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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NO. 0-27698
CHIREX INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3296309
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
300 ATLANTIC STREET, SUITE 402
STAMFORD, CONNECTICUT 06901
(ADDRESS OF PRINCIPLE EXECUTIVE OFFICE) (ZIP CODE)
(203) 351-2300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
TITLE OF EACH CLASS SECURITIES
REGISTERED PURSUANT TO SECTION 12(g)
OF THE SECURITIES EXCHANGE ACT NAME OF EXCHANGE
OF 1934 ON WHICH REGISTERED
___________________________ __________________________________
COMMON STOCK, $.01 PAR VALUE THE NASDAQ STOCK MARKET'S NATIONAL
MARKET
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
such 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 $197,632,965 as of March 4, 1998.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
As of March 4, 1998 there were 11,798,983 shares outstanding (excluding as
of such date 1,491,295 shares of common stock issuable upon exercise of
options with a weighted average price of $10.78 per share).
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CHIREX INC.
TABLE OF CONTENTS
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PAGE
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PART I
<C> <S> <C>
ITEM 1. BUSINESS....................................................... 1
ITEM 2. PROPERTIES..................................................... 11
ITEM 3. LEGAL PROCEEDINGS.............................................. 11
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS........................................................ 12
ITEM 6. SELECTED FINANCIAL DATA........................................ 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS...................................... 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE........................................... 15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 15
ITEM 11. EXECUTIVE COMPENSATION......................................... 15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS................ 15
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS........... 16
</TABLE>
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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 over 50 products at
its manufacturing facilities located in Dudley, England and Annan, Scotland.
The Company's customers include Glaxo Wellcome plc, SmithKline Beecham plc,
Pfizer Inc., Pharmacia & Upjohn Inc., Rohm and Haas Company, ACS Dobfar, Cell
Therapeutics Inc., and Sanofi S.A.
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, added new core products to the
Company's portfolio while phasing out non-core products to release capacity
and improve profitability, purchased a new manufacturing facility in Annan,
Scotland and further developed its commercial development process and
technology base. The Company is engaged in one business segment, the
development, manufacture and marketing of pharmaceutical fine chemicals.
RECENT DEVELOPMENTS
In October 1997, the Company purchased a Glaxo Wellcome plc pharmaceutical
production facility located in Annan, Scotland for approximately $69 million,
including payment for certain working capital. As part of the transaction,
Glaxo Wellcome awarded the Company a five-year contract to supply certain
pharmaceutical intermediates and active ingredients with an aggregate sales
value of approximately $450 million in revenues. The Company plans to invest
approximately $25 million over two years to accommodate newly contracted
products and modify the facility for general purpose manufacturing.
In April 1997, as part of its strategy to phase out of non-core products,
the Company disposed of its acetaminophen (paracetamol) business to Rhone
Poulenc Chimie SpA. Although acetaminophen, an OTC analgesic, was the largest
volume product manufactured by the Company, representing approximately 31% of
the Company's 1996 pro forma revenues, it was not highly profitable at the
gross margin level and certain long-term supply arrangements were scheduled to
terminate by 1998 year end. In connection with the disposition of the
business, the Company implemented measures to partially offset the effect on
operating performance, including a 15% headcount reduction and a rebudget of
all cost centers.
During the spring of 1997 the Company finalized its 1996 agreement with
Dabur India Ltd. ("Dabur") to dissolve their joint venture, InNova
Pharmaceuticals SRL ("InNova") due to certain changes in the market for semi-
synthetic paclitaxel, a compound used in the treatment of breast and ovarian
cancer.
In January 1997, the Company entered into an exclusive license with Harvard
University for the application of kinetic resolution technology ("KR
Technology") applicable to the manufacture of single isomer forms of certain
chiral intermediates. The Company believes that such technology may be
developed to reduce the manufacturing costs and improve purity, potency and
efficacy for some single-isomer drugs and intermediates.
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
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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 at clinical, pilot and commercial
scale
.Technical competence and a broad technology base
.Regulatory support at all development stages
.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 information management, clinical trial
management, 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 accelerate realization of revenue,
capture market share and obtain the longest possible term 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. 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, 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.
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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 spend the
substantial capital resources, time, competency, personnel and risk
necessary to operate 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 and Annan facilities 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;
and
. 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.
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 600 cubic meters (over 160,000 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.
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
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transformations. The third building is a plant that was dedicated to the
manufacture of acetaminophen. The equipment associated with the
acetaminophen business was dismantled in 1997 and this plant is now
available for future capacity expansion. 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 has made a significant addition to its manufacturing capacity
with the acquisition of a former Glaxo Wellcome facility in Annan,
Scotland. This 154 acre site encompasses three main production buildings.
Two of the production buildings have operated as a unit since 1980 to
produce large volumes of an anti-hypertensive drug. Special features of
this unit include computer control and totally enclosed plant with bulk
handling systems (for both powders and liquids) to ensure safe processing
of chemicals and solvents. The second production unit was opened in 1987
and has manufactured one of the intermediates for an anti-ulcer drug. Under
a Supply Agreement with Glaxo Wellcome, the Company will continue to
manufacture certain products currently made at the site and plans to invest
approximately $25 million over two years to accommodate newly contracted
products and modify the facility for general purpose pharmaceutical fine
chemical manufacturing. The second production unit comprises nearly half
the site capacity and is available for future contract manufacturing
demand.
The Company's quality assurance department has extensive 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,
hazard evaluation 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. 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 because the CMO is certified to
produce 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"). In
January 1997, the Company added to this technology platform by licensing KR
Technology from Harvard University. During 1997, the Company manufactured
four products in its pilot plant using its ChiRex Technologies.
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PRODUCT PORTFOLIO
The Company sold over 50 products in 1997. Approximately 90% of the
Company's product portfolio are pharmaceutical products with the remaining 10%
consisting of 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.
Core Products
During 1996, management identified certain core products which it
believes offer superior long-term growth potential, higher margins or
strategic customer relationship benefits. In 1997, core products accounted
for 72.4% of the Company's revenues. The Company's customers'
pharmaceutical products are used in the treatment of, among others, cancer,
cardiovascular disease, AIDS, urinary tract infections and high
cholesterol.
Non-Core Products
In 1997, the Company effectively completed the planned phase out of
products which do not meet management's criteria regarding profitability,
growth profile or customer development potential. There are currently
approximately less than five remaining non-core products which the Company
plans to eliminate from its product portfolio. In 1997, non-core products
(excluding acetaminophen) accounted for 6.4% of the Company's revenues.
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. The following table sets forth 37 products in
the Company's development pipeline which the Company believes have significant
revenue potential. Sixteen of these products have been identified as core
products, of which ten are produced at pilot-scale and had revenues associated
with them in 1997 and fifteen incorporate ChiRex Technologies. The remaining
products are at an earlier stage in the development cycle and have not been
identified as core products.
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NUMBER OF
DEVELOPMENT PHASE OF COMPANY
DRUG(1) PRODUCTS REPRESENTATIVE INDICATIONS
-------------------- --------- -------------------------------------------------------------
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Commercial.............. 18 AIDS, Hypertension, Central Nervous System Disorder, Diabetes
Phase III............... 6 Cancer, Pancreatitis, Asthma, Migrane
Phase II................ 7 AIDS
Preclinical/Phase
I/Unknown.............. 6 Various
</TABLE>
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(1) Based on customer provided or publicly available information.
Fourteen of the commercial products listed above 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.
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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
approximately 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>
<CAPTION>
DEVELOPMENT
--------------------------------
METHOD OF
TECHNOLOGY USE PHASE MANUFACTURE
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<S> <C> <C> <C>
Kinetic Resolution...... Catalytic ring opening Pilot Plant Asymmetric Synthesis
of epoxides to make
chiral epoxides and
Diols
Asymmetric Catalytic asymmetric Commercial Asymmetric Synthesis
dihydroxylation........ 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 Resolution by Commercial Resolution
crystallization........ 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 technology position through significant
research and development expenditures, licensing third party technology and by
maintaining close relationships with its Scientific Advisory Board and
institutional research partners.
In support of its 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.
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The Company uses a wide range of computer software in its operations. The
Company has dedicated internal resources to identify and resolve "year 2000"
compliance issues within computer applications utilized by the Company. The
Company has also engaged external resources and will purchase necessary
computer software and upgrades to become "year 2000" compliant.
SALES AND MARKETING, CUSTOMERS
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 is dependent on a small number of customers. In 1997, the
Company's four largest customers accounted for approximately 76% of total
revenues. Sanofi S.A., Glaxo Wellcome plc, Rohm and Haas Company and
SmithKline Beecham accounted for approximately 36%, 17%, 13% and 10% of the
Company's 1997 revenues respectively. The loss of one or more of these
customers could have a material adverse effect on the Company. In addition, in
light of the worldwide consolidation of the pharmaceutical market, there is a
risk that the Company could lose customers in market consolidations or become
more dependent on individual customers as such customers increase their size
and market share.
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 and marketing personnel present papers at symposia on a regular
basis.
CONTRACTS
The Company conducts business on both a purchase order basis and a formal
contract basis. Where the company conducts business on a formal contract
basis, it has entered into a variety of contractual arrangements with its
customers, on both a fixed price and a cost plus basis. In cases where the
contracts are fixed price, the Company bears the cost of overruns, with
certain exceptions, but benefits if the costs are lower than anticipated. In
cases where the contracts are on a cost plus basis, the Company is guaranteed
reimbursement for its actual costs of performance and an agreed upon profit,
with certain exceptions.
Contracts may have terms ranging from a few months to several years
depending upon the nature of the work being performed and the approval status
of the product in question. Some of the Company's contracts are terminable by
the customer upon notice. Contracts may also be terminated for a variety of
reasons including unexpected or undesired results of the product, the failure
of a product to satisfy safety requirements, the failure of a product to gain
regulatory approval or a party's failure to properly discharge its obligations
under such agreement.
In 1997 the Company bore the cost of overruns on certain contracts with
customers which were on a fixed price basis. In response to such losses,
management of the Company has initiated discussions with such customers and is
attempting to renegotiate these contracts. However, there can be no assurance
that any renegotiation will be successful or that any new contractual
provisions so negotiated will result in arrangements which will be more
favorable to the Company.
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
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approximately 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.
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 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,
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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.
Dudley, England Facility
The Company's manufacturing plant in Dudley, England is subject to the U.K.
Environmental Protection Act 1990 ("EPA 1990"), which requires
authorizations for any industrial air and certain 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 for its Dudley facility are administered by
the U.K.'s Environment Agency ("EA"). In addition, the Dudley plant is also
subject to the U.K. Water Resource Act 1991 ("WRA") governing the discharge
of liquid waste, and the U.K. Water Industry Act 1991 ("WIA") governing
discharges to sewers.
The Company believes it is in compliance in all material respects with
its IPC authorization conditions, limitations and compliance schedules for
Dudley. 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 in Dudley,
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 ("NW") is the local sewer
operator and the EA is the governmental regulatory body responsible for the
regulation of NW 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 NW 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.
Since the IPO, the Company reached agreement with NW and the EA on a set
of contingency measures that would be taken in the event the Company's
biological pretreatment plant in Dudley 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 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 Dudley site are
confined and will not give rise to liability under the 1995 Act.
Annan, Scotland Facility
The Company's manufacturing plant in Annan, Scotland is also subject to
the EPA 1990 and the 1995 Act. The Company's IPC authorizations for Annan
are administered by the Scottish Environmental Protection Agency ("SEPA").
In addition, the facility is also subject to the Sewerage (Scotland) Act
1968 and the Control of Pollution Act 1974 providing for the regulation of
trade or sewage effluent to streams and other inland waters, as well as
certain provisions of The Rivers (Prevention of Pollution) (Scotland) Acts
1951 and 1965.
9
<PAGE>
The Company possesses certain IPC authorizations covering existing
products at the Annan site. In addition, the Company has also applied for
additional IPC authorizations governing other products to be manufactured
and is engaged in discussions with SEPA to obtain envelope authorizations.
SEPA has approved a two phase, twenty-four month environmental improvement
program for the Annan incinerator. Phase one relating to burner
modifications is underway and is scheduled to be completed by the end of
second quarter 1998. Phase two which involves installation of a baghouse
filter to manage particulate emissions, will begin by September 1998 with
completion expected by year end. The Company has also agreed with SEPA upon
a program to reduce volatile organic compound emissions by fitting the site
with new vacuum pumps and scrubber systems.
An oil spill following the off-loading of a road tanker occurred on the
Annan site in 1992 when Glaxo Wellcome plc owned the facility. Actions to
control the oil spill were taken at such time. However, sporadic problems
have been encountered since such spill, involving the appearance of fuel in
the site's drainage system. To address this issue, the Company has applied
for permission to install a land drainage interceptor to capture minor
residual oil before it can enter any waterways or the land drainage system.
Under the Asset Purchase Agreement between the Company and Glaxo Wellcome,.
Glaxo is responsible for remediation costs relating to such oil spill and
has agreed to provide the Company with certain indemnities in the event of
governmental and other claims.
There can be no assurance that the Company will not be required to incur
future expenditures for environmental compliance and control at both the
Dudley and Annan sites. 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.
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's
manufacturing operations are required to comply with applicable FDA
regulations with respect to cGMP. Similar requirements are imposed by
regulatory authorities in other countries. The concept of cGMP encompasses all
aspects of the production process, including validation and record keeping,
and involves changing and evolving standards. Consequently, continuing
compliance with cGMP is a particularly difficult and expensive part of
regulatory compliance, especially since the FDA and certain other analogous
international governmental agencies have increased the number of regular
inspections to determine compliance. 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.
Continuing studies of the proper utilization, safety and efficacy of
pharmaceutical products are being conducted by government agencies, industry
and others. Such studies, which increasingly employ sophisticated methods and
techniques, can call into question the utilization, safety and efficacy of
previously marketed products and in some cases have resulted, and may in the
future result, in the discontinuance of their marketing and, in certain
countries, give rise to claims for damages for persons who allege they have
been injured as a result of their use.
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.
The evolving and complex nature of regulatory requirements, the broad
authority and discretion of governmental agencies, continuing studies
involving the safety of currently marketed pharmaceutical products and the
generally high level of regulatory oversight results in a continuing
possibility that from time to time the Company will be adversely affected by
regulatory actions despite its ongoing efforts and commitment to achieve and
maintain compliance with regulatory requirements.
10
<PAGE>
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.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company derives the majority of its revenues and operating income from
its foreign operations. The Company's foreign operations are subject to
various risks including, in certain countries, currency exchange fluctuations
and restrictions, restrictions on imports, government price controls,
restrictions on the level of remittance of dividends, interest, royalties and
other payments, the need for governmental approval of new operations, the
continuation of existing operations and other corporate actions, political
instability, the possibility of expropriation and uncertainty as to the
enforcement of commercial rights, trademarks and other proprietary rights. In
addition, the introduction of the Euro as currency in Europe in 1999 may
subject the Company to additional risks including contract termination,
computer system application changes, and currency swaps.
EMPLOYEES
As of December 31, 1997, the Company had 578 full-time employees. Three
hundred and seventy-four of the Company's full time employees are unionized.
The Company believes its labor relations are satisfactory.
ITEM 2. PROPERTIES
The Company's production facilities are located in the United Kingdom. The
Company's corporate office is located in Stamford, Connecticut.
<TABLE>
<CAPTION>
LAND SIZE
LOCATION TITLE (ACRES) (SQ. FT) USE
-------- ------ ------ ------- -----------------------------------
<S> <C> <C> <C> <C>
Stamford, CT Leased -- 4,500 Corporate Office
Dudley, England Owned 42 443,108 Manufacturing, Warehousing, Offices
Annan, Scotland Owned 154 158,446 Manufacturing, Warehousing, Offices
</TABLE>
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 late 1996, Phenomenex Inc., of Torrance, California formally opposed the
Company's attempt to register the ChiRex name as a trademark for "single
isomer chiral intermediate chemical compounds and active ingredients for use
in the manufacture of pharmaceuticals" in a proceeding filed in the U.S.
Patent and Trademark Office's Trademark Trial and Appeal Board. In December
1997, the Company reached a final agreement with Phenomenex whereby Phenomenex
discharged their opposition proceeding on terms favorable to the Company.
Under such agreement, the Company also purchased certain Phenomenex
trademarks.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
<PAGE>
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 SM ("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>
1997: HIGH LOW
----- ------ ------
<S> <C> <C>
First Quarter.............................................. $13.25 $ 9.50
Second Quarter............................................. 12.75 9.88
Third Quarter.............................................. 25.50 11.63
Fourth Quarter............................................. 26.25 16.63
<CAPTION>
1996: HIGH LOW
----- ------ ------
<S> <C> <C>
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 4, 1998, the last reported sale price of the Common Stock as
reported by Nasdaq was $16.75. As of March 4, 1998, there were approximately
6,500 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.
12
<PAGE>
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data of ChiRex Inc. as of
December 31, 1994 and 1995 and for the years then ended have been derived from
the financial statements of ChiRex Inc. which have been audited by Coopers &
Lybrand L.L.P., independent public accountants. The selected historical
financial data for ChiRex Inc. as of December 31, 1996 and 1997 and for the
years then ended, have been derived from the financial statements of ChiRex
Inc. which are incorporated by reference elsewhere in this document and which
have been audited by Arthur Andersen LLP , independent public accountants. The
period from inception (January 1, 1993) to December 31, 1993 is unaudited.
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>
YEARS ENDED DECEMBER 31
---------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- -------- --------
(IN THOUSANDS EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................ $ 4,633 $ 1,810 $ 2,754 $ 74,615 $ 94,100
Cost and expenses:
Cost of goods sold............ 1,565 814 1,715 56,508 71,440
Research and development...... 3,458 2,343 595 3,517 3,937
Selling, general and
administrative............... 1,999 1,964 2,099 8,876 10,587
Restructruring charge, net of
proceeds from disposition of
acetaminophen business....... -- -- -- -- 8,069
Write-off of in-process
research and development..... -- -- -- 5,790 --
Stock compensation charge..... -- -- -- 5,611 --
------- ------- ------- -------- --------
Total operating expenses.... 7,022 5,121 4,409 80,302 94,033
------- ------- ------- -------- --------
Operating income (loss)......... (2,389) (3,311) (1,655) (5,687) 67
Interest expense, net........... -- -- -- 755 1,052
Other expenses.................. -- -- 797 -- --
------- ------- ------- -------- --------
Loss before income taxes........ (2,389) (3,311) (2,452) (6,442) (985)
Benefit (provision) for income
taxes.......................... -- -- -- (1,867) 335
------- ------- ------- -------- --------
Net loss........................ $(2,389) $(3,311) $(2,452) $ (8,309) $ (650)
======= ======= ======= ======== ========
Basic and diluted loss per
common share................... $ (0.68) $ (0.94) $ (0.70) $ (0.88) $ (0.06)
======= ======= ======= ======== ========
BALANCE SHEET DATA (AS OF
DECEMBER 31):
Cash............................ $ -- $ -- $ 1 $ 291 $ 5,347
Total assets.................... 2,531 1,873 2,693 130,806 203,067
Long-term debt.................. -- -- -- 3,933 69,675
Stockholders' equity............ 2,351 1,873 2,693 90,068 93,095
</TABLE>
13
<PAGE>
The following selected historical financial data of ChiRex (Dudley) Limited
(formerly ChiRex Limited or Sterling Organics Limited) as of December 31,
1992, 1993 and 1994 and for the years then ended and for the period from
January 1, 1995 to August 10, 1995, have been derived from the financial
statements of Sterling Organics Limited which have been audited by Coopers &
Lybrand L.L.P., independent public accountants. The following selected
historical financial data of ChiRex (Holdings) Limited (formerly Crossco (157)
Limited) as of December 31, 1995 and for the period from August 10, 1995 to
December 31, 1995, have been derived from the consolidated financial
statements of Crossco (157) Limited which have been audited by Coopers &
Lybrand L.L.P., independent public 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 (DUDLEY) LIMITED
<TABLE>
<CAPTION>
CHIREX (HOLDINGS)
LIMITED(1)
------------------------
CHIREX (DUDLEY) LIMITED PERIOD FROM
----------------------------------- INCEPTION
PERIOD (AUGUST 10, (UNAUDITED)
YEARS ENDED DECEMBER 31 ENDED 1995) TO PERIOD
------------------------ AUGUST 10, DECEMBER 31, ENDED MARCH
1992 1993 1994 1995(1) 1995 11, 1996(2)
------- ------- ------- ---------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $85,609 $74,497 $78,859 $51,375 $34,828 $15,212
Costs and expenses:
Cost of goods sold.... 74,245 66,529 68,572 44,220 30,836 12,564
Research and develop-
ment expenses........ 1,741 1,564 1,816 1,115 651 558
Selling, general and
administrative....... 6,202 4,908 5,598 2,156 2,728 1,300
------- ------- ------- ------- ------- -------
Total costs and ex-
penses............. 82,188 73,001 75,986 47,491 34,215 14,422
------- ------- ------- ------- ------- -------
Operating income........ 3,421 1,496 2,873 3,884 613 790
Interest income (ex-
pense)................. (181) 264 237 16 (1,927) (690)
Other income............ 484 379 481 402 5 --
------- ------- ------- ------- ------- -------
Income before income tax
expense................ 3,724 2,139 3,591 4,302 (1,309) 100
Income tax expense...... 1,353 935 1,061 1,327 (351) 33
------- ------- ------- ------- ------- -------
Net income (loss)... $ 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.................... $ -- $ 3,329 $ -- $ 396 $ 7,845 $ 7,517
Total assets............ 75,552 73,362 77,016 82,727 79,961 78,793
Long-term debt.......... -- -- -- -- 40,304 40,376
Total shareholders' eq-
uity................... 49,824 50,502 54,849 59,821 365 322
</TABLE>
- --------
(1) On August 10, 1995, ChiRex (Dudley) Limited was acquired by ChiRex
(Holdings) Limited.
