1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997 Commission File number 0 - 27698
CHIREX INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3296309
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
65 WILLIAM STREET
WELLESLEY, MASSACHUSETTS 02181
(Address of principle executive office) (Zip Code)
617-431-2200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes X No
----- -----
Number of shares outstanding of the issuer's classes of common stock as of July
25, 1997.
CLASS NUMBER OF SHARES OUTSTANDING
- -------------------------------------- ----------------------------
Common Stock, par value $.01 per share 11,498,073
2
CHIREX INC.
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
December 31, 1996 and June 30, 1997 3
Consolidated Statements of Operations for the
three-month and six-month periods ended
June 30, 1996 and 1997. 4
Consolidated Statements of Cash Flows for the
six-month periods ended June 30, 1996 and 1997 5
Notes to Consolidated Interim Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders. 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE 18
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.
3
PART I - FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
CHIREX INC.
CONSOLIDATED BALANCE SHEETS
December 31 June 30
1996 1997
------------- --------------
(in thousands)
ASSETS
Current Assets:
Cash $ 291 $ 2,743
Trade and other receivables 12,764 15,010
Inventories 23,350 26,545
Other current assets 4,448 7,604
-------- --------
Total current assets 40,853 51,902
Property, plant and equipment, net 61,349 51,634
Intangible assets, net 28,604 28,022
======== ========
Total Assets $130,806 $131,558
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 11,421 $ 11,175
Accrued expenses 9,232 11,416
Income taxes payable 2,383 4,114
Deferred income taxes 2,369 2,274
-------- --------
Total current liabilities 25,405 28,979
Long-term debt 3,933 -
Deferred income taxes 7,411 7,442
Deferred income 3,989 3,625
-------- --------
Total liabilities 40,738 40,046
-------- --------
Stockholders' equity:
Common stock $.01 par value, 30,000,000 shares
authorized, 11,496,323 and 10,933,735 shares
issued and outstanding on June 30, 1997
and December 31, 1996, respectively. 109 115
Additional paid-in capital 95,479 99,785
Retained earnings (10,761) (12,257)
Cumulative translation adjustment 5,241 3,869
-------- --------
Total stockholders' equity 90,068 91,512
======== ========
Total liabilities and stockholders' equity $130,806 $131,558
======== ========
The accompanying notes are an integral part
of the consolidated financial statements
4
CHIREX INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997
(unaudited)
Three Months Ended Six Months Ended
June 30 June 30
--------------------------- -------------------------
1996 1997 1996 1997
----------- ------------ ---------- ---------
(in thousands, except per share amounts)
Revenues:
Product sales $ 21,694 $ 19,996 $ 28,970 $ 46,280
License fee and royalty income 282 161 605 383
-------- -------- -------- --------
Total revenues 21,976 20,157 29,575 46,663
Costs and expenses:
Cost of goods sold 16,943 13,811 22,645 34,402
Research and development 832 1,270 1,267 2,457
Write-off of in-process research and
development - - 5,790 -
Selling, general and administrative 3,012 2,563 3,556 5,148
Stock compensation charge - - 5,611 -
Proceeds from disposition of
acetaminophen business (note 5) - (6,308) - (6,308)
Restructuring and other costs (note 5) - 12,901 - 12,901
-------- -------- -------- --------
Total operating expenses 20,787 24,237 38,869 48,600
Operating profit (loss) 1,189 (4,080) (9,294) (1,937)
Interest income (expense) - net (379) 59 (420) (75)
-------- -------- -------- --------
Income (loss) before income taxes 810 (4,021) (9,714) (2,012)
Provision (benefit) for income taxes 452 (1,327) 850 (516)
-------- -------- -------- --------
Net income (loss) $ 358 $ (2,694) $(10,564) $ (1,496)
======== ======== ======== ========
Net income (loss) per share: $ 0.03 $ (0.24) $ (1.32) $ (0.13)
Weighted average number of common
and common equivalent shares outstanding 11,216 11,352 7,992 11,149
The accompanying notes are an integral part
of the consolidated financial statements
5
CHIREX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1996 AND 1997
(unaudited)
Six Months Ended
June 30
----------------------------
1996 1997
------------ ------------
(in thousands)
Cash flows from operating activities:
Net income (loss) $(10,564) $ (1,496)
Add back: Depreciation & amortization 2,910 4,785
Inventory uplift release 1,372 -
Write-off of in-process research and development 5,790 -
