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 June 30, 1998
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 June 30, 1998: 3,214,401 shares.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION, Item 1. Financial Page
Statements (Unaudited)
Consolidated Balance Sheets at
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations
for Three Months Ended June 30, 1998 and June 30, 1997
and Six Months Ended June 30, 1998 and June 30, 1997 4
Consolidated Statements of Cash Flows for Six Months
Ended June 30, 1998 and June 30, 1997 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 8
PART II OTHER INFORMATION 12
SIGNATURES 14
EXHIBITS - Exhibit 10.13, Settlement Agreement
- Exhibit 27, Financial Data Schedule
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
June 30, Dec 31,
1998 1997
ASSETS
Current Assets:
Cash and cash equivalents $ 6,080 $ 5,277
Investments 1,146 1,647
Accounts receivable 7,598 10,247
Inventory 1,539 415
Prepaid expenses 872 520
Deferred income taxes 145 137
Total current assets $ 17,380 $ 18,243
Notes receivable-trade 2,218 1,703
Notes receivable-other 827 791
Property and equipment, less
accumulated depreciation 6,844 5,995
Capitalized development costs, net 1,294 3,412
Goodwill, net of amortization 1,167 1,171
Other, net 1,259 1,295
Total assets $ 30,989 $ 32,610
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,087 $ 1,390
Current portion of long-term debt 270 178
Accrued expenses 826 3,216
Deferred revenue 5,863 4,695
Total current liabilities $ 8,046 $ 9,479
Long-term debt 3,460 3,367
Deferred income taxes 599 855
Shareholders' equity:
Common stock 32 32
Additional paid-in capital 17,642 17,343
Accumulated earnings 938 1,198
Accumulated other
comprehensive income 272 336
Total shareholders' equity 18,884 18,909
Total liabilities and
shareholders' equity $ 30,989 $ 32,610
See accompanying notes.
Item 1. Financial Statements (continued)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
Net sales:
Software licenses $ 2,262 $ 1,853 $ 4,248 $ 3,921
Support 1,929 1,783 3,823 3,529
Accelerated discovery
services 514 1,448 1,704 3,795
Hardware 824 1,267 1,938 1,898
Total net sales 5,529 6,351 11,713 13,143
Operating costs and expenses:
Cost of sales 980 2,375 3,148 4,699
Sales and marketing 2,434 2,114 4,768 4,610
Research and development 1,445 856 2,797 1,751
General and administrative 991 491 1,862 1,452
Total costs and expenses 5,850 5,836 12,575 12,512
Income from operations (321) 515 (862) 631
Other income, net 386 112 455 266
Income before income taxes 65 627 (407) 897
Income tax expense 24 240 (146) 342
Net income $ 41 $ 387 $ (261) $ 555
Basic earnings (loss)
per share $ 0.01 $ 0.13 $ (0.08) $ 0.18
Diluted earnings (loss)
per share $ 0.01 $ 0.11 $ (0.08) $ 0.16
Diluted weighted average
number of shares 3,510 3,466 3,185 3,474
See accompanying notes.
Item 1. Financial Statements (continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended
June 30, June 30,
1998 1997
Operating activities:
Net income (loss) $ (261) $ 555
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation of property and equipment 335 318
Amortization of capitalized development
costs and goodwill 2,189 1,461
Deferred income taxes (264) 169
Change in operating assets and liabilities:
Accounts receivable 2,603 2,816
Notes receivable-trade (510) (1,674)
Prepaid expenses and other assets (1,300) 79
Accounts payable and accrued expenses (2,939) (1,461)
Deferred revenue 1,178 806
Net cash provided by operating activities 1,031 3,069
Investing activities:
Net purchases, sales, and
maturities of investments 501 221
Notes receivable-other (36) 0
Purchases of property and equipment (1,096) (431)
Capitalized development costs (2) (1,758)
Other (34) (293)
Net cash (used in) investing activities (667) (2,261)
Financing activities:
Proceeds from stock issuance
pursuant to stock plans 300 449
Net issuance of long-term debt 146 0
Net cash provided by financing activities 446 449
Effect of foreign exchange rate changes
on cash and cash equivalents (7) (231)
Net increase in cash and cash equivalents 803 1,026
Cash and cash equivalents at
beginning of period 5,277 5,393
Cash and cash equivalents at
end of periods $ 6,080 $ 6,419
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 six-month periods ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the
year ended December 31, 1998.
(2) Income taxes
The provision for income taxes is computed using the liability
method. The primary 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.
(3) Recent Pronouncements
As of January 1, 1998, the Company adopted AICPA SOP 97-2,
"Software Revenue Recognition", which was effective for
transactions that the Company entered into in 1998. Prior years
were not restated.
For annual financial reporting beginning January 1, 1998 and
for interim reporting for years beginning January 1, 1999, the
Company will adopt the FASB's Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related
Information" ("FAS 131"). FAS 131 superseded FASB Statement No.
14, "Financial Reporting of Segments of a Business Enterprise".
FAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports. FAS 131 also establishes standards for related
disclosures about products and services, geographic areas, and
major customers. The adoption of FAS 131 will not affect results
of operations or financial position, but will require additional
enterprise-wide disclosures.