(2) On March 11, 1996, ChiRex (Holdings) Limited was acquired by ChiRex inc.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Management's discussion and analysis of results of operations and financial
condition as set forth on pages 14 through 17 of the Registrant's 1997 Annual
Report to Stockholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data as set forth on pages 18 through
31 of the Registrant's 1997 Annual Report to Stockholders is incorporated
herein by reference. In addition, the following is included herein as Schedule
II:
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
CHARGED BALANCE
BALANCE (CREDITED) TO AT END
BEGINNING STATEMENTS OF OF
OF PERIOD OPERATIONS DEDUCTIONS PERIOD
--------- ------------- ---------- --------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts:
1995....................... $ -- $ 70,000 $ -- $ 70,000
1996....................... 70,000 434,000 (204,000) 300,000
1997....................... 300,000 (236,000) (42,000) 22,000
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 1998 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission by March 17, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The required information is hereby incorporated by reference from the
Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission by March 17, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The required information is hereby incorporated by reference from the
Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission by March 17, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The required information is hereby incorporated by reference from the
Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission by March 17, 1998.
15
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. The following financial statements as set forth
on pages 18 through 31 of the Registrant's 1997 Annual Report to Stockholders
are incorporated herein by reference:
. Reports of Independent Public Accountants
. Consolidated Balance Sheets as of December 31, 1996 and 1997
. Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997
. Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997
. Consolidated Statements of Stockholder's equity for the years ended
December 31, 1995, 1996 and 1997
. Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedule. Schedules have been omitted as they are
not applicable or the required information is shown in the financial
statements or notes thereto.
(a)(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. In 1997 the Company filed the following Reports on
Form 8-K:
. On April 11, 1997 the Company filed a Report on Form 8-K reporting the
sale of its acetaminophen business to Rhone-Poulenc Chimie.
. On May 1, 1997 the Company filed Amendment Number 1 to its April 11,
1997 Report on Form 8-K. This Amendment Number 1 included pro forma
financial statements relating to the sale of the Company's
acetaminophen business to Rhone-Poulenc Chimie which were not filed in
the original Report.
. On November 17, 1997 the Company filed a Report on Form 8-K reporting
its completion of the purchase of a pharmaceutical production facility
located in Annan, Scotland from Glaxo Wellcome plc.
. On November 26, 1997 the Company filed Amendment Number 1 to its
November 17, 1997 Report on Form 8-K. This Amendment Number 1 included
audited financial statements for the years ended December 31, 1994,
1995 and 1996 relating to the Annan, Scotland business purchased.
16
<PAGE>
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. Wooley, dated as of February 6, 1996, as amended.
2.4+**** Asset Purchase Agreement between ChiRex Limited, ChiRex Inc. and Rhone-
Poulenc Chimie S.A.
2.5+***** Asset Purchase Agreement between ChiRex Inc. and Glaxo Wellcome plc
3.1* Certificate of Incorporation of the Registrant.
3.2*** Amended and Restated By-Laws of the Registrant.
4.1* Specimen Certificate for Shares of Common Stock, $.01 par value, of the
Registrant.
4.2***** Facilities Agreement between ChiRex (Holdings) Limited and Bankers Trust
Company.
4.3***** Pledge Agreement between ChiRex Inc. and Bankers Trust Company.
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.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
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.
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 the Registrant, Roger B. Pettman and Broomes
Secretarial Services Limited.
10.35* 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
10.36+***** Supply Agreement between ChiRex Inc. and Glaxo Wellcome plc.
10.37 Employment Agreement with Michael A. Griffith dated December 22, 1997.
10.38 Employment Agreement with Jon E. Tropsa dated January 1, 1998.
10.39 Employment Agreement with Beth P. Hecht dated December 22, 1997.
10.40 Scientific Advisory Board Consulting Agreement with Eric Jacobsen, Ph.D.
dated July 19, 1996.
13 ChiRex Inc. 1997 Annual Report
16** Letter re Change in Certifying Accountant
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
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 L.L.P.
27 Financial Data Schedule
</TABLE>
- --------
* 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).
**** Incorporated by reference to the Form 8-K previously filed by the
Registrant on April 11, 1997.
***** Incorporated by reference to the Form 8-K previously filed by the
Registrant on November 17, 1997.
# Previously filed by the Registrant on the Company's 1996 Annual Report on
Form 10-K and is incorporated by reference.
+ Confidential treatment received as to certain portions.
19
<PAGE>
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 Stamford, Connecticut on this 13th day of
March, 1998.
CHIREX INC.
/s/ Alan R. Clark
By __________________________________
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 13th day of March, 1998.
SIGNATURE TITLE
/s/ Alan R. Clark Chairman of the Board of Directors and
- ------------------------------------- Chief Executive Officer (Principal
Alan R. Clark Executive Officer)
/s/ Michael A. Griffith Chief Financial Officer, Secretary and
- ------------------------------------- Director (Principal Financial and
Michael A. Griffith Accounting Officer)
/s/ Eric Jacobsen Director
- -------------------------------------
Eric A. Jacobsen
/s/ Dirk Detert Director
- -------------------------------------
Dirk Detert
/s/ Elizabeth M. Greetham Director
- -------------------------------------
Elizabeth M. Greetham
/s/ W. Dieter Zander Director
- -------------------------------------
W. Dieter Zander
- -------------------------------------
SM
20
<PAGE>
EXHIBIT 10.37
Execution Copy
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made as of December 22, 1997, between CHIREX INC., a
Delaware corporation (the "Company"), and Michael A. Griffith ("Executive").
RECITALS
--------
Executive is presently the Chief Financial Officer and Secretary of the
Company. The parties hereto desire to set forth in writing the terms of the
Executive's continuing employment relationship with the Company.
In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Employment. (a) The Company hereby agrees to continue its employment
----------
of Executive to render exclusive and full-time services to the Company as its
Chief Financial Officer and Secretary, and to perform such other duties
commensurate with such office as he shall reasonably be directed by the Board of
Directors of the Company, for the period specified in Section 2 (the "Employment
----------
Period").
- ------
(b) Executive hereby accepts such employment and agrees to render
the services described above to the best of his abilities in a diligent,
trustworthy, businesslike and efficient manner. Executive further agrees to
accept election and to serve during all or any part of the term of this
Agreement as an officer or director of the Company and of any subsidiary or
affiliate of the Company, without any compensation therefor, other than that
specified in this Agreement or as otherwise determined by the Board of Directors
of the Company or of any subsidiary or affiliate, as the case may be.
(c) The duties to be performed by Executive hereunder shall be
performed primarily at the principal office of the Company at 300 Atlantic
Street, Stamford, Connecticut, subject to reasonable travel requirements on
behalf of the Company.
2. Term of Employment. The Employment Period of Executive by the Company
------------------
shall commence on January 1, 1998 and end on December 31, 2000 (the "Initial
Term") unless further extended or sooner terminated as hereinafter provided.
Executive may terminate his employment during the Initial Term with six months
written notice to the Company. Commencing on December 31, 2000, and each
December 31 thereafter, the term of Executive's employment shall automatically
be extended for one additional year to, respectively, December 31, 2001, and
each December 31 thereafter, unless, not later than six months prior to the end
of the Initial Term or any renewal term, either party hereunder shall have given
notice to
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the other party that it does not wish to extend this Agreement. If the Company
gives Executive notice that it does not wish to extend this Agreement during the
Initial Term or any renewal term, Executive shall be entitled to the severance
payments provided in Section 4(d) hereof.
3. Base Salary and Benefits. (a) During the Employment Period,
------------------------
Executive's base salary shall be $250,000 per annum or such higher rate as the
Board may designate from time to time (the "Base Salary"), which salary shall be
-----------
payable in regular installments in accordance with the Company's general payroll
practices and shall be subject to customary withholding. In addition, during the
Employment Period, Executive shall be entitled to participate in all of the
Company's employee benefit programs for which senior executive employees of the
Company and its subsidiaries are generally eligible.
(b) The Company shall reimburse Executive for all reasonable expenses
incurred by him in the course of performing his duties under this Agreement
which are consistent with the Company's policies in effect from time to time
with respect to travel, entertainment and other business expenses, subject to
the Company's requirements with respect to reporting and documentation of such
expenses.
(c) In addition to the Base Salary, the Board may, in its sole discretion,
award a bonus to Executive following the end of each fiscal year during the
Employment Period, which bonus shall be based upon the Company's operating
results during such year and upon Executive achieving defined specific goals and
objectives during the twelve months prior to review.
(d) Executive may be awarded, from time to time, additional compensation
(such as stock options, stock appreciation rights, performance shares,
restricted stock or unrestricted stock) pursuant to the Company's 1997 Stock
Incentive Plan or any additional or replacement incentive compensation program
established for the key employees of the Company. Any awards under such programs
shall be at such levels or in such amounts as the Board of Directors deems, in
its sole discretion, appropriate for the position occupied by Executive and his
performance therein. Subject to Section 4 herein, the terms, conditions and
rights with respect to any such grants will be subject to the actual provisions
and conditions applicable to such plans.
4. Termination and Change of Control. (a) If Executive shall die during
---------------------------------
the Employment Period, this Agreement shall terminate, except that (i)
Executive's surviving spouse or, if none, his estate, shall be entitled to
receive Executive's compensation (including bonus) to the last day of the third
calendar month following the date of his death; and (ii) such termination shall
not affect any rights which Executive may have at the time of his death pursuant
to any insurance or other death benefit, retirement, stock option or other plans
or arrangements of the Company or of any subsidiary or affiliate of the Company,
which rights shall continue to be governed by the provisions of such plans and
arrangements.
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(b) At the sole discretion of the Board of Directors, Executive may be
terminated if the Executive is disabled (as defined below) and shall have been
absent from his duties with the Company on a full time basis for one hundred and
eighty (180) consecutive days, and within thirty (30) days after written notice
by the Company to do so, the Executive shall not have returned to the
performance of his duties hereunder on a full time basis. In the event of such
termination, the Company shall make to Executive the payments specified in
Section 4(d). As used herein, the term "disabled" shall (i) mean that Executive
--------
is unable, as a result of a medically determinable physical or mental
impairment, to perform the duties and services of his position, or (ii) have the
meaning specified in any disability insurance policy maintained by the Company,
whichever is more favorable to the Executive.
(c) The Company may, by notice to Executive, terminate Executive's
employment hereunder for cause. As used herein, "cause" shall mean (i) the
-----
conviction of Executive of a felony or conviction of a misdemeanor if such
misdemeanor involves moral turpitude; or (ii) Executive's voluntary engagement
in conduct constituting larceny, embezzlement, conversion or any other act
involving the misappropriation of Company funds in the course of his employment;
or (iii) the willful refusal to carry out specific directions of the Board of
Directors, which directions shall be consistent with the provisions hereof; or
(iv) Executive's committing any act of gross negligence or intentional
misconduct in the performance or non-performance of his duties as an employee of
the Company; or (v) any material breach by the Executive of any material
provision of this Agreement (other than for reasons related only to the business
performance of the Company or business results achieved by the Executive). For
purposes of this Section 4(c), no act or failure to act on Executive's part
shall be considered to be reason for termination for cause if done, or omitted
to be done, by Executive in good faith and with the reasonable belief that the
action or omission was in the best interests of the Company.
(d) Executive's employment may be terminated at any time by the Company
without cause; provided, however, that in such event Executive shall be entitled
to receive (so long as he executes and delivers the Company's standard form of
release), 250% of Executive's then effective annual Base Salary. The foregoing
amount shall be payable in one lump sum payment within five (5) days after
Executive's last day of active employment. In addition, Executive shall be
entitled to continue participation in the Company's health and other welfare
benefit plans for a period of up to two (2) years or until Executive is covered
by a successor employer's benefit plans, whichever is sooner.
(e) If a "Change in Control" of the Company (as defined in Section 4(f)
below) occurs, all stock options, restricted stock, deferred compensation and
similar benefits which have not yet become vested on the date of a Change in
Control shall become vested upon such event, and Executive shall be permitted to
exercise all such rights in accordance with the administrative provisions of
those plans, whether or not Executive remains employed with the Company or
terminates his employment in accordance with this subsection (e). In addition,
if a Change in Control occurs, Executive may, after such Change in Control,
terminate his employment with the Company for any reason during the thirty (30)
day period immediately following the first anniversary of such Change in
Control, in which event Executive shall be entitled to the
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payments specified in Section 4(d) above and to the other rights described
herein (subject to his compliance therewith).
(f) For purposes of this Agreement, a "Change in Control" of the Company
-----------------
shall be deemed to have occurred if: (i) any person (as such term is used in
Sections 13(d) and 14(d)(2) of the Securities and Exchange Act of 1934) becomes
the beneficial owner, directly or indirectly, of Company securities representing
30% or more of the capital stock of the Company; or (ii) individuals who
constitute the Company's Board of Directors as of the date of this Agreement
(the "Incumbent Board") cease for any reason to constitute at least a majority
---------------
thereof, provided, however, that any person becoming a director subsequent to
the date of this Agreement whose election, or nomination for election by the
Company's stockholders, was approved by a vote of at least 51% of the directors
comprising the Incumbent Board (either by a specific vote or by approval of the
proxy statement of the Company in which such person is named as a nominee for
director, without objection to such nomination) shall be, for the purpose of
this clause (ii), considered as though such person were a member of the
Incumbent Board; or (iii) the Company's shareholders approve a merger or
consolidation (where in either case the Company is not the survivor thereof) in
which shareholders of the Company cease to own at least 80% of the surviving
entity's voting power, or a sale or disposition of all or substantially all of
the Company's assets or a plan of partial or complete liquidation of the
Company.
(g) Executive's employment may be terminated by the Executive for Good
Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the
assignment to Executive of any duties inconsistent in any respect with
Executive's position (including status, offices, titles, and reporting
requirements), authority, duties or responsibilities as contemplated by Section
1(a) hereof, or any other action by the Company which results in a diminution in
such position, authority, duties or responsibilities, excluding for this purpose
an isolated, insubstantial and inadvertent action not taken in bad faith and
which is remedied by the Company promptly after receipt of notice thereof given
by Executive; (ii) any failure by the Company to comply with any of the
provisions of Section 3 hereof, other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by Executive; (iii) the
Company's requiring Executive to be based at any office or location other than
as provided in Section 1(c) hereof; (iv) any purported termination by the
Company of Executive's employment otherwise than as expressly permitted by this
Agreement; or (v) any failure by the Company to obtain an express assumption of
this Agreement by a successor as required pursuant to Section 15 hereof. For
purposes of this Section 4(g), any good faith determination of "Good Reason"
made by Executive shall be conclusive. Upon any termination pursuant to this
subsection (g), Executive shall be entitled to the payment specified in Section
4(d) hereof and to the other rights described therein (subject to his compliance
therewith).
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5. Confidential Information.
------------------------
(a) Executive acknowledges and agrees that the information, observations
and data obtained by him while employed by the Company and its subsidiaries
concerning the business or affairs of the Company or any other subsidiary
("Confidential Information") are the property of the Company or such subsidiary.
------------------------
Therefore, Executive agrees to keep secret and retain in the strictest
confidence all Confidential Information, including without limitation, trade
"know-how" secrets, customer lists, pricing policies, operational methods,
technical processes, formulae, inventions and research projects and other
business affairs of the Company, learned by him prior to or after the date of
this Agreement, and not to disclose them to anyone outside the Company, either
during or after his employment with the Company, except (i) in the course of
performing his duties hereunder; (ii) with the Company's express written
consent; (iii) to the extent that the Confidential Information becomes generally
known to and available for use by the public other than as a result of
Executive's acts or omissions; or (iv) where required to be disclosed by court
order, subpoena or other government process. If Executive shall be required to
make disclosure pursuant to the provisions of clause (iv) of the preceding
sentence, Executive promptly, but in no event more than 48 hours after learning
of such subpoena, court order or other governmental process, shall notify the
Company, by personal delivery or fax (pursuant to Section 10 hereof), and, at
the Company's expense, shall take all reasonably necessary steps requested by
the Company to defend against the enforcement of such subpoena, court order or
other governmental process and permit the Company to intervene and participate
with counsel of its own choice in any related proceeding.
(b) Executive shall deliver to the Company at the termination of his
employment, or at any other time the Company may request, all memoranda, notes,
plans, records, reports, computer tapes, printouts and software and other
documents and data (and copies thereof) relating to the Confidential
Information, Work Product (as defined below) or the business of the Company or
any subsidiary which he may then possess or have under his control.
6. Inventions and Patents. Executive acknowledges that all inventions,
----------------------
innovations, improvements, developments, methods, designs, analyses, drawings,
reports and all similar or related information (whether or not patentable) which
relate to the Company's or any of its subsidiaries' actual or anticipated
business, research and development or existing or future products or services
and which are conceived, developed or made by Executive while employed by the
Company or its predecessor and its subsidiaries ("Work Product") belong to the
------------
Company or such subsidiary. Executive shall promptly disclose such Work Product
to the Board and perform all actions reasonably requested by the Board (whether
during or after his employment) to establish and confirm such ownership
(including, without limitation, assignments, consents, powers of attorney and
other instruments).
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7. Non-Compete, Non-Solicitation. (a) In further consideration of the
-----------------------------
compensation to be paid to Executive hereunder, Executive acknowledges that
during his employment with the Company he has become familiar with the Company's
trade secrets and with other Confidential Information concerning the Company and
its predecessors and its subsidiaries and that his services have been and shall
be of special, unique and extraordinary value to the Company and its
subsidiaries. Therefore, Executive agrees that, during the Employment Period and
for one year thereafter (the "Noncompete Period"), he shall not, directly or
-----------------
indirectly, own any interest in, manage, control, participate in, consult with,
render services for, or in any manner engage in any business competing with the
businesses of the Company or its subsidiaries, as such businesses exist or are
in process on the date of the termination of Executive's employment. Nothing
herein shall prohibit Executive from being a passive owner of not more than 2%
of the outstanding stock of any class of a corporation which is publicly traded,
so long as Executive has no active participation in the business of such
corporation.
(b) During the Noncompete Period, Executive shall not, directly or
indirectly, through another entity (i) induce or attempt to induce any employee
of the Company or any subsidiary to leave the employ of the Company or such
subsidiary, or in any way interfere with the relationship between the Company or
any subsidiary and any employee thereof, (ii) induce or attempt to induce any
customer, supplier, licensee, licensor, franchisee or other business relation of
the Company or any subsidiary to cease doing business with the Company or such
subsidiary, or in any way interfere with the relationship between any such
customer, supplier, licensee or business relation and the Company or any
subsidiary (including, without limitation, making any negative statements or
communications about the Company or its subsidiaries).
(c) If, at the time of enforcement of this Section 7, a court shall hold
that the duration, scope or area restrictions stated herein are unreasonable
under circumstances then existing, the parties agree that the maximum duration,
scope or area reasonable under such circumstances shall be substituted for the
stated duration, scope or area and that the court shall be allowed to revise the
restrictions contained herein to cover the maximum period, scope and area
permitted by law. Executive agrees that the restrictions contained in this
Section 7 are reasonable.
(d) In the event of the breach or a threatened breach by Executive of any
of the provisions of this Section 7, the Company, in addition and supplementary
to other rights and remedies existing in its favor, may apply to any court of
law or equity of competent jurisdiction for specific performance and/or
injunctive or other relief in order to enforce or prevent any violations of the
provisions hereof (without posting a bond or other security). In addition, in
the event of an alleged breach or violation by Executive of this Section 7, the
Noncompete Period shall be extended until such breach or violation has been duly
cured.
8. Indemnification. The Company will indemnify Executive and his legal
---------------
representatives, to the fullest extent permitted by the laws of the State of
Delaware and the existing by-laws of the Company or any other applicable laws or
the provisions of any other corporate document of the Company, and Executive
shall be entitled to the protection of any
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insurance policies the Company may elect to obtain generally for the benefit of
its directors and officers, against all costs, charges and expenses whatsoever
incurred or sustained by him or his legal representatives in connection with any
action, suit or proceeding to which he or his legal representatives may be made
a party by reason of his being or having been a director or officer of the
Company or of any of its subsidiaries or affiliates or actions taken purportedly
on behalf of the Company or of any of its subsidiaries or affiliates.
