensing from Harvard University kinetic resolution
technology applicable to the manufacture of single-isomer forms of certain
chiral intermediates, which the Company believes has significant commercial
potential. The Company believes that there are numerous potential commercial
opportunities for the application of these technologies to the manufacture of
single-isomer products, including drugs for the treatment of asthma, arthritis,
obesity, cardiovascular disease, AIDS, cancer and hepatitis.

Product Portfolio

The Company sold 54 products in 1996, 29 of which management has identified
as core products and 25 of which are non-core products. The 54 products include
48 pharmaceutical products and six fragrance and flavor, agrichemical and
polymer products. Nearly all of the products produced or under development by
the Company are governed by secrecy agreements which contain, among other
things, restrictions on the disclosure of the customer, the product and the
therapeutic indication.

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Core Products

Management has identified 29 core products (including seven new products
for 1996) which it believes offer superior long-term growth potential, higher
margins or strategic customer relationship benefits. Twelve of the Company's
core products are produced in its development center. In 1996, core products
accounted for 56% of the Company's total pro forma revenues. Twenty-three of the
Company's core products are manufactured for use in pharmaceuticals, with the
remaining six products manufactured for the fragrance and flavor, agrichemical
and polymer markets. The Company's customers' pharmaceutical products are used
in the treatment of, among others, cancer, cardiovascular disease, AIDS, urinary
tract infections and high cholesterol. Major pharmaceutical customers include
ACS Dobfar, Glaxo Wellcome, Pfizer, Pharmacia & Upjohn and Sanofi. The Company
manufactures eight products for Sanofi under a renewable long-term contract
which (excluding acetaminophen) accounted for 40% of the Company's 1996 pro
forma revenues. In addition, the Company currently manufactures two commercial
agrichemical core products for Rohm and Haas, which (excluding acetaminophen)
accounted for approximately 19% of the Company's 1996 pro forma revenues.

Non-Core Products

The Company intends to phase out the manufacture of products which do not
meet management's criteria regarding profitability, growth profile or customer
development potential. There are currently 25 non-core products, including
acetaminophen, which the Company plans to eliminate from its product portfolio.
In 1996, non-core products (including acetaminophen) accounted for 44% of the
Company's total revenues.

The Company is engaged in active negotiations for the disposition of its
acetaminophen business. Although acetaminophen (paracetamol), an OTC analgesic,
is the largest volume product manufactured by the Company, representing
approximately 31% of the Company's 1996 pro forma revenues, it is not highly
profitable at the gross margin level. The Company's decision to dispose of its
acetaminophen business followed a strategic review of several alternatives and
was based on a number of factors, including the continued domination of the
acetaminophen business by high volume, low-cost manufacturers and the Company's
expectation that the market price of acetaminophen will continue to erode.

DEVELOPMENT PRODUCTS

The Company has over 30 years of experience collaborating with
pharmaceutical companies on the process development of new pharmaceutical
products. The Company's work in the development stage of its customers' products
provides a strong foundation for securing supply arrangements for full-scale
manufacturing upon commercialization. Products are no longer considered
development products when they are produced by the Company on a commercial
scale.

The Company provides development and pilot-scale manufacturing services for
its pharmaceutical customers, including Cell Therapeutics, Glaxo Wellcome,
Pharmacia & Upjohn, Pfizer and SmithKline Beecham. The following table sets
forth 40 products in the Company's development pipeline which the Company
believes have significant revenue potential. Twelve of these products have been
identified as core products, are produced at pilot-scale and had revenues
associated with them in 1996. The remaining products are at an earlier stage in
the development cycle and have not been identified as core products.

<TABLE>
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NUMBER OF
DEVELOPMENT PHASE OF DRUG(1) COMPANY PRODUCTS REPRESENTATIVE INDICATIONS
- ------------------------------------------------ ---------------- ------------------------------
<S> <C> <C>
Approved........................................ 7 Cancer, AIDS, Hypertension,
Diabetes
Phase III....................................... 11 Cancer, Pancreatitis, Central
Nervous System Disorder
Phase II........................................ 3 Migraine, AIDS, Cardiovascular
Disease
Preclinical/Phase I/Unknown..................... 19 Various
</TABLE>

- ---------------
(1) Based on customer provided or publicly available information.

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The seven approved products have been produced on a commercial scale by
manufacturers other than the Company. However, the Company is working with its
customers to gain the necessary regulatory approval to participate in the
manufacture of these products.

TECHNOLOGY

The Company has developed expertise in the large-scale operation of many
classical chemical transformation technologies and has the exclusive rights to
use the ChiRex Technologies in a defined field on a perpetual basis under 45
U.S. patents and several patent applications. In addition, it has accumulated
experience in the effective management of the risks inherent in handling toxic
or hazardous raw materials and products and in carrying out hazardous chemical
reactions. The Company's expertise allows pharmaceutical companies to have
complex multi-step procedures carried out at a single site, which increases the
ability of such companies to maintain confidentiality, product supervision and
management.

The Company's ChiRex Technologies consist of a broad platform of
proprietary asymmetric synthesis and resolution technologies, which it believes
provide multiple manufacturing routes to produce single-isomer chiral
pharmaceutical intermediates and active ingredients. The Company selects the
most appropriate ChiRex Technology for a particular application based on several
factors, including the cost of any required catalyst, the availability and cost
of the starting materials and the cost of recovering and recycling by-products.
The following table summarizes certain aspects of the ChiRex Technologies:

<TABLE>
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DEVELOPMENT
TECHNOLOGY USE PHASE METHOD OF MANUFACTURE
- --------------------------------- ------------------------- ----------- ---------------------
<S> <C> <C> <C>
Kinetic Resolution............... Catalytic ring opening of Pilot Plant Asymmetric Synthesis
epoxides to make chiral
epoxides and diols
Asymmetric dihydroxylation....... Catalytic asymmetric Commercial Asymmetric Synthesis
reaction to make chiral
diols using Sharpless
catalyst
Asymmetric epoxidation........... Catalytic oxidation to Commercial Asymmetric Synthesis
make chiral epoxides
using Jacobsen catalyst
Enzymatic resolution............. Enzymatic Commercial Resolution
biotransformation
Diastereomeric crystallization... Resolution by Commercial Resolution
crystallization
Asymmetric reduction............. Catalytic reduction to Laboratory Asymmetric Synthesis
make chiral alcohols
</TABLE>

Single-isomer chiral chemicals are generally manufactured by asymmetric
synthesis or resolution. In asymmetric synthesis, the single-isomer form of the
drug or intermediate is synthesized directly from a precursor compound that is
achiral. With resolution, the single-isomer is separated from a racemic mixture.
Asymmetric synthesis is often the preferred method of producing single-isomer
drugs or intermediates due to the potential higher attainable yields. Due to the
technical challenges of developing a cost-effective process, however, there are
few asymmetric synthesis processes demonstrated at commercial scale.

The Company continues to improve its leading technology position through
significant research and development expenditures and by maintaining close
relationships with its Scientific Advisory Board and institutional research
partners. On January 28, 1997, the Company entered into an exclusive license
agreement with Harvard University for the application of kinetic resolution
technology ("KR Technology") to a wide range of pharmaceutical products. KR
Technology is a new technology developed by Professor Eric N. Jacobsen, a member
of the Company's Scientific Advisory Board, which the Company believes will
enable it to produce single-isomer pharmaceutical intermediates in a more
cost-effective process than others currently available. The Company intends to
utilize KR Technology to develop and market new pharmaceutical intermediates to
many customers for multiple applications.

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In support of these technologies, the Company maintains a state-of-the-art
hazards evaluation laboratory where operating hazards are identified and safe
operating parameters established for all processes before they are carried out
in the pilot plant. The pilot plant is then used to confirm the safe operation
of the process and evaluate scale-up parameters before moving to full-scale
operation. In addition, the Company has accumulated extensive in-house
experience in the development and application of microprocessor control systems
to control process hazards and improve the reproducibility of process
performance and product quality.

SALES AND MARKETING

The Company markets the majority of its products directly to pharmaceutical
and other life science companies. An important component of the Company's
strategy is to pursue long-term supply relationships with selected major
customers. The Company employs sales and marketing personnel who possess the
requisite technical backgrounds to communicate effectively with both prospective
customers and the Company's research and development personnel.

The Company, as part of its ongoing commercial development efforts,
maintains a presence at important international trade shows and hosts a
bi-annual international technical symposium to which selected senior
representatives and executives of the research and development organizations of
major pharmaceutical companies are invited. In addition, the Company's technical
personnel and marketing present papers at symposia on a regular basis.

PATENTS AND PROPRIETARY TECHNOLOGY

Proprietary rights relating to the Company's products and processes will
generally be protected from unauthorized use by third parties only to the extent
that they are covered by valid and enforceable patents or are maintained in
confidence as trade secrets. The Company currently has the exclusive,
royalty-free perpetual right and license to use and practice the ChiRex
Technologies on a worldwide basis in a defined field under 45 U.S. patents and
several patent applications. The material patents licensed to the Company expire
at various times beginning in 2005. The Company has ongoing research efforts and
expects to seek additional patents in the future covering patentable results of
such research. Certain of the Company's technology is not covered by any patent
or patent application. There can be no assurance that any pending patent
applications filed by the Company will result in patents being issued or that
any patents now or hereafter owned or licensed by the Company will afford
protection against competitors with similar technology, will not be infringed
upon or designed around by others or will not be challenged by others and held
to be invalid or unenforceable. In the absence of patent protection, the
business of the Company may be adversely affected by competitors who
independently develop substantially equivalent technology.

There may now or in the future be issued third-party patents relating to
technology utilized by the Company. The Company may need to acquire licenses to,
or to contest the validity of, any such patents. It is likely that significant
funds would be required to defend any claim that the Company infringes a
third-party patent, and any such claim could adversely affect sales of the
challenged product until the claim is resolved. Furthermore, any such dispute
could result in a rejection of the Company's patent applications or the
invalidation of its patents. There can be no assurance that any license required
under any such patent would be made available or, if available, would be
available on acceptable terms or that the Company would prevail in any
litigation involving such patent. Any of the foregoing adverse results could
have a material adverse effect on the Company and its results of operations.

The Company also seeks to protect its proprietary technology, including
technology which may not be patented nor patentable, in part by confidentiality
agreements and, if applicable, inventors' rights agreements with its
collaborators, advisors, employees and consultants. There can be no assurance
that these agreements will be enforceable and will not be breached, that the
Company will have adequate remedies for any breach or that the Company's trade
secrets will not otherwise be disclosed to, or discovered by, competitors.

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COMPETITION

Competition in the Company's market is based upon reputation, service,
manufacturing capability and expertise, reliability of supply and price. In
addition, the Company's success depends to a significant extent on its ability
to sell products to potential customers at an early stage of product
development. The Company's current competitors include Alusuisse-Lonza Holdings
AG, DSM Andeno B.V. and Laporte PLC. In the acetominophen business, the
Company's competitors include Rhone-Poulene S.A. and Mallinckrodt Group Inc. In
addition, the Company competes with major pharmaceutical manufacturers
(including a number of the Company's customers) who develop their own process
technologies and manufacture fine chemicals and pharmaceutical intermediates
in-house.

The Company encounters, and expects to continue to encounter, intense
competition in obtaining contracts for the sale of its products. The market in
which the Company competes is characterized by extensive research efforts and
rapid technological progress. Competition may increase further as a result of
advances that may be made in the commercial applicability of the Company's and
competitors' technologies and greater availability of capital for investment in
these fields. In addition, the Company faces intense competition for scientific,
managerial and marketing personnel from other companies, research and academic
institutions and governmental entities.

The Company also has encountered, and expects to continue to encounter,
intense competition for the acquisition of additional manufacturing capacity.
The Company's competitors for manufacturing capacity include CMOs and certain
pharmaceutical and chemical companies, some of which have substantially greater
financial resources than the Company.

ENVIRONMENTAL REGULATION

The manufacturing and research and development processes of the Company
involve the controlled use of hazardous materials. The Company is subject to
laws and regulations governing the use, manufacture, storage, handling and
disposal of such materials and waste products in the United Kingdom. In the
event of contamination or injury from hazardous materials, the Company could be
held liable for any resulting damages and any such liability could exceed its
resources.

The Company's manufacturing plant in Dudley, United Kingdom, is subject to
the U.K. Environmental Protection Act 1990 ("EPA 1990"), which requires
authorizations for any industrial air and water discharges and solid waste
disposal. The individual authorizations are contained within several Integrated
Pollution Control ("IPC") authorizations under the 1991 Environmental Protection
Regulations adopted pursuant to the EPA 1990. The Company's IPC authorizations
are administered by the U.K.'s Environment Agency ("EA").

The Company believes it is in compliance in all material respects with its
IPC authorization conditions, limitations and compliance schedules. The Company
possesses "envelope" authorizations for its air pollutant emissions, which
enable the Company to alter its production lines and processes to a degree
without seeking additional authorizations. The Company has committed itself in a
plan submitted to the EA to implement certain air pollution emission reduction
programs.

The Company has a consent to discharge its process waste water, following
treatment in the Company's biological waste water pretreatment plant, into local
sewers for further treatment by the company that owns and operates the local
area wastewater treatment facility, which discharges its effluent to the River
Tyne. Northumbrian Water Limited ("NWL") is the local sewer operator and the EA
is the governmental regulatory body responsible for the regulation of NWL and
the country's rivers. In the past, the Company has had periodic difficulty in
meeting its consent limits for suspended solids in waste water. During 1996, the
Company reached agreement with NWL which resulted in a relaxation of the consent
limit for suspended solids. The Company also made certain capital improvements
to its biological waste water treatment plant, and it is now generally in
compliance with the consent limit. If the consent limit is exceeded, the plant
must adhere to certain notice and corrective action procedures. This compliance
program was developed in consultation with and has received the approval of the
EA.

10
<PAGE> 11

Since the IPO, the Company reached agreement with NWL and the EA on a set
of contingency measures that would be taken in the event the Company's
biological pretreatment plant experienced a treatment upset or, due to
malfunction or other failure had to be bypassed for a period of time. The
procedures are designed to minimize the impact of such occurrences while
allowing the Company to continue its production operations, which in the absence
of such agreed procedures, would have been subject to potential shutdown.

The Environment Act of 1995 ("1995 Act") imposes strict, retroactive
clean-up liability on persons responsible for creating or contributing to
contaminated sites. Landowners are presumptively liable under this statute for
conditions existing on their property where a different responsible party can
not be found. The Company believes that the limited areas of subsurface
contamination presently known to exist at the site are confined and will not
give rise to liability under the 1995 Act. However, there can be no assurance
that the Company will not be required in the future to incur remedial costs
pursuant to the 1995 Act. Such costs, and other unanticipated costs of
compliance with environmental laws and regulations in the future, could have a
material adverse effect on the Company's results of operations.

There can be no assurance that future expenditures for environmental
compliance and control, including reductions of air emissions, waste water
treatment improvements and remediation matters, will not have a material adverse
effect on the Company's results of operations.

OTHER GOVERNMENTAL REGULATION

The Company's operations, as well as those of its customers, are subject to
extensive regulation by numerous governmental authorities in the United States,
the United Kingdom and other countries. In particular, the Company is required
to adhere to applicable FDA regulations with respect to cGMP, including
extensive record keeping and reporting and periodic inspections of manufacturing
facilities. Similar requirements are imposed by regulatory authorities in other
countries. Failure to comply with the applicable regulatory requirements can
among other things result in fines, suspensions of regulatory approvals, product
recalls, operating restrictions and criminal prosecution. The Company is also
subject to numerous environmental, health and workplace safety laws and
regulations, including those governing emissions control, laboratory procedures
and the handling of hazardous materials. Any violation of, and cost of
compliance with, these laws and regulations could adversely affect the Company's
operations.

In addition, compliance with governmental laws and regulations, including
environmental laws and regulations, requires the Company to obtain permits
issued by appropriate regulatory agencies. Permits generally require periodic
renewal or review of their conditions, and public comment may be solicited in
the permitting process. 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 or that material public
opposition will not surface. Failure to obtain or renew certain permits could
result in the shutdown of the Company's facility, the imposition of significant
fines or require the Company to incur significant expenditures to comply with
the law.

The Company is subject to environmental, labor, health and workplace safety
regulation pursuant to a variety of national and local legislation in the United
Kingdom. The Company is also subject to FDA regulation under the Federal Food,
Drug, and Cosmetic Act, the Public Health Service Act and the Toxic Substances
Control Act. In addition, numerous other domestic and foreign government
regulations govern the Company.

EMPLOYEES

As of December 31, 1996, the Company had 490 full-time employees, of which
485 employees were based at the Company's site in Dudley. Three hundred and
thirty-two of the full-time employees at such site are unionized. The Company
believes its labor relations are satisfactory.

11
<PAGE> 12

ITEM 2. PROPERTIES

The Company's 42-acre manufacturing facility in Dudley, England was
originally constructed by Sterling Winthrop Inc. in the late 1960's and became
its primary pharmaceutical chemical manufacturing facility. With a production
capacity of 770 cubic meters (over 200,000 gallons), the Dudley facility is one
of the largest independent pharmaceutical chemical manufacturing facilities in
the world. Since 1992, the Company has invested over $50 million at the site,
including major expenditures on waste water treatment facilities and a new cGMP
pilot plant and development center.

ITEM 3. LEGAL PROCEEDINGS

The Company is involved in various legal proceedings incidental to the
conduct of its business. While it is not possible to determine the ultimate
disposition of these proceedings, the Company believes that the outcome of such
proceedings will not have a material adverse effect on the financial position or
results of operations of the Company.

In a proceeding now pending before the U.S. Patent and Trademark Office's
Trademark Trial and Appeal Board, Phenomenex, Inc. of Torrance, California, has
formally opposed the Company's attempt to register the ChiRex name for "single
isomer chiral intermediate chemical compounds and active ingredients for use in
the manufacture of pharmaceuticals." As a basis for the opposition, Phenomenex
asserts, inter alia, that it was using ChiRex as a trademark for chiral chemical
compounds used in liquid chromatography columns before the Company adopted the
name and that consumers are likely to be confused as to the source of the
Company's and Phenomenex's products because of their similarities and an overlap
in the channels of trade in which they travel. The proceeding is at an early
stage, and the Company does not expect a decision as to whether it can register
its name prior to the first quarter of 1998. The Company's management strongly
disputes Phenomenex's allegations, and intends to vigorously defend the
Company's position. However, there can be no assurance that the Company will
prevail in any such proceeding or be able to settle any such dispute on terms
favorable to the Company. Were Phenomenex to pursue and prevail on its claims,
the Company could be required to cease using the ChiRex name which could have a
material adverse affect on the Company's business and results of operations.

ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

None in the fourth quarter of the year ended December 31, 1996.

12
<PAGE> 13

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK

The Common Stock was initially offered to the public on March 5, 1996 at a
price of $13.00 per share. The Common Stock is listed and traded on The Nasdaq
Stock Market's National Market ("Nasdaq") under the symbol "CHRX." The following
table sets forth for the periods indicated the high and low sales prices of the
Common Stock as reported by Nasdaq.

<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
1996:
First Quarter (from March 5).................................... $ 13.25 $ 9.50
Second Quarter.................................................. 13.25 10.00
Third Quarter................................................... 13.38 7.88
Fourth Quarter.................................................. 13.50 9.50
</TABLE>

On March 6, 1997, the last reported sale price of the Common Stock as
reported by Nasdaq was $10.75. As of March 6, 1997, there were approximately
2,800 holders of record of the Common Stock.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain any future earnings for use in the
Company's business and, therefore, does not anticipate paying cash dividends in
the foreseeable future.

13
<PAGE> 14

ITEM 6. SELECTED HISTORICAL FINANCIAL DATA

The following selected historical financial data of ChiRex Inc. as of
December 31, 1995 and for the years ended December 31, 1994 and 1995, has been
derived from the financial statements of ChiRex Inc. which appear elsewhere in
this document and which have been audited by Coopers & Lybrand L.L.P.,
independent accountants. The selected historical financial data for ChiRex Inc.
as of December 31, 1996 and for the year then ended, has been derived from the
financial statements of ChiRex Inc. which appear elsewhere in this document and
which have been audited by Arthur Andersen LLP, independent accountants. This
information should be read in conjunction with "Item 8. Financial Statements and
Supplementary Data" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."

CHIREX INC.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1993 1994 1995 1996
------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................... $ 4,633 $ 1,810 $ 2,754 $ 74,615
Cost and expenses:
Cost of goods sold............................... 1,565 814 1,715 56,508
Research and development......................... 3,458 2,343 595 3,517
Selling, general and administrative.............. 1,999 1,964 2,099 8,876
Write-off of in-process research and
development................................... 0 0 0 5,790
Stock compensation charge........................ 0 0 0 5,611
------- ------- ------- --------
Total costs and expenses......................... 7,022 5,121 4,409 80,302
------- ------- ------- --------
Operating loss..................................... (2,389) (3,311) (1,655) (5,687)
Interest expense................................... 0 0 0 (755)
Other expense...................................... 0 0 (797) 0
------- ------- ------- --------
Loss before income taxes........................... (2,389) (3,311) (2,452) (6,442)
Provision for income taxes......................... 0 0 0 1,867
------- ------- ------- --------
Net loss........................................... $(2,389) $(3,311) $(2,452) $ (8,309)
======= ======= ======= ========
BALANCE SHEET DATA (END OF PERIOD):
Cash............................................... $ 0 $ 0 $ 1 $ 291
Total assets....................................... 2,531 1,873 2,693 130,806
Long-term debt..................................... 0 0 0 3,933
Stockholders' equity............................... 2,351 1,873 2,693 90,068
</TABLE>

14
<PAGE> 15

The following selected historical financial data of ChiRex Limited
(formerly Sterling Organics Limited) as of December 31, 1994 and for the years
ended December 31, 1993, 1994 and the period from January 1, 1995 to August 10,
1995, has been derived from the combined financial statements of Sterling
Organics Limited which appear elsewhere in this document and which have been
audited by Coopers & Lybrand, independent accountants. The following selected
historical financial data of ChiRex (Holdings) Limited (formerly named Crossco
(157) Limited) as of December 31, 1995 and for the period from August 10, 1995
to December 31, 1995, has been derived from the consolidated financial
statements of Crossco (157) Limited which appear elsewhere in this document and
which have been audited by Coopers & Lybrand, independent accountants. This
information should be read in conjunction with "Item 8. Financial Statements and
Supplementary Data" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."

