UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the fiscal year ended December 31, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from _____________
to _______________.
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 Identification No.)
incorporation or organization)
1699 S. Hanley Rd, St. Louis, MO 63144
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (314) 647-1099
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered:
None None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.01 Par Value
Preferred Stock Purchase Rights
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No __.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of the
Form 10-K or any amendment to this Form 10-K [X].
The aggregate market value of the voting stock held by nonaffiliates
of the Registrant as of March 19, 1999, was $19,262,349 (based upon
the March 19, 1999 closing price for shares of the Registrant's Common
Stock as reported by the NASDAQ National Market). Shares of Common Stock
held by each officer, director and holder of 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily
a conclusive determination for other purposes.
On March 19, 1999, 3,256,722 shares of the Registrant's Common Stock,
$0.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held May 11, 1999 are incorporated by reference into
Part III.
Part I
Item 1.
Business
Tripos Inc., ("Tripos", the "Company" or the "Registrant"), is a leader
in discovery services, informatics and products for life science
organizations worldwide. Tripos' current proprietary technologies
and strategic relationships expand its reputation in computational chemistry
for efficient pharmacological activity prediction and analysis, a major
factor in customers' cost effective new product success. Based on
scientific expertise in these areas as well as a worldwide sales and
marketing organization, Tripos expanded its business model in 1997. The
Company now offers the following products and services: software, software
consulting services, technology transfer, screening libraries, and contract
discovery research. The Company continues to be a reseller of third party
hardware products that are compatible with the Company's software products.
The Company was originally incorporated in the state of Missouri on October
29, 1979. The Company was reincorporated under the laws of the State of
Utah effective June 1, 1994. The Company maintains its executive offices
and principal facilities at 1699 South Hanley Road, St. Louis, Missouri 63144.
The Company also has wholly owned subsidiaries with offices in Milton
Keynes, England; Antony, France; Munich, Germany; and laboratory
facilities in Bude, England. There are two leased offices for sales
activities in Shrewsbury, New Jersey and Redwood City, California.
The remainder of this Item 1 contains certain statements that are forward-
looking and involve risks and uncertainties. Words such as "expects",
"anticipates", "projects", "estimates", "intends", "plans", "believes",
variations of such words and similar expressions are intended to
identify such forward looking statements. These statements are based on
current expectations and projections made by management and are not
guarantees of future performance. Therefore, actual events, outcomes
and results may differ materially from what is expressed or forecast in such
forward-looking statements. Among the factors that could cause actual
results to differ materially from the forwardlooking statements are set
forth under the caption "Cautionary Statements - Additional Important Factors
to be Considered" in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A"). The Company
undertakes no obligation to update any forward-looking statements in this
Form 10-K.
Industry Background
The success of companies in the pharmaceutical, biotechnology,
chemical and agrochemical industries is substantially dependent
upon their ability to identify new pharmaceutical and chemical
compounds with targeted activities and properties which can be
brought to market rapidly and on a cost-effective basis. The
discovery and development of a new pharmaceutical or chemical
product candidate typically involves many investigative phases,
including storage, retrieval, analysis, review, communication,
management and manipulation of large volumes of information
relating to chemical structures and properties, molecular
patterns, statistical information, reactions involved in
syntheses and biological properties. Based on industry data, the
average pharmaceutical discovery process requires synthesis and
testing of over 10,000 chemical compounds for each new product
brought to market. The Company's products are used primarily in the
pre-clinical phases of new pharmaceutical development, the equivalent
pre-approval phase of agrochemical product development and product
discovery phases of chemical research. These phases can represent
up to 30% of the expense of new product research and development.
Industry pressure to reduce product development cost and time to market
are in part attributable to increased competition and increased political,
regulatory and consumer scrutiny. By reducing the time to market,
pharmaceutical companies can generate billions of dollars of additional
profits. In addition, environmental regulations and consumer activism
are forcing chemical andagrochemical companies to evaluate alternative
products and means of doing business, thereby increasing their product
development and operating costs. Through the use of effective integrated
discovery information and analysis software in the key initial stages of
new compound research and development, companies in these industries may
be able to evaluate scientific data faster and more cost efficiently for
the creation of new chemical lead candidates. The industries served by
the Company have special requirements for the communication and analysis
of chemical and biological data and the Company believes that it is
uniquely qualified to fulfill these requirements.
Pharmaceutical and biotech companies have focused their R&D efforts
on both novel compounds exhibiting demonstrable benefits over existing
commercial drugs and on novel targets, many of which are emerging
from work being done on the human genome project. Many companies
are implementing high throughput screening laboratories with robotic
systems for the rapid analysis of large numbers of compounds for
biological activity. An outgrowth of this development is the increased
need for material to screen, or to test. Companies are buying thousands
of compounds a year to screen in order to find a novel compound with the
desired biological activity. The Company believes it is positioned to provide
these compounds through its laboratories at Tripos Receptor Research and
its worldwide sales organization. By coupling compounds with discovery
informatics, Tripos offers its customers increased discovery efficiencies.
Tripos Receptor Research has established partnerships with major companies
in the pharmaceutical and biotechnology industries, supplying pure, novel
chemical compounds for biological applications in new drug discovery.
These applications involve the testing or screening of chemical
compounds against a biological target to refine lead compounds.
Tripos Receptor Research has a reputation for providing excellent
medicinal chemistry with specific expertise in solid phase chemistry.
Located in Bude, England, Tripos Receptor Research is
specifically involved in custom chemical synthesis using solidphase
and solution methods.
The Company's goal is to facilitate and accelerate certain aspects of
the chemical discovery process for our clients. This is achieved through
a combination of both products and services specifically targeted at the
development of new chemical entities for use in the pharmaceutical,
agrochemical, biotechnology and associated markets. The Collaborative
Research business unit draws upon the technology foundation within Tripos.
The Company delivers high value products to the market including software,
custom software development, specially designed chemical libraries for
general screening and for targeted lead refinement, contract services for
drug discovery and full discovery partnerships.
Products
The Company offers its expertise for customer applications via a
complementary range of new research technologies including
Discovery Software, Software Consulting Services and Accelerated
Discovery Services.
Discovery Software (Chemical Design Software Systems)
The Company's software products and services collectively address the needs
of the customer organizations' new compound research team. This is
achieved though the provision of expert chemical design tools that improve
the efficiency of the chemical design process by providing important
structure and property data to the scientists. This structure and property
data is calculated through complex pattern analysis and 3D simulation of
chemical structures and behaviors. By reviewing data produced through
Tripos software products, scientists can avoid costly synthesis and testing
expenses that are not likely to produce positive results.
The information produced through Tripos' expert design environment can
be easily accessed and reviewed by non-specialist users of the software
such as medicinal chemists and biologists. This easycommunication and
collaboration is accomplished through Tripos' chemical Intranet technology.
The next few paragraphs highlight some of the many products and services
available through Tripos Discovery Software.
Discovery Software Products:
Tripos provides a highly integrated set of chemical design systems
consisting of the SYBYL Expert Molecular Design System, UNITY Chemical
Databases System, and Discovery.Net Chemical Intranet System among
others. All of Tripos' software systems combine to provide a total
discovery solution for the pharmaceutical and biotechnology market. The
exact needs of our client base are met through customization of these
systems. These customization services are provided through the new
Software Consulting Services group. (See Software Consulting Services for
more detail.)
The SYBYL Expert Molecular Design System:
SYBYL is a comprehensive computational
tool kit for molecular design and analysis, with a
special focus on the creation of new chemical
entities. SYBYL provides essential construction
and analysis tools for both organic and
inorganic molecular structures.
SYBYL/Base gives our customers access to
building tools, molecular mechanics,
quantum mechanical calculations, molecular
dynamics, docking, geometric measurements,
molecular comparisons (fits), surfaces and
grid displays, journaling, annotation, hard copy, a
programming language, an object manager, and
the Molecular Spreadsheet; all are included in
the core module. Large (proteins, nucleic acids,
etc.) and small molecules are modeled in the
same window.
SYBYL is a modular program. Researchers can
take advantage of as many of the specialized
tools as necessary by adding functionality
through optional modules. The optional
modules are focused on conformational searching
(AdvComp), biopolymer modeling (Biopolymer),
combinatorial chemistry or library design
(Legion, Selector, DiverseSolutions),
quantitative structure activity statistics
(QSAR, Advanced CoMFAr), protein homology
modeling and analysis (Composer, MatchMaker,
ProTable), pharmacophore recognition (RECEPTOR,
DISCO), and others. SYBYL also connects
seamlessly to UNITY, Tripos' Chemical Database
Searching system.
The UNITY Chemical Database System:
Featuring the industry-standard 3D-flexible
search engine, UNITY produces the most
relevant responses to complex customer interactive
queries. UNITY enables effective chemical structure
based searching of multiple, distributed databases of chemical
information. UNITY has been engineered for rapid data exploration
and lead identification. Offering Markush-query definition,
powerful links to relational databases, and integration with
SYBYL and the Molecular Spreadsheet, UNITY will speed the
discovery process.
The new UNITY 3.0 version provides a series of flexible 3D searching
enhancements. UNITY's speed, accuracy and efficient interface makes
it a system of fully integrated analysis tools to help analyze
databases in a way that facilitates new compound discovery.
The GeneFold protein identification software:
GeneFold, released in fall of 1998, is a
protein fold identification software tool,
developed in collaboration with Professors
Jeffrey Skolnick and Adam Godzik of the
Scripps Research Institute. GeneFold was the
first product launched in an ongoing agreement
between Tripos and Scripps to develop
bioinformatics software applications for drug
discovery. Specifically, GeneFold bridges the
gap between Tripos' unique expertise in the
area of cheminformatics and the expanding need
for gene sequencing, allowing the wealth of
knowledge in bioinformatics to be applied to
drug design.
The FlexX library analysis product:
FlexX provides fast analysis of potential drug
libraries. Its speed makes it possible to
rank these libraries of potential drug
compounds on how they "fit" into a receptor
site-critical to the effectiveness of
therapeutics. This combination of speed and ability
to score libraries based on fit gives the program a
unique advantage in meeting today's market
demands for combinatorial and virtual high
throughput screening. Marketed by Tripos,
FlexX was developed by Professor Lengauer and
co-workers at the GMD German National Research
Center for Information Technology.
CombiLibMaker virtual library software:
CombiLibMaker, when paired with Tripos' Legion software,
creates a new set of tools for the generation and enumeration
of virtual combinatorial libraries. This program, developed
by Professor Robert Pearlman at the Laboratory for Molecular
Graphics and Theoretical Modeling at the University of Texas
at Austin, runs seamlessly with Tripos' flagship product, SYBYL.
The Alchemy 2000 Desktop Chemical Design System:
Alchemy 2000 is a chemical discovery system for
the personal computer with advanced molecular
graphic displays, accurate energy calculations,
and customizable tools that allows the user to
tailor the program for their research team.
Alchemy 2000 delivers high performance
visualization with all types of chemical
structures including proteins, polymers, and
small molecules. Local database storage, graphing,
batchmode, and spreadsheet capabilities provide
a means for expanded analysis and
investigation on all families of chemical
compounds. Alchemy 2000 includes
application modules for specific research needs
including QSAR, Protein, Polymer, and LogP.
This is a complete chemical discovery system
that is easy to use, comprehensive, and
powerful. It is also a key component of
Tripos' intranet chemistry solution.
The New Discovery.Net Chemical Intranet System:
The mission of our Discovery.Net system
is to help streamline the drug candidate
discovery and development process by providing
useful, innovative, web-based solutions for the
efficient management and effective use of
chemical information by chemists, modelers,
and biologists in a distributed intranet-
based environment. Two Discovery.Net products
currently available are ChemEnlighten and GASP.
A tool kit is also available to allow custom
solutions to be assembled either by customer
staff or Tripos personnel.
ChemEnlighten:
Scientists need a tool accessible from
multiple platforms that enables them to
filter very large chemical structure data sets
based on a variety of metrics. Tripos has
created the ChemEnlighten environment for the
analysis of large or small data sets.
ChemEnlighten integrates visual access to large
tables, the capability to generate a range of
metrics, and the ability to perform analyses
(selections) on the data in the table.
ChemEnlighten is a powerful product for the
Intranet age. The tables, metric engines and
analysis routines reside on a UNIX platform.
The ChemEnlighten Graphical User Interface
(GUI) is Web-based, using Java applets that were
built with the Discovery.Net toolkit.
Customers access ChemEnlighten through any
Java enabled web browser. Computational or
medicinal chemists who need to choose
representative subsets from a very large number
of compounds will be interested in
ChemEnlighten. Researchers who are using
hierarchical clustering as a step towards
selection will also want to examine
ChemEnlighten for the OptiSim algorithm, which
gives selection sets that have the same
properties as sets from hierarchical
clustering.
