TRIPOS, INC., Form 10-Q, March 31, 1998
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 March 31, 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 March 31, 1998: 3,179,959 shares.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION, Page
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations
for Three Months Ended March 31, 1998
and March 31, 1997 4
Consolidated Statements of Cash Flows for Three Months
Ended March 31, 1998 and March 31, 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 7
PART II OTHER INFORMATION 10
SIGNATURES 11
EXHIBITS 12
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
Mar. 31, Dec. 31,
1998 1997
ASSETS
Current Assets:
Cash and cash equivalents $ 7,030 $ 5,277
Investments 1,148 1,647
Accounts receivable 9,795 10,247
Inventory 439 415
Prepaid expenses 761 520
Deferred income taxes 141 137
Total current assets 19,314 18,243
Notes Receivable-trade 1,831 1,703
Notes Receivable-other 809 791
Property and equipment, less
accumulated depreciation 6,001 5,995
Capitalized development costs, net 2,947 3,412
Goodwill, net of amortization 1,200 1,171
Other, net 1,301 1,295
Total assets $ 33,403 $ 32,610
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,162 $ 1,390
Current portion of long-term debt 178 178
Accrued expenses 2,698 3,216
Deferred revenue 6,506 4,695
Total current liabilities 10,544 9,479
Long-term debt 3,323 3,367
Deferred income taxes 799 855
Shareholders' equity :
Common Stock 32 32
Additional paid-in capital 17,393 17,343
Retained earnings 896 1,198
Accumulated other
comprehensive income 416 336
Total shareholders' equity 18,737 18,909
Total liabilities and
shareholders' equity $ 33,403 $ 32,610
See accompanying notes.
Item 1. Financial Statements (cont'd)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
Mar. 31, Mar. 31,
1998 1997
Net sales:
Software licenses $ 1,986 $ 2,068
Support 1,894 1,746
Accelerated discovery services 1,190 2,347
Hardware 1,114 631
Total net sales 6,184 6,792
Operating costs and expenses:
Cost of sales 2,168 2,324
Sales and marketing 2,334 2,529
Research and development 1,352 895
General and administrative 871 928
Total costs and expenses 6,725 6,676
Income (loss) from operations (541) 116
Other income, net 69 154
Income (loss) before income taxes (472) 270
Income tax expense (benefit) (170) 102
Net income (loss) $ (302) $ 168
Basic earnings (loss) per share $ (0.10) $ 0.06
Diluted earnings (loss) per share $ (0.10) $ 0.05
Diluted weighted average
number of shares 3,176 3,492
See accompanying notes.
Item 1. Financial Statements (cont'd)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
Mar. 31, Mar. 31,
1998 1997
Operating activities:
Net income (loss) $ (302) $ 168
Adjustments to reconcile net income(loss)
to net cash provided by operating activities:
Depreciation of property and equipment 188 161
Amortization of capitalized development
costs and goodwill 484 726
Deferred income taxes (60) 14
Change in operating assets and liabilities:
Accounts receivable 375 1,344
Notes receivable-trade (128) 0
Prepaid expenses and other current assets (257) 195
Accounts payable and accrued expenses (707) (1,102)
Deferred revenue 1,833 1,186
Net cash provided by operating activities 1,426 2,692
Investing activities:
Net purchases, sales, and maturities
of investments 499 (172)
Notes receivable-other (18) 0
Purchases of property and equipment (198) (290)
Capitalized development costs (46) (863)
Net cash provided by (used in)
investing activities 237 (1,325)
Financing activities:
Stock issuance pursuant to stock plans 50 168
Payments on long-term debt (48) 0
Net cash provided by financing activities 2 168
Effect of foreign exchange rate changes on
cash and cash equivalents 88 (203)
Net increase in cash and cash equivalents 1,753 1,332
Cash and cash equivalents at
beginning of period 5,277 5,393
Cash and cash equivalents at end
of period $7,030 $6,725
See accompanying notes.
Item 1. Financial Statements (cont'd)
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 month period ended March 31, 1998
are not necessarily indicative of the results that may be
expected for the year ending 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 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.