9. Executive's Representations. Executive hereby represents and warrants
---------------------------
to the Company that (a) the execution, delivery and performance of this
Agreement by Executive do not and shall not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree to which Executive is a party or by which he is bound, and (b) upon the
execution and delivery of this Agreement by the Company, this Agreement shall be
the valid and binding obligation of Executive, enforceable in accordance with
its terms. Executive hereby acknowledges and represents that he has consulted
with independent legal counsel regarding his rights and obligations under this
Agreement and that he fully understands the terms and conditions contained
herein.
10. Notices. Any notice provided for in this Agreement shall be in
-------
writing and shall be deemed to have been duly given if delivered personally with
receipt acknowledged or sent by registered or certified mail or equivalent, if
available, postage prepaid, or by fax (which shall be confirmed by a writing
sent by registered or certified mail or equivalent on the same day that such fax
was sent), addressed to the parties at the following addresses or to such other
address as such party shall hereafter specify by notice to the other:
Notices to Executive: Michael A. Griffith
-------------------- 83 Sawmill Lane
Greenwich, Connecticut 06830
(203) 552-9184 (Phone)
(203) 552-9186 (Fax)
Notices to the Company: ChiRex Inc.
---------------------- 300 Atlantic Street
Suite 402
Stamford, Connecticut 06901
(203) 351-2300 (Phone)
(203) 425-9996 (Fax)
Attention: General Counsel
11. Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall
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not affect any other provision or any other jurisdiction, but this Agreement
shall be reformed, construed and enforced in such jurisdiction as if such
invalid, illegal or unenforceable provision had never been contained herein.
12. Complete Agreement. This Agreement constitutes the complete agreement
------------------
and understanding among the parties and supersedes and preempts any prior
understandings, agreements or representations by or among the parties, written
or oral, which may have related to the subject matter hereof in any way.
13. No Strict Construction. The language used in this Agreement shall be
----------------------
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction shall be applied against any party.
14. Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
15. Successors and Assigns. This Agreement is intended to bind and inure
----------------------
to the benefit of and be enforceable by Executive, the Company and their
respective heirs, successors and assigns, except that Executive may not assign
his rights or delegate his obligations hereunder without the prior written
consent of the Company. The Company will require any successor to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place.
16. Choice of Law. All issues and questions concerning the construction,
-------------
validity, enforcement and interpretation of this Agreement and the exhibits and
schedules hereto shall be governed by, and construed in accordance with, the
laws of the State of New York, without giving effect to any choice of law or
conflict of law rules or provisions that would cause the application of the laws
of any jurisdiction other than the State of New York.
17. Amendment and Waiver. The provisions of this Agreement may be amended
--------------------
or waived only with the prior written consent of the Company and Executive, and
no course of conduct or failure or delay in enforcing the provisions of this
Agreement shall affect the validity, binding effect or enforceability of this
Agreement.
18. Arbitration. Any controversy or claim arising out of or relating to
-----------
this Agreement, the making, interpretation or the breach thereof, other than a
claim solely for injunctive relief for any alleged breach of the provisions of
Section 5 as to which the parties shall have the right to apply for specific
performance to any court having equity jurisdiction, shall be settled by
arbitration in New York City by one arbitrator in accordance with the Commercial
Arbitration Rules of the American Arbitration Association and judgement upon the
award rendered by the arbitrator may be entered in any court having jurisdiction
thereof and any party to the arbitration may, if he elects, institute
proceedings in any court having jurisdiction for the
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specific performance of any such award. The powers of the arbitrator shall
include, but not be limited to, the awarding of injunctive relief. The Company
shall reimburse Executive for all expenses incurred by Executive in connection
with any arbitration, including reasonable attorney's fees, to the extent the
arbitration is concluded in Executive's favor.
19. No Mitigation or Set-Off. The provisions of this Agreement are not
------------------------
intended to, nor shall they be construed to require that Executive mitigate the
amount of any payment provided for in this Agreement by seeking or accepting
other employment, nor shall the amount of any payment provided for in this
Agreement be reduced by any compensation earned by Executive as a result of his
employment by another employer or otherwise. The Company's obligations to make
the payments to Executive required under this Agreement, and otherwise to
perform its obligations hereunder shall not be affected by any set-off,
counterclaim, recoupment, defense or other claim, right or action that the
Company may have against Executive.
* * * * * * * * * * * * * * * *
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
CHIREX INC.
By Its Compensation Committee of the
Board Of Directors:
____________________________
Elizabeth M. Greetham
_____________________________
W. Dieter Zander
_____________________________
Michael A. Griffith
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EXHIBIT 10.38
Execution Copy
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made as of January 1, 1998, between CHIREX INC., a
Delaware corporation (the "Company"), and Jon Tropsa ("Executive").
------- ---------
RECITALS
--------
Executive is presently the Corporate Controller of the Company. The
parties hereto desire to set forth in writing the terms of the Executive's
continuing employment relationship with the Company.
In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Employment
----------
(a) The Company hereby agrees to continue its employment of Executive to
render exclusive and full time services to the Company as its Corporate
Controller, and to perform such other duties commensurate with such office as he
shall reasonably be directed by the senior management of the Company, for the
period specified in Section 2 (the "Employment Period").
-----------------
(b) Executive hereby accepts such employment and agrees to render the
services described above to the best of his abilities in a diligent,
trustworthy, businesslike and efficient manner. Executive further agrees to
accept election and to serve during all or any part of the term of this
Agreement as an officer or director of the Company and of any subsidiary or
affiliate of the Company, without any compensation therefor, other than that
specified in this Agreement or as otherwise determined by the Board of Directors
of the Company or of any subsidiary or affiliate, as the case may be.
(c) The duties to be performed by Executive hereunder shall be performed
primarily at the principal office of the Company at 300 Atlantic Street,
Stamford, Connecticut, subject to reasonable travel requirements on behalf of
the Company.
2. Term of Employment. The Employment Period of Executive by the
------------------
Company shall commence on January 1, 1998 and end on December 31, 2000 (the
"Initial Term") unless further extended or sooner terminated as hereinafter
------------
provided. Executive may terminate his employment during the Initial Term with
six months written notice to the Company. Commencing on December 31, 2000, and
each December 31 thereafter, the term of Executive's employment shall
automatically be extended for one additional year to, respectively, December 31,
2001, and each December 31 thereafter, unless, not later than six months prior
to the end of any renewal term, either party hereunder shall have given notice
to the other party that
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it does not wish to extend this Agreement. If the Company gives Executive notice
that it does not wish to extend this Agreement during the Initial Term or any
renewal term, Executive shall be entitled to the severance payments provided in
Section 4(d) hereof.
3. Base Salary and Benefits.
------------------------
(a) During the Employment Period, Executive's base salary shall be
$100,000 per annum or such higher rate as the Company may designate from time to
time (the "Base Salary"), which salary shall be payable in regular installments
-----------
in accordance with the Company's general payroll practices and shall be subject
to customary withholding. In addition, during the Employment Period, Executive
shall be entitled to participate in all of the Company's employee benefit
programs for which senior executive employees of the Company and its
subsidiaries are generally eligible.
(b) The Company shall reimburse Executive for all reasonable expenses
incurred by him in the course of performing his duties under this Agreement
which are consistent with the Company's policies in effect from time to time
with respect to travel, entertainment and other business expenses, subject to
the Company's requirements with respect to reporting and documentation of such
expenses.
(c) In addition to the Base Salary, the Board may, in its sole
discretion, award a bonus to Executive following the end of each fiscal year
during the Employment Period, which bonus shall be based upon the Company's
operating results during such year and upon Executive achieving defined specific
goals and objectives during the twelve months prior to review.
(d) Executive may be awarded, from time to time, additional compensation
(such as stock options, stock appreciation rights, performance shares,
restricted stock or unrestricted stock) pursuant to the Company's 1997 Stock
Incentive Plan or any additional or replacement incentive compensation program
established for the key employees of the Company. Any awards under such programs
shall be at such levels or in such amounts as the Board of Directors deems, in
its sole discretion, appropriate for the position occupied by Executive and his
performance therein. Subject to Section 4 herein, the terms, conditions and
rights with respect to any such grants will be subject to the actual provisions
and conditions applicable to such plans.
4. Termination and Change of Control
---------------------------------
(a) If the Executive shall die during the Employment Period, this Agreement
shall terminate, except that (i) Executive's surviving spouse or, if none, his
estate, shall be entitled to receive Executive's compensation (including bonus)
to the last day of the third calendar month following the date of his death; and
(ii) such termination shall not affect any rights which Executive may have at
the time of his death pursuant to any insurance or other death benefit,
retirement, stock option or other plans or arrangements of the Company or of any
subsidiary or affiliate of the Company, which rights shall continue to be
governed by the provisions of such plans and arrangements.
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(b) At the sole discretion of the Board of Directors, Executive may be
terminated if the Executive is disabled (as defined below) and shall have been
absent from his duties with the Company on a full time basis for one hundred and
eighty (180) consecutive days, and, within thirty (30) days after written notice
by the Company to do so, the Executive shall not have returned to the
performance of his duties hereunder on a full time basis. In the event of such
termination, the Company shall make to Executive the payments specified in
Section 4(d). As used herein, the term "disabled" shall (i) mean that Executive
--------
is unable, as a result of a medically determinable physical or mental
impairment, to perform the duties and services of his position, or (ii) have the
meaning specified in any disability insurance policy maintained by the Company,
whichever is more favorable to the Executive.
(c) The Company may, by notice to Executive, terminate Executive's
employment hereunder for cause. As used herein, "cause" shall mean (i) the
-----
conviction of Executive of a felony or conviction of a misdemeanor if such
misdemeanor involves moral turpitude; or (ii) Executive's voluntary engagement
in conduct constituting larceny, embezzlement, conversion or any other act
involving the misappropriation of Company funds in the course of his employment;
or (iii) the willful refusal to carry out specific directions of the Board of
Directors, which directions shall be consistent with the provisions hereof; or
(iv) Executive's committing any act of gross negligence or intentional
misconduct in the performance or non-performance of his duties as an employee of
the Company; or (v) any material breach by the Executive of any material
provision of this Agreement (other than for reasons related only to the business
performance of the Company or business results achieved by Executive). For
purposes of this Section 4(c), no act or failure to act on Executive's part
shall be considered to be reason for termination for cause if done, or omitted
to be done, by Executive in good faith and with the reasonable belief that the
action or omission was in the best interests of the Company.
(d) Executive's employment may be terminated at any time by the Company
without cause; provided, however, that in such event Executive shall be entitled
to receive (so long as he executes and delivers the Company's standard form of
release), 120% of Executive's then effective annual Base Salary. The foregoing
amount shall be payable in one lump sum payment within five (5) days after
Executive's last day of active employment. In addition, Executive shall be
entitled to continue participation in the Company's health and other welfare
benefit plans for a period of up to one year or until Executive is covered by a
successor employer's benefit plans, whichever is sooner.
(e) If a "Change in Control" of the Company (as defined in Section 4(f)
below) occurs, all stock options, restricted stock, deferred compensation and
similar benefits which have not yet become vested on the date of a Change in
Control shall become vested upon such event, and Executive shall be permitted to
exercise all such rights in accordance with the administrative provisions of
those plans, whether or not Executive remains employed with the Company or
terminates his employment in accordance with this subsection (e). In addition,
if a Change in Control occurs, Executive may, after such Change in Control,
terminate his
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employment with the Company for any reason during the thirty (30) day period
immediately following the first anniversary of such Change in Control, in which
event Executive shall be entitled to the payments specified in Section 4(d)
above and to the other rights described herein (subject to his compliance
therewith).
(f) For purposes of this Agreement, a "Change in Control" of the Company
-----------------
shall be deemed to have occurred if: (i) any person (as such term is used in
Sections 13(d) and 14(d)(2) of the Securities and Exchange Act of 1934) becomes
the beneficial owner, directly or indirectly, of Company securities representing
30% or more of the capital stock of the Company; or (ii) individuals who
constitute the Company's Board of Directors as of the date of this Agreement
(the "Incumbent Board") cease for any reason to constitute at least a majority
--------- -----
thereof, provided, however, that any person becoming a director subsequent to
the date of this Agreement whose election, or nomination for election by the
Company's stockholders, was approved by a vote of at least 51% of the directors
comprising the Incumbent Board (either by a specific vote or by approval of the
proxy statement of the Company in which such person is named as a nominee for
director, without objection to such nomination) shall be, for the purpose of
this clause (ii), considered as though such person were a member of the
Incumbent Board; or (iii) the Company's shareholders approve a merger or
consolidation (where in either case the Company is not the survivor thereof) in
which shareholders of the Company cease to own at least 80% of the surviving
entity's voting power, or a sale or disposition of all or substantially all of
the Company's assets or a plan of partial or complete liquidation of the
Company.
(g) Executive's employment may be terminated by the Executive for Good
Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the
assignment to Executive of any duties inconsistent in any respect with
Executive's position (including status, offices, titles, and reporting
requirements), authority, duties or responsibilities as contemplated by Section
1(a) hereof, or any other action by the Company which results in a diminution in
such position, authority, duties or responsibilities, excluding for this purpose
an isolated, insubstantial and inadvertent action not taken in bad faith and
which is remedied by the Company promptly after receipt of notice thereof given
by Executive; (ii) any failure by the Company to comply with any of the
provisions of Section 3 hereof, other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by Executive; (iii) the
Company's requiring Executive to be based at any office or location other than
as provided in Section 1(c) hereof; (iv) any purported termination by the
Company of Executive's employment otherwise than as expressly permitted by this
Agreement; or (v) any failure by the Company to obtain an express assumption of
this Agreement by a successor as required pursuant to Section 14 hereof. For
purposes of this Section 4(g), any good faith determination of "Good Reason"
made by Executive shall be conclusive. Upon any termination pursuant to this
subsection (g), Executive shall be entitled to the payment specified in Section
4(d) hereof and to the other rights described therein (subject to his compliance
therewith).
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5. Confidential Information.
------------------------
(a) Executive acknowledges and agrees that the information, observations
and data obtained by him while employed by the Company and its subsidiaries
concerning the business or affairs of the Company or any other subsidiary
("Confidential Information") are the property of the Company or such subsidiary.
------------------------
Therefore, Executive agrees to keep secret and retain in the strictest
confidence all Confidential Information, including without limitation, trade
"know-how" secrets, customer lists, pricing policies, operational methods,
technical processes, formulae, inventions and research projects and other
business affairs of the Company, learned by him prior to or after the date of
this Agreement, and not to disclose them to anyone outside the Company, either
during or after his employment with the Company, except (i) in the course of
performing his duties hereunder; (ii) with the Company's express written
consent; (iii) to the extent that the Confidential Information becomes generally
known to and available for use by the public other than as a result of
Executive's acts or omissions; or (iv) where required to be disclosed by court
order, subpoena or other government process. If Executive shall be required to
make disclosure pursuant to the provisions of clause (iv) of the preceding
sentence, Executive promptly, but in no event more than 48 hours after learning
of such subpoena, court order or other governmental process, shall notify the
Company, by personal delivery or fax (pursuant to Section 9 hereof), and, at
the Company's expense, shall take all reasonably necessary steps requested by
the Company to defend against the enforcement of such subpoena, court order or
other governmental process and permit the Company to intervene and participate
with counsel of its own choice in any related proceeding.
(b) Executive shall deliver to the Company at the termination of his
employment, or at any other time the Company may request, all memoranda, notes,
plans, records, reports, computer tapes, printouts and software and other
documents and data (and copies thereof) relating to the Confidential
Information, Work Product (as defined below) or the business of the Company or
any subsidiary which he may then possess or have under his control.
6. Inventions and Patents. Executive acknowledges that all inventions,
----------------------
innovations, improvements, developments, methods, designs, analyses, drawings,
reports and all similar or related information (whether or not patentable) which
relate to the Company's or any of its subsidiaries' actual or anticipated
business, research and development or existing or future products or services
and which are conceived, developed or made by Executive while employed by the
Company or its predecessor and its subsidiaries ("Work Product") belong to the
Company or such subsidiary. Executive shall promptly disclose such Work Product
to the Board and perform all actions reasonably requested by the Board (whether
during or after his employment) to establish and confirm such ownership
(including, without limitation, assignments, consents, powers of attorney and
other instruments).
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7. Indemnification. The Company will indemnify Executive and his legal
---------------
representatives, to the fullest extent permitted by the laws of the State of
Delaware and the existing by-laws of the Company or any other applicable laws or
the provisions of any other corporate document of the Company, and Executive
shall be entitled to the protection of any insurance policies the Company may
elect to obtain generally for the benefit of its directors and officers, against
all costs, charges and expenses whatsoever incurred or sustained by him or his
legal representatives in connection with any action, suit or proceeding to which
he or his legal representatives may be made a party by reason of him being or
having been a director or officer of the Company or of any of its subsidiaries
or affiliates or actions taken purportedly on behalf of the Company or of any of
its subsidiaries or affiliates.
8. Executive's Representations. Executive hereby represents and
---------------------------
warrants to the Company that (i) the execution, delivery and performance of this
Agreement by Executive do not and shall not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree to which Executive is a party or by which he is bound, and (ii) upon the
execution and delivery of this Agreement by the Company, this Agreement shall be
the valid and binding obligation of Executive, enforceable in accordance with
its terms. Executive hereby acknowledges and represents that he has consulted
with independent legal counsel regarding his rights and obligations under this
Agreement and that he fully understands the terms and conditions contained
herein.
9. Notices. Any notice provided for in this Agreement shall be in
-------
writing and shall be deemed to have been duly given if delivered personally with
receipt acknowledged or sent by registered or certified mail or equivalent, if
available, postage prepaid, or by fax (which shall be confirmed by a writing
sent by registered or certified mail or equivalent on the same day that such fax
was sent), addressed to the parties at the following addresses or to such other
address as such party shall hereafter specify by notice to the other:
Notices to Executive: Jon Tropsa
-------------------- 35 Griffith Lane
Ridgefield, Connecticut
(203) 431-6102 (Phone)
Notices to the Company: ChiRex Inc.
---------------------- 300 Atlantic Street
Suite 402
Stamford, Connecticut 06901
(203) 351-2300 (Phone)
(203) 425-9996 (Fax)
Attention: General Counsel
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10. Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
11. Complete Agreement. This Agreement constitutes the complete
------------------
agreement and understanding among the parties and supersedes and preempts any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
12. No Strict Construction. The language used in this Agreement shall
----------------------
be deemed to be the language chosen by the parties hereto to express their
mutual intent, and no rule of strict construction shall be applied against any
party.
13. Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
14. Successors and Assigns. This Agreement is intended to bind and
----------------------
inure to the benefit of and be enforceable by Executive, the Company and their
respective heirs, successors and assigns, except that Executive may not assign
his rights or delegate his obligations hereunder without the prior written
consent of the Company. The Company will require any successor to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place.
15. Choice of Law. All issues and questions concerning the
-------------
construction, validity, enforcement and interpretation of this Agreement and the
exhibits and schedules hereto shall be governed by, and construed in accordance
with, the laws of the State of New York, without giving effect to any choice of
law or conflict of law rules or provisions that would cause the application of
the laws of any jurisdiction other than the State of New York.
16. Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended or waived only with the prior written consent of the Company and
Executive, and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement .
17. Arbitration. Any controversy or claim arising out of or relating
-----------
to this Agreement, the making, interpretation or the breach thereof, other than
a claim solely for injunctive relief for any alleged breach of the provisions of
Section 5 as to which the parties shall have the right to apply for specific
performance to any court having equity jurisdiction, shall be
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settled by arbitration in New York City by one arbitrator in accordance with the
Commercial Arbitration Rules of the American Arbitration Association and
judgement upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof and any party to the arbitration may, if he elects,
institute proceedings in any court having jurisdiction for the specific
performance of any such award. The powers of the arbitrator shall include, but
not be limited to, the awarding of injunctive relief. The Company shall
reimburse Executive for all expenses incurred by Executive in connection with
any arbitration, including reasonable attorney's fees, to the extent the
arbitration is concluded in Executive's favor.
18. No Mitigation or Set-Off. The provisions of this Agreement are not
------------------------
intended to, nor shall they be construed to require that Executive mitigate the
amount of any payment provided for in this Agreement by seeking or accepting
other employment, nor shall the amount of any payment provided for in this
Agreement be reduced by any compensation earned by Executive as a result of his
employment by another employer or otherwise. The Company's obligations to make
the payments to Executive required under this Agreement, and otherwise to
perform its obligations hereunder shall not be affected by any set-off,
counterclaim, recoupment, defense or other claim, right or action that the
Company may have against Executive.
* * * * * * * * * * * * * * * *
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
CHIREX INC.
By Its Chief Financial Officer:
-------------------------------
Michael A. Griffith
-------------------------------
Jon Tropsa
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EXHIBIT 10.39
Execution Copy
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made as of December 22, 1997, between CHIREX INC., a
Delaware corporation (the "Company"), and Beth P. Hecht ("Executive").
------- ---------
RECITALS
--------
Company wishes to hire Executive as its General Counsel and Executive
wishes to accept such position. The parties hereto desire to set forth in
writing the terms of the Executive's employment relationship with the Company.