GASP Chemical Structure Analysis Tool:
GASP (Genetic Algorithm Similarity Program)
uses a genetic algorithm to align sets of
flexible molecules, where the genetic
algorithm selects alignments with more
pharmacophore overlaps between the molecules
in the set. Drs. Gareth Jones, Peter
Willett and Robert Glen developed the GASP
algorithm at the University of Sheffield and
the Wellcome Research Laboratories. Tripos
has incorporated this algorithm in a Web-
based application. GASP 2.0 is designed to
allow medicinal chemists to perform molecular
alignments and analyze the results in order to
assist in the decision process of what
compounds should be synthesized next. It is
easy for the medicinal chemists to collaborate
with one or more molecular modelers who can
help optimize the setup and assist in
analyzing the pharmacophore information in the
results. GASP 2.0 is very easy to use and
requires no prior knowledge regarding either
the constraints or the pharmacophore.
Software Consulting Services
(Combining innovative web technology with attention to the
customer's specific information system needs)
Tripos offers its skills and experience to help at all stages of an IS
project, whether the customers are only in the planning and budgeting stages,
or are looking for a partner to take on maintenance of a customer system.
The Company has twenty years of experience developing scientific software
applications for the pharmaceutical and chemical industries. Tripos can work
as the Project Manager for a project, or work with the customer as a
supplier of key integration and development expertise along with important
software components.
Analysis: Tripos is skilled at interviewing end-
user scientists to determine essential business
tasks, current business logic, and workflow. The
Company can perform this phase of a project
independently or work with other consultants that are
engaged by the Client, in order to ensure that
the highest level of scientific understanding is
part of any ongoing project.
Specification: The Company's scientific software
teams are skilled at determining the functional,
performance and interface requirements of a new
application. Tripos enlists real users for paper
prototype systems to assist in validating
requirements, as well as ensuring a complete and
shared understanding of the system requirements.
Design: Tripos software engineers are skilled in
data modeling and object-oriented design, through
which they reduce the risks involved in
engineering complex chemical and biological
information systems.
Research: The Company's scientific skills can be used
to help the Customer develop novel methods for drug
discovery. Tripos has the inside edge for
modifying and extending existing Tripos drug
discovery software to explore new ideas that the
Customer may wish to integrate.
Implementation: Tripos is skilled in all vital
web-related technologies, and has a large staff of
skilled Ph.D. scientists with real industry
experience. The Company created the first
significant, and industry recognized chemistry
applications to be written in Java.
Maintenance: The Company is an industry leader in
providing highquality and high-value customer
support for scientific software applications. Its
customers have always ranked the Company highly
when it comes to providing helpful and timely
assistance.
Discovery Software products and Software Consulting Services combine
to provide a solid business offering to the pharmaceutical, agrochemical,
and biotechnology markets.
Accelerated Discovery Services
(Chemistry theory put into practice in the laboratory)
Compounds:
Recent advances in the area of high throughput screening
(rapid screening of compounds for biological activity) have
given rise to the need for large numbers of compounds by
pharmaceutical, biotechnology and other life science companies.
These companies routinely acquire thousands of compounds a year
to screen in search of novel classes of active compounds.
By applying Tripos' compound design technology in conjunction
with its synthesis capabilities, the Company has brought to
market LeadQuest, a growing compound library which now includes
over 20,000 compounds that meet the Company's diversity and purity
criteria. This library provides an efficient source of compounds
for screening by removing redundant and impure samples from the
screening effort. When LeadQuest compounds demonstrate activity
in pharmaceutical company assays, the Company can quickly and
efficiently provide hundreds of similar compounds for
follow-up screening and lead optimization.
Contract Research:
The reforms in health care have forced
pharmaceutical and related companies to
restructure their operations, including their
research programs. One of the results of
this restructuring is a significant emphasis on
outsourcing and partnering on the part of the
large pharmaceutical companies with smaller
technology companies. At the same time, the
rapid development of certain technologies,
including combinatorial chemistry and high throughput
screening, have forced many of the smaller
companies to look to outside groups to provide
needed technology rather than invest in it
themselves. This significant trend in
outsourcing has presented the opportunity for
the Company to offer its expertise to
these organizations through compound design,
molecular analysis, and a complete suite of
lead discovery and lead optimization
capabilities. Tripos leverages these
capabilities by entering into research
agreements with its customers.
Collaborative Research:
The Collaborative Research group has two
purposes. One is to focus on internal
discovery collaborations with Arena
Pharmaceuticals and the Wolfson Institute, and
on associated opportunities such as that
provided by our collaboration with Phase-1
Molecular Toxicology. The second goal is to
focus on external discovery collaborations
with customer companies. Tripos is engaged
in finding collaborative partnerships in the
pharmaceutical, biotechnology, and
related industries using any or all aspects of
research that Tripos has access to or can
provide directly. Across all areas, Tripos
will work with customers using their own
targets or targets that we identify
through our collaborations.Tripos is combining
its strengths in molecular design, combinatorial
chemistry, and data capture with the pioneering
expertise of complimentary organizations. Our
investments and collaborative efforts are
structured to deliver long-term revenue and
profits based on successful research that lead to new
broad-based products when partnered with pharmaceutical,
biotechnology, and related companies. This unit is
dedicated to managing efforts critical to the
success of these projects and investments.
ChemSpace:
Tripos has developed unique and proprietary
technology for the storage and searching of
vast numbers of combinatorial products and
related data. The unique searching methods
enable the user to identify new compounds which
are likely to have similar activity to the
original molecule while avoiding problematic
side effects or toxicity. Using this
technology, Tripos has rapidly created a
database of trillions of synthetically
accessible small organic chemical structures
that are searchable in real time at the rate
of 500 billion per hour. The database can be
customized to include reactions and compounds
that are proprietary to its customer base.
Tripos may license this technology to a
limited number of pharmaceutical companies.
ChemSpace has proven to be an invaluable tool
in performing the compound design activities
in both contract research and
collaborative research relationships.
Sales, Marketing and Distribution
The Company sells its software products directly in the U.S. and Europe,
through an exclusive distributor arrangement in Japan with Sumisho
Electronics Company, Ltd., and through non-exclusive agency relationships
in Korea with T & J Tech Inc., in Taiwan with FairTech Limited, in China and
Singapore with 3-Link Systems Pte. Ltd, in India with Seascape Learning, and
in Australia with Worley Limited. On December 31, 1998, the Company's sales
force consisted of 37 management, technical, sales and administrative
employees: 15 for the United States and Canada, 20 in Europe, and 2 for the
Pacific Rim. The Company's domestic sales and support center is located at
its headquarters in St. Louis, Missouri. The Company also maintains
sales offices in California, New Jersey, Massachusetts, and near London,
Paris and Munich. For its software product lines for workstations,
the Company employs pre-sales and post-sales support scientists resident in
the United States, England, France, and Germany. These scientists,
working in collaboration with the Company's sales employees, have
developed a consultative sales approach through which the Company has
created relationships with its key customers. The Company believes
these relationships enable the Company to understand and better serve
the information management needs of its customers. Because the Company's
customers frequently have both domestic and international operations, the
Company's sales staff and scientists in foreign locations work closely
with their counterparts in the United States to ensure that the customer's
international needs are met in a coordinated and consistent fashion.
The Company's workstation-based software products are sold in a variety of
ways, one of which is term licenses on the basis of a fixed number of
simultaneous users per module. Network-based licensing is available,
based on a count of the number of simultaneous users. The Company has
also introduced one, two and three year token license options that offer
customers the ability to tailor their product selections to their specific
research needs and that are renewable at the end of the selected terms.
The Company expects to migrate its customer base to shorter-term license
renewals based on the flexibility to access all of its software products.
This will provide a predictable recurring revenue stream from periodic
renewals. Software packages consisting of modules typically purchased
by customers in particular industry segments have been defined and have
been specially priced to facilitate customer purchase of an optimal module
set for their problems.
Software Consulting Services are sold on a collaborative basis by direct
salespersons and scientists to the end user chemist and Information
Technology departments at the Customer site. Each contract is negotiated
based on the custom software service needs of the Customer. The term of the
contract can last from two weeks up to two years. The Company provides
programming and scientific expertise on a cost plus margin basis. Services
may include specifications, gap and risk assessment, up to full biological
and chemical data integration.
Sales of the compound libraries are made through a staff assigned to the
product. Tripos has dedicated sales professionals in the United States and
Europe along with distributors in the Pacific Rim. The LeadQuest library
now includes over 20,000 compounds that are available for purchase. The
compounds are sold on a nonexclusive basis to all purchasers
and Tripos retains no trailing rights to the compounds once they are
purchased by a customer. The Company's sales staff includes employees with
Ph.D. degrees in chemistry, various advanced degrees in the sciences and
work experience with various hardware and software suppliers as well as
with the industries served by the Company. The Company's sales
representatives are compensated through a combination of base salary,
commissions and bonuses based on quarterly and annual sales
performance. In addition, the Company's pre-sales scientists, all of whom
have Ph.D. degrees in chemistry or a closely related field, receive
total compensation determined in part by their success in supporting and
generating sales in a particular territory.
Contract research relationships are offered through a team comprised
of salespersons, discovery scientists and members of the senior
management staff of the Company. This approach is best suited for the
long cycle of developing meaningful partnerships with key customers for the
outsourcing of discovery research.
The Company exhibits its software at various scientific conferences
and trade exhibitions, including national and regional conferences of the
American Chemical Society, at the IBC Drug Discovery Conference and
the CHI High Throughput Screening for Drug Discovery Conference. Company
scientists frequently publish and present results of original research at
these and other conferences throughout the world.
The Company sells its personal computer software products
principally through direct mail and relationships with distributors.
Customer Training, Service and Support
The Company's licenses typically provide a limited warranty for a 90 day
period. Thereafter, support of the Company's software products is provided
for an annual fee. Approximately 80% of the Company's commercial customers
and half of the Company's academic customers have contracted for support
service. This service gives customers access to telephone consultation
with the Company's technical personnel in local offices, on-line access to a
Company-operated computer bulletin board, new release versions of licensed
software and other support required to utilize the Company's products
effectively.
The Company offers customer training in the use of its products through
staff knowledgeable in both chemistry and computer science. The Company
sends technical newsletters, bulletins, and advance notification about
future software releases to its customers to keep them informed and to
help them with resource allocation and scheduling. The Company also
sponsors seminars throughout the world for its customers, involving
presentations both by Company personnel and guest lecturers. These
seminars are designed to enhance customer understanding of the Company's
products and their potential utilization as an aid to customer research
requirements. The Company currently provides its customers with advice on
computer system configuration management and frequently provides
customers with consulting advice in addressing particular research
questions as part of the normal pre- and post-sales process.
Product Development
The Company believes that its position as a leader in discovery products and
services will depend in large part on its ability to enhance its current
product line, develop new products, maintain technological competitiveness,
integrate complimentary thirdparty products and meet a rapidly evolving
range of customer requirements. The Company intends to continue to
make substantial investments in product and technology development to meet
its customers' requirements.
The Company has previously experienced delays in developing new products
ranging from a few days to approximately twelve months. The complexity of
developing new and enhanced scientific information management software
in a client/server environment is significant. Delays or unexpected
difficulties in any segment of a development project can result in late
or undeliverable product. In view of this complexity, there can be
no certainty that the Company will be able to introduce its products on
a timely basis in the future, or that the Company's new products and
product enhancements will adequately meet the requirements of the marketplace
or achieve market acceptance.
The Company's research and development activities are undertaken by its
Discovery Software group and its Accelerated Discovery Services group.
The Discovery Software group, composed of chemists and other scientists,
works closely with customers to identify market needs for new products. Upon
identification of a market need for a new product, the Discovery
Software group collaborates with the Company's software engineers to develop
requirements and specifications, implement code and perform regression
tests for the new product. Separate quality assurance, environment
management and systems groups manage the final release, documentation and
porting of the new product to all supported platforms. In addition,
the Company funds research at certain academic institutions. The Company
believes that this funding allows it to gain access to significant technology
not otherwise available.
Tripos and MDS Panlabs defined the market for diverse screening libraries
with the introduction of the Optiverse compound library in late 1995.
Optiverse was a general screening library of over 100,000 diverse chemical
compounds. In late 1996 and early 1997, a shift in the market demanded an
increase in the level of purity of this compound library. Despite the
anticipation of this demand and the purchase of a specialized apparatus
for compound purification, the delay in receipt of this equipment and
subsequent further delay in the purification process caused a nine-month
slippage in new product. In March 1998, the Company restructured
its agreement with MDS Panlabs terminating the Company's distribution of
the Optiverse product and simultaneously announcing the launch of the
Company's own LeadQuest compound library product. In June 1998, the Company
purchased an inventory of highly-pure diverse chemical compounds from a
third-party for distribution to continue generating revenue from this
market. In September 1998, the Company opened its own laboratory
operations in Bude, England for all chemical synthesis operations.
The Company began production of a newly designed set of LeadQuest
screening libraries which now includes over 20,000 compounds. The
Accelerated Discovery Services group has its own staff of scientists and
programmers that are familiar with the research techniques and requirements
of its customers for chemistry, purification and diversity assessment.
Research and development expenses were $2.8 million, $3.8 million, and
$6.3 million in 1996, 1997 and 1998, respectively. Research and
development expenses, including the amount of capitalized costs were
$6.4 million in 1996, $6.4 million in 1997 and $6.3 in 1998, representing
22%, 21% and 25% of net sales, respectively. The Company capitalized $3.6
million of product development costs in 1996, $2.6 million in 1997 and
$1.3 million in 1998. This represented 56%, 40% and 17% of total
product research and development expenditures in these periods. The
Company anticipates that its investment in new product research will
continue to be significant as Tripos invests in the growth of web-based
tools, discovery collaborations, diverse compound libraries, and its
recently acquired laboratory facilities.
