FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission File Number 0-23666
TRIPOS, INC.
(Exact Name of Registrant as Specified in its Charter)
Utah 43-1454986
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1699 South Hanley Road
St. Louis, Missouri 63144
(Address of Principal Executive Offices and Zip Code)
(314) 647-1099
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
Yes X No
Number of shares outstanding of the issuer's Common Stock, par
value $.01 per share, as of September 30, 1997: 3,115,584 shares.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION, Item 1. Financial Page
Statements (Unaudited)
Consolidated Balance Sheets at
September 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations
for Three and Nine Months Ended September 30, 1997
and September 30, 1996 4
Consolidated Statements of Cash Flows for Nine Months
Ended September 30, 1997 and September 30, 1996 5
Notes to Consolidated Financial Statements 6
PART I FINANCIAL INFORMATION, Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations 7
PART II OTHER INFORMATION 10
SIGNATURES 11
EXHIBITS 12
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
Sep 30, Dec 31,
1997 1996
ASSETS
Current Assets:
Cash and cash equivalents $ 6,580 $ 5,393
Investments 2,289 3,335
Accounts receivable 9,646 10,558
Prepaid expenses 625 496
Deferred income taxes 151 118
Total current assets $ 19,291 $ 19,900
Notes Receivable 1,918 0
Property and equipment, less
accumulated depreciation 1,240 1,163
Capitalized development costs, less
accumulated amortization 3,508 3,130
Other, net 661 316
Total assets $ 26,618 $ 24,509
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 843 $ 845
Accrued expenses 4,953 5,306
Deferred revenue 4,036 3,389
Total current liabilities 9,832 9,540
Deferred income taxes 827 602
Shareholders' equity:
Common stock 31 30
Additional paid-in capital 15,689 15,220
Accumulated deficit 15 (1,382)
Cumulative translation adjustment 224 499
Total shareholders' equity 15,959 14,367
Total liabilities and
shareholders' equity $ 26,618 $ 24,509
See accompanying notes.
Item 1. Financial Statements (continued)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
Sep 30, Sep 30, Sep 30, Sep 30,
1997 1996 1997 1996
Net sales:
Software licenses $ 2,972 $ 2,218 $ 6,893 $ 6,438
Support 1,807 1,708 5,336 4,928
Accelerated discovery
services 2,503 3,141 6,298 4,979
Hardware 1,718 486 3,616 2,814
Total net sales 9,000 7,553 22,143 19,159
Operating costs and expenses:
Cost of sales 3,111 2,344 7,810 6,482
Sales and marketing 2,693 2,741 7,367 7,732
Research and development 1,123 851 3,127 2,472
General and administrative 881 726 2,016 1,484
Total costs and expenses 7,808 6,662 20,320 18,170
Income from operations 1,192 891 1,823 989
Other income, net 164 47 430 174
Income before income taxes 1,356 938 2,253 1,163
Income tax expense 514 250 856 302
Net income $ 842 $ 688 $ 1,397 $ 861
Fully diluted earnings per common
and common equivalent share $ 0.24 $ 0.21 $ 0.40 $ 0.26
Weighted average number
of common and common
equivalent shares 3,553 3,305 3,515 3,265
See accompanying notes.
Item 1. Financial Statements (continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
Sep 30, Sep 30,
1997 1996
Cash flows from operating activities
Net income $ 1,397 $ 861
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation of property and equipment 480 499
Amortization of capitalized 2,203 2,220
development costs
Deferred income taxes 192 295
Change in operating assets and
liabilities:
Accounts receivable 538 (338)
Notes receivable (1,918) 0
Prepaid expenses and other assets (119) (250)
Accounts payable and accrued expenses (278) 328
Deferred revenue 751 (256)
Net cash provided by operating
activities 3,246 3,359
Cash flows from investing activities:
Net purchases, sales, and maturities
of investments 1,047 (253)
Purchases of property and equipment (575) (434)
Capitalized development costs (2,635) (3,016)
Other (345) (265)
Net cash used in investing activities (2,508) (3,968)
Cash flows from financing activities:
Stock issuance pursuant to stock plans 568 456
Net cash provided by financing
activities 568 456
Effect of foreign exchange rate changes
on cash and cash equivalents (119) (77)
Net increase (decrease) in cash and
cash equivalents 1,187 (230)
Cash and cash equivalents at beginning
of period 5,393 3,955
Cash and cash equivalents at end of
period $6,580 $ 3,725
See accompanying notes.
Item 1. Financial Statements (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Summary of significant accounting policies
(a) Organization
Tripos, Inc. (the "Company") delivers science, tools and
analysis services that advance customers' creativity and
productivity in pharmaceutical, agrochemical, biotechnology and
related research industries worldwide. The Company is also a value-
added reseller of third party hardware products required to operate
its software products. A substantial portion of the Company's
business is conducted with pharmaceutical companies, however, the
Company is not economically dependent on any customer on an ongoing
basis.