In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Employment.
----------
(a) The Company hereby agrees to hire Executive as its General
Counsel to render legal services to the Company and to perform such other duties
commensurate with such office as she shall reasonably be directed by the senior
management and/or Board of Directors of the Company, for the period specified in
Section 2 (the "Employment Period"). Such position is part-time, with
-----------------
Executive agreeing to work 3.5 days per week for the benefits enumerated herein.
(b) Executive hereby accepts such employment and agrees to render
the services described above to the best of her abilities in a diligent,
trustworthy, businesslike and efficient manner. Executive further agrees to
accept election and to serve during all or any part of the term of this
Agreement as an officer or director of the Company and of any subsidiary or
affiliate of the Company, without any compensation therefor, other than that
specified in this Agreement or as otherwise determined by the Board of Directors
of the Company or of any subsidiary or affiliate, as the case may be.
(c) The duties to be performed by Executive hereunder shall be
performed primarily at the principal office of the Company at 300 Atlantic
Street, Stamford, Connecticut, subject to reasonable travel requirements on
behalf of the Company.
2. Term of Employment. The Employment Period of Executive by the
------------------
Company shall commence on January 1, 1998 and end on December 31, 2000 (the
"Initial Term") unless further extended or sooner terminated as hereinafter
provided. Executive may terminate her employment during the Initial Term with
six months written notice to the Company. Commencing on December 31, 2000, and
each December 31 thereafter, the term of Executive's employment shall
automatically be extended for one additional year to, respectively, December 31,
2001, and each December 31 thereafter, unless, not later than six months prior
to the end of any renewal term, either party hereunder shall have given notice
to the other party that
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it does not wish to extend this Agreement. If the Company gives Executive notice
that it does not wish to extend this Agreement during the Initial Term or any
renewal term, Executive shall be entitled to the severance payments provided in
Section 4(d) hereof.
3. Base Salary and Benefits.
------------------------
(a) During the Employment Period, Executive's base salary shall be
$100,000 per annum or such higher rate as the Board may designate from time to
time (the "Base Salary"), which salary shall be payable in regular installments
-----------
in accordance with the Company's general payroll practices and shall be subject
to customary withholding. In addition, during the Employment Period, Executive
shall be entitled to participate in all of the Company's employee benefit
programs for which senior executive employees of the Company and its
subsidiaries are generally eligible.
(b) The Company shall reimburse Executive for all reasonable expenses
incurred by her in the course of performing her duties under this Agreement
which are consistent with the Company's policies in effect from time to time
with respect to travel, entertainment and other business expenses, subject to
the Company's requirements with respect to reporting and documentation of such
expenses.
(c) In addition to the Base Salary, the Board may, in its sole
discretion, award a bonus to Executive following the end of each fiscal year
during the Employment Period, which bonus shall be based upon the Company's
operating results during such year and upon Executive achieving defined specific
goals and objectives during the twelve months prior to review.
(d) Executive may be awarded, from time to time, additional
compensation (such as stock options, stock appreciation rights, performance
shares, restricted stock or unrestricted stock) pursuant to the Company's 1997
Stock Incentive Plan or any additional or replacement incentive compensation
program established for the key employees of the Company. Any awards under such
programs shall be at such levels or in such amounts as the Board of Directors
deems, in its sole discretion, appropriate for the position occupied by
Executive and her performance therein. Subject to Section 4 herein, the terms,
conditions and rights with respect to any such grants will be subject to the
actual provisions and conditions applicable to such plans.
4 Termination and Change of Control
---------------------------------
(a) If the Executive shall die during the Employment Period, this
Agreement shall terminate, except that (i) Executive's surviving spouse or, if
none, her estate, shall be entitled to receive Executive's compensation
(including bonus) to the last day of the third calendar month following the date
of her death; and (ii) such termination shall not affect any rights which
Executive may have at the time of her death pursuant to any insurance or other
death benefit, retirement, stock option or other plans or arrangements of the
Company or of any subsidiary or affiliate of the Company, which rights shall
continue to be governed by the provisions of such plans and arrangements.
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(b) At the sole discretion of the Board of Directors, Executive may be
terminated if the Executive is disabled (as defined below) and shall have been
absent from her duties with the Company on a full time basis for one hundred and
eighty (180) consecutive days, and , within thirty (30) days after written
notice by the Company to do so, the Executive shall not have returned to the
performance of her duties hereunder on a full time basis. In the event of such
termination, the Company shall make to Executive the payments specified in
Section 4(d). As used herein, the term "disabled" shall (i) mean that Executive
--------
is unable, as a result of a medically determinable physical or mental
impairment, to perform the duties and services of her position, or (ii) have the
meaning specified in any disability insurance policy maintained by the Company,
whichever is more favorable to the Executive.
(c) The Company may, by notice to Executive, terminate Executive's
employment hereunder for cause. As used herein, "cause" shall mean (i) the
conviction of Executive of a felony or conviction of a misdemeanor if such
misdemeanor involves moral turpitude; or (ii) Executive's voluntary engagement
in conduct constituting larceny, embezzlement, conversion or any other act
involving the misappropriation of Company funds in the course of her employment;
or (iii) the willful refusal to carry out specific directions of the Board of
Directors, which directions shall be consistent with the provisions hereof; or
(iv) Executive's committing any act of gross negligence or intentional
misconduct in the performance or non-performance of her duties as an employee of
the Company; or (v) any material breach by the Executive of any material
provision of her Agreement (other than for reasons related only to the business
performance of the Company or business results achieved by Executive). For
purposes of this Section 4(c), no act or failure to act on Executive's part
shall be considered to be reason for termination for cause if done, or omitted
to be done, by Executive in good faith and with the reasonable belief that the
action or omission was in the best interests of the Company.
(d) Executive's employment may be terminated at any time by the Company
without cause; provided, however, that in such event Executive shall be entitled
to receive (so long as she executes and delivers the Company's standard form of
release), 120% of Executive's then effective annual Base Salary. The foregoing
amount shall be payable in one lump sum payment within five (5) days after
Executive's last day of active employment. In addition, Executive shall be
entitled to continue participation in the Company's health and other welfare
benefit plans for a period of up to one year or until Executive is covered by a
successor employer's benefit plans, whichever is sooner.
(e) If a "Change in Control" of the Company (as defined in Section 4(f)
below) occurs, all stock options, restricted stock, deferred compensation and
similar benefits which have not yet become vested on the date of a Change in
Control shall become vested upon such event, and Executive shall be permitted to
exercise all such rights in accordance with the administrative provisions of
those plans, whether or not Executive remains employed with the Company or
terminates her employment in accordance with this subsection (e). In addition,
if a Change in Control occurs, Executive may, after such Change in Control,
terminate her
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employment with the Company for any reason during the thirty (30) day period
immediately following the first anniversary of such Change in Control, in which
event Executive shall be entitled to the payments specified in Section 4(d)
above and to the other rights described herein (subject to her compliance
therewith).
(f) For purposes of this Agreement, a "Change in Control" of the Company
-----------------
shall be deemed to have occurred if: (i) any person (as such term is used in
Sections 13(d) and 14(d)(2) of the Securities and Exchange Act of 1934) becomes
the beneficial owner, directly or indirectly, of Company securities representing
30% or more of the capital stock of the Company; or (ii) individuals who
constitute the Company's Board of Directors as of the date of this Agreement
(the "Incumbent Board") cease for any reason to constitute at least a majority
--------- -----
thereof, provided, however, that any person becoming a director subsequent to
the date of this Agreement whose election, or nomination for election by the
Company's stockholders, was approved by a vote of at least 51% of the directors
comprising the Incumbent Board (either by a specific vote or by approval of the
proxy statement of the Company in which such person is named as a nominee for
director, without objection to such nomination) shall be, for the purpose of
this clause (ii), considered as though such person were a member of the
Incumbent Board; or (iii) the Company's shareholders approve a merger or
consolidation (where in either case the Company is not the survivor thereof) in
which shareholders of the Company cease to own at least 80% of the surviving
entity's voting power, or a sale or disposition of all or substantially all of
the Company's assets or a plan of partial or complete liquidation of the
Company.
(g) Executive's employment may be terminated by the Executive for Good
Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the
assignment to Executive of any duties inconsistent in any respect with
Executive's position (including status, offices, titles, and reporting
requirements), authority, duties or responsibilities as contemplated by Section
1(a) hereof, or any other action by the Company which results in a diminution in
such position, authority, duties or responsibilities, excluding for this purpose
an isolated, insubstantial and inadvertent action not taken in bad faith and
which is remedied by the Company promptly after receipt of notice thereof given
by Executive; (ii) any failure by the Company to comply with any of the
provisions of Section 3 hereof, other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by Executive; (iii) the
Company's requiring Executive to be based at any office or location other than
as provided in Section 1(c) hereof; (iv) any purported termination by the
Company of Executive's employment otherwise than as expressly permitted by this
Agreement; or (v) any failure by the Company to obtain an express assumption of
this Agreement by a successor as required pursuant to Section 14 hereof. For
purposes of this Section 4(g), any good faith determination of "Good Reason"
made by Executive shall be conclusive. Upon any termination pursuant to this
subsection (g), Executive shall be entitled to the payment specified in Section
4(d) hereof and to the other rights described therein (subject to her compliance
therewith).
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5. Confidential Information.
------------------------
(a) Executive acknowledges and agrees that the information, observations
and data obtained by her while employed by the Company and its subsidiaries
concerning the business or affairs of the Company or any other subsidiary
("Confidential Information") are the property of the Company or such subsidiary.
------------------------
Therefore, Executive agrees to keep secret and retain in the strictest
confidence all Confidential Information, including without limitation, trade
"know-how" secrets, customer lists, pricing policies, operational methods,
technical processes, formulae, inventions and research projects and other
business affairs of the Company, learned by her prior to or after the date of
this Agreement, and not to disclose them to anyone outside the Company, either
during or after her employment with the Company, except (i) in the course of
performing her duties hereunder; (ii) with the Company's express written
consent; (iii) to the extent that the Confidential Information becomes generally
known to and available for use by the public other than as a result of
Executive's acts or omissions; or (iv) where required to be disclosed by court
order, subpoena or other government process. If Executive shall be required to
make disclosure pursuant to the provisions of clause (iv) of the preceding
sentence, Executive promptly, but in no event more than 48 hours after learning
of such subpoena, court order or other governmental process, shall notify the
Company, by personal delivery or fax (pursuant to Section 9 hereof), and, at
the Company's expense, shall take all reasonably necessary steps requested by
the Company to defend against the enforcement of such subpoena, court order or
other governmental process and permit the Company to intervene and participate
with counsel of its own choice in any related proceeding.
(b) Executive shall deliver to the Company at the termination of her
employment, or at any other time the Company may request, all memoranda, notes,
plans, records, reports, computer tapes, printouts and software and other
documents and data (and copies thereof) relating to the Confidential
Information, Work Product (as defined below) or the business of the Company or
any subsidiary which he may then possess or have under her control.
6. Inventions and Patents. Executive acknowledges that all inventions,
----------------------
innovations, improvements, developments, methods, designs, analyses, drawings,
reports and all similar or related information (whether or not patentable) which
relate to the Company's or any of its subsidiaries' actual or anticipated
business, research and development or existing or future products or services
and which are conceived, developed or made by Executive while employed by the
Company or its predecessor and its subsidiaries ("Work Product") belong to the
------------
Company or such subsidiary. Executive shall promptly disclose such Work Product
to the Board and perform all actions reasonably requested by the Board (whether
during or after her employment) to establish and confirm such ownership
(including, without limitation, assignments, consents, powers of attorney and
other instruments).
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7. Indemnification. The Company will indemnify Executive and her legal
---------------
representatives, to the fullest extent permitted by the laws of the State of
Delaware and the existing by-laws of the Company or any other applicable laws or
the provisions of any other corporate document of the Company, and Executive
shall be entitled to the protection of any insurance policies the Company may
elect to obtain generally for the benefit of its directors and officers, against
all costs, charges and expenses whatsoever incurred or sustained by her or her
legal representatives in connection with any action, suit or proceeding to which
she or her legal representatives may be made a party by reason of her being or
having been a director or officer of the Company or of any of its subsidiaries
or affiliates or actions taken purportedly on behalf of the Company or of any of
its subsidiaries or affiliates.
8. Executive's Representations. Executive hereby represents and warrants
---------------------------
to the Company that (i) the execution, delivery and performance of this
Agreement by Executive do not and shall not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree to which Executive is a party or by which she is bound, and (ii) upon the
execution and delivery of this Agreement by the Company, this Agreement shall be
the valid and binding obligation of Executive, enforceable in accordance with
its terms. Executive hereby acknowledges and represents that she has consulted
with independent legal counsel regarding her rights and obligations under this
Agreement and that she fully understands the terms and conditions contained
herein.
9. Notices. Any notice provided for in this Agreement shall be in
-------
writing and shall be deemed to have been duly given if delivered personally with
receipt acknowledged or sent by registered or certified mail or equivalent, if
available, postage prepaid, or by fax (which shall be confirmed by a writing
sent by registered or certified mail or equivalent on the same day that such fax
was sent), addressed to the parties at the following addresses or to such other
address as such party shall hereafter specify by notice to the other:
Notices to Executive: Beth P. Hecht
-------------------- 295 Phillips Hill Road
New City, New York 10956
(914) 634-1074 (Phone)
(914) 639-9495 (Fax)
Notices to the Company: ChiRex Inc.
---------------------- 300 Atlantic Street
Suite 402
Stamford, Connecticut 06901
(203) 351-2300 (Phone)
(203) 425-9996 (Fax)
Attention: Chief Financial Officer
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10. Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
11. Complete Agreement. This Agreement constitutes the complete
------------------
agreement and understanding among the parties and supersedes and preempts any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
12. No Strict Construction. The language used in this Agreement shall
----------------------
be deemed to be the language chosen by the parties hereto to express their
mutual intent, and no rule of strict construction shall be applied against any
party.
13. Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
14. Successors and Assigns. This Agreement is intended to bind and
----------------------
inure to the benefit of and be enforceable by Executive, the Company and their
respective heirs, successors and assigns, except that Executive may not assign
her rights or delegate her obligations hereunder without the prior written
consent of the Company. The Company will require any successor to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place.
15. Choice of Law. All issues and questions concerning the
-------------
construction, validity, enforcement and interpretation of this Agreement and the
exhibits and schedules hereto shall be governed by, and construed in accordance
with, the laws of the State of New York, without giving effect to any choice of
law or conflict of law rules or provisions that would cause the application of
the laws of any jurisdiction other than the State of New York.
16. Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended or waived only with the prior written consent of the Company and
Executive, and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement.
17. Arbitration. Any controversy or claim arising out of or relating
to this Agreement, the making, interpretation or the breach thereof, other than
a claim solely for injunctive relief for any alleged breach of the provisions of
Section 5 as to which the parties shall have the right to apply for specific
performance to any court having equity jurisdiction, shall be
7
<PAGE>
Execution Copy
settled by arbitration in New York City by one arbitrator in accordance with the
Commercial Arbitration Rules of the American Arbitration Association and
judgement upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof and any party to the arbitration may, if he elects,
institute proceedings in any court having jurisdiction for the specific
performance of any such award. The powers of the arbitrator shall include, but
not be limited to, the awarding of injunctive relief. The Company shall
reimburse Executive for all expenses incurred by Executive in connection with
any arbitration, including reasonable attorney's fees, to the extent the
arbitration is concluded in Executive's favor.
18. No Mitigation or Set-Off. The provisions of this Agreement are not
------------------------
intended to, nor shall they be construed to require that Executive mitigate the
amount of any payment provided for in this Agreement by seeking or accepting
other employment, nor shall the amount of any payment provided for in this
Agreement be reduced by any compensation earned by Executive as a result of her
employment by another employer or otherwise. The Company's obligations to make
the payments to Executive required under this Agreement, and otherwise to
perform its obligations hereunder shall not be affected by any set-off,
counterclaim, recoupment, defense or other claim, right or action that the
Company may have against Executive.
* * * * * * * * * * * * * * * *
8
<PAGE>
Execution Copy
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
CHIREX INC.
By Its Chief Financial Officer:
____________________________
Michael A. Griffith
_____________________________
Beth P. Hecht
9
<PAGE>
CHIREX INC.
SPECIAL SCIENTIIC ADVISORY BOARD CONSULTING AGREEMENT
-----------------------------------------------------
THIS SPECIAL SCIENTIFIC ADVISORY BOARD CONSULTING AGREEMENT (the
"Agreement"), made as of this 19th day of July, 1996, is entered into by CHIREX
INC., a Delaware corporation with its principal offices at 65 William Street,
Wellesley, MA 02181 (the "Company") and Eric N. Jacobsen, Ph.D., with an address
at Harvard University, Cambridge, Massachusetts (the "Consultant").
INTRODUCTION
------------
The Company desires to retain the services of the Consultant as a
consultant to the Company and as a member of its Scientific Advisory Board
("SAB") and the Consultant desires to serve as a consultant to the Company and
as a member of its SAB. Accordingly, the parties agree as follows:
1. Services
1.1 General. The Consultant agrees to serve on the SAB and to use
-------
his best efforts to perform such consulting, advisory and related services for
the Company as may be reasonably requested from time to time by the Company. The
Company anticipates that the SAB shall meet two times each year, at times and
locations to be determined by the Company in consultation with SAB members. If
the Consultant has a conflict of interest, or potential conflict of interest,
with respect to any matter presented at a meeting of the SAB, he shall excuse
himself from the discussion of such matter. The delivery by the Consultant of
consulting, advisory and related services hereunder not involving attendance at
meetings of the SAB shall be at such times and at such locations as the
Consultant and the Company may agree from time to time. The Company agrees that
such consulting services shall not require a commitment of the Consultant's time
in excess of an aggregate of four and one-half days per month. In addition, the
Consultant shall not be required to devote more than an aggregate of four days
per year to the attendance at and participation in meetings of the SAB.
1.2 Fields. During the Consultation Period (as defined below), the
------
Consultant shall consult with the Company in the field of pharmaceutical fine
chemicals with special reference to asymmetric synthesis of organic compounds.
The Consultant shall also consult with and advise the Company with respect to
such other matters as the Company may reasonably request from time to time or as
may be presented at meetings of the SAB.
2. Term. This Agreement shall be effective as of July 1, 1996 and shall
----
continue until July 1, 2001, unless extended by mutual written consent or sooner
terminated as provided below (the "Consultation Period"). Either party to this
Agreement may terminate the Consultation Period upon 60 days' prior written
notice to the other party, provided, however, that
<PAGE>
the terms of Sections 4.1 and 7 shall not terminate but shall remain in full
force and effect. In the event of such termination, the Consultant shall be
entitled to payment for services performed and expenses paid or incurred prior
to the effective date of termination.
3. Compensation. The Company shall pay the Consultant a monthly retainer of
------------
$1,666.67 for an aggregate of two and one half days per month of compensable
services for the Company. For any services provided by the Consultant in excess
of two and one half days in any month, the Company shall pay the Consultant at
the rate of $666.67 per day (i.e., per eight hours of effort), payable monthly
upon receipt of a statement of services rendered. Without prior mutual
agreement, the Company will not request, and the Consultant will not spend, more
than an aggregate of two and one half days per month on compensable services for
the Company. The Company shall reimburse the Consultant for all reasonable and
necessary expenses incurred or paid by the Consultant in connection with, or
related to, attendance at SAB meetings (which shall not require prior approval
of the Company) or the performance of consulting services hereunder (which shall
require prior approval of the Company) or the performance of consulting services
hereunder (which shall require prior approval of the Company) within 30 days of
receipt of an itemization and documentation of such expenses.
4. Proprietary Information; Inventions; Non-Competition
----------------------------------------------------
4.1 Proprietary Information. The Consultant acknowledges that his
-----------------------
relationship with the Company is one of high trust and confidence and that in
the course of his service to the Company he will have access to and contact with
Proprietary Information or Invention (as defined in Section 4.2 below). For
purposes of this Agreement, Proprietary Information shall mean all information
(whether or not patentable and whether or not copyrightable) owned, possessed or
used by the Company or any third party, including, without limitation, any
Invention, formula, trade secret, process, research, report, technical data,
know-how, technology and marketing or business plan, that is communicated to,
learned or, developed or otherwise acquired by the Consultant in the course of
his performing consulting services to the Company hereunder. The Consultant's
obligations under this Section 4.1 shall not apply to any information that (i)
is or becomes known to the general public under circumstances involving no beach
by the Consultant or others of the terms of this Section 4.1, (ii) is generally
disclosed to third parties by the Company without restriction on such third
parties or (iii) is in the Consultant's possession at the time of disclosure
otherwise than as a result of a prior disclosure by the Company to the
Consultant or a to a third party under an obligation of confidentiality with
respect thereto. The Consultant represents that his retention as a Consultant
with the Company and his performance under this Agreement, does not, and shall
not, breach any agreement that obligates him to keep in confidence any trade
secrets or confidential or proprietary information of his or of any other party
or to refrain from competing, directly or indirectly, with the business of any
other party. The Consultant shall not disclose to the Company any trade secrets
or confidential or proprietary information of any party.