Executive stock option charge 5,611 -
Proceeds from disposition of acetaminophen business - (6,308)
Restructuring and other costs - 12,901
Changes in assets and liabilities:
Receivables (1,813) (2,572)
Inventories (84) (3,828)
Other current assets (2,265) (105)
Accounts payable and accrued expenses 2,789 (1,288)
Income taxes payable 768 1,458
Other non current assets and liabilities (103) (2,771)
-------- --------
Net cash provided from operations 4,411 776
Cash flows from investing activities:
Capital expenditures (1,545) (3,709)
-------- --------
Net cash (used in) investing activities (1,545) (3,709)
-------- --------
Cash flows from financing activities:
Long-term debt activity:
Borrowings on revolving line of credit, net - (3,771)
Borrowings on long-term line of credit, net 13,708 -
Repayment of subordinate note (53,534) -
Redemption of common stock (40,472) -
Proceeds from disposition of acetaminophen business - 4,100
Proceeds from the issuance of common stock 83,149 4,767
-------- --------
Net cash provided from financing activities 2,851 5,096
-------- --------
Effect of exchange rate changes on cash 94 257
-------- --------
Net increase in cash 5,811 2,420
Cash at beginning of period 1 323
-------- --------
Cash at end of period $ 5,812 $ 2,743
======== ========
The accompanying notes are an integral part
of the consolidated financial statements
6
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 currently manufactures over 50 products, of which
29 are core products, in its world-class, cGMP manufacturing facilities located
in Dudley, Northumberland, England. ChiRex holds 54 patents and patent
applications in the field of chiral chemistry.
ChiRex was incorporated in December 1995 and, effective March 11, 1996,
merged with SepraChem Inc. ("SepraChem"), a chiral chemistry business and a
wholly owned subsidiary of Sepracor Inc. ("Sepracor")(the "Merger"), and
acquired (the "Contribution") the business of Crossco (157) Limited ("Crossco")
(including its wholly-owned subsidiary Sterling Organics Limited) a fine
chemical manufacturer located in Dudley, England. Simultaneously, Crossco,
Sterling Organics Limited and SepraChem changed their names to ChiRex (Holdings)
Limited ("Holdings"), ChiRex Limited ("Limited"), and ChiRex America Inc.
("ChiRex America"), respectively.
PRINCIPLES OF CONSOLIDATION
The financial statements for the six-month period ending June 30, 1996 of
the Company combine the historical results of ChiRex America (formerly
SepraChem) with the results of ChiRex Inc. The results of Holdings and Limited
are included from the date of acquisition on March 11, 1996.
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 June 30, 1997. 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 December 31, 1996 for additional information.
2. RECENT ACCOUNTING DEVELOPMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). This
Statement establishes standards for computing and presenting earnings per share
and applies to entities with publicly traded common stock or potential common
stock. SFAS 128 is effective for financial statements for both the interim and
annual periods ending after December 15, 1997 and early adoption is not
permitted. When adopted, the statement will require restatement of prior years'
earnings per share. The Company will adopt this statement for its quarter ended
December 31, 1997. Assuming that SFAS No. 128 had been implemented, basic
earnings per share would not have differed significantly from those disclosed in
the accompanying statements of operations.
RECLASSIFICATION:
Certain amounts in the prior period's financial statements have been
reclassified to be consistent with the current period presentation.
7
3. SECONDARY PUBLIC OFFERING OF SHARE HOLDING OF SEPRACOR INC.
On March 31, 1997 Sepracor sold its entire shareholding in ChiRex Inc.,
3,489,301 shares of Common Stock, $0.01 par value per share. Under the terms of
the SepraChem merger agreement, the Company bore the legal and accounting costs
associated with the offering of Sepracor's shares and Sepracor bore all other
related costs.
Under the terms of the underwriting agreement entered into in connection
with the secondary offering, the Company granted the underwriters an option,
exercisable for 30 days from March 31, 1997, to purchase up to an aggregate of
523,395 additional shares of Common Stock at the public offering price of $9.50,
less underwriting discounts and commissions. The underwriters exercised their
rights under this option and purchased the entire 523,395 shares of Common Stock
on April 25, 1997, which resulted in net proceeds of approximately $4.7 million.
