SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998 Commission File number 0 - 27698
CHIREX INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3296309
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
300 Atlantic Street
Suite 402
Stamford, Connecticut 06901
(Address of principle executive office) (Zip Code)
(203) 351-2300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes X No
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Number of shares outstanding of the issuer's classes of common stock as of April
22, 1998.
Class Number of Shares Outstanding
- -------------------------------------- ----------------------------
Common Stock, par value $.01 per share 11,805,685
1
CHIREX INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
December 31, 1997 and March 31, 1998 3
Consolidated Statements of Operations
and Comprehensive Operations for the
three-month periods ended March 31,
1997 and 1998 4
Consolidated Statements of Cash Flows
for the three-month periods ended
March 31, 1997 and 1998 5
Notes to Consolidated Interim Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders. 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURE 12
This Quarterly Report on Form 10-Q contains forward-looking
statements. For this purpose, any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. Many important factors could cause actual results to differ
materially from those indicated by forward-looking statements made herein and
presented elsewhere by management from time to time.
2
PART I - FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
CHIREX INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND MARCH 31, 1998
(dollars in thousands except per-share amounts)
December 31, March 31,
1997 1998
----------- -----------
(unaudited)
ASSETS
- ------
Current Assets:
Cash $ 5,347 $ 2,947
Trade and other receivables 18,811 23,124
Inventories 23,225 23,447
Other current assets 3,774 4,067
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Total current assets 51,157 53,585
Property, plant and equipment, net 120,755 125,638
Other non-current assets 3,591 3,574
Intangible assets, net 27,564 27,271
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Total assets $ 203,067 $ 210,068
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable $ 8,763 $ 11,542
Accrued expenses 11,587 10,809
Income taxes payable 348 -
Current portion of long-term debt 7,311 7,422
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Total current liabilities 28,009 29,773
Long-term debt 69,675 72,738
Deferred income taxes 7,955 8,480
Deferred income 4,333 6,171
Contingencies - -
------------ ------------
Total liabilities 109,972 117,162
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Stockholders' equity:
Common stock ($.01 par value, 30,000,000
shares authorized, 11,792,990 and
11,802,719 shares issued and outstanding
on December 31, 1997 and March 31, 1998,
respectively) 118 118
Additional paid-in capital 100,788 100,900
Retained earnings (11,411) (12,507)
Cumulative translation adjustment 3,600 4,395
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Total stockholders' equity 93,095 92,906
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Total liabilities and stockholders' equity $ 203,067 $ 210,068
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
3
CHIREX INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1998
(unaudited)
(in thousands, except per-share amounts)
Three Months Ended
March 31
----------------------------
1997 1998
------------ ------------
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues:
Product sales $ 26,284 $ 23,601
License fee and royalty income 222 57
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Total revenues 26,506 23,658
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Costs and expenses:
Cost of goods sold 20,671 19,302
Selling, general and administrative 2,294 3,126
Research and development 1,107 1,201
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Total costs and expenses 24,072 23,629
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Operating profit 2,434 29
Interest expense - net (134) (1,404)
Amortization of goodwill (291) (291)
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Income (loss) before income taxes 2,009 (1,666)
Benefit (provision) for income taxes (811) 570
------------ ------------
Net income (loss) $ 1,198 $ (1,096)
============ ============
Weighted average number of common
shares outstanding 10,944 11,797
------------ ------------
Basic and diluted net income (loss) per
common share $ 0.11 $ (0.09)
------------ ------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
Net income (loss) $ 1,198 $ (1,096)
Change in cumulative translation adjustment (1,616) 795
------------ ------------
Comprehensive net loss $ (418) $ (301)
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The accompanying notes are an integral part of the consolidated financial
statements.