CHIREX (HOLDINGS) LIMITED AND CHIREX LIMITED

<TABLE>
<CAPTION>
CHIREX (HOLDINGS) LIMITED(1)
CHIREX LIMITED --------------------------------
---------------------------------------------------- PERIOD FROM
INCEPTION PERIOD ENDED
YEAR ENDED DECEMBER 31, PERIOD ENDED (AUGUST 10, 1995) MARCH 11,
------------------------------------- AUGUST 10, TO DECEMBER 31, 1996
1991 1992 1993 1994 1995(1) 1995 (UNAUDITED)
------- ------- ------- ------- ------------ ----------------- ------------
(IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................... $76,422 $85,609 $74,497 $78,859 $ 51,375 $34,828 $ 15,212
Costs and expenses:
Cost of goods sold.......... 70,365 74,245 66,529 68,572 44,220 30,836 12,564
Research and development
expenses.................. 410 1,741 1,564 1,816 1,115 651 558
Selling, general and
administrative............ 4,167 6,202 4,908 5,598 2,156 2,728 1,300
------- ------- ------- ------- ------- ------- -------
Total costs and
expenses........... 74,942 82,188 73,001 75,986 47,491 34,215 14,422
------- ------- ------- ------- ------- ------- -------
Operating income.............. 1,480 3,421 1,496 2,873 3,884 613 790
Interest income (expense)... (181) 264 237 16 (1,927) (690)
Other income................ 100 484 379 481 402 5 0
------- ------- ------- ------- ------- ------- -------
Income before income tax
expense..................... 1,580 3,724 2,139 3,591 4,302 (1,309) 100
Income tax expense.......... 653 1,353 935 1,061 1,327 (351) 33
------- ------- ------- ------- ------- ------- -------
Net income (loss).... $ 927 $ 2,371 $ 1,204 $ 2,530 $ 2,975 (958) 67
======= ======= ======= ======= =======
Dividends on preference
shares...................... (243) (217)
------- -------
Net loss for ordinary
shares............. $(1,201) $ (150)
======= =======
BALANCE SHEET DATA (END OF PERIOD):
Cash.......................... $ 49 $ 0 $ 3,329 $ 0 $ 396 $ 7,845 $ 7,517
Total assets.................. 77,450 75,552 73,362 77,016 82,727 79,961 78,793
Long-term debt................ 0 0 0 0 0 40,304 40,376
Total shareholders' equity.... 58,408 49,824 50,502 54,849 59,821 365 322
</TABLE>

- ---------------
(1) On August 10, 1995, ChiRex Limited was acquired by ChiRex (Holdings)
Limited.

15
<PAGE> 16

ITEM 7. 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 Company" or "ChiRex"), incorporated in 1995, is a
combination of Sterling Organics Limited (subsequently renamed ChiRex Limited,
"ChiRex Ltd."), a fine chemicals manufacturer, and the chiral chemistry business
of Sepracor Inc. ("Sepracor"), which was conducted through its subsidiary,
SepraChem Inc. (subsequently renamed ChiRex America Inc., "ChiRex America"). The
Company completed its initial public offering ("the IPO") of 6,675,000 shares of
its Common Stock, $0.01 par value per share, on March 11, 1996. Concurrent with
the IPO, ChiRex America was contributed to the Company in exchange for 3,520,889
shares of Common Stock through a merger of a newly formed wholly-owned
subsidiary of the Company with and into ChiRex America (the "Merger"). In
conjunction with the Merger, certain executives and directors of ChiRex America
received shares or options to purchase shares of Common Stock with an intrinsic
value totaling $5.6 million which resulted in a compensation charge and an
increase to additional paid in capital.

Concurrent with the IPO, the share capital of Crossco (157) Limited
(subsequently renamed ChiRex (Holdings) Limited, "ChiRex Holdings Ltd."), a
private company incorporated in England and Wales that is the sole shareholder
of ChiRex Ltd., was contributed to the Company (the "Contribution") in exchange
for 3,739,206 shares of Common Stock and promissory notes (including a loan
stock note) of the Company. Certain shares of Common Stock issued in connection
with the Contribution and the promissory notes (including the loan stock note)
were redeemed by the Company concurrently with, and using the proceeds from, the
IPO. The proceeds from the IPO were also used to repay indebtedness under an
existing financing arrangement.

ChiRex Inc. is a contract manufacturing organization serving the
outsourcing needs of the pharmaceutical industry through its extensive
pharmaceutical fine chemical manufacturing and process development capabilities
and proprietary technologies. The Company supports and supplements the in-house
development and manufacturing capabilities of its pharmaceutical and
biotechnology customers with a broad range of fully-integrated services,
accelerating the time from drug discovery to commercialization. In 1996, the
Company manufactured 54 products at its cGMP manufacturing facility in Dudley,
England. Capacity utilization at the Dudley facility varies in accordance with
the number and nature of products under manufacture. Management currently
estimates that the Dudley facility (excluding acetaminophen) is operating in a
range of 65% to 75% capacity utilization. Management has reviewed the Company's
product portfolio and identified 29 of the 54 products it manufactured in 1996
as "core products" which the Company believes offer superior long-term growth
potential, higher margins or strategic customer relationship benefits.

The Company is actively negotiating the disposition of its acetaminophen
business. Although acetaminophen (paracetamol), an OTC analgesic, is the largest
volume product manufactured by the Company, representing approximately 31% of
the Company's 1996 pro forma revenues, it is not highly profitable at the gross
margin level. In connection with the disposition of the business, the Company
intends to implement measures designed to substantially offset the effect on net
income. The Company's decision to dispose of its acetaminophen business followed
a strategic review of several alternatives and was based on a number of factors,
including the continued domination of the acetaminophen business by high volume,
low cost manufacturers and the Company's expectation that the market price of
acetaminophen will continue to erode. The Company expects that the immediate
impact of the disposition of this business would be a decrease in revenue and an
increase in gross margin percentage. The impact on net income will depend on the
effectiveness of the Company's cost reduction efforts. In addition, any such
disposition would result in a one-time charge related to plant closure,
severance and other costs related to the disposition of this business. The
magnitude and timing of this charge cannot currently be estimated with
certainty.

16
<PAGE> 17

Substantially all of the Company's revenues and expenses are denominated in
Pounds Sterling, and to prepare the Company's financial statements such amounts
are translated into U.S. Dollars at average exchange rates in accordance with
generally accepted accounting principles. The average exchange rate used to make
this translation in 1994, 1995 and 1996 was $1.59, $1.64 and $1.56 respectively,
per (pound). Period-to-period changes in exchange rates can affect the
comparability of the Company's financial statements.

RESULTS OF OPERATIONS

In order to make the comparison of financial information for 1996 with that
of 1995 and 1994 more meaningful, the following tables set forth (i) the
historical results of the Company for 1996 and the pro forma 1996 results of the
Company which give effect to the Contribution as if it had occurred on January
1, 1996, and as adjusted to exclude various non-recurring charges resulting from
the Contribution and the Merger (consisting of an adjustment to restate
inventory at fair value, the write-off of acquired in-process research and
development and a non-recurring expense relating to certain executive stock
compensation), (ii) the audited operating results of ChiRex combined with the
audited operating results of ChiRex Holdings Ltd. for the period from August 10,
1995 to December 31, 1995 and ChiRex Ltd. for the period from January 1, 1995 to
August 10, 1995 and (iii) the combined audited operating results of ChiRex and
ChiRex Ltd. for the year ended December 31, 1994. There were no intercompany
transactions requiring elimination in any of the periods presented. The pro
forma adjustments are based upon available information and certain assumptions
that management believes are reasonable. The pro forma, pro forma as adjusted
and combined financial data set forth in the following tables are not
necessarily indicative of future operations or what the Company's results of
operations would actually have been had the various transactions set forth below
occurred as described. The period-to-period comparisons that follow the tables
compare the pro forma as adjusted and combined results of operations set forth
in the following tables for the periods indicated and not the actual results of
operations of any of the constituent entities.

The Contribution was accounted for using the purchase method of accounting.
The cost of the Contribution exceeded the estimated fair value of the acquired
net assets by $29.5 million, which is being amortized over a period of 25 years.
The allocation of the purchase price for the Contribution was based on estimates
of fair value of net assets, including purchased in-process research and
development costs of $5.8 million which were written off immediately following
the Contribution.

ChiRex America was established in November 1994 as a wholly-owned
subsidiary of Sepracor. Effective January 1, 1995, Sepracor transferred its
chiral chemistry business, which was then operated as a division, to ChiRex
America in exchange for 7,999,999 shares of common stock of ChiRex America. The
exchange was treated as a transfer between entities under common control and,
therefore, the assets, liabilities, revenues and expenses of the transferred
business are representative of Sepracor's historical costs at the date of
transfer. Operating losses incurred from the inception of ChiRex America through
January 1, 1995, were recorded as a reduction in the net balance transferred to
ChiRex America by Sepracor.

In 1996, the management of ChiRex adopted a new cost accounting policy for
the manufactured inventory of ChiRex Ltd. effective as of March 11, 1996, the
date of the Contribution. Under this policy, various indirect and contractual
research expenses (which were previously allocated to inventory) were
reclassified as selling, general and administrative and research and development
expenses, respectively, to more closely conform to industry standards. This new
accounting policy accounted for $5.1 million of the $9.0 million decrease in
cost of goods sold from 1995 to 1996. Accordingly, a comparison of gross margin
for such periods is not meaningful.

17
<PAGE> 18

COMPARATIVE OPERATING RESULTS

FOR YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)

<TABLE>
<CAPTION>
CHIREX
(HOLDINGS)
LIMITED JANUARY 1, PRO
CHIREX 1996 THRU FORMA PRO PRO FORMA
1996 INC. MARCH 11, 1996 ADJUSTMENTS FORMA ADJUSTMENTS AS ADJUSTED
- ------------------------------------ ------- --------------- ----------- ------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues............................ $74,615 $15,212 $89,827 $ 0 $89,827
Cost of goods sold.................. 56,508 12,564 $ 112(1) 69,184 (1,372)(5) 67,812
------- ------- ---- ------- ------- -------
Gross profit........................ 18,107 2,648 (112) 20,643 1,372 22,015
Research and development............ 9,307 558 9,865 (5,790)(6) 4,075
Selling, general and
administrative.................... 13,563 1,300 225(2) 14,863 (5,611)(7) 9,252
Goodwill............................ 924 0 1,149 0 1,149
Interest expense.................... 755 690 (440)(3) 1,005 0 1,005
------- ------- ---- ------- ------- -------
Income (loss) before income taxes... (6,442) 100 103 (6,239) 12,773 6,534
Provision for income taxes.......... 1,867 33 108(4) 2,008 453(8) 2,461
------- ------- ---- ------- ------- -------
Net income (loss) before preferred
dividend.......................... $(8,309) $ 67 (5) $(8,247) $12,320 $ 4,073
======= ======= ==== ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
CHIREX
CHIREX CHIREX (HOLDINGS)
1995 INC. LIMITED LIMITED COMBINED(9)
- ------------------------------------ ------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................ $ 2,754 $51,375 $ 34,828 $88,957
Cost of goods sold.................. 1,715 44,220 30,836 76,771
------- ------- -------
Gross profit........................ 1,039 7,155 3,992 12,186
Research and development............ 595 1,115 651 2,361
Selling, general and
administrative.................... 2,099 2,156 2,728 6,983
Interest and other (income)
expense........................... 797 (418) 1,922 2,301
------- ------- -------
Income (loss) before income taxes... (2,452) 4,302 (1,309) 901
Provision (benefit) for income
taxes............................. 0 1,327 (351) 976
------- ------- -------
Net income (loss) before preferred
dividend.......................... $(2,452) $ 2,975 $ (958) $ (435)
======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
CHIREX CHIREX
1994 INC. LIMITED COMBINED(10)
- ------------------------------------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................ $ 1,810 $78,859 $ 80,669
Cost of goods sold.................. 814 68,572 69,386
------- -------
Gross profit........................ 996 10,287 11,283
Research and development............ 2,343 1,816 4,159
Selling, general and
administrative.................... 1,964 5,598 7,562
Other............................... 0 (718) (718)
------- -------
Income loss before income taxes..... (3,311) 3,591 280
Provision for income taxes.......... 0 1,061 1,061
------- -------
Net income (loss)................... $(3,311) $ 2,530 $ (781)
======= =======
</TABLE>
Footnotes appear on the following page.

18
<PAGE> 19

- ---------------
Notes to the pro forma and other adjustments for the year ended December 31,
1996 and the combination of operating results of ChiRex, ChiRex Holdings Ltd.
and ChiRex Ltd. for the years ended December 31, 1995 and 1994.

(1) Increase in depreciation reflecting the increased valuation of ChiRex
Holdings Ltd.'s fixed assets for the period prior to the Contribution.

(2) Increase in amortization of goodwill related to the period prior to the
Contribution.

(3) Reduction in interest expense related to debt retired in connection with
the Contribution.

(4) Income tax effect of pro forma adjustments, excluding amortization of
goodwill, which is not deductible for tax purposes.

(5) To reverse the one-time effect of the purchase method of accounting step-up
of inventory to fair value at the time of the Contribution.

(6) To reverse the one-time effect of the write-off of research and development
expenses that were in-process at the time of the Contribution.

(7) To reverse the one-time effect of stock compensation charge associated with
granting of stock and options to purchase stock in connection with the
Merger.

(8) Tax effect of the adjustment described in note (5) above.

(9) Reflects the audited historical operating results of ChiRex for the year
ended December 31, 1995 combined with the audited historical operating
results of ChiRex Holdings Ltd. for the period from August 10, 1995 to
December 31, 1995 and ChiRex Ltd. for the period from January 1, 1995 to
August 10, 1995, respectively. See "Item 6. Selected Historical Financial
Data."

(10) Reflects the combination of the audited historical operating results of
ChiRex Inc. for the year ended December 31, 1994 and the audited historical
operating results of ChiRex Ltd. for the year ended December 31, 1994.

Years ended December 31, 1995 and 1996

Revenues increased $0.8 million, or 1.0%, from $89.0 million in 1995 to
$89.8 million in 1996. Revenues from core products, which accounted for 55.7% of
revenues in 1996, increased by $13.1 million or 35.3%, while non-core products
(excluding acetaminophen), which accounted for 13.2% of revenues in 1996,
decreased by $11.1 million or 48.4%. Existing core products revenues increased
by $9.2 million, and seven new products contributed $3.9 million of revenues.
Revenues attributable to acetaminophen, which accounted for 31.1% of revenues in
1996, declined by $1.2 million compared to 1995 due to lower demand for product
from Sanofi. Product price changes did not contribute significantly to changes
in revenue between the two periods.

Cost of goods sold decreased $9.0 million, or 11.7%, to $67.8 million in
1996 (excluding the fair value of inventory adjustments in 1996) from $76.8
million in 1995. Of the reduction, $5.1 million was due to the reclassification
of inventory charges as selling, general and administrative expenses and
research and development expenses. The remainder of the reduction was due to the
selective replacement of high-cost non-core products, as well as improved
efficiencies due to continual process improvement and the reduction in fixed
costs following organizational changes in the Company's structure.

Research and development expenses (excluding the write-off of in-process
research and development expenses in 1996) increased $1.7 million, or 70.8%, to
$4.1 million in 1996 from $2.4 million in 1995. Of the increase, $0.9 million
was due to the reclassification of contract research expenses previously
classified as cost of goods sold. The remaining increase was due to higher
expenses of $0.6 million related to increased activity in the pilot plant to
support the new product pipeline and an increase of $0.2 million related to the
cost of additional research chemists.

Selling, general and administrative expenses (excluding stock compensation
charged in 1996) increased $2.3 million, or 32.5%, to $9.3 million in 1996 from
$7.0 million in 1995. The reclassification of inventory charges from cost of
goods sold resulted in an increase of $4.2 million, and non-recurring legal and
consulting

19
<PAGE> 20

fees resulted in an increase of $0.4 million. These increases were offset by a
reduction in fixed costs following organizational changes to the Company's
structure.

Interest expense and other income in 1995 of $2.3 million includes interest
expense of $1.9 million and $0.8 million incurred in connection with the
unconsummated initial public offering of ChiRex America in 1995, offset by other
income of $0.4 million. Interest expense (on a pro forma basis), in 1996
decreased $0.9 million, or 47.7%, from $1.9 million in 1995 to $1.0 million in
1996 as a result of lower borrowing requirements in 1996 due to increased cash
flow from operations and the actual and pro forma effect of the repayment of
debt with proceeds from the IPO.

Income tax expense was $2.5 million in 1996 (an effective tax rate of
37.6%) compared to $1.0 million in 1995. The effective tax rate in 1996 (on a
pro forma basis) exceeds statutory rates primarily due to non-deductible
goodwill associated with the Contribution.

As a result of the factors described above, the pro forma as adjusted net
income was $4.1 million in 1996 compared to a $0.4 million combined loss before
preferred dividend in 1995.

Years ended December 31, 1994 and 1995

Total revenues increased $8.3 million, or 10.3%, to $89.0 million in 1995
compared to $80.7 million in 1994, due principally to the introduction of new
products and increased volume of existing products. Sales of new products
accounted for $2.6 million of the increase.

Cost of goods sold increased $7.4 million, or 10.6%, to $76.8 million in
1995 compared to $69.4 million in 1994 as a result of new products and higher
production levels. Gross margin declined slightly to 13.7% in 1995 from 14.0% in
1994.

Research and development expenses decreased $1.8 million to $2.4 million in
1995 from $4.2 million in 1994 due to reduced research and development
expenditures by SepraChem Inc. during 1995, as it increased the emphasis on
production scale-up activities.

Selling, general and administrative expenses decreased $0.6 million, or
7.7%, to $7.0 million in 1995 from $7.6 million in 1994 due primarily to lower
share of Sepracor's overhead cost allocation in 1994.

Interest expense and other income in 1995 of $2.3 million includes interest
expense of $1.9 million and $0.8 million incurred in connection with the
unconsummated initial public offering of ChiRex America in 1995, offset by other
income of $0.4 million. Interest and other income in 1994 includes interest
income of $0.2 million and other income of $0.5 million. Interest expense was
$1.9 million in 1995 compared to interest income of $0.2 million in 1994. The
increase primarily related to an arrangement fee and interest paid to Midland
Bank, as well as interest on the loan stock in connection with the purchase of
ChiRex Ltd. by ChiRex Holdings Ltd. on August 10, 1995.

As a result of the factors described above, net loss before preferred
dividend decreased $0.4 million, or 44.3%, to $0.4 million from a net loss of
$0.8 million in 1995.

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operations of $12.0 million in 1996 reflects the overall
profitability (prior to non-cash charges) in the period since the consummation
of the Formation Transactions on March 11, 1996. The Company has generated $10.7
million in cash from operating activities since that time which was supplemented
by a modest reduction in working capital of $1.3 million from December 31, 1995.
The net cash generated from operations in 1996 of $10.7 million was used for
both capital expenditures and the repayment of long-term debt.

Net cash used in investing activities was $4.3 million in 1996, consisting
of maintenance capital expenditures. The Company anticipates investing $30
million to $40 million over approximately the next two years on capital
improvements to increase capacity.

20
<PAGE> 21

Net cash used in financing activities in 1996 was $7.1 million, consisting
of $94.0 million used for the redemption of stock and the repayment of debt
existing at the time of the Merger and Contribution, $3.6 million of net
borrowings (after exchange rate effect) and $83.3 million provided by the IPO.
On August 1, 1996, the Company converted its existing long-term debt to a new
revolving facility Midland Bank plc. The new credit facility allows a maximum
borrowing limit of L10.5 million ($18.0 million as of December 31, 1996),
renewable every two years, at an interest rate of LIBOR plus 1.25% and a
commitment fee of 0.375%. See Note 7 of Notes to Consolidated Financial
Statements of the Company.

The Company expects to satisfy its cash requirements, including the
requirements of its subsidiaries, through internally generated cash and
borrowings. As of December 31, 1996, approximately $14.0 million of cash was
available for immediate use, if required.

FOREIGN CURRENCY

For 1994, 1995 and 1996, net sales of the Company's products outside the
United States totaled approximately $78 million, $85 million and $82 million,
representing 98%, 96% and 92% of the Company's net sales for those years. The
Company currently expects that sales of its products outside the United States
will continue to be a substantial percentage of its net sales. The Company
currently intends to hedge its foreign exchange exposure to a certain extent by
entering into forward contracts with banks to the extent that the timing of the
currency flows can reasonably be anticipated and by offsetting matching 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. Operating results of foreign
subsidiaries will be translated into U.S. dollars at average monthly exchange
rates. In addition, the U.S. dollar value of transactions based in foreign
currency also fluctuates with exchange rates. The Company expects that the
largest foreign currency exposure will result from activity in Pounds Sterling,
German marks and Dutch guilders.

