<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934, FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997.
Commission File Number
0-19659
CHRYSALIS INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2877973
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
575 Route 28, Raritan, New Jersey 08869
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 722-7900
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 the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Common Stock $0.01 par value 11,418,572 shares
outstanding at November 6 , 1997
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CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1997 (unaudited) and December 31, 1996 3
Unaudited Consolidated Statements of Operations -
for the three and nine months ended
September 30, 1997 and 1996 4
Unaudited Consolidated Statement of Stockholders' Equity -
for the nine months ended September 30, 1997 5
Unaudited Consolidated Statements of Cash Flows -
for the nine months ended September 30, 1997 and 1996 6
Notes to Unaudited Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996
(in thousands except share and par value amounts)
<TABLE>
<CAPTION>
Assets September 30, 1997 December 31, 1996
------ ------------------ -----------------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 7,406 10,455
Cash in escrow -- 4,550
Short-term investments -- 2,518
Marketable debt securities -- 101
Trade accounts receivable, net 10,539 10,788
Prepaid expenses and other current assets 2,601 1,433
-------- -------
Total current assets 20,546 29,845
Property and equipment, net 15,316 15,963
Marketable debt securities -- 396
Intangible assets, net 814 953
Other assets 401 326
Restricted cash 460 460
-------- -------
$ 37,537 47,943
======== =======
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities
Short-term borrowings 1,603 10,939
Note payable -related party -- 299
Current portion of long-term debt 454 180
Accounts payable 3,467 3,386
Accrued expenses 6,692 8,273
Deferred revenue 4,018 5,842
-------- -------
Total current liabilities 16,234 28,919
Long-term debt, excluding current portion 6,915 2,376
Deferred income taxes 1,732 2,053
Note payable -related party 277 --
Other liabilities 902 1,054
-------- -------
Total liabilities 26,060 34,402
-------- -------
Stockholders' equity
Serial preferred stock, $.01 par value, 5,000,000
shares authorized; no shares issued and outstanding -- --
Common stock, $.01 par value, 20,000,000 shares
authorized; issued and outstanding 11,418,572 in 1997
and 11,359,721 in 1996 114 113
Additional paid-in capital 57,724 57,498
Translation adjustment (332) 462
Employee stock purchase loans (86) (86)
Accumulated deficit (45,943) (44,541)
Net unrealized gain on marketable securities -- 95
-------- -------
Total stockholders' equity 11,477 13,541
-------- -------
Commitments and contingencies
$ 37,537 47,943
======== =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements
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CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
Three and nine months ended September 30, 1997 and 1996
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
------------------------- -------------------------
<S> <C> <C> <C> <C>
Revenues:
Service revenue $ 11,815 $ 12,111 $ 34,787 $ 35,227
Less: Reimbursed costs (1,367) (1,127) (4,725) (4,466)
-------- -------- -------- --------
Net service revenue 10,448 10,984 30,062 30,761
License fees and other 175 105 612 351
-------- -------- -------- --------
10,623 11,089 30,674 31,112
-------- -------- -------- --------
Operating expenses:
Direct costs 7,392 7,379 21,415 20,467
Research and development 31 92 130 325
General, administrative and marketing 3,123 2,630 8,973 7,825
Depreciation and amortization 708 699 2,001 2,050
-------- -------- -------- --------
11,254 10,800 32,519 30,667
Income (loss) from operations (631) 289 (1,845) 445
-------- -------- -------- --------
Other income (expense):
Interest income 93 309 396 896
Interest expense (206) (345) (563) (1,032)
Foreign currency gain - (41) - 91
Other 692 108 691 369
-------- -------- -------- --------
579 31 524 324
-------- -------- -------- --------
Income (loss) before income taxes (52) 320 (1,321) 769
Income tax expense (41) (244) (81) (459)
-------- -------- -------- --------
Net income (loss) ($ 93) $ 76 ($ 1,402) $ 310
======== ======== ======== ========
Earnings (loss) per common and common
equivalent share:
Primary ($ 0.01) $ 0.01 ($ 0.12) $ 0.03
-------- -------- -------- --------
Fully diluted ($ 0.01) $ 0.01 ($ 0.12) $ 0.03
-------- -------- -------- --------
Shares used in computing per share amounts:
Primary 11,405 12,013 11,389 11,920
======== ======== ======== ========
Fully Diluted 11,405 12,013 11,389 11,976
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Statement of Stockholders' Equity
Nine months ended September 30, 1997
(in thousands except share amounts)
<TABLE>
<CAPTION>
Net unrealized
gain (loss)
Employee on Total
Additional stock marketable stock-
Common paid-in Translation purchase Accumulated debt holders'
stock capital adjustment loan deficit securities equity
----- ------- ---------- ---- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1996 113 57,498 462 (86) (44,541) 95 13,541
Issuance of 25,956 shares
of common stock upon
exercise of stock options 1 82 -- -- -- -- 83
Issuance of 32,895 shares
of common stock pursuant
to 401(k) plan -- 144 -- -- -- -- 144
Translation adjustment -- -- (794) -- -- -- (794)
Decrease in net unrealized
gain on marketable debt
securities -- -- -- -- -- (95) (95)
Net loss -- -- -- -- (1,402) -- (1,402)
--- ------ ---- --- ------- ---- ------
Balance September 30, 1997 114 57,724 (332) (86) (45,943) -- 11,477
=== ====== ==== === ======= ---- ======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows Nine months