(b) Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
normal recurring adjustments necessary for a fair presentation of
such financial statements have been included. Operating results
for the three and nine month periods ended September 30, 1997 are
not necessarily indicative of the results that may be expected for
the year ended December 31, 1997.
In March 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share" (SFAS No. 128). SFAS No.
128 applies to entities with publicly held common stock or
potential common stock and is effective for financial statements
issued for periods ending after December 15, 1997. Under SFAS No.
128 the presentation of primary earnings per share is replaced with
a presentation of basic earnings per share. SFAS No. 128 requires
dual presentation of basic and diluted earnings per share for
entities with complex capital structures. Basic earnings per share
includes no dilution and is computed by dividing net income
available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities that could
share in the earnings of the entity, similar to fully diluted
earnings per share. Management has not yet computed the impact of
SFAS No. 128 on the Company's financial statements.
(2) Income taxes
The provision for income taxes is computed using the liability
method. The difference between financial statement and taxable
income results primarily from the use of different methods of
computing capitalized development costs, accrued vacation and
customer deposits.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
The Company's quarterly operating results can vary
significantly depending upon such factors as the capital
expenditure budgets of its customers, lengthy sales cycles, market
acceptance of new products and enhanced versions of existing
products, the timing of new product introductions by the Company,
partners and other vendors, changes in pricing policies by the
Company and other vendors, and changes in general economic and
competitive conditions. In addition, a substantial portion of the
Company's revenues for each quarter is attributable to a limited
number of orders and tends to be realized towards the end of each
quarter. Thus, even short delays or deferrals of sales near the
end of a quarter can cause quarterly results to fluctuate
substantially. The Company typically experiences greater gross
margins on software licenses, consulting, and compound sales than
on sales of hardware. The Company's profitability depends in part
on the mix of its revenue components and not necessarily on total
revenues.
Except for the historical information and statements contained in
Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A"), the matters and items contained in
this document, including MD&A, contain certain forward-looking
statements that involve uncertainties and risks. The Company's
future results could differ materially from those discussed in this
document. Factors that could cause a contribution to such
differences, include, but are not limited to, those presented in
the Company's Form 10-K for the year ended December 31, 1996.
Results of Operations
Net sales for the third quarter of 1997 were $9.0 million
compared with $7.6 million for the third quarter of 1996. The
overall increase in net sales for the quarter was attributed to
significant increases in the software (support, licensing and
consulting) and hardware lines. Net sales for the first nine
months of 1997 were $22.1 million compared to $19.2 million for the
same period in 1996. Sales increases were achieved in all areas,
software licenses, support, hardware and accelerated discovery
services, for the nine month period.
For the three months ended September 30, 1997, software
licenses sales increased 34.0% to $3.0 million. The increase is
due to several wide-area network sales and an upfront license fee
on a custom software contract. For the first nine months of 1997,
software license sales increased 7.1% to $6.9 million compared to
the same period for 1996. Support revenues for the third quarter
of 1997 increased 5.8% to $1.8 million from the same period in
1996. Support sales increased 8.3% to $5.3 million for the nine
month period ending September 30, 1997. Accelerated discovery
services sales, primarily diverse compound libraries, amounted to
$2.5 million in the third quarter of 1997 and $6.3 million for the
nine months year-to-date compared to $3.1 and $5.0 million for the
three and nine month periods, respectively, in 1996. Hardware
sales increased by 253.5% to $1.7 million for the third quarter
1997. Several large orders accounted for the increase in hardware
sales for the current quarter. For the first nine months of 1997,
hardware sales increased 28.5% to $3.6 million compared to 1996.
Sales to existing customers represent 88.2% of total revenues for
the nine month period. For the same period, sales of new products
represent 10.8% of software license and accelerated discovery
service sales.
Net sales for the Company's activities outside North America
represented approximately 38.6% for the first nine months of 1997
compared to 50.7% for the same period in 1996. Net sales in Europe
decreased 17.0% for the first nine months of 1997 compared to 1996
and accounted for 28.6% and 39.8% of net sales for the nine month
periods in 1997 and 1996, respectively. Net sales in the Pacific
Rim, principally Japan and South Korea, increased 6.2% compared to
the first nine months of 1996 and accounted for 10.0% and 10.9% of
net sales for the respective periods.
Cost of sales for the quarter ending September 30, 1997
increased 32.7% to $3.1 million and increased 20.5% to $7.8 million
for the nine month period in 1997. These increases were due to the
increased sales of lower margin hardware sales. Cost of sales as a
percent of net sales was 34.6% and 35.3% for the three and nine
month periods in 1997, and 31.0% and 33.8% for the three and nine
month periods in 1996, respectively.