21
<PAGE> 22

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ChiRex Inc.
Reports of Independent Public Accountants........................................... 23
Consolidated Balance Sheets as of December 31, 1995 and 1996........................ 25
Consolidated Statements of Operations for the years ended December 31, 1994, 1995
and 1996......................................................................... 26
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995
and 1996......................................................................... 27
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1994, 1995 and 1996.............................................................. 28
Notes to Consolidated Financial Statements.......................................... 29

Sterling Organics Limited (renamed ChiRex Limited on March 11, 1996)
Report of Independent Accountants................................................ 44
Combined Balance Sheet as of December 31, 1994................................... 45
Combined Statements of Operations for the years ended December 31, 1993 and 1994
and the period ended August 10, 1995............................................ 46
Combined Statements of Shareholders' Equity for the years ended December 31, 1993
and 1994 and for the period ended August 10, 1995............................... 47
Combined Statements of Cash Flows for the years ended December 31, 1993 and 1994
and for the period ended August 10, 1995........................................ 48
Notes to Combined Financial Statements........................................... 49

Crossco (157) Limited (renamed ChiRex (Holdings) Limited on March 11, 1996)
Report of Independent Accountants................................................ 64
Consolidated Balance Sheet as of December 31, 1995............................... 65
Consolidated Statement of Operations for the period from inception (July 14,
1995) to December 31, 1995...................................................... 66
Consolidated Statement of Shareholders' Equity for the period from inception
(July 14, 1995) to December 31, 1995............................................ 67
Consolidated Statement of Cash Flows for the period from inception (July 14,
1995) to December 31, 1995...................................................... 68
Notes to Consolidated Financial Statements....................................... 69

Financial Statement Schedule
Reports of Independent Public Accountants........................................ 83
Schedule II -- Valuation and Qualifying Accounts................................. 85
</TABLE>

22
<PAGE> 23

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of ChiRex Inc.:

We have audited the accompanying consolidated balance sheet of ChiRex Inc.
(a Delaware corporation) and its subsidiaries as of December 31, 1996, and the
related consolidated statements of operations, Stockholders' equity and cash
flows for the year ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ChiRex Inc.
and its subsidiaries as of December 31, 1996, and the results of its operations
and its cash flows for the year ended December 31, 1996 in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Boston, Massachusetts
February 17, 1997

23
<PAGE> 24

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors of ChiRex Inc.:

We have audited the accompanying balance sheet of ChiRex Inc. (formerly
SepraChem Inc.) as of December 31, 1995 and the related statements of
operations, shareholders' equity and cash flows for each of the two years in the
period then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ChiRex Inc. as of December
31, 1995, and the results of its operations and its cash flows for each of the
two years in the period then ended in conformity with generally accepted
accounting principles.

COOPERS & LYBRAND L.L.P.

Boston, Massachusetts
February 9, 1996

24
<PAGE> 25

CHIREX INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
1995 1996
------- --------
(DOLLAR AMOUNTS IN
THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash.................................................................. $ 1 $ 291
Trade and other receivables........................................... 546 12,764
Inventories........................................................... 193 23,350
Other current assets.................................................. 1,646 4,448
------- --------
Total current assets.......................................... 2,386 40,853
Property, plant and equipment, net...................................... 307 61,349
Intangible asset, net (Note 2).......................................... 0 28,604
------- --------
Total Assets.................................................. $ 2,693 $130,806
======= ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 0 $ 11,421
Accrued expenses...................................................... 0 9,232
Accrued income taxes payable (Note 4)................................. 0 2,383
Current deferred income taxes (Note 4)................................ 0 2,369
------- --------
Total current liabilities..................................... 0 25,405
Long-term debt (Note 7)................................................. 0 3,933
Deferred income taxes (Note 4).......................................... 0 7,411
Deferred income......................................................... 0 3,989
Contingencies (Note 6)..................................................
------- --------
Total Liabilities............................................. 0 40,738
------- --------
Stockholders' Equity (see Notes 1 and 2):
Preferred Stock of ChiRex Inc., $.01 par value, 4,000,000 shares
authorized, none issued and outstanding............................ 0 0
Common stock of ChiRex Inc., $.01 par value, 30,000,000 shares
authorized; 10,933,735 shares issued and outstanding............... 0 109
Additional paid-in capital of ChiRex Inc. ............................ 1 95,479
Preferred Stock of ChiRex America Inc., $.01 par value, 1,000,000
shares authorized; none issued or outstanding...................... 0 0
Common stock of ChiRex America Inc., $.01 par value, 14,000,000 shares
authorized; 8,015,000 shares issued and outstanding................ 80 0
Additional paid-in capital of ChiRex America Inc. .................... 5,064 0
Accumulated deficit................................................... (2,452) (10,761)
Cumulative translation adjustment..................................... 0 5,241
------- --------
Total Stockholders' Equity.................................... 2,693 90,068
------- --------
Total Liabilities and Stockholders' Equity.................... $ 2,693 $130,806
======= ========
</TABLE>

The accompanying notes are an integral part
of the consolidated financial statements

25
<PAGE> 26

CHIREX INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Product sales............................................... $ 1,135 $ 1,854 $73,440
License fee and royalty income.............................. 675 900 1,175
------- ------- -------
Total revenues...................................... 1,810 2,754 74,615
------- ------- -------
Costs and expenses:
Cost of goods sold (Note 10)................................ 814 1,715 56,508
Research and development.................................... 2,343 595 3,517
Write-off of in-process research and development (Note 2)... 0 0 5,790
Selling, general and administrative (Note 10)............... 1,964 2,099 8,876
Stock compensation charge (Note 2).......................... 0 0 5,611
------- ------- -------
Total operating expenses............................ 5,121 4,409 80,302
------- ------- -------
Operating loss................................................ (3,311) (1,655) (5,687)
Interest expense (Note 7)................................... 0 0 755
Other expenses (Note 8)..................................... 0 797 0
------- ------- -------
Loss before income taxes...................................... (3,311) (2,452) (6,442)
Provision for income taxes (Note 4)........................... 0 0 1,867
------- ------- -------
Net loss...................................................... (3,311) (2,452) (8,309)
======= ======= =======
Net loss per common share:.................................... $ (0.88)
Weighted average number of common shares outstanding (Note
1).......................................................... 9,485
</TABLE>

The accompanying notes are an integral part
of the consolidated financial statements

26
<PAGE> 27

CHIREX INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
1994 1995 1996
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $(3,311) $(2,452) $ (8,309)
Add back: Depreciation & amortization.................... 148 148 8,371
Write-off of in-process research and development (Note
2).................................................. 0 0 5,790
Executive stock compensation charge (Note 2).......... 0 0 5,611
Provision for doubtful accounts....................... 0 70 434
Deferred income....................................... 0 0 682
Deferred income tax................................... 0 0 (1,468)
Changes in assets and liabilities:
Trade and other receivables.............................. 1,018 22 (1,970)
Inventories.............................................. 133 (6) (855)
Other current assets..................................... (180) 0 973
Accounts payable and accrued expenses.................... 0 0 1,101
Income taxes payable..................................... 0 0 1,614
------- ------- -------
Net cash provided from (used in) operations...... (2,192) (2,218) 11,974
------- ------- -------
Cash flows from investing activities:
Capital expenditures..................................... (48) 0 (4,290)
(Increase) in other current assets....................... (593) (1,053) 0
------- ------- -------
Net cash used in investing activities............ (641) (1,053) (4,290)
------- ------- -------
Cash flows from financing activities:
Long-term debt activity:
Borrowings on revolving line of credit, net........... 0 0 3,588
Repayment of subordinated note........................ 0 0 (53,534)
Redemption of common stock............................... 0 0 (40,472)
Proceeds from the issuance of common stock............... 0 11 83,285
Investment by Sepracor................................... 2,833 3,261 0
------- ------- -------
Net cash provided from (used in) financing
activities..................................... 2,833 3,272 (7,133)
------- ------- -------
Effect of exchange rate changes on cash.................... 0 0 (261)
------- ------- -------
Net increase in cash....................................... 0 1 290
Cash at beginning of period................................ 0 0 1
------- ------- -------
Cash at end of period...................................... $ 0 $ 1 $ 291
======= ======= =======
Cash paid for:
Interest................................................. 0 0 755
Income taxes............................................. 0 0 1,081
</TABLE>

NON-CASH INVESTING AND FINANCING ACTIVITIES

As discussed in Note 2, ChiRex America was contributed to the Company in
exchange for the issuance of 3,520,889 shares of Common Stock through a merger
with and into a newly formed wholly-owned subsidiary of the Company on March 11,
1996. The net assets contributed by ChiRex America were at historical cost basis
of $3,123,000.

In addition, as discussed in Note 2, the shareholders of ChiRex (Holdings)
Limited (Holdings) contributed to the Company all outstanding equity capital of
Holdings for 3,739,206 shares of Common Stock and promissory notes of the
Company. Certain of the shares were repurchased and all of the promissory notes
were repaid with the proceeds from the initial public offering. The net assets
of Holdings were initially recorded at its purchase price $48,610,000.

The accompanying notes are an integral part
of the consolidated financial statements

27
<PAGE> 28

CHIREX INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

CHIREX AMERICA INC. (SEE NOTE 1)
CHIREX INC.
<TABLE>
<CAPTION>
CHIREX AMERICA INC. (SEE NOTE 1) CHIREX INC.
------------------------------------------------------------------------- ---------------
PREFERRED STOCK COMMON STOCK ADDITIONAL INVESTMENT PREFERRED STOCK
--------------- --------------- PAID-IN ACCUMULATED BY ---------------
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SEPRACOR SHARES AMOUNT
------ ------ ------ ------ ---------- ----------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993.... 0 $ 0 0 $ 0 $ 0 $ 0 $ 2,351
Net Loss........................ 0 0 0 0 0 0 (3,311)
Investment by Sepracor.......... 0 0 0 0 0 0 2,833
- -- ------- ---- ------- ------- -------

Balance at December 31, 1994.... 0 0 0 0 0 0 1,873
Net Loss........................ 0 0 0 0 0 (2,452) 0
Issuance of common
stock......................... 0 0 8,000 80 1,793 0 (1,873)
Proceeds under common stock
plans......................... 0 0 15 0 10 0 0
Investment by Sepracor.......... 0 0 0 0 3,261 0 0
- -- ------- ---- ------- ------- -------

Balance at December 31, 1995.... 0 0 8,015 80 5,064 (2,452) 0
Net Income...................... 0 0 0 0 0 431 0
Exchange of ChiRex Inc. shares
for shares of ChiRex America
Inc........................... (8,015) $ (80) $ (5,064) $ 2,021 $ 0 0 0
Issuance of Common stock........ 0 0
Redemption of Common stock...... 0 0
Net Loss........................ 0 0
Effect of stock compensation
charge (note 2)............... 0 0
Options Exercised............... 0 0
Translation Adjustment.......... 0 0
- --
Balance at December 31, 1996.... 0 $ 0 0 $ 0 $ 0 $ 0 $ 0 0 $ 0
= == ======= ==== ======= ======= ======= = ==

COMMON STOCK ADDITIONAL CURRENCY TOTAL
--------------- PAID-IN ACCUMULATED TRANSLATION SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT EQUITY
------ ------ ---------- ----------- ---------- -------------
<S> <<C> <C> <C> <C> <C> <C>
Balance at December 31, 1993.... $ 2,351
Net Loss........................ (3,311)
Investment by Sepracor.......... 2,833
--------

Balance at December 31, 1994.... 1,873
Net Loss........................ (2,452)
Issuance of common
stock......................... 0
Proceeds under common stock
plans......................... 10
Investment by Sepracor.......... 3,261
--------

Balance at December 31, 1995.... 2,692
Net Income...................... 431
Exchange of ChiRex Inc. shares
for shares of ChiRex America
Inc........................... 3,496 $ 35 $ 5,109 $ (2,021) $ -- $ 0
Issuance of Common stock........ 10,414 104 125,065 0 0 125,169
Redemption of Common stock...... (3,091) (31) (40,441) 0 0 (40,472)
Net Loss........................ 0 0 0 (8,740) 0 (8,740)
Effect of stock compensation
charge (note 2)............... 25 0 5,611 0 0 5,611
Options Exercised............... 90 1 135 0 0 136
Translation Adjustment.......... 0 0 0 0 5,241 5,241
------ ---- -------- -------- ------ --------
Balance at December 31, 1996.... 10,934 $ 109 $ 95,479 $ (10,761) $5,241 $ 90,068
====== ==== ======== ======== ====== ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

28
<PAGE> 29

CHIREX INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

ChiRex Inc. ("the Company") was incorporated in December 1995 and,
effective March 11, 1996, merged with SepraChem Inc. ("SepraChem"), a chiral
chemistry business (the Merger), and acquired the business of Crossco (157)
Limited ("Crossco") (including its wholly-owned subsidiary Sterling Organics
Limited) a fine chemical manufacturer located in Dudley, England.
Simultaneously, Crossco, Sterling Organics Limited and SepraChem changed their
names to ChiRex (Holdings) Limited (Holdings), ChiRex Limited (Limited), and
ChiRex America, Inc. (ChiRex America) respectively.

SepraChem was established in November 1994 as a wholly-owned subsidiary of
Sepracor Inc. (Sepracor). SepraChem manufactured and sold fine chemical
intermediates and bulk active pharmaceuticals to pharmaceutical companies
worldwide. SepraChem also leased pharmaceutical separation modules to a company
in Japan. Effective January 1, 1995, in exchange for 7,999,999 shares of Common
Stock, Sepracor transferred to SepraChem the pharmaceutical fine chemical
manufacturing business of Sepracor.

Principles of Consolidation and Basis of Presentation

The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany accounts and transactions
have been eliminated.

The financial statements of the Company combine the historical results of
ChiRex America (formerly SepraChem) for the three years ended December 31, 1996
with the results of ChiRex Inc. from the date of incorporation. The results of
Holdings and Limited are included from the date of acquisition on March 11,
1996.

The January 1, 1995 exchange discussed above has been treated as a transfer
between entities under common control and therefore the financial statements
present the assets, liabilities, revenues and expenses of the transferred
business at Sepracor's historical cost at the date of transfer. Operating losses
from inception of SepraChem through January 1, 1995 have been recorded as a
reduction in the net balance advanced to SepraChem by Sepracor. SepraChem
entered into various agreements wherein Sepracor agreed to provide certain
services and facilities to SepraChem in accordance with terms described in Note
9.

Revenue Recognition

Product Sales

Product Sales represent the invoiced value of goods and services, excluding
value added tax, supplied in the normal course of business. Revenues are
recognized as services are provided or goods are shipped.

The cost of specific equipment required to implement a new custom synthesis
process for a customer is incurred by the Company and included in fixed assets.
An engineering premium is sometimes charged to applicable customers, either by
installments or by an increment to the unit sales price, to recover an agreed
upon element of these costs. These revenues are recognized on a systematic basis
over the life of the project at the same rate as the depreciation on the related
fixed assets. The difference between amounts invoiced during the year and
revenue earned is accounted for as deferred income.

License Fee and Royalty Income

License fee and royalty income is recognized as amounts become due based on
contract terms.

29
<PAGE> 30

CHIREX INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

UK Government Grants

UK government grants for capital expenditures are credited to a deferred
grant account when received and are recognized as an offset to depreciation
expense over the expected useful life of the related property, plant and
equipment.

Research and Development Costs

Research and development costs are expensed as incurred.

Stock Based Compensation Plans

The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations in
accounting for its stock-based compensation plans. Accordingly, no accounting
recognition is given to stock options granted at fair market value until they
are exercised. Upon exercise, net proceeds, including tax benefits realized,
will be credited to equity. If stock options are granted for less than fair
market value, the difference between the exercise price and the fair market
value at the date of the grant is charged to earnings as a compensation expense
over the period in which the employee vests in the options.

Income Taxes

Charges for taxation are based on income for the year and take into account
adjustments for deferred taxes.

In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes", the Company recognizes deferred income taxes
based on future tax consequences of differences between the financial statement
basis and the tax basis of assets and liabilities, calculated using enacted tax
rates in effect for the year in which the differences are expected to be
reflected in the tax return.

Net Loss Per Common Share

Net loss per common share is computed based upon the weighted average
number of common and common equivalent shares outstanding during the period.
Weighted average shares for the year ended December 31, 1996 include shares
issued to the former owners of ChiRex America in connection with the Merger.
Common equivalent shares are not included in the per share calculations where
the effect of their inclusion would be anti-dilutive. Net loss per share for the
years ended December 31, 1995 and 1994 have not been presented since ChiRex
America operated as a division of Sepracor for such periods.

Inventories

Inventories are stated at the lower of cost or market value and include
materials, labor and manufacturing overhead. The components of inventories are
as follows:

<TABLE>
<CAPTION>
1995 1996
---- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials.............................................. $ 46 $ 6,176
Work in progress........................................... 0 6,158
Finished goods............................................. 147 11,016
---- -------
Total............................................ $193 $23,350
==== =======
</TABLE>

30
<PAGE> 31

CHIREX INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Property, Plant and Equipment

The costs of capital additions and improvements are capitalized, while
maintenance and repairs are expensed as incurred. The Company provides for
depreciation and amortization using the straight-line method over the estimated
useful lives of the property as follows: buildings 40 years; machinery and
equipment 3 to 13 years.

Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land..................................................... $ 0 $ 1,146
Buildings................................................ 0 9,307
Machinery and equipment.................................. 1,673 59,709
------- -------
1,673 70,162
Less: Accumulated depreciation........................... (1,366) (8,813)
------- -------
$ 307 $61,349
======= =======
</TABLE>

Depreciation expense was $7,447,000, $148,000 and $148,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.

Other Current Assets

At December 31, 1996, other current assets consist primarily of prepaid
expenses and other miscellaneous non-trade receivables. At December 31, 1995
other current assets consist of an option fee of $789,000 relating to the
Contribution which was credited against amounts due to the former owners of
ChiRex Holdings Limited at March 11, 1996 and $857,000 of deferred costs
incurred in connection with the initial public offering.

Intangible Asset

The intangible asset on the accompanying balance sheet relates to the
excess cost over the fair value of net assets of Holding and Limited acquired on
March 11, 1996. The intangible asset is amortized using the straight-line method
over 25 years. Accumulated amortization at December 31, 1996 was $924,000. The
Company assesses the future useful life of this asset whenever events or changes
in circumstances indicate that the current useful life has diminished. The
Company considers combined undiscounted cash flows of Holding and Limited in
assessing the recoverability of their asset. If impairment has occurred, any
excess of carrying value over fair value would be recorded as a loss.

Foreign Currency

All assets and liabilities of the Company's UK subsidiaries are translated
at year-end exchange rates, and revenues and expenses are translated at average
exchange rates for the year in accordance with Statement of Financial Accounting
Standards (SFAS) No. 52, "Foreign Currency Translation." Resulting translation
adjustments are reflected as a separate component of shareholders' investment
titled "Cumulative translation adjustment." Foreign Currency transaction gains
and losses are included in the accompanying statement of operations and are not
material for the three years presented.

Fair Value of Financial Instruments

The Company's financial instruments consist primarily of cash, accounts
receivable, accounts payable and a balance due under a revolving line of credit.
Their respective carrying amounts in the accompanying balance

31
<PAGE> 32

CHIREX INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

sheet approximate fair value due either to the short term nature of the balances
or in the case of the revolving line of credit because the interest rate is
variable.

Use of Estimates

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 at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.

Accounting for Long Lived Assets

The Company adopted Statement of Financial Accounting Standards No. 121
(SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" in 1995. SFAS 121 requires that long-lived
assets be reviewed for impairment by comparing the fair value of the assets with
their carrying amount. Any write-downs are to be treated as permanent reductions
in the carrying amount of the assets. The adoption of FAS 121 did not have any
material financial impact on the Company.

Environmental Costs

2. SIGNIFICANT CURRENT YEAR TRANSACTIONS

Initial Public Offering, Acquisition and Merger

On March 11, 1996 the Company completed the sale of 6,675,000 shares of its
Common Stock, $0.01 par value per share, pursuant to an underwritten initial
public offering (the "Offering"). Concurrent with the Offering, ChiRex America
was contributed to the Company in exchange for the issuance of 3,520,889 shares
of Common Stock through a merger with and into a newly formed and wholly-owned
subsidiary of the Company. In conjunction with the merger certain executives and
directors of ChiRex America received stock and or stock options of the Company
with an intrinsic value totaling $5,611,000. Such amount has been recorded as a
compensation charge and an increase to additional paid in capital in the
accompanying financial statements.

Immediately prior to the Offering, the equity share capital of Holdings, a
private company incorporated in England and the sole shareholder of Limited, was
recapitalized. Concurrent with the closing of the Offering, the shareholders of
Holdings contributed to the Company all of the outstanding newly recapitalized
equity share capital of Holdings in exchange for 3,739,206 shares of Common
Stock and promissory notes of the Company (the "Notes"). As part of this
contribution, all redeemable preferred shares of Holdings were exchanged for a
promissory note of the Company (the "Loan Stock Note"). As a result of these
transactions the Company holds all of the outstanding share capital of Holdings
which in turn holds all the outstanding share capital of Limited. Certain shares
held by the original shareholders of Holdings, the Notes and the Loan Stock Note
were redeemed by the Company concurrently with, and using the proceeds from, the
Offering.

The acquisition of Holdings and Limited by the Company was accounted for
using the purchase method of accounting and its results of operations has been
included in the accompanying financial statements from the date of acquisition.
The cost of this acquisition exceeded the estimated fair value of the acquired
net assets by $29,528,000, which is being amortized over 25 years. Allocation of
the purchase price for this acquisition was based on estimates of fair value of
net assets, including purchased in-process research and development

32
<PAGE> 33

CHIREX INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

costs which was written off immediately following the acquisition of $5,790,000.
The balance of goodwill is subject to adjustment upon finalization of the
purchase price allocation.

The following table presents pro forma revenues, net loss and net loss per
Common Share for the Company assuming the incorporation of the Company, the
merger with ChiRex America and the acquisition of Holdings and Limited on
January 1, 1995 are as follows:

<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Revenues................................................... 88,957 89,827
Net Income (loss).......................................... 13,330 4,073
Net loss per common share.................................. (1.23) .36
</TABLE>

The pro forma results are not necessarily indicative of future operations
or the actual results that would have occurred had the acquisition Holdings and
Limited been made at the beginning of 1995.