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("FAS 133"), which is required to be adopted in
years beginning after June 15, 1999. FAS 133 permits early
adoption as of the beginning of any fiscal quarter after its
issuance. The Company expects to adopt the new Statement effective
January 1, 2000. FAS 133 will require the Company to recognize all
derivatives on the balance sheet at fair value. The Company has
not yet determined what the effect FAS 133 will be on the earnings
and financial position of the Company.
(4) Comprehensive Income
As of January 1, 1998, the Company adopted Statement 130,
"Reporting Comprehensive Income". Statement 130 establishes new
rules for the reporting and display of comprehensive income and its
components, however, the adoption of this Statement had no impact
on the Company's net income or shareholders' equity. Statement 130
requires foreign currency translation adjustments, which prior to
adoption were reported separately in shareholders' equity to be
included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of
Statement 130.
The components of comprehensive income, net of related tax,
for the three- and six-month periods ended June 30, 1998 and 1997
are as follows:
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
Net income (loss) $ 41 $ 387 $(261) $ 555
Foreign currency
translation adjustments (144) 11 (64) (158)
Comprehensive income (loss) $ (103) $ 398 $(325) $ 397
The components of accumulated other comprehensive income, net
of related tax, at June 30, 1998 and December 31, 1997 are as
follows:
1998 1997
Foreign currency translation adjustments $ 272 $ 336
Accumulated other comprehensive income $ 272 $ 336
(5) Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share for the quarters ended June 30, 1998
and 1997.
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
Numerator:
Numerator for basic and
diluted earnings (loss)
per share $ 41 $ 387 $ (261) $ 555
Denominator:
Denominator for basic
earnings (loss) per share-
weighted average shares 3,193 3,068 3,185 3,049
Effect of dilutive securities:
Employee stock options 317 398 0 425
Denominator for diluted
earnings (loss) per share-
adjusted weighted average
shares and assumed conversions 3,510 3,466 3,185 3,474
Basic earnings (loss) per share $ 0.01 $ 0.13 $(0.08) $ 0.18
Diluted earnings (loss) per share $ 0.01 $ 0.11 $(0.08) $ 0.16
The diluted per share denominator for the six-month period ended
June 30, 1998 excludes incremental shares of 302 related to
employee stock options because of their anti-dilutive effect as a
result of the Company's net loss for the period.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Tripos, Inc. is a leader in providing discovery services,
informatics and products for compound research to life science
organizations worldwide.
The Company's quarterly operating results can vary sig-
nificantly depending upon such factors as the capital expenditure
budgets of its customers, lengthy sales cycles, customer selection
of compounds from our chemical compound library, market acceptance
of new products and enhanced versions of existing products, the
timing of new product introductions by the Company 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 are 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.
The Company provides software licenses that are activated and
remain active based on the date and time of the computer where the
software resides. The Company relies on the hardware suppliers to
address any and all Year 2000 issues and provide letters of
compliance to the Company. The total cost that the Company
estimates will be spent to remediate its Year 2000 issues will not
be material and should not affect future financial results of
operations, liquidity or capital resources. At this time, the
Company fully expects to be Year 2000 compliant, however, it will
remain dependent on its hardware suppliers to make Year 2000
compliant equipment available to its customers.
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 above
and in the Company's Form 10-K for the year ended December 31,
1997.
Results of Operations
Net sales for the second quarter of 1998 were $5.5 million
compared with $6.4 million for the second quarter of 1997. The
overall decrease in net sales for the quarter was attributed to
decreases in accelerated discovery services and hardware sales
being partially offset by increases in software license and
software support sales. Net sales for the first six months of 1998
were $11.7 million compared to $13.1 million for the same period in
1997. Increases were achieved in software licenses, software
support and hardware while sales of accelerated discovery services
decreased in the six- month period.
For the three months ended June 30, 1998, software license
sales increased 22.1% to $2.3 million. For the first six months of
1998, software license sales increased 8.3% to $4.2 million
compared to the same period for 1997. The increases are due to
strong U.S. software license business and the addition of worldwide
software consulting revenues. Support revenues for the second
quarter of 1998 increased 8.2% from the same period in 1997.
Support sales increased 8.3% to $3.8 million for the six-month
period ending June 30, 1998. Support revenue increased due to a
larger installed base of customers from software license sales in
recent years. Accelerated discovery services ("ADS") sales
decreased 64.5% to $0.5 million in the second quarter of 1998 and
55.1% to $1.7 million for the six-months year-to-date. The
decrease in ADS revenue is due to production issues discussed
below. Hardware sales decreased by 35.0% to $0.8 million for the
second quarter 1998 in comparison to the same period in 1997. For
the first six months of 1998, hardware sales increased 2.1% to $1.9
million compared to 1997. The decrease from the prior year for the
quarter is due to a large hardware order in the prior year period.
Sales to existing customers represent 80.5% of total revenues for
the six-month period.
In 1997, in response to a market demand for highly purified
compounds, Tripos and MDS Panlabs invested in state-of-the-art
equipment for the further analysis and purification of the
Optiverse compound library. The companies experienced delays in
the purification process which resulted in a shortage of enhanced
Optiverse compounds available for sale for the three- and six-month
periods ending June 30, 1998. In the second quarter of 1998,
Tripos introduced its new LeadQuestT library of compounds.