4.2 Inventions. All inventions, discoveries, technology, designs,
----------
innovations and improvements related to the business of the Company which are
made, conceived or reduced to practice by the Consultant, solely or jointly with
others, during the consultation Period which arise directly from information and
discussions presented to the SAB members at their meetings
<PAGE>
or which are provided to the Company during the SAB meetings or on other
occasions or while providing consulting services to the Company or during a
meeting of the SAB (collectively, the "Inventions") shall be the sole property
of the Company. The Consultant hereby assigns to the Company all Inventions and
any and all related patents, copyright, trademarks, trade names, and other
industrial and intellectual property rights and applications therefor, in the
United States and elsewhere and appoints any officer of the Company as his duly
authorized attorney to execute such further assignments, documents and other
instruments as may be necessary or desirable to fully and completely assign all
Inventions to the Company and to assist the Company in applying for, obtaining
and enforcing patens or copyrights or other rights in the United States and in
any foreign country with respect to any Invention.
4.3 Non-Competition The Consultant agrees that, during the consultation
---------------
Period, he will not, directly or indirectly, without the prior written consent
of the Company, whether alone or in association with others, in the United
States of America or in any foreign nation, state or jurisdiction, become
associated with, render advisory, consulting or other services to, or become
employed by, any person or business enterprise engaging in the commercial
business contemplated or being conducted by the Company. A business will be
considered "contemplated" only if the Company has written business plans for
entering that business. The Consultant ha acknowledged to the Company that the
foregoing territorial non-competition restriction for the indicated duration is
appropriate in light of the nature of the businesses to be conducted by the
Company and the Consultant's unique position within this specialized field.
5. Independent Contractor Status. The Consultant shall perform all services
-----------------------------
under this Agreement as an "independent contractor" and not as an employee or
agent of the Company. The Consultant is not authorized to assume or create any
obligation or responsibility, express or implied, on behalf of, or in the name
of, the Company or to bind the Company in any manner.
6. Consent to Use of Name. The Consultant hereby consents to the use of his
----------------------
name by the Company, as required, in connection with any previous, current or
future offering and ongoing registration of securities of the Company including,
but not limited to, an registration statement, prospectus or other document
filed with the Securities and Exchange Commission, any state securities
commission, the National Association of Securities Dealers, Inc. and The Nasdaq
Stock Market.
7. Miscellaneous. This Agreement constitutes the entire agreement between
-------------
the parties and supersedes all prior agreements and understandings, whether
written or oral, relating to the subject matter of this Agreement. This
Agreement may be amended or modified only by a written instrument executed by
both the Company and the Consultant. This Agreement shall be construed,
interpreted and enforced in accordance with the laws of the Commonwealth of
Massachusetts. The Consultant agrees that a breach of any of the restrictions
set forth in this Agreement would cause the Company irreparable injury and
damage, and that, in the event of any breach or threatened breach, the Company,
in addition to all other rights and remedies at law or in equity, shall have the
right to enforce the specific performance of such restrictions and to apply for
injunctive relief against their violation. The invalidity or unenforceability of
any provision hereof (or portion thereof) shall not affect the validity or
enforceability of any other provision hereof, and if any such provision (or
portion thereof) is so broad as to be
<PAGE>
unenforceable, it shall be interpreted to be only as broad as is enforceable.
This Agreement shall be binding upon, and inure to the benefit of both parties
and their respective successors and assigns, including any corporation with
which, or into which, the Company may be merged or which may succeed to its
assets or business, provided, however that the obligations of the Consultant are
personal and shall not be assigned by him.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date set forth above.
CHIREX INC. CONSULTANT
By:------------------------- By:----------------------------
Alan R. Clark Eric N., Jacobsen, Ph.D.
Chairman and CEO
<PAGE>
[Logo]
CHIREX
ChiRex Inc.
300 Atlantic St., Ste. 402
Stamford, CT 06901
TEL: (203) 351 2300 FAX: (203) 425 9996
Designed and produced by The Artworks Consortium Ltd., Newcastle upon Tyne,
England.
<PAGE>
[Logo]
CHIREX
PATHWAYS TO GROWTH: TECHNOLOGY, MANUFACTURING AND SERVICES
<PAGE>
REVENUES (U.S. dollars in thousands)
$88,957
$89,827
$94,100
CORE REVENUES (U.S. dollars in thousands)
$36,103
$48,445
$68,130
GROSS PROFIT (U.S. dollars in thousands)
$12,186
$22,015
$22,660
EARNINGS (LOSS) PER SHARE
$(0.10)
$0.37
$0.42
<TABLE>
<CAPTION>
Fiscal Year Ended December 31 1995 1996 1997
<S> <C> <C> <C>
Total Revenues $88,957 $89,827 $94,100
Core Revenues $36,103 $48,445 $68,130
Annual Growth 34.2% 40.6%
Gross Profit $12,186 $22,015 $22,660
Percent of Total Revenues 13.7% 24.5% 24.1%
Earnings Per Share (Loss) $ (0.10) $ 0.37 $ 0.42
Employees (Year End) 504 490 578
</TABLE>
(U.S. dollars in thousands, except per share data)
This table summarizes fiscal year proforma unaudited financial data presented in
Management's Discussion and Analysis of Results of Operations and Financial
Condition.
<PAGE>
Dudley Production Plant
[PHOTO]
Annan Production Plant
[PHOTO]
<PAGE>
[Logo]
CHIREX
ChiRex Inc., a leading contract manufacturing organization serving the
outsourcing needs of the pharmaceutical industry:
. Supports and enhances in-house development and manufacturing capabilities of
its pharmaceutical and biotechnology customers with broad, fully-integrated
services, including product development and regulatory support.
. Manufactures pharmaceutical intermediates and active ingredients in its world-
class cGMP manufacturing facilities located in Dudley, Northumberland, England,
and Annan, Scotland.
. Holds more than 50 patents and patent applications in chiral chemistry.
Serves customers including eight of the ten largest pharmaceutical companies in
the world.
. Serves customers including eight of the ten largest pharmaeutical compaies in
the world.
. Employs more than 630 people in the U.S. and U.K.
1
<PAGE>
GROWTH
PATHWAYS TO GROWTH
- ------------------
As outsourcing plays a larger role in the global pharmaceutical industry,
contract manufacturing organizations (CMO) must offer innovative technology,
consistent quality and a broad range of services. For pharmaceutical CMOs, these
are the pathways to growth.
TECHNOLOGY
TECHNOLOGY...
- -------------
Two thirds of drugs in development today are chiral. With its extensive
portfolio of classical chemical and proprietary chiral technologies, ChiRex is
focused on manufacturing these complex, high value-added pharmaceuticals. The
Company will continue to expand its technology base to offer its customers
innovative manufacturing solutions.
QUALITY
QUALITY...
- ----------
Pharmaceutical customers expect superior quality, which ChiRex delivers through
its state-of-the-art manufacturing facilities, technological excellence and
scientific leadership.
SERVICE
SERVICE...
- ----------
ChiRex offers a full range of manufacturing, development, scaleup, hazards
evaluation and regulatory services. ChiRex plants maintain strict cGMP
compliance while exceeding local environmental regulations for chemical waste.
By following these pathways to growth, --Technology, Quality, Service-- ChiRex
will strengthen its prominent position in pharmaceutical contract manufacturing
and improve its prospects for exploiting the $12 billion global market for
pharmaceutical outsourcing.
2
<PAGE>
HIGHLIGHTS
HIGHLIGHTS OF 1997:
- -------------------
. Continued growth of Core Revenues
. Purchased Glaxo Wellcome's cGMP pharmaceutical production facility at
Annan, Scotland
. Secured a five year, $450 million contract from
Glaxo Wellcome
. Sold ChiRex's acetaminophen business
. Licensed a kinetic resolution technology for preparing pure enantiomeric
forms of drug intermediates
TO OUR SHAREHOLDERS
- -------------------
During 1997, ChiRex's second year as a public company, we achieved all of our
strategic objectives for the year: improving sales mix by increasing revenues
from higher value-added core products; increasing production capacity through
internal efficiencies as well as via the major acquisition of Glaxo Wellcome's
manufacturing facility at Annan, Scotland; and further enhancing our already
strong technological platform in chiral chemistry.By meeting these objectives we
have positioned ChiRex for exceptional growth over the next several years.
Business Strategy
There are three major components to the ChiRex strategy. First, we intend to be
a leader in the supply chain for the next generation of high-value ethical
products now in development at major and emerging pharmaceutical companies.
Second, we plan to evolve into a full-service contract manufacturing
organization (CMO) that can partner with clients throughout the life cycle of a
product from early clinical development stages through to large-scale commercial
production. Third, we are committed to securing and applying the most cutting-
edge process technologies as they emerge from the laboratories of the leading
innovators in the field, in order to provide state-of-the-art production
quality, cost-efficiency and speed-to-market advantages to our clients.
Our purchase of Glaxo Wellcome's cGMP pharmaceutical chemical manufacturing
facility at Annan supports our business strategy in several ways, by:
. Positioning ChiRex as a key supplier to one of the world's largest
pharmaceutical companies, and providing a platform to further develop that
relationship based on a continuing high level of service and
reliability.
. Ensuring ChiRex a large and steadily growing revenue stream into the next
decade.
. Giving ChiRex access to the manufacture of a number of new, high-value
ethical pharmaceutical products.
. Expanding our production capacity and eliminating the perceived risk
associated with single-plant dependence.
. Providing a working template for the development of long-term business
relationships with other major pharmaceutical companies.
We are pressing ahead with a major investment program to refit two of the three
Annan production buildings, and expect these facilities to undergo validation
during the fourth quarter of 1998 and be operational by year end. The overall
investment goal is to convert the production facilities from dedicated single-
product design to the flexible, general-purpose configuration that is ideally
suited to ChiRex's business.
In the year we agreed to supply Cell Therapeutics Inc. with bulk Lysofylline, a
drug in advanced development for preventing infection and other treatment-
related toxicity in cancer patients undergoing high dose radiation or
3
<PAGE>
chemotherapy. This agreement represents a significant step in our evolution into
a full-service CMO. While we are primarily manufacturing the product using Cell
Therapeutics' own chemistry, we are also applying our proprietary chiral
chemistry expertise to the production of a key intermediate which will
streamline the process and improve the economics. We view this collaboration as
a model for future agreements within the industry, and as a pathway to being the
preferred supplier for a broad pipeline of new products.
An increasing number of drugs today -- two-thirds of new drugs -- are developed
as single optical isomers. Single-isomer drugs are often up to twice as
effective as their racemic (mixed isomer) counterparts, can have fewer side
effects, and their manufacture usually generates less waste. Producing single-
isomers can be expensive, but with the right chemistry it need not always be so.
We feel our proprietary chemistries can play a pivotal role in meeting the
associated challenges faced by the pharmaceutical industry. In this regard, we
are particularly excited about the latest process technology which we licensed
in March 1997, called Kinetic Resolution.
We expect this novel chemistry to reduce the manufacturing costs for many
single-isomer drugs and intermediates, while solidly positioning ChiRex for the
manufacture of these products.
The Kinetic Resolution technology was discovered by Professor Eric Jacobsen of
Harvard University, a long-time adviser to ChiRex, and the newest member of our
Board of Directors. Prof. Jacobsen brings to the company world-class scientific
expertise, fifteen years experience in the discovery of innovative chemistry and
long-standing consulting relationships with a number of major pharmaceutical
companies. We eagerly look forward to Prof. Jacobsen's guidance in the expansion
of our research & development programs, accelerating our transition to becoming
the preferred manufacturer of the new generation of pharmaceutical chemicals.
ChiRex Infrastructure
We are delighted to confirm the appointment of Professor Sandy McKillop
as Research & Development Director, based at our Dudley site.
This appointment has concluded our search for a high-caliber and experienced
scientist to lead our day-to-day process development activities and closely
coordinate our internal efforts with those of our leading academic advisers.
Prof. McKillop was previously Professor of Chemistry at the University of East
Anglia in the United Kingdom and is an
internationally renowned organic chemist. He has been a member of our Scientific
Advisory Board and has consulted widely within the pharmaceutical industry.
We have embarked on a search for a Chief Operating Officer, a position we feel
is now warranted for a Company of our size and potential. In addition, we intend
to continue strengthening our overall management and technical resources to
fully support our planned growth.
Financial Performance
For 1997, ChiRex achieved gross revenues of $94.1 million, compared with $89.8
million in 1996. Core revenues grew by 41% to $68.1 million from $48.4 million
in 1996. Gross profit at $22.7 million (24.1% of revenues) was slightly ahead of
1996 levels of $22.0 million (24.5% of revenues).
Net income before restructuring expenses was $4.8 million, or $0.42 per share
for 1997, some 19% ahead of 1996 earnings of $4.1 million, or $0.37 per share.
While the year was one of substantial achievement in the strategic development
of the business, the financial results overall, and in the fourth quarter in
particular, were below our goals. This performance was primarily the result of
faster-than-anticipated revenue growth in our core business which created
operating challenges that adversely affected gross profit.
The operating impact on gross profit was exacerbated by the need to make prudent
inventory provisions of $1.2 million at year end. These provisions principally
related to the write-down of the value of stocks of some non-core products,
including phentermine hydrochloride, one of the active ingredients
in the dietary suppressant combined therapy known as "Fen-Phen". Lastly, we
incurred some unanticipated residual expenses following termination of
acetaminophen manufacture in September, including the operation of the Dudley
site biological wastewater treatment plant as this facility adjusted to a
significantly different feed stream.
We believe that many of these growth-related operating issues will be resolved
in 1998 and that gross profit will improve accordingly. Moreover, the sale of
our uncompetitive acetaminophen business in April 1997 reflects our commitment
to eliminating low-margin non-core products. We view this divestment as the
final significant step in positioning ChiRex as a leading CMO focused on high
added-value products.
Looking Forward
The new year promises new and greater opportunities to ChiRex as the Company
follows its pathway to growth in its core business. A top priority in 1998 is to
bring our Annan facility into full operation to support our supply agreement
with Glaxo Wellcome and in anticipation of further new business potential. At
our Dudley site we are aggressively addressing the key operating issues while
simultaneously advancing plans to introduce several additional new products
during the year.
We remain committed to building the finest full-service CMO to capitalize on the
strong outsourcing demand that continues to emerge from the pharmaceutical
industry, and thereby to enhance value for all our shareholders. We will
continue to update you on our progress as we strive to achieve sustained growth
in revenue, earnings and profitability through 1998 and beyond.
Sincerely,
Signature
Alan R. Clark
Chairman and Chief Executive Officer
February 23rd 1998
4
<PAGE>
[PHOTOS]
"We have positioned ChiRex for exceptional growth over the next several years by
shifting the sales mix to high value-added products, expanding internal
capacity, acquiring a second manufacturing site and enhancing our already strong
technological platform in chiral chemistry. "
Alan Clark
Chairman and Chief Executive Officer
5
<PAGE>
MANUFACTURING
MANUFACTURING GROWTH...
- -----------------------
ChiRex has enjoyed significant growth as pharmaceutical clients increasingly
outsource their manufacturing. To fulfill the future needs of its customers,
ChiRex must continue to expand its pharmaceutical production capabilities.
ChiRex's most significant addition to manufacturing capacity to date has been
the acquisition of Glaxo's cGMP facility in Annan, Scotland, for approximately
$67 million. Investment in the Annan facility will eventually reach about $90
million. By the end of the fourth quarter of 1998, the site should be
operational, producing some of the products covered by the five year, $450
million agreement with Glaxo.
The first six products to be produced under the Glaxo Wellcome contract include
an intermediate for the AIDS drug 3TC, Lamivudine for treating hepatitis B, and
Vertex 141, another AIDS therapeutic. The Glaxo agreement will bring ChiRex
substantial revenues in 1998, which are expected to increase throughout the term
of the contract.
ChiRex's manufacturing facility in Dudley, Northumberland, England has been the
anchor of the Company's manufacturing base for thirty years. During the past
five years, more than $50 million has been invested in the Dudley site,
including the construction of a $15 million state-of-the-art pilot plant and a
research and development center in 1996. The Dudley plant is one of the world's
largest independent fine chemical manufacturing sites. The plant is inspected by
the U.S. Food and Drug Administration (FDA) and has management systems certified
to ISO 9002 standards. Dudley also complies with UK Integrated Pollution Control
legislation and its products comply with relevant Pharmacopoeias and FDA
requirements.
MANUFACTURING QUALITY
- ---------------------
ChiRex is equipped to provide a Quality System in full compliance with
regulatory and cGMP requirements. Analytical resources are capable of developing
and operating modern methods of analysis for raw materials, intermediates and
final products.
A team establishes validation of analytical methods, manufacturing
equipment and processes, while documentation systems provide assurance of
compliance.
6
<PAGE>
"The acquisition of the Annan site by ChiRex has unlocked tremendous
opportunities and an exciting future for this facility. With the ChiRex capital
investment program we will quickly transform the Annan capabilities from
dedicated to flexible manufacture of an expanding value-adding product
portfolio."
Frank Wright
Vice President, Annan Operations
7
<PAGE>
TECHNOLOGY
TECHNOLOGY GROWTH...
- --------------------
Modern pharmaceuticals are complex, expensive, highly regulated products which
present enormous manufacturing challenges. As many as two-thirds of drugs in
development are being introduced as single isomers. Market and regulatory forces
have pushed new product timelines beyond ten years and launch costs above $300
million. Time-to-market is therefore more critical today than ever. Helping our
customers shorten time-to-market through innovative technology and associated
services is a central component of ChiRex's strategy for growth.
Recognizing the commercial significance of chirality, ChiRex has taken the
initiative of licensing in six leading chiral chemical technologies. Developed
by leading researchers, ChiRex's technologies provide a proprietary base for
creating high value intermediates for drug synthesis, often starting from
relatively inexpensive raw materials.
The most recent addition to our chiral chemistry technology platform is a
Kinetic Resolution technique invented by Prof. Eric N. Jacobsen at Harvard
University and licensed in from Harvard. This Kinetic Resolution method permits
facile separation of the two isomeric forms of terminal epoxides. Single isomer
epoxides are very reactive molecules which can be used to manufacture chiral
intermediates and actives. This is more cost effective chemistry than
traditional routes, which frequently require recycling of the unwanted isomer.
ChiRex will seek relationships with its customers that go well beyond simple
supplier-purchaser arrangements. Although ChiRex is and will remain primarily a
contract manufacturing company, more and more of its interaction with customers
involves such issues as scale-up, product development and regulatory issues.
ChiRex views these activities as opportunities to work more closely with
customers and provide a higher quality and breadth of service at reasonable
cost.
ERIC JACOBSEN
- -------------
Eric N. Jacobsen, Ph.D., Professor of Chemistry at Harvard University and the
discoverer of kinetic resolution technology recently licensed by ChiRex, brings
unmatched synthetic chemistry expertise to the Company as a member of the Board
of Directors, and the Scientific Advisory Board.
With two patents, 14 awards for scientific excellence and more than 60
publications, Dr. Jacobsen is a recognized innovator in the chiral chemistry
technologies which will fuel the Company's growth.
"Chirality is one of the most intriguing artifacts of nature. No one knows
exactly how or why natural chiral molecules arose only in left- or right-handed
form. I am fortunate to be working at a time in history when harnessing
chirality to provide safer, more effective drugs is becoming a reality."
Eric Jacobsen, Ph.D.
Professor, Department of Chemistry
and Chemical Biology, Harvard University.
Board of Directors.
Scientific Advisory Board.
8
<PAGE>
ChiRex's State-of-the-Art Water For Injection Generation Plant
9
<PAGE>
EXPERTISE
MANAGEMENT AND TECHNICAL EXPERTISE...
- -------------------------------------
World-class technology requires superlative management and technical expertise.
Filling key research and director positions with internationally respected
pharmaceutical chemists assures ChiRex of a high level of technical leadership
and the reputation to attract the best scientists at all levels.
ALEXANDER MCKILLOP
- ------------------
Alexander ("Sandy") McKillop, Ph.D., D.Sc., a leading chemical researcher and
internationally known consultant, will take ChiRex technology to the next level
as R&D Director. As a respected pharmaceutical chemist, Dr. McKillop has already
begun attracting prestigious technical talent to ChiRex.
Dr. McKillop brings to ChiRex broad-based experience in the discovery and
application of new chemical processes, as well as extensive knowledge of
pharmaceutical product development.
EXPANDED, WORLD-CLASS SERVICES
- ------------------------------
Manufacturing is ChiRex's core activity and major focus. But as pharmaceutical
companies seek more outsourcing arrangements over the next several years,
ChiRex's relationships with contract partners will become more complex, more
vertically integrated, to reflect the dynamics of the discovery-to-market
phenomenon.
Process development is a logical area for ChiRex to assist its partners. At this
stage in the evolution of a drug, pharmaceutical companies begin to look for the
safest, most efficient, most cost-effective methods of producing clinical-grade
material in large quantities. Traditionally, contract manufacturers have entered
the picture after this critical part of the manufacturing process has been
worked out. With its world-class chemical development technologies, however,
ChiRex can pick up the reins much earlier, perhaps at the discovery stage, to
assure efficient transition from the lab to the clinic to market.