ended September 30, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,402) $ 310
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Non-cash items:
Depreciation and amortization 2,001 2,208
Deferred income tax expense (benefit) (384) 13
Loss (gain) on disposal of property and equipment 3 (30)
Gain on settlement of VCU (700) --
Amortization of premium on short-term investments -- 177
Foreign currency transaction gain -- (91)
Noncash charges 144 67
Change in operating assets and liabilities:
Increase in accounts receivable (481) (692)
Increase in prepaid expenses and other current assets (754) (112)
Increase in other assets (137) (1,390)
Increase in accounts payable 185 1,216
Increase (decrease) in accrued expenses (398) 492
Increase (decrease) in deferred revenue (1,381) 306
Increase (decrease) in other liabilities (332) 54
-------- --------
Net cash provided by (used in) operating activities (3,636) 2,528
-------- --------
Cash flows from investing activities:
Decrease in escrow/restricted cash 4,550 317
Purchases of property and equipment (2,621) (1,246)
Proceeds from disposal of property and equipment 2 70
Purchases of intangible assets (7) (21)
Purchases of short-term investments -- (5,409)
Proceeds from maturities of short-term investments 2,518 1,000
-------- --------
Net cash provided by (used in) investing activities 4,442 (5,289)
-------- --------
Cash flows from financing activities:
Principal payments on short-term borrowings (3,710) (2,463)
Principal proceeds on short-term borrowings 5 1,389
Principal payments on long-term debt (5,154) (893)
Principal proceeds on long-term debt 5,000 --
Payments received on employee stock purchase loans -- 7
Proceeds from stock options exercised 84 91
-------- --------
Net cash used in financing activities (3,775) (1,869)
-------- --------
Effect of exchange rate changes on cash (80) (73)
-------- --------
Decrease in cash and cash equivalents (3,049) (4,703)
Cash and cash equivalents, beginning of period 10,455 21,168
-------- --------
Cash and cash equivalents, end of period $ 7,406 $ 16,465
======== ========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 587 $ 773
Income taxes 869 74
-------- --------
Noncash investing activities:
Unrealized gain (loss) on marketable securities $ (95) $ 77
-------- --------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
September 30, 1997
Note 1. Statement of Accounting Presentation
In the opinion of the management of Chrysalis International
Corporation and Subsidiaries (the "Company"), the accompanying unaudited
consolidated financial statements include all significant adjustments
(consisting only of normal recurring accruals) necessary to fairly state the
Company's consolidated financial position as of September 30, 1997, and the
consolidated results of operations and cash flows for the three and nine month
periods ended September 30, 1997 and 1996. The unaudited consolidated financial
statements have been prepared in accordance with the requirements for Form 10-Q
and, therefore, do not include all disclosures of financial information required
by generally accepted accounting principles. The accompanying consolidated
financial statements should be read in conjunction with the financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996. The information set forth in the accompanying consolidated balance
sheet as of December 31, 1996 has been derived from the audited consolidated
balance sheet included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
Interim results are not necessarily indicative of the results for the full
year.
Note 2. Earnings (Loss) Per Share
Earnings (loss) per common and common equivalent share is computed based
upon the weighted average number of common shares outstanding during the
periods, plus when their effect is dilutive, common stock equivalents consisting
of certain shares subject to stock options and warrants. Primary and
fully-diluted loss per share are the same for each period presented.
Note 3. Legal Proceedings
In 1995, the Company terminated its relationship with the Virginia
Commonwealth University ("VCU"), which performed Phase I and analytical services
on behalf of the Company in the United States. The Company signed a settlement
agreement with VCU in the third quarter of 1997, that was significantly less
than the recorded liability. This action resulted in a book gain of $700,000.
Accordingly, this gain of $700,000 was recorded in other income in the third
quarter of 1997.
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CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
September 30, 1997
Note 4. Debt
In December 1992, the Company acquired preclinical operations in France.
Included in the purchase price were promissory notes having an aggregate
principal amount of $7.0 million (the "Notes"). The unpaid principal balance on
the Notes as of December 31, 1996 of $5.0 million, which was originally due in
December 1997, was paid-off in August 1997. In the third quarter, the Company
refinanced this debt by obtaining a five year $5.0 million term loan from a
large commercial bank, with the principal payable in quarterly installments
beginning September 1998. Interest will be paid monthly over the life of the
loan. This loan is secured by substantially all of the Company's assets,
including the capital stock of its subsidiaries.
Note 5. Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 is effective for
periods ending after December 15, 1997. SFAS 128 requires companies to change
the method currently used to compute earnings per share and to restate all prior
periods for comparability. Under SFAS 128, primary and fully diluted earnings
per share are eliminated and SFAS 128 requires presentation of basic and diluted
earnings per share. The adoption of SFAS 128 is not expected to have a material
impact on the Company's earnings per share.