4. STOCKHOLDERS' RIGHTS PLAN
On April 3, 1997, the Company announced that its Board of Directors adopted
a stockholders' rights plan and declared a dividend in connection therewith of
one right for each outstanding share of Common Stock on March 31, 1997. Each
right entitles the holder, in certain events, to purchase one one-thousandth
(1/1000th) of a share of Series A Participating Cumulative Preferred Stock at an
initial purchase price of $50.00.
5. DISPOSITION OF ACETAMINOPHEN BUSINESS
On April 9, 1997, the Company announced the sale of its acetaminophen
business, including related intellectual property, to French pharmaceutical
company, Rhone-Poulenc Chimie S.A. ("RPC"). Under the terms of the asset
purchase agreement, the Company will continue to manufacture acetaminophen for
RPC pursuant to a Supply Agreement for a period to effect a seamless transfer of
customers.
Under the asset purchase agreement, RPC is required to make specified
payments to the Company, subject to certain conditions over a three year period.
The Company anticipates it will recognize net sales proceeds of approximately
$6.3 million, after considering the likelihood of receipt of each required
payment and the effect of discounting future cash receipts. The sale of the
acetaminophen business creates a permanent impairment of assets consisting of
related buildings and equipment, which has resulted in a provision for
impairment of approximately $8.3 million. Additionally, the Company has
implemented a plan to terminate certain employees associated with the production
of acetaminophen and otherwise restructure its operations, which has resulted in
charges of approximately $4.6 million.
8
The following table presents pro forma revenues, net income (loss) and net
income (loss) per Common Share for the Company assuming that the incorporation
of the Company, the merger with ChiRex America, the acquisition of Holdings and
Limited, and sale of the acetaminophen business had occurred on January 1,
1996, as adjusted for certain one-time charges associated with the contribution
and merger in 1996.
Three months ended June 30
1996 1997
---- ----
Revenues .................................... $14,918 $15,021
Net Income (loss) ........................... (405) (2,950)
Net income (loss) per Common Share .......... $ (0.04) $ (0.26)
Six months ended June 30
1996 1997
---- ----
Revenues .................................... $29,908 $34,540
Net Income (loss) ........................... (321) (2,300)
Net income (loss) per Common Share .......... $ (0.03) $ (0.20)
The pro forma results are not necessarily indicative of future operations or the
actual results that would have occurred had the acquisition of Holdings and
Limited and disposition of the acetaminophen business been made at the
beginning of 1996.
6. SUBSEQUENT EVENTS
Acquisition.
On July 7, 1997, the Company announced the signing of a letter of intent
with Glaxo Wellcome plc for the Company to acquire Glaxo Wellcome's cGMP
pharmaceutical production facility at Annan, Scotland. As part of the proposed
agreement, Glaxo Wellcome would award the Company a five year contract to supply
certain pharmaceutical intermediates and active ingredients worth up to $450
million, of which $250 million would be guaranteed.
9
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 outsourcing needs of the pharmaceutical
industry through its extensive pharmaceutical fine chemical manufacturing and
process development capabilities and proprietary technologies. The Company
supports and supplements the in-house development and manufacturing capabilities
of its pharmaceutical and biotechnology customers with a broad range of
fully-integrated services, accelerating the time from drug discovery to
commercialization. In 1996, the Company manufactured 54 products at its cGMP
manufacturing facility in Dudley, England. Capacity utilization at the Dudley
facility varies in accordance with the number and nature of products under
manufacture. Management currently estimates that the Dudley facility (excluding
acetaminophen) is operating in a range of 65% to 75% capacity utilization.
Management has reviewed the Company's product portfolio and identified 29 of the
54 products it manufactured in 1996 as "core products" which the Company
believes offer superior long-term growth potential, higher margins or strategic
customer relationship benefits.
The Company, incorporated in December 1995, is a combination of Sterling
Organics, a pharmaceutical fine chemicals manufacturer, and the chiral chemistry
business of Sepracor, which was conducted through its subsidiary SepraChem. On
March 11, 1996, the Company consummated (i) its initial public offering, (ii)
the merger of a subsidiary of the Company with and into ChiRex America in the
Merger and (iii) the acquisition of Holdings, the corporate parent of Limited,
in the Contribution.
Substantially all of the Company's revenues and expenses are denominated in
Pounds Sterling, and to prepare the Company's financial statements such amounts
are translated into U.S. Dollars at average exchange rates in accordance with
generally accepted accounting principles.