Dissolution of InNova Pharmaceuticals SRL (InNova)

During 1995 ChiRex America agreed to form a fifty percent owned joint
venture, InNova Pharmaceuticals SRL with Dabur India Limited (Dabur) to
manufacture semi-synthetic paclitaxel. This joint venture (InNova) did not carry
out any significant operations during 1996 or 1995.

The Company has agreed in principle with Dabur to dissolve the joint
venture. Both the Company and Dabur recognized significant changes in the
generic drug market, and in particular in the market for paclitaxel, sufficient
to enable each company to exploit its own position of strength within the
market, without the need for a joint venture.

InNova was never capitalized and it was mutually agreed between the Company
and Dabur, that each partner would expense costs that it had incurred on
InNova's behalf. Such costs incurred by the Company relate substantially to
research and development.

3. EMPLOYEE BENEFIT PLANS

Stock-Based Compensation Plans

Stock Option Plan

On December 20, 1995 the Company adopted an incentive stock-based
compensation plan for its employees, directors and scientific advisory board,
which permits the grant of a variety of stock and stock-based awards as
determined by the Compensation Committee of the Company's Board of Directors
(the Compensation Committee), including stock, restricted stock, stock options,
stock appreciation rights or performance based shares. The option recipients and
the terms of options granted under this plan are determined by the Compensation
Committee. Options granted generally vest ratably over a five year period. In
some instances, vesting for certain stock options may be accelerated due to
achievement of specific events determined by the Compensation Committee at the
date of the grant. Typically, options are immediately exercisable upon vesting.
Non-qualified stock options may be granted at any price determined by the
Compensation Committee, although incentive stock options must be granted at an
exercise price not less than the fair market value of the Company's common stock
on the date of the grant. The Company also has a directors stock option plan,
adopted on December 20, 1995, that provides for the grant of stock options to
outside directors. Initial grants under this plan generally vest over five
years, while subsequent grants on reelection will generally vest within one year
and will be immediately exercisable at that time.

To date, all options from the incentive stock option plan have been granted
at fair market value, except for stock options granted in conjunction with the
Merger, which are discussed below. No options have been granted under the
directors' stock option plan.

33
<PAGE> 34

CHIREX INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In conjunction with the Merger, the Compensation Committee granted 458,821
stock options to certain directors and employees of ChiRex America at an
exercise price of $1.48 per option, when the fair market value per share of
Common Stock was $13.00 which resulted in a compensation charge of $5,286,000.
In addition, immediately prior to the Merger, ChiRex America granted an employee
56,911 shares of Common Stock in ChiRex America in consideration for services
performed. This stock grant resulted in a compensation charge of $325,000. These
shares were converted into 25,000 shares of Common Stock of the Company at the
time of the Merger.

A summary of the Stock Option Activity under the ChiRex Inc. plan in 1996
may be summarized as follows:

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Options outstanding beginning of period........... -- $ --
Granted........................................... 941,822 6.38
Exercised......................................... (90,331) 1.51
Lapsed/Canceled................................... (750) 11.00
-------
Options outstanding end of period................. 850,741 $ 6.89
-------
Options exercisable............................... 554,490 $ 4.66
=======
Options available for grant....................... 658,178
=======
Weighted average fair value per share of options
granted during period........................... $ 7.35
</TABLE>

As of December 31, 1996, the options outstanding were exercisable at prices
ranging from $1.48 to $13.00 and had a weighted-average remaining contractual
life of 6.4 years.

In 1994 and 1995 the stock option plans of ChiRex America provided for the
grant of both incentive stock options and nonstatutory stock options to
officers, directors, and key employees of and consultants to the Company. A
total of up to 960,000 and 240,000 shares of common stock of ChiRex America were
contingently issuable upon the exercise of options granted under the 1994 and
1995 Plans, respectively.

In November 1994, options to purchase 960,000 shares of common stock were
granted under the 1994 Plan. These options vested over a five year period and
had an exercise price of $2.40, determined to be the then current fair market
value by the Board of Directors. In August 1995, these options were repriced at
an exercise price of $.65, determined to be the then current fair market value
by the Board of Directors. In August 1995, the Board of Directors also
authorized a change in the vesting provisions of these options such that 20% of
options previously granted became immediately vested. In October 1995, 60,000
options under the 1994 Plan were canceled and 15,000 shares were exercised. As
of December 31, 1995, options for 314,692 shares were exercisable.

In January 1995, options to purchase 134,500 shares of common stock were
granted under the 1995 Plan. These options vested over a five year period and
had an exercise price of $2.40, determined to be the then current fair market
value by the Board of Directors. In August 1995, these options were repriced at
an exercise price of $.65, determined to be the then current fair market value
by the Board of Directors. In August 1995, the Board of Directors also
authorized a change in the vesting provisions of these options such that 20% of
options previously granted became immediately vested. As of December 31, 1995,
options for 26,900 shares were exercisable. No shares had been exercised under
this Plan as of December 31, 1995.

The 1994 Director Option Plan (the "Director Plan") provides for the
granting of nonstatutory stock options to directors of ChiRex America who were
not officers or employees. A total of up to 100,000 shares of common stock were
authorized to be issued under the Director Plan therein. The exercise price per
share

34
<PAGE> 35

CHIREX INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

equaled the fair market value of a share of common stock on the date on which
the option is granted. Options granted under the Director Plan vested over a
five year period.

In November 1994 and January 1995, options to purchase 15,000 and 10,000
shares of common stock, respectively, were granted under the Director Plan at an
exercise price of $2.40, determined to be the then current fair market value by
the Board of Directors. A total of 75,000 options remained available for grant
at December 31, 1995. In August 1995, these options were repriced at an exercise
price of $.65 determined to be the then current fair market value by the Board
of Directors. In August 1995, the Board of Directors also authorized a change in
the vesting provisions of these options such that 20% of options previously
granted became immediately vested. As of December 31, 1995, options for 5,000
shares were exercisable. No shares had been exercised under this Plan as of
December 31, 1995.

At the date of the Merger all outstanding options were exchanged for
458,821 options of the Company as discussed above.

1995 Employee Stock Purchase Plan

The Company's 1995 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors of the Company on December 20, 1995 and became
effective on March 11, 1996. The Purchase Plan authorizes the issuance of up to
a total of 480,000 shares of Common Stock to participating employees. All US
employees and certain UK employees are eligible to participate in the Purchase
Plan, subject to certain limitations.

The Purchase Plan is effective for a three year term, and includes six plan
periods (Plan Period), which are each six month increments. Eligible employees
may authorize payroll deductions between 1% and 10% of gross wages, limited to a
pre-determined percentage of an employee's annual gross wages. At the end of
each Plan Period the amounts accumulated under the Purchase Plan by employees
will be used to purchase shares of Common Stock of the Company at 85% of the
fair value of Common Stock at either the first day or the last day of the Plan
Period, whichever is lower. The Purchase Plan provides for six Plan Periods of
80,000 shares each. Shares not purchased during a Plan Period will be eligible
for purchase in subsequent Plan Periods. As of December 31, 1996, the Company
had not implemented this plan for employee participation.

UK Employee Stock Purchase Plan

Substantially all of the Company's full-time UK employees are eligible to
participate in a employee stock purchase plan approved by Inland Revenue. Under
this plan, employees obtain the right to purchase a pre-determined number of
shares at 85% of the fair market value at the beginning of the plan period.
Shares are purchased through pre-determined payroll deductions which may not
exceed a pre-determined maximum dollar amount. These funds accumulate in a
savings account in the name of the employee over a three year period, at the end
of which such savings may be used to purchase the allocated shares.

Pro Forma Stock-based Compensation Plan Expense

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which sets forth a fair-value based method of recognizing
stock-based compensation expense. As permitted by SFAS No. 123, the Company has
elected to continue to apply APB 25 in accounting for its stock-based
compensation plans. Had compensation cost for awards in 1996 under the Company's
stock-based compensation plans been determined

35
<PAGE> 36

CHIREX INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

based on the fair value at the grant dates consistent with the method set forth
under SFAS No. 123, the effect on the Company's net loss and net loss per common
share would have been as follows:

<TABLE>
<CAPTION>
1996
---------------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C>
Net loss:
As reported.............................................. $(8,039)
Pro forma................................................ (9,001)
Net loss per common share
As reported.............................................. (0.88)
Pro forma................................................ (0.95)
</TABLE>

The resulting pro forma compensation expense may not be representative of
the amount to be expected in future years as pro forma compensation expense may
vary based upon the number of options granted.

The pro forma net loss and pro forma net loss per common share presented
above have been computed assuming no tax benefit. The effect of a tax benefit
has not been considered since a substantial portion of the stock options granted
are incentive stock options and the Company does not anticipate a future
deduction associated with the exercise of these stock options.

The fair value of each option grant is estimated on the grant date using
the Black-Scholes options-pricing model with the following weighted-average
assumptions:

<TABLE>
<CAPTION>
1996
--------------
(IN THOUSANDS)
<S> <C>
Volatility..................................................... 30%
Risk-free interest rate........................................ 6.2%
Expected life of options....................................... 5 years
</TABLE>

The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions including expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

Information related to the fair value of stock option grants under the
ChiRex America stock option plans has not been quantified due to the fact that
all such options were canceled in exchange for the options issued on March 11,
1996.

At December 31, 1996, the Company had reserved 658,178 unissued shares of
its common stock for possible issuance under the stock-based compensation plans.

Defined Benefit Pension Plan

The Company's U.K. subsidiary has a defined benefit pension plan covering
substantially all of its full-time employees. Benefits are based on a percentage
of eligible earnings for each year of service from the date of employment. The
Company's funding policy is to make contributions within a range required by
applicable regulations. Eligible employees are required to contribute 3% of
their current earnings under the plan. The participants also have the ability to
voluntarily contribute up to an additional 12% of their current earnings.

36
<PAGE> 37

CHIREX INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Net periodic pension costs included the following components:

<TABLE>
<CAPTION>
1996
--------------
(IN THOUSANDS)
<S> <C>
Service cost................................................... $ 2,008
Interest cost on projected benefit obligation.................. 3,217
Return of plan assets.......................................... (3,878)
Amortization of unrecognized obligation........................ (332)
-------
Net Periodic Pension Cost...................................... $ 1,015
=======
</TABLE>

The funded status of the Company's defined pension plan is as follows:

<TABLE>
<CAPTION>
1996
--------------
(IN THOUSANDS)
<S> <C>
Actuarial present value of benefit obligations:
Vested benefits.............................................. $ 40,869
Non-vested benefits.......................................... 0
-------
Accumulated benefit obligation............................... 40,869
Effect of projected future salary increases.................... 5,501
-------
Projected benefit obligation................................... 46,370
Plan assets at fair value...................................... 54,817
-------
Projected benefit obligation less than plan assets............. 8,447
Unrecognized net gain.......................................... 2,544
Initial unrecognized net obligation............................ 5,450
-------
Prepaid pension costs........................................ $ 453
=======
</TABLE>

Significant actuarial assumptions used to determine the net periodic
pension costs during 1996 were:

<TABLE>
<CAPTION>
1996
--------------
<S> <C>
Discount rate.................................................. 8.5%
Rate of increase in salary levels.............................. 6.0%
Expected long-term rate of return on assets.................... 9.0%
</TABLE>

4. INCOME TAXES

Prior to 1996 the predecessor entity, ChiRex America, was in a net loss
position for both financial reporting and tax purposes; thus, no detailed
analysis of income taxes is presented for these periods. The components of loss
before provision for income taxes are as follows:

<TABLE>
<CAPTION>
1996
--------------
(IN THOUSANDS)
<S> <C>
Domestic....................................................... $ (5,832)
Foreign........................................................ (610)
-------
Total................................................ $ (6,442)
=======
</TABLE>

37
<PAGE> 38

CHIREX INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The components of the provision (benefit) for income taxes are as follows:

<TABLE>
<CAPTION>
1996
--------------
(IN THOUSANDS)
<S> <C>
Currently payable:
Federal...................................................... 0
State........................................................ 0
Foreign...................................................... $ 2,530
------
$ 2,530
------
Deferred:
Federal...................................................... 0
State........................................................ 0
Foreign...................................................... $ (663)
------
(663)
------
$ 1,867
------
</TABLE>

The provision for income taxes in the accompanying statements of income for
the period ended December 31, 1996 differs from the benefit calculated by
applying the statutory federal income tax rate of 34% to income before income
taxes due to the following:

<TABLE>
<CAPTION>
1996
--------------
(IN THOUSANDS)
<S> <C>
Benefit for income taxes at statutory rate..................... $ (2,190)
Foreign tax rate differential.................................. (61)
Non deductible amortization of goodwill........................ 314
Non deductible research and development expenses............... 1,811
Valuation allowance on US tax net operating loss carryforwards
and executive stock compensation............................. 1,953
Other, net..................................................... 40
-------
$ 1,867
=======
</TABLE>

Prepaid income taxes, included in other assets, and deferred income taxes
in the accompanying balance sheet consist of the following :

<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Prepaid income taxes:
US net operating loss carryforwards and executive stock
compensation.......................................... $ 993 $ 1,953
Reserves and other accruals.............................. 62 1,227
Accrued compensation..................................... 0 1,394
Other, net............................................... (42) 130
Valuation allowance...................................... (1,013) (1,953)
------- -------
$ 0 $ 2,751
------- -------
Deferred income taxes:
Inventory basis difference............................... $ 0 $ 2,369
Depreciation............................................. 0 7,411
------- -------
$ 0 $ 9,780
======= =======
</TABLE>

38
<PAGE> 39

CHIREX INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 1995, the Company had US federal and state net tax
operating loss carryforwards of approximately $2.3 million. These net tax
operating loss carryforwards were not transferred in the Merger of the Company
on March 11, 1996. In the period subsequent to the Merger, the Company has
generated $0.8 million in US federal and state net tax operating losses, which
have been fully reserved through a valuation allowance.

A provision has not been made for US taxes on undistributed earnings of the
Company's UK subsidiary that could be subject to taxation if remitted to the US
because the Company currently plans to keep these amounts permanently reinvested
overseas.

5. COMMITMENTS

The Company leases executive office and warehouse space under various
operating arrangements. The accompanying statement of income includes expenses
from operating leases of $148,000, in 1996. Future minimum lease payments due
under the non-cancelable operating leases at December 31, 1996 are $181,000 in
1997; $185,000 in 1998; $189,000 in 1999; $193,000 in 2000; and $296,000 in 2001
and thereafter. Total future minimum lease payments are $1,044,000.

6. CONTINGENCIES

In a proceeding now pending before the U.S. Patent and Trademark Office's
Trademark Trial and Appeal Board, Phenomenex Inc. of Torrance, California, has
formally opposed the Company's attempt to register the ChiRex name for "single
isomer chiral intermediate chemical compounds and active ingredients for use in
the manufacture of pharmaceuticals." The Company's management strongly disputes
Phenomenex's allegations, and intends to vigorously defend the Company's
position. However, there can be no assurance that the Company will prevail in
any such proceeding or be able to settle such dispute on terms favorable to the
Company.

7. REVOLVING CREDIT FACILITY

In August 1996, the Company's UK subsidiary entered into a revolving credit
facility agreement with a major UK clearing bank secured by certain assets of
the Company, including real estate assets. This facility allows a maximum
borrowing limit of (pound) 10.5 million ($18.0 million as at December 31, 1996),
renewable every two years, at an interest rate of LIBOR plus 1.25% and a
commitment fee of 0.375%.

The LIBOR rate can be fixed by the Company for a period from one to twelve
months. The Company has elected a one month LIBOR rate during 1996 which has
resulted in an average rate of 7.40%. Currently, interest is due monthly,
although payment periods can fluctuate with the LIBOR rate election. The Company
is subject to certain covenants under this facility, including a minimum
tangible net worth requirement and a cash flow multiple. Management believes
that it has complied with all covenants of the facility.

As of December 31, 1996 the Company had drawn down the equivalent of $3.9
million of this facility.

8. OTHER EXPENSES

In 1995, ChiRex America recorded a charge of $797,000 representing costs
relating to an offering of securities that was not completed.

39
<PAGE> 40

CHIREX INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. AGREEMENTS WITH SEPRACOR

ChiRex America and Sepracor entered into the following agreements which
were effective with the closing of the initial public offering except for the
Technology Transfer and License Agreement which was effective between ChiRex
America and Sepracor as of January 1, 1995:

Technology Transfer and License Agreement. Under the Technology Transfer
and License Agreement Sepracor granted to ChiRex America an exclusive,
royalty-free perpetual right and license to use and practice the ChiRedox
Technologies licensed and sublicensed thereunder (the "Licensed Technologies")
on a worldwide basis in a field (the "Company field") described as the
development, manufacture, use and sale of pharmaceutical intermediaries, active
ingredients, agrichemicals, flavors, fragrances and other chemicals and
compounds.

Pursuant to the terms of the Technology Transfer and License Agreement,
ChiRex America is permitted to use Sepracor's improvements to the Licensed
Technologies on a non-exclusive basis in the Company field. Similarly, Sepracor
is allowed to use ChiRex America's improvements to the Licensed Technologies
with respect to the development, manufacture, use, and sale of the compounds
outside of the Company field. Furthermore, ChiRex America agreed not to use
improvements to the Licensed Technologies jointly developed or acquired by
Sepracor and ChiRex America outside the Company field, and Sepracor agreed not
to use such improvements in the Company field.

The term of this agreement ends on December 31, 1998, unless either party
exercises its option to terminate such agreement on six months written notice
after the date on which Sepracor's ownership of the outstanding voting stock of
the Company first drops below 20%. The termination of the agreement shall not
affect ChiRex America's ability to continue using the Licensed Technologies in
the Company field, ChiRex America's ability to continue using improvements
developed by Sepracor during the term of such agreements in the Company field or
Sepracor's ability to continue using improvements developed by ChiRex America
during the term of such agreement outside the Company field.

Contract Manufacturing Agreement. Pursuant to the terms of the Contract
Manufacturing Agreement, upon ChiRex America's request, Sepracor may sell
various commercial products to ChiRex America and provide related services to
the Company, in connection with procuring supplies and raw materials, invoicing
and warehousing. Sepracor's price for those products shall be its cost plus 25%
per unit. However, if Sepracor is unwilling or unable to supply these products,
then ChiRex America shall be provided access to Sepracor's manufacturing plant
and equipment to manufacture such products. Sepracor will warrant that its
products conform to the agreed-upon specifications and that they are
manufactured in compliance with cGMP or other relevant regulations promulgated
by the FDA. The term of this agreement is until December 31, 2001, and is
subject to automatic extensions of one year each unless either party, in its
sole discretion, decides to block further extensions. In addition, each of
ChiRex America and Sepracor has the option to terminate this agreement on twelve
(12) months' written notice after the date on which Sepracor's ownership of the
outstanding voting stock of ChiRex America first drops below 20%.

Supply Agreement. Pursuant to the terms of the Supply Agreement, Sepracor
is required to purchase all of its needs with respect to ICE (Improved Chemical
Entities) pharmaceutical active ingredients from ChiRex America, however,
Sepracor may buy such ingredients from other sources if; (i) the price which
ChiRex America charges to Sepracor for such ingredients is greater than 115% of
the price charged by comparable suppliers for the same ingredient; (ii) ChiRex
America does not accept a firm order placed by Sepracor for such ingredient with
a requested delivery date at least 12 months after Sepracor placed such order;
or (iii) such ingredient previously delivered by ChiRex America was repeatedly
found not to conform to the agreed-upon specifications; or (iv) ChiRex America
failed to deliver the active ingredients by the agreed upon dates (unless such
failure is beyond the Company's control). The price charged by ChiRex America
for any products manufactured for Sepracor pursuant to the Supply Agreement is
cost plus 25%. The term of the

40
<PAGE> 41

CHIREX INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

agreement is until December 31, 2001, and is subject to automatic extensions of
one year each unless either party, in its sole discretion, elects not to extend
the agreement.

Contract Research Agreement. Under the Contract Research Agreement, either
party may provide scientific research and experimental development services to
the other party. Such services may include procuring supplies and materials used
in performing such services, providing scientific and technical personnel and
equipment in order to perform such services and contracting with specialized
third parties in connection with such services. The party rendering such
services shall charge for those services 110% of the sum of: (i) the salaries of
its employees who are directly engaged in performing such services, (ii) an
allocation of overhead directly related to those services equal to 65% of the
amount set forth in (i) above, (iii) any other direct expenditures related to
those services, including the cost of materials, the costs of leased equipment
and expenditures directly undertaken on behalf of the party receiving such
services; and (iv) any payments to third parties in connection with those
services. Under the Contract Research Agreement, each ChiRex America and
Sepracor shall own the intellectual property rights that they each conceive.
Pursuant to the terms of the Contract Research Agreement, the conceiving party,
however, grants to the other party an exclusive, perpetual, worldwide license,
with the right to grant sublicenses, with respect to use and practice of those
rights in a designated field (for ChiRex America, in the Company field; for
Sepracor, outside the Company field) for a reasonable royalty to be negotiated
between the parties. Intellectual property rights conceived jointly by the
parties shall be owned jointly. The Company has agreed not to use or license
such jointly owned rights outside the Company field, and Sepracor has agreed not
to use or license such rights in the Company field. The term of this agreement
is until December 31, 1997, and shall be subject to automatic extensions of one
year unless either party, in its sole discretion, decides to block further
extensions. In addition, either party shall have the option to terminate this
agreement on twelve (12) months written notice after the date on which
Sepracor's ownership of the outstanding voting stock of ChiRex America first
drops below 20%.

10. RELATED PARTY TRANSACTIONS

In 1996 the Company has paid $158,000 to Sepracor under the Technology
Transfer and License Agreement for legal expenses and has received $609,000 in
license royalty income.