LeadQuest will include compounds from other third-party suppliers
that meet the Company's quality and diversity thresholds as well as
newly designed compounds manufactured at Tripos Receptor Research.
The Company has also experienced delays, estimated to be three
months, in the design and construction of its new physical
laboratory facilities in England. The timing of the availability
of LeadQuest compounds and the enhanced Optiverse compounds may
have a material impact on revenues and earnings for 1998.
On March 30, 1998, the Company restructured its agreement with MDS
Panlabs to co-develop and market the OptiverseT library of chemical
compounds. Under the terms of the new agreement, MDS Panlabs would
begin to market the Optiverse library. After June 30, 1998, MDS
Panlabs assumes sole marketing and distribution rights to the
Optiverse compounds. As a result of this shift in their
relationship, MDS Panlabs agreed to make fixed payments to Tripos
and royalties on future sales of Optiverse. Tripos has recognized
revenues for its sales of Optiverse compounds up to June 30th and
will recognize royalties from future sales of Optiverse by MDS
Panlabs in the periods in which they occur. For the three- and six-
month periods ending June 30, 1998, Tripos has accounted for the
payments from MDS Panlabs through a reduction of Cost of Sales for
royalty amounts previously payable to MDS Panlabs that have been
waived and through Other Income for the first of six fixed payments
for the rights to the Optiverse library. The parties will continue
to collaborate on research contracts involving compound designs
from Tripos and synthesis at MDS Panlabs.
Net sales for the Company's activities outside North America
represented approximately 44.6% for the first six months of 1998
compared to 46.1% for the same period in 1997. Net sales in Europe
decreased 1.3% for the first six months of 1998 compared to 1997
and accounted for 36.0% and 32.5% of net sales for the six month
periods in 1998 and 1997, respectively. European sales increased
15.8% for the second quarter of 1998 compared to 1997 and accounted
for 42.6% of net sales, up from 32.0% in the same period of 1997.
Net sales in the Pacific Rim, principally Japan, decreased 43.6% in
1998 compared to the first six months of 1997 and accounted for
8.6% and 13.7% of net sales for the respective periods. For the
second quarter, sales in the Pacific Rim declined 51.4% from the
prior year and represented 8.4% and 15.1% of net sales in 1998 and
1997, respectively. The difficult business climate in Asia is
primarily responsible for the decline in period sales for the
region, however, the Company's customer base in the Pacific Rim
remains strong.
Cost of sales for the quarter ending June 30, 1998 decreased
58.7% to $1.0 million and decreased 33.0% to $3.1 million for the
six-month period in 1998. The decrease in the second quarter was
due to the lower hardware and ADS compound sales along with certain
recoveries of costs related to the restructuring of the agreement
with MDS/Panlabs. The decrease in year-to-date cost of sales for
1998 compared to 1997 relates to the lower compound sales and
recoveries mentioned above. Cost of sales as a percent of net
sales was 17.7% and 26.9% for the three- and six-month periods in
1998, and 37.4% and 35.8% for the three- and six-month periods in
1997, respectively.
Gross profit margin percentage for the second quarter of 1998
increased to 82.3% from 62.6% in 1997. For the first six months of
1998, gross margin percentage was increased to 73.1% compared to
64.2% for the same period in 1997. The increase for the quarter is
attributable to the restructuring recoveries and to a change in the
sales mix in that lower margin revenue sources, specifically
hardware and chemical compound sales, represented a lower
percentage of total net sales in 1998 compared to 1997.
Sales and marketing expenses increased 15.1% to $2.4 million
for the three-month period in 1998 and 3.4% to $4.8 million for the
six-month period ending June 30, 1998. Sales and marketing
expenses as a percentage of net sales were 44.0% and 40.7% for the
three- and six-month periods in 1998 as compared to 33.3% and 35.1%
for the same periods in 1997. The increases in the percentage of
net sales for the three- and six-month periods of 1998 are primarily
due to the hiring of staff for previously open positions and the
decreases in sales for the periods.
Research and development costs, including the costs that were
capitalized, were $1.4 million and $1.7 million for the three-month
periods in 1998 and 1997, $2.8 million and $3.7 million for the six-
month periods, respectively and represented 26.1%, 26.2%, 23.9% and
27.6% of net sales. These decreases reflect a change in the
treatment of compound related costs after the restructuring of the
agreement with MDS/Panlabs. Due to the specifics of the
relationship with MDS/Panlabs, compound costs were capitalized and
amortized. However, compounds produced by the Company are now
reflected in inventory on a unit cost basis. The Company
anticipates that its overall spending for new product research will
remain relatively constant as a percentage of net sales as it
continues to invest in the software, consulting, diverse compound
libraries and contract research markets. Research and development
expenses, net of capitalized development costs, represented 26.1%
and 13.5% of net sales for the three-month periods in 1998 and
1997, and 23.9% and 13.3% of net sales for the six-month periods
ending June 30, 1998 and 1997, respectively. These increases
reflect the Company's investment in sponsoring drug discovery
research with the Cruciform Group at the University College of
London and at Arena Pharmaceuticals, Inc.
General and administrative expenses increased to $1.0
million for the second quarter of 1998 compared to $0.5 million in
1997, and represent 17.9% and 7.7% of net sales for the respective
periods. For the six-month period, G & A expenses were $1.9
million and $1.5 million in 1998 and 1997, respectively, and
represent 15.9% and 11.0% of net sales in the six-month periods.