RESULTS OF OPERATIONS
In order to make the comparison of financial information for the three- and
six-month periods ended June 30, 1997 with that of the same periods for 1996
more meaningful, the following tables sets forth (i) the historical results of
the Company for the three- and six-month periods ended June 30, 1997, (ii) the
historical results of the Company for the period from April 1, 1996 to June 30 ,
1996 adjusted to exclude the effect of an adjustment to restate inventory at
fair value resulting from the Contribution and, (iii) the pro forma results of
the Company for the six month period ended June 30, 1996, adjusted to exclude
various non-recurring charges resulting from the Contribution and the Merger
(consisting of an adjustment to restate inventory at fair value, the write-off
of acquired in-process research and development and a non-recurring expense
relating to certain executive stock compensation). There were no intercompany
transactions requiring elimination in any of the periods presented. The
historical adjusted and the pro forma 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 results of operations for the three- and six-month periods ended
June 30, 1997, set forth in the following tables.
10
COMPARITIVE OPERATING RESULTS
FOR THE THREE-MONTH AND SIX-MONTH PERIOD ENDED JUNE 30,1997 AND 1996
(IN THOUSANDS)
CHIREX
THREE MONTHS ENDED JUNE 30, 1997 INC.
- -------------------------------- ---
Revenues ...................................................................................................... $ 20,157
Cost of goods sold ............................................................................................ 13,811
--------
Gross profit .................................................................................................. 6,346
Research and development ...................................................................................... 1,270
Selling, general and administrative ........................................................................... 2,563
Proceeds from diposition of acetaminophen business ............................................................ (6,308)
Restructuring and other costs ................................................................................. 12,901
Interest income (expense) ..................................................................................... 59
--------
Income before income taxes .................................................................................... (4,021)
Provision (benefit) for income taxes .......................................................................... (1,327)
--------
Net income .................................................................................................... $ (2,694)
========
THREE MONTHS ENDED JUNE 30, 1996
- --------------------------------
CHIREX INC.
CHIREX AS
INC. ADJUSTMENTS ADJUSTED
---- ----------- --------
Revenues ..................................................................... $ 21,976 $ -- $ 21,976
Cost of goods sold ........................................................... 16,943 (1,097) (1) 15,846
-------- -------- --------
Gross profit ................................................................. 5,033 1,097 6,130
Research and development ..................................................... 832 -- 832
Selling, general and administrative .......................................... 3,012 -- 3,012
Interest income (expense) .................................................... (379) -- (379)
-------- -------- --------
Income before income taxes ................................................... 810 1,097 1,907
Provision (benefit) for income taxes ......................................... 452 362 (2) 814
-------- -------- --------
Net income ................................................................... $ 358 $ 735 $ 1,093
======== ======== ========
CHIREX
SIX MONTHS ENDED JUNE 30, 1997 INC.
- ------------------------------ ----
Revenues ...................................................................................................... $ 46,663
Cost of goods sold ............................................................................................ 34,402
--------
Gross profit .................................................................................................. 12,261
Research and development ...................................................................................... 2,457
Selling, general and administrative ........................................................................... 5,148
Proceeds from diposifion of acetaminophen business ............................................................ (6,308)
Restructuring and other costs ................................................................................. 12,901
Interest income (expense) ..................................................................................... (75)
--------
Income before income taxes .................................................................................... (2,012)
Provision (benefit) for income taxes .......................................................................... (516)
--------
Net income .................................................................................................... $ (1,496)
========
CHIREX
(HOLDINGS)
LIMITED
JANUARY 1, PRO
1996 THRU PRO FORMA
CHIREX MARCH 11, FORMA PRO AS
SIX MONTHS ENDED JUNE 30, 1996 INC. 1996 ADJUSTMENTS FORMA ADJUSTMENTS ADJUSTED
- ------------------------------ ---- ---- ----------- ----- ----------- --------
Revenues ............................. $ 29,575 $ 15,212 -- $ 44,787 $ -- $ 44,787
Cost of goods sold ................... 22,645 12,564 $ 112 (3) 35,321 (1,372) (1) 33,949
-------- -------- ------ -------- -------- --------
Gross profit ......................... 6,930 2,648 (112) 9,466 1,372 10,838
Research and development ............. 7,057 558 -- 7,615 (5,790) (7) 1,825
Selling, general and administrative .. 9,167 1,300 225 (4) 10,692 (5,611) (8) 5,081
Interest income (expense) ............ (420) (690) 440 (5) (670) -- (670)
-------- -------- ------ -------- -------- --------
Income before income taxes ........... (9,714) 100 103 (9,511) 12,773 3,262
Provision (benefit) for income taxes . 850 33 108 (6) 991 453 (2) 1,444
-------- -------- ------ -------- -------- --------
Net income ........................... $(10,564) $ 67 $ (5) $(10,502) $ 12,320 $ 1,818
======== ======== ====== ======== ======== ========
11
- ----------
Notes to the pro forma and other adjustments for the three-month and six-month
periods ended June 30, 1996 and 1997.
