-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FF2Knnt4K7IonXBjOIi99i2aBCdb8IQXavREXMuhYDSmjQxGQ5M4AI/JsAT0VLKq ams75SK5Zab7lOfAD5EW2Q== 0000893220-97-001400.txt : 19970815 0000893220-97-001400.hdr.sgml : 19970815 ACCESSION NUMBER: 0000893220-97-001400 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHRYSALIS INTERNATIONAL CORP CENTRAL INDEX KEY: 0000880456 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 222877973 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19659 FILM NUMBER: 97661750 BUSINESS ADDRESS: STREET 1: 575 ROUTE 28 CITY: RARITAN STATE: NJ ZIP: 08869 BUSINESS PHONE: 9087227900 MAIL ADDRESS: STREET 1: 575 RT 28 CITY: RARITAN STATE: NJ ZIP: 08869 FORMER COMPANY: FORMER CONFORMED NAME: DNX CORP DATE OF NAME CHANGE: 19930328 10-Q 1 CHRYSALIS INTERNATIONAL CORP. FORM 10-Q 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 1 2 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES INDEX
PART I. FINANCIAL INFORMATION PAGE NO. -------- 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 - -----------------------------------------
2 3 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)
Assets June 30, 1997 December 31, 1996 ------ ------------- ----------------- (unaudited) 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 ======== =======
See accompanying notes to unaudited consolidated financial statements 3 4 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)
Three months ended Six months ended June 30, June 30, 1997 1996 1997 1996 ----------------------------- ------------------------------ 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 ============ ============ ============= =============
See accompanying notes to unaudited consolidated financial statements. 4 5 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES Unaudited Consolidated Statements of Stockholders' Equity Six months ended June 30, 1997 (in thousands except share amounts)
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 ------ ---------- ----------- -------- ----------- ----------- ------- 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 === ====== ==== ====== ====== ==== ======
See accompanying notes to unaudited consolidated financial statements. 5 6 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES Unaudited Consolidated Statements of Cash Flows Six months ended June 30, 1997 and 1996 (in thousands)
Six months ended June 30, 1997 1997 1996 ---- ---- 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 -------- --------
See accompanying notes to unaudited consolidated financial statements. 6 7 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. 7 8 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 8 9 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 9 10 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. 10 11 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. 11 12 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 12 13 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. 13 14
QUARTER ENDED ($000'S EXCEPT PER SHARE DATA) ----------------------------------------------------------------- (UNAUDITED) June 30, Sept. 30, Dec. 31, March 31, June 30, -------- --------- -------- --------- -------- 1996 1996 1996 1997 1997 ---- ---- ---- ---- ---- 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 QUARTER ENDED ($000'S) ---------------------------------------------------------------- (UNAUDITED) June 30, Sept. 30, Dec. 31, March 31, June 30, 1996 1996 1996 1997 1997 ---- ---- ---- ---- ---- 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 ======= ====== ====== ===== ======
14 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 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 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 18
French Franc U.S. dollar per Period per U.S. dollar French Franc ------ --------------- --------------- 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
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 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 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 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 JUN-30-1997 8,186 0 10,374 0 0 20,699 15,013 0 37,396 16,010 0 0 0 114 11,303 37,396 0 10,145 0 7,054 0 0 165 (634) 31 (665) 0 0 0 (665) (.06) (.06)
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