Prior to January 1, 1996 certain facilities and support services of ChiRex
America, including administrative support, were provided by Sepracor. For these
facilities and services, ChiRex America, was charged approximately $1,005,000,
and $220,000 for the years ended December 31, 1994 and 1995, respectively. These
charges represent an allocation of ChiRex America's proportionate share of
Sepracor's overhead costs using formulas which the management of ChiRex America
believed were reasonable based upon the use of such facilities and services. In
developing the formulas for these allocations, the management of ChiRex America
recognized the fact that the incremental costs for the ChiRex America's
facilities and administrative support services were lower than separate or
independent alternatives. All costs of the ChiRex America during 1994 and 1995,
including payroll costs, were paid by Sepracor.

In 1995 and prior ChiRex America purchased equipment from HemaSure Inc., an
affiliate of Sepracor, at prices based upon a pricing agreement between HemaSure
and ChiRex America. Under this agreement, the equipment which was leased or sold
to third parties by ChiRex America was purchased at cost plus a 25% margin. The
value of these purchases was approximately $275,000 and $476,000 for the years
ended December 31, 1994, and 1995, respectively.

ChiRex America sold certain pharmaceutical compounds to Sepracor in 1995
and 1996. Total revenue from these transactions amounted to $344,000 in 1995 and
$38,600 in 1996, respectively. In 1995 ChiRex America purchased certain
compounds at cost plus a 20% margin from a wholly-owned subsidiary of Sepracor.
The total cost of goods sold related to those purchases was $434,000.

41
<PAGE> 42

CHIREX INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. SUBSEQUENT EVENTS

Acetaminophen Business

The Company is actively negotiating the disposition of its acetaminophen
business. Although acetaminophen (paracetamol), an OTC analgesic, is the largest
volume product manufactured by the Company, representing approximately 31% of
the Company's 1996 pro forma revenues, it is not highly profitable at the gross
margin level. In connection with the disposition of the business, the impact on
net income will depend on the Company's ability to add new non-acetaminophen
business and the effectiveness of the Company's cost reduction efforts. In
addition, any such disposition would result in a one-time charge related to
plant closure, severance and other costs related to the disposition of the
business. The magnitude and timing of this charge cannot currently be estimated
with certainty. The Company's decision to dispose of its acetaminophen business
followed a strategic review of several alternatives and was based on a number of
factors, including the continued domination of the acetaminophen business by
high volume, low cost manufacturers and the Company's expectation that the
market price of acetaminophen will continue to erode.

On February 26, 1997, the Company filed with the Securities and Exchange
Commission a registration statement on Form S-1 with respect to a sale by
Sepracor of its 3,489,301 shares of Common Stock, which have been outstanding
since the Offering.

12. SIGNIFICANT CUSTOMERS

In 1996 the Company's three largest customers account for a approximately
66% percentage of its total revenues. Sanofi S.A. ("Sanofi"), SmithKline Beecham
plc ("SmithKline Beecham") and Rohm and Haas Company ("Rohm and Haas") accounted
for approximately 36%, 19% and 11%, respectively, of the Company's 1996
Revenues. In 1995 two customers represented 62% and 11% of revenues and in 1994
one customer represented 42% of revenue.

42
<PAGE> 43

CHIREX INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. GEOGRAPHICAL INFORMATION

The Company is engaged in one business segment: the development,
manufacture and marketing of pharmaceutical fine chemicals. The following table
shows data for the Company by geographical area.

<TABLE>
<CAPTION>
1994 1995 1996
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
United States............................................. $ 1,810 $ 2,754 $ 6,296
Europe.................................................... 0 0 63,072
Other..................................................... 0 0 5,247
-------- ------ -------
1,810 2,754 74,615
======== ====== =======
Income (Loss) before non-recurring charges and
provision for income taxes:
United States............................................. (3,311) (2,452) 947
Europe.................................................... 0 0 5,631
Other..................................................... 0 0 340
-------- ------ -------
(3,311) (2,452) 6,918
======== ====== =======
Identifiable assets:
United States............................................. 1,873 2,692 1,117
Europe.................................................... 0 0 126,938
-------- ------ -------
127,431 2,692 128,055
======== ====== =======
</TABLE>

In general, export sales are denominated in pounds sterling.

43
<PAGE> 44

STERLING ORGANICS LIMITED

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of Sterling Organics Limited

We have audited the accompanying combined balance sheet of Sterling
Organics Limited and Sterling Organics Division (together "the Company") as of
31 December 1994, and the related combined statements of operations, equity and
cash flows for each of the two years in the period ended 31 December 1994 and
the period ended 10 August 1995. These financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

As more fully described in Note C to the combined financial statements, the
Company has not "pushed down" certain purchase accounting adjustments related to
fiscal periods when the Company was owned by other parent companies. In our
opinion, generally accepted accounting principles, as established by the
Securities and Exchange Commission for public companies, require that such
adjustments be reflected in the financial statements.

In our opinion, except for the effects of not pushing down certain purchase
accounting adjustments as described in the preceding paragraph, the combined
financial statements referred to above present fairly, in all material respects,
the combined financial position of the Company as of 31 December 1994, and the
combined results of its operations and its cash flows for each of the two years
in the period ended 31 December 1994 and the period ended 10 August 1995, in
conformity with accounting principles generally accepted in the United States.

COOPERS & LYBRAND

Newcastle upon Tyne
England
February 27, 1996

44
<PAGE> 45

STERLING ORGANICS LIMITED

COMBINED BALANCE SHEET

<TABLE>
<CAPTION>
31 DECEMBER
1994
FOOTNOTE -----------
-------- $'000
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash............................................................ --
Accounts and other receivables.................................. D 8,040
Inventories..................................................... E 20,273
Prepayments..................................................... 371
-------
Total current assets............................................ 28,684
Property, plant and equipment, net.............................. F 48,332
-------
Total assets............................................ 77,016
=======

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short term borrowings........................................... G 612
Accounts payable................................................ H 1,604
Accrued expenses................................................ I 5,538
Accrued income taxes............................................ 1,170
-------
Total current liabilities....................................... 8,924
-------
NON-CURRENT LIABILITIES
Deferred income................................................. J 2,926
Deferred income taxes........................................... K 3,675
Accrued expenses................................................ I 6,642
-------
Total non-current liabilities................................... 13,243
-------
Total liabilities....................................... 22,167
-------
Commitments and contingencies................................... L

SHAREHOLDERS' EQUITY
Common stock, L1 and FF100 par value; authorised, issued and
fully paid shares............................................ M 196
Donated capital................................................. N 45,272
Retained earnings............................................... 19,198
Cumulative translation adjustments.............................. (9,817)
-------
Total shareholders' equity.............................. 54,849
-------
Total liabilities and shareholders' equity.............. 77,016
=======
</TABLE>

The accompanying footnotes are an integral part of the combined financial
statements.

45
<PAGE> 46

STERLING ORGANICS LIMITED

COMBINED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FISCAL YEAR ENDED PERIOD
31 DECEMBER ENDED
----------------------- 10 AUGUST
FOOTNOTE 1993 1994 1995
-------- ------- ------- ---------
$'000 $'000 $'000
<S> <C> <C> <C> <C>
Gross revenues........................ O 74,497 78,859 51,375
Cost of goods sold.................... (66,529) (68,572) (44,220)
Research and development.............. (1,564) (1,816) (1,115)
------- ------- -------
6,404 8,471 6,040
Selling and distribution expenses..... (1,819) (1,696) (1,048)
Administrative expenses............... (3,089) (3,902) (1,108)
------- ------- -------
Operating income...................... 1,496 2,873 3,884
Interest income....................... 286 255 24
Interest expense...................... (22) (18) (8)
Other income, net..................... 379 481 402
------- ------- -------
Income before income tax expense...... 2,139 3,591 4,302
Income tax expense.................... P (935) (1,061) (1,327)
------- ------- -------
Net income............................ 1,204 2,530 2,975
======= ======= =======
</TABLE>

The accompanying footnotes are an integral part of the combined financial
statements.

46
<PAGE> 47

STERLING ORGANICS LIMITED

COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY

ADDITIONAL CUMULATIVE TOTAL
COMMON PAID IN DONATED RETAINED TRANSLATION SHAREHOLDERS'
STOCK CAPITAL CAPITAL EARNINGS ADJUSTMENTS EQUITY
------ ---------- ------- -------- ------------ ------------
$'000 $'000 $'000 $'000 $'000 $'000
<S> <C> <C> <C> <C> <C> <C>
Balance at 1 January 1993............ 196 -- 45,272 15,925 (11,569) 49,824
Net income........................... -- -- -- 1,204 -- 1,204
Translation adjustments.............. -- -- -- -- (526) (526)
--- ------- -------- -------- -------- -------
Balance at 31 December 1993.......... 196 -- 45,272 17,129 (12,095) 50,502
Net income........................... -- -- -- 2,530 -- 2,530
Dividends on common stock............ -- -- -- (461) -- (461)
Translation adjustments.............. -- -- -- -- 2,278 2,278
--- ------- -------- -------- -------- -------
Balance at 31 December 1994.......... 196 -- 45,272 19,198 (9,817) 54,849
Capital donation (Note N)............ -- -- 1,202 -- -- 1,202
Issue of common stock (Note N)....... 163 56,809 (46,474) (15,487) 4,989 --
Net income........................... -- -- -- 2,975 -- 2,975
Translation adjustments.............. -- -- -- -- 795 795
--- ------- -------- -------- -------- -------
Balance at 10 August 1995............ 359 56,809 -- 6,686 (4,033) 59,821
=== ======= ======== ======== ======== =======
</TABLE>

The accompanying footnotes are an integral part of the combined financial
statements.

47
<PAGE> 48

STERLING ORGANICS LIMITED

COMBINED STATEMENTS OF CASH FLOWS

FISCAL YEAR ENDED PERIOD
31 DECEMBER ENDED
------------------ 10 AUGUST
1993 1994 1995
------ ------- ---------
$'000 $'000 $'000
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income before dividends.................................. 1,204 2,530 2,975
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 7,589 8,039 4,924
Loss/(profit) on sale of equipment........................ 96 12 (5)
Government grant release.................................. (471) (231) (72)
Release of engineering premium............................ (1,091) (2,502) (723)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Decrease/(increase) in accounts receivable................... 1,520 (2,157) (1,480)
Decrease in accounts receivable from related parties......... 2,406 1,187 1,725
Decrease/(increase) in prepayments........................... 271 (140) (559)
Decrease/(increase) in inventories........................... 1,383 2,499 (1,407)
(Decrease)/increase in accounts payable...................... (361) 159 1,276
(Decrease) in accounts payable to related parties............ (222) (385) (134)
(Decrease)/increase in accrued expenses...................... (404) 2,422 953
Increase in income taxes..................................... 288 199 1,452
(Decrease)/increase in deferred income taxes................. (321) 429 (110)
------ ------ ------
Net cash provided by operating activities...................... 11,887 12,061 8,815
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment.............................. 48 97 78
Payments for purchase of equipment........................... (9,240) (11,475) (9,037)
------ ------ ------
Net cash used in investing activities.......................... (9,192) (11,378) (8,959)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash receipt on issue of common stock........................ -- -- 454
(Decrease)/increase in short term borrowings................. (5,721) 601 (624)
Receipt of related party loan (Note Q)....................... 8,086 -- --
Repayment of related party loan (Note Q)..................... (3,757) (5,153) --
Payment of dividends......................................... -- (461) --
Receipt of government grants................................. 300 154 --
Engineering premium received................................. 1,320 466 736
------ ------ ------
Net cash provided by/(used in) financing activities............ 228 (4,393) 566
------ ------ ------
Net increase/(decrease) in cash................................ 2,923 (3,710) 422
Cash at beginning of period.................................... -- 3,287 --
Effect of foreign exchange rate changes on cash................ 364 423 (26)
------ ------ ------
Cash at end of period.......................................... 3,287 -- 396
====== ====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash received for interest................................... 288 255 24
====== ====== ======
Cash paid for interest....................................... (22) (18) (8)
====== ====== ======
Cash paid for income taxes................................... (971) (434) --
====== ====== ======
</TABLE>

The accompanying footnotes are an integral part of the combined financial
statements.

48
<PAGE> 49

STERLING ORGANICS LIMITED

NOTES TO THE COMBINED FINANCIAL STATEMENTS

A ORGANISATION AND HISTORY OF STERLING ORGANICS LIMITED

Sanofi Winthrop Limited (SWL) was established in the United Kingdom as a
joint venture between Sterling Winthrop Group Limited (SWGL) and Elf Sanofi UK
Limited on 1 January 1992. As part of its business operations SWL had interests
in:-

(a) Sterling Organics Division (Division) -- a manufacturing division
of the company located at Dudley together with limited activities at
Fawdon, both in the North East of England. Division was primarily a
production site for chemical intermediates to be used elsewhere within the
Sanofi Group and for made to order products for third parties; and

(b) Sterling Organics Limited -- a wholly owned subsidiary of SWL
whose sole purpose was to act as an intermediate sales company for the sale
of the majority of third party products manufactured by Division.

Prior to the establishment of the joint venture in 1992, Division and
Sterling Organics Limited were respectively a division and wholly owned
subsidiary of SWGL.

SWGL sold its interest in SWL to Sanofi UK Limited (formerly Elf Sanofi UK
Limited) on 30 September 1994. The business, assets and liabilities of Division
were transferred to Sterling Organics Limited on 31 March 1995 in anticipation
of the forthcoming sale of the business as part of a Sanofi Group plan to divest
non-core activities.

On 10 August 1995 Crossco (157) Limited, a company whose equity is owned by
Sterling Management and the HSBC Entities, purchased the entire issued share
capital of Sterling Organics Limited from SWL.

These combined financial statements have been prepared as if Sterling
Organics Limited and Division had operated as a single entity (the Company)
throughout the period to 10 August 1995.

B NATURE OF THE BUSINESS

The Company is a manufacturer of fine chemical intermediates, mainly for
the pharmaceuticals industry in Europe. Historically, the Company's business had
been concentrated in the bulk manufacture of the pharmaceutical requirements of
related parties, although over the years the business has developed a presence
in the fine chemicals market, offering both:

(a) custom synthesis services, whereby customers' process technology
is used to toll manufacture a product under contract for a fixed
period; and

(b) a range of standard fine chemical products.

C SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1 Basis of presentation

The combined financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The combined
financial statements are presented in US Dollars ("$").

For all fiscal periods presented, the Company was owned by two large
international companies, each of whom acquired the Company's parent utilizing
the purchase method of accounting. Pursuant to regulations established by the
Securities and Exchange Commission for public companies, generally accepted
accounting principles require that the new purchase accounting basis in an
acquired company's assets be "pushed down" to a subsidiary's stand-alone
financial statements. Because the predecessor owners could not provide the
detailed information necessary to allocate these purchase accounting adjustments
to the Company, management has not been able to comply with this accounting
requirement. Had push down accounting been applied

49
<PAGE> 50

STERLING ORGANICS LIMITED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

to the Company's financial statements, the balance sheet of the Company would
have been adjusted to reflect higher values for inventory and fixed assets and a
new asset for goodwill would have been recorded; accordingly, in the Company's
statements of operations, cost of goods sold would have been increased because
of the inventory uplift, depreciation expense would have been higher, resulting
in increased cost of goods sold and administrative expenses, and a new expense
would have been recorded for goodwill amortization. Following the acquisition of
the Company by Crossco (157) Limited on August 10, 1995, a new basis of
accounting was established for the Company and any such push down adjustments
with respect to goodwill and fixed assets would have been eliminated.

2 Principles of combination

The combined financial statements present the financial position,
statements of operations, and cash flows as if Sterling Organics Limited and
Division had operated as a single entity (the Company) throughout the two year
period ended 31 December 1994 and the 32 week period ended 10 August 1995.

Transactions between Sterling Organics Limited and Division and all
intercompany accounts have been eliminated in combination.

3 Revenue recognition

(a) Trading revenue

Trading revenue represents the invoiced value of goods and services,
excluding value added tax, supplied in the normal course of business.
Revenues are recognised as services are provided and as goods are shipped.

(b) Engineering premium

The cost of equipment required to develop a new custom synthesis
process is incurred by the Company and included in fixed assets. An
engineering premium is charged to customers, either by instalments or by an
increment to the unit sales price, to recover an agreed element of these
costs. Revenues are recognised on a systematic basis over the life of the
project at the same rate as the depreciation charge on the related fixed
assets. The difference between amounts invoiced during the year and revenue
earned is accounted for as deferred income.

Government grants for capital expenditure are credited to a deferred
income account in the balance sheet and the income is recognised over the
expected useful life of the related property, plant and equipment.
Government grants for operating expenditure are treated as income in the
period in which the related expenditure is charged.

4 Property, plant and equipment

Property, plant and equipment are stated at cost less depreciation charged
to date.

The cost of property, plant and equipment represents the purchase cost,
together with any incidental costs of acquisition.

50
<PAGE> 51

STERLING ORGANICS LIMITED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets. The maximum lives assumed for depreciating assets are as
follows:

<TABLE>
<S> <C>
Freehold buildings..................................................... 40 years
Short leasehold properties............................................. Lease life
Building installations................................................. 13 years
Machinery and equipment................................................ 8 to 10 years
Automobiles and trucks................................................. 5 years
Office machines........................................................ 3 to 10 years
Furniture and fittings................................................. 10 years
</TABLE>

The depreciation charge for assets acquired and disposed of during the year
is calculated in proportion to the number of months that the assets are in use.
No depreciation is calculated on freehold land or assets in the course of
construction.

When assets are sold or otherwise disposed of, the cost and accumulated
depreciation are removed from the balance sheet and any resulting gain or loss
is reflected in income.

5 Operating leases

Operating lease rentals are charged to the statement of operations in equal
instalments over the life of the lease.

6 Inventories

Inventories are stated at the lower of cost or market. In general, cost is
determined on a first-in first-out basis and includes transport and handling
costs.

In the case of manufactured products, cost includes all direct expenditure
and fixed overheads incurred in bringing each product to its present location
and condition based on the normal level of activity. Where necessary, provision
is made for obsolete, slow moving and defective inventories.

Market value is the estimated selling price reduced by all costs of
marketing, selling and distribution.

7 Research and development costs

Research and development costs are expensed as incurred.

8 Retirement plan

SWL has a defined benefit pension plan which covers substantially all
employees of the Company. The benefits are based on years of service and the
employee's compensation during each year of employment. The scheme is funded by
contributions partly from the employees and partly from the Company at rates
determined by a professionally qualified actuary.

The cost of providing retirement pensions and related benefits is charged
to the statement of operations over the periods benefitting from the employees'
services. The effects of variations from regular cost arising from actuarial
valuations of the pension scheme are spread over the expected average remaining
service lives of the members of the scheme. The difference between the charge to
the statement of operations and the contributions paid to the scheme is shown as
an asset or a liability in the balance sheet.

51
<PAGE> 52

STERLING ORGANICS LIMITED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

9 Income taxes

The charge for taxation is based on the income for the year and takes into
account deferred taxation. Deferred tax assets and liabilities are recognised
for the tax consequences in future years of differences between the tax basis of
assets and liabilities and their financial reporting amounts based on enacted
tax laws and statutory tax rates expected to be in effect in the periods in
which the differences are expected to affect taxable income.

10 Foreign currencies

The functional currency of the Company is Pounds Sterling. For the purposes
of these financial statements, the reporting currency has been taken to be US
Dollars as in periods subsequent to the offering, for the purpose of which these
financial statements have been prepared, financial information in respect of the
Company will need to be recast in US Dollars for comparative purposes pursuant
to accounting requirements of the Securities and Exchange Commission.

(a) Transaction gains and losses

Transaction gains and losses arise when transactions are
denominated in a currency other than Pounds Sterling. Changes in
exchange rates then increase or decrease the expected amount of
functional currency cash flows upon settlement of the transaction,
giving rise to a transaction gain or loss.

Transactions in foreign currencies are accounted for as follows:

(i) At the date the transaction is recognised, each asset,
liability, revenue, expense, gain or loss arising from the
transaction is measured in Pounds Sterling by use of the
exchange rate in effect at that date; and

(ii) At each balance sheet date, recorded balances that are
denominated in a currency other than Pounds Sterling are
adjusted to reflect the current exchange rate.

(b) Translation adjustments

Translation adjustments result from the process of translating the
Company's financial statements into US Dollars. Assets and liabilities
are translated using the exchange rate at the balance sheet date.
Reserves, expenses, gains and losses are translated using an
appropriately weighted average exchange rate for the period. Translation
adjustments are separately reported as cumulative translation
adjustments within shareholders' equity and are not included in the
determination of net income.

11 Restructuring and reorganisation costs

Severance liabilities in respect of rationalisation, reorganisation and
related measures are recorded when such obligations are committed. Other such
costs which are not associated with or that do not benefit activities that will
be continued are recognised as liabilities from the commitment date. Associated
expenditure is then charged against the related provision to the extent that it
is covered by that provision, or directly against reserves to the extent that it
is not so covered.

12 Environmental costs

Liabilities for costs relating to environmental and remedial work which
must be performed to comply with Her Majesty's Inspector of Pollution and other
environmental guidelines are recorded when it is probable that obligations have
been incurred and the amounts can be reasonably estimated. Associated
expenditure is then charged against the related provision to the extent that it
is covered by that provision, or directly against reserves to the extent that it
is not so covered.

52
<PAGE> 53

STERLING ORGANICS LIMITED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

13 Cash equivalents

For the purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or less to
be cash equivalents.

D ACCOUNTS AND OTHER RECEIVABLES

The components of accounts and other receivables are as follows:

<TABLE>
<CAPTION>
31 DECEMBER
1994
-----------
$'000
<S> <C>
Trade accounts receivable............................................. 5,398
Less allowance for doubtful accounts receivable....................... (144)
------
5,254
Accounts receivable from related parties.............................. 1,690
Other receivables..................................................... 1,096
------
8,040
======
</TABLE>

Amounts charged/(credited) to administrative expenses relating to doubtful
accounts receivable totalled $Nil and $129,000 for the fiscal years 1993 and
1994 respectively, and $(144,000) for the period ended 10 August 1995. The
allowance for doubtful accounts receivable at the end of 1994 related to
specific doubtful accounts in Iran. The provision of $144,000 was reversed in
1995 when those accounts were paid. There were no significant doubtful accounts
at 10 August 1995.

