FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
Commission File Number 0-23666
TRIPOS, INC.
(Exact Name of Registrant as Specified in its Charter)
Utah 43-1454986
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1699 South Hanley Road
St. Louis, Missouri 63144
(Address of Principal Executive Offices and Zip Code)
(314) 647-1099
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
Yes X No
Number of shares outstanding of the issuer's Common Stock, par
value $.01 per share, as of March 31, 1999: 3,259,647 shares.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION, Page
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations
for Three Months Ended March 31, 1999
and March 31, 1998 4
Consolidated Statements of Cash Flows for Three Months
Ended March 31, 1999 and March 31, 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION 12
SIGNATURES 13
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
Mar. 31, Dec. 31,
1999 1998
ASSETS
Current Assets:
Cash and cash equivalents $ 2,393 $ 1,774
Accounts receivable 10,129 12,451
Inventory 2,292 2,389
Prepaid expenses 818 1,278
Deferred income taxes 226 242
Total current assets 15,858 18,134
Notes Receivable-trade 2,539 2,304
Notes Receivable-other 881 863
Property and equipment, less
Accumulated depreciation 12,420 11,076
Capitalized development costs, net 841 877
Goodwill, net of amortization 1,123 1,147
Investment in unconsolidated
affiliate 2,367 1,982
Other, net 418 427
Total assets $ 36,447 $ 36,810
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt
to be refinanced and capital leases $ 327 $ 328
Accounts payable 1,141 827
Accrued expenses 1,484 2,858
Deferred revenue 5,901 5,005
Total current liabilities 8,853 9,018
Long-term portion of capital leases 180 226
Long-term debt to be refinanced 6,145 5,289
Long-term deferred revenue 2,238 2,303
Deferred income taxes 442 465
Shareholders' equity :
Common Stock 33 33
Additional paid-in capital 17,998 17,980
Retained earnings 781 1,269
Other comprehensive income (223) 227
Total shareholders' equity 18,589 19,509
Total liabilities and $ 36,447 $ 36,810
shareholders' equity
See accompanying notes.
Item 1. Financial Statements (cont'd)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
Mar. 31, Mar. 31,
1999 1998
Net sales:
Software licenses $ 1,816 $ 1,986
Support 2,057 1,894
Accelerated discovery services 1,363 1,190
Hardware 919 1,114
Total net sales 6,155 6,184
Operating costs and expenses:
Cost of sales 1,870 2,168
Sales and marketing 2,347 2,334
Research and development 1,747 1,352
General and administrative 1,096 871
Total costs and expenses 7,060 6,725
Loss from operations (905) (541)
Other income, net 120 69
Loss before income taxes (785) (472)
Income tax benefit (299) (170)
Net loss $ (486) $ (302)
Basic and diluted loss per share $ (0.15) $ (0.10)
Basic and diluted weighted
average number of shares 3,257 3,176
See accompanying notes.
Item 1. Financial Statements (cont'd)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
Mar. 31, Mar. 31,
1999 1998
Operating activities:
Net loss $ (486) $ (302)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation of property and equipment 310 188
Amortization of capitalized
development costs and goodwill 167 484
Deferred income taxes (7) (60)
Change in operating assets and
liabilities:
Accounts receivable 1,928 375
Notes receivable-trade (235) (128)
Inventories 21 -
Prepaid expenses and other
current assets 474 (257)
Accounts payable and accrued expenses (508) (707)
Deferred revenue 1,013 1,833
Net cash provided by operating activities 2,677 1,426
Investing activities:
Net purchases, sales, and maturities
of investments - 499
Notes receivable-other (18) (18)
Purchases of property and equipment (1,878) (198)
Capitalized development costs (143) (46)
Acquisition, including investment in
unconsolidated affiliates (385) -
Net cash provided by (used in)
investing activities (2,424) 237
Financing activities:
Stock issuance pursuant to stock plans 18 50
Issuance of long-term debt 845 (48)
Net cash provided by financing activities 863 2
Effect of foreign exchange rate changes
on cash and cash equivalents (497) 88
Net increase in cash and cash equivalents 619 1,753
Cash and cash equivalents at
beginning of period 1,774 5,277
Cash and cash equivalents at end
of period $2,393 $7,030
See accompanying notes.
Item 1. Financial Statements (cont'd)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(1) Summary of significant accounting policies
(a) Organization
Tripos, Inc. (the "Company") delivers science, tools and
analysis services that advance customers' creativity and
productivity in pharmaceutical, agrochemical, biotechnology and
related research industries worldwide. The Company is also a
value-added reseller of third party hardware products required to
operate its software products. A substantial portion of the
Company's business is conducted with pharmaceutical companies,
however, the Company is not economically dependent on any
customer on an ongoing basis.