The FASB has recently issued two new accounting standards, Statement No.
130 "Reporting Comprehensive Income" and Statement No. 131, "Disclosure about
Segments of an Enterprise and Related Information", and if adopted will be
effective for periods presented after December 31, 1997. The Company is
evaluating the effect of these new statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL SUMMARY
The Company is an international contract research organization ("CRO")
providing a broad portfolio of integrated drug development services primarily to
the pharmaceutical and biotechnology industries. This portfolio of drug
development services includes preclinical and clinical capabilities that enable
the Company to manage a comprehensive drug development program or a client's
specific requirements. The Company utilizes its international expertise and
experience in preclinical and clinical services to provide a coordinated
approach for a client to transition its drug through various preclinical to
clinical stages of development thereby minimizing certain delays which typically
occur before a new drug is introduced to the market. In addition, the Company is
the only CRO that is currently able to use its proprietary transgenic and other
related technology to provide services for its clients that require transgenic
animal models for the evaluation and development of therapeutic lead compounds
for further development and for genomics research in order to determine the
function of human genes and identify gene targets implicated in disease. The
Company generates substantially all of its revenues from its drug development
services and currently provides services for more than 250 clients in 26
countries.
On December 18, 1996, the Company issued 2,632,600 shares of Common Stock
in connection with the acquisition (the "Acquisition") by the Company of all of
the outstanding capital stock of, or equity interests in, BioClin, Inc., a
Delaware corporation, BioClin Europe AG, a Swiss corporation, BioClin GmbH, a
German corporation, Kilmer N.V., a Netherlands Antilles corporation, and BioClin
Institute of Clinical Pharmacology GmbH, a German corporation. The Acquisition
has been recorded using the "pooling-of-interests" method of accounting.
Chrysalis is also the exclusive commercial licensee of a U.S. patent
covering DNA Microinjection, the process widely used in the pharmaceutical and
biotechnology industries to develop transgenic animals. The Company utilizes
this license for its drug development services and grants sublicenses for the
use of this technology. These sublicenses entitle the Company to receive
revenues consisting of fees and, in certain cases, royalties.
The Company's financial statements are denominated in U.S. dollars
and, accordingly, changes in the exchange rate between non-U.S. currencies
and the U.S. dollar will affect the translation of non-U.S. revenues and
operating results into U.S. dollars for purposes of reporting the
Company's financial results. For the nine month period ended September
30, 1997, approximately 64% of the Company's revenues were from operations
outside the U.S. Approximately 45% of the Company's revenues for the nine
months ended September 30, 1997 were from operations in France and
denominated in French Francs; accordingly, fluctuations in the exchange
rate between the French Franc and the U.S. dollar may have a material
effect on the Company's operating results. See " -- Liquidity and
Capital Requirements -- Exchange Rate Fluctuations."
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In addition, the Company may be subject to foreign currency transaction
risk when the Company's multi-country contracts are denominated in a currency
other than the currency in which the Company incurs the expenses related to such
contracts. For such multi-country contracts, the Company seeks to require its
client to incur the effect of fluctuations in the relative values of the
contract currency and the currency in which the expenses are incurred. To the
extent the Company is unable to require its clients to incur the effects of
currency fluctuations, these fluctuations could have a material effect on the
results of operations of the Company. The Company does not currently hedge
against the risk of exchange rate fluctuations.
The Company's contracts are typically fixed price contracts that require a
portion of the contract amount to be paid at or near the time the trial is
initiated. The Company generally bills its clients upon the completion of
negotiated performance requirements and, to a lesser extent, on a date certain
basis. Certain of the Company's contracts are subject to cost limitations which
cannot be exceeded without client approval. Because, in many cases, the Company
bears the risk of cost overruns, unbudgeted costs in connection with performing
these contracts may have a detrimental effect on the financial results of the
Company. If it is determined that a loss will result from the performance of a
contract, the entire amount of the estimated loss is charged against income in
the period in which the determination is made.
The Company's contracts generally may be terminated with or without cause.
In the event of termination, the Company is typically entitled to all sums owed
for work performed through the notice of termination and all costs associated
with termination of the study. In addition, most of the Company's contracts
provide for an early termination fee, the amount of which usually declines as
the work progresses. The loss of a large contract or the loss of multiple
contracts, however, could adversely affect the Company's future revenues and
profitability. In addition, termination or delay in the performance of a
contract occurs for various reasons, including, but not limited to, unexpected
or undesired results, inadequate patient enrollment or investigator recruitment,
production problems resulting in shortages of the drug being tested, adverse
patient reactions to the drug being tested, or the client's decision to not
proceed with a particular trial.
Revenue for contracts is recognized on a percentage of completion basis as
work is performed. Revenue is affected by the mix of trials conducted and the
degree to which effort is expended. The Company will incur travel costs and may
subcontract with third-party investigators in connection with multi-site
clinical trials. These costs are passed through to clients and, in accordance
with industry practice, are included in service revenue. The costs may vary
significantly from contract to contract; therefore, changes in service revenue
may not be indicative of trends in revenue growth. Accordingly, the Company
considers net service revenue, which consists of service revenue less these
costs, as its primary measure of revenue growth.