The increases in G&A expense for 1998 relate to the addition of
expenses related to Tripos Receptor Research Ltd.
Other income increased from income of $112,000 for the second
quarter in 1997 to income of $386,000 for the comparable period in
1998. For the first six months of 1998, other income was $455,000
compared to income of $266,000 in 1997. This change was due to the
addition of interest expense from the financing of the Company's
headquarters acquisition which was offset by net rental revenues
from the building's tenants and receipt of the first of six fixed
payments for the rights to the Optiverse library from MDS/Panlabs.
Income tax (benefit) was $(146,000) for the six-month period
in 1998 which represents an effective tax rate of 36% compared to
tax expense of $342,000 and 38% for the same period in 1997. The
Company's effective tax rate for the six months ended June 30, 1998
reflects a decrease to approximate the expected effective tax rate
for the year ending December 31, 1998.
Liquidity, Capital Resources and Capital Commitments
For the six-month period ending June 30, 1998, net cash
provided by operations was $1.0 million as a result of decreases in
accounts receivable of $2.6 million, accounts payable of $2.9
million and a net loss of $0.3 million along with increases in
depreciation, amortization, notes receivable, deferred revenue,
prepaid expenses and inventory of $0.3 million, $2.2 million, $0.5
million, $1.1 million and $1.3 million, respectively. $1.5 million
of amortization is attributable to the costs of manufacturing the
OptiverseTM compound library. Increased trade notes receivable of
$0.5 million represent the long-term portion of revenue generated
from the Company's sales of extended access contracts to its
software technologies. For the same period in 1997, net cash
provided by operations was $3.1 million as a result of decreases in
accounts receivable of $2.8 million and accounts payable of $1.5
million along with increases in net income, depreciation,
amortization, notes receivable and deferred revenue of $0.6
million, $0.3 million, $1.5 million, $1.7 million and $0.8 million,
respectively.
Investments of $1.1 million in property and equipment,
primarily at Tripos Receptor Research, were partially offset by a
decrease in marketable securities of $0.5 million resulting in cash
used in investing activities of approximately $0.7 million in the
first six months of 1998. Capitalized development costs were
negligible for the first six months of 1998 as the Company now
expenses software development as incurred due to the shorter amount
of time required to bring new products to market and uses the
inventory accounting method for the new LeadQuestTM library of
compounds. In the prior year, costs of designing and producing the
OptiverseTM compounds were capitalized along with software
development.
The Company believes that current working capital of $9.3
million, together with continued cash from operations and the
Company's access to lines of credit, will be adequate to fund short-
term liquidity requirements including investments in research and
development, capital purchases to expand the facilities of its
subsidiary, Tripos Receptor Research Ltd., and any other
commitments in the upcoming year.
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
Three matters were submitted to a vote of the shareholders
of the Company at its Annual Meeting of Shareholders on May
7, 1998:
(a) The following directors were elected to serve for the
ensuing year or until the earlier of death, resignation or
removal. Votes cast were as follows:
Votes Votes
"For" "Withhold Authority"
Ralph S. Lobdell 2,459,766 208,509
Alfred Alberts 2,459,566 208,709
Stewart Carrell 2,459,766 208,509
John P. McAlister 2,459,766 208,509
Gary Meredith 2,458,603 209,672
Ferid Murad 2,459,766 208,509
(b) To amend the 1994 Stock Option plan to increase the number
of shares reserved thereunder from 1,100,000 to 1,280,000. The
voting results approving this matter were: "For" 1,073,481,
"Against" 448,795, and "Abstain" 18,303.
(c) To amend the 1994 Employee Stock Purchase Plan to increase
the number of shares reserved thereunder from 150,000 to 350,000.
The matter was approved by the shareholders by the following
tally of votes: "For" 784,483, "Against" 735,174, and "Abstain"
20,922.
Item 5. Other Information
Under Section 2.13 of Article II of the Company's
Bylaws, any shareholder proposal submitted with respect to
Tripos, Inc.'s 1999 Annual Meeting of Shareholders, which
proposal is submitted outside the requirements of Rule 14a-8
under the Securities Exchange Act of 1934, will be
considered untimely if notice thereof is received by the
Company before February 6, 1999 or after March 8, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
10.13 Settlement Agreement between Tripos,
Inc. and Panlabs, Inc.
27 Financial Data Schedule
(b) No reports on Form 8-K were required to be filed
during the period from March 31, 1998 to June 30, 1998.
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: August 5, 1998 /s/ John P. McAlister
John P. McAlister
President and
Chief Executive Officer
Date: August 5, 1998 /s/ Colleen A. Martin
Colleen A. Martin
Chief Financial Officer, Secretary
Exhibit 10.13
SETTLEMENT AGREEMENT
THIS SETTLEMENT AGREEMENT ("Agreement") is made as of March
30, 1998, (the "Effective Date") by and between (i) PANLABS
INCORPORATED, a Washington corporation with its principal place
of business at 11804 North Creek Parkway South, Bothell,
Washington 98011-8805 ("Panlabs"), and (ii) TRIPOS, INC., a Utah
corporation with its principal place of business at 1699 South
Hanley Road, Suite 303, St. Louis, Missouri 63144 ("Tripos"),
who, intending to be legally bound, hereby agree as follows:
1. INTRODUCTION
1.1 The parties entered into that certain Strategic
Alliance Business Teaming Agreement, including Project
Description #1 thereunder, dated June 30, 1995 (the "Teaming
Agreement").