4
CHIREX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1998
(unaudited)
(in thousands)
Three Months Ended
March 31
1997 1998
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 1,198 $ (1,096)
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation & amortization 2,567 3,045
Deferred tax provision (benefit) (35) 437
Changes in assets and liabilities:
Receivables (2,779) (4,048)
Inventories (693) 191
Other current assets (739) 516
Accounts payable and accrued
expenses 2,096 1,713
Income taxes payable 763 (1,034)
Deferred income (115) 1,745
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Net cash provided from operating activities 2,263 1,469
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Cash flows from investing activities:
Capital expenditures (1,529) (5,969)
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Net cash used in investing activities (1,529) (5,969)
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Cash flows from financing activities:
Borrowings on line of credit and revolving
credit facility, net 147 1,919
Proceeds from exercise of stock options 95 112
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Net cash provided from financing activities 242 2,031
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Effect of exchange rate changes on cash 201 69
------------ ------------
Net increase (decrease) in cash 1,177 (2,400)
Cash at beginning of period 291 5,347
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Cash at end of period $ 1,468 $ 2,947
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
5
CHIREX INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION
NATURE OF OPERATIONS
ChiRex Inc. (the "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 manufactures products at its world-class FDA cGMP
manufacturing facilities located in Dudley, England and Annan, Scotland. ChiRex
holds over 50 patents and patent applications in the field of chiral chemistry.
PRINCIPLES OF CONSOLIDATION
The financial statements of the Company include the historical results
of its subsidiaries for the entire period presented or from the date of
acquisition.
The interim financial statements, in the opinion of management, reflect
all adjustments (including normal recurring adjustments) necessary for a fair
presentation of the results for the interim period ended March 31, 1998. The
results of operations for the interim period are not necessarily indicative of
the results of operations expected for the fiscal year.
See Form 10-K filed as of and for the year ended December 31, 1997 for
additional information.
2. RECENT ACCOUNTING DEVELOPMENTS:
Net Loss per Common Share
Basic income (loss) per common share for the quarters ended March 31,
1997 and 1998 were computed by dividing the net income (loss) by the weighted
average shares outstanding during the period in accordance with Statement of
Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128"). Since
the effect of the assumed exercise of stock options of 444,000 shares in 1998
was anti-dilutive, basic and diluted loss per share as presented on the
statement of operations are the same. Upon adoption of SFAS 128 at year-end
1997, the Company's reported earnings per common share for the first quarter of
1997 was required to be restated. There was no effect on net income per common
share for the first quarter of 1997 from the adoption of SFAS 128.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). This statement establishes standards for reporting and display of
comprehensive income and its components. Components of comprehensive income are
net income and all other nonowner 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. SFAS 130 is effective for financial statements
issued for periods beginning after December 15, 1997 which for the Company is
the first quarter of 1998. Presentation of comprehensive income for earlier
periods provided for comparative purposes is required and has been presented in
these financial statements.
6
3. RECLASSIFICATION
Certain amounts in the prior period's financial statements have been
reclassified to be consistent with the current period presentation.
7
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the historical consolidated financial statements and the notes thereto included
elsewhere herein.
INTRODUCTION
ChiRex Inc. is a CMO serving the out-sourcing 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 manufactures products at its world-class FDA cGMP
manufacturing facilities located in Dudley, England and Annan, Scotland. ChiRex
holds over 50 patents and patent applications in the field of chiral chemistry.
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 he 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 offer
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.
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 (pounds 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
inermediates 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 form 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 U.S. dollars at average exchange
rates in accordance with generally accepted accounting principles.
8
RESULTS OF OPERATIONS
Three-month period ended March 31, 1997 and 1998
Total revenues declined $2.8 million, or 10.7% to $23.7 million in the
first quarter of 1998, from $26.5 million in the comparable period in 1997,
primarily as a result of the sale of the Company's acetaminophen business in
April 1997, which contributed $7.0 million in sales in the first quarter of
1997. The unfavorable effect on revenues in the first quarter of 1998 from the
sale of the acetaminophen business was partly offset by increased revenues as
new products came on stream and shipments under the Glaxo Wellcome supply
contract expanded.
Cost of goods sold decreased $1.4 million, or 6.6% to $19.3 million in
the three-month period ended March 31, 1998 from $20.7 million in last year's
first quarter. This decrease is due to the lower volume of aceataminophen sales
partly offset by higher new-product sales, expenses associated with new product
introductions and the under-utilization of the Annan facility acquired in the
fourth quarter of 1997 during its re-conditioning into a general purpose
pharmaceutical fine chemical manufacturing facility. As a result of the above
factors, gross margin percentage in the first quarter of 1998 decreased to 18.4%
from 22.0% in 1997.