The Company has had, and will continue to have, certain clients from which
at least 10% of the Company's overall revenue is generated over multiple
contracts. Such concentration of business is not uncommon within the CRO
industry. For the quarter and nine months ended September 30, 1997, the
Company's top five customers accounted for approximately 44% and 41%,
respectively, of its combined net service revenue. One customer, one of the
world's leading pharmaceutical companies, accounted for approximately 29% and
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22%, respectively, of the Company's net service revenues in the three and nine
month periods ended September 30, 1997. The Company believes that the loss of
any of these customers, if not replaced or if services provided to existing
customers are not expanded, may have a material adverse effect on the Company.
There can be no assurance that the loss of any such customer would be replaced
or services to existing customers would be expanded on terms acceptable to the
Company.
The Company has incurred expenses during the nine months ended September
30, 1997 expanding its infrastructure, primarily in the clinical operations, to
support global drug development capabilities and utilizing management's
resources primarily to communicate these expanded capabilities to its existing
client base and the pharmaceutical and biotechnology industries. As a result of
these efforts, the Company believes it is capable of supporting higher revenues.
However, the Company's future operating results will be contingent upon
successfully utilizing this expanded infrastructure which will require the
Company to convert proposals into contracts and revenues. There can be no
assurance that the Company will be able to successfully utilize its expanded
infrastructure or that proposals will be converted into revenues in a timely
manner. The Company's ability to utilize its expanded infrastructure in order to
enhance future operating results may also be affected by factors such as delays
in initiating or completing significant preclinical and clinical trials, the
lengthening of lead times to convert proposals into contracts and revenues, and
the termination of preclinical and clinical trials, all of which may be beyond
the control of the Company. See " -- Quarterly Results."
RESULTS OF OPERATIONS
REVENUES
Revenues were $10,623,000 for the three months ended September 30, 1997 as
compared to $11,089,000 for the same period in 1996. For the nine month period
ended September 30, 1997, revenues were $30,674,000 as compared to $31,112,000
for the same period in 1996. For the three and nine month periods ended
September 30, 1997, the Company generated approximately 58% and 64%,
respectively, of its revenues from operations outside of the U.S. Excluding the
impact of foreign currency translations, revenues for the third quarter of 1997
would have been approximately $11,900,000 as compared to $11,089,000 for the
same period last year, and approximately $33,700,000 for the nine months ended
September 30, 1997 as compared to $31,112,000 for the same period in 1996. See "
- -- Liquidity and Capital Requirements - Exchange Rate Fluctuations." These
results were primarily the result of the following: (i) an increase in the
clinical business including services provided under contracts with the Company's
largest customer; (ii) an increase in the Company's specialty transgenic and
molecular biology services; and (iii) an increase in preclinical business in
Europe in the first half of 1997. These increases were offset by the unfavorable
impact of foreign currency translations as well as by a decrease in the
preclinical business in North America, and the Phase I clinical business in
Europe. In addition, the Company believes that revenue growth for the clinical
business in the nine months ended September 30, 1997 was adversely affected as a
result of (i) the long lead times in converting proposals into contracts and
revenues and (ii) the continuing impact, as a result of such long lead times, of
the focus of senior management in the clinical business in the negotiation and
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consummation of the Acquisition during 1996 and, consequently, having less
opportunity to devote to business development and marketing the clinical
business.
OPERATING EXPENSES
Direct costs were $7,392,000 or 70% of net revenues for the three months
ended September 30, 1997 and $7,379,000 or 67% of net revenues for the same
period in 1996. For the nine months ended September 30, 1997 direct costs were
$21,415,000 or 70% of net revenues and $20,467,000 or 66% of net revenues for
the same period in 1996. Excluding the impact of foreign currency translations,
this increase in direct costs for the three months ended September 30, 1997 of
$13,000 would have been an increase of approximately $869,000. For the nine
month period ended September 30, 1997, the increase in direct costs of $948,000
would have been an increase of approximately $2,956,000. This increase in direct
costs for the three and nine months ended September 30, 1997 as compared to the
same period in 1996 was primarily due to (i) investment in personnel and
infrastructure to accommodate anticipated growth in the worldwide clinical
business and (ii) increased variable costs as a result of increased business
activity in the European preclinical services in the first half of 1997. The
increase in these costs as a percent of revenues is due to a base cost structure
of personnel, facilities and related expenses which is capable of supporting a
higher level of business than experienced during the nine month period ended
September 30, 1997.
General, administrative and marketing expenses were $3,123,000 for the
three months ended September 30, 1997 versus $2,630,000 for the same period in
1996. Excluding the impact of foreign currency translations, this increase of
$493,000 would have been an increase of approximately $848,000. For the nine
month periods ended September 30, 1997 and 1996, general, administrative and
marketing expenses were $8,973,000 and $7,825,000, respectively. Excluding the
impact of foreign currency translations, this increase of $1,148,000 would have
been an increase of approximately $2,015,000. This increase in expenses for the
three and nine month periods was primarily the result of increased personnel and
related costs for marketing, business development, information systems, general
management and financial management activities.