(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-month periods ended March 31, 1998 and 1997 are as
follows:
1998 1997
Net income (loss) $ (302) $ 168
Foreign currency translation 80 (169)
adjustments
Comprehensive income (loss) $ (222) $ (1)
The components of accumulated other comprehensive income,
net of related tax, at March 31, 1998 and December 31, 1997 are
as follows:
1998 1997
Foreign currency translation
adjustments $ 416 $ 330
Accumulated other comprehensive income $ 416 $ 330
(5) Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share for the quarters ended March 31,
1998 and 1997.
(In thousands, except per share data)
1998 1997
Numerator:
Numerator for basic and diluted earnings
per share-net income (loss) $ (302) $ 168
Denominator:
Denominator for basic earnings per share-
weighted average shares 3,176 3,030
Effect of dilutive securities:
Employee stock options 0 462
Denominator for diluted earnings per share-
adjusted weighted average shares
and assumed conversions 3,176 3,492
Basic earnings per share $0.06 $(0.10)
Diluted earnings per share $0.05 $(0.10)
Employee stock options to purchase shares of the Company's
common stock were not included in the March 31, 1998
computation of diluted earnings per share because the effect
would have been anti-dilutive. For additional disclosures
regarding earnings per share, see the notes to the Company's
1997 consolidated financial statements in it Form 10-K.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Tripos, Inc. is a leader in discovery services,
informatics and products for compound research in life science
organizations worldwide.
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 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 CompanyOs 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, 1997.
Results of Operations
Net sales for the first quarter of 1998 and 1997 were $6.2
million and $6.8 million, respectively. The Company experienced
increases in support and hardware sales offset by decreases in
software license and accelerated discovery services revenues in
the quarter.
For the three months ended March 31, 1998, software licenses
sales decreased slightly to $2.0 million. Software license sales
are historically volatile in the first quarter as customer
capital budgets are finalized and apportioned. Support revenues
increased 8.9% to $1.9 million compared to the first three month
period in 1997. Support sales increased due to a larger
installed base of customers as a result of the overall increase
in software license sales over the past several years.
Accelerated Discovery Services ("ADS") sales accounted for $1.2
million in the first quarter of 1998 and $2.3 million in the same
period in 1997. This decrease in ADS business was expected due
to delays in external production of pure compounds for sale as
OptiverseTM screening libraries. Hardware sales increased by
76.5% to $1.1 million for the first quarter 1998. This increase
compared to the prior year is due to the customers' continuing
desire to obtain software and hardware from one source. Sales to
existing customers represent 76% of total revenues for the three-
month period ending March 31, 1998.
The ADS production issues have been addressed through a
series of steps including restructuring the Company's agreement
with MDS Panlabs, a new non-exclusive distribution agreement with
an outside supplier of compounds, and a major expansion of the
laboratories at Tripos Receptor Research in Bude, England. The
agreement with MDS Panlabs (dated April, 1998) has shifted sales
and marketing responsibilities of the Optiverse library to MDS
Panlabs in return for an initial payment and a royalty fee to be
paid to Tripos based on any and all future uses and sales of
these libraries. The parties will continue to collaborate on
research contracts involving compound designs from Tripos and
synthesis at MDS Panlabs. In addition, Tripos will be
distributing compounds from other third-party suppliers that meet
the Company's quality and diversity thresholds. During 1998, the
Company will manufacture compounds at Tripos Receptor Research to
complete its portfolio of offerings. The Company expects that it
will return to a strong revenue position from ADS business in the
third quarter of 1998.
Net sales for the Company's activities outside of North
America represented approximately 38.9% for the first three
months of 1998 compared to 45.2% for the same period in 1997.
Net sales in Europe decreased 16.8% for the first three months of
1998 compared to 1997 and accounted for 30.1% and 33.0% of net
sales for the three-month periods in 1998 and 1997,
respectively. Net sales in the Pacific Rim, principally Japan,
decreased 34.6% compared to the first three months of 1997 and
accounted for 8.8% and 12.2% of net sales for the respective periods.
Cost of sales for the three-month period ending March 31,
1998 decreased 6.7% compared to the same period in 1997. Cost
of sales was $2.2 million and $2.3 million for the first quarter
of 1998 and 1997, respectively. This change was due to decreased
costs directly related to lower sales of compounds which was
partially offset by an increase in hardware costs from higher
hardware sales. Cost of sales as a percent of net sales was
35.1% and 34.2% for the three-month periods in 1998 and 1997,
respectively.