E INVENTORIES

The components of inventories are as follows:

<TABLE>
<CAPTION>
31 DECEMBER
1994
-----------
$'000
<S> <C>
Raw materials.......................................................... 1,422
Work in progress....................................................... 5,214
Finished goods......................................................... 10,673
Engineering stores and replacement parts............................... 2,964
------
20,273
======
</TABLE>

Amounts charged/(credited) to cost of goods sold relating to slow-moving
and obsolete inventories totalled $622,000 and $(574,000) for the fiscal years
1993 and 1994, and $(123,000) for the period ended 10 August 1995. During 1994,
work in progress for a chemical intermediate relating to an obsolete Sanofi
product valued at $389,000 was written off and disposed of and the related
provision was released. In the period ended 10 August 1995, a previously
recorded provision for Glaxo Sulphonamide of $145,000 was reversed in response
to improved sales of the product.

53
<PAGE> 54

STERLING ORGANICS LIMITED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

F PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>
31 DECEMBER
1994
-----------
$'000
<S> <C>
Land................................................................ 158
Buildings........................................................... 10,451
Building installations.............................................. 7,300
Machinery and equipment............................................. 89,021
Automobiles and trucks.............................................. 770
Office machines..................................................... 2,948
Furniture and fittings.............................................. 316
---------
110,964
Accumulated depreciation............................................ (68,034)
Assets in the course of construction................................ 5,402
---------
Property, plant and equipment, net.................................. 48,332
=========
</TABLE>

Depreciation expense relating to property, plant and equipment totalled
$7,589,000 and $8,039,000 for the fiscal years 1993 and 1994 respectively and
$4,924,000 for the period ended 10 August 1995.

G SHORT TERM BORROWINGS

As part of the operations of SWL, the Company had access to a short term
credit facility with Midland Bank plc between 1 January 1992 and 10 August 1995.
The main terms of this credit facility were:

(a) Repayable on demand;

(b) Maximum drawdown of L3,000,000 ($4,700,000);

(d) Interest rate charged at LIBOR (London Inter-Bank Offer Rate) +1%
on the outstanding balance.

H ACCOUNTS PAYABLE

Accounts payable include:

<TABLE>
<CAPTION>
31 DECEMBER
1994
-----------
$'000
<S> <C>
Trade accounts payable............................................... 1,472
Accounts payable to related parties.................................. 132
------
1,604
======
</TABLE>

54
<PAGE> 55

STERLING ORGANICS LIMITED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

I ACCRUED EXPENSES

These consist of the following:

<TABLE>
<CAPTION>
31 DECEMBER
1994
-----------
$'000
<S> <C>
CURRENT LIABILITIES
Accrued payroll and payroll taxes...................................... 967
Capital accruals....................................................... 2,283
Retirement plan (Note R)............................................... 152
Restructuring provision................................................ 307
Environmental provision................................................ 45
Other liabilities...................................................... 1,784
------
5,538
------
NON-CURRENT LIABILITIES
Retirement plan (Note R)............................................... 4,610
Restructuring provision................................................ 497
Environmental provision................................................ 1,535
------
6,642
------
Total accrued expenses....................................... 12,180
======
</TABLE>

Restructuring provision

<TABLE>
<CAPTION>
YEAR ENDED
31 DECEMBER
1994
-----------
$'000
<S> <C>
Balance at beginning of period......................................... 760
Translation adjustments................................................ 44
------
Balance at end of period............................................... 804
======
Due less than one year................................................. 307
Due after more than one year........................................... 497
------
804
======
</TABLE>

The provision remaining at 31 December 1994 is in respect of 7 planned
employee terminations and the expected write down of fixed assets at Fawdon.

55
<PAGE> 56

STERLING ORGANICS LIMITED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Environmental provision

<TABLE>
<CAPTION>
YEAR ENDED
31 DECEMBER
1994
-----------
$'000
<S> <C>
Balance at beginning of period....................................... 1,735
Cash payments........................................................ (133)
Amounts charged to provision......................................... 27
Translation adjustments.............................................. (49)
-----
Balance at end of period............................................. 1,580
=====
Due less than one year............................................... 45
Due after more than one year......................................... 1,535
-----
1,580
=====
</TABLE>

The two main elements of the environmental provision are:

Fawdon relocation

Historically, Fawdon housed the Company's Pilot Plant and Research and
Development facilities. A decision was taken in late 1991 to move these
facilities to the site at Dudley and close down the operations at Fawdon. This
transfer of operations began in 1991 and is expected to be completed by the end
of 1996. A provision of $915,000 was made in respect of the decommissioning
costs expected to be incurred.

Waste treatment plant

In 1991 a provision of $1,635,000 was set up when it was decided to build a
new waste treatment plant at Dudley. The provision was made in respect of
environmental clean-up costs relating to lagoons which were used to store waste
effluent before the commissioning of the new plant which came on line during
1993. Costs of $1,166,000 have been incurred to date, and the remaining
provision is expected to be utilised by the end of 1996.

J DEFERRED INCOME

The components of deferred income are as follows:

<TABLE>
<CAPTION>
31 DECEMBER
1994
-----------
$'000
<S> <C>
Government grants.................................................... 1,009
Engineering premium.................................................. 1,917
-----
2,926
=====
</TABLE>

56
<PAGE> 57

STERLING ORGANICS LIMITED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

K DEFERRED INCOME TAXES

The deferred tax assets and liabilities consist of:

<TABLE>
<CAPTION>
31 DECEMBER
1994
-----------
$'000
<S> <C>
DEFERRED TAX ASSETS:
Non-current:
Engineering premium................................................ (634)
Retirement plan provision.......................................... (50)
------
(684)
------
CURRENT:
Environmental provision............................................ (211)
Retirement plan provision.......................................... (1,522)
Restructuring provision............................................ (264)
Other differences.................................................. (65)
------
(2,062)
------
Total deferred tax assets.................................. (2,746)

DEFERRED TAX LIABILITIES:
Non-current:
Excess capital allowances.......................................... 6,421
------
3,675
======
</TABLE>

L COMMITMENTS AND CONTINGENCIES

The Company leases certain equipment used in its operations. The rental
costs arising from operating leases are expensed in the year they are incurred.
Rental expense was $382,000 and $361,000 for the fiscal years 1993 and 1994
respectively and was $230,000 for the period ended 10 August 1995.

The minimum lease commitments under non-cancellable operating leases at 31
December 1994 were as follows:

<TABLE>
<CAPTION>
1994
-----
$'000
<S> <C>
0 - 1 years.................................................................. 386
1 - 2 years.................................................................. 349
2 - 3 years.................................................................. 207
3 - 4 years.................................................................. 188
4 - 5 years.................................................................. 136
thereafter................................................................... 330
-----
1,596
=====
</TABLE>

Existing leases are expected to be renewed or replaced by leases on other
assets in the normal course of business.

57
<PAGE> 58

STERLING ORGANICS LIMITED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

M COMMON STOCK AND ADDITIONAL PAID IN CAPITAL

The composition of the common stock of the Company is set out below:

<TABLE>
<CAPTION>
$'000
<S> <C>
DURING THE PERIOD 1 JANUARY 1993 TO 30 MARCH 1995:
Authorised, issued and fully paid; 100,000 ordinary shares of L1 ($1.96)
each........................................................................ 196
===
DURING THE PERIOD 31 MARCH 1995 TO 9 AUGUST 1995:
Authorised, issued and fully paid; 200,000 ordinary shares of L1 (average of
$1.795) each................................................................ 359
===
ON 10 AUGUST 1995:
Authorised, issued and fully paid;
200,000 deferred shares of L1 (average of $1.795) each...................... 359
2 shares of FF100 ($20.37) each............................................. --
---
359
===
</TABLE>

On 30 March 1995, authorised share capital was increased to 200,000
ordinary shares of L1 each, the new shares ranking pari passu with those already
in existence. On 31 March 1995, 100,000 ordinary shares of L1 each were issued
to SWL in consideration for the transfer of the assets and liabilities of
Division at a net book value of $56,972,000 from SWL. This transaction resulted
in the creation of additional paid in capital of $56,809,000 (see Note N).

On 10 August 1995, there were further changes in the common stock and
attached rights as follows:

(a) The authorised share capital was increased to include two shares of
FF100 each, ranking pari passu with the existing ordinary shares,
which were duly issued to Sanofi UK Limited on that date;

(b) The existing 200,000 ordinary shares were converted to 200,000
deferred shares of L1 each; and

(i) the deferred shares were attributed no voting rights or rights
to share in profits; and

(ii) the deferred shares were given the right to participate in a
capital distribution at par only once L1,000,000 ($1,589,000)
had been paid in respect of each FF100 share. Any remaining
capital would then be applied equally to the FF100 shares.

N DONATED CAPITAL

Immediately prior to the formation of the SWL joint venture, a capital
donation of $45,272,000 was made to Division by SWGL. This donation was effected
by the waiver of debts owed by Division to SWGL.

On 31 March 1995, a further capital donation of $1,202,000 was made by SWL
to Division by the transfer of credit balances to SWL from Division for nil
consideration.

58
<PAGE> 59

STERLING ORGANICS LIMITED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

On 31 March 1995, the entire net assets of Division of $56,972,000 were
transferred to the Company by SWL in consideration for the issue of 100,000
ordinary shares of L1 ($1.63) each by the Company to SWL. The effect of this
transaction is set out below:

<TABLE>
<CAPTION>
$'000
<S> <C>
NET ASSETS OF DIVISION AT 31 MARCH 1995, REPRESENTED BY:
Donated capital........................................................... 41,485
Retained earnings......................................................... 15,487
------
56,972
======
CONVERTED TO:
Common stock.............................................................. 163
Additional paid in capital................................................ 56,809
------
56,972
======
</TABLE>

O SEGMENT INFORMATION

The Company considers that it operates in one industry segment, the
manufacture of fine chemical intermediates for the pharmaceuticals industry.

Gross revenues, operating profits and identifiable assets of the Company
all relate to UK operations. Gross revenues by destination are set out below:

<TABLE>
<CAPTION>
UNITED
KINGDOM & CONTINENTAL ASIA,
REPUBLIC EUROPE AMERICA AFRICA TOTAL
OF IRELAND ----------- ------- & PACIFIC ------
------------ $'000 $'000 --------- $'000
$'000 $'000
<S> <C> <C> <C> <C> <C> <C>
GROSS REVENUES
1993 Related parties......... 42,011 -- 975 -- 42,986
Third parties........... 15,222 14,940 264 1,085 31,511
------ ------ ----- ----- ------
57,233 14,940 1,239 1,085 74,497
====== ====== ===== ===== ======
1994 Related parties......... 40,845 207 255 -- 41,307
Third parties........... 19,771 15,917 326 1,538 37,552
------ ------ ----- ----- ------
60,616 16,124 581 1,538 78,859
====== ====== ===== ===== ======
10 August 1995 Related parties......... 28,222 787 -- -- 29,009
Third parties........... 11,685 7,188 2,677 816 22,366
------ ------ ----- ----- ------
39,907 7,975 2,677 816 51,375
====== ====== ===== ===== ======
</TABLE>

59
<PAGE> 60

STERLING ORGANICS LIMITED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Gross revenues from each of five customers exceeded 10% during one or more
of the periods presented. These customers accounted for the following
percentages of gross revenues.

YEAR ENDED PERIOD
31 DECEMBER ENDED
------------- 10 AUGUST
1993 1994 1995
---- ---- ---------
% % %
<S> <C> <C> <C>
Related party (United Kingdom & Republic of Ireland)
Related party A........................................... 17 15 17
Related party B........................................... 29 31 36
Related party C........................................... 11 12 2
== == ==

Third party (United Kingdom & Republic of Ireland)
Third party A............................................. 12 11 11
== == ==
Third party (Continental Europe)
Third party B............................................. 10 8 8
== == ==
</TABLE>

All related parties referred to above were fellow group companies at the
time of the relevant transactions. Prices charged to related parties were based
on a cost plus formula (see Note Q) and normal commercial payment terms were
applied to these transactions.

P INCOME TAX EXPENSE

Income tax expense comprised the following:

YEAR ENDED PERIOD
31 DECEMBER ENDED
------------- 10 AUGUST
1993 1994 1995
---- ---- ---------
$'000 $'000 $'000
<S> <C> <C> <C>
United Kingdom corporation tax at 33% based on income
for the year.......................................... 1,256 632 1,437
Deferred taxation....................................... (321) 429 (110)
--- ---- ----
Total taxes on income................................... 935 1,061 1,327
=== ==== ====
</TABLE>

Total taxes on income varied from the amount computed by applying the
corporate tax rate to income before taxes. The differences were mainly
attributable to the following factors:

<TABLE>
<CAPTION>
YEAR ENDED PERIOD
31 DECEMBER ENDED
------------- 10 AUGUST
1993 1994 1995
---- ---- ---------
% % %
<S> <C> <C> <C>
United Kingdom statutory corporation tax rate........... 33.0 33.0 33.0

Group charges disallowed (see Note Q)................... 7.3 -- --
Release of government grants............................ (1.7) (0.7) (0.6)
Adjustments in respect of prior years................... 4.5 (3.1) 0.4
Other differences....................................... 0.6 0.4 (2.0)
---- ---- ----
43.7 29.6 30.8
==== ==== ====
</TABLE>

60
<PAGE> 61

STERLING ORGANICS LIMITED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

The deferred taxation (credit)/charge was mainly the result of the tax
effect of timing differences as follows:

<TABLE>
<CAPTION>
YEAR ENDED 31 PERIOD
DECEMBER ENDED
------------- 10 AUGUST
1993 1994 1995
---- ---- ---------
$'000 $'000 $'000
<S> <C> <C> <C>
Excess capital allowances/(depreciation)................ 266 (46) (153)
Engineering premium..................................... (76) 672 --
Retirement plan provision............................... (391) (854) 26
Restructuring provision................................. -- 423 102
Environmental provision................................. 42 91 --
Other differences....................................... (162) 143 (85)
---- ---- ----
(321) 429 (110)
==== ==== ====
</TABLE>

Q RELATED PARTY TRANSACTIONS

The Company had the following total amounts of transactions and balances
with related parties:

<TABLE>
<CAPTION>
PERIOD
YEAR ENDED 31 DECEMBER ENDED
---------------------- 10 AUGUST
1993 1994 1995
------ ----------- ---------
$'000 $'000 $'000
<S> <C> <C> <C>
Sales............................................. 42,986 41,307 29,009
====== ====== ======
Other income...................................... 929 451 30
====== ====== ======
Purchases and other expenses...................... 6,341 4,860 1,704
====== ====== ======
</TABLE>

<TABLE>
<CAPTION>
31 DECEMBER
1994
-----------
<S> <C>
ACCOUNTS RECEIVABLE
Related party A................................... 1,661
==========
ACCOUNTS PAYABLE
Related party B................................... 35
Other group companies............................. 94
-----------
129
==========
</TABLE>

During the periods under examination, the Company's main objective was the
delivery of active ingredients to fellow group companies. Prices charged were
based on a cost-plus formula. Following completion of the management buy-out on
10 August 1995, trading with Sanofi Group companies is governed by the terms of
an arm's length supply agreement.

Related party purchases consisted principally of charges such as interest,
car fleet management, insurance, pension, rates, utilities and raw materials.
These charges were generally charged based on a specific identification of the
costs incurred, or an allocation of total costs. Management believes that these
allocation methods are reasonable and that they result in the allocation of
expenses that are applicable to the Company's operations. Additionally,
management believes that the expenses so charged are representative of the
amounts which the Company would have incurred had it operated as an unrelated
entity.

The Company incurred administration charges of $475,000 in the fiscal year
1993, relating to administration carried out by related parties, which, in the
opinion of management, would not have been incurred had the Company operated
independently. These charges have been treated as disallowable for taxation
purposes.

61
<PAGE> 62

STERLING ORGANICS LIMITED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

In February 1993, the Company received an interest free loan of L5,679,000
($8,086,000) from a related party. This loan was repaid as follows:

<TABLE>
<CAPTION>
$'000
<S> <C>
March 1993................................................................... 1,183
October 1993................................................................. 2,506
December 1993................................................................ 68
-----
3,757
October 1994................................................................. 5,153
Translation differences...................................................... (824)
-----
8,086
=====
</TABLE>

R RETIREMENT PLAN

The employees of the Company participate in the Sanofi Winthrop Pension
Plan (SWPP). Benefits are based on years of service and the employee's
compensation throughout that period.

SWPP commenced on 31 October 1992 with the initial membership comprising
the active members of the Sterling-Winthrop Group Pension Fund (SWGPF), who
agreed to transfer their rights following the creation of SWL in the United
Kingdom.

The transferring members were granted back-dated service under the plan and
a transfer of assets from SWGPF to SWPP took place.

Following a transition period after the change in ownership of the Company
on 10 August 1995, the Company's participation in SWPP will terminate. A new
plan is expected to be established in substantially the same form as SWPP
covering the Company's employees. It is intended that there will then be a
transfer of assets between SWPP and the new plan in an amount equal to the
present value of the accrued benefits.

The assets of SWPP are invested in a portfolio of investments managed by
Mercury Asset Management Limited.

The following table sets forth the funded status of the element of SWPP in
which the Company has an interest:

<TABLE>
<CAPTION>
31 DECEMBER
1994
-----------
$'000
<S> <C>
Vested benefit obligations................................ 18,807
------
Accumulated benefit obligations........................... 18,807
------
Projected benefit obligations............................. 30,741
Fair value of plan assets................................. 27,337
------
Funded status............................................. (3,404)
Unrecognised transition asset............................. (3,015)
Unrecognised net loss..................................... 1,657
------
Accrued pension expense................................... (4,762)
======
Due less than one year.................................... 152
Due after more than one year.............................. 4,610
------
4,762
======
</TABLE>

62
<PAGE> 63

STERLING ORGANICS LIMITED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

The pension costs and related assumptions in respect of the fiscal years
1993 and 1994 and the period ended 10 August 1995 are set out below:

Pension costs and related assumptions

YEAR ENDED PERIOD
31 DECEMBER ENDED 10
--------------------- AUGUST
1993 1994 1995
------ ------ ---------
% % %
<S> <C> <C> <C>
ASSUMPTIONS
Discount rate...................... 6 3/4 9 8 1/2
Return on plan assets.............. 9 1/2 9 1/2 9 1/2
Salary increases................... 6 1/2 7 7
PENSION EXPENSE $'000 $'000 $'000
Service cost....................... 1,681 2,725 1,182
Interest cost...................... 2,296 2,711 1,722
Return on plan assets.............. (2,475) (2,947) (1,616)
Amortisation of transition asset... (321) (329) (210)
Amortisation of net loss........... -- 425 --
------ ------ ------
Net periodic pension cost.......... 1,181 2,585 1,078
Employer contribution.............. -- -- (1,155)
Translation adjustments............ (33) 160 74
------ ------ ------
(Increase)/decrease in accrued
pension expense.................. (1,148) (2,745) 3
====== ====== ======
</TABLE>

The Company enjoyed a pension contribution holiday from the establishment
of the SWPP until 31 December 1994. The Company resumed normal contribution
levels on 1 January 1995.

In line with FAS 87 the cost of providing retirement pensions and related
benefits must be charged to the statement of operations over the periods
benefitting from the employees' service. The amount by which the charge to the
statement of operations has exceeded contributions paid is shown as a liability
in the balance sheet.

S FOREIGN CURRENCY TRANSACTIONS

Foreign currency transactions gave rise to gains/(losses) of $139,000;
$(31,000) and $(13,000) in the fiscal years 1993, 1994 and the period ended 10
August 1995, respectively.

63
<PAGE> 64

CROSSCO (157) LIMITED

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of Crossco (157) Limited:

We have audited the accompanying consolidated balance sheet of Crossco
(157) Limited as of 31 December 1995 and the related consolidated statements of
operations, equity and cash flows for the period from inception (July 14, 1995)
to 31 December 1995. These financial statements are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the combined financial position of
Crossco (157) Limited as of 31 December 1995, and the combined results of its
operations and its cash flows for the period from inception (July 14, 1995) to
31 December 1995, in conformity with accounting principles generally accepted in
the United States.

COOPERS & LYBRAND

Newcastle upon Tyne
England
February 27, 1996

64
<PAGE> 65

CROSSCO (157) LIMITED

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
31 DECEMBER
1995
FOOTNOTE -----------
-------- $'000
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash................................................................. 7,845
Accounts and other receivables....................................... D 8,335
Inventories.......................................................... E 18,547
Prepayments.......................................................... 366
Total current assets.............................................. 35,093
Property, plant and equipment, net................................... F 44,868
Total assets................................................. 79,961
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable..................................................... 5,374
Accrued expenses..................................................... G 7,881
Accrued income taxes................................................. 996
Current portion of long-term debt.................................... J 660
Total current liabilities......................................... 14,911
NON-CURRENT LIABILITIES
Deferred income...................................................... H 2,962
Deferred income taxes................................................ I 3,453
Accrued expenses..................................................... G 4,425
Long term debt....................................................... J 40,304
Total non-current liabilities..................................... 51,144
Total liabilities............................................ 66,055
Cumulative redeemable preferred stock at redemption value.............. K 13,541
Commitments and contingencies.......................................... L
SHAREHOLDERS' EQUITY
Common stock, ordinary (on incorporation L1 par value, 100 shares
authorised, 1 share issued and outstanding. At 31 December 1995, L0.1
par value, 300,000 shares authorised, issued and outstanding)........ M 48
Common stock, Series A (on incorporation none authorised, issued or
outstanding. At 31 December 1995 L0.1 par value, 790,909 shares
authorised, issued and outstanding).................................. M 125
Additional paid in capital............................................. 1,560
Accumulated deficit.................................................... (1,201)
Cumulative translation adjustments..................................... (167)
Total shareholders' equity........................................ 365
Total liabilities and shareholders' equity................... 79,961
</TABLE>

The accompanying footnotes are an integral part of the consolidated financial
statements.