Depreciation and amortization expense increased to $708,000 for the three
months ended September 30, 1997 as compared to $699,000 for the same period last
year. For the nine months ended September 30, 1997 depreciation and amortization
expense decreased to $2,001,000 as compared to $2,050,000 for the same period
last year.
OTHER INCOME (EXPENSE)
Other income (expense) represented income of $579,000 for the three months
ended September 30, 1997 compared to income of $31,000 for the same period last
year. For the nine month period ended September 30, 1997, other income (expense)
represented income of $524,000 as compared to income of $324,000 for the same
period in 1996. This increase in income is primarily due to a settlement
agreement with Virginia Commonwealth University ("VCU"), signed in the third
quarter of 1997, which resulted in
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a $700,000 gain. This increase in other income (expense) was also the result of
a decrease in interest expense in the three and nine month periods ended
September 30, 1997 resulting from lower outstanding debt balances (see " --
Liquidity and Capital Requirements -- Debt."). These increases in other income
(expense) for the three and nine month periods ended September 30, 1997 as
compared to the same period in 1996 are partially offset by a decrease in
interest income earned in 1997 as a result of a decrease in cash and other
investment balances. Additionally, other income of $225,000 is included in the
nine month period ended September 30, 1996 associated with the installment sale
of the former Plainsboro pilot facility.
TAXES
The Company's foreign subsidiaries are subject to foreign income taxes
under foreign tax laws on the profits generated in such countries which in
general may not be offset by losses from operations in other countries. As a
result, the Company recorded net provisions of $41,000 and $244,000, for the
three months ended September 30, 1997 and 1996, respectively. For the nine
months ended September 30, 1997 and 1996, the Company recorded net provisions of
$81,000 and $459,000, respectively. These provisions are primarily due to
profits generated by its French operations partially offset by tax benefits
recorded as a result of losses in other European operations.
The impact from United States federal income taxes is currently not
significant due to the Company's available net operating loss carryforwards. At
December 31, 1996, the Company has available net operating loss carryforwards of
approximately $25,396,000 for United States federal income tax purposes. Such
loss carryforwards expire through 2011. The Company also has research and
development tax credit carryforwards of approximately $3,000,000 at December 31,
1996 for U.S. federal income tax reporting purposes which are available to
reduce U.S. federal income taxes, if any, through 2010. The Company has
alternative minimum tax credit carryforwards of approximately $164,000 at
December 31, 1996 for U.S. federal income tax purposes which are available to
reduce U.S. federal income taxes, if any. These tax credits have an unlimited
carryforward period. The Acquisition of the clinical drug development business
in December 1996 resulted in an ownership change under the Internal Revenue Code
of 1986, as amended (the "Code"). Accordingly, the Company's ability to utilize
its net operating loss carryforwards to offset operating profits may be subject
to certain limitations in the future under the Code. These net operating loss
carryforwards may not be utilized to offset profits in other countries.
BACKLOG
The Company reports backlog based on anticipated net service revenues from
uncompleted projects which have been authorized by the client, through a written
contract or otherwise. Once work under a letter of intent or contract commences,
net service revenue is recognized over the life of the contract using the
percentage-of-completion method of accounting. In certain cases, the Company
will commence work on a project prior to finalizing a letter of intent or
contract. Contracts included in backlog are subject to termination or delay at
any time by the client or regulatory authorities. Termination or delays can
result from a number of factors, many of which are beyond the Company's
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control. See "- General Summary". Delayed contracts remain in the Company's
backlog pending determination of whether to continue, modify or cancel the
contract.
The Company believes that its backlog as of any date is not necessarily a
meaningful indicator of future results and no assurance can be given that the
Company will be able to realize any or all of net service revenue included in
backlog. As of September 30, 1997, the Company's backlog was approximately $45.1
million compared to approximately $38.4 million at June 30, 1997 and $25.7 at
December 31, 1996. One client of the Company accounted for approximately $31.7
million of the backlog at September 30, 1997 with one contract accounting for
approximately $28.7 of such backlog.
QUARTERLY RESULTS
The Company's quarterly operating results are subject to variation, and
are expected to continue to be subject to variation, as a result of factors such
as delays in initiating or completing significant preclinical and clinical
trials, the lengthening of lead times to convert proposals into contracts and
revenues, termination of preclinical and clinical trials, acquisitions and
exchange rate fluctuations. Delays and terminations of studies or trials are
often the result of actions taken by clients or regulatory authorities and are
not typically subject to the control of the Company. See " -- General Summary".
Because a large portion of the Company's operating costs are relatively fixed
while its revenues are subject to fluctuation, minor variations in the
commencement, progress or completion of preclinical and clinical trials may
cause significant variations in quarterly operating results.
The following table presents unaudited quarterly operating results for
each of the fiscal quarters beginning September 30, 1996 through September 30,
1997. In the opinion of the Company, this information has been prepared on the
same basis as the audited consolidated financial statements of the Company and
reflects all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of results of operations for those periods.
This quarterly financial data should be read in conjunction with the
consolidated audited financial statements and notes thereto included in the
Company's 1996 Annual Report on Form 10-K. The operating results for any quarter
are not necessarily indicative of the results to be expected in any future
period.