The Company has entered into consulting contracts with certain customers
which provide for collaboration with the Company in customizing
chemical compound libraries for drug discovery in specific therapeutic
areas. The Company recognizes revenue related to such agreements as
contractual milestones are achieved and delivered or, absent such
contractual milestones, on a completed contract basis.
Tripos offers its customers software consulting services by which the Company
builds customized systems solutions. Chemical research teams require
improved information access and usage in their discovery process. The
Company is helping its customers meet these needs by applying its
expertise in web technologies, chemical information systems, and biological
data handling to build integrated systems designed specifically for
the customer's environment and discovery process.
Proprietary Rights
The Company relies primarily upon a combination of copyright, trademark
and trade secret laws and license and non-disclosure agreements to establish
and protect the proprietary rights in its products. In addition, the Company
has obtained one patent with respect to its SYBYL QSAR product which expires
June 18, 2008. In 1998 the Company was granted a patent on Hologram
QSAR. During the years 1996 to 1998, the Company applied for eight (8)
additional patents for its software and compound products. The source
code for the Company's products is protected both as a trade secret and
as an unpublished, copyrighted work. In addition, the Company's core
software products are developed and manufactured only at its St. Louis
facility and the Company does not disclose the source code for its
products to any of its subsidiaries or distributors. The Company supplies
its source code under special, restrictive license provisions to customers
on special request. All software products are shipped from its St. Louis
facility. General screening and targeted compound libraries are
manufactured and shipped by Tripos Receptor Research from its Bude,
England facilities. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use the Company's products
or technology without authorization, or to develop similar technology
independently. In addition, effective copyright and trade secret protection
may be unavailable or limited in certain foreign countries where the
Company does business. Because the markets in which the Company
competes are characterized by rapid technological change, the Company
believes that factors such as the technological and creative skills of
its personnel, new product development, frequent product enhancements,
name recognition and reliable product maintenance are more important to
establishing and maintaining a technology leadership position than the
various legal protections of its technology.
The Company licenses its workstation software through the execution of
license agreements. The Company licenses its personal computer
software products by use of a "shrink wrap" license. A "shrink wrap"
license agreement is a printed license agreement included within packaged
software that sets forth the terms and conditions under which the
purchaser can use the product and is intended to bind the purchaser, by
the purchaser's acceptance of the software, to such terms and conditions.
The Company has a number of contracts with academic institutions and
individuals providing the Company the right to license, market and use
technology developed outside the Company. These products, enhance the
Company's ability to offer an enriched product line, represent a material
percentage of the Company's annual revenue.
Compound, consulting, contract research and collaborative agreements
entered into by the Company require specific documentation regarding
defined proprietary rights, responsibilities of the parties, and/or
allowed use of any related compounds or libraries of compounds.
Competition
The Company operates in a highly competitive industry characterized by
rapidly changing technology, frequent new product introductions and
enhancements, and evolving industry standards. The Company competes with
other vendors of software products designed for applications in analytical
chemistry, computational chemistry, chemical information management, and
combinatorial chemistry; the four principal areas in the chemical and
pharmaceutical research market. The Company's Accelerated Discovery Services
group competes with other vendors for the sale of contract research, targeted
libraries and diverse compound libraries.
Competition is likely to intensify as current competitors expand their
product offerings and as new companies enter the market. The competition
experienced by the Company in its existing and targeted markets could
result in price reductions, reduced margins and loss of market
share, all of which could have a material adverse effect on the Company.
A number of the Company's existing competitors have significantly
greater financial, technical and marketing resources than the Company. The
Company believes that the principal factors affecting competition in its
markets are product quality, performance, reliability, ease of use,
technical service and support, and price. It is expected that these
factors will remain major competitive issues in the future, but
additional factors will become increasingly important, including
contribution to the overall efficiency of the research effort
through enhanced integration, communication and analysis. Although the
Company believes that it currently competes favorably with respect to these
factors, there can be no assurance that the Company will be able to compete
successfully against current and future competitors or that the
competitive pressures faced by the Company will not have a material
effect on its business, operating results or financial condition.
Production
The Company's software production operations consist of assembling,
packaging and shipping the software and database products and documentation
needed to fulfill orders. Outside vendors provide CD-ROM duplication,
printing of documentation, manufacturing of packaging materials and assembly
of the Company's desktop products. The Company typically ships its software
products promptly after the acceptance of a customer purchase order and the
execution of a software license agreement. Accordingly, the Company does not
generally have any significant software backlog, and the Company
believes that backlog at any particular time, or fluctuations in backlog,
are not indicative of sales for any succeeding period.
LeadQuest chemical compounds are designed and manufactured at Tripos
Receptor Research in Bude, England. Compound sales are shipped shortly after
the execution of a sales contract between the customer and Tripos. The
potential for backlogs exists in the delivery of compounds due to the
nature of the materials to be accumulated, packaged and shipped along with
the sometimes lengthy compound selection process of the customer. Backlogs
will fluctuate based on the number, size and timing of orders received,
and availability of product.
Significant Customers
The Company does not derive 10% or more of its total sales from any single
customer.
International Sales
The Company sells its software products through its wholly owned subsidiaries
in Europe and through a network of distributors in the Pacific Rim,
Australia and India. Net sales from the Company's activities outside
of North America represented approximately 48%, 41% and 48% of the
Company's total net sales in 1996, 1997, and 1998, respectively. Net
sales in Europe accounted for 38%, 32% and 40% of the Company's net sales
in 1996, 1997, and 1998, respectively, with the balance from customers
in the Pacific Rim. The Company believes that revenues from its foreign
activities will continue to account for a significant percentage of its
total net sales. See Note 7 to the consolidated financial statements,
Geographic Segment Data, later in this Annual Report.
Employees
As of December 31, 1998, the Company had a total of 187 employees, of
whom 113 were based in the United States and 74 were based internationally.
Of that total, 59 were engaged in marketing, sales and related customer-
support services, 52 in product development, 41 in chemistry laboratory
activities and 35 in operations, administration, MIS and finance.
The Company's future success is significantly dependent on the continued
service of its key technical and senior management personnel and its
continuing ability to attract and retain highly qualified technical and
managerial personnel. None of the Company's employees are represented
by a labor union nor covered by a collective bargaining agreement. The
Company has not experienced any work stoppages and considers its relations
with employees to be good.
Executive Officers of the Registrant
The information required by this item is included in the Company's
Proxy Statement in connection with its Annual Meeting of Shareholders
to be held on May 11, 1999 under the caption "Management", and is
incorporated herein by reference.
Item 2. Properties
The Company's principal administrative, sales, marketing and product
development facilities are located in St. Louis, Missouri. These facilities
are owned by the Company and are financed by a mortgage note. Laboratory
facilities in Bude, England are owned. The Company leases two domestic
sales and service offices in Shrewsbury, New Jersey and South San
Francisco, California. The Company's European subsidiaries lease sales and
service offices in the United Kingdom, France and Germany. The
Company believes that its existing facilities are adequate for its current
needs and that additional space will be available as needed.
Item 3. Legal Proceedings
The Company is currently not a party to any material litigation and is
currently not aware of any pending or threatened litigation that could
have any material adverse effect upon the Company's business, operating
results or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of its fiscal year ended December 31, 1998.
Part II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
The Company's common stock trades on The NASDAQ National Market System
under the symbol "TRPS". The following table sets forth the range of the
high and low sales prices per share of the Company's common stock for
the fiscal quarters indicated, as reported by NASDAQ. Quotations
represent actual transactions in NASDAQ's quotation system but do not
include retail markup, markdown, or commission.
1998
High Low
First quarter $14.875 $ 9.000
Second quarter $14.750 $11.000
Third quarter $14.000 $ 6.625
Fourth quarter $ 9.625 $ 5.250
1997
High Low
First quarter $23.750 $11.750
Second quarter $19.125 $13.250
Third quarter $19.500 $12.500
Fourth quarter $20.000 $13.375
The Company had approximately 1,000 shareholders of record and 2,600 street
name holders as of December 31, 1998. The Company has not declared or paid any
dividends on its Common Stock. The Company currently intends to retain
earnings for use in its business, therefore, it does not anticipate paying
cash dividends in the foreseeable future to common shareholders.
Item 6. Selected Financial Data
Selected Consolidated Financial Data
Year Year Year Year Year
ended ended ended ended ended
Consolidated Statements Dec 31, Dec 31, Dec 31, Dec31, Dec 31,
of Operations 1998 1997 1996 1995 1994
In thousands, except per
share amounts
Net Sales:
Software licenses........ $11,639 $10,117 $9,186 $8,651 $8,848
Support.................. 7,928 7,209 6,715 6,510 5,564
Accelerated discovery
services ............. 2,831 7,737 9,053 2,111 -
Hardware................. 3,174 5,125 3,832 3,825 5,190
Total net sales.......... 25,572 30,188 28,786 21,097 19,602
Cost of sales............ 6,685 9,999 9,990 6,458 6,416
Gross profit............. 18,887 20,189 18,796 14,639 13,186
Operating expenses:
Sales and marketing...... 9,737 10,065 10,705 9,951 8,259
Research and development. 6,263 3,810 2,796 2,978 2,909
General and administrative 4,182 2,940 2,991 2,030 1,708
Restructuring charge..... - - - 2,165 -
Total operating expenses. 20,182 16,815 16,492 17,124 12,876
Income (loss) from
operations ........... (1,295) 3,374 2,304 (2,485) 310
Other income (expense),net 1,404 511 408 450 228
Income(loss) before
income taxes.......... 109 3,885 2,712 (2,035) 538
Income tax expense (benefit) 38 1,305 760 (339) 186
Net income (loss)........ $71 $2,580 $1,952 $(1,696) $352
Basic earnings (loss)
per share (1)(2)...... $0.02 $0.84 $0.67 $(0.59) $0.10
Basic weighted average
number of shares...... 3,208 3,085 2,923 2,860 2,845
Diluted earnings per
share (1)(2).......... $0.02 $0.74 $0.61 $(0.59) $0.10
Diluted weighted average
number of shares...... 3,480 3,504 3,222 2,860 2,846
Consolidated Balance Sheet Data
(at year end) (3)
Working capital.......... $9,116 $9,544 $10,589 $8,800 $10,177
Total assets........... $36,810 $32,610 $24,509 $19,059 $21,134
Long-term obligations,
less current portion $5,515 $3,367 $ - $ - $ -
Total shareholders'equity $19,509 $18,909 $14,367 $11,322 $12,828
(1) The earnings per share calculation for 1994 is a pro forma calculation
which reflects the effect of adjustments to historical results
of operations for estimates of the costs which would have
been incurred by Tripos during the period on a stand-alone basis.
(2) Earnings per share for 1996 and prior periods has been restated to
reflect the adoption of FAS 128. (3) See Note 1 of the Notes to
Consolidated Financial Statements for discussion regarding the
comparability of consolidated balance sheet data.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the audited
consolidated financial statements and notes thereto.
Overview
Tripos, Inc. is a discovery research organization with unique expertise
in molecular informatics and novel medicinal chemistry. Tripos supplies
software, research services and compound libraries to the pharmaceutical,
biotechnology and other life science industries worldwide. The customer
base includes the world's largest scientific research organizations as well
as the rapidly growing biotechnology industry.
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, some of which are discussed below, including,
under the caption "Cautionary Statements-Additional Important Factors to be
Considered." The Company is under no obligation to update any forward-
looking statements in this section. Words such as "expects",
"anticipates", "projects", "estimates", "intends", "plans", "believes",
variations of such words and similar expressions are intended to identify
such forward looking statements.
The Company's revenues and expenses can vary from quarter to quarter
depending upon, among other things, the Company's ability to produce compound
libraries in a timely manner, 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, partners and other vendors, and changes in general economic
and competitive conditions. In addition, the Company may chose to
negotiate a long-term software license contract that may, subject to certain
rules of SOP 97-2, be recognized ratably over the life of the contract.
See Note 1 of the Notes to Consolidated Financial Statements for a
further discussion of revenue recognition policies. A substantial
portion of the Company's revenues for each quarter is attributable to a
limited number of orders and tends to be realized toward 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,
contract research, custom software development and chemical 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.
Year 2000 Issues
The Company provides software licenses that are activated and remain
active based on date and time of the computer where the software resides.
Tripos products sold to its customers are Year 2000 compliant. 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 dollar
amount 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.
The Company has no software used for internal processing, other than its
software products that are already Year 2000 compliant that are more than
three years old. When written, this software was Year 2000 compliant. The
Company has been verifying its Year 2000 compliance throughout 1998 and into
1999. In addition to informal testing and purchases of Year 2000
compliant software and equipment, the Company started development of a
formal plan in October 1998. The second phase of the planning, which will
be completed in April 1999 includes a full written description of potential
problems. The third phase is follow-up documentation, which includes a
written description of each solution and workaround as well as the
testing plan to validate a workable solution. The third phase is
estimated to be completed in early May 1999. Immediately following the
third phase will be the validation of the proposed solutions. This
fourth phase is estimated to be completed by July 1, 1999. In July 1999,
the Company will implement the solutions. Finally, in September 1999,
the Company will fully implement the plan. The implementation will
mean that a) all computers are Year 2000 compliant, or b) those computers
not Year 2000 compliant will not affect the company's ability to conduct
business, and c) no changes will be made to already validated systems
unless adequate testing (re-validation) is performed.