(b) Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all normal recurring adjustments necessary for a fair
presentation of such financial statements have been included.
Operating results for the three month period ended March 31, 1999
are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.
(2) Income Taxes
The provision for income taxes is computed using the
liability method. The primary difference between financial
statement and taxable income results from the use of different
methods of computing capitalized development costs, accrued
vacation and customer deposits.
(3) Comprehensive Income
The components of comprehensive income, net of related tax,
for the three-month periods ended March 31, 1999 and 1998 are as
follows:
1999 1998
Net loss $ (486) $ (302)
Foreign currency translation adjustments (450) 80
Comprehensive loss $ (936) $ (222)
The components of accumulated other comprehensive income, net of
related tax, at March 31, 1999 and December 31, 1998 are as
follows:
1999 1998
Foreign currency translation $ (223) $ 227
adjustments
Accumulated other comprehensive $ (223) $ 227
income (loss)
(4) Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share for the quarters ended March 31,
1999 and 1998.
1999 1998
Numerator:
Numerator for basic and diluted earnings
per share-net loss $ (488) $ (302)
Denominator:
Denominator for basic earnings per share-
weighted average shares 3,257 3,176
Effect of dilutive securities: Employee
stock options Note A - -
Denominator for diluted earnings per
share-adjusted weighted average shares
and assumed conversions 3,257 3,176
Basic loss per share $(0.15) $(0.10)
Diluted loss per share $(0.15) $(0.10)
Note A: Employee stock options to purchase shares of the
Company's common stock were not included in the March 31, 1999
computation of diluted earnings per share because the effect
would have been anti-dilutive. For additional disclosures
regarding earnings per share, see the notes to the Company's
1998 consolidated financial statements in its Form 10-K.
(5) 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.
March 31, December 31,
1999 1998
Raw materials.......... $43 $44
Work in process.......... 589 1,764
Finished goods............ 1,660 581
$2,292 $2,389
(6) Long Term Debt
At March 31, 1999 the Company maintained a $12,000 Credit
Agreement and a mortgage note with a bank. The Credit Agreement
and mortgage note required the Company to meet certain financial
covenants, including various coverage ratios and a debt to
capitalization ratio. As of March 31, 1999, the Company was in
violation of one covenant for that quarterly reporting period.
On April 30, 1999, the Company entered into a new credit
facility with a bank, which refinanced the existing $12,000
Credit Agreement and the mortgage note. The new Credit Agreement
is for a total of $15,320 which is broken into three separate
credit facilities: a $3,320 secured real estate mortgage, $4,000
three-year secured term loan, and an $8,000 three-year revolving
line of credit. The Credit Agreement 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 credit
facility also requires the Company to meet certain financial
covenants, including various coverage ratios. The Company expects
to meet these new covenant requirements during 1999.
(7) 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.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Tripos, Inc. is a leader in discovery services, informatics
and products for 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'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. 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 May 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 work-around as well as the testing plan to validate
a workable solution. The third phase is estimated to be
completed in early June 1999. Immediately following the third
phase will be the validation of the proposed solutions. This
fourth phase is estimated to be completed by July 15, 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) 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.
Except for the historical information and statements
contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A"), the matters and
items contained in this document, including MD&A, contain certain
forward-looking statements that involve uncertainties and risks.
The Company's future results could differ materially from those
discussed in this document. Factors that could cause a
contribution to such differences, include, but are not limited
to, those presented in the Company's Form 10-K for the year ended
December 31, 1998.
Results of Operations
Net sales for the first quarter of 1999 and 1998 were $6.2
million. The Company experienced increases in support and
accelerated discovery services revenue offset by decreases in
software license and hardware sales in the quarter.
For the three months ended March 31, 1999, software licenses
sales decreased slightly to $1.8 million. Software license sales
are historically volatile in the first quarter as customer
capital budgets are finalized and apportioned. Support revenues
increased 8.6% to $2.1 million compared to the first three month
period in 1998. The increase in support revenue is due to the
increase in long term token license sales. The Company allocates
a portion of the sale to support which is recognized ratably over
the life of the agreement. Accelerated Discovery Services
("ADS") sales accounted for $1.4 million in the first quarter of
1999 and $1.2 million in the same period in 1998. This increase
in ADS business was expected due to shipment of backlog from the
prior quarter. Hardware sales decreased by 17.5% to $.9 million
for the first quarter 1999. This decrease is attributable to the
occurrence of several large orders in the first quarter 1998.
Sales to existing customers represent 91% of total net sales for
the three-month period ending March 31, 1999.