14
<PAGE> 15
<TABLE>
<CAPTION>
QUARTER ENDED ($000'S EXCEPT PER SHARE DATA)
------------------------------------------------------------------------
(UNAUDITED)
Sept. 30, Dec. 31, March 31, June 30, Sept. 30,
--------- -------- --------- -------- ---------
1996 1996 1997 1997 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues $ 11,089 10,375 9,905 10,145 10,623
Operating expenses:
Direct costs 7,379 6,846 6,970 7,054 7,392
Research and development 92 203 52 47 31
General, administrative &
marketing 2,630 3,117 2,874 2,976 3,123
Depreciation & amortization 699 730 638 654 708
Business combination costs -- 3,649 -- -- --
-------- ------- ------- ------- -------
10,800 14,545 10,534 10,731 11,254
Income (loss) from operations 289 (4,170) (629) (586) (631)
Other income (expense):
Interest income 309 291 181 123 93
Interest expense (345) (413) (191) (165) (206)
Foreign currency gain (loss) (41) 426 -- -- --
Other 108 114 4 (6) 692
-------- ------- ------- ------- -------
31 418 (6) (48) 579
-------- ------- ------- ------- -------
Income (loss) before income taxes 320 (3,752) (635) (634) (52)
Income tax expense 244 18 9 31 41
-------- ------- ------- ------- -------
Net income (loss) $ 76 (3,770) (644) (665) (93)
======== ======= ======= ======= =======
Earnings (loss) per share $ 0.01 (0.33) (0.06) (0.06) (0.01)
======== ======= ======= ======= =======
Shares used in computing
per share amounts 12,013 11,353 11,372 11,388 11,405
======== ======= ======= ======= =======
</TABLE>
REVENUES BY BUSINESS AND GEOGRAPHIC REGION BY QUARTER
<TABLE>
<CAPTION>
QUARTER ENDED ($000'S)
------------------------------------------------------------------------
(UNAUDITED)
Sept. 30, Dec. 31, March 31, June 30, Sept. 30,
--------- -------- --------- -------- ---------
1996 1996 1997 1997 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Preclinical $ 7,286 7,484 6,720 6,708 6,476
Clinical 3,698 2,728 2,909 3,277 3,972
Licensing/Other 105 163 276 160 175
------ ------ ----- ------ ------
Total 11,089 10,375 9,905 10,145 10,623
====== ====== ===== ====== ======
International 7,782 7,085 6,779 6,661 6,168
North America 3,202 3,127 2,850 3,324 4,280
Licensing/Other 105 163 276 160 175
------ ------ ----- ------ ------
Total $11,089 10,375 9,905 10,145 10,623
====== ====== ===== ====== ======
</TABLE>
15
<PAGE> 16
LIQUIDITY AND CAPITAL REQUIREMENTS
CASH RESERVES
The Company finances its operations and activities by relying on (i) its
operating activities for its working capital requirements, (ii) its cash
reserves and (iii) its available lines of credit. Additionally, the Company
obtained a five year $5.0 million term loan from a large commercial bank in the
third quarter of 1997. As of September 30, 1997, the Company had cash reserves
(consisting of cash and cash equivalents, short-term investments, marketable
debt securities and restricted cash) of $7,866,000. The Company invests its
excess cash in a diversified portfolio of high-grade money market funds, United
States Government-backed securities and commercial paper and corporate
obligations. The Company's cash reserves decreased by $10,614,000 during the
nine month period ended September 30, 1997 primarily due to the following: (i)
the payment of approximately $5,000,000 of outstanding debt associated with the
Acquisition of the clinical business; (ii) the payment in the first three
quarters of 1997 of approximately $1,200,000 of nonrecurring business
combination costs also associated with the Acquisition of the clinical business;
(iii) capital expenditures of approximately $2,621,000 primarily associated with
solidifying and expanding our world leadership position in continuous infusion
studies, updating and expanding information systems and supporting the growth of
the transgenic/molecular biology services business; and (iv) the funding of
operating losses of approximately $2,400,000.
DEBT
In connection with the Acquisition of the clinical business on December
18, 1996, the Company acquired approximately $9.8 million of short-term
borrowings outstanding under line of credit arrangements with various banks. The
majority of such borrowings and credit arrangements were guaranteed by certain
prior stockholders of the clinical business. One of the conditions of the
closing was the release of these guarantees. In order to satisfy this condition,
on December 18, 1996, the Company paid approximately $4.0 million to reduce
these short-term borrowings and transferred approximately $4.5 million into
escrow for purposes of securing the future payment of the remaining personally
guaranteed borrowings. In January 1997, the Company paid the remaining
outstanding balance on these lines utilizing the cash in escrow and established
a new $3.0 million line of credit with a Swiss bank. As of September 30, 1997,
the outstanding balance under this line of credit was approximately $1,603,000.
Additionally, the Company has lines of credit and overdraft privileges
with French banks in the aggregate amount of 10.5 million French Francs ($1.8
million at the exchange rate in effect on September 30, 1997). At September 30,
1997, there were no short-term borrowings outstanding under these facilities.
In December 1992, the Company acquired preclinical operations in France.