Tripos is dependent upon many third parties for the operation of the
business. These include hardware and software suppliers, suppliers of
raw materials to the compound business, and suppliers of business
services such as payroll and accounting services. To date, the Company is
not aware of any external agent with a Year 2000 issue that would materially
impact the Company's results of operations, liquidity, or capital resources.
The Company will make appropriate contingency plans should a vendor
or supplier report that it is not Year 2000 compliant or will not be by
January 1, 2000. However, the Company has no means of ensuring that external
agents will be Year 2000 ready. The inability of external agents to
complete their Year 2000 resolution process in a timely fashion
could materially impact the Company. The effect of non-compliance by
external agents is not determinable.
The costs of the Year 2000 project are included in the Company's annual
software and hardware budget. These amounts do not differ materially from
those costs experienced in prior periods. Acquisitions of new hardware
are dealt with as part of the ordinary capital purchase process and were
not accelerated by the Year 2000. In addition, the Company has allocated
funds for the purchase of Year 2000 compliance testing software, estimated to
be $7,000. Other costs will be expensed or capitalized according to
established Company procedures. At present, no material costs are
anticipated, and during the periods presented there have been no costs
incremental to normal operating activities.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the
Company has not yet completed all necessary phases of the year 2000 program.
In the event that the Company does not complete any additional phases, the
Company would be unable to take customer orders for compounds, issue keys
to activate software, manufacture or ship products, invoice customers or
collect payments. The amount of lost revenue cannot be reasonably
estimated at this time.
The Company is currently assessing its contingency plans. These contingency
plans will be developed as part of the remedial steps taken in the second and
third quarter of 1999.
European Union Conversion to Euro
The Company conducts business throughout Europe and has transactions
denominated in the currencies of countries not currently participating
in the European Union as well as transactions denominated in the Euro.
The Company is following the "triangulation" procedure for all
transactions effected by the Euro. This procedure is followed by first
converting one legacy currency into its Euro equivalent and then converting
the Euro equivalent into the other legacy currency. The Company
established Euro bank accounts in adherence to this procedure for collection
and payment of invoices. The Company has not experienced any material
impact on its operations due to the Euro nor does it anticipate any impact.
The Company historically conducts 35% of its business in Europe. Any
impact of the conversion would be material to the business, but cannot be
determined at this time.
Results of Operations
The following table sets forth, for the periods indicated, certain
consolidated financial data as a percentage of net sales, (except costs of
sales data, which is set forth as a percentage of the corresponding net
sales data):
1998 1997 1996
Net sales:
Software licenses 46% 33% 32%
Support 31 24 23
Accelerated discovery 11 26 32
services
Hardware 12 17 13
Total net sales 100 100 100
Cost of sales:
Software licenses 21 17 19
Support 1 2 5
Accelerated discovery 44 45 49
services
Hardware 91 91 92
Total cost of sales 26 33 35
Gross profit 74 67 65
Operating expenses:
Sales and marketing 38 33 37
Research and development 25 13 10
General & administrative 16 10 10
Total operating expenses 79 56 57
Income (loss) from
operations (5) 11 8
Interest income 2 2 1
Interest expense (1) - -
Other income
(expense), net 5 - -
Net income before
income taxes 1 13 9
Income tax expense 0 4 2
Net income 1 9 7
Net Sales Net sales increased approximately 5% from $28.8 million in
1996 to $30.2 million in 1997, and decreased 15% in 1998 to $25.6 million.
These fluctuations in net sales were principally attributable to sales of
diverse chemical compound libraries in the Accelerated Discovery Services
("ADS") business. The changes were augmented by increases in software and
support sales. New product sales represented 11% of software license sales
in 1996, 17% in 1997, and 8% in 1998. Tripos generates a substantial portion
of its revenues from the pharmaceutical industry. Net sales to this
industry accounted for approximately 58%, 62%, and 52% of the Company's
total net sales in 1996, 1997, and 1998, respectively.
The Company sells its products and services directly in North America,
through its wholly owned subsidiaries in Europe, through an exclusive
distributor arrangement in Japan, and through nonexclusive agency
relationships in Australia, China, India, Korea, Singapore, and Taiwan. Net
sales from the Company's activities outside of North America represented
approximately 48%, 41% and 48% of the Company's total net sales in 1996,
1997 and 1998, respectively. Net sales in Europe accounted for 38%, 32%,
and 40% of the Company's net sales in 1996, 1997, and 1998,
respectively, with the balance from customers in the Pacific Rim area,
principally Japan. The Company believes that revenues from its foreign
activities will continue to account for a significant percentage of its total
net sales. List prices for the Company's products have remained relatively
stable over the last few years. In 1997, the Company started selling
token software licenses in addition to perpetual licenses. A token
license includes a minimum level of modules for a minimum total price.
In 1997 and 1998, 18% and 38%, respectively of software license sales
were sold in the form of a token license. As a result of selling more
modules through token licenses, the average software license revenue per
customer has increased. The average sale price for chemical compound
libraries decreased in 1997 and 1998 due to the demand for a highly
purified product which caused a decline in the size and number of orders
based on the availability of purified product for sale. Existing customers
represented 85% of total net sales in 1997 and 1998. Increasing net sales
from period to period is dependent, in part, on the Company's ability to
introduce new products which are accepted by the market and on the
Company's ability to penetrate new and existing markets.
Software license sales increased 10% from $9.2 million in 1996 to $10.1
million in 1997 and increased 15% to $11.6 million in 1998. The increases
for the three-year period are attributable to the increase in the number of
new products introduced, the increase in orders of worldwide licenses
for large pharmaceutical companies, the increased penetration into the
biotechnology sector, a large custom software development contract, two
large software consulting contracts and token licensing.
Support sales increased 7% from $6.7 million in 1996 to $7.2 million in
1997, and increased 10% to $7.9 million in 1998. The increase for the
three-year period is primarily due to a larger installed base of customers
with more modules per customer as a result of the overall increase in
software license sales in the prior years.
The Company introduced the Accelerated Discovery Services ("ADS") product
line in September 1995. The Company derives ADS revenues from its compound
library, discovery contract research and license revenue on its
ChemSpaceT technology. ADS sales decreased 15% to $7.7 million in 1997
from $9.1 million in 1996 and decreased 63% to $2.8 million in 1998.
Through an alliance with MDS Panlabs, Inc., the Company sold the
Optiverse compound library in 1996 and 1997. Optiverse was a general
screening library of over 100,000 diverse chemical compounds. In late 1996
and early 1997, a shift in the market demanded an increase in the level
of purity of this compound library. Despite the anticipation of this
demand and the purchase of a specialized apparatus for compound
purification, the delay in receipt of this equipment and subsequent
further delay in the purification process caused a nine-month slippage
in new product. In 1998, the Company restructured its agreement
with MDS Panlabs terminating the Company's distribution of the
Optiverse product. Simultaneously, the Company shifted the focus of
its newly acquired laboratory, Tripos Receptor Research in Bude,
England, from contract research synthesis to synthesis for general
screening libraries and announced the launch of the its own LeadQuest
compound library product. In June 1998, the Company purchased an inventory
of highly-pure diverse chemical compounds from a third-party for
distribution to continue generating revenue from this market. In
September 1998, the Company opened its larger laboratory facility
suitable for all chemical synthesis operations. The Company began
production of a newly designed set of screening libraries,
started pilot projects for contract research and generated focussed
libraries in its collaborative work with Arena Pharmaceutical and
the Wolfson Institute. The Company expects to return to increased levels
of ADS sales by third quarter 1999.
Hardware revenues increased 34% to $5.1 million in 1997 from $3.8 in 1996
and decreased by 38% to $3.2 million in 1998. The increase in 1997
reflects an increase in the average order amount from customers who
purchased the Company's software along with the hardware. The decrease
in 1998 reflects the absence of new models of hardware offered during
the year as well as customers decision to move from Unix based platforms
to Windows NT systems.
Cost of Sales Total cost of sales decreased 33% from $10 million in 1996
and 1997 to $6.7 million in 1998, which represents 35%, 33% and 26%,
respectively, of total net sales. In 1997, the decline in the costs of
diverse compound libraries as a result of the decline in sales was offset
by the increase in hardware costs corresponding to the increase in hardware
sales. In 1998, the decline in hardware costs and diverse compound
library costs was the result of the decline in corresponding product sales.
Costs of software licenses represented 19%, 17% and 21% of software
license sales in 1996, 1997, and 1998, respectively. Costs of software
licenses consist of amortization of capitalized software, royalties to
third-party developers, and the cost of software product packaging and
media. The cost of software licenses as a percentage of software
license sales decreased in 1997 due to a decrease in royalties paid to
distributors in the Pacific Rim resulting from the decline in
revenues in that territory for the year. In 1998, the increase in
costs as a percentage of sales is due to an increase in third party
royalties based on an increase in the number of third party software
modules sold during the year. Costs of support represented 5%, 2% and 1%
of support sales in 1996, 1997, and 1998, respectively. Cost of support
principally consists of software product packaging, media and updates
to documentation. The decrease in costs of sales for support in 1997
and 1998 is due to lowered costs of documentation.
Costs of ADS represented 49%, 45% and 44% of ADS sales in 1996, 1997,
and 1998, respectively. Cost of ADS represents the costs associated with
the design and creation of the diverse compound libraries. In 1997,
the decrease in the costs of ADS as a percentage of sales is due to the
increase of higher margin contract research and ChemSpace revenues,
and the decrease in the royalties for the Optiverse chemical compound
libraries, as a result of the decline in the sales of the library.
In 1998, the decrease in the costs of ADS as a percentage of sales is
due to the decrease in sales of both the Optiverse and LeadQuest
compound libraries. The Company expects the LeadQuest library will have
an overall lower cost than the Optiverse product. The Company expects
the costs of this product line to decline in future periods based on
increases in compound sales offset by increases in higher margin contract
research revenues.
Costs of hardware represented 92%, 91% and 91% of hardware sales in 1996,
1997 and 1998, respectively. Cost of hardware consist primarily of the costs
of hardware sold. The Company expects the cost of hardware as a percentage
of hardware sales to remain relatively stable in future periods.
Gross Profit Gross profit was $18.8 million in 1996, $20.2 million in
1997, and $18.9 million in 1998, which represents gross profits of 65%,
67% and 74%, respectively. The increase in the 1997 gross profit
was due to a decline in the percentage of compound library sales and an
increase in higher margin software license, support, contract research
and ChemSpace sales. The increase in the gross profit margin in 1998
was due to the increase in software license and support sales and the
decrease in the compound library and hardware sales. The Company believes
that gross profit will remain stable as increases in higher margin
contract research and software license revenues offset increases in
lower margin sales of compound libraries. The overall decline in the
gross margin dollars of 6% in 1998 was due to the decrease in revenues of
15% offset by increases in sales of higher margin products and services.
Sales and Marketing Expenses Sales and marketing expenses decreased 6%
from $10.7 million in 1996 to $10.1 million in 1997, and decreased 3%
to $9.7 million in 1998. The decrease in 1998 was due to the overall
decrease in revenues. Sales and marketing expenses as a percentage of
net sales decreased from 37% in 1996 to 33% in 1997, and increased to 38%
in 1998. The fluctuation in sales and marketing expenses as a percentage
of sales is a function of the overall fluctuation in sales. The
Company expects total sales and marketing expenses as a percentage of net
sales to decline as the Company increases its revenue.
Research and Development Expenses Research and development expenses
increased 36% from $2.8 million in 1996 to $3.8 million in 1997, and
increased 64% to $6.3 million in 1998, representing 10%, 13%, and
25% of net sales, respectively. The increases in 1997 and 1998 are
due to the decrease in the amount of capitalized costs as the Company
moves from long-term software development cycles to shorter-term
development cycle for webbased software applications, the increase in
chemistry staff at Tripos Receptor Research, shared costs for the
collaborations with Arena Pharmaceuticals and the Wolfson Institute,
and an increase in staff and facilities for software consulting
programmers.
Research and development expenses, including the amount of capitalized
costs were $6.4 million in 1996, $6.4 million in 1997 and $6.3 million
in 1998 which represents 22%, 21%, and 25% of net sales, respectively.
In accordance with Statement of Financial Accounting Standards No. 86
and SOP 98-1, the Company capitalizes software development costs
for both external and internal use. The total amount of costs capitalized
were $3.6 million, $2.6 million, and $1.3 million in 1996, 1997 and
1998, respectively. This represented 56%, 41% and 17% of total product
research and development expenditures in these periods. In 1996 and 1997,
the capitalized costs of compound development were classified on the
balance sheet under "Capitalized Discovery Services". Beginning in 1998,
the Company capitalized compound library production and design costs to
inventory. The Company anticipates that its investment in new product
research will increase significantly as Tripos continues participation
in research collaborations, development in web-based tools, funded research
and development of software, and increases diverse compound library
production.