Net sales for the Company's activities outside of North
America represented approximately 58.5% for the first three
months of 1999 compared to 38.9% for the same period in 1998.
Net sales in Europe increased 60.6% for the first three months of
1999 compared to 1998 and accounted for 48.4% and 30.1% of net
sales for the three-month periods in 1999 and 1998, respectively.
Net sales in the Pacific Rim, principally Japan, increased 15.0%
compared to the first three months of 1998 and accounted for 10.1%
and 8.8% of net sales for the respective periods.
Cost of sales for the three-month period ending March 31,
1999 decreased 13.7% compared to the same period in 1998. Cost
of sales was $1.9 million and $2.2 million for the first quarter
of 1999 and 1998, respectively. This change was due to decreased
costs directly related to lower sales of hardware and software as
well as the decrease in costs of discovery compounds over the
prior year. Cost of sales as a percent of net sales was 30.4%
and 35.1% for the three-month periods in 1999 and 1998,
respectively.
Gross profit margin percentage for the first quarter 1999
increased to 69.6% from 64.9% of total net sales in the first
quarter of 1998. This increase in gross profit percentage is due
to the decreases in cost of sales described above.
Sales and marketing expenses remained the same at $2.3
million for the three-month period in 1999 and 1998. Sales and
marketing expenses as a percentage of net sales were 38.1% and
37.7% for the three-month periods in 1999 and 1998, respectively.
Research and development expenses increased to $1.7 million
from $1.4 million and represented 28.4% and 21.9% of net sales
for the three-month periods in 1999 and 1998, respectively. The
increase in expenses as a percentage of net sales reflects the
decrease in the amount of capitalized costs as the Company moves
from long-term software development cycles to shorter-term
development cycle for web-based 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.
General and administrative expenses increased 25.9% to $1.1
million for the first quarter of 1999 compared to $0.9 million in
1998, and represent 17.8% and 14.1% of net sales for the
respective periods. The increase in G & A expenses in the period
is due to the addition of Tripos Receptor Research administrative
staff.
Other income (expense) increased from $69,000 of income for
the first quarter in 1998 to $120,000 of income for the
comparable period in 1999. This change was due to foreign
currency transaction losses in the prior period partially offset
by a decrease in interest income from investments in the current
period.
Income tax benefit was $299,000 for the three-month period
in 1999, which represents an effective tax rate of 38%, compared
to an income tax benefit of $170,000 for the first quarter of
1998, an effective rate of 36%. The rates reflect the change in
the relative weight of the Company's earnings and losses
including those from foreign subsidiaries. The Company's
effective tax rate for the three months ended March 31, 1999
reflects an increase to approximate the expected effective tax
rate for the year ending December 31, 1999.
Liquidity, Capital Resources and Capital Commitments
For the three-month period ending March 31, 1999, a decrease
in accounts receivable of $1.9 million, along with depreciation
and amortization and an increase in deferred revenue of $0.3
million, $0.2 million and $1.0 million, respectively, were offset
by a decrease in accounts payable and accrued expenses of $0.5
million, an increase in prepaid expenses of $0.5 million and a
net loss of $0.5 million resulted in net cash provided by
operations of $2.7 million. For the same period in 1998, net
cash provided by operations was $1.4 million primarily due to
decreases in accounts and notes receivable of $0.2 million along
with net income, depreciation, amortization and increases in
deferred revenue of $0.3 million, $0.2 million, $0.5 million,
$1.8 million respectively, which were offset by a decrease in
accounts payable and accrued expenses of $0.7 million and an
increase in prepaid expenses of $0.3 million. Notes receivable-
trade represent the long-term portion of revenue generated from
the Company's sales of extended access contracts to its software
technologies.
Investments of $1.9 million in property and equipment,
mainly attributable to the increased investment in production
facilities at Tripos Receptor Research, and an increase in the
Arena investment of $0.4 million resulted in cash used by
investing activities of approximately $2.4 million in the first
three months of 1999.
The Company believes that current working capital of $7.0
million, together with continued cash flow from operations and
the $12 million line of credit, will be adequate to fund short-
term liquidity requirements including investment in research and
development, capital purchases and any other commitments in the
upcoming year.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any material litigation
and is not aware of any threatened material litigation.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
27 Financial Data Schedule
(b) No reports on Form 8-K were required to be filed
during the three months ended March 31, 1999.
TRIPOS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
TRIPOS, INC.
Date: May 12, 1999 /s/ John P. McAlister
President and
Chief Executive Officer
Date: May 12, 1999 /s/ Colleen A. Martin
Chief Financial Officer, Secretary
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