<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 JUNE 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 11,404,575 shares
outstanding at August 8, 1997
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CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1997 (unaudited) and December 31, 1996 3
Unaudited Consolidated Statements of Operations -
for the three and six months ended
June 30, 1997 and 1996 4
Unaudited Consolidated Statement of Stockholders' Equity -
for the six months ended June 30, 1997 5
Unaudited Consolidated Statements of Cash Flows -
for the six months ended June 30, 1997 and 1996 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
- ---------------------------------------------------------
Condition and Results of Operations 8 - 19
-----------------------------------
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Stockholders 20
- --------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K 20
- -----------------------------------------
</TABLE>
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<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996
(in thousands except share and per share amounts)
<CAPTION>
Assets June 30, 1997 December 31, 1996
------ ------------- -----------------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 8,186 10,455
Cash in escrow -- 4,550
Short-term investments -- 2,518
Marketable debt securities -- 101
Trade accounts receivable, net 10,374 10,788
Prepaid expenses and other current assets 2,139 1,433
-------- -------
Total current assets 20,699 29,845
Property and equipment, net 15,013 15,963
Marketable debt securities -- 396
Intangible assets, net 829 953
Other assets 387 326
Restricted cash 468 460
-------- -------
$ 37,396 47,943
======== =======
Liabilities and Stockholders' Equity
Current liabilities
Short-term borrowings 1,449 10,939
Note payable -related party 274 299
Current portion of long-term debt 158 180
Accounts payable 3,129 3,386
Accrued expenses 6,723 8,273
Deferred revenue 4,277 5,842
-------- -------
Total current liabilities 16,010 28,919
Long-term debt, excluding current portion 7,300 2,376
Deferred income taxes 1,765 2,053
Other liabilities 904 1,054
-------- -------
Total liabilities 25,979 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 11,404,575 in 1997
and 11,359,721 in 1996 114 113
Additional paid-in capital 57,669 57,498
Translation adjustment (430) 462
Employee stock purchase loans (86) (86)
Accumulated deficit (45,850) (44,541)
Net unrealized gain on marketable securities -- 95
-------- -------
Total stockholders' equity 11,417 13,541
-------- -------
Commitments and contingencies
$ 37,396 47,943
======== =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements
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<TABLE>
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
Three and six months ended June 30, 1997 and 1996
(in thousands except per share amounts)
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1997 1996 1997 1996
----------------------------- ------------------------------
<S> <C> <C> <C> <C>
Revenues:
Service revenue $11,491 $12,010 $22,973 $23,116
Less: Reimbursed costs (1,506) (1,711) (3,359) (3,339)
------------ ------------ ------------- -------------
Net service revenue 9,985 10,299 19,614 19,777
License fees and other 160 127 437 246
------------ ------------ ------------- -------------
10,145 10,426 20,051 20,023
------------ ------------ ------------- -------------
Operating expenses:
Direct costs 7,054 6,816 14,024 13,088
Research and development 47 130 99 233
General, administrative and marketing 2,976 2,519 5,850 5,195
Depreciation and amortization 654 679 1,293 1,351
------------ ------------ ------------- -------------
10,731 10,144 21,266 19,867
Income (loss) from operations (586) 282 (1,215) 156
------------ ------------ ------------- -------------
Other income (expense):
Interest income 123 272 303 587
Interest expense (165) (327) (357) (687)
Foreign currency gain - 65 - 132
Other (6) 140 - 261
------------ ------------ ------------- -------------
(48) 150 (54) 293
------------ ------------ ------------- -------------
Income (loss) before income taxes (634) 432 (1,269) 449
Income tax expense (31) (86) (40) (215)
------------ ------------ ------------- -------------
Net income (loss) ($665) $346 ($1,309) $234
============ ============ ============= =============
Earnings (loss) per common and common
equivalent share:
Primary ($0.06) $0.03 ($0.12) $0.02
============ ============ ============= =============
Fully diluted ($0.06) $0.03 ($0.12) $0.02
============ ============ ============= =============
Shares used in computing per share amounts:
Primary 11,388 11,944 11,380 11,856
============ ============ ============= =============
Fully Diluted 11,388 12,017 11,380 12,044
============ ============ ============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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<TABLE>
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Statements of Stockholders' Equity
Six months ended June 30, 1997
(in thousands except share amounts)
<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 25,223 shares
of common stock upon
exercise of stock options 1 80 -- -- -- -- 81
Issuance of 19,631 shares
of common stock pursuant
to 401(k) plan -- 91 -- -- -- -- 91
Translation adjustment -- -- (892) -- -- -- (892)
Decrease in net unrealized
gain on marketable debt
securities -- -- -- -- -- (95) (95)
Net loss -- -- -- -- (1,309) -- (1,309)
--- ------ ---- ------ ------ ---- ------
Balance June 30, 1997 114 57,669 (430) (86) (45,850) -- 11,417
=== ====== ==== ====== ====== ==== ======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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<TABLE>
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash
Flows Six months ended June 30, 1997 and 1996
(in thousands)
<CAPTION>
Six months ended
June 30, 1997
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,309) $ 234
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Non-cash items:
Depreciation and amortization 1,293 1,457
Deferred income tax expense (benefit) (337) 7
Loss (gain) on disposal of property and equipment 2 (29)
Amortization of premium on short-term investments -- 163
Foreign currency transaction gain -- (132)
Noncash charges 91 40
Change in operating assets and liabilities:
Increase in accounts receivable (421) (140)
Increase in prepaid expenses and other current assets (550) (3)
Increase in other assets (136) (554)
Increase in accounts payable 114 653
Decrease in accrued expenses (1,067) (59)
Decrease in deferred revenue (1,114) (2,370)
Increase (decrease) in other liabilities (254) 14
-------- --------
Net cash used in operating activities (3,688) (719)
-------- --------
Cash flows from investing activities:
(Increase) decrease in restricted cash (38) 317
Purchases of property and equipment (1,572) (891)
Proceeds from disposal of property and equipment 1 70
Purchases of intangible assets (1) (18)
Purchases of short-term investments -- (5,409)
Proceeds from maturities of short-term investments 7,068 1,000
-------- --------
Net cash provided by (used in) investing activities 5,458 (4,931)
-------- --------
Cash flows from financing activities:
Principal payments on short-term borrowings (4,368) (1,119)
Principle proceeds on short-term borrowings 462 1,307
Principal payments on long-term debt (70) (705)
Proceeds from stock options exercised 81 86
-------- --------
Net cash used in financing activities (3,895) (431)
-------- --------
Effect of exchange rate changes on cash (144) (35)
-------- --------
Decrease in cash and cash equivalents (2,269) (6,116)
Cash and cash equivalents, beginning of period 10,455 21,168
-------- --------
Cash and cash equivalents, end of period $ 8,186 $ 15,052
======== ========
Supplemental disclosure of cash flow information Cash paid during the period
for:
Interest $ 323 $ 490
Income taxes 770 49
-------- --------
Noncash investing activities:
Unrealized gain (loss) on marketable securities $ (95) $ 78
-------- --------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
June 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 June 30, 1997, and the consolidated results of
operations and cash flows for the three and six month periods ended June 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. 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 first six months of 1997, approximately 67% of the Company's
revenues were from operations outside the U.S. Approximately 47% of the
Company's revenues for the six months ended June 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."
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
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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 extending over more than one accounting period 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 six months ended June 30, 1997, the Company's top
ten customers accounted for approximately 47% and 46%, respectively, of its
combined net service revenue. One customer accounted for approximately 16% of
the Company's net service revenues in the three and six month periods ended June
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
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would be replaced or services to existing customers would be expanded on terms
acceptable to the Company.
The Company has incurred expenses during the first six months of 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 $10,145,000 for the three months ended June 30, 1997 as
compared to $10,426,000 for the same period in 1996. For the six month period
ended June 30, 1997, revenues were $20,051,000 as compared to $20,023,000 for
the same period in 1996. For the three and six month periods ended June 30,
1997, the Company generated approximately 66% and 67%, respectively, of its
revenues from operations outside of the U.S. Excluding the impact of foreign
currency translations, revenues for the second quarter of 1997 would have been
approximately $11,100,000 as compared to $10,426,000 for the same period last
year, and approximately $21,800,000 for the first half of 1997 as compared to
$20,023,000 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;
(iii) an increase in licensing revenues generated from the Company's patented
Microinjection technology; and (iv) an increase in preclinical business in
Europe. 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. In addition, the Company believes that revenue growth for the
clinical business in the first six months of 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
consummation of the Acquisition and, consequently, having less opportunity to
devote to business development and marketing the clinical business.
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OPERATING EXPENSES
- ------------------
Direct costs were $7,054,000 or 70% of net revenues for the three
months ended June 30, 1997 and $6,816,000 or 65% of net revenues for the same
period in 1996. For the six months ended June 30, 1997 direct costs were
$14,024,000 or 70% of net revenue and $13,088,000 or 65% 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 June 30, 1997 of $238,000
would have been an increase of approximately $786,000. For the six month period
ended June 30, 1997, the increase in direct costs of $936,000 would have been an
increase of approximately $2,080,000. This increase in direct costs for the
three and six months ended June 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. 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 first six months of 1997.