General and Administrative Expenses General and administrative expenses
decreased 2% from $3.0 million in 1996 to $2.9 million in 1997 and
increased 42% to $4.2 million in 1998, representing 10%, 10%, and 16% of
net sales, respectively. The increase as a percentage of sales in 1998
is due to the addition of Tripos Receptor Research administrative staff
and a bonus reserve for general staff. The Company expects general
and administrative expenses to remain at comparable levels to 1998 in the
future.
Interest Income Interest income of $425,000 in 1996, $544,000 in 1997
and $471,000 in 1998, was from interest earned on investments.
Interes Expense Interest expense of $13,000 in 1996 was from miscellaneous
bank fees. Interest expense of $50,000 in 1997 and $304,000 in 1998
was from interest due on the long-term note payable for the corporate
building, the line-of-credit, and interest on capital leases.
Other Income (Expense) Other income (expense) was ($4,000) in 1996,
$17,800 in 1997, and $1.2 million in 1998. In 1998, other income was
primarily from the recognition of the guaranteed settlement payment
attributable to the transfer by the Company of the marketing and
distribution rights of the Optiverse product to MDS Panlabs.
Income Tax Expense The Company's tax expense was $760,000 in 1996,
$1.3 million in 1997 and $ 38,000 in 1998. The Company's effective tax
rate was 28%, 34% and 35% for 1996, 1997 and 1998, respectively. The
effective rate for 1996 reflects the impact of net operating loss
carryforwards for which current benefits were not recognized until the
second quarter of 1996.
Liquidity and Capital Resources
The Company's working capital decreased from $9.5 million in 1997 to $9.1
million in 1998. The decrease in working capital is the result of the
Company's expansion of Tripos Receptor Research Limited and investment
in Arena Pharmaceuticals.
Net cash provided by operating activities decreased from $4.4 million
in 1997 to net cash used of $0.4 million in 1998. This was primarily due
to a decrease in net income of $2.5 million, an increase in short-term
receivables of $2.2 million, an increase in inventory of $2.0 million,
an increase in notes receivable of $0.6 million for customer accounts
receivable due to long-term installment sales offset by an increase in
deferred revenue of $2.6 million due to both increased support billings
at year-end and token license contracts for the year. During 1997, net
cash provided by operating activities decreased by $0.5 million from 1996.
This reduction resulted from an increase in notes receivable of
$3.7 million along with a decrease in accrued liabilities of $3.7
million which were partially offset by an increase in net income of
$0.6 million, an increase in deferred revenue of $1.4 million and a
decline in accounts receivable of $3.1 million.
Net cash used in investing activities decreased from $8.6 million in 1997
to $6.0 million in 1998. The decrease relates to the capital acquisitions
for Tripos Receptor Research, the equity investment in Arena Pharmaceuticals
offset by lowered purchases of marketable security investments throughout
the year and reduced amounts of capitalized development costs. The
Company invests available cash in bank deposits, investment-grade
securities and, short-term interest-producing investments, including
government obligations and other money market instruments. The
Company anticipates that 1999 capital purchases will increase slightly
above 1998 due to the continued expansion of the facilities at the
Company's Tripos Receptor Research subsidiary which will be funded
through operating activities and a line-of-credit.
Net cash provided by financing activities decreased from $4.2 million in
1997 to $3.0 million in 1998 as the result of an increase in the
principal payments on long-term debt offset by draws on the negotiated
line-of-credit.
Management believes that with the current cash position of $1.8 million,
accounts receivable of $12 million, cash flow from operations, and
availability of a $12 million line-of-credit, the Company will be able to
meet both its liquidity needs and capital expenditure needs for the next
twelve months. See Note 12 later in this Annual Report for further
discussion of the credit facilities available to the Company. Management
believes that the Company will be able to satisfy its known
long-term liabilities and liquidity needs through the funding sources
identified above. 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
and services, depending upon the associated working capital requirements.
The Company was in violation of one covenant under its current
line-of-credit at December 31, 1998. The Company was granted a waiver
by the bank for this variance and expects to comply with covenants
in 1999. Subsequently, the Company has obtained a firm credit commitment
from a financial organization that possesses a strong global presence
to better meet the worldwide banking requirements of the Company and
has decided to refinance its present debt. The refinancing is expected
to be completed early in the second quarter of 1999. For a further
discussion see Note 12 of this Annual Report.
Foreign Currency Translations
The Company's foreign operations transact the majority of their business
in their respective local currencies and are therefore generally not
exposed to foreign currency gains or losses. Due to the relative
stability of the currency of the countries in which the Company operates
and the level of investment in each country, the Company's current intent
is to retain assets within its foreign operations to fund those operations.
The Company's foreign currency transaction gains and losses have not
been significant to date, and management believes the Company's
exposure to future foreign currency transaction gains and losses
is minimal.
Cautionary Statements-Additional important factors to be considered
The Company's future results could differ materially from those discussed
in this document. Factors that could contribute to such differences,
include, but are not limited to, the following:
Rapid Technological Change. The software and discovery research
industries are characterized by rapid change and uncertainty due to
new and emerging technologies. The pace of change has recently
accelerated due to the Internet, combinatorial chemistry software products,
market demand for high-throughput purified chemical compound libraries,
high throughput screening techniques and combinatorial chemistry companies
entering the market. There can be no assurance that Tripos will be
successful in developing or acquiring product enhancements and new products
necessary to keep pace with the changing technologies.
Customer Acceptance. While the Company provides a database of the
chemical compounds in its library and performs extensive usability
and beta-testing of its new software products, user acceptance and
corporate penetration rates ultimately dictate the success of development
and marketing efforts.
Competition. The software and discovery research industries are highly
competitive. A number of companies offer products that target these
markets. Tripos competes with software and discovery research
vendors for the research budgets of pharmaceutical and biotechnology
companies. It is possible that there will be consolidation in the market
of competitive software and discovery research vendors. Certain of the
Company's competitors have substantially greater financial, technical,
marketing and sales resources than Tripos.
Dependence on key personnel. Tripos' continued success depends to a
significant degree upon the continued service of its President and CEO,
John P. McAlister, and other key technical and senior management personnel.
The loss of the services of Dr. McAlister or any other key personnel,
and the inability of the Company to attract and retain suitable
replacements could have a material adverse effect on the Company.
Possible Acquisitions. The Company may make acquisitions in the future.
Acquisitions involve numerous risks, including difficulties in the
assimilation of the operations and products of the acquired companies,
the diversion of management's attention from other business concerns,
risks of entering markets in which the Company has no or little direct
experience, and potential loss of key employees of the acquired companies.
Item 7a. Market Risks
The Company's exposure to market risks is limited to foreign exchange
variances and fluctuations in interest rates. Neither foreign exchange
nor interest rate exposure has resulted in a material impact on the
Company.
The Company's foreign exchange risk is presently limited to currencies
that historically have exhibited only minor fluctuations. Assets
outside the United States are primarily located in England. The
Company's investments in foreign subsidiaries with a functional currency
other than the U.S. dollar are not hedged. The net assets in foreign
subsidiaries translated into U.S. dollars using the year-end exchange
rates were approximately $2.5 million at December 31, 1998. The
potential loss in fair value resulting from a hypothetical 10% adverse
change in foreign currency exchange rates would be approximately
$0.25 million at December 31, 1998. Any loss in fair value would be
reflected in Other Comprehensive Income and would not impact net income
of the Company. The Company's foreign currency transaction gains and
losses for 1998 were immaterial.
The Company's interest rate risk is attributable to its outstanding
borrowings under its line-of-credit and mortgage loan. The Company
has fixed a its floating rate interest risk on the mortgage loan
through the purchase of a swap instrument. The Company will continue
to monitor its exposure to floating interest rate risk on outstanding
line-of-credit borrowings and endeavor to mitigate this risk through
the use of appropriate hedging instruments.
Item 8. Financial Statements and Supplementary Data
Consolidated Balance Sheets
Year ended Year ended
Assets: December 31, December 31,
1998 1997
Current assets:
Cash and cash $1,773,663 $5,277,469
Investments -- 1,647,073
Accounts receivable, less allowance
for doubtful accounts of $98,783
in 1998 and $78,420 in 1997 12,451,041 10,246,743
Inventory 2,389,442 414,626
Prepaid expenses 1,277,947 520,440
Deferred income taxes 241,900 137,000
Total current assets 18,133,993 18,243,351
Notes receivable-trade 2,303,698 1,703,056
Notes receivable-other 863,079 791,357
Property and equipment,
less accumulated depreciation 11,075,870 5,994,500
Capitalized development costs,
net of accumulated amortization of
$1,857,689 in 1998 and $7,220,643 in 1997 877,036 3,412,062
Goodwill, net of accumulated amortization
of $108,964 in 1998 and $12,450 in 1997 1,146,728 1,170,890
Investment in unconsolidated affiliate 1,982,478 845,000
Other, net 426,864 450,228
Total assets 36,809,746 32,610,444
Liabilities and shareholders' equity:
Current liabilities:
Current portion of long-term debt
and capital leases $ 328,405 $ 178,000
Accounts payable 827,604 1,389,946
Accrued expenses 2,857,734 3,216,366
Deferred revenue 5,004,701 3,914,627
Total current liabilities 9,018,444 8,698,939
Long-term portion of capital leases 225,571 -
Long-term debt 5,289,167 3,367,167
Long-term deferred revenue 2,302,613 780,748
Deferred income taxes 465,000 855,000
Shareholders' equity
Common stock, $.01 par value; authorized
20,000,000 shares; issued and outstanding
3,256,722 shares in 1998 and 3,171,803
shares in 1997 32,567 31,718
Additional paid-in capital 17,980,295 17,342,956
Retained earnings 1,268,980 1,198,360
Other comprehensive income 227,109 335,556
Total shareholders' equity 19,508,951 18,908,590
Total liabilities and shareholders' equity $36,809,746 $32,610,444
See notes to consolidated financial statements
Consolidated Statements of Operations
Year ended Year ended Year ended
December 31, December 31, December 31,
1998 1997 1996
Net sales:
Software licenses.............. $11,638,804 $10,117,342 $9,185,917
Support........................ 7,927,859 7,209,475 6,715,669
Accelerated discovery services. 2,830,681 7,736,952 9,053,042
Hardware....................... 3,174,169 5,124,531 3,831,765
Total net sales................ 25,571,513 30,188,300 28,786,393
Cost of sales:
Software licenses.............. 2,435,555 1,679,025 1,735,380
Support........................ 113,175 163,277 305,000
Accelerated discovery services. 1,247,763 3,519,417 4,422,477
Hardware....................... 2,888,363 4,637,861 3,527,871
Total cost of sales............ 6,684,856 9,999,580 9,990,728
Gross profit................... 18,886,657 20,188,720 18,795,665
Operating expenses:
Sales and marketing............ 9,736,881 10,065,100 10,704,959
Research and development....... 6,262,661 3,809,562 2,795,543
General and administrative..... 4,182,278 2,940,524 2,990,960
Total operating expenses....... 20,181,820 16,815,186 16,491,462
Income (loss) from operations.. (1,295,163) 3,373,534 2,304,203
Interest income................ 470,553 543,628 424,826
Interest expense............... (303,848) (49,744) (12,860)
Marketing rights settlement.... 977,167 - -
Other income (expense), net.... 260,411 17,796 (3,953)
Income before income taxes..... 109,120 3,885,214 2,712,216
Income tax expense............. 38,500 1,305,353 760,000
Net income..................... $ 70,620 $ 2,579,861 $ 1,952,216
Basic earnings per share....... $0.02 $0.84 $0.67
Basic weighted average number
of shares..................... 3,207,853 3,085,077 2,923,284
Diluted earnings per share..... $0.02 $0.74 $0.61
Diluted weighted average number
of shares..................... 3,480,241 3,503,946 3,221,980
See notes to consolidated financial statements
Consolidated Statements of Cash Flows
Year ended Year ended Year ended
Dec 31, Dec 31, Dec 31,
1998 1997 1996
Operating activities:
Net income................. $ 70,620 $2,579,861 $1,952,216
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation of property and
equipment................ 970,127 825,854 790,190
Amortization of capitalized development
costs and goodwill....... 2,890,129 2,302,976 2,484,897
Deferred income taxes...... (496,000) 234,000 289,000
Net gain from sale of property
and equipment ........... - - (25,264)
Change in operating assets and liabilities:
Accounts receivable........ (2,189,016) 67,165 (3,055,248)
Notes receivable, trade.... (600,642) (1,703,056) -
Inventories................ (2,017,108) (396,054) (22,329)
Prepaid expenses and other
current assets........... (776,400) 345,797 21,307
Accounts payable and
accrued expenses......... (859,667) (1,225,286) 2,449,341
Deferred revenue........... 2,605,831 1,383,401 25,826
Net cash provided (used) by
operating activities..... (402,126) 4,414,658 4,909,936
Investing activities:
Purchases of investments... - (851,037) (2,465,000)
Notes receivable, other.... (71,722) (791,357) -
Sales and maturities of
investments.............. 1,647,073 2,539,408 2,308,193
Purchases of property and
equipment................ (5,689,592) (5,687,423) (734,604)
Capitalized development costs (224,562) (2,341,589) (3,320,411)
Acquisition, including investments
in unconsolidated affiliates (1,232,599) (1,488,221) (298,385)
Net cash used in investing
activities............... (5,571,402) (8,620,219) (4,510,207)
Financing activities:
Proceeds from stock issuance
pursuant to stock purchase
and option plans......... 638,188 657,471 984,297
Proceeds from issuance of
long-term debt........... 2,100,000 3,560,000 -
Payments on long-term debt and
capital lease obligations (229,739) (14,833) -
Net cash provided by financing
activities............... 2,508,449 4,202,638 984,297
Effect of foreign exchange rate
changes on cash and cash equivalents (38,727) (112,682) 54,244
Net increase (decrease) in cash
and cash equivalents..... (3,503,806) (115,605) 1,438,270
Cash and cash equivalents at
beginning of year........ 5,277,469 5,393,074 3,954,804
Cash and cash equivalents at
end of year.............. $1,773,663 $5,277,469 $5,393,074
See notes to consolidated financial statements
Consolidated Statements of Shareholders' Equity
Other Total
Common Stock Additional Retained Compre- Share-
Paid-in Earnings hensive holders'
Shares Amount Capital (Deficit) Income Equity
Balance at December 31,
1995 2,879,763 $28,798 $14,236,705 $(3,333,717) $390,569 $11,322,355
Stock issued under
stock purchase plan 32,602 326 164,435 - - 164,761
Stock issued under
stock option plan 98,264 983 801,803 - - 802,786
Stock issued
under director
compensation plan 1,423 14 16,736 - - 16,750
Comprehensive income:
Translation
adjustment - - - - 108,514 108,514
Net income - - - 1,952,216 - 1,952,216
Total comprehensive
income 2,060,730
Balance at December 31,
1996 3,012,052 30,121 15,219,679 (1,381,501) 499,083 14,367,382
Stock issued under
stock purchase plan 42,321 423 360,729 - - 361,152
Stock issued under
stock option plan 84,780 848 540,163 - - 541,011
Stock issued
under director
compensation plan 2,650 26 44,157 - - 44,183
Stock and warrants
issued related to
acquisition 30,000 300 1,178,228 - - 1,178,528
Comprehensive income:
Translation
adjustment - - - - (163,527) (163,527)
Net income - - - 2,579,861 - 2,579,861
Total comprehensive
income 2,416,334
Balance at December 31,
1997 3,171,803 31,718 17,342,956 1,198,360 335,556 18,908,590
Stock issued under
stock purchase plan 43,108 431 376,212 - - 376,643
Stock issued under
stock option plan 38,428 384 228,740 - - 229,124
Stock issued
under director
compesation plan 3,383 34 32,387 - - 32,421
Comprehensive income:
Translation
adjustment (108,447) (108,447)
Net income 70,620 70,620
Total comprehensive
income (37,827)
Balance at December 31,
1998 3,256,722 $32,567 $17,980,295 $1,268,980 $227,109 $19,508,951
See notes to consolidated financial statements
Notes to Consolidated Financial Statements December 31, 1998
1. Description of Business and Summary of Significant Accounting Policies
Description of Business and Company Organization
Tripos, Inc. 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 thirdparty 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.