Regulated products represent another challenging area where ChiRex is equipped
to assist its pharmaceutical industry partners. All ChiRex products are
manufactured under strict cGMP protocols and are subject to intense regulatory
scrutiny. As manufacturers of these products, ChiRex is well positioned to work
alongside its customers to satisfy regulatory requirements, including FDA
filings, and further streamline time-to-market.
Expansion of our services and partnering with our customers are critical
components of ChiRex's growth strategy.
"Shortening time-to-market is going to save a lot of money, but the implications
for contract manufacturers are very clear: The whole time line must be
telescoped dramatically."
Alexander McKillop, Ph.D.
Director of Research
and Development.
Chairman, Scientific
Advisory Board.
"As R&D productivity increases, pharmaceutical companies will recognize that
manufacturing everything in-house is not a serious option. The capacity and
capabilities of good CMOs will have to become part of their supply network."
David Pulman, Ph.D
Director of International Activities
Supply. Glaxo Wellcome Operations.
10
<PAGE>
"It is imperative that ChiRex sustains production capabilities to meet the
increasingly complex requirements of our customers and to complement these with
excellent analytical, validation, documentation and compliance services."
David Raynor
Vice President, Dudley Operations
11
<PAGE>
SERVICE
CHIREX: THE FULL-SERVICE CMO
- ----------------------------
Development, manufacturing and regulatory compliance constitute core activities
of new drug introduction between discovery and marketing. With its world-class
technical, management and regulatory expertise, ChiRex services its
pharmaceutical industry partners with more than just contract manufacturing. The
Company's product and revenue growth are strong indications that drug companies
are willing to have ChiRex as a partner in their race to the marketplace.
As an elite, full-service CMO partner, ChiRex offers three levels of service:
laboratory scale expertise, pilot plant capabilities and commercial scale
production. A multidisciplinary project team guides products through these
levels, as needed. Process design and development activities revolve around
ChiRex's broad technology base and chiral expertise, including such essentials
as hazards evaluation, in-house engineering design, regulatory support and
secure management of trade secrets.
12
<PAGE>
FINANCIAL
CHIREX INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Management's Discussion and Analysis of Results 14
of Operations and Financial Condition
Reports of Independent Public Accountants 18
Consolidated Balance Sheets as of December 31, 19
1996 and 1997
Consolidated Statements of Operations for the years 20
ended December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the years 21
ended December 31, 1995, 1996 and 1997
Consolidated Statements of Stockholders' Equity for 22
the years ended December 31, 1995, 1996 and 1997
Notes to Consolidated Financial Statements 23
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS and FINANCIAL CONDITION
- -----------------------------------------------
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the notes thereto included herein.
INTRODUCTION
ChiRex Inc. 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. In 1996 and
1997, the Company manufactured over 50 products at its cGMP manufacturing
facilities in Dudley, England and Annan, Scotland. The Annan facility, acquired
in October 1997, is currently underutilized and is in the process of being
reconfigured into a flexible manufacturing facility. Management has reviewed the
Company's product portfolio and identified certain products it manufactured in
1996 and 1997 as "core products" which the Company believes offer superior long-
term growth potential, higher margins or strategic customer relationship
benefits. The Company intends to phase-out the manufacture of non-core products
which do not meet management's criteria regarding profitability, growth profile
or customer development potential.
In April 1997, the Company disposed of its acetaminophen (paracetamol, an over-
the-counter analgesic) business and in September 1997, the Company ceased
production of acetaminophen. At the time of the disposition, acetaminophen was
the largest volume product manufactured by the Company, representing
approximately 31% of the Company's 1996 pro forma revenues, but was not highly
profitable at the gross margin level. In connection with the disposition of the
business, the Company implemented measures designed to offset the effect on
operating performance. 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 disposition
resulted in a pre-tax charge in 1997 of $8.1 million for costs associated with
asset impairment, plant closure, severance and other expenses related to the
disposition of this business net of proceeds received on the disposal. The
after-tax charge was approximately 6% of stockholders' equity of the Company at
December 31, 1996.
On October 31, 1997, the Company completed the purchase of a Glaxo Wellcome FDA
cGMP pharmaceutical production facility located in Annan, Scotland. The Company
paid approximately $66.8 million ($40.0 million) for the facility plus an
additional payment for certain working capital of approximately $1.7 million
((Pounds)1.0 million). As part of the transaction, Glaxo Wellcome awarded the
Company a five-year contract to supply certain pharmaceutical intermediates and
active ingredients with an aggregate sales value of approximately $450 million.
Under the Asset Purchase Agreement, ChiRex purchased all of the buildings, land
and equipment at the 154-acre Annan, Scotland property, encompassing three main
production facilities plus certain working capital. The Company plans to invest
approximately $25 million over two years to accommodate newly contracted
products and to modify the facility for general purpose pharmaceutical fine
chemical manufacturing. Under the Supply Agreement, ChiRex will manufacture up
to ten products at Annan and Dudley. The acquisition has been accounted for as a
purchase and, accordingly, the operating results of the Annan facility have been
included in the Company's consolidated financial statements from the date of
acquisition.
Substantially all of the Company's revenues and expenses are denominated in
Great Britain pounds sterling, and to prepare the Company's financial statements
such amounts are translated into US Dollars at average exchange rates in
accordance with generally accepted accounting principles. The average exchange
rate used to make this translation in 1995, 1996 and 1997 was $1.64, $1.56 and
$1.65 respectively, per (Pounds)1.00. Period-to-period changes in exchange rates
can affect the comparability of the Company's financial statements.
The Company has dedicated internal resources to identify and resolve "year 2000"
compliance issues within computer applications utilized by the Company. The
Company has also engaged external resources and will purchase necessary computer
software and upgrades to become year 2000 compliant. The Company is also
developing and will implement in 1998 a new management information system at its
Annan facility in connection with its business plans for this location. The
Company's long term plan is to implement these systems at the Company's other
locations as soon as feasible.
RESULTS OF OPERATIONS
In order to make the comparison of financial information more meaningful, the
following tables sets forth (i) the historical results of the Company for 1997
adjusted to exclude various restructuring charges resulting from the disposal of
the acetaminophen business, (ii) the historical results of the Company for 1996
and the pro forma 1996 results of the Company, adjusted to exclude various
charges resulting from the Contribution and the Merger (see Notes 1 and 2)
consisting of adjustments to restate inventory at fair value, write-off of
acquired in-process research and development and an expense relating to certain
stock compensation, and (iii) the combined audited operating results of ChiRex,
Holdings and Dudley for 1995. All intercompany transactions requiring
elimination have been eliminated. 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.
In 1996, the Company adopted a new cost accounting policy for the manufactured
inventory of Dudley 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.
14
<PAGE>
<TABLE>
<CAPTION>
Comparative Operating Results
For Years Ended December 31, 1997, 1996 and 1995 (In thousands)
<S> <C> <C> <C> <C> <C> <C>
(Unaudited)
ChiRex
1997 Inc. Adjustment As Adjusted
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues $94,100 $- $94,100
Cost of goods sold 71,440 - 71,440
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 22,660 - 22,660
Research and development 3,937 - 3,937
Selling, general and administrative 9,423 - 9,423
Goodwill 1,164 - 1,164
Restructuring charges, net of 8,069 8,069)(1) -
proceeds
Interest expense, net 1,052 - 1,052
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (985) 8,069 7,084
Benefit (provision) for
income taxes 335 (2,572)(2) (2,237)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (650) $ 5,497 $ 4,847
- ------------------------------------------------------------------------------------------------------------------------------------
ChiRex (Holdings)
Limited January 1, Pro
ChiRex 1996 thru Forma Pro Pro Forma
Inc. March 11, 1996 Adjustments Forma Adjustments As adjusted
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $ 74,615 $ 15,212 $- $89,827 $- $89,827
Cost of goods sold 56,508 12,564 (112) (3) 69,184 (1,372)(7) 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)(8) 4,075
Selling, general and
administrative 13,563 1,300 - 14,863 (5,611)(9) 9,252
Goodwill 924 - 225)(4) 1,149 - 1,149
Interest expense, net 755 690 (440)(5) 1,005 - 1,005
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income (6,442) 100 103 (6,239) 12,773 6,534
taxes
Benefit (provision) for
income taxes (1,867) (33) (108)(6) (2,008) (453)(10) (2,461)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (8,309) $ 67 $ (5) $(8,247) $ 12,320 $ 4,073
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ChiRex
1995 Inc. Dudley Holdings Combined (11)
- ------------------------------------------------------------------------------------------------------------------------------------
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) 541
Benefit (provision) for income taxes - (1,327) 351 (976)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before preferred dividend $ (2,452) $ 2,975 $ (958) $ (435)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) To reverse the effect of the restructuring and asset impairment charge net
of proceeds received on the disposal of the acetaminophen business.
(2) Tax effect of the adjustment described in note (1) above.
(3) Increase in depreciation reflecting the increased valuation of ChiRex
Holdings Ltd.'s fixed assets for the period prior to the Contribution.
(4) Increase in amortization of goodwill related to the period prior to the
Contribution.
(5) Reduction in interest expense related to debt retired in connection with the
Contribution.
(6) Income tax effect of pro forma adjustments, excluding amortization of
goodwill which is not deductible for tax purposes.
(7) To reverse the effect of the purchase method of accounting step-up of
inventory to fair value at the time of the Contribution.
(8) To reverse the effect of the write-off of research and development expenses
that were in-process at the time of the Contribution.
(9) To reverse the effect of stock compensation charge associated with granting
of stock and options to purchase stock in connection with the Merger.
(10) Tax effect of the adjustment described in note (7) above.
(11) Reflects the combination of the audited historical operating results of
ChiRex for the year ended December 31, 1995 and the aggregate audited historical
operating results of Holdings and Dudley for the periods from August 10, 1995 to
December 31, 1995 and January 1, 1995 to August 10, 1995, respectively.
15
<PAGE>
YEARS ENDED DECEMBER 31, 1996 AND 1997
Revenues of $94.1 million in 1997 increased $4.3 million, or 4.7%, from $89.8
million in 1996. Revenues from core products of $68.2 million, which accounted
for 72.4% of revenues in 1997, increased by $19.7 million or 40.6%, while
revenues from non-core products (excluding acetaminophen) of $6.0, which
accounted for 6.4% of revenues in 1997, decreased by $6.3 million or 51.1%.
Existing core-product revenues increased by $15.6 million, and seven new
products contributed $4.1 million of revenues in 1997. Revenues of $19.2 million
attributable to acetaminophen, which accounted for 20.4% of revenues in 1997,
declined by $8.7 million or 31.1% compared to 1996 due primarily to the disposal
of the business in 1997. License fee and royalty income declined $0.4 million
due to the decline in demand for the products generating such revenue. Product
price changes did not contribute significantly to changes in revenue between the
two periods.
Cost of goods sold increased $3.6 million, or 5.4%, to $71.4 million in 1997. Of
the increase, approximately $1.2 million relates to reserves recorded in 1997
for certain inventory including Phentermine Hydrochloride, one of the active
ingredients in the dietary suppressant combined therapy commonly known as "Fen-
Phen", that was the subject of an FDA action resulting in significantly reduced
demand for the drug. The remainder of the increase can be attributable to the
higher level of sales and the Company's introduction of new products.
Research and development expenses decreased $0.1 million, or 3.4%, to $3.9
million in 1997 from $4.0 million in 1996. Development activity in 1997 remained
at a high level to support new product development. The Company is committed to
improving and expanding its research and development activities including
commercializing its proprietary process technologies.
Selling, general and administrative expenses increased $0.2 million, or 1.9%, to
$9.4 million in 1997. The increase is attributable to approximately $0.4 million
of additional expenses generated at the Annan facility after its acquisition
partly offset by a reduction in fixed costs following changes to the Company's
organizational structure.
Interest expense, net in 1997 of $1.1 million is $0.1 million higher then last
year because lower debt borrowings early in the year as proceeds received from
the Secondary Offering (see Note 2) were used to reduce bank borrowings, were
more then offset by higher borrowing requirements in the fourth quarter of 1997
following the acquisition of the Annan facility which was financed by long-term
borrowings.
Income tax expense was $2.2 million in 1997 (an effective tax rate of 31.6%)
compared to $2.5 million in 1996, an effective tax rate of 37.7%. The effective
tax rate in 1997 is less then 1996 due to the recognition of a $410 thousand
deferred tax benefit resulting from the enactment of a statutory rate reduction
in the UK from 33% to 31% in 1997. The Company's effective tax rate generally
exceeds the statutory rates primarily due to non-deductible amortization of
goodwill.
As a result of the factors described above, the as adjusted net income was $4.8
million in 1997 compared to $4.1 million in 1996.
YEARS ENDED DECEMBER 31, 1995 AND 1996
Revenues of $89.8 million in 1996 increased $0.8 million, or 1.0%, from $89.0
million in 1995. Revenues from core products, which accounted for 55.7% of
revenues in 1996, increased by $13.1 million or 35.3%, while revenues from 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 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 Initial Public Offering.
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.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations of $4.3 million in 1997 reflects the overall
profitability of the business prior to the impact of the disposition of the
acetaminophen business less the cash costs of restructuring charges incurred
during 1997. The Company generated $10.5 million in cash from operating
activities before $6.2 million of cash restructuring charges incurred in 1997
related to the disposal of the acetaminophen business. Working capital increased
$7.7 million in 1997 largely due to an increase in accounts receivable in the
fourth quarter.
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 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 $77.5 million in 1997, consisting of
the acquisition of the Annan facility for $69.5 million and $12.1 million in
capacity expansion and maintenance capital expenditures primarily at the
Company's Dudley facility. These expenditures were partly offset by $4.1 million
in proceeds received from the disposal of the acetaminophen business. The
Company plans to invest approximately $25 million over two years to accommodate
newly contracted products and to modify the Annan facility for general purpose
pharmaceutical fine chemical manufacturing.
Net cash used in investing activities was $4.3 million in 1996, consisting of
maintenance capital expenditures.
Net cash generated from financing activities in 1997 was $78.1 million. To
finance the acquisition of the Annan facility and provide for the general cash
requirements of the business, a subsidiary of the Company entered into a senior
secured term-loan and revolving credit agreement in October 1997, with Bankers
Trust Company allowing it to borrow up to (Pounds)62.0 million (approximately
$102.0 million at December 31, 1997) for a five-year period. The credit facility
is comprised of a (Pounds)40.0 million (approximately $65.8 million at December
31, 1997) term loan and a (Pounds)22.0 million (approximately $36.2 million at
December 31, 1997) revolving-credit facility each bearing interest at LIBOR plus
1%. As of December 31, 1997, (Pounds)46.8 million ($77.0 million) was
outstanding under the term loan and revolving credit facility. Contemporaneously
with the new financing, the Company re-paid and terminated its existing
revolving facility with Midland Bank plc. (see Note 7 of Notes to Consolidated
Financial Statements). Other sources of funds generated from financing
activities during 1997 include in February 1997, the Company filed with the
Securities and Exchange Commission to register for the sale by a Former
Affiliate of its 3,489,301 shares of the Company's common stock at $9.50 per
common share (the "Secondary Offering"). The Former Affiliate's shares have been
outstanding since the Initial Public Offering. In connection with the Secondary
Offering, the Company granted the underwriters a 30-day option to purchase up to
523,395 additional shares of the Company's common stock on the same terms as set
forth in the Secondary Offering to cover over allotments. In April 1997, the
underwriters exercised their option and the Company issued 523,395 shares of its
common stock and received proceeds of $4.2 million net of associated expenses.
The Company also received $1.1 million in proceeds from the exercise of stock
options during 1997.
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
Initial Public Offering (see Note 2 of Notes to Consolidated Financial
Statements). On August 1, 1996, the Company converted its existing long-term
debt to a revolving facility with Midland Bank plc. This credit facility allowed
a maximum borrowing limit of (Pounds)10.5 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%.
The Company expects to satisfy its cash requirements, including the requirements
of its subsidiaries, through internally generated cash and borrowings. As of
December 31, 1997, approximately $30.4 million of cash and borrowings were
available for immediate use, if required.
FOREIGN CURRENCY
For 1995, 1996 and 1997, net sales of the Company's products outside the United
States totaled approximately $85 million, $82 million and $89 million,
representing 96%, 92% and 94% 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 believes it has a natural cash currency hedge because its operating
expenses and revenues tend to be denominated in matched currencies. Also the
Company has partly offset foreign currency-denominated assets with foreign
currency-denominated liabilities.
Financial results of the Company could be adversely or beneficially affected by
fluctuations in foreign exchange rates. Fluctuations in the value of foreign
currencies will affect the US 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 US dollars at average monthly exchange rates.
In addition, the US 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 Great Britain pounds sterling,
German marks and Dutch guilders.
17
<PAGE>
REPORTs OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Stockholders and Board of Directors of ChiRex Inc.:
We have audited the accompanying consolidated balance sheets of ChiRex Inc. (a
Delaware corporation) and its subsidiaries as of December 31, 1996 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year ended December 31, 1996 and 1997. 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 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 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 audits provide 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 1997, and the results of its operations
and its cash flows for the years ended December 31, 1996 and 1997, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 4, 1998
To the Stockholders and Board of Directors of ChiRex Inc.:
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of ChiRex Inc. (formerly SepraChem Inc.) for
the year ended December 31, 1995. 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 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 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 financial statements referred to above present fairly, in
all material respects, of operations and cash flows of ChiRex Inc. for the year
ended December 31, 1995 in conformity with generally accepted accounting
prinicples.
COOPERS & LYBRAND LLP.
Boston, Massachusetts
February 9, 1996
<PAGE>
ChiRex Inc.