1.2 Certain controversies have arisen between the parties
concerning their respective rights and obligations under the
Teaming Agreement.
1.3 The parties now wish to resolve the controversies between
them in accordance with the terms of this Settlement Agreement.
2. TEAMING AGREEMENT TERMINATION
2.1 Effect of Termination. The parties acknowledge and agree
that the Teaming Agreement has been terminated in its entirety as
of the Effective Date hereof. The parties further acknowledge
and agree that, notwithstanding the provisions of Section 8.1 of
the Teaming Agreement, no provision of the Teaming Agreement,
including without limitation any provision of Project Description
#1, shall survive such termination. All rights and obligations
of the parties to one another in connection with the Teaming
Agreement shall be exclusively as set forth in this Agreement.
2.2 Settlement of Customer Claims. Each party ("Indemnitor")
will indemnify the other party ("Indemnitee") and hold it
harmless from and against all claims, damages, losses and
expenses, including court costs and reasonable fees and expenses
of attorneys, expert witnesses and other professionals, arising
out of or resulting from, and will defend the other party
against:
(a) any action by a third party that is based on any claim
that any services performed by the Indemnitor or under the
Teaming Agreement, or their results, infringe a patent, copyright
or other proprietary right or violate a trade secret of such
third party; provided, however, that for purposes of a patent
infringement claim, unless such claim rests definitely and solely
on the technology of, or the services performed by, one of the
parties or the party who owned any infringing technology or
performed any infringing services knew that the same was
infringing at the time of use or performance, the Indemnitor and
the Indemnitee shall be jointly responsible for the defense of
the claim and shall bear all resulting liability in proportion to
the respective revenues realized by them from the transaction in
connection with which the claim arose; and
(b) any action by a third party that is based on
(i)any unauthorized warranty given by the Indemnitor
for services performed under the Teaming Agreement,
or
(ii) the results of any services performed by the
Indemnitor under the Teaming Agreement, including
any action based on a claim that Optiverse
materials fail to meet quality requirements, or
(iii) any failure by the Indemnitor to provide
services under the Teaming Agreement, or the
results of such services, in accordance with a
contract entered into between the Indemnitor and/or
the Indemnitee and such third party.
The indemnification obligations set forth in this Section 2.2 are
conditioned on (i) the Indemnitor being notified promptly in
writing of any indemnifiable claim and all prior claims relating
to such action and being given all available relevant information
and reasonable assistance in connection with defense and
settlement efforts, and (ii) the Indemnitor having sole control
of the defense and settlement efforts for such claim, other than
for patent matters as set forth in Section 2.2(a).
2.3 Final Accounting. The parties acknowledge that they
are in agreement regarding (a) the number of shipments and
quantity of Optiverse Materials shipped between November 1, 1997
and the Effective Date, (b) the allocation of revenues
attributable to the Optiverse Materials which have been collected
between November 1, 1997 and the Effective Date, (c) other
accounting issues, and (d) existing inventories, as of the
Effective Date, of Optiverse Materials and raw materials obtained
for purposes of synthesizing Optiverse Materials. A detailed
listing of all items and calculation of the net credit to which
the parties agree pursuant to this Section 2.3 is attached hereto
as Schedule A.
3. OWNERSHIP RIGHTS in VENTURE PROPERTY
3.1 Joint Ownership. The following property created by
either party individually, or by the parties jointly, in
performance of the parties' obligations under the Teaming
Agreement (the "Venture Property") shall be jointly owned by the
parties until Tripos has realized the Agreed Amount in accordance
with Article 5 below, and until such time, the payment and credit
obligations set forth in said Article 5 shall apply in connection
with any sale or other disposition of any Venture Property:
(a) all diverse library compound designs which have been
synthesized and identified by Panlabs, whether in the possession
of Tripos or Panlabs;
(b) all existing inventory of Optiverse Materials, whether
in the possession of Tripos or Panlabs;
(c) the Optiverse library database; and
(d) all biological data that was developed for purposes of
marketing Optiverse Materials, the expenses for development of
which were reimbursed out of revenues from transactions
concerning Optiverse Materials.
3.2 Transfer to Panlabs. On the date on which Tripos has
realized the Agreed Amount, Tripos shall transfer all of its
rights, title and interest in any then-remaining Venture
Property, and shall execute any documents reasonably requested by
Panlabs to evidence such transfer. After such date, Panlabs
shall have the exclusive right to sell the Optiverse Materials
worldwide without further royalty obligation to Tripos.
3.3 Conditional Tripos Marketing Rights. In the event that
Panlabs reports no revenues from Optiverse Materials during, and
makes no payment to Tripos in accordance with Section 5.3 for,
any two consecutive calendar quarters prior to the expiration of
Phase 2 as identified in Section 4.2 below, Tripos shall
thereupon have the exclusive right to market the remaining
Optiverse Materials worldwide and shall credit twenty-five
percent (25%) of all revenues received therefrom by Tripos
against the Agreed Amount in accordance with Section 5.4.