General, administrative and marketing expenses were $2,976,000 for the
three months ended June 30, 1997 versus $2,519,000 for the same period in 1996.
Excluding the impact of foreign currency translations, this increase of $457,000
would have been an increase of approximately $707,000. For the six month periods
ended June 30, 1997 and 1996, general, administrative and marketing expenses
were $5,850,000 and $5,195,000, respectively. Excluding the impact of foreign
currency translations, this increase of $655,000 would have been an increase of
approximately $1,166,000. This increase in expenses for the three and six 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 decreased to $654,000 for the
three months ended June 30, 1997 as compared to $679,000 for the same period
last year. For the six months ended June 30, 1997 depreciation and amortization
expense decreased to $1,293,000 as compared to $1,351,000 for the same period
last year.
OTHER INCOME (EXPENSE)
- ----------------------
Other income (expense) represented expense of $48,000 for the three
months ended June 30, 1997 compared to income of $150,000 for the same period
last year. For the six month period ended June 30, 1997, other income (expense)
represented expense of $54,000 as compared to income of $293,000 for the same
period in 1996. The increase in expense for 1997 as compared to the income for
1996 is primarily due to a decrease in interest income earned in the first half
of 1997 as a result of a decrease in cash and other investment balances,
partially offset by a decrease in interest expense in the first six months of
1997 resulting from lower outstanding debt balances (see "-- Liquidity and
Capital Requirements -- Debt."). Additionally, other income of $150,000 is
included in the first six months of 1996 associated with the installment sale of
the former Plainsboro pilot facility which was completed by the fourth quarter
of 1996.
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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 $31,000 and $86,000, for the
three months ended June 30, 1997 and 1996, respectively. For the six months
ended June 30 ,1997 and 1996, the Company recorded net provisions of $40,000 and
$215,000, 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 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 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 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 June 30, 1997, the Company's backlog was approximately $38.4
million compared to approximately $21.6 million at March 31, 1997. One client of
the Company accounted for approximately $25.7 million of the backlog at June 30,
1997. The increase in backlog is primarily attributable to the transitioning
into a Phase III study of the previously
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announced multinational clinical trial with the client which accounted for 16%
of the Company's net service revenues in the quarter and six months ended June
30, 1997.
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 June 30, 1996 through June 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.
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<TABLE>
<CAPTION>
QUARTER ENDED ($000'S EXCEPT PER SHARE DATA)
-----------------------------------------------------------------
(UNAUDITED)
June 30, Sept. 30, Dec. 31, March 31, June 30,
-------- --------- -------- --------- --------
1996 1996 1996 1997 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues $ 10,426 11,089 10,375 9,905 10,145
Operating expenses:
Direct costs 6,816 7,379 6,846 6,970 7,054
Research and development 130 92 203 52 47
General, administrative &
marketing 2,519 2,630 3,117 2,874 2,976
Depreciation & amortization 679 699 730 638 654
Business combination costs -- -- 3,649 -- --
-------- ------- ------- ------- -------
10,144 10,800 14,545 10,534 10,731
Income (loss) from operations 282 289 (4,170) (629) (586)
Other income (expense):
Interest income 272 309 291 181 123
Interest expense (327) (345) (413) (191) (165)
Foreign currency gain (loss) 65 (41) 426 -- --
Other 140 108 114 4 (6)
-------- ------- ------- ------- -------
150 31 418 (6) (48)
-------- ------- ------- ------- -------
Income (loss) before income taxes 432 320 (3,752) (635) (634)
Income tax expense 86 244 18 9 31
-------- ------- ------- ------- -------
Net income (loss) $ 346 76 (3,770) (644) (665)
======== ======= ======= ======= =======
Earnings (loss) per share $ 0.03 0.01 (0.33) (0.06) (0.06)
======== ======= ======= ======= =======
Shares used in computing
per share amounts 11,944 12,014 11,353 11,307 11,388
======== ======= ======= ======= =======
REVENUES BY BUSINESS AND GEOGRAPHIC REGION BY QUARTER
<CAPTION>
QUARTER ENDED ($000'S)
----------------------------------------------------------------
(UNAUDITED)
June 30, Sept. 30, Dec. 31, March 31, June 30,
1996 1996 1996 1997 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Preclinical $ 7,319 7,286 7,484 6,720 6,708
Clinical 2,980 3,698 2,728 2,909 3,277
Licensing/Other 127 105 163 276 160
------- ------ ------ ----- ------
Total 10,426 11,089 10,375 9,905 10,145
======= ====== ====== ===== ======
International 6,864 7,782 7,085 6,779 6,661
North America 3,435 3,202 3,127 2,850 3,324
Licensing/Other 127 105 163 276 160
------- ------ ------ ----- ------
Total $10,426 11,089 10,375 9,905 10,145
======= ====== ====== ===== ======
</TABLE>
14
<PAGE> 15
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. As of June 30, 1997, the
Company had cash reserves (consisting of cash and cash equivalents, short-term
investments, marketable debt securities and restricted cash) of $8,654,000. 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 $9,826,000
during the first six months of 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 quarter of
1997 of approximately $1,200,000 of nonrecurring business combination costs also
associated with the Acquisition of the clinical business; (iii) approximately
$1,572,000 in capital expenditures primarily associated with expansion of
specialty transgenic/molecular biology services and investments in information
systems; and (iv) approximately $2,000,000 for the funding of operating losses.