Gross profit margin percentage for the third quarter of 1997
declined to 65.4% from 69.0% in 1996. For the first nine months of
1997, gross margin percentage decreased to 64.7% from 66.2% for the
same period in 1996. The decrease is attributable to a change in
the sales mix in that lower margin revenue sources, specifically
hardware and chemical compound sales, represent a higher percentage
of total net sales in 1997 compared to 1996.
Sales and marketing expenses decreased 1.8% to $2.7 million
for the three month period in 1997 and 4.7% to $7.4 million for the
nine months period. Sales and marketing expenses as a percentage
of net sales were 30.0% and 33.3% for the three and nine month
periods in 1997 as compared to 36.3% and 40.4% for the same periods
in 1996. The decrease in the percent to sales, for the three and
nine month periods of 1997, is a function of increased sales along
with the reclassification of certain expenses to General and
Administrative that were considered Sales and Marketing in 1996.
Research and development costs, including the costs that were
capitalized, were $2.0 million and $1.7 million for the three month
periods in 1997 and 1996, $5.7 million and $5.3 million for the
nine month periods, respectively and represented 22.7%, 22.5%,
25.7% and 27.7% of net sales. Research and development expenses,
net of capitalized development costs, represented 12.5% and 11.3%
of net sales for the three month periods in 1997 and 1996, and
14.1% and 12.9% of net sales for the nine month periods ending
September 30, 1997 and 1996, respectively. The Company anticipates
that its investments in new product research will remain at
comparable levels as Tripos continues development in web-based
tools, desktop, diverse compound libraries and combinatorial
chemistry markets.
General and administrative expenses increased to $0.9 million
for the third quarter of 1997 compared to $0.7 million in 1996, and
represent 9.8% and 9.6% of net sales for the respective periods.
For the nine month period, G & A expenses were $2.0 million and
$1.5 million in 1997 and 1996, respectively. G&A year-to-date
percent to net sales was 9.1% in 1997 and 7.7% in 1996. The
increase in G&A for the third quarter versus 1996 is a result of
the reclassification of certain expenses that were considered Sales
and Marketing expenses in 1996 and an increase in the reserve for
bad debt.
Other income increased from of $47,000 for the third quarter
in 1996 to $164,000 for the comparable period in 1997. For the
first nine months of 1997, other income was $430,000 compared to
$174,000 in 1996. This change was due to an increase in foreign
currency translation gains and increase in interest income on
investments.
Income tax expense was $856,000 for the nine month period in
1997 which represents an effective tax rate of 38% compared to
$302,000 and 26% for the same period in 1996. The rates reflect
the change in valuation of the Company's prior losses, including
foreign subsidiary losses. The Company's effective tax rate for
the nine months ended September 30, 1997 reflects an increase to
approximate the expected effective tax rate for the year ending
December 31, 1997.
Liquidity, Capital Resources and Capital Commitments
For the nine month period ending September 30, 1997, net cash
provided by operations was $3.2 million as a result of net income
of $1.4 million, depreciation and amortization of $2.7 million and
an increase in deferred revenue of $0.8 million offset by an
increase in accounts and notes receivable of $1.4 million and other
assets of $0.3 million. Amortization of $1.8 million is
attributable to the cost of manufacturing the compound library.
For the same period in 1996, net cash provided by operations was
$3.4 million as a result of a increase in working capital of $0.5
million and increases in net income, depreciation, and amortization
of $0.9 million, $0.5 million, and $2.2 million, respectively.
Investments of $0.6 million in property and equipment and $2.6
million in capitalized development costs were partially offset by a
reduction of $1.0 million in marketable securities, resulting in a
use of cash of approximately $2.5 million in the first three
quarters of 1997.
The Company believes that current working capital of $9.5
million, together with continued cashflow from operations, will be
adequate to fund short-term liquidity requirements including
investments in research and development, capital purchases and any
other commitments in the upcoming year. The Company may seek to
obtain additional financing at any time in connection with the
Company's product development efforts and its efforts to penetrate
existing and new markets for its products, depending upon the
associated working capital requirements.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any material litigation
and is not aware of any threatened material litigation.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
27 Financial Data Schedule
(b) No reports on Form 8-K were required to be filed
during the period from June 30, 1997 to September
30, 1997.
TRIPOS, INC.
SIGNATURES
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 hereunto duly authorized.
TRIPOS, INC.
Date: November 6, 1997 John P. McAlister /s/
John P. McAlister
President and
Chief Executive Officer
Date: November 6, 1997 Colleen A. Martin /s/
Colleen A. Martin
Chief Financial Officer, Secretary
Exhibit Index
Exhibit No. Description
27 Financial Data Schedule
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