Effective June 1, 1994, Evans and Sutherland Computer Company ("E&S"),
the former parent of the Company, distributed all outstanding shares
of the common stock of the Company (formerly Tripos Associates, Inc.) to
E&S shareholders ("the Distribution") such that every three shares of E&S
yielded one share of the Company. Shortly before the Distribution, the
Company changed its name to Tripos, Inc.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions are eliminated in consolidation.
Investments in affiliates, owned more than 20%, but not in excess of 50%,
are recorded on the equity method. Investments in unconsolidated
affiliates less than 20% owned are accounted for under the cost method.
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Investments
The Company's investments, which consist primarily of U.S. government and
other high-quality debt securities with maturities of less than five years,
have been classified as available-for-sale and are carried at fair value.
There were no unrealized holding gains and losses since the fair value
approximated the amortized cost of investments at each year-end.
Inventory
Inventory consists of finished chemical compounds, supplies and work in
process at its U.K. subsidiary, Tripos Receptor Research Ltd., and is
carried at the lower of cost (standard cost method approximating FIFO) or
market.
Notes Receivable-Trade
Amounts shown for notes receivable-trade represent customer receivables with
maturities in excess of one year net of imputed interest discount.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed by
applying an accelerated method over the estimated useful lives of the assets,
which range from five to ten years for equipment and furniture, twenty-
five to thirty-nine years for buildings, the shorter of the useful life
of the improvement or the life of the related lease for leasehold improvements,
and three years for purchased software.
Development Costs
Development costs consist of software development costs which are
capitalized after the establishment of technological feasibility in
accordance with Statement of Financial Accounting Standards No. 86.
For 1997 and 1996, costs associated with the design and creation of
diverse compound libraries, within the Company's Accelerated Discovery
Services relationship with MDS Panlabs, were capitalized. Amortization of
capitalized software development costs is provided on a productby-product
basis as the greater of (a) the ratio of current gross revenues for a product
to the total current and anticipated future gross revenues or (b) the
straight-line method over the remaining estimated economic life of the
product. Currently, the Company is using an estimated economic life of
three to five years. Capitalized costs associated with the diverse
compound libraries were amortized on a two-year straight-line method up
until the time of the restructuring of the Agreement with MDS Panlabs,
at which time all remaining costs were written off to cost of sales.
Beginning in 1998, library design and production costs associated with the
LeadQuest compound library are accounted for under the inventory method
of accounting.
The Company assesses the recoverability of capitalized development costs by
comparing the remaining unamortized balance to the net realizable value of
the related product. Any excess is written off. All other research and
development expenditures are charged to research and development expense
in the period incurred.
Effective January 1, 1998, the Company adopted AICPA's Statement of Position
98-1 ("SOP 98-1") which requires capitalization of certain costs incurred
in connection with developing or obtaining internal use software. Capitalized
costs are amortized over the lesser of three years or the remaining
useful life of the software.
Goodwill
Goodwill represents the excess of the cost of the net assets acquired of
Tripos Receptor Research Ltd. over its fair value. It is being amortized
on a straight-line basis over 15 years. On a periodic basis, the Company
evaluates goodwill for impairment by comparing estimated future discounted
cash flows of the business to which the goodwill relates to its carrying value.
Revenue Recognition
In late 1997, the Accounting Standards Executive Committee of the AICPA
issued statement of Position 972 ("SOP 97-2"), "Software Revenue Recognition"
and updated it in early 1998 with SOP 98-4. These SOPs became effective
for the Company for transactions entered into after January 1, 1998. The
Company recognizes revenue from software licenses in accordance with these
SOPs upon product delivery, customer acceptance with all obligations fulfilled
at the date of delivery, and determination that collectibility of the sale
proceeds is probable. The Company recognizes revenue from software support
contracts ratably over the term of the contract, typically one to three years.
In software arrangements that include rights to multiple software products,
specified upgrades, software support services and/or other services, the
Company allocates the total arrangement fee among each deliverable based on
the relative fair value of each of the deliverables determined based on
vendor specific objective evidence. Revenue from chemical compound sales is
recognized upon delivery of the product. Hardware sales are recognized on
delivery of the product from the Company's vendor to the Company's customer.
The Company has entered into contract research agreements and software
consulting arrangements with certain customers which provide for
collaboration with the Company in defining related software products,
early access to the products, discounts on licenses for the products
developed and compound library design. The Company recognizes revenue
related to contract research and software consulting agreements as
contractual milestones are achieved and delivered or, absent such contractual
milestones, on a completed contract basis or a percentage of completion basis.
Warranty
The Company is a reseller of hardware and passes through to its customers
the standard warranties provided by the hardware supplier. The Company
warrants its application software products to perform in accordance with
written user documentation and the agreements negotiated with the customer.
Since the Company does not customize its applications software, software
warranty costs are insignificant and expensed as incurred.
Foreign Currency Translation
The local foreign currency is the functional currency for the Company's
foreign operations. Assets and liabilities of foreign operations are
translated to U.S. dollars at the current exchange rates as of the
applicable balance sheet date. Revenues and expenses are translated at the
average exchange rates prevailing during the period. Adjustments resulting
from translation are reported as a separate component of shareholders'
equity. Net gains and losses from foreign currency transactions were not
significant during any of the years presented.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income" which became effective for the Company
for 1998. SFAS 130 establishes standards for reporting and display of
comprehensive income and its components (revenue, gains and losses) in a
full set of general purpose financial statements. SFAS 130 requires that
all components of comprehensive income, including net income, be
reported in a financial statement that is displayed with the same prominence
as other financial statements. Comprehensive income is defined as the change
in equity during a period from transactions and other events and circumstances
from non-owner sources. Net income and other comprehensive income, including
foreign currency translation adjustments, and unrealized gains and losses
on investments, shall be reported, net of their related tax effect, to
arrive at comprehensive income. The adoption of SFAS 130 has not had an
impact on the Company's financial position or results of operations.
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 depreciation,
capitalized development costs, accrued vacation and customer deposits.
Earnings Per Common and Dilutive Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128
("FAS 128"), "Earnings per Share". FAS 128 replaced the calculation
of primary and fully diluted earnings per share with basic and diluted
earnings per share. Basic earnings per common share is computed using the
weighted average number of common shares outstanding during the year.
Diluted earnings per common share is computed using the weighted
average number of common shares and potential dilutive common shares that
were outstanding during the period. Potential dilutive common shares
consist of outstanding stock options. See Note 14 for additional
information regarding earnings per share.
Stock-based Compensation
The Financial Accounting Standards Board issued SFAS 123, "Accounting For
Stock-Based Compensation", effective for years beginning after December 1995.
However, the Company has elected to continue following Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees",
and related Interpretations in accounting for its stock-based transactions.
Under APB 25, generally no compensation expense is recognized because the
exercise price of the options equal the fair value of the stock at the
grant date. The Company has adopted the disclosure-only provisions of SFAS
123 as shown in Note 6 to these financial statements.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
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.
Reclassifications
Certain amounts in the prior year financial statements have been reclassified
to conform with the current year presentation.
2. Property and Equipment
Property and equipment at the end of each year are summarized below:
1998 1997
Computer equipment $5,204,145 $4,649,805
Capital leases -
laboratory equipment 469,059 -
Furniture and fixtures 3,106,024 1,705,225
Purchased software 1,335,899 1,107,828
Company vehicles 25,722 -
Land 1,592,732 1,340,000
Buildings 6,292,876 3,240,927
18,026,457 12,043,785
Less accumulated
depreciation 6,950,587 6,049,285
$11,075,870 $5,994,500
3. Accrued Expenses
Accrued expenses consist of the following at the end of each year:
1998 1997
Payroll related $1,224,260 $1,011,821
Income taxes refundable (714,429) (653,713)
Product royalties 797,622 286,442
Compound development 105,000 1,426,011
Other 1,445,281 1,145,805
$2,857,734 $3,216,366
4. Income Taxes
The components of income (loss) before income taxes for the years ended
were as follows:
1998 1997 1996
Domestic $712,260 $3,871,118 $2,523,411
Foreign (603,140) 14,096 188,805
$109,120 $2,712,214 $3,885,214
The components of income tax expense (benefit) for the years ended were
as follows:
1998 1997 1996
Current tax expense (benefit)
Federal $345,000 $862,000 $71,000
State and local 83,000 183,000 87,000
Foreign 107,000 26,000 313,000
Total current 535,000 1,071,000 471,000
Deferred tax expense (benefit) (496,000) 234,000 289,000
Total provision $39,000 $1,305,000 $760,000
The difference between the effective income tax rate and the U.S. federal
income tax rate for the years ended is explained as follows:
1998 1997 1996
Tax at U.S. federal
statutory rate 34.00 % 34.00 % 34.00 %
Effect of foreign operations
(net of foreign taxes) 18.26 0.54 0.48
Valuation allowance - - (10.73)
State taxes 13.04 5.62 3.17
R&D tax credits (39.04) (5.15) -
Other 8.94 (1.41) 1.08
35.20 % 33.60 % 28.00 %
The tax effects of temporary differences that give rise to deferred
tax assets and liabilities at the end of each year are summarized as follows:
1998 1997
Current deferred income tax asset:
Allowance for doubtful accounts $25,000 $23,000
Vacation accrual 129,000 109,000
Customer deposits - 3,000
NOL carryforward - 45,000
Other 43,000 2,000
Tax credit carryforward 45,000 -
Valuation allowance - (45,000)
$242,000 $137,000
Noncurrent deferred income tax liability:
Capitalized development costs (516,000) $(911,000)
Property and equipment 4,000 31,000
Other 47,000 25,000
$(465,000) $(855,000)
Income tax payments for 1998, 1997 and 1996 were $361,500, $1,010,000
and $262,000, respectively.
Three of the Company's foreign subsidiaries had loss carryforwards
at December 31, 1998, totaling approximately $1,104,000 that have no
expiration date. Undistributed earnings of subsidiaries outside the
United States are considered to be permanently invested. Accordingly, no
provision for U.S. income taxes was made for undistributed earnings of
such subsidiaries, which aggregated $426,000 at December 31, 1998.