Research and development expenses increased $0.1 million or 8.5% to
$1.2 million in first three months of 1998. This increase was due mainly to the
cost of additional research chemists and pilot plant costs to support the new
product pipeline.
Selling, general and administrative expenses increased $0.8 million, or
36.3%, to $3.1 million in three-month period ended March 31, 1998 from $2.3
million last year. This increase is due primarily to additional expenses
associated with the Annan facility acquired in the fourth quarter of 1997 and
expenses incurred related to the ongoing search for a Chief Operating Officer.
Interest expense was $1.4 million in the first quarter of 1998 compared
to interest expense of $0.1 million in last year's first quarter. This is a
result of higher borrowing levels resulting from the acquisition of the Annan
facility in the fourth quarter of 1997 and significant capital improvement
projects.
The benefit for income taxes was $0.6 million in the three-month period
ended March 31, 1998 which is $1.4 million favorable to the $0.8 million
provision for income taxes in the comparable prior-year period. This represents
an effective rate of 41.4% in 1998 after adjusting for non-deductible goodwill
amortization compared to an effective rate of 35.3% after adjusting for
non-deductible goodwill amortization in the same period in 1997. The higher
effective tax rate in 1998 is the result of profitability expectations for 1998.
As a result of the factors described above, the Company reported a net
loss of $1.1 million in the first quarter of 1998 compared to net income of $1.2
million for the comparable prior-year period.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations for the three months of 1998 of $1.5
million is $0.8 million lower than the $2.3 million provided in the same period
in 1997 and reflects an increased investment in operating assets of $0.9
million.
Net cash used in investing activities in the first quarter of 1998 was
$6.0 million compared to $1.5 million in the same period of 1997. Capital
spending in 1998 includes expenditures for plant maintenance, alteration of
equipment at Dudley to accommodate new products, and modification of the Annan
facility. The majority of these expenditures are to accommodate newly contracted
products at Dudley and Annan, and to convert the Annan facility to a general
purpose pharmaceutical fine chemical manufacturing facility.
Net cash provided from financing activities for the first three months
of 1998 of $2.0 million is the result of $1.9 million in borrowings under the
Company's revolving-credit facility and from $0.1 million in proceeds from the
exercise of stock options.
9
The Company expects to satisfy its cash requirements, including the
requirements of its subsidiaries, through internally generated cash and
borrowings.
FOREIGN CURRENCY
The Company currently expects that sales of its products outside the
United States will continue to be a substantial percentage of its net sales. The
Company currently intends to hedge its foreign exchange exposure to a certain
extent by entering into forward contracts with banks to the extent that the
timing of the currency flows can reasonably be anticipated. The Company believes
it has a natural currency hedge because its operating expenses tend to be
denominated in matched currencies. Also the Company has partly offset foreign
currency-denominated assets with foreign currency-denominated liabilities.
Financial results of the Company could be adversely or beneficially
affected by fluctuations in foreign exchange rates. Fluctuations in the value of
foreign currencies will affect the U.S. dollar value of the Company's net
investment in its foreign subsidiaries, with related effects included in a
separate component of stockholders' equity title Cumulative Translation
Adjustments. Operating results of foreign subsidiaries are translated into U.S.
dollars at average monthly exchange rates and balance sheet amounts are
translated at period-end exchange rates. In addition, the U.S. dollar value of
transactions based in 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.
10
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a vote of Security Holders.
---------------------------------------------------
- NONE -
ITEM 5. Other Information
-----------------
- NONE -
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits. The exhibits listed on the accompanying Exhibit Index
are filed as part of this Quarterly Report on Form 10-Q.
(b) Current Reports on Form 8-K: - NONE -
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHIREX INC.
Date: April 23, 1998 By: /s/ Michael A. Griffith
-----------------------
Michael A. Griffith
Chief Financial Officer
11
EXHIBIT INDEX
Exhibit Number Description
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27 Financial Data Schedule