(1) To reverse the effect of the purchase method of accounting step-up of
inventory to fair value at the time of the Contribution.
(2) To give effect to the income tax impact of the adjustment described
in note (1) above.
(3) To reflect an increase in depreciation resulting from the increased
valuation of Holding's fixed assets for the period prior to the Contribution.
(4) To reflect an increase in amortization of goodwill related to the
period prior to the Contribution.
(5) To reflect a reduction in interest expense related to debt retired
in connection with the Contribution.
(6) To give effect to the income tax impact of the other pro forma
adjustments, excluding amortization of goodwill which is not deductible for
tax purposes.
(7) To reverse the effect of the write-off of research and development
expenses that were in-process at the time of the Contribution.
(8) To reverse the effect of stock compensation charge associated with
granting of stock and options to purchase stock in connection with the Merger.
12
Three-month period ended June 30, 1996 and 1997
Revenues Three-month period ended Three-month period ended
(in thousands) June 30,1996 June 30,1997
- -------------- ------------ ------------
Core products $11,378 $13,570
Non-core products 3,258 1,290
Acetaminophen 7,058 5,136
License and royalty
income 282 161
------- -------
Total revenues $21,976 $20,157
======= =======
Total revenues decreased $1.8 million, or 8.3%, from $22.0 million in the
three months ended June 30, 1996 to $20.2 million in the same period in 1997.
Revenues from core products, which accounted for 67.3% of total revenues in the
three months ended June 30, 1997, increased by $2.2 million or 19.3%, while
non-core products (excluding acetaminophen), which accounted for 6.4% of
revenues in the three month period ended June 30, 1997, decreased by $2.0
million or 60.4%. Revenues attributable to acetaminophen, which accounted for
25.5% of revenues in three month period ended June 30, 1997, declined by $1.9
million or 27.2% compared to the same period in 1996, due to lower selling price
under the supply agreement with RPC, and lower demand for product.
Cost of goods sold decreased $2.0 million, or 12.8%, to $13.8 million in
three month period ended June 30, 1997 from $15.8 million in the same period in
1996. This decrease represents an increase in gross margin to 31.5% for the
three month period ending June 30, 1997 from 27.9% for the same period in 1996
and is due to the selective replacement of low margin non-core products with
high-margin core products.
Research and development expenses increased $0.4 million, or 52.6%, to $1.2
million in three month period ended June 30, 1997 from $0.8 million in the same
period in 1996. The increase was due mainly to the cost of additional research
chemists to support the new product pipeline.
Selling, general and administrative expenses decreased $0.4 million, or
14.9%, to $2.6 million in three month period ended June 30, 1997 from $3.0
million in the same period in 1996. This decrease is due primarily to one-time
legal and consulting costs in 1996.
Proceeds from the disposition of the acetaminophen business includes
anticipated cash proceeds of $7.8 million, of which $4.1 million has been
received, with the balance being paid over three years subject to certain
conditions. Accordingly, the Company has discounted future payments by $0.6 and
established a reserve against receipt of future payments of $0.9 million,
resulting in net proceeds recognized of $6.3 million
Restructuring and other costs includes provision for impairment of
acetaminophen assets of $8.3 million and a provision for severance and
restructuring costs following disposition of acetaminophen of $4.6 million,
resulting in a total charge of $12.9 million.
Interest income in three month period ended June 30, 1997 was $0.1 million
representing an improvement of $0.4 million from $0.3 million interest expense
in the same period in 1996. This is a result of lower borrowing requirements in
the interim period due to increased cash flow from operations, proceeds from the
sale of the acetaminophen business and proceeds from the exercise of the
underwriters' option to purchase additional shares during the secondary public
offering.