Included in the purchase price were promissory notes having an aggregate
principal amount of $7.0 million (the "Notes"). The unpaid principal balance on
the Notes as of December 31, 1996 of $5.0 million was paid-off in August 1997.
In the third quarter, the Company refinanced this debt by obtaining a five year
$5.0 million term loan from a large commercial bank, with the principal
16
<PAGE> 17
payable in quarterly installments beginning September 1998. Interest will be
paid monthly over the life of the loan. This loan is secured by substantially
all of the Company's assets, including the capital stock of its subsidiaries.
In connection with its U.S. preclinical facility, in 1994 the Company
secured (i) a $1.5 million 15-year mortgage with a bank and, (ii) a $1.2 million
15-year mortgage from a Pennsylvania agency, which required cash collateral of
$450,000. These two loans are secured by mortgages on the property acquired. The
cash collateral on the mortgage loan with the Pennsylvania agency is classified
as restricted cash as of September 30, 1997. Upon achievement of certain
financial covenants, this $450,000 of cash collateral will be released.
Additionally, the favorable interest rate on the mortgage with the Pennsylvania
agency is subject to change upon review by the agency of certain future
conditions.
CAPITAL REQUIREMENTS
The Company believes that with its current financial resources it has the
ability to meet its working capital requirements for the foreseeable future. The
Company anticipates that its future capital requirements may include investment
for expansion of its operating infrastructure to meet anticipated increased
demand for drug development services from the pharmaceutical and biotechnology
industries. In connection with the refinancing of the Notes (see "- Debt"), the
Company has quarterly cash requirements for the repayment of principal beginning
September 1998, and monthly cash requirements for interest payments due
throughout the five year term of the loan. The Company may, from time to time,
consider funding its future capital requirements by issuing stock or other
securities in public or private equity or debt financings. Additionally, the
Company from time to time is engaged in discussions regarding strategic
acquisitions of organizations providing various drug development services and
strategic dispositions of certain of its assets and or services. The Company may
finance such an acquisition by additional public or private debt or equity
financings or through the issuance of stock. In the event that the Company seeks
to issue stock or other securities or pursue any such acquisition requiring
financing, there can be no assurance that the Company will be able to issue such
stock or other securities or that any financing will be available to the Company
or that such offering or financing will be available on acceptable terms. Also,
there can be no assurance that the Company will consummate any such acquisition
or disposition or obtain any such financing, or if consummated, that the Company
will be able to issue such stock or other securities or obtain any such
financing arrangements that will satisfy a material portion of the Company's
capital needs for any such acquisition.
In addition to the above, the Company's working capital and other capital
requirements will depend on numerous factors, including among others: success in
increasing the Company's revenues and managing its operations; maintaining its
contractual relationship with its top customer; exchange rate fluctuations
between the United States dollar and foreign currencies; capital expenditures
for clinical and preclinical information system objectives; the level of Company
resources devoted to management, marketing, information and data management
capabilities and business and financial administration; technological advances;
the status of competitors; costs of potential future acquisitions; and the
maintenance of certain restrictive debt covenants.
17
<PAGE> 18
EXCHANGE RATE FLUCTUATIONS
Approximately 58% and 70% of the Company's net revenues for the quarters
ended September 30, 1997 and 1996, respectively, and 64% and 68% of the
Company's net revenues for the nine months ended September 30, 1997 and 1996,
respectively, were derived from the Company's operations outside the United
States. The Company's consolidated financial statements are denominated in U.S.
dollars and, accordingly, changes in exchange rates between the applicable
foreign currency and the U.S. dollar will affect the translation of such
subsidiary's financial results into U.S. dollars for purposes of reporting the
Company's consolidated financial results. Translation adjustments are reported
as a separate section of stockholders' equity.
The Company may be subject to foreign currency transaction risks when the
Company's multi-country contracts are denominated in a currency other than the
currency in which the Company incurs the expenses related to such contracts. For
such multi-country contracts, the Company seeks to require its client to incur
the effect of fluctuations in the relative values of the contract currency and
the currency in which the expenses are incurred. To the extent the Company is
unable to require its clients to incur the effects of currency fluctuations,
these fluctuations could have a material effect on the results of operations of
the Company. The Company generally does not hedge its currency translation and
transaction exposure.
Due to its preclinical operations in France, the percentage of the
Company's total revenues recorded in French Francs is significant. For the
quarters ended September 30, 1997 and 1996, the French operations accounted for
approximately 40% and 47%, respectively, of the Company's revenues. For the nine
month period ended September 30, 1997 and 1996 the French operations accounted
for approximately 45% and 48%, respectively, of the Company's revenues.
Accordingly, changes in the exchange rate between the French Franc and the U.S.
dollar will affect the translation of the French preclinical operation's
revenues and operating results into U.S. dollars for purposes of reporting the
Company's consolidated financial results, and also affect the U.S. dollar
amounts actually received by the Company from the French preclinical operations.