65
<PAGE> 66

CROSSCO (157) LIMITED

CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD ENDED
31 DECEMBER
1995
FOOTNOTE ------------
-------- $'000
<S> <C> <C>
Gross revenues........................................................ O 34,828
Cost of goods sold.................................................... (30,836)
Research and development.............................................. (651)
------------
3,341
Selling and distribution expenses..................................... (681)
Administrative expenses............................................... (2,047)
------------
Operating income...................................................... 613
Interest income....................................................... 143
Interest expense...................................................... (2,070)
Other income, net..................................................... 5
------------
Loss before income tax expense........................................ (1,309)
Income tax expense.................................................... P 351
------------
Net loss.............................................................. (958)
Dividends on preference shares........................................ (243)
------------
Net loss for ordinary shares.......................................... (1,201)
==========
</TABLE>

The accompanying footnotes are an integral part of the consolidated financial
statements.

66
<PAGE> 67

CROSSCO (157) LIMITED

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
ORDINARY L1 ADDITIONAL CUMULATIVE
COMMON STOCK ORDINARY L0.1 SERIES A L0.1 PAID-IN ACCUMULATED TRANSLATION TOTAL
COMMON STOCK COMMON STOCK CAPITAL DEFICIT ADJUSTMENTS SHARE-
------------ ---------------- ---------------- ---------- ----------- ---------- HOLDERS'
EQUITY
--------
NO $'000 NO $'000 NO $'000 $'000 $'000 $'000 $'000
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at 14 July
1995............. 1 -- -- -- -- -- -- -- -- --
Conversion of L1
ordinary shares
into L0.1
ordinary
shares........... (1) -- 10 -- -- -- -- -- -- --
L0.1 ordinary
shares issued for
cash............. -- -- 299,990 48 -- -- 428 -- -- 476
L0.1 ordinary A
shares issued for
cash............. -- -- -- -- 790,909 125 1,132 -- -- 1,257
Net loss for
period........... -- -- -- -- -- -- -- (958) -- (958)
Dividends on
preference
shares........... -- -- -- -- -- -- -- (243) -- (243)
Translation
adjustments...... -- -- -- -- -- -- -- -- (167) (167)
-- -- --
--- ------- ------- --- --- --- ---
Balance at 31
December 1995.... -- -- 300,000 48 790,909 125 1,560 (1,201) (167) 365
=== == ======= == ======= == === === === ===
</TABLE>

The accompanying footnotes are an integral part of the consolidated financial
statements.

67
<PAGE> 68

CROSSCO (157) LIMITED

CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD
ENDED
31 DECEMBER
1995
-----------
$'000
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss before dividends....................................................... (958)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation.................................................................... 2,576
Loss on sale of equipment....................................................... 11
Government grant release........................................................ (50)
Release of engineering premium.................................................. (374)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Increase in accounts receivable................................................. (692)
Decrease in prepayments......................................................... 549
Decrease in inventories......................................................... 4,831
Increase in accounts payable.................................................... 2,694
Increase in accrued expenses.................................................... 327
Increase in preference share dividends payable.................................. 243
Decrease in income taxes........................................................ (858)
Decrease in deferred income taxes............................................... (704)
-------
Net cash provided by operating activities....................................... 7,595
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of equipment.............................................. (4,107)
Proceeds from sale of equipment................................................. 424
Purchase of subsidiary undertaking, (net of cash acquired) (Note N)............. (53,762)
-------
Net cash used in investing activities........................................... (57,445)
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash receipt on issue of common shares (Note M)................................. 1,733
Proceeds from issuance of cumulative redeemable preference shares (Note K)...... 13,606
Proceeds from issuance of long term debt (Note J)............................... 41,911
Engineering premium received.................................................... 542
-------
Net cash provided by financing activities....................................... 57,792
-------
Net increase in cash............................................................ 7,942
Cash at beginning of period..................................................... --
Effect of foreign exchange rate charges on cash................................. (97)
-------
Cash at end of period........................................................... 7,845
=======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash received for interest...................................................... 143
=======
Cash paid for interest.......................................................... (1,466)
=======
Cash paid for income taxes...................................................... (1,221)
=======
</TABLE>

The accompanying footnotes are an integral part of the consolidated financial
statements.

68
<PAGE> 69

CROSSCO (157) LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A ORGANISATION AND HISTORY OF CROSSCO (157) LIMITED

The Company was incorporated on 14 July 1995. On 10 August 1995 the Company
acquired the entire issued share capital of Sterling Organics Limited from
Sanofi Winthrop Limited (SWL) (see Note N).

SWL was established in the United Kingdom as a joint venture between
Sterling Winthrop Group Limited (SWGL) and Elf Sanofi UK Limited on 1 January
1992. As part of its business operations SWL had interests in:-

(b) Sterling Organics Limited (SOL) -- a wholly owned subsidiary of
SWL whose sole purpose was to act as an intermediate sales company for the
sale of the majority of third party products manufactured by Division.

Prior to the establishment of the joint venture in 1992, Division and SOL
were respectively a division and wholly owned subsidiary of SWGL.

SWGL sold its interest in SWL to Sanofi UK Limited (formerly Elf Sanofi UK
Limited) on 30 September 1994 and the business, assets and liabilities of
Division were transferred to SOL on 31 March 1995 in anticipation of the
forthcoming sale of the business as part of a Sanofi Group plan to divest
non-core activities.

B NATURE OF THE BUSINESS

The Company's wholly owned subsidiary, SOL, is a manufacturer of fine
chemical intermediates, mainly for the pharmaceuticals industry in Europe.
Historically, SOL's business had been concentrated in the bulk manufacture of
the pharmaceutical requirements of related parties, although over the years the
business has developed a presence in the fine chemicals market, offering both:

(a) custom synthesis services, whereby customers' process technology
is used to toll manufacture a product under contract for a fixed
period; and

(b) a range of standard fine chemical products.

C SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1 Basis of presentation

The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The consolidated
financial statements are presented in US Dollars ("$").

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 reported
period. Actual results could differ from those estimates.

2 Principles of consolidation

The consolidated financial statements present the financial position,
statement of operations, and cash flows of the Company and its subsidiary
undertaking (the Group) for the period to 31 December 1995.

On acquisition of a subsidiary, all of the subsidiary's separable assets
and liabilities that exist at the date of acquisition are recorded at their fair
values reflecting their condition at that date (see Note N).

69
<PAGE> 70

CROSSCO (157) LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Transactions between the Company and SOL and all intercompany accounts have
been eliminated on consolidation.

3 Revenue recognition

(a) Trading revenue

(b) Engineering premium

The cost of equipment required to develop a new custom synthesis
process is incurred by the Group and included in fixed assets. An
engineering premium is charged to customers, either by instalments or by an
increment to the unit sales price, to recover an agreed element of these
costs. Revenues are recognised on a systematic basis over the life of the
project at the same rate as the depreciation charge on the related fixed
assets. The difference between amounts invoiced during the year and revenue
earned is accounted for as deferred income.

4 Property, plant and equipment

Property, plant and equipment are stated at cost less depreciation charged
to date.

The cost of property, plant and equipment represents the purchase cost,
together with any incidental costs of acquisition.

Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets. The maximum lives assumed for depreciating assets are as
follows:

When assets are sold or otherwise disposed of, the cost and accumulated
depreciation are removed from the balance sheet and any resulting gain or loss
is reflected in income.

5 Operating leases

Operating lease rentals are charged to the statement of operations in equal
instalments over the life of the lease.

70
<PAGE> 71

CROSSCO (157) LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6 Inventories

Inventories are stated at the lower of cost or market. In general, cost is
determined on a first-in first-out basis and includes transport and handling
costs.

Market value is the estimated selling price reduced by all costs of
marketing, selling and distribution.

7 Research and development costs

Research and development costs are expensed as incurred.

8 Retirement plan

SWL has a defined benefit pension plan which covers substantially all
employees of SOL. The benefits are based on years of service and the employee's
compensation during each year of employment. The scheme is funded by
contributions partly from the employees and partly from the Group at rates
determined by a professionally qualified actuary.

The cost of providing retirement pensions and related benefits is charged
to the income statement over the periods benefitting from the employees'
services. The effects of variations from regular cost arising from actuarial
valuations of the pension scheme are spread over the expected average remaining
service lives of the members of the scheme. The difference between the charge to
the statement of operations and the contributions paid to the scheme is shown as
an asset or a liability in the balance sheet.

9 Income taxes

10 Foreign currencies

The functional currency of the Company is Pounds Sterling. For the purposes
of these financial statements, the reporting currency has been taken to the US
Dollars as in periods subsequent to the offering, for the purpose of which these
financial statements have been prepared, financial information in respect of the
Company will need to be recast in US Dollars for comparative purposes pursuant
to accounting requirements of the Securities Exchange Commission.

(a) Transaction gains and losses

Transaction gains and losses arise when transactions are denominated in a
currency other than Pounds Sterling. Changes in exchange rates then increase or
decrease the expected amount of functional currency cash flows upon settlement
of the transaction, giving rise to a transaction gain or loss.

Transactions in foreign currencies are accounted for as follows:

(i) At the date the transaction is recognized, each asset, liability,
revenue, expense, gain or loss arising from the transaction is
measured in Pounds Sterling by use of the exchange rate in effect
at that date; and

(ii) At each balance sheet date, recorded balances that are
denominated in a currency other than Pounds Sterling are adjusted
to reflect the current exchange rate.

71
<PAGE> 72

CROSSCO (157) LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(b) Translation adjustments

Translation adjustments result from the process of translating the
Company's financial statements into US Dollars. Assets and liabilities are
translated using the exchange rate at the balance sheet date. Reserves,
expenses, gains and losses are translated using an appropriately weighted
average exchange rate for the period. Translation adjustments are separately
reported as cumulative translation adjustments within shareholders' equity and
are not included in the determination of net income.

11 Restructuring and reorganisation costs

12 Environmental costs

Liabilities for costs relating to environmental and remedial work which
must be performed to comply with Her Majesty's Inspector of Pollution and other
environmental guidelines are recorded when it is probable that obligations have
been incurred and the amounts can be reasonably estimated. Associated
expenditure is then charged against the related provision to the extent that is
covered by that provision, or directly against reserves to the extent that it is
not so covered.

13 Cash equivalents

For the purposes of the statement of cash flows, the Group considers all
highly liquid investments purchased with a maturity of three months or less to
be cash equivalents.

14 Other

The Company adopted Statement of Financial Accounting Standards No. 121
(FAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" in 1995. FAS 121 requires that long-lived
assets be reviewed for impairment by comparing the fair value of the assets with
their carrying amount. Any write-downs are to be treated as permanent reductions
in the carrying amount of the assets. The adoption of FAS 121 did not have any
material financial impact on the Company.

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based
Compensation." FAS 123 encourages but does not require the recognition of
compensation expense for grants of stock, stock options, and other equity
instruments based upon new fair value accounting rules (the "recognition
method"). Companies that choose not to adopt the recognition method must
disclose pro forma net income and earnings per share amounts under that method
and make detailed disclosures about plan terms, exercise prices, and assumptions
used in measuring the fair value of stock-based grants (the "disclosure
method"). The Company plans to adopt the disclosure method in 1996. The Company
has not determined the effect, on a pro forma basis to 1995 net loss, of
applying fair value accounting rules to grants of stock-based awards in 1995.

72
<PAGE> 73

CROSSCO (157) LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

D ACCOUNTS AND OTHER RECEIVABLES

The components of accounts and other receivables are as follows:

<TABLE>
<CAPTION>
31 DECEMBER
1995
-----------
$'000
<S> <C>
Trade accounts receivable.............................................. 7,775
Less allowance for doubtful accounts receivable........................ (144)
-----
7,631
Other receivables...................................................... 704
-----
8,335
=====
</TABLE>

Amounts charged to administrative expenses relating to doubtful accounts
receivable totalled $144,000 for the period ended 31 December 1995. $64,000 of
this charge related to specific doubtful debts with Iranian customers, the
remainder being a general provision for doubtful accounts which was created
during the period.

Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of accounts receivable.
Concentration of credit risk with respect to accounts receivable is
significantly due to two customers (see Note O).

E INVENTORIES

The components of inventories are as follows:

<TABLE>
<CAPTION>
31 DECEMBER
1995
-----------
$'000
<S> <C>
Raw materials.......................................................... 1,792
Work in progress....................................................... 5,024
Finished goods......................................................... 8,704
Engineering stores and replacement parts............................... 3,027
------
18,547
======
</TABLE>

The cost of products sold for the period ended 31 December 1995 has been
charged with $105,000, which relates to slow-moving and obsolete inventories.

F PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>
31 DECEMBER
1995
------------
$'000
<S> <C>
Land.................................................................. 151
Buildings............................................................. 8,642
Building installations................................................ 7,538
Machinery and equipment............................................... 85,437
Automobiles and trucks................................................ 727
Office machines....................................................... 3,263
Furniture and fittings................................................ 365
-------
106,123
Accumulated depreciation.............................................. (72,089)
Assets in the course of construction.................................. 10,834
-------
Property, plant and equipment, net.................................... 44,868
=======
</TABLE>

73
<PAGE> 74

CROSSCO (157) LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Depreciation expense relating to property, plant and equipment totalled
$2,576,000 for the period ended 31 December 1995.

G ACCRUED EXPENSES

These consist of the following:

<TABLE>
<CAPTION>
31 DECEMBER
1995
------------
$'000
<S> <C>
CURRENT LIABILITIES
Accrued payroll and payroll taxes..................................... 1,385
Capital accruals...................................................... 1,087
Retirement plan (Note R).............................................. 151
Restructuring provision............................................... 1,510
Environmental provision............................................... 1,510
Other liabilities..................................................... 2,238
------
7,881
NON-CURRENT LIABILITIES
Retirement plan (Note R).............................................. 4,425
------
Total accrued expenses...................................... 12,306
======
</TABLE>

Restructuring provision

<TABLE>
<CAPTION>
$'000
<S> <C>
Balance at 14 July 1995................................................ --
Provision acquired upon acquisition of SOL............................. 505
Amounts charged to provision........................................... 1,094
Provision utilised for write off of fixed assets....................... (69)
Translation adjustments................................................ (20)
-----------
Balance at 31 December 1995............................................ 1,510
=========
</TABLE>

During the period the provision was partially utilised to effect the write
down of fixed assets at Fawdon.

The increase in the provision is substantially in respect of additional
employee terminations planned in order to restructure and integrate the business
following a business process simplification review performed during 1995. The
provision at 31 December 1995 includes $1,354,000 in relation to 24 planned
employee terminations in the administration, supervisory and support functions.
The provision is expected to be utilised during 1996.

Environmental provision

<TABLE>
<CAPTION>
WASTE
FAWDON TREATMENT
RELOCATION PLANT OTHER TOTAL
---------- --------- ----- -----
$'000 $'000 $'000 $'000
<S> <C> <C> <C> <C>
Balance at 14 July 1995......................... -- -- -- --
Provision acquired upon acquisition of SOL...... 794 477 291 1,562
Cash payments................................... -- -- (16) (16)
Translation adjustments......................... (18) (11) (7) (36)
--- --- ----- -----
Balance at 31 December 1995..................... 776 466 268 1,510
=== ==== ==== =====
</TABLE>

74
<PAGE> 75

CROSSCO (157) LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Fawdon relocation

Historically, Fawdon housed SOL's Pilot Plant and Research and Development
facilities, however a decision was taken in late 1991 to move these facilities
to the site at Dudley and close down the operations at Fawdon. This transfer of
operations began in 1991 and is expected to be completed by the end of 1996. The
provision was made in respect of the decommissioning costs expected to be
incurred.

Waste treatment plant

In 1991 a provision of $1,635,000 was set up in SOL when it was decided to
build a new waste treatment plant at Dudley. The provision was made in respect
of environmental clean-up costs relating to lagoons which were used to store
waste effluent before the commissioning of the new plant which came on line
during 1993. Costs of $1,169,000 have been incurred to date, and the remaining
provision is expected to be utilised by the end of 1996.

H DEFERRED INCOME

The components of deferred income are as follows:

<TABLE>
<CAPTION>
31 DECEMBER
1995
-----------
$'000
<S> <C>
Government grants...................................................... 882
Engineering premium.................................................... 2,080
-----------
2,962
=========
</TABLE>

I DEFERRED INCOME TAXES

The deferred tax assets and liabilities consist of:

<TABLE>
<CAPTION>
31 DECEMBER
1995
------------
$'000
<S> <C>
DEFERRED TAX ASSETS:
NON-CURRENT:
Engineering premium................................................. (686)
Retirement plan provision........................................... (50)
------------
(736)
------------
CURRENT:
Environmental provision............................................. (191)
Retirement plan provision........................................... (1,462)
Restructuring provision............................................. (498)
Other differences................................................... (302)
------------
(2,453)
------------
Total deferred tax assets............................................. (3,189)
DEFERRED TAX LIABILITIES:
Non-current:
Excess capital allowances........................................... 6,594
Current:
Revaluation of inventories.......................................... 48
------------
3,453
==========
</TABLE>

75
<PAGE> 76

CROSSCO (157) LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

J LONG-TERM DEBT

<TABLE>
<CAPTION>
$'000
<S> <C>
Long-term debt at 31 December 1995 consisted of:
Note payable of L9,384,000 to shareholders with interest at 10% per annum.
Interest is paid bi-annually on 30 June and 31 December. Principal is
repayable in three equal instalments on 31 December 2002, 2003 and 2004.
The note is guaranteed by a fixed and floating charge over all of the
property and assets of the Group.......................................... 14,570
Note payable of L17,000,000 to a bank. Interest is charged bi-annually on 30
June and 31 December at LIBOR plus 1.875% per annum. Principal is
repayable in twenty four instalments through to 30 September 2002. The
note is guaranteed by a fixed and floating charge over all of the property
and assets of the Group................................................... 26,394
-------
40,964
Less current portion; L425,000 (due 31 December 1996)....................... (660)
-------
Long-term portion of debt................................................... 40,304
=======

The balance of 31 December 1995 comprises: $'000
Proceeds from issuance of long-term debt.................................... 41,911
Translation adjustments..................................................... (947)
-------
40,964
=======
</TABLE>

The Company entered into a revolving group credit facility with its bank
for L2,900,000 ($4,600,000) in August 1995. The main terms of this credit
facility are:

(a) service charge of 0.875% per annum;

(b) interest charged at LIBOR plus 1.875% per annum;

(d) repayable on demand.

The Company paid an arrangement fee of $430,000 in respect of long-term
debt and the revolving group credit facility.

K CUMULATIVE REDEEMABLE PREFERRED STOCK

On 10 August 1995, the Company was authorised to issue 8,565,000 cumulative
redeemable preference shares with a par value of L0.5 ($0.795) each. On the same
date, 7,650,913 of these preference shares were issued, with the remainder being
issued on 30 November 1995. The shares were issued for a total consideration of
L8,565,000 ($13,606,000).

The balance at 31 December 1995 consists of:

<TABLE>
<CAPTION>
$'000
<S> <C>
Proceeds from issuance of cumulative redeemable preference shares...... 13,606
Accrued preference share dividends payable............................. 243
Translation adjustments................................................ (308)
-----------
13,541
=========
</TABLE>

The shares have no voting rights except in exceptional circumstances to
protect the rights of the preference shareholders. In such instances the shares
carry one vote each.

76
<PAGE> 77

CROSSCO (157) LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The shares are entitled to a fixed cumulative preferential dividend at the
following rates:

5% per annum for the year to 10 August 1996
6% per annum for the year to 10 August 1997
7% per annum for the year to 10 August 1998
8% per annum thereafter

In the event that the preference dividends are not paid on the due date the
amount of the overdue dividend shall be increased by way of a further cumulative
dividend at the rate of 3% per annum above the Midland Bank plc base rate,
calculated on a daily basis, until the dividend is paid.

The shares are redeemable, in whole or in part, at the option of the
Company at the issue price.

To the extent that the shares have not been redeemed by the Company on each
of the dates set out below, the Company shall redeem the number of shares as set
out below:

<TABLE>
<CAPTION>
DATE NUMBER
-------------------------------------------------------------------------- ---------
<S> <C>
30 June 2005.............................................................. 2,855,000
30 June 2006.............................................................. 2,855,000
30 June 2007.............................................................. 2,855,000
---------
8,565,000
========
</TABLE>

The shares are preferred upon liquidation of the Company to the full extent
of the issue price and any unpaid arrears and accruals of dividends.

L COMMITMENTS AND CONTINGENCIES

The Group leases certain equipment used in its operations. The rental costs
arising from operating leases are expensed in the period they are incurred.
Rental expense was $157,000 for the period to 31 December 1995.

The minimum lease commitments under non-cancellable operating leases at 31
December 1995 were as follows:

<TABLE>
<CAPTION>
1995
-----
$'000
<S> <C>
0 - 1 years.................................................................. 366
1 - 2 years.................................................................. 227
2 - 3 years.................................................................. 185
3 - 4 years.................................................................. 141
4 - 5 years.................................................................. 79
thereafter................................................................... 256
---
1,254
===
</TABLE>

Existing leases are expected to be renewed or replaced by leases on other
assets in the normal course of business.

77
<PAGE> 78

CROSSCO (157) LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

M COMMON STOCK AND ADDITIONAL PAID IN CAPITAL

The composition of the common stock of Crossco (157) Limited is set out
below:

<TABLE>
<S> <C>
UPON INCORPORATION ON 14 JULY 1995:
Authorised; 100 ordinary shares of L1 ($1.59) each........................... $ 159
======
Issued and outstanding; 1 ordinary share of L1 ($1.59) each.................. $ 2
======
FROM 10 AUGUST 1995 ONWARDS: $'000
Authorised
300,000 ordinary shares of L0.1 ($0.159) each................................ 48
790,909 'A' shares of L0.1 ($0.159) each..................................... 125
------
173
======
</TABLE>

On 10 August 1995, each authorised ordinary share with a par value of L1
was subdivided into 10 ordinary shares with a par value of L0.1 each.