13
Income tax benefit was $1.3 million in the three-month period ended June
30, 1997. This represents an income tax provision of $0.9 million, after
allowing for a tax benefit of $2.2 million relating to the net charges
associated with the disposition of the acetaminophen business, in the
three-month period ended June 30, 1997. $0.9 million of income tax
provision on income from activities before one-time charges relating to
the disposition of the acetaminophen business, represents an effective
rate of 30.3% after adjusting for non-deductible goodwill amortization, in
the three month period ended June 30, 1997, compared to an income tax
provision of $0.8 million, an effective rate of 37.1%, after adjusting
for non-deductible goodwill amortization, in the same period in 1996,
and is a result of increased profitability within the U.K. where
a statutory Corporation tax rate of 31% prevails.
As a result of the factors described above, net loss was $2.7 million, and
net income before one-time charges relating to the disposition of the
acetaminophen business was $1.7 million, in the three month period ended June
30, 1997 compared to net income of $1.1 million for the same period in 1996.
Six-month period ended June 30, 1996 and 1997
Revenues Six-month period ended Six-month period ended
(in thousands) June 30,1996 June 30,1997
- -------------- ------------ ------------
Core products $21,860 $30,920
Non-core products 7,442 3,237
Acetaminophen 14,880 12,123
License and royalty
income 605 383
------- -------
Total revenues $44,787 $46,663
======= =======
Total revenues increased $1.9 million, or 4.2%, from $44.8 million in the
six months ended June 30, 1996 to $46.7 million in the same period in 1997.
Revenues from core products, which accounted for 66.3% of total revenues in the
six months ended June 30, 1997, increased by $9.1 million or 41.5%, while
non-core products (excluding acetaminophen), which accounted for 6.9% of
revenues in the six month period ended June 30, 1997, decreased by $4.2 million
or 56.5%. Revenues attributable to acetaminophen, which accounted for 26.0% of
revenues in six month period ended June 30, 1997, declined by $2.8 million
compared to the same period in 1996 due to lower selling price following sale of
the acetaminophen supply contracts under a supply agreement with RPC, and lower
demand for product.
Cost of goods sold decreased $0.5 million to $34.4 million in six month
period ended June 30, 1997. This decrease represents an increase in gross margin
to 26.3% for the six month period ending June 30, 1997 from 24.2% for the same
period in 1996 and is due to the selective replacement of low margin non-core
products with high-margin core products.
Research and development expenses increased $0.6 million, or 34.6%, to $2.4
million in six month period ended June 30, 1997 from $1.8 million in the same
period in 1996. The increase was due mainly to the cost of additional research
chemists to support the new product pipeline.
Selling, general and administrative expenses of $5.1 million in six month
period ended June 30, 1997 were in line with $5.1 million in the same period in
1996.
Proceeds from the disposition of the acetaminophen business includes
anticipated cash proceeds of $7.8 million, of which $4.1 million has been
received, with the balance being paid over three years subject to certain
conditions. Accordingly the Company has discounted future payments by $0.6 and
established a reserve against receipt of future payments of $0.9 million,
resulting in net proceeds recognized of $6.3 million
14
Restructuring and other costs includes provision for impairment of assets
related to the production of acetaminophen of $8.3 million and provision for
severance and other restructuring costs following disposition of acetaminophen
of $4.6 million, resulting in a total charge of $12.9 million.
Interest expense in the six month period ended June 30, 1997 was $0.1
million an improvement of $0.6 million from $0.7 million interest expense in the
same period in 1996. This is a result of lower borrowing requirements in the
interim period due to increased cash flow from operations, proceeds from the
sale of the acetaminophen business and proceeds from the exercise of the
underwriters' option to purchase additional shares during the secondary public
offering.
Income tax benefit was $0.5 million in the six month period ended June 30,
1997. This represents an income tax provision of $1.7 million, after allowing
for a tax benefit of $2.2 million relating to the net charges associated with
the disposition of the acetaminophen business, in the six month period ended
June 30, 1997. $1.7 million of income tax provision on income from activities
before one-time charges relating to the disposition of the acetaminophen
business, represents an effective rate of 32.5% after adjusting for
non-deductible goodwill amortization, in the six month period ended June 30,
1997, compared to an income tax provision of $1.4 million, an effective rate of
35.7%, after adjusting for non-deductible goodwill amortization, in the same
period in 1996, and is a result of increased profitability within the U.K. where
a statutory Corporation tax rate of 31% has existed since April 1997, prior to
which the statutory rate was 33%.