Based on the assumption that the French preclinical operations will continue to
represent a significant portion of the business of the Company, the appreciation
of the U.S. dollar against the French Franc would have an unfavorable impact on
the Company's revenues and a favorable impact on the Company's operating
expenses due to the effect of such currency translation on the French
preclinical operation's operating results; however, the depreciation of the U.S.
dollar against the French Franc would have a favorable impact on the Company's
revenues and an unfavorable impact on the Company's operating expenses. The net
effect of such impact can not be predicted with certainty.
For purposes of the Company's consolidated financial results, the results
of operations of the French preclinical business denominated in French Francs
have been translated from French Francs into U.S. dollars using the following
exchange rates:
18
<PAGE> 19
<TABLE>
<CAPTION>
French Franc U.S. dollar per
Period per U.S. dollar French Franc
------ --------------- ------------
<S> <C> <C>
1st quarter 1996 5.0384 .1985
2nd quarter 1996 5.1578 .1939
3rd quarter 1996 5.0965 .1962
4th quarter 1996 5.1821 .1930
1st quarter 1997 5.6038 .1785
2nd quarter 1997 5.7831 .1729
3rd quarter 1997 6.0838 .1644
</TABLE>
The rates in the above table represent an average exchange rate calculated using
rates quoted in The Wall Street Journal. As of November 6, 1997, the French
Franc per U.S. dollar rate was 5.7685.
ACCUMULATED DEFICIT
Since its inception in 1988 until the formation in 1994 and subsequent
sale of its partnership interest in Nextran in 1995, the Company expended
substantial funds for research and development and capital expenditures. A
significant portion of such expenditures were made to support the Company's
organ transplantation and blood substitute research and development programs,
which programs were transferred to the Nextran partnership. Historically, these
expenditures accounted for a substantial portion of the Company's accumulated
deficit. Also contributing to the accumulated deficit are the costs associated
with the development of a worldwide clinical business.
INFLATION
The Company believes that inflation has not had a material impact on its
results of operations.
FORWARD LOOKING STATEMENTS
The statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere throughout this
Quarterly Report on Form 10-Q that are not historical facts are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange of 1934. These forward-looking statements
are subject to certain risks and uncertainties described below, which could
cause actual results to differ materially from those reflected in the
forward-looking statements. These forward-looking statements reflect
management's analysis, judgment, belief or expectation only as of the date
hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof or to publicly release the results of any revisions to such
forward-looking statements that may be made to reflect events or circumstances
after
19
<PAGE> 20
the date hereof. In addition to the disclosure contained herein, readers
should carefully review any disclosure of risks and uncertainties contained in
other documents the Company files or has filed from time to time with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934.
Factors that could cause actual results to differ materially from those
reflected in the forward looking statements include, without limitation: the
degree of the Company's success in obtaining new contracts; the scope and
duration of drug development trials; the loss or downsizing of, or delay in,
existing drug development trials; the lengthening of the lead time to convert
proposals into contracts and revenues; the Company's exposure to cost overruns
under fixed-price contacts; the Company's dependence on certain clients,
especially its largest client, and on the pharmaceutical and biotechnology
industries; adverse trends in the regulatory environment, including health care
reform measures; the Company's dependence on key management personnel;
competition and consolidation in the drug development services industry;
liability for negligence or errors and omissions arising out of drug development
trials; foreign exchange rate fluctuations; and the costs associated with
integrating future acquired businesses. In addition, the Company's quarterly
operating results will continue to be subject to variation as a result of
factors such as those discussed above in " --Quarterly Results" as well as the
costs associated with integrating the clinical and preclinical businesses.
20
<PAGE> 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In 1995, the Company terminated its relationship with the Virginia
Commonwealth University ("VCU"), which performed Phase I and analytical services
on behalf of the Company in the United States. The Company signed a settlement
agreement with VCU in the third quarter of 1997, that was significantly less
than the recorded liability. This action resulted in a book gain of $700,000.
Accordingly, this gain of $700,000 was recorded in other income in the third
quarter of 1997.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
27 Financial Data Schedule
b. Reports on Form 8-K
None.
21
<PAGE> 22
CHRYSALIS INTERNATIONAL CORPORATION
SIGNATURES
The financial information furnished herein has not been audited. However
in the opinion of management, all significant adjustments necessary for a fair
presentation for the three and nine month periods ended September 30, 1997 and
1996, have been included.
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.
Date: November 12, 1997 CHRYSALIS INTERNATIONAL CORPORATION
/s/ John G. Cooper
---------------------------------------------
John G. Cooper
Senior Vice President, Chief Financial Officer
and Treasurer
(Duly Authorized Officer and Chief
Accounting Officer)
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,406
<SECURITIES> 0
<RECEIVABLES> 10,539
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,546
<PP&E> 15,316
<DEPRECIATION> 0
<TOTAL-ASSETS> 37,537
<CURRENT-LIABILITIES> 16,234
<BONDS> 0
0
0
<COMMON> 114
<OTHER-SE> 1,363
<TOTAL-LIABILITY-AND-EQUITY> 37,537
<SALES> 0
<TOTAL-REVENUES> 10,623
<CGS> 0
<TOTAL-COSTS> 7,392
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 206
<INCOME-PRETAX> (52)
<INCOME-TAX> 41
<INCOME-CONTINUING> (93)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (93)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