3.4 The OPTIVERSE Trademark. During Phase 1 as identified
in Section 4.1 below, each party shall be entitled to use the
OPTIVERSE trademark solely in connection with, and solely for the
purpose of, identifying and marketing the Optiverse Materials.
Upon the expiration of Phase 1, Tripos shall transfer and assign
to Panlabs (via written assignment upon Panlabs "request") all
right, title and interest in and to the OPTIVERSE trademark and
associated goodwill, after which assignment Tripos shall have no
further right to use the OPTIVERSE trademark in any form, except
as allowed under this Section. Said assignment shall be
predicated upon Panlabs' agreement that it shall not use or
attempt to register the OPTIVERSE mark for any purpose or product
other than the identification and marketing of the OPTIVERSE
Materials, as defined in this Agreement. Following assignment
from Tripos, Panlabs shall have the right to pursue registration
and enforcement of the mark in connection with the OPTIVERSE
Materials, and Tripos shall cooperate in the execution of any
documents necessary to enable Panlabs to pursue such
registration. Panlabs shall also have the right to license the
use and/or transfer ownership of the mark to third parties,
provided that such third-party licensees shall be bound by the
same restrictions of use of the mark as bind Panlabs under this
Section. In the event that the exclusive marketing rights to the
OPTIVERSE Materials shall revert to Tripos by operation of
Section 3.3 of this Agreement, Panlabs shall assign back to
Tripos all right, title and interest in and to the mark and
associated goodwill, including any trademark filings initiated by
Panlabs.
4. DISPOSITION OF OPTIVERSE MATERIALS
The Optiverse Materials shall be disposed of in three phases
as follows:
4.1 Phase 1. During the period beginning on the Effective
Date and expiring on June 30, 1998, which period shall be known
as "Phase 1", each party may market the Optiverse Materials
worldwide, subject to the payment and credit obligations set
forth in Sections 5.3 and 5.4.
4.2 Phase 2. During the period beginning on July 1, 1998
and expiring on the date on which Tripos has realized the Agreed
Amount in accordance with Article 5 below, which period shall be
known as "Phase 2", Panlabs shall have the exclusive right
(except as otherwise provided in Section 3.3 and as may be
mutually agreed by the parties in connection with their
cooperative pursuit of any joint research contracts) to market
the Optiverse Materials worldwide, subject to the payment
obligations set forth in Article 5. The terms and conditions,
including revenue allocations, which are applicable to any
mutually agreed upon joint research contracts shall be separately
specified in writing for each such contract.
4.3 Phase 3. During the period after the transfer by
Tripos to Panlabs of all of Tripos' rights, title and interest in
any then-remaining Optiverse Materials, Panlabs shall have the
exclusive right to market the Optiverse Materials worldwide and
Tripos shall have no rights hereunder to market any Optiverse
Materials.
4.4. Use by the Parties. Prior to Phase 3, neither
party shall use any Optiverse Materials without paying its share
of the standard charge, except that Panlabs may transport,
process, repackage and otherwise prepare or enhance OPTIVERSE
Materials for third-party sale. In addition, Panlabs shall be
permitted to utilize jointly owned diverse library compound
designs without charge for the purpose of manufacturing
additional quantities of OPTIVERSE Materials as needed for
product line maintenance. For use of Optiverse Materials by
Tripos, payment of its share of the standard charge shall mean
crediting to Panlabs in accordance with Section 5.4 an amount
equal to the amount which would have been credited to Panlabs
thereunder if Tripos had marketed the same Optiverse Materials to
a third party. For use of Optiverse Materials by Panlabs,
payment of its share of the standard charge shall mean payment to
Tripos in accordance with Section 5.4 of an amount equal to the
amount which would have been payable to Tripos thereunder if
Panlabs had marketed the Optiverse Materials to a third party.
5. PAYMENTS AND CREDITS
Regardless of any amounts paid pursuant to Section 2.3 of
this Agreement, Panlabs hereby agrees to pay Tripos up to XXXX
Dollars ($XXXX) (XXXX Dollars being the "Agreed Amount" for
purposes of this Agreement) as consideration for Tripos' transfer
to Panlabs, in accordance with Section 3.2, of all of Tripos'
rights, title and interest in any remaining Venture Property as
of the expiration of Phase 2, as follows:
5.1 Initial Payment. Upon execution of this Agreement,
Panlabs shall authorize the release to Tripos of all funds in the
escrow account established by Tripos to receive and hold Panlabs'
share of the proceeds derived from marketing the Optiverse
Materials to (customer name) and the (customer name) and
shall take all steps which may be necessary to enable Tripos to
receive such funds and shall further authorize Tripos to retain
all such proceeds which Tripos may subsequently collect. Such
funds shall be non-refundable by Tripos, and Tripos shall credit
XXXX Dollars ($XXXX), as and to the extent that Tripos collects
applicable proceeds, against the Agreed Amount.
5.2 Subsequent Lump-Sum Payments. Panlabs shall remit to
Tripos an aggregate amount of XXXX Dollars ($XXXX) in six (6)
equal installments of XXXX Dollars ($XXXX) on each of the
following dates: June 30, 1998, September 30, 1998, December 31,
1998, March 31, 1999, June 30, 1999 and September 30, 1999. Such
payments shall be non-refundable by Tripos, and upon receipt,
Tripos shall credit one hundred percent (100%) of each such
payment against the Agreed Amount. Any payment which is past due
shall bear interest at a rate of eighteen percent (18%) per
annum.