On the same date, the authorised share capital was increased to L109,000
($173,000) by the creation of:

(a) 299,000 ordinary shares with a par value of L0.1 each; and

(b) 790,909 'A' shares with a par value of L0.1 each.

ISSUED AND OUTSTANDING:

The issued share capital was increased from $2 to $173,000 as follows:

<TABLE>
<CAPTION>
COMMON ADDITIONAL
STOCK PAID IN PROCEEDS
ISSUE ------ CAPITAL --------
SHARES ISSUED NUMBER PAR VALUE PRICE ----------
- ------------------------------------ --------- ----------- -------- $'000 $'000 $'000
<S> <C> <C> <C> <C> <C> <C>
On 10 August 1995:
Ordinary shares................ 299,990 L0.1($0.159) L1($1.59) 48 428 476
A shares....................... 706,500 L0.1($0.159) L1($1.59) 112 1,010 1,122
On 30 November 1995:
A shares....................... 84,409 L0.1($0.159) L1($1.59) 13 122 135
--------- ----------- -------- ------ ---------- --------
173 1,560 1,733
====== ======= ======
</TABLE>

Ordinary shares

The ordinary shares carry one vote per share.

The ordinary shares and 'A' shares have equal rights to participate in
dividends providing all of the preference share dividends (see Note K for
details of rights of preference shares) and cumulative participating dividends
on the 'A' shares have all been paid.

The ordinary shares have the right to participate in a capital distribution
upon liquidation after the preference shareholders and 'A' shareholders. They
are entitled to the issue price of the shares. Any remaining capital available
for distribution would be applied equally in respect of the 'A' shares and
ordinary shares.

'A' shares

The 'A' shares carry one vote per share.

The shares have the right to a cumulative participating dividend of 5% of
the consolidated profit before taxes, extraordinary items and directors'
emoluments, in respect of each fiscal year commencing with the year ending 31
December 1995. In the event that the participating dividends are not paid on the
due date the amount of the overdue dividend shall be increased by way of a
further cumulative dividend at the rate of

78
<PAGE> 79

CROSSCO (157) LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3% per annum over and above the Midland Bank plc base rate, calculated on a
daily basis, until the dividend is paid.

The shares are preferred (after the preference shares) upon liquidation to
the full extent of the issue price and any unpaid arrears and accruals of
dividends.

N ACQUISITIONS

On 10 August 1995 the Company acquired the whole of the issued share
capital of SOL for a total consideration of $54,158,000.

The assets and liabilities of SOL acquired are set out below:

<TABLE>
<CAPTION>
NEW BOOK BASIS
BOOK VALUE REVALUATION --------------
---------- ----------- $'000
$'000 $'000
<S> <C> <C> <C>
CURRENT ASSETS
Cash........................................... 396 -- 396
Accounts receivable............................ 7,825 -- 7,825
Inventories.................................... 21,983 1,897 23,880
Prepayments.................................... 932 -- 932
------ ------ ------
Total current assets................. 31,136 1,897 33,033
Property, plant and equipment, net............. 51,591 (6,933) 44,658
------ ------ ------
Total assets......................... 82,727 (5,036) 77,691
------ ------ ------
CURRENT LIABILITIES
Accounts payable............................... 2,764 -- 2,764
Accrued expenses............................... 7,115 -- 7,115
Accrued income taxes........................... 1,889 -- 1,889
------ ------ ------
Total current liabilities............ 11,768 -- 11,768
------ ------ ------
NON-CURRENT LIABILITIES
Deferred income................................ 2,912 -- 2,912
Deferred income taxes.......................... 3,622 626 4,248
Accrued expenses............................... 4,605 -- 4,605
------ ------ ------
Total non-current liabilities........ 11,139 626 11,765
------ ------ ------
Total liabilities.................... 22,907 626 23,533
------ ------ ------
Net assets..................................... 59,820 (5,662) 54,158
====== ====== ======
Satisfied by cash.............................. 54,158
======
</TABLE>

In accordance with Accounting Principles Board Opinion 16, negative
goodwill has been allocated to reduce the value assigned to property, plant and
equipment in determining their fair value.

Analysis of the net cash outflow in respect of the purchase of SOL:

<TABLE>
<CAPTION>
$'000
<S> <C>
Cash consideration..................................................... 54,158
Cash acquired.......................................................... (396)
-------
Net cash outflow....................................................... 53,762
=======
</TABLE>

O SEGMENT INFORMATION

The Group considers that it operates in one industry segment, the
manufacture of fine chemical intermediates for the pharmaceuticals industry.

79
<PAGE> 80

CROSSCO (157) LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Gross revenues, operating profits and identifiable assets of the Group all
relate to UK operations. Gross revenues by destination are set out below:

<TABLE>
<CAPTION>
UNITED
KINGDOM & ASIA,
THE REPUBLIC CONTINENTAL AFRICA
OF IRELAND EUROPE AMERICA & PACIFIC TOTAL
------------ ----------- ------- --------- ------
$'000 $'000 $'000 $'000 $'000
<S> <C> <C> <C> <C> <C>
GROSS REVENUES -- PERIOD ENDED
DECEMBER 31, 1995
Third parties........................... 17,372 16,103 1,121 232 34,828
===== ===== === = =====
</TABLE>

Gross revenues from each of two customers exceeded 10% during the period
presented. These customers accounted for the following percentages of gross
revenues:

<TABLE>
<CAPTION>
PERIOD ENDED
31 DECEMBER
1995
------------
%
<S> <C>
THIRD PARTY (UNITED KINGDOM & REPUBLIC OF IRELAND)
Third party A........................................................... 12
Third party B........................................................... 24
==
</TABLE>

Concentration of credit risk with respect to accounts receivable is
significant in respect of two third party customers. Total accounts receivable
due from third party A and third party B were $1,251,000 and $2,047,000;
respectively accounting for 16% and 26% of trade accounts receivable at 31
December 1995.

P INCOME TAX EXPENSE

Income tax expense comprised the following:

<TABLE>
<CAPTION>
PERIOD ENDED
31 DECEMBER
1995
------------
$'000
<S> <C>
United Kingdom corporation tax at 33% based on income for the period.... 363
Deferred taxation....................................................... (714)
---
Total taxes on income......................................... (351)
===
</TABLE>

Total taxes on income varied from the amount computed by applying the
corporate tax rate to income before taxes. The differences were mainly
attributable to the following factors:

<TABLE>
<CAPTION>
PERIOD ENDED
31 DECEMBER
1995
------------
%
<S> <C>
United Kingdom statutory corporation tax rate........................... 33
Release of government grants............................................ 1.3
Other differences....................................................... (7.5)
----
26.8
====
</TABLE>

80
<PAGE> 81

CROSSCO (157) LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The deferred taxation credit was mainly the result of the tax effect of
timing differences as follows:

<TABLE>
<CAPTION>
PERIOD
ENDED
31 DECEMBER
1995
-----------
$'000
<S> <C>
Excess capital allowances.............................................. 374
Engineering provision.................................................. (58)
Retirement plan provision.............................................. 25
Restructuring provision................................................ (338)
Environmental provision................................................ (291)
Revaluation of inventories............................................. (578)
Other.................................................................. 152
----
(714)
====
</TABLE>

Q RELATED PARTY TRANSACTIONS

Included within the cost of acquisition of SOL of $54,158,000 (Note N) is
an amount of $590,000 which was paid to the HSBC Entities in respect of the
provision of equity and loan finance to the Company. This transaction was
undertaken on normal commercial terms.

The Company's shareholders provide loan finance to the Company. During the
period ended December 31, 1995, the Company's interest expense included $626,000
of interest on a note payable to shareholders. At December 31, 1995, accrued
expenses -- other liabilities includes an amount of $574,000 in respect of
interest due to shareholders. Details of the note payable to shareholders are
set out in Note J. These transactions were undertaken on normal commercial
terms.

The Company's bank is a related party of the HSBC Entities. During the
period ended December 31, 1995, the Company's interest expense included
$1,444,000 of interest on a note payable to the bank and arrangement fees in
respect of long-term debt and the revolving group credit facility. At December
31, 1995, accrued expenses -- other liabilities includes an amount of $25,000 in
respect of interest due to the bank. Details of the arrangements with and the
note payable to the bank at December 31, 1995 are set out in Note J. These
transactions were undertaken on normal commercial terms.

R RETIREMENT PLAN

The employees of the Group participate in the Sanofi Winthrop Pension Plan
(SWPP). Benefits are based on years of service and the employee's compensation
throughout that period.

The transferring members were granted back-dated service under the plan and
a transfer of assets from SWGPF to SWPP took place.

Following a transition period after the acquisition of SOL on 10 August
1995, the Group's participation in SWPP will terminate. A new plan is expected
to be established in substantially the same form as SWPP covering the Group's
employees. It is intended that there will then be a transfer of assets between
SWPP and the new plan in an amount equal to the present value of the accrued
benefits.

The assets of SWPP are invested in a portfolio of investments managed by
Mercury Asset Management Limited.

81
<PAGE> 82

CROSSCO (157) LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table sets forth the funded status of the element of SWPP in
which the Group has an interest:

<TABLE>
<CAPTION>
31 DECEMBER
1995
-----------
$'000
<S> <C>
Vested benefit obligations............................................... 25,466
------
Accumulated benefit obligations.......................................... 25,466
------
Projected benefit obligations............................................ 41,625
Fair value of plan assets................................................ 34,061
------
Funded status............................................................ (7,564)
Unrecognised transition asset............................................ (2,660)
Unrecognised net loss.................................................... 5,648
------
Accrued pension expense.................................................. (4,576)
======
Due less than one year................................................... 151
Due after more than one year............................................. 4,425
------
4,576
======
</TABLE>

The pension costs and related assumptions in respect of the period to 31
December 1995 are set out below:

<TABLE>
<CAPTION>
PERIOD ENDED
31 DECEMBER
1995
------------
%
<S> <C>
ASSUMPTIONS
Discount rate............................................................ 8
Return on plan assets.................................................... 9 1/2
Salary increases......................................................... 7

'$000
PENSION EXPENSE
Service cost............................................................. 740
Interest cost............................................................ 1,080
Return on plan assets.................................................... (1,014)
Amortisation of transition asset......................................... (130)
-----
Net periodic pension cost................................................ 676
Employer contribution.................................................... (754)
Translation adjustments.................................................. (105)
-----
Decrease in accrued pension expense...................................... 183
=====
</TABLE>

SOL enjoyed a pension contribution holiday from the establishment of the
SWPP until 31 December 1994. Normal contribution levels resumed on 1 January
1995.

S FOREIGN CURRENCY TRANSACTIONS

Foreign currency transactions gave rise to gains of $11,000 in the period
to 31 December 1995.

82
<PAGE> 83

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors
of ChiRex Inc.:

We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of ChiRex Inc. included in ChiRex Inc.'s
Annual Report on Form 10-K as of and for the year ended December 31, 1996 and
have issued our report thereon dated February 17, 1997. Our audit was made for
the purpose of forming an opinion on the basic consolidated financial statements
taken as a whole. ChiRex Inc.'s Schedule of Valuation and Qualifying Accounts,
included in Schedule II, is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic consolidated financial statements and, in our opinion
fairly states, in all material respects, the financial data required to be set
forth therein as of and for the year ended December 31, 1996 in relation to the
basic consolidated financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Boston, Massachusetts
February 17, 1997

83
<PAGE> 84

REPORT OF INDEPENDENT ACCOUNTANTS

In connection with our audits of the financial statements of ChiRex Inc.
(formerly SepraChem Inc.) as of December 31, 1995 and for each of the two years
in the period then ended, which financial statements are included in this Form
10-K, we have also audited the financial statement schedule of ChiRex Inc.
(formerly SepraChem Inc.) listed in Item 14(a)(2) herein.

In our opinion, this financial statement schedule, where considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information required to be included therein.

COOPERS & LYBRAND L.L.P.

Boston, Massachusetts
February 9, 1996

84
<PAGE> 85

CHIREX INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, 1996

<TABLE>
<CAPTION>
BALANCE OF CHARGED TO BALANCE AT
BEGINNING OF STATEMENTS OF END OF
PERIOD OPERATIONS DEDUCTIONS PERIOD
------------ ------------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
1994......................................... -- -- -- --
1995......................................... -- $ 70,000 -- $ 70,000
1996......................................... $ 70,000 $ 434,000 $204,000 $ 300,000
</TABLE>

85
<PAGE> 86

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

On September 5, 1996, the Company engaged Arthur Andersen LLP as its
independent accountant and dismissed Coopers & Lybrand L.L.P. from such
position. The decision to change accountants was made by the Board of Directors
of the Company. During the fiscal years ended December 31, 1994 and 1995 and the
subsequent interim period immediately preceding the date of this change in
accountants, the Company and each of its subsidiaries (the "Subsidiaries") had
no disagreements with Coopers & Lybrand L.L.P. on any matter of accounting
principles or practices, financial statements disclosure or auditing scope or
procedure, which disagreement(s), if not resolved to the satisfaction of Coopers
& Lybrand L.L.P., would have caused Coopers & Lybrand L.L.P. to make a reference
to the subject matter of the disagreement in connection with its reports on the
financial statements of the Company or any of the Subsidiaries.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The required information is hereby incorporated by reference from the
Company's Proxy Statement for the 1997 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission by April 30, 1997.

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

<TABLE>
<C> <S>
(a)(1) Financial Statements. The financial statements listed under "Item 8. Financial
Statements and Supplementary Data" are filed as part of this Annual Report on Form
10-K.
(2) Financial Statement Schedule. The financial statement schedule listed under "Item
8. Financial Statements and Supplementary Data" is filed as part of this Annual
Report on Form 10-K.
(3) Exhibits. The Exhibits listed on the accompanying Index to Exhibits are filed as
part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K. The Company did not file any Current Reports on Form 8-K
during the last quarter of the period covered by this Annual Report on Form 10-K.
</TABLE>

86
<PAGE> 87

CHIREX INC.

INDEX TO EXHIBITS
ITEM 14 (a) (3)

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ---------------------------------------------------------------------------------
<S> <C>
2.1* Agreement for the Sale and Purchase of the Entire Issued Share Capital of
Sterling Organics Limited by and among Sanofi Winthrop Limited, Crossco (157)
Limited and Sanofi, dated August 10, 1995.
2.2* Contribution Agreement by and among the Registrant, SepraChem Inc. and the
shareholders of Crossco (157) Limited listed on Schedule I attached thereto,
dated February 7, 1996.
2.3* Agreement and Plan of Merger by and among the Registrant, SepraChem, Sepracor,
SepraChem Merger Corporation, Roger B. Pettman and Certain Trusts Affiliated with
Victor H. Woolley, dated as of February 6, 1996, as amended.
3.1* Certificate of Incorporation of the Registrant.
3.2*** Amended and Restated By-Laws of the Registrant.
4* Specimen Certificate for Shares of Common Stock, $.01 par value, of the
Registrant.
10.1* 1995 Employee Stock Purchase Plan.
10.2*** 1997 Stock Incentive Plan.
10.3*** Amended and Restated 1995 Director Stock Option Plan.
10.4* Employment Agreement with Alan R. Clark.
10.5* Employment Agreement with David F. Raynor.
10.6*** Employment Agreement with John Graham Thorpe.
10.7*** Employment Agreement with John Edward Weir.
10.8*** Settlement Agreement with Robert L. Bratzler.
10.9*** Consulting Agreement with Robert L. Bratzler.
10.10*** ChiRex Pension Scheme.
10.11+*** Supply Agreement dated as of January 21, 1997 between ChiRex Inc. and Cell
Therapeutics, Inc.
10.12+*** License Agreement dated as of January 28, 1997 between ChiRex Inc. and President
and Fellows of Harvard College.
10.13* Contract Research Agreement by and between the Registrant and Sepracor, dated
December 21, 1995.
10.14* Contract Manufacturing Agreement by and between the Registrant and Sepracor,
dated December 21, 1995.
10.15* Technology Transfer and License Agreement by and between the Registrant and
Sepracor, dated as of January 1, 1995.
10.16* Corporate Services Agreement by and between the Registrant and Sepracor, dated
December 21, 1995.
10.17* Supply Agreement by and between the Registrant and Sepracor, dated December 21,
1995.
10.18* Technology Development Agreement by and between SepraChem and Sandoz Pharma Ltd.,
dated October 1, 1995.
10.19* License Agreement by and between Sepracor and Massachusetts Institute of
Technology, dated May 5, 1989.
10.20* License Agreement by and between Sepracor and Massachusetts Institute of
Technology, dated June 21, 1991.
</TABLE>

87
<PAGE> 88

CHIREX INC.

INDEX TO EXHIBITS
ITEM 14 (A) (3)

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ---------------------------------------------------------------------------------
<S> <C>
10.21* License Agreement by and between Sepracor and Research Corporation Technologies,
Inc., dated March 13, 1991.
10.22* License Agreement by and between Sepracor and Research Corporation Technologies,
Inc., dated September 10, 1992.
10.23* License Agreement by and between Sepracor and Tanabe Seiyaku Co., Ltd., dated
October 30, 1990.
10.24* Toll Manufacturing Agreement by and between Sterling Organics and Rohm and Haas
(UK) Limited, dated July 4, 1991.
10.25* Toll Manufacturing Agreement by and between Sterling Organics and Rohm and Haas
(UK) Limited, dated August 27, 1987.
10.26* Supply Agreement by and between Sterling Organics and Sanofi Winthrop Limited and
Sterling Winthrop, Inc. dated June 17, 1994.
10.27* Supply Agreement by and between Sterling Organics and Sanofi S.A., dated August
10, 1995.
10.28* Supply Agreement by and between Sterling Organics and Sanofi S.A., dated August
10, 1995.
10.29*** Sterling/Currency LIBOR Revolving Credit Facility between Midland Bank Plc and
ChiRex (Holdings) Limited, executed as of August 10, 1996.
10.30* Procedural Joint Union Agreement by and between Sterling Organics and AEEU, dated
July 7, 1975.
10.31* House Agreement by and between Sterling Organics and AEEU, dated February 1976.
10.32* Procedural Agreement by and between Sterling Organics and EESA, dated November 3,
1979.
10.33* Agreement by and between Sterling Organics and ACTS, dated July 19, 1978.
10.34* Escrow Agreement by and between Alan R. Clark, David F. Raynor, John E. Weir, J.
Graham Thorpe, Hugh F. Ford, William Riddell, Geoff B. Loxham, C. Lyn Chapple,
David A. Routledge and Broomes Secretarial Services Limited.
16** Letter re Change in Certifying Accountant
21*** Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Coopers & Lybrand
27 Financial Data Schedule
</TABLE>

- ---------------

<TABLE>
<S> <C>
* Incorporated by reference to the corresponding exhibits in the Registration Statement on
Form S-1 previously filed by the Registrant (File no. 33-80831).
** Incorporated by reference to the Form 8-K previously filed by the Registrant on
September 11, 1996.
*** Incorporated by reference to the corresponding exhibits in the Registration Statement on
Form S-1 previously filed by the Registrant on February 26, 1997 (File no. 333-22401).
+ Confidential treatment request pending as to certain portions.
</TABLE>

88
<PAGE> 89

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Town of Wellesley, Commonwealth of Massachusetts, on
this 7th day of March, 1997.

CHIREX INC.

By: /s/ ALAN R. CLARK
------------------------------------
Alan R. Clark, Chairman
and Chief Executive Officer

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been
signed below by the following persons in the capacities indicated below on this
7th day of March, 1997.

<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------ -------------------------------------------------
<C> <S>
/s/ ALAN R. CLARK Chairman of the Board of Directors and Chief
- ------------------------------------------ Executive Officer (Principal Executive Officer)
Alan R. Clark

/s/ MICHAEL A. GRIFFITH Chief Financial Officer, Secretary and Director
- ------------------------------------------ (Principal Financial and Accounting Officer)
Michael A. Griffith

/s/ ROBERT L. BRATZLER Director
- ------------------------------------------
Robert L. Bratzler

/s/ DIRK DETERT Director
- ------------------------------------------
Dirk Detert

/s/ ELIZABETH M. GREETHAM Director
- ------------------------------------------
Elizabeth M. Greetham

/s/ W. DIETER ZANDER Director
- ------------------------------------------
W. Dieter Zander
</TABLE>

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation
by reference of our reports dated February 17, 1997, included in or
incorporated by reference into ChiRex Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1996, and into ChiRex Inc.'s previously filed
Registration Statement No. 333-02216 on Form S-8, Registration Statement
No. 333-02218 on Form S-8 and Registration Statement No. 333-02220 on Form S-8.

ARTHUR ANDERSEN LLP

Boston, Massachusetts
March 6, 1997

<PAGE> 1

EXHIBIT 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the previously filed
registration statements of ChiRex Inc. on Forms S-8 (File Nos. 333-02216,
333-02218 and 333-02220) of our reports dated February 9, 1996, on our audits of
the financial statements and financial statement schedule of ChiRex Inc.
(formerly SepraChem Inc.), which report are included in this Annual Report on
Form 10-K. We also consent to the references to our firm under the caption
"Selected Historical Financial Data."

COOPERS & LYBRAND L.L.P.

Boston, Massachusetts
March 7, 1997

<PAGE> 1

EXHIBIT 23.3

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the previously filed
registration statements of ChiRex on Form S-8 (File Nos. 333-02216, 333-02218
and 333-02220) of our reports dated February 27, 1996, on our audits of the
financial statements of Sterling Organics Limited and our audit of the financial
statements of Crossco (157) Limited, which reports are included in this Annual
Report on Form 10-K. We also consent to the references to our firm under the
caption "Selected Historical Financial Data."

COOPERS & LYBRAND

Newcastle upon Tyne
England
March 7, 1997

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<FISCAL-YEAR-END> DEC-31-1996
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</TABLE>