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 June 30, 1997, the
outstanding balance under this line of credit was approximately $1,449,000.
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 June 30, 1997). At June 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 remaining unpaid principal
balance on the Notes as of June 30, 1997 of $5.0 million, which was originally
due in December 1997, has been reclassified to long-term debt as the Company
intends to refinance the Notes in accordance with a commitment letter executed
in July 1997 by the Company and a commercial bank. The Notes are expected to be
refinanced over five years with the principal payable in quarterly installments
beginning
15
<PAGE> 16
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 June 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 will have 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 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 such an acquisition 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. Although the Company
continually considers and evaluates potential acquisitions and related
opportunities for growth, it does not have any understandings, arrangements or
agreements with respect to any such acquisitions at this time.
As a former general partner of Nextran, the Company remains obligated
with respect to certain environmental representations and warranties which
expire on August 29, 1997. Such representations and warranties are also limited
by certain financial indemnification provisions.
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;
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;
16
<PAGE> 17
technological advances; the status of competitors; costs of potential future
acquisitions; and the maintenance of certain restrictive debt covenants.
EXCHANGE RATE FLUCTUATIONS
- --------------------------
Approximately 66% of the Company's net revenues for the quarters ended
June 30, 1997 and 1996, and 67% of the Company's net revenues for the six months
ended June 30, 1997 and 1996, 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 June 30, 1997 and 1996, the French operations accounted for
approximately 47% of the Company's revenues. For the six month period ended June
30, 1997 and 1996 the French operations accounted for approximately 47% and 49%
of the Company's revenues, respectively. 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 continued 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.
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:
17
<PAGE> 18
<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
</TABLE>
The rates in the above table represent an average exchange rate calculated using
rates quoted in The Wall Street Journal. As of August 8, 1997 the French Franc
per U.S. dollar rate was 6.2215.
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.
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
18
<PAGE> 19
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 dependence on certain clients, especially its largest client, and
on the pharmaceutical and biotechnology industries; 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.
19
<PAGE> 20
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Stockholders
-----------------------------------------------
On June 26, 1997, the Company held its Annual Meeting of Shareholders to
consider and vote upon the following two proposals:
(1) A proposal to elect two (2) directors of the Company to hold office
until the 2000 Annual Meeting of Shareholders, and until their
successors are duly elected and qualified.
(2) A proposal to ratify the appointment of KPMG Peat Marwick LLP as
independent accountants of the Company for the current fiscal year.
Results with respect to the voting on each of the above proposals were as
follows:
Proposal 1: Paul J. Schmitt
For -10,872,832 Against - 29,431
--- -------
J. Christian Jensen, Ph.D.
For - 10,875,001 Against - 27,262
--- -------
Proposal 2: 10,876,308 Votes For
----------
16,805 Votes Against
------
9,150 Abstentions
-----
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
27 Financial Data Schedule
b. Reports on Form 8-K
None.
20
<PAGE> 21
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 six month periods ended June 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: August 13, 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)
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 8,186
<SECURITIES> 0
<RECEIVABLES> 10,374
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,699
<PP&E> 15,013
<DEPRECIATION> 0
<TOTAL-ASSETS> 37,396
<CURRENT-LIABILITIES> 16,010
<BONDS> 0
0
0
<COMMON> 114
<OTHER-SE> 11,303
<TOTAL-LIABILITY-AND-EQUITY> 37,396
<SALES> 0
<TOTAL-REVENUES> 10,145
<CGS> 0
<TOTAL-COSTS> 7,054
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 165
<INCOME-PRETAX> (634)
<INCOME-TAX> 31
<INCOME-CONTINUING> (665)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (665)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