5.3 Payments Due on Transactions Concerning Optiverse
Materials. Panlabs shall pay Tripos XX percent (XX%) of Total
Revenues received by Panlabs from marketing Optiverse Materials
during Phase 1 and Phase 2. Not later than twenty-five (25) days
after the end of each calendar quarter, Panlabs shall submit to
Tripos a written report of all Panlabs transactions concerning
Optiverse Materials during the such quarter and Total Revenues
received by Panlabs therefrom and shall remit payments due in
accordance with this Section 5.3. Tripos shall credit one
hundred percent (100%) of such payments against the Agreed
Amount.
5.4 Credits for Transactions Initiated by Tripos. Not
later than twenty-five (25) days after the end of Phase 1, Tripos
shall submit to Panlabs a written report of all Tripos
transactions concerning Optiverse Materials during such calendar
quarter and all revenues received by Tripos therefrom. XX
percent (XX%) of the revenues identified in each report shall be
credited against the Agreed Amount as of the date of such report.
5.5 Buyout. At any time after Tripos has received all
proceeds derived from marketing the Optiverse Materials to
(customer name) and (customer name) in accordance with
Section 5.1 and prior to December 31, 1999, Panlabs shall have
the right to accelerate receipt of Phase 3 marketing rights and
cause the transfer to Panlabs of all of Tripos' rights, title and
interest in the Optiverse Materials by making a lump-sum payment
to Tripos equal to the portion of the Agreed Amount then
remaining unpaid discounted by 8.5% compounded monthly.
5.6 Total Revenues. For purposes hereof, "Total Revenues"
shall mean all amounts received from any source by Panlabs, its
affiliates or assigns for the sale, transfer, use or other
disposition of any Optiverse Materials.
6. GUARANTEE
6.1 MDS Guarantee. In order to induce Tripos to enter into
this Settlement Agreement with Panlabs, MDS Inc., a Canadian
corporation with offices at 100 International Boulevard, Toronto
M9W 6J6 CANADA ("MDS"), hereby assumes, subject to the limitation
set forth in Section 6.2 below, responsibility for and
guarantees, the timely payment by Panlabs of all amounts due and
payable by Panlabs to Tripos in accordance with Sections 5.1, 5.2
and 5.3. The foregoing payment obligations of Panlabs are
hereinafter referred to as the "Guaranteed Obligations". In the
event that Panlabs shall fail to perform any Guaranteed
Obligation within the time such performance is due, Tripos shall
promptly notify both Panlabs and MDS of the amount of the
Guaranteed Obligation that is past due, and MDS shall, within
three (3) business days after receipt of such notice, remit
payment of such amount to Tripos. Tripos shall not be required,
prior to any such notice to MDS, to pursue or exhaust any of its
rights or remedies against Panlabs with respect to performance of
any Guaranteed Obligation other than providing Panlabs with
notice of default. MDS hereby waives presentment, demand,
protest and notice of dishonor, nonpayment or other default with
respect to any Guaranteed Obligations and promptness in
commencing suit against Panlabs and/or in giving notice to, or
making any demand hereunder on, MDS. It is understood and agreed
that this Guarantee shall remain in effect notwithstanding any
assignment or delegation by Panlabs of any of its obligations
under the Settlement Agreement or any change in control of
Panlabs, and that none of the terms of this Guarantee may be
waived, altered, modified or amended except in writing signed by
Tripos and MDS.
6.2 Ratification by MDS Board. Until such time that the
terms of this agreement have been ratified by the Board of
Directors of MDS, Inc., the total liability to Tripos of MDS
under this article shall not exceed XXXX (XXXX) Canadian Dollars.
6.3 Additional Financial Assurance. To demonstrate its
financial ability to discharge its obligations pursuant to this
Agreement, Panlabs shall, not later than April 17, 1998,
establish an irrevocable, confirmed letter of credit drawn on a
US bank reasonably acceptable to Tripos and confirmed by
NationsBank of St. Louis, in the amount of XXXX (US) dollars
($XXXX), payable to Tripos upon presentment of this Agreement and
an affidavit by an officer of Tripos that the required payment
has not been made. Continuation of such letter of credit
facility shall not be required following receipt by Tripos of
certification by MDS, Inc. that the terms of this Agreement have
been ratified by its Board of Directors and that the limitation
provided in Section 6.2 is no longer in effect.
7. OWNERSHIP OF INDIVIDUAL PROPERTY
7.1 Tripos Property. The following intellectual property
which Tripos used in connection with the performance of services
under the Teaming Agreement shall remain the sole property of
Tripos, and Panlabs hereby acknowledges that Panlabs has obtained
no interest in or to any such property: (a) the virtual library
databases, (b) library design methods, Tripos proprietary
software, know-how and Tripos proprietary computational design
and analysis tools, (c) biological information on compounds
developed or obtained by Tripos, and (d) fifty percent of the
existing inventory of raw materials obtained for purposes of
synthesizing Optiverse Materials.