Gross profit margin percentage for the first quarter 1998
decreased to 64.9% from 65.8% of total net sales in the first
quarter of 1997. Gross profit decreased 10.1% compared to first
quarter 1997 due to the decreases in sales described above.
Sales and marketing expenses decreased 7.7% to $2.3 million
for the three-month period in 1998 compared to $2.5 million for
the same period of 1997. Sales and marketing expenses as a
percentage of net sales were 37.7% and 37.2% for the three-month
periods in 1998 and 1997, respectively. The decrease in the
first quarter of 1998 is a result of lower commissions and
bonuses related to lower sales in the quarter.
Research and development costs, including the amount of
capitalized costs, decreased to $1.4 million for the three-month
period in 1998 compared to $1.8 million 1997 and represented
21.6% and 26.9% of net sales, respectively. Research and
development expenses, net of capitalized development costs,
increased to $1.4 million from $0.9 million and represented 21.9%
and 13.2% of net sales for the three-month periods in 1998 and
1997, respectively. This increase as a percentage of net sales
for the period reflects the current expensing of R&D costs in
lieu of capitalization as the development time of new products
shortens. The Company anticipates that its capital requirements
for new product research will remain relatively constant as a
percentage of net sales as Tripos continues to invest in the
software, consulting, diverse compound libraries and contract
research markets.
General and administrative expenses decreased 6.1% to $0.8
million for the first quarter of 1998 compared to $0.9 million in
1997, and represent 14.1% and 13.7% of net sales for the
respective periods. The decrease in G & A expenses in the period
is due the absence of reserves, such as reserve for bad debts,
necessary in this quarter versus the same period in 1997.
Other income (expense) decreased from $154,000 of income
for the first quarter in 1997 to $69,000 of income for the
comparable period in 1998. This change was due to foreign
currency transaction losses in the current period compared to
gains in the prior year period and the addition of interest
expense from the financing of the Company's headquarters
acquisition which was partially offset by net rental revenues
from the building's tenants.
Income tax benefit was $170,000 for the three-month period
in 1998, which represents an effective tax rate of 36%, compared
to an income tax expense of $102,000 for the first quarter of
1997, an effective rate of 38% . The rates reflect the change in
the relative weight of the Company's earnings and losses
including those from foreign subsidiaries. The Company's
effective tax rate for the three months ended March 31, 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 three-month period ending March 31, 1998, decreases
in accounts and notes receivable of $0.2 million along with
depreciation, amortization and an increase in deferred revenue of
$0.2 million, $0.5 million and $1.8 million, respectively, were
offset by a decrease in accounts payable and accrued expenses of
$0.7 million an increase in prepaid expenses of $0.3 million and
a net loss of $0.3 million resulted in net cash provided by
operations of $1.4 million. For the same period in 1997, net
cash provided by operations was $2.7 million primarily due to
decreases in accounts and notes receivable of $1.3 million and
prepaid expenses of $0.2 million along with net income,
depreciation, amortization and increases in deferred revenue of
$0.2 million, $0.2 million, $0.7 million and $1.2 million,
respectively, which were offset by a decrease in accounts payable
and accrued expenses of $1.1 million. Notes receivable-trade
represent the long-term portion of revenue generated from the
Company's sales of extended access contracts to its software
technologies.
Investments of $0.2 million in property and equipment were
offset by a decrease in marketable securities of $0.5 million
resulting in cash provided by investing activities of
approximately $0.2 million in the first three months of 1998.
Delays in synthesis of the ADS compound library resulted in
negligible capitalized development costs for the first quarter of
1998.
The Company believes that current working capital of $8.8
million, together with continued cashflow from operations, will
be adequate to fund short-term liquidity requirements including
investment 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 expand
the facilities of its subsidiary, Tripos Receptor Research Ltd.
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 three months ended March 31, 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: May 13, 1998 /s/ John P. McAlister
President and
Chief Executive Officer
Date: May 13, 1998 /s/ Colleen A. Martin
Chief Financial Officer, Secretary
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