5. Stock Plans
In 1994, the Company adopted the 1994 Employee Stock Purchase Plan,
which allows eligible employees to purchase stock at the lower of 85%
of the fair market value of the stock on the enrollment date
or exercise date as defined by the plan. Pursuant to the plan,
employee purchases are limited to 10% of compensation. The plan, which
was amended in 1998 to raise the number of shares reserved for
issuance from 150,000 to 350,000 shares, is in effect for ten years unless
terminated or amended sooner by the Board of Directors. At
December 31, 1998, 149,661 shares have been purchased under this plan.
In 1994, the Company adopted the 1994 Stock Plan which is administered
by the Compensation Committee and provides for incentive stock options,
nonstatutory stock options and stock purchase rights to be granted to
employees and consultants of the Company. Pursuant to the plan, incentive
stock options can be exercised at a price which is not less than the fair
value of the stock on the grant date, and nonstatutory stock options and
stock purchase rights can be exercised at a price which is determined by
the Compensation Committee. The Compensation Committee is responsible for
establishing the period over which options and rights can be exercised.
Options vest at the rate of 25% on the first anniversary of each grant and
1/48th per month over the next three years. All options granted have 10-
year terms. The plan, which was amended in 1998 to increase the number
of shares of common stock reserved for issuance from 1,100,000
to 1,280,000, is in effect for ten years unless terminated or amended
sooner by the Board of Directors.
In 1994, the Company adopted the 1994 Director Option
Plan which provides for nonstatutory stock options to
be granted to non-employee directors at the fair market value of the
stock at the date of grant. Options can be
exercised in 25% increments on the anniversary of
its date of grant. The plan, which was amended in
1998 to decrease the number of shares of common stock
reserved for issuance from 300,000 to 240,000, is in
effect for ten years unless terminated or amended
sooner by the Board of Directors.
The Company has elected to follow APB 25,
"Accounting for Stock Issued to Employees", and
related interpretations in accounting for its
employee and director stock options because, as
discussed below, the alternative fair value
accounting provided for under SFAS 123, "Accounting
for Stock-Based Compensation", requires use of
option valuation models that were not developed for
use in valuing employee stock options. Under
APB 25, because the exercise price of the
Company's employee and director stock options
equals the market price of the underlying stock on
the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and
earnings per share is required by SFAS 123 and has
been determined as if the Company had accounted for
its employee and director stock options under the
fair value method of that Statement. The fair
value for these options was estimated at the date
of grant using a BlackScholes option pricing model
with the following weighted average assumptions: risk-
free interest rates ranging from 5.13% to 6.64%
for 1996, 5.45% to 6.50% for 1997 and 4.26% to
5.65% for 1998; volatility factor of .85 for 1996,
.86 for 1997 and .94 for 1998; and a weighted
average expected life of the option of 5.3 years for
both 1996 and 1997 and 4.2 years for 1998. For the
Company's Employee Stock Purchase Plan,
compensation expense was also estimated using a
Black-Scholes option pricing model with the
following assumptions: risk-free interest rates
ranging from 5.05% to 5.25% for 1996, 5.7%
to 6.4% for 1997 and 5.36% to 5.65%
for 1998; volatility factors of .85 for 1996, .86
for 1997 and .94 for 1998; and a weighted average
expected life of the option of 6 months. For all
years presented, the Company used a dividend rate
of zero.
The Black-Scholes option valuation model was
developed for use in estimating the fair value of
traded options which have no vesting restrictions
and are fully transferable. In addition, option
valuation models require the input of highly
subjective assumptions including the expected
stock price volatility. Because the Company's
employee and director stock options have
characteristics significantly different from those
of traded options and because changes in the
subjective input assumptions can materially affect
the fair value estimate, in management's opinion,
the existing models do not necessarily provide
a reliable single measure of the fair value of its
employee and director stock options.
For purposes of pro forma disclosures, the estimated
fair value of the options is amortized to expense
over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings
per share information):
Pro Forma 1998 1997 1996
Pro forma net income (loss) $(1,311) $1,580 $1,299
Pro forma earnings (loss)
per share:
Basic $(0.41) $0.51 $0.44
Diluted $(0.41) $0.48 $0.42
Options 1998 Weighted 1997 Weighted 1996 Weighted
Outstanding Average Average Average
Summary Shares Exercise Shares Exercise Shares Exercise
Price Price Price
Beginning 834,093 $7.7899 770,969 $6.0881 669,931 $5.2747
outstanding
Granted:
Price=Fair 161,575 $12.1595 195,700 $13.0313 215,700 $8.4899
Value
Exercised (42,452) $5.7222 (97,316) $5.1889 (98,677) $5.8116
Canceled/expired (72,325) $10.2501 (35,260) $6.8504 (15,985) $6.1111
Ending 880,891 $8.4890 834,093 $7.7899 770,969 $6.0881
outstanding
Exercisable- 547,082 417,038 299,929
end of year
Weighted
average fair
value per
share of $8.21 $8.22 $5.29
options
granted during
the year
12/31/98 Options Outstanding Options Exercisable
Weighted Weighted Weighted
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices Life Price Price
$4.2500-$4.7500 76,827 6.05 $4.3092 73,536 $4.2991
$5.0000-$5.0000 262,275 5.42 $5.0000 262,275 $5.0000
$5.7500-$7.8750 150,721 6.65 $7.3697 112,071 $7.3445
$8.0000-$12.500 317,068 8.57 $11.4875 85,075 $10.7488
$13.6875-$20.500 74,000 8.79 $15.1761 14,125 $15.9331
$4.2500-$20.500 880,891 7.20 $8.4890 547,082 $6.5623
In January 1996, the Board of Directors of the Company
authorized and declared a dividend of one preferred
share purchase right (a "right") for each share of
common stock outstanding on January 26, 1996.
Each right represents the right to purchase one
preferred share of stock. These rights can be
exercised only if certain events occur, which
include, among other things, when a beneficial owner
of the Company's common stock acquires a total of
20% or more of the outstanding common stock of the Company.
6. Benefit Plan
In 1994, the Company established a defined
contribution 401(k) Plan covering all domestic
employees who are at least 21 years of age and have
completed at least six months of service (provided that
such service represents a minimum of 1,000 hours
worked). Employees may contribute to the plan up
to 17% of their compensation, which is further
limited by law ($9,700 in 1998). The Company will
match employee contributions for an amount up to 50%
of the first 6% of each employee's compensation
deferral. Contributions made by the Company were
$177,600 in 1998 and $180,500 in 1997.
7. Geographic Segment Data
In June 1997, the Financial Accounting Standards
Board issued SFAS 131, "Segment Information" which
became effective for the Company for 1998. SFAS 131
amends the requirements for public companies to
report financial and descriptive information about its
reportable operating segments in annual financial
statements and selected information about operating
segments in interim reports issued to shareholders.
It also establishes standards for related disclosures
about products and services, geographic areas, and
major customers. Operating segments, as defined in
SFAS 131, are components of the enterprise for which
separate financial information is available and is
evaluated regularly by the Company in deciding how
to allocate resources and assess performance. The
Company believes it operates in one reportable
business operating segment and therefore presents
only the following geographic data as representative
segment information.
The Company's foreign operations historically have been
conducted principally through the Company's wholly
owned foreign subsidiaries and distributors. Information regarding
operations by geographic area for 1998, 1997 and 1996 is as follows :
U.S.A. U.K. Germany France Pacific Rim Total
1998
Net sales $13,263,414 $2,622,418 $5,501,931 $2,183,765 $1,999,985 $25,571,513
Long-lived
assets 6,190,701 6,385,449 90,365 44,879 - 12,711,394
1997
Net sales 17,898,691 4,205,506 3,699,848 1,665,820 2,718,435 30,188,300
Long-lived
assets 5,955,301 1,550,399 115,397 59,062 - 7,680,159
1996
Net sales 14,975,383 4,093,618 5,072,253 1,769,421 2,875,718 28,786,393
Long-lived
assets 1,127,437 108,874 119,596 42,673 - 1,398,580
Most services of the Company are provided on an
integrated worldwide basis. Because of the integration of
U.S. and non-U.S. services, it is not practical to
separate precisely the U.S.oriented services from
services resulting from operations outside the United States and
performed for customers outside the United States; accordingly, the
separation set forth in the preceding table is based upon internal
allocations, which involve certain management judgments.
Net sales and long-lived assets in the preceding
table are attributable to the country or territory
in which the Company's subsidiaries or distributors
are located.
8. Concentrations of Credit Risk
Financial instruments that potentially subject the
Company to concentrations of credit risk have
consisted principally of investments and trade
receivables. The Company invests available cash in
bank deposits, investment-grade securities, and
shortterm interest-producing investments,
including government obligations and other money
market instruments. The Company has adopted credit
policies and standards to evaluate the risk
associated with its sales and requires
collateral, such as letters of credit and bank
guarantees, whenever deemed necessary. Management
believes that any risk of loss is significantly
reduced due to the nature of the customers and
distributors with which it does business.
9. Lease Obligations
The Company leases certain office facilities and
equipment under noncancelable operating and capital
leases with terms from one to five years. The
capital leases specifically pertain to the
acquisition of certain laboratory equipment
totaling $442,046. Rent expense under such
arrangements was $406,100, $757,712, and $629,505
in 1998, 1997, and 1996, respectively.
Noncancelable future minimum lease commitments as of
December 31, 1998 are:
Year Operating Capital
Leases Leases
1999 $413,800 $179,400
2000 361,700 179,400
2001 291,800 57,000
2002 170,600 -
2003 55,200 -
1,293,100 415,800
Less amount representing
interest - (39,800)
Present value of minimum
lease payments $1,293,100 $376,000 *
* Includes the current portion of capital lease obligations of $150,405
10. Selected Quarterly Financial Data (Unaudited)
The following table presents unaudited financial data for
each quarter of 1998 and 1997 (in thousands, except per share data):
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
Total net sales............ $6,184 $5,529 $5,587 $8,272
Gross profit............... 4,016 4,549 4,258 6,063
Income (loss) from operations (541) (321) (769) 336
Net income (loss).......... (302) 41 70 262
Net income (loss) per share:
Basic................. $(0.10) $0.01 $0.02 $0.08
Diluted................ $(0.10) $0.01 $0.02 $0.08
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
Total net sales............ $6,792 $6,351 $9,000 $8,045
Gross profit............... 4,468 3,976 5,889 5,855
Income from operations..... 116 515 1,192 1,551
Net income................. 168 387 842 1,183
Net income per share:
Basic................. $0.06 $0.13 $0.27 $0.38
Diluted............... $0.05 $0.11 $0.24 $0.34
The first three quarters of 1997 earnings per share
amounts have been restated as required to comply
with Statement of Financial Accounting Standards No.
128, "Earnings Per Share". For further discussion
of earnings per share and the impact of Statement
No. 128, see note 1 of the consolidated
financial statements, "Description of Business and
Summary of Significant Accounting Policies,
Earnings Per Common and Dilutive Share".
11. Inventory
The Company maintains a physical inventory of
chemical compound libraries in various states of
completion. Costs associated with the
manufacture of compounds are calculated using
the standard cost method and are carried at the
lower of cost or market. Compounds that are acquired from
third parties are also carried at the lower of
cost or market. Finished Goods inventory may periodically
contain costs of computer hardware that has been acquired
for resale to the Company's customers.
December 31, December 31,
1998 1997
Raw materials........... $43,844 $41,260
Work in process......... 1,764,643 18,808
Finished goods.......... 580,955 354,558
$2,389,442 $414,626
12. Long-term Debt
The Company entered into a five-year $12,000,000 Credit
Agreement with a bank on October 16, 1998. The Credit Agreement
requires the Company to meet certain financial
covenants, including various coverage ratios and a
debt to capitalization ratio. The line of credit
is secured by all of the Company's U.S. assets as
well as a pledge of its European assets. As of
December 31, 1998, the Company was in violation of
one covenant which was subsequently waived by the
bank for that quarterly reporting period.
Interest on borrowings is payable under several
rate options. Additionally, the Company is required
to pay a nominal commitment fee for the unused
portion of the facility. As of December 31,
1998, $2,100,000 of borrowings were outstanding.
Average borrowings under the facility for 1998
were $1,153,000 from the date of the first draw
until December 31, 1998. The weighted-average
interest rate incurred from the date of inception
until December 31, 1998 was 7.02%.
On November 14, 1997, the Company acquired its
headquarters building and grounds. Financing for
the acquisition was obtained from the same bank
that provides the current line of credit in the
amount of $3,560,000. The five-year mortgage note
amortizes the loan principal on a straight-line
basis on a twenty-year schedule. The variable
interest rate on the note is equivalent to the
thirty-day LIBOR rate plus 1.75%. The note
requires the Company to meet certain financial
covenants consistent with those of the Credit
Agreement above. The property acquired acts
as security for the borrowing. Concurrent with
the issuance of the mortgage note, the Company
entered into an interest rate swap agreement with
the bank. This agreement effectively changed the
Company's floating rate exposure to a fixed rate
of 8.26%. The interest rate swap agreement
matures at the same time as the mortgage note and
is for the same notional amount. The Company is
exposed to credit loss in the event of
nonperformance by the counterparty. However, the
Company does not anticipate nonperformance by the
counterparty bank. At December 31, 1998 the thirty-
day LIBOR rate plus 1.75% equaled 7.38%. Interest
paid during the periods was $292,500 in 1998 and
$21,300 in 1997.