CONSOLIDATED BALANCE SHEETS
as of december 31, 1996 and 1997
- --------------------------------
(dollars in thousands except per-share amounts)
<TABLE>
<CAPTION>
1996 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- ---------------------------------------------------------------------------------------------------------------
Current assets:
Cash $ 291 $ 5,347
Trade and other receivables 12,764 18,811
Inventories 23,350 23,225
Other current assets 4,448 3,774
- ---------------------------------------------------------------------------------------------------------------
Total current assets 40,853 51,157
Property, plant and equipment, net 61,349 120,755
Intangible assets, net (Note 1) 28,604 27,564
Other assets (Note 2) 3,591
- ---------------------------------------------------------------------------------------------------------------
Total Assets $130,806 $203,067
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 11,421 $ 8,763
Accrued expenses 9,232 11,587
Current portion of long-term debt (Note 7) -- 7,311
Income taxes payable (Note 4) 2,383 348
Deferred income taxes (Note 4) 2,369 --
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 25,405 28,009
Long-term debt (Note 7) 3,933 69,675
Deferred income taxes (Note 4) 7,411 7,955
Deferred income 3,989 4,333
Contingencies (Note 6) -- --
- ---------------------------------------------------------------------------------------------------------------
Total Liabilities 40,738 109,972
- ---------------------------------------------------------------------------------------------------------------
Stockholders' Equity (Notes 1 and 2):
Preferred Stock ($.01 par value, 4,000,000 shares authorized;
none issued and outstanding in 1996 and 1997)
Common stock ( $.01 par value, 30,000,000 shares authorized; 10,933,735
and 11,792,990 issued and outstanding at December 31, 1996 and 1997) 109 118
Additional paid-in capital 95,479 100,788
Accumulated deficit (10,761) --
Cumulative translation adjustment 5,241 3,600
- ---------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 90,068 93,095
- ---------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $130,806 $203,067
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
<PAGE>
ChiRex Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 and 1997
- ----------------------------------------------------
(in thousands except per-share amounts)
<TABLE>
<CAPTION>
1995 1996 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Product sales $ 1,854 $ 73,440 93,362
License fee and royalty income 900 1,175 738
- ------------------------------------------------------------------------------------------------------------------------
Total revenues 2,754 74,615 94,100
- ------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of goods sold (Note 11) 1,715 56,508 71,440
Research and development 595 3,517 3,937
Selling, general and administrative (Note 10) 2,099 8,876 10,587
Restructuring charge, net of proceeds from disposition of
Acetaminophen business (Note 2) -- -- 8,069
Write-off of in-process research and development (Note 2) -- 5,790 --
Stock compensation charge (Note 2) -- 5,611 --
- ------------------------------------------------------------------------------------------------------------------------
Total operating expenses 4,409 80,302 94,033
- ------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (1,655) (5,687) 67
Interest expense, net (Note 7) -- 755 1,052
Other expenses (Note 8) 797 -- --
- -------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (2,452) (6,442) (985)
Benefit (provision) for income taxes (Note 4) -- (1,867) 335
- -------------------------------------------------------------------------------------------------------------------------
Net loss $(2,452) $(8,309) $(650)
- -------------------------------------------------------------------------------------------------------------------------
Net loss per common share (Note 1):
Basic net loss per common share $ (0.70) $ (0.88) $(0.06)
Diluted net loss per common share $ (0.70) $ (0.88) $(0.06)
Weighted average shares outstanding for basic and diluted net loss per common share 3,521 9,485 11,407
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
<PAGE>
CHIREX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
- ----------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
1995 1996 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,452) $ (8,309) $ (650)
Adjustments to reconcile net loss to cash provided by
operating activities:
Depreciation & amortization 148 8,371 10,062
Impairment charge (Note 2) - - 7,743
Loss on sale of assets - - 30
Proceeds from sale of acetaminophen (Note 2) - - (7,159)
Benefit for deferred income taxes - (1,468) (495)
Provision for doubtful accounts 70 434 -
Write-off of in-process research and development (Note 2) - 5,790 -
Stock compensation charge (Note 2) - 5,611 -
Changes in assets and liabilities:
Trade and other receivables 22 (1,970) (6,500)
Inventories (6) (855) 2,749
Other current assets (1,053) 973 947
Other assets - - (500)
Accounts payable and accrued expenses - 1,101 (562)
Income taxes payable - 1,614 (1,929)
Deferred income - 682 517
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operations (3,271) 11,974 4,253
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds on sale of assets (Note 2) - - 4,100
Purchase of assets and transaction costs (Note 2) - - (69,495)
Capital expenditures - (4,290) (12,067)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities - (4,290) (77,462)
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings on term-loan and revolving credit facility, net - - 77,983
Proceeds from the issuance of common stock 11 83,149 4,180
Proceeds from exercise of stock options - 136 1,138
(Payments) borrowings on revolving line of credit, net - 3,588 (3,772)
Deferred financing costs - - (1,404)
Repayment of subordinated note - (53,534) -
Redemption of common stock - (40,472) -
Investment by Former Affiliate 3,261 - -
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided from (used in) financing activities 3,272 (7,133) 78,125
- -----------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash - (261) 140
- -----------------------------------------------------------------------------------------------------------------------
Net increase in cash 1 290 5,056
Cash at beginning of period - 1 291
- -----------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 1 $ 291 $ 5,347
- -----------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information (Note 9):
Cash paid for:
Interest, net of amounts capitalized $ - $ 755 $ 1,241
Income taxes $ - $ 1,081 $ 1,647
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
<PAGE>
CHIREX INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 and 1997
- ----------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Additional Acc- Investment Cumulative Total
Common Stock Paid-In umulated By Former Translation Stockholders'
Shares Amount Capital Deficit Affiliate Adjustment Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 3l, 1994 - $ - $ - $ - $ 1,873 $ - $ 1,873
Net loss - - - (2,452) - - (2,452)
Issuance of common stock 8,000 80 1,793 - (1,873) - -
Proceeds under common stock plans 15 - 10 - - - 10
Investment by Former Affiliate - - 3,261 - - - 3,261
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 8,015 80 5,064 (2,452) - - 2,692
Exchange of ChiRex Inc. shares
for ChiRex America shares (4,519) (45) 45 - - - -
Issuance of common stock, net 10,414 104 125,065 - - - 125,169
Redemption of common stock (3,091) (31) (40,441) - - - (40,472)
Net loss - - - (8,309) - - (8,309)
Effect of stock compensation charge 25 - 5,611 - - - 5,611
Options exercised 90 1 135 - - - 136
Translation adjustment - - - - - 5,241 5,241
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 10,934 109 95,479 (10,761) - 5,241 90,068
Net loss - - - (650) - - (650)
Issuance of common stock, net 524 5 4,175 - - - 4,180
Options exercised 335 4 1,134 - - - 1,138
Translation adjustment - - - - - (1,641) (1,641)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 11,793 $ 118 $ 100,788 $(11,411) $ - $ 3,600 $ 93,095
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
<PAGE>
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 owned by the same stockholders as the Company (the Merger), and
acquired the business of Crossco (157) Limited ("Crossco"), including its
wholly-owned subsidiary Sterling Organics Limited, a pharmaceutical 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. Limited is a wholly-owned subsidiary of
Holdings, and Holdings and ChiRex America are wholly-owned subsidiaries of the
Company. During 1997 Limited changed its name to ChiRex (Dudley) Limited
("Dudley") and a new wholly-owned subsidiary of Holdings, ChiRex (Annan) Limited
("Annan"), was formed.
SepraChem was established in November 1994 as a wholly-owned subsidiary of
Sepracor Inc. (the"Former Affiliate"). 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, the Former Affiliate transferred to SepraChem the
pharmaceutical fine chemical manufacturing business of the Former Affiliate.
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 for the three years ended December 31, 1997 with the results of ChiRex
Inc. from the date of incorporation. The results of Holdings and Dudley are
included from the date of their acquisition on March 11, 1996 and the results of
Annan from the date of its incorporation.
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 the Former Affiliate'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 the Former
Affiliate. SepraChem entered into various agreements wherein the Former
Affiliate agreed to provide certain services and facilities to SepraChem in
accordance with terms described in Note 10.
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 generally 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.
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
Research and development costs are expensed as incurred.
STOCK BASED COMPENSATION PLANS
The Company applies Accounting Principles Board Opinion No. 25,"Accounting for
Stock Issued to Employees" ("APB 25") 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
The Company accounts for income taxes in accordance with the liability method as
prescribed by 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
In 1997 the Company adopted the provisions of Statement of Financial Accounting
Standards No. 128,"Earnings Per Share" ("SFAS No. 128"). This statement
establishes the standards for computing and presenting earnings per share and
applies to entities with publicly-held common stock or potential common stock.
This statement replaces the presentation of primary earnings (loss) per share
with a presentation of basic earnings (loss) per share and also requires a dual
presentation of basic and diluted earnings (loss) per share on the face of the
statement of operations.
Basic loss per common share was computed by dividing the net loss by the
weighted average number of shares of common stock outstanding during the year.
Since the effect of the assumed exercise of stock options of 391,000 shares,
420,000 shares and 581,000 shares in 1995, 1996 and 1997, respectfully, are
anti-dilutive, basic and diluted loss per share as presented on the statement of
operations are the same.
Upon adoption of SFAS No. 128, the Company's reported loss per common share for
1996 was restated. There was no effect on net loss per common share for prior
periods.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(Continued)
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:
1996 1997
(in thousands),
- --------------------------------------------
Raw materials $6,176 $8,688
Work in progress 6,158 6,608
Finished goods 11,016 7,929
- --------------------------------------------
Total $23,350 $23,225
- --------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET
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:
1996 1997
(in thousands),
- --------------------------------------------
Land $ 1,146 $ 6,037
Buildings 9,307 27,347
Machinery and equipment 59,709 104,509
- --------------------------------------------
70,162 137,894
Less accumulated
depreciation (8,813) (17,139)
- --------------------------------------------
$61,349 $120,755
- --------------------------------------------
Depreciation expense was $148,000, $7,447,000 and $8,898,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.
OTHER CURRENT ASSETS
At December 31, 1996 and 1997, other current assets consist primarily of prepaid
expenses and other miscellaneous non-trade receivables.
INTANGIBLE ASSETS
Intangible assets primarily relate to the excess cost over the fair value of net
assets of Holdings and Dudley acquired on March 11, 1996. This intangible asset
is being amortized using the straight-line method over 25 years. Accumulated
amortization at December 31, 1996 and 1997 was $924,000 and $2,088,000,
respectively. 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 un-discounted cash flows of Holdings
and Dudley in assessing the recoverability of this asset. If impairment has
occurred, any excess of carrying value over fair value would be recorded as a
loss.
FOREIGN CURRENCY
The accounts of the Company's UK subsidiaries are recorded in their functional
currency, Great Britain pounds sterling, and are translated into US dollars
using year-end exchange rates for assets and liabilities and average exchange
rates during the year for revenues and expenses. Resulting translation
adjustments are reflected as a separate component of stockholders' equity 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 term loan and revolving
line of credit. Their respective carrying amounts in the accompanying balance
sheet approximate fair value due either to the short-term nature of the balances
or in the case of the term loan and 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 1996. 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
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.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130,"Reporting Comprehensive Income". This
statement establishes standards for reporting and display of comprehensive
income and its components. Components of comprehensive income are net income and
all other non-owner changes in equity such as the change in the cumulative
translation adjustment. This statement requires that an enterprise: (a) classify
items of other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of a
balance sheet. This statement is effective for the Company's financial
statements issued for the year ended December 31, 1998. Reclassification of
financial statements for earlier periods provided for comparative purposes will
be required.
SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131,"Disclosures About Segments of an
Enterprise and Related Information". This statement establishes the standards
for reporting information about segments in annual and interim financial
statements. The statement introduces a new model for segment reporting,
the"management approach". The management approach is based on the way the chief
operating decision-maker organizes segments within a company for making
operating decisions and assessing performance. Reportable segments are based on
products and services, geography, legal structure, management structure - any
manner in which management desegregates a company. This statement is effective
and will be adopted for the Company's financial statements for the year ended
December 31, 1998 and requires the restatement of previously reported segment
information for all periods presented.
2. SIGNIFICANT TRANSACTIONS
PURCHASE OF ANNAN, SCOTLAND MANUFACTURING SITE
On October 31, 1997, the Company through its Annan subsidiary completed the
purchase of Glaxo Wellcome's FDA cGMP pharmaceutical production facility located
in Annan, Scotland. The Company paid approximately $66.8 million ($40.0 million)
for the facility plus an additional payment for certain working capital of
approximately $1.7 million ((pound)1.0 million).
As part of the transaction, Glaxo Wellcome awarded the Company a five-year
contract to supply certain pharmaceutical intermediates and active ingredients
with an aggregate sales value of approximately $450 million.
Under the Asset Purchase Agreement, ChiRex purchased all of the buildings, land
and equipment at the 154-acre Annan, Scotland property, encompassing three main
production facilities plus certain working capital. Under the Supply Agreement,
ChiRex will continue to manufacture most of the products currently made at
Annan. The Company plans to invest approximately $25 million over
<PAGE>
two years to accommodate newly contracted products and to modify the facility
for general purpose pharmaceutical fine chemical manufacturing. The acquisition
has been accounted for as a purchase and, accordingly, the operating results of
the Annan facility have been included in the Company's consolidated financial
statements from the date of acquisition. The total purchase price including
expenses of the transaction was allocated to the assets purchased. This
allocation is subject to adjustment upon finalization of the purchase price
allocation
To finance the acquisition and provide for the general cash requirements of the
business, Holdings entered into a senior secured term-loan and revolving credit
agreement (see Note 7).
The following table presents pro forma revenues, net loss and basic and diluted
loss per common share for the Company assuming the incorporation of the Company,
the merger with ChiRex America and the acquisition of Holdings and Dudley (see
below) occurred on January 1, 1995, and the acquisition of the Annan facility
occurred on January 1, 1996 as follows:
1995 1996 1997
- -----------------------------------------------------------
Revenues $88,957 $118,864 $113,411
Net loss (13,330) (10,276) (1,163)
Net loss per common share:
Basic and diluted net loss
per common share (3.79) (1.08) (0.10)
- -----------------------------------------------------------
The pro forma results are not necessarily indicative of future operations or the
actual results that would have occurred had the incorporation of the Company,
the merger with ChiRex America and the acquisition of Holdings and Dudley been
made at the beginning of 1995, and the acquisition of the Annan facility been
made at the beginning of 1996.
SALE OF ACETAMINOPHEN BUSINESS AND RESTRUCTURING CHARGE
In April 1997, the Company sold it acetaminophen business and related
intellectual property to Rhone-Poulenc Chimie S. A., a French pharmaceutical
company, for net proceeds of approximately $7.1 million ((pound)4.3 million), of
which $4.1 million ((pound)2.5 million) was received during 1997 with the
balance being received over the next three years. Amounts due from Rhone-Poulenc
Chimie of $3.4 million ((pound)2.1 million) at December 31, 1997, are reflected
in other current assets and other assets on the balance sheet and have been
discounted at a market interest rate. Under terms of the agreement, ChiRex
continued to manufacture acetaminophen for the purchaser pursuant to a supply
agreement for a period after the sale to effect a seamless transfer of
customers. The Company ceased manufacture of acetaminophen in September 1997.
In connection with the disposal of the acetaminophen business, the Company
recorded an asset impairment and restructuring charge totaling $7.7 million to
write down the equipment associated with the acetaminophen business to their net
realizable value and to provide for severance and other costs of $7.5 million
due to the elimination of employees involved with the manufacture and support of
the acetaminophen business. As of December 31, 1997, approximately $1.3 million
of the restructuring charge remains in accrued expenses on the balance sheet for
future obligations associated with the divestiture of the Acetaminophen
business.
SECONDARY PUBLIC OFFERING OF THE COMPANY'S COMMON STOCK
On February 26, 1997, the Company filed with the Securities and Exchange
Commission to register for the sale by the Former Affiliate of its 3,489,301
shares of the Company's common stock at $9.50 per common share (the "Secondary
Offering"). In connection with the Secondary Offering, the Company granted the
underwriters a 30-day option to purchase up to 523,395 additional shares of the
Company's common stock on the same terms as set forth in the Secondary Offering
to cover over allotments. In April 1997, the underwriters exercised their option
and the Company issued 523,395 shares of its common stock and received proceeds
of $4,180,000 net of associated expenses.
INITIAL PUBLIC OFFERING, ACQUISITION AND MERGER
On March 11, 1996, the Company completed the sale of 6,675,000 shares of its
common stock, pursuant to an underwritten initial public offering (the Initial
Public Offering). Concurrent with the Initial Public Offering, ChiRex America
was contributed to the Company in exchange for the issuance of 3,520,889 shares
of common stock of the Company 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 Initial Public Offering, the equity share capital of
Holdings, a private company incorporated in England and the sole shareholder of
Dudley, was re-capitalized. Concurrent with the closing of the Initial Public
Offering, the shareholders of Holdings contributed to the Company all of the
outstanding newly re-capitalized equity share capital of Holdings in exchange
for 3,739,206 shares of common stock of the Company 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 Dudley. 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 Initial Public Offering.
The acquisition of Holdings and Dudley by the Company was accounted for using
the purchase method of accounting and their results of operations are 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 costs which was
written off immediately following the acquisition of $5,790,000.
DISSOLUTION OF INNOVA PHARMACEUTICALS SRL (INNOVA)
During 1995, ChiRex America agreed to form a fifty percent owned joint venture,
InNova Pharmaceuticals SRL ("InNova") with Dabur India Limited (Dabur) to
manufacture semi-synthetic paclitaxel. InNova did not carry out any significant
operations during 1996 or 1995.
During 1996, the Company agreed with Dabur to dissolve InNova. 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
CHIREX INC. STOCK OPTION PLANS
In December 1995, the Company adopted an incentive stock-based compensation plan
which permits the grant of up to 1,500,000 shares of the Company's common stock
(the"1995 Plan") and in February 1997 the Company adopted an incentive
stock-based compensation plan which permits the grant of up to 2,000,000 shares
of the Company's common stock (the"1997 Plan"). The 1995 Plan and 1997 Plan
allow for 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 the 1995 Plan and 1997 Plan are determined by the
Compensation Committee. Options granted generally vest ratably over a five-year
period from the date of grant and expire after seven to ten years from the date
of grant. 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.
<PAGE>
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 in December 1995
and amended in February 1997, which permits the grant of up to 100,000 options
to purchase shares of the Company's common stock to outside directors. Options
granted under this plan generally vest ratably over a five-year period from the
date of grant and expire after seven to ten years from the date of grant.
To date, all options from the Company's incentive stock option plans and
directors stock option plan have been granted at fair market value, except for
stock options granted in conjunction with the Merger, which are discussed below.
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 stock option activity under the ChiRex Inc.
plans in 1996 and 1997 is summarized as follows:
Weighted Average
Number Exercise
of Shares Price
- ---------------------------------------------------------------------
1996
- ---------------------------------------------------------------------
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 of options
granted during period $7.35
- ---------------------------------------------------------------------
1997
- ---------------------------------------------------------------------
Options outstanding beginning of period 850,741 $6.89
Granted 902,350 11.23
Exercised (334,566) 3.23
Lapsed/Canceled (43,730) 13.30
- ---------------------------------------------------------------------
Options outstanding end of period 1,374,795 $10.43
- ---------------------------------------------------------------------
Options exercisable 342,067 $8.33
- ---------------------------------------------------------------------
Options available for grant 1,800,308
- ---------------------------------------------------------------------
Weighted average fair value of options
granted during period $3.62
- ---------------------------------------------------------------------
A summary of the status of the Company's stock options at December 31, 1997 is
as follows:
Weighted
Average Weighted
Remaining Average
Range of Exercise Number Contractual Exercise
Prices of Shares Life Price
----------------------------------------------------------------
$1.48 - $1.48 95,760 6.9 years $1.48
9.75 - 13.00 1,226,035 7.1 years 10.69
20.38 - 21.75 53,000 6.8 years 20.66
----------------------------------------------------------------
$1.48 - $21.75 1,374,795 7.0 years $10.43
----------------------------------------------------------------
CHIREX AMERICA STOCK OPTION PLANS
In 1994 and 1995, the stock option plans of ChiRex America provided for the
grant of both incentive stock options and non-statutory 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 ChiRex America Board of Directors (the"ChiRex America Board"). In
August 1995, these options were repriced at an exercise price of $.65,
determined to be the then current fair market value by the ChiRex America Board.
In August 1995, the ChiRex America Board 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 ChiRex America Board. In August 1995, these options were repriced at an
exercise price of $.65, determined to be the then current fair market value by
the ChiRex America Board. In August 1995, the ChiRex America Board 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
non-statutory 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 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 ChiRex America Board. 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 ChiRex
America Board. In August 1995, the ChiRex America Board 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 of ChiRex America 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
<PAGE>
purchased during a Plan Period will be eligible for purchase in subsequent Plan
Periods. Currently no eligible employees participate in this plan.
UK EMPLOYEE STOCK PURCHASE PLAN
Substantially all of the Company's full-time UK employees at its Dudley facility
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 and 1997 under the
Company's stock-based compensation plans been determined 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:
1996 1997
(in thousands, except
per-share amounts)
- ------------------------------------------------------------------------------
Net loss:
As reported $(8,039) $(650)
Pro forma (9,001) (1,442)
Basic and diluted net loss per common share:
As reported $(0.88) $(0.06)
Pro forma (0.95) (0.13)
- ------------------------------------------------------------------------------
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. In addition, any benefit
from deductibility of non-qualifying stock options is subject to the Company's
realization of net operating loss carryforwards.
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:
1996 1997
- ------------------------------------------------------------------------------
Volatility 30% 30%
Risk-free interest rate 6.2% 6.0%
Expected dividend payout - -
Expected life of options 10 years 7 years
- ------------------------------------------------------------------------------
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 and 1997, the Company had reserved 658,178 and 1,800,308
unissued shares of its common stock for possible issuance under the stock-based
compensation plans.
DEFINED BENEFIT PENSION PLAN
The Company's UK 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.