As a result of the factors described above, net loss was $1.5 million, and
net income after one-time charges relating to the disposition of acetaminophen
was $2.9 million in the six month period ended June 30, 1997 compared to net
income of $1.8 million for the same period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations for the six month period ending June 30, 1997
of $0.8 million is $3.6 million lower than the $4.4 million provided in the same
period in 1996 and reflects increased demand for working capital due to
manufacturing activity in the six months ended June 30, 1997 to meet customer
demand in the second half of 1997.
Net cash used in investing activities in the six month period ending in
June 30, 1997 was $3.7 million and $1.5 million in the same period of 1996, and
consists of capital expenditures for plant maintenance and, in 1997, for
improved capacity utilization.
Net cash provided from financing activities for the six month period ending
June 30, 1997 of $5.1 million is a result of $4.8 million from the issuance of
common stock proceeds from the exercise of the underwriters' option to purchase
additional shares during the secondary public offering and the exercise of stock
options, $4.1 million from the initial cash payment made by RPC in conjunction
with disposition of the acetaminophen business offset by $3.8 million used to
pay down the Company's revolving line of credit.
The Company expects to satisfy its cash requirements, including the
requirements of its subsidiaries, through internally generating 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 and by offsetting
matching foreign currency-denominated assets with foreign currency-denominated
liabilities.
15
Financial results of the Company could be adversely or beneficially
affected by fluctuations in foreign exchange rates. Fluctuations in the value of
foreign currencies will affect the U.S. dollar value of the Company's net
investment in its foreign subsidiaries, with related effects included in a
separate component of stockholders' equity. Operating results of foreign
subsidiaries will be translated into U.S. dollars at average monthly exchange
rates. In addition, the U.S. dollar value of transactions based in foreign
currency also fluctuates with exchange rates. The Company expects that the
largest foreign currency exposure will result from activity in Pounds Sterling,
German marks and Dutch guilders.
16
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
On April 17, 1997, the Company held its Annual Meeting of Stockholders
at the offices of Cravath, Swaine & Moore, 825 Eighth Avenue, New
York, New York. The matters voted on are described below .
1. The election of each of Michael A. Griffith, Chief Financial
Officer and Secretary of the Company and W. Dieter Zander as
Class I directors of the Company for a three year term
expiring at the Annual Meeting of Stockholders in 2000.
For Against
Michael A. Griffith 10,135,774 or 92.6% 68,712 or 0.63%
W. Dieter Zander 10,117,074 or 92.5% 87,412 or 0.8%
2. The ratification of Arthur Anderson LLP as independent
auditors of the Company for fiscal 1997.
For Against Abstentions
10,140,431 or 92.7% 4,425 or 0.04% 59,630 or 0.5%
3. The approval of the Amended and Restated 1995 Director Stock
Incentive Plan.
For Against Abstentions
8,586,799 or 78.5% 1,539,289 or 14.1% 78,398 or 0.7%
4. The approval of the 1997 Stock Incentive Plan.
For Against Abstentions Non-Votes
6,428,518 or 2,582,927 or 73,118 or 0.7% 1,119,923 or
58.7% 23.6% 10.2%
ITEM 5. Other Information
-----------------
Acquisition.
On July 7, 1997, the Company announced the signing of a letter of
intent with Glaxo Wellcome plc for the Company to acquire Glaxo
Wellcome's cGMP pharmaceutical production facility at Annan, Scotland.
As part of the proposed agreement, Glaxo Wellcome would award the
Company a five year contract to supply certain pharmaceutical
intermediates and active ingredients worth up to $450 million, of
which $250 million would be guaranteed.
Change in address of principle executive office.
From August 15, 1997, the address of the Company's principle executive
office will change to 300 Atlantic Street, Stamford, Connecticut,
06901 and the telephone number of this office will be 203-968-2900.
17
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.
(1) On April 11, 1997, the Company filed a Current Report on
Form 8-K reporting the disposition of its acetaminophen
business to Rhone Poulenc Chimie ("RPC").
(2) On April 30, 1997, the Company filed an amendment to the
Current Report on Form 8-K described in (1) above
presenting the pro forma financial statements required
to be filed in connection with the disposition of its
acetaminophen business.
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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: July 31, 1997 By: /S/ MICHAEL A. GRIFFITH
-----------------------
Michael A. Griffith
Chief Financial Officer
19
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
27 Financial Data Schedule.
99.1 Press release relating to ChiRex
signing a letter of intent with Glaxo
Wellcome plc to acquire Glaxo
Wellcome's cGMP pharmaceutical
production facility at Annan, Scotland.