On March 22, 1999, the Company received a credit
commitment with a bank, that will refinance the
existing $12 million Credit Agreement and the
mortgage note. The credit commitment is for a total
of $15,332,667 which is broken into three separate
credit facilities: a $3,332,667 secured real
estate mortgage, $4,000,000 three-year secured term
loan, and an $8,000,000 threeyear revolving line of credit.
The credit commitment is collateralized by substantially
all of the Company's U.S. assets and stock pledges for
the Company's U.S. and foreign subsidiaries. The commitment
also requires the Company to meet certain financial covenants,
including various coverage ratios and a debt to
capitalization ratio. These covenants within the
credit commitment are less stringent than those
contained in the current Credit Agreement. The Company
expects to meet these new covenant requirements during 1999.
The mortgage note under the credit commitment calls
for even quarterly principal payments based on a
twenty-year amortization schedule beginning June 30,
1999. Borrowings under the mortgage will be subject
to a variable interest rate at LIBOR plus 2.25%.
The new bank has agreed to assume the underlying
swap agreement which was issued associated with the
previous mortgage note. The term note under the
credit commitment will require quarterly principal
payments of $250,000 plus interest beginning March
31, 2000. The revolving line of credit under the
credit commitment will require quarterly interest-
only payments with any remaining borrowings due at
the end of the three-year commitment period.
Availability under the revolving line of credit will
be based on eligible U.S. accounts receivable.
Borrowings under the term loan will bear interest
at variable rates tied to LIBOR while the revolving
line of credit will bear interest at comparable LIBOR
rates or at the bank's prime rate.
Long-term debt obligations were:
December 31, December 31,
1998 1997
Borrowings outstanding under
Credit Agreement $2,100,000 -
8.26% mortgage note,
due November 14, 2002 3,367,167 $3,545,167
Less current maturities, as (178,000) (178,000)
refinanced
Long-term debt $5,289,167 $3,367,167
At December 31, 1998, the Company continues to
classify the $5,289,167 related to the line of
credit and mortgage note as long-term debt based
on management's intent and ability to refinance
this debt on a long-term basis. Maturities of
longterm debt, as refinanced, are $178,000 for 1999,
$1,178,000 for 2000, $1,178,000 for 2001 and $2,933,167 for 2002.
13. Acquisition of Tripos Receptor Research Ltd.
On November 11, 1997, the Company purchased all the
outstanding common stock of Receptor Research Ltd,
a U.K. company, for a mixture of cash, warrants
and common stock of Tripos, Inc. Warrants for
20,000 shares of Tripos, Inc. Common Stock vested
at December 31, 1998. Warrants for 30,000 shares
will vest on December 31, 1999. The warrants
were recorded at their fair market value at the
date of the grant. The purchase price has been
allocated to net identifiable assets with the
excess recorded as goodwill. The goodwill is being
amortized over 15 years on a straight-line basis.
The results of operations for Receptor Research
are included in these financial statements from
the date of the acquisition. Pro forma results
of operations, assuming the acquisition of Receptor
Research had occurred on January 1, 1997, would
not materially differ from the reported results of
operations. The name of the company was changed to
Tripos Receptor Research Ltd. on January 7, 1998.
14. Earnings Per Share
The following table sets forth the computation of
basis and diluted earnings per share:
1998 1997 1996
Numerator:
Numerator for basic and
diluted earnings $70,620 $2,579,861 $1,952,216
per share-net income
Denominator:
Denominator for basic
earnings per share- 3,207,853 3,085,077 2,923,284
weighted average shares
Effect of dilutive securities:
Employee stock options 272,388 418,869 298,696
Denominator for diluted
earnings per share-
adjusted weighted 3,480,241 3,503,946 3,221,980
average shares and
assumed conversions
Basic earnings per share $0.02 $0.84 $0.67
Diluted earnings per share $0.02 $0.74 $0.61
Report of Independent Auditors
Board of Directors and Shareholders
Tripos, Inc.
We have audited the accompanying consolidated balance
sheets of Tripos, Inc. as of December 31, 1998 and 1997, and the
related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period
ended December 31, 1998. Our audits also included the financial
statement schedule listed in the index at Item 14(a). These
financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Tripos, Inc. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. Also in our opinion,
the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
ERNST & YOUNG LLP
St. Louis, Missouri
February 5, 1999, except for Note 13,
as to which the date is March 22, 1999
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
Part III
Item 10. Directors and Officers of the Registrant
The information required by this item is included
under the captions "Election of Directors" in the Company's
Proxy Statement in connection with its Annual Meeting of
Shareholders to be held on May 11, 1999 and is incorporated
herein by reference.The information required by this item
relating to the Company's executive officers and key employees
is included in the Company's Proxy Statement under the caption
"Management" and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item is included
under the caption "Election of Directors - Director
Remuneration" and under the caption "Executive
Compensation and Related Information", except for
the "Report of the Compensation Committee" and the
"Comparison of Shareholder Return", in the
Company's Proxy Statement in connection with its
Annual Meeting of Shareholders to be held on May 11,
1999 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial
Owners and Management
The information required by this item is included under
the caption "Ownership of Securities" in the Company's
Proxy Statement in connection with its Annual Meeting of
Shareholders to be held on May 11, 1999 and is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
The Company has not engaged in any transaction
or had any relationship with any executive
officer or director that is required to be
disclosed pursuant to Item 404 of Regulation S-K.
Part IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) The following documents are filed as part of this Annual Report
on Form 10-K:
1. Financial Statements.
See Part II, Item 8 Financial Statements and Supplementary Data
2. Financial Statement Schedule
The following financial statement schedule
of Tripos, Inc. is included in this annual report on Form 10-K.
Page Number
Schedule II - Valuation and Qualifying Accounts II-1
Schedules other than that which is listed above
have been omitted since they are either not
required, are not applicable, or the required
information is shown in the financial statements
or related items.
3. Exhibits - see the following Exhibit Index of this report.
The following exhibits listed in the Exhibit Index are filed
with this report:
12 See Part II, Item 8; Financial Statements and Supplementary Data
23.1 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
(b) Reports on Form 8-K filed in the fourth quarter of 1998:
None.
(c) Exhibits - see Exhibit Index:
Management Contracts and Compensatory Plans -
the following exhibits listed in the Exhibit
Index are listed below pursuant to item 14(a)-3 of Form 10-K:
10.1 Tripos, Inc. 1994 Stock Option Plan
10.2 Tripos, Inc. 1994 Employee Stock Purchase Plan
10.3 Tripos, Inc. 1994 Director Option Plan
10.4 Tripos, Inc. 1994 401(k) Plan
10.5 Amendment to the 1994 401(k) Plan
10.6 Tripos, Inc. 1996 Director Stock Compensation Plan
Pursuant to the requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIGNATURES
TRIPOS, INC.
By: /s/John P. McAlister March 26, 1999
John P. McAlister, III Date
President, Chief Executive Officer
and Member of the Board of Directors
POWER OF ATTORNEY
Know all men by these presents, that each person
whose signature appears below constitutes and
appoints John P. McAlister, III, Colleen A. Martin
and John D. Yingling, and each of them (with full
power to each of them to act alone), his true and
lawful attorney-in-fact and agent, with full power
of substitution and resubstitution, for him and in
his name, place and stead, in any and all
capacities, to sign any or all amendments to this
report on Form 10-K for the fiscal year ended
December 31, 1998, and to file the same, with all
exhibits thereto and other documents in connection
therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority
to do and perform each and every act and thing
requisite and necessary to be done in and about
the premises, as fully to all intents and purposes
as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and
agents, or any of them, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ John P. McAlister Chief Executive Officer, March 26, 1999
John P. McAlister III President and Director
(Principal Executive Officer)
/s/ Colleen A. Martin VP, Chief Financial Officer March 26, 1999
Colleen A. Martin and Secretary
(Principal Financial Officer)
/s/ John D. Yingling Corporate Controller March 26, 1999
John D. Yingling and Treasurer
(Principal Accounting Officer)
/s/ Ralph S. Lobdell Chairman of the Board of March 26, 1999
Ralph S. Lobdell Directors
/s/ Stewart Carrell Director March 26, 1999
Stewart Carrell
/s/ Gary Meredith Director March 26, 1999
Gary Meredith
/s/ Ferid Murad Director March 26, 1999
Ferid Murad
/s/ Alfred Alberts Director March 26, 1999
Alfred Alberts
TRIPOS, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1996, December 31,1997 and December 31, 1998
(in thousands)
Col. A Col. B Col. C Col. D Col. E
Additions
Balance Charged Charged Deductions Balance
at to Cost Other Charge to at
Description Beginning and Accounts Reserves End of
of Period Expenses Period
Allowance for
Doubtful Accounts
1996 $40 $140 $-- $103 $77
1997 77 1 -- -- 78
1998 78 60 -- 39 99
Valuation
Allowance for
Deferred Income
Tax Assets:
1996 $414 $-- $143 $414 $143
1997 143 -- -- 98 45
1998 45 -- -- 45 --
Exhibit Exhibit Index
Number Description
2.1 a Distribution Agreement between Tripos and E&S
3.1 c Amended and Restated Articles of Incorporation dated January 26, 1996
3.2 a Amended and Restated Bylaws of Tripos
10.1b Tripos, Inc. 1994 Stock Option Plan
10.2b Tripos, Inc. 1994 Employee Stock Purchase Plan
10.3b Tripos, Inc. 1994 Director Option Plan
10.4b Tripos, Inc. 1994 401(k) Plan
10.5c Amendment to the 1994 401(k) Plan
10.6c Tripos, Inc. 1996 Director Stock Compensation Plan
10.7c Master Collaboration Agreement between Tripos and MDL Information
Systems, Inc. dated February 2, 1996
10.8c Rights Agreement between Tripos and Boatmen's Trust Company, as
Rights Agent, dated January 26, 1996
10.9c Strategic Business Alliance Teaming Agreement between Tripos and
MDS Panlabs, Inc. dated June 30, 1995
10.10d Credit Agreement-Line of Credit, dated as of September 12, 1996,
between Tripos and NationsBank, N.A. formerly known as Boatmen's
National Bank of St. Louis)
10.11e Loan Agreement dated November 14, 1997 between NationsBank, N.A.
and Tripos Realty, LLC.
10.12e Purchase and Sale Agreement dated June 3, 1997 between
Cahn Realty Associates and Tripos, Inc.
10.13f Settlement Agreement between Tripos, Inc. and Panlabs, Inc. dated
March 30, 1998
10.14g Loan Agreement between Tripos, Inc. and NationsBank, N.A.
dated October 16, 1998
21 Subsidiaries of the Registrant: Tripos Realty, LLC,
Tripos S.A.R.L., Tripos GMBH, Tripos UK Holdings Limited,
Tripos UK Limited, and Tripos Receptor Research Limited
23.1 Consent of Ernst & Young LLP, Independent Auditors
24 Power of Attorney, See the signature page
27 Financial Data Schedule
a Previously filed as an exhibit to the Company's Registration
Statement on Form 10 dated May 27, 1994 and incorporated herein by
reference
b Previously filed as an exhibit to the Company's Registration
Statement on Form S-8, 33-79610 dated May 31, 1994 and incorporated
herein by reference.
c Previously filed as an exhibit to the Company's Form 10-K for the
fiscal year ended December 31, 1995 and incorporated herein by
reference.
d Previously filed as an exhibit to the Company's Form 10-Q
for the period ended September 30, 1996 and incorporated herein by
reference.
e Previously filed as an exhibit to the Company's Form 10-K
for the fiscal year ended December 31, 1997 and incorporated
herein by reference.
f Previously filed as an exhibit to the Company's Form 10-Q
for the period ended June 30, 1998 and incorporated herein by
reference.
g Previously filed as an exhibit to the Company's Form 10-Q
for the period ended September 30, 1998 and incorporated herein
by reference.
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the
Registration Statements (Form S-8, No. 33-79610)
pertaining to the Tripos, Inc. 1994 Stock Plan,
the Tripos, Inc. 1994 Director Option Plan, and the
Tripos, Inc. 1994 Employee Stock Purchase Plan, (Form
S-8, No. 333-09459) pertaining to the Tripos, Inc.
1996 Director Stock Compensation Plan and the amendment
of the 1994 Director Option Plan, and (Form S-8, No.
333-33163) pertaining to the Tripos, Inc. 1996 Director Stock
Compensation Plan, the 1994 Stock Option Plan, and
the 1994 Director Option Plan, (Form S-8, No. 333-61829)
pertaining to the Tripos, Inc. 1994 Employee Stock Purchase
Plan and the 1994 Stock Option Plan of our report dated
February 5, 1999 (except Note 13, as to which the date is
March 22, 1999), with respect to the consolidated
financial statements and schedule of Tripos, Inc. included
in its Annual Report (Form 10-K) for the year ended December 31, 1998.
/s/ Ernst & Young LLP
St. Louis, Missouri
March 26, 1999
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