7.2 Panlabs Property. The following intellectual property
which Panlabs used in connection with the performance of services
under the Teaming Agreement shall remain the sole property of
Panlabs, and Tripos hereby acknowledges that Tripos has obtained
no interest in or to any such property: (a) methods, systems and
know-how for the synthesis and purification of chemical
libraries, production and storage facilities and biological
information on library compounds developed by Panlabs (b) library
design methods, Panlabs proprietary software, know-how and
Panlabs proprietary computational design and analysis tools
developed or obtained by Panlabs independent of any proprietary
information furnished by Tripos, and (c) fifty percent of the
existing inventory of raw materials obtained for purposes of
synthesizing diverse Optiverse Materials.
8. DELIVERIES
In the number of business days after the Effective Date as
noted, Panlabs shall ship to Tripos, at Panlabs' expense: (a)
within forty-five business days, fifty percent (50%) of the raw
materials in Panlabs' possession on the Effective Date which were
obtained for purposes of synthesizing Optiverse Materials,
provided however that Panlabs shall provide the written list of
such inventory within fifteen (15) business days; (b) within
twenty (20) business days, all diverse library compound designs
which have not been synthesized by Panlabs; and (c) within twenty
(20) business days, the SYBYL software and related data
management software that is proprietary to Tripos, with written
certification signed by an officer of Panlabs that all copies of
such software have been purged from Panlabs' computers and that
Panlabs has retained no copies in any form.
9. RECORDKEEPING AND AUDITS
Each party shall maintain complete and accurate records of
all transactions concerning Optiverse Materials which occur at
any time on or after the Effective Date and prior to a transfer
of rights in the Optiverse Materials in accordance with Section
3.2 or Section 3.3. Each party shall have the right, upon
reasonable prior written notice, through an independent public
accounting firm reasonably acceptable to the other party, to
examine and copy the books, records and accounts of such other
party relating to transactions concerning the Optiverse
Materials, for the purposes of verifying such other party's
compliance with the terms and conditions of this Agreement. All
information regarding an audited party's business received in any
such examination shall be held in confidence. The expenses of
such audits shall be borne by the auditing party; provided,
however, that the audited party shall be charged for the expense
of any such audit that discloses a discrepancy in favor of
auditing party which is greater than or equal to five percent
(5%) of Total Revenues reported in accordance with Section 5.3 or
Section 5.4. In addition, if Panlabs is the audited party,
Panlabs shall promptly remit to Tripos all amounts due in respect
of the discrepancy, and if Tripos is the audited party, Tripos
shall promptly credit against the Agreed Amount all amounts due
in respect of the discrepancy.
10. PUBLICITY
Each party acknowledges that the terms of this Settlement
Agreement are considered confidential by the other party. With
the exception of disclosures required by law and routine
announcements, neither party nor any of its affiliates shall make
any announcements or disclosures regarding the other party, the
Teaming Agreement or this Settlement Agreement without the prior
written consent of the other party. In no event shall either
party make or publish any announcements of any kind which might
tend to disparage the public image or corporate reputation of the
other party.
11. MUTUAL RELEASES
11.1 By Tripos. Tripos, on its own behalf and on behalf of
its principals, agents, officers, directors, employees,
representatives, affiliates, successors, assigns and attorneys,
hereby releases and forever discharges Panlabs and its
principals, agents, officers, directors, employees,
representatives, affiliates, successors, assigns and attorneys
(the "Panlabs Released Parties") from any and all liabilities,
claims, demands, rights, damages, debts, responsibilities and
actions which Tripos had, has or hereafter may have against the
Panlabs Released Parties arising out of or in connection with the
Teaming Agreement; provided, however, that this provision shall
not be read to release any claims which may hereafter be asserted
against any Panlabs Released Party which arise out of or in
connection with this Agreement.
11.2 By Panlabs. Panlabs, on its own behalf and on behalf
of its principals, agents, officers, directors, employees,
representatives, affiliates, successors, assigns and attorneys,
hereby releases and forever discharges Tripos and its principals,
agents, officers, directors, employees, representatives,
affiliates, successors, assigns and attorneys (the "Tripos
Released Parties") from any and all liabilities, claims, demands,
rights, damages, debts, responsibilities and actions which
Panlabs had, has or hereafter may have against the Tripos
Released Parties arising out of or in connection with the Teaming
Agreement; provided, however, that this provision shall not be
read to release any claims which may hereafter be asserted
against any Tripos Released Party which arise out of or in
connection with this Agreement.
12. MISCELLANEOUS
The validity, construction and performance of this Agreement
shall be governed by and construed in accordance with the
substantive law of the State of Washington, without regard to
conflicts of law provisions. If any provision of this Agreement
or the application of any such provision shall be held by a
tribunal of competent jurisdiction to be contrary to law, the
remaining provisions of this Agreement shall remain in full force
and effect to the maximum extent permissible. This Agreement, as
executed by the parties, constitutes the complete and exclusive
understanding and agreement of the parties with respect to the
subject matter hereof and supersedes all prior understandings and
agreements, whether written or oral, with respect to such subject
matter.
13. COUNTERPARTS
This Agreement may be signed in any number of counterparts,
each of which shall be deemed to be an original and all of which
shall be deemed to constitute one and the same Agreement.
IN WITNESS WHEREOF, the parties have signed this Agreement as of
the Effective Date.
PANLABS INCORPORATED TRIPOS, INC.
By: By:
Title: Title:
MDS INC. (solely for purposes of Section 6)
By:
Title:
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