Net periodic pension costs included the following components:
<TABLE>
<CAPTION>
1996 1997
(in thousands),
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Service cost $ 2,008 $ 2,298
Interest cost on projected benefit obligation 3,217 3,826
Return of plan assets (3,878) (7,470)
Amortization of unrecognized obligation (332) 2,260
- ---------------------------------------------------------------------------------------------
Net periodic pension cost $ 1,015 $ 914
- ---------------------------------------------------------------------------------------------
The funded status of the Company's defined benefit pension plan is
as follows:
1996 1997
(in thousands),
- ---------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefits $40,869 $48,927
Non-vested benefits - -
- ---------------------------------------------------------------------------------------------
Accumulated benefit obligation 40,869 48,927
Effect of projected future salary increases 5,501 4,254
- ---------------------------------------------------------------------------------------------
Projected benefit obligation 46,370 53,181
Plan assets at fair value 54,817 58,662
- ---------------------------------------------------------------------------------------------
Projected benefit obligation less than plan assets 8,447 5,481
Unrecognized net (gain) loss (2,544) 594
Initial unrecognized net obligation (5,450) (4,892)
- ---------------------------------------------------------------------------------------------
Prepaid pension costs $ 453 $ 1,183
- ---------------------------------------------------------------------------------------------
</TABLE>
Significant actuarial assumptions used to determine the net periodic pension
costs during 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
1996 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Discount rate 8.5% 8.0%
Rate of increase in salary level 6.0% 6.0%
Expected long-term rate of return on assets 9.0% 9.0%
- ---------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
4. INCOME TAXES
Prior to 1996 the predecessor entity, ChiRex America, was in a net operating
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 benefit (provision) for income taxes for the years ended December 31,
1996 and 1997 are as follows :
<TABLE>
<CAPTION>
1996 1997
(in thousands),
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Domestic $(5,832) $ 724
Foreign (610) (1,709)
- -----------------------------------------------------------------------------------------
Total $(6,442) $ (985)
- -----------------------------------------------------------------------------------------
</TABLE>
The components of the benefit (provision) for income taxes for the years ended
December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
(in thousands),
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Current benefit (provision) for income taxes:
Federal $ - $ -
State - (205)
Foreign (2,530) 45
- ----------------------------------------------------------------------------------------------
(2,530) (160)
- ----------------------------------------------------------------------------------------------
Deferred benefit for income taxes:
Federal - 10
State - -
Foreign 663 485
- ----------------------------------------------------------------------------------------------
663 495
- ----------------------------------------------------------------------------------------------
Total benefit (provision) for income taxes $(1,867) $ 335
- ----------------------------------------------------------------------------------------------
</TABLE>
The benefit (provision) for income taxes in the accompanying statements of
operations for the periods ended December 31, 1996 and 1997 is different from
the benefit calculated by applying the statutory federal income tax rate of 34%
to the loss before income taxes due to the following:
<TABLE>
<CAPTION>
1996 1997
(in thousands),
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Benefit for income taxes at statutory rate $ 2,190 $ 335
Effect of change in UK statutory tax rate - 410
US net operating loss carryforwards - 202
Foreign tax rate differential 61 (43)
State income taxes, net of federal tax benefit - (135)
Non-deductible amortization of goodwill (314) (396)
Valuation allowance on US tax net operating
loss carryforwards and stock compensation (1,953) -
Non-deductible research and development expenses (1,811) -
Other, net (40) (38)
- -----------------------------------------------------------------------------------------------
Benefit (provision) for income taxes $(1,867) $ 335
- -----------------------------------------------------------------------------------------------
</TABLE>
Deferred income tax assets and liabilities reflected in the accompanying balance
sheet consist of the following as of December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
(in thousands),
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
US net operating loss carryforwards and
stock compensation $ 1,953 $ 2,023
Reserves and other accruals 1,227 2,025
Accrued pensions 1,394 1,057
Other, net 130 112
Valuation allowance (1,953) (2,186)
- -------------------------------------------------------------------------------------------------
Total deferred tax assets, net 2,751 3,031
- -------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Depreciation and other basis differences (9,780) (9,300)
- -------------------------------------------------------------------------------------------------
Total deferred tax liabilities (9,780) (9,300)
- -------------------------------------------------------------------------------------------------
Net deferred tax liabilities $(7,029) $(6,269)
</TABLE>
At December 31, 1996 and 1997, the Company had US federal and state tax net
operating loss carryforwards of approximately $4.0 million and $6.0 million,
respectively. Of the total tax net operating loss carryforwards, $646,000 and
$3,419,000 in 1996 and 1997, respectively, represent the tax benefit of
disqualifying dispositions and the exercise of non-qualified stock options. The
tax benefit related to disqualifying dispositions and exercise of non-qualified
stock options has been fully reserved for through a valuation allowance due to
the uncertainty of realization. If this tax benefit is realized or if the
valuation allowance is reduced in future periods, the tax benefit will be
recorded in additional paid-in capital. The remaining tax net operating loss
carryforwards of $3,312,000 and $2,532,000 in 1996 and 1997, respectively, have
been fully reserved for through a valuation allowance since the Company is
uncertain if it will generate future taxable income sufficient to realize the
deferred tax benefit.
A provision has not been made for US taxes on undistributed earnings of $3.5
million 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.
5. COMMITMENTS
The Company leases equipment and executive office and warehouse space under
various operating arrangements. The accompanying statement of operations
includes expenses from operating leases of $148,000 in 1996 and $748,000 in
1997. Future minimum lease payments due under non-cancelable operating leases
net of non-cancelable sub-lease rental income at December 31, 1997 are $674,000
in 1998; $456,000 in 1999; $280,000 in 2000; $257,000 in 2001; $141,000 in 2002;
and $79,000 thereafter. Total future minimum net lease payments are $1,887,000.
6. CONTINGENCIES
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 late 1996, Phenomenex Inc. filed a proceeding before the US Patent and
Trademark Office's Trademark Trial and Appeal Board, formally opposing 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." In December 1997, the Company reached a final
agreement with Phenomenex to discharge their opposition to the Company's
registration of the ChiRex trademark on terms favorable to the Company and for
Phenomenex to assign certain trademark rights to the Company.
28
<PAGE>
7. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
In August 1996, Holdings 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 allowed a maximum borrowing of (Pounds)10.5
million (approximately $18.0 million 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 could be fixed by the Company for a period from one to twelve
months. As of December 31, 1996 the Company had drawn down the equivalent of
$3.9 million of this facility. The Company's repaid all outstanding borrowings
and terminated this facility in October 1997 upon signing of a new credit
facility (see below).
To finance the acquisition of the Annan facility (see Note 2) and provide for
the general cash requirements of the business, Holdings entered into a senior
secured term-loan and revolving credit agreement on October 29, 1997, with
Bankers Trust Company allowing it to borrow up to (Pounds)62 million
(approximately $102 million at December 31, 1997) for a five-year period. The
credit facility is comprised of a (Pounds)40 million (approximately $66 million
at December 31, 1997) term loan and a (Pounds)22 million (approximately $36
million at December 31, 1997) revolving-credit facility each bearing interest at
LIBOR plus 1% (8.4% at December 31, 1997). The term-loan facility is repayable
in nine equal semi-annual installments beginning on December 31, 1998 and also
provides for annual mandatory pre-payments from excess cashflow as defined in
the credit agreement. The maximum borrowings under the revolving-credit facility
step-down by (Pounds)3.0 million (approximately $4.9 million at December 31,
1997) at both December 31, 2000 and 2001 and terminates on December 31, 2002. At
December 31, 1997, (Pounds)6.8 million ($11.2 million) in advances were
outstanding under the revolving-credit facility. Borrowings under the credit
facility are secured by the real and personal property of and guaranteed by the
Company and its subsidiaries. The credit agreement contains normal and customary
financial covenants and limitations on indebtedness, dividends, capital
expenditures, repurchase of common stock and certain other transactions.
Management believes that the Company is in compliance with all terms and
covenants of the credit facility.
Long-term debt is comprised of the following as of December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
(in thousands),
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Revolving credit facility $ - $11,186
Term loan - 65,800
Revolving credit line 3,933 -
- -----------------------------------------------------------------------------------------------------
Total debt 3,933 76,986
Less current portion of long-term debt - 7,311
- -----------------------------------------------------------------------------------------------------
Long-term debt $3,933 $69,675
- -----------------------------------------------------------------------------------------------------
</TABLE>
The Company has classified all of the outstanding borrowings under the
revolving-credit line and revolving-credit facility as long-term at December 31,
1996 and 1997 because borrowings are not re-payable within one year as of the
balance sheet date.
Long-term debt maturities during the next five years as of December 31, 1997 is
as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $ 7,311
1999 14,622
2000 14,622
2001 14,622
2002 25,808
- ----------------------------------------------------------------
Total $76,986
- ----------------------------------------------------------------
</TABLE>
Interest costs incurred during 1996 and 1997 were $755,000 and $1,397,000,
respectively. Interest costs totalling $150.000 were capitalized in 1997.
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.
9. 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 recorded at historical
cost basis of $3,123,000.
In addition, as discussed in Note 2, the shareholders of 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 of $48,610,000.
10. AGREEMENTS WITH FORMER AFFILIATE
ChiRex America and the Former Affiliate 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 the Former Affiliate as of January 1, 1995.
TECHNOLOGY TRANSFER AND LICENSE AGREEMENT
Under the Technology Transfer and License Agreement the Former Affiliate granted
to ChiRex America an exclusive, royalty-free perpetual right and license to use
and practice the ChiRex Technologies licensed and sub-licensed 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 the Former Affiliate's improvements to the Licensed
Technologies on a non-exclusive basis in the Company field. Similarly, the
Former Affiliate 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 the Former Affiliate and ChiRex America outside the Company field, and the
Former Affiliate 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 the Former Affiliate's ownership of the outstanding
voting stock of the Company first drops below 20% (see Note 2). 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 the Former Affiliate during the term of such
agreements in the Company field or the Former Affiliate'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, the Former Affiliate 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.
The Former Affiliate's price for those products shall be its cost plus 25% per
unit. However, if the Former Affiliate is unwilling or unable to supply these
products, then ChiRex America shall be provided access to the Former Affiliate's
manufacturing plant and equipment to manufacture such products. The Former
Affiliate 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
29
<PAGE>
extensions. In addition, each of ChiRex America and the Former Affiliate has the
option to terminate this agreement on twelve months written notice after the
date on which the Former Affiliate's ownership of the outstanding voting stock
of ChiRex America first drops below 20% (see Note 2).
SUPPLY AGREEMENT
Pursuant to the terms of the Supply Agreement, the Former Affiliate is required
to purchase all of its needs with respect to Improved Chemical Entities
("ICE's") pharmaceutical active ingredients from ChiRex America, however, the
Former Affiliate may buy such ingredients from other sources if; (i) the price
which ChiRex America charges to the Former Affiliate 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 the
Former Affiliate for such ingredient with a requested delivery date at least 12
months after the Former Affiliate 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) of 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 the Former Affiliate pursuant to the Supply Agreement is cost
plus 25%. The term of the 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 of ChiRex America and the Former Affiliate 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 the Former Affiliate,
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 the Former Affiliate 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 the
Former Affiliate's ownership of the outstanding voting stock of ChiRex America
first drops below 20% (see Note 2).
11. RELATED PARTY TRANSACTIONS
In 1996 and 1997 the Company has incurred $158,000 and $346,000, respectively,
to the Former Affiliate under the Technology Transfer and License Agreement for
legal expenses and has received $609,000 and $460,000, respectively, in license
royalty income.
Prior to January 1, 1996 certain facilities and support services of ChiRex
America, including administrative support, were provided by the Former
Affiliate. For these facilities and services, ChiRex America, was charged
approximately $220,000 for the year December 31, 1995. This charge represents an
allocation of ChiRex America's proportionate share of the Former Affiliate'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, 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 ChiRex America during 1995, including
payroll costs, were paid by the Former Affiliate.
In 1995 and prior, ChiRex America purchased equipment from an affiliate of the
Former Affiliate, at prices based upon a pricing agreement between the affiliate
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 $476,000 for the year ended December
31, 1995.
ChiRex America sold certain pharmaceutical compounds to the Former Affiliate in
1995 and 1996. Total revenue from these transactions amounted to $344,000 in
1995 and $38,600 in 1996. In 1995 ChiRex America purchased certain compounds at
cost plus a 20% margin from a wholly-owned subsidiary of the Former Affiliate.
The total cost of goods sold related to those purchases was $434,000.
12. SIGNIFICANT CUSTOMERS
In 1997 the Company's four largest customers accounted for approximately 76% of
total revenues. Sanofi S.A. ("Sanofi"), Glaxo Wellcome plc, Rohm and Haas
Company ("Rohm and Haas") and Smithkline Beecham plc ("Smithkline") accounted
for approximately 36%, 17%, 13% and 10%, respectively, of the Company's 1997
revenues. In 1996 the Company's three largest customers accounted for
approximately 66% of total revenues. Sanofi, SmithKline and 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.
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>
1995 1996 1997
(in thousands)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $ 2,754 $ 6,296 $ 5,423
Europe - 63,072 85,601
Other - 5,247 3,076
- ----------------------------------------------------------------------------------------------------------
$ 2,754 $ 74,615 $ 94,100
- ----------------------------------------------------------------------------------------------------------
Income (loss) before non-recurring charges and provision for income taxes:
United States $(2,452) $ 947 $ 1,065
Europe - 5,631 5,654
Other - 340 365
- ----------------------------------------------------------------------------------------------------------
$(2,452) $ 6,918 $ 7,084
- ----------------------------------------------------------------------------------------------------------
Identifiable assets :
United States $ 2,692 $ 1,117 $ 1,195
Europe - 126,938 201,872
- ----------------------------------------------------------------------------------------------------------
$2,692 $128,055 $203,067
- ----------------------------------------------------------------------------------------------------------
In general, sales are denominated in Great Britain pounds sterling.
</TABLE>
30
<PAGE>
14. PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY (UNAUDITED)
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
- ------------------------------------------------------------------------------------------------------
1996:
<S> <C> <C>
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
1997:
First Quarter $13.25 $ 9.50
Second Quarter 12.75 9.88
Third Quarter 25.50 11.63
Fourth Quarter 26.25 16.63
- ------------------------------------------------------------------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
15. QUARTERLY INFORMATION (UNAUDITED)
Quarter Ended
(in thousands except per-share amounts) March 31 June 30 September 30 December 31
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Revenues $ 7,599 $21,976 $20,562 $24,478
Gross profit 1,897 5,033 4,930 6,247
Stock compensation and write-off of in-process R & D 11,401)(a) - - -
Net income (loss) (10,922) 358 980 1,275
Net income (loss) per common share:
Basic $ (2.12) $ 0.03 $ 0.09 $ 0.12
Diluted $ (2.12) $ 0.03 $ 0.09 $ 0.11
Weighted average shares outstanding 5,158 10,909 10,910 10,912
- ---------------------------------------------------------------------------------------------------------------------
1997 (c)
- ---------------------------------------------------------------------------------------------------------------------
Revenues $ 26,506 $20,157 $21,605 $25,832
Gross profit 5,835 6,050 5,286 5,489
Restructuring charges, net of proceeds - (6,599) (b) - (1,470) (b)
Net income (loss) 1,198 (2,698) 1,600 (750)
Net income (loss) per common share:
Basic $ 0.11 $ (0.24) $ 0.14 $ (0.06)
Diluted $ 0.11 $ (0.24) $ 0.13 $ (0.06)
Weighted average shares outstanding 10,944 11,352 11,534 11,786
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Write off of research and development expenses at the date of the
Contribution and a stock compensation charge associated with the granting of
stock options at the time of the Merger.
(b) Restructuring and fixed asset impairment charge net of proceeds received on
the sale of the acetaminophen business.
(c) Certain amounts have been reclassified to be consistent with the full-year
presentation on the Statement of Operations.
31
<PAGE>
CORPORATE INFORMATION
BOARD OF DIRECTORS
- ------------------
Alan R. Clark, Chairman and Chief Executive Officer, ChiRex Inc.
Michael A. Griffith, Chief Financial Officer and Secretary, ChiRex Inc.
Dirk Detert, Ph.D., Former General Manager of Wellcome GmbH
Elizabeth M. Greetham, Portfolio Manager
Weiss, Peck, & Greer Investments
Eric N. Jacobsen, Ph.D., Professor of Chemistry, Harvard University
W. Dieter Zander, Managing Director, Arnhold and S. Bleichroeder
CORPORATE OFFICERS
- ------------------
Alan R. Clark, Chairman and Chief Executive Officer
Michael A. Griffith, Chief Financial Officer and Secretary
Beth P. Hecht, General Counsel
Roger B. Pettman, Ph.D., Vice President, Sales and Marketing
David F. Raynor, Vice President, Dudley Operations
J. Graham Thorpe, Ph.D., Vice President, Business Development
John E. Weir, Vice President, Treasurer
Frank J. Wright, Vice President, Annan Operations
SCIENTIFIC ADVISORY BOARD
- -------------------------
Alexander McKillop, Ph.D., Chairman
Stephen Buchwald, Ph.D., Massachusetts Institute of Technology
Eric N. Jacobsen, Ph.D., Harvard University
J. Bryan Jones, Ph.D., University of Toronto
Roger B. Pettman, Ph.D., ChiRex Inc.
William H. Pirkle, Ph.D., University of Illinois
K. Barry Sharpless, Ph.D., The Scripps Research Institute
ANNUAL MEETING
- --------------
The 1998 Annual Meeting of Shareholders will be held on April 15, 1998, at the
Company's headquarters in Stamford, Connecticut.
SEC FORM 10-K
- -------------
A copy of the Company's Form 10-K filed with the Securities
and Exchange Commission may be obtained by contacting the Company at its
Stamford, Connecticut headquarters.
INDEPENDENT PUBLIC ACCOUNTANTS
- ------------------------------
Arthur Andersen LLP, One International Place, Boston, MA 02110
OUTSIDE GENERAL COUNSEL
- -----------------------
Cravath, Swaine & Moore, Worldwide Plaza, 825 Eighth Avenue,
New York, New York 10019
TRANSFER AGENT
- --------------
Boston EquiServe, L.P., Shareholders Services Division, 150 Royall Street,
Canton, Massachusetts 02021 Phone: (781) 575-2559
INVESTOR RELATIONS
- ------------------
ChiRex Inc., Investor Relations Department, 300 Atlantic Street, Suite 402,
Stamford, CT 06901 Phone: (203) 351-2300
Homepage: http://www.chirex.com
or-
Feinstein Kean Partners Inc., Douglas MacDougall, 245 First Street, 14th Floor,
Cambridge, Massachusetts 02142 Phone: (617) 577-8110 email:
[email protected]
SAFE HARBOR STATEMENT
- ---------------------
Statements in this annual report that are not strictly historical are `forward
looking' statements as defined in Section 27A of the Securities Act and 21E of
the Exchange Act. These forward-looking statements involve risks and
uncertainties, including, but not limited to, product development and market
acceptance risks, product manufacturing risks, the impact of competitive
products and pricing, the results of current and future licensing and other
collaborative relationships, the results of financing efforts, developments
regarding intellectual property rights and litigation, risks of product non-
approval or delays or post-approval reviews by the FDA or foreign regulatory
authorities, and other risks identified in the Company's filings with the
Securities and Exchange Commission.
32
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated February 4, 1998 included in or incorporated by
reference into ChiRex Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1997, 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. 333-0220 on Form S-8.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 10, 1998
<PAGE>
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 333-0220 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 reports are included in this Annual Report on "Selected
Historical Financial Data."
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 12, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM CHIREX INC.
DECEMBER 31, 1997 FINANCIAL STATEMENTS FILED ON FORM 10-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,347
<SECURITIES> 0
<RECEIVABLES> 18,811
<ALLOWANCES> 0
<INVENTORY> 23,225
<CURRENT-ASSETS> 3,774
<PP&E> 137,894
<DEPRECIATION> 17,139
<TOTAL-ASSETS> 203,067
<CURRENT-LIABILITIES> 28,009
<BONDS> 69,675
0
0
<COMMON> 118
<OTHER-SE> 92,977
<TOTAL-LIABILITY-AND-EQUITY> 203,067
<SALES> 93,362
<TOTAL-REVENUES> 94,100
<CGS> 71,440
<TOTAL-COSTS> 92,869
<OTHER-EXPENSES> 1,164
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,052
<INCOME-PRETAX> (985)
<INCOME-TAX> (335)
<INCOME-CONTINUING> (650)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (650)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM CHIREX INC.
SEPTEMBER 30, 1997 FINANCIAL STATEMENTS FILED ON FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,945
<SECURITIES> 0
<RECEIVABLES> 14,007
<ALLOWANCES> 0
<INVENTORY> 24,613
<CURRENT-ASSETS> 6,291
<PP&E> 74,141
<DEPRECIATION> 22,324
<TOTAL-ASSETS> 128,407
<CURRENT-LIABILITIES> 21,752
<BONDS> 2,916
118
0
<COMMON> 0
<OTHER-SE> 92,540
<TOTAL-LIABILITY-AND-EQUITY> 128,407
<SALES> 67,691
<TOTAL-REVENUES> 68,268
<CGS> 51,097
<TOTAL-COSTS> 67,134
<OTHER-EXPENSES> 873
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64
<INCOME-PRETAX> 197
<INCOME-TAX> 93
<INCOME-CONTINUING> 104
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 104
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM CHIREX INC. SEPTEMBER
30, 1997 FINANCIAL STATEMENTS FILED ON FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FROM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,743
<SECURITIES> 0
<RECEIVABLES> 15,010
<ALLOWANCES> 0
<INVENTORY> 26,545
<CURRENT-ASSETS> 7,604
<PP&E> 122,907
<DEPRECIATION> 71,273
<TOTAL-ASSETS> 131,558
<CURRENT-LIABILITIES> 28,979
<BONDS> 0
0
0
<COMMON> 115
<OTHER-SE> 91,397
<TOTAL-LIABILITY-AND-EQUITY> 131,558
<SALES> 46,280
<TOTAL-REVENUES> 46,663
<CGS> 34,778
<TOTAL-COSTS> 48,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75
<INCOME-PRETAX> (2,012)
<INCOME-TAX> (516)
<INCOME-CONTINUING> (1,496)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,496)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM CHIREX INC.
MARCH 31, 1997 FINANCIAL STATEMENTS FILED ON FORM 10-Q AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,468
<SECURITIES> 0
<RECEIVABLES> 15,016
<ALLOWANCES> 0
<INVENTORY> 23,085
<CURRENT-ASSETS> 5,619
<PP&E> 68,886
<DEPRECIATION> 10,171
<TOTAL-ASSETS> 132,216
<CURRENT-LIABILITIES> 27,608
<BONDS> 3,918
0
0
<COMMON> 110
<OTHER-SE> 89,636
<TOTAL-LIABILITY-AND-EQUITY> 132,216
<SALES> 26,284
<TOTAL-REVENUES> 26,506
<CGS> 20,671
<TOTAL-COSTS> 24,072
<OTHER-EXPENSES> 291
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 134
<INCOME-PRETAX> 2,009
<INCOME-TAX> 811
<INCOME-CONTINUING> 1,198
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,198
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
