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48
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, 1999.
[ ] 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 (I.R.S. Employer
of incorporation or organization) Identification No.)
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 non-
affiliates of the Registrant as of March 20, 2000, was
$42,510,262 (based upon the March 20, 2000 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 20, 2000, 3,438,919 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, 2000 are
incorporated by reference into Part III.
Part I
Item 1.
Business
Tripos, Inc. is a leading provider of integrated discovery
software products, software consulting services, and
discovery research services to the pharmaceutical,
biotechnology, agrochemical, and other life sciences
industries. We combine information technology and scientific
research to optimize and accelerate molecular research for
the discovery of new products by our clients.
With a strong foundation in cheminformatics, Tripos provides
its customers with what we believe are distinct competitive
advantages. Our "chemically intelligent" discovery software
tools are able to manage, analyze and share biological and
chemical information. Tripos' software consulting services
help to organize data in a manner that is conducive to
discovery research. Tripos' proprietary chemical compound
libraries couple Tripos' molecular design technology and
synthesis capabilities. Discovery research services leverage
Tripos' cheminformatics expertise in molecular design
analysis and medicinal chemistry. Together, these services
allow our customers to take advantage of recent advances in
high throughput screening for biological activity with a goal
of accelerating the development and commercialization of
major new products.
Our customers, a number of whom are industry leaders, use our
products and services to reduce product discovery costs and
time, and to accelerate the development of major new
products. To date, Tripos has entered into strategic
alliances with pharmaceutical companies that include Warner-
Lambert and Pfizer along with biotechnology companies that
include Arena Pharmaceuticals, LION Biosciences AG and the
Wolfson Institute. Certain of these contracts provide for
recurring payments for products and services over the course
of the contract term as well as milestone payments or royalty
arrangements for new product discoveries. Tripos has a
geographically diverse customer base, with more than half its
1999 revenues derived from European and other customers
outside the United States. Tripos has a worldwide sales
force with offices throughout the United States, and in
England, France and Germany, representatives throughout the
Pacific Rim, and its Tripos Receptor Research chemistry
laboratories in England.
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 forward-looking
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"). Tripos
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 that 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 more than 10,000
chemical compounds for each new product brought to market.
Tripos estimates that up to 30% of the expense of new product
research and development arises 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.
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 substantial amounts of additional profits. In
addition, environmental regulations and consumer activism are
forcing chemical and agrochemical companies to evaluate
alternative products and means of doing business, thereby
increasing their product development and operating costs.
Pharmaceutical and biotechnology 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.
Tripos Solution - Integration of Software, Research and Services
Tripos believes it offers a uniquely integrated suite of
discovery information and analysis software tools and related
software support and services, specially designed lead
chemical compounds, and discovery research services. We seek
to accelerate our customers' product discoveries and time to
market through offering the opportunity to outsource research
and discovery activities that can not be efficiently
performed in house. The key elements of this strategy
include:
* State of the art software products and software consulting
services that aid in the identification of new chemical
compounds for use in the product discovery process as well
as in the production of high volumes of new chemical
compounds used in the discovery process;
* A proprietary library of over 50,000 potential lead
compounds which we believe can be used by multiple
customers on multiple projects to support new product
discoveries;
* Discovery research services that enable customers to more
efficiently and rapidly design multiple series of related
chemical compounds to enhance the discovery process;
* Integration of informatics software and discovery research
services to maximize the effective contribution to new
discoveries; and
* A worldwide focus to our customer base, which has resulted
in strategic arrangements with many leading pharmaceutical
as well as emerging biotechnology companies.
Tripos has successfully demonstrated the integration of
software, research and services through its collaborations
with Arena Pharmaceuticals and the Wolfson Institute. The
rapid and efficient discovery in these collaborations
resulted in two lead series of compounds progressing from
inception to in-vivo biology in less than nine months that
are now being actively marketed to the pharmaceutical
industry.
Products and Services.
Tripos offers a complementary range of new research
technologies including Discovery Software, Software
Consulting Services and Discovery Services.
Discovery Software
Tripos offers its customers the ability to accelerate the
speed with which multiple new compounds can be generated
through the use of Tripos' highly integrated expert chemical
design software tools. Our proprietary software is used by
scientists at major research facilities around the world to
manage, analyze and share biological and chemical
information. Software users generally require generation of
multiple series of new compounds, often numbering 10,000 or
more, in order to test reactions to biological agents.
Tripos' expert chemical design tools 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 easy communication and collaboration is
accomplished through Tripos' chemical Intranet technology.
The cornerstone of Tripos' discovery software system is its
common interface, the SYBYL(R) Expert Molecular Design System.
SYBYL is a comprehensive computational tool kit for molecular
design and analysis, which simplifies and accelerates the
discovery of drugs and new chemical entities. SYBYL is a
modular collection of programs. Customization to meet the
researcher's specific needs is achieved by incorporating
optional modules. Tripos offers software to support the
following application areas: molecular modeling and
visualization (AdvComp, MOLCAD), chemical information systems
(UnityTM, ChemInfo, MetaLayer), pharmacophore perception
(FlexSTM, RECEPTORTM), combinatorial chemistry and molecular
diversity (LegionTM/CombiLibMaker(R), DiverseSolutionsTM), structure-
activity relationships (QSAR, Advanced CoMFA(R), CharismaTM),
structural biology and bioinformatics (Composer, GeneFoldTM,
MatchMakerTM), macromolecule-based drug design, NMR analysis
and structure generation, and desktop modeling and data
analysis.
Other software products offered include:
UNITY Chemical -industry-standard 3D-flexible search
Database System engine for effective chemical structure
based searching of multiple, distributed
databases of chemical information
FlexXTM -analyzes potential drug libraries for
"fit" into a receptor site
-developed by Professor Lengauer and
associates at the GMD German National
Research Center for Information
Technology
CharismaTM -structure-activity relationship
visualization software classifies
compounds according to their common
substructures and organizes results
SiteIDTM -used to find and visualize sites in
protein molecules where potential drug
compounds would bind
GeneFoldTM -protein fold identification tool
developed with Professors Jeffrey
Skolnick and Adam Godzik, and The
Scripps Research Institute
ChemEnlightenTM -enables filtering of very large
chemical structure data sets based on a
variety of metrics from multiple
platforms
GASPTM (Genetic -genetic algorithm selects alignments of
Algorithm sets of flexible molecules with more
Similarity Program) pharmacophoric features
-developed by Drs. Gareth Jones, Peter
Willett and Robert Glen at the
University of Sheffield and the Wellcome
Research Laboratories.
Software Consulting Services
Tripos is uniquely positioned to meet the growing demand in
the life sciences industries for integration of information
management for all aspects of research data. The highly
specialized research environments of these industries require
an experienced understanding of the discovery process. We
draw upon two decades of experience developing scientific
software applications for the pharmaceutical and
biotechnology industries. Our highly trained consultants
work in scientific software consulting teams to build
exceptional enterprise applications specifically designed for
research.
Tripos' consulting services are available to assist at all
stages of an information technology project, including:
Analysis and Specification: Tripos is skilled at
interviewing end-user scientists to determine essential
business tasks, current business logic, and workflow.
We can perform this phase of a project independently or
work with other consultants that are engaged by the
customer, in order to ensure that the highest level of
scientific understanding is part of any ongoing project.
Our scientific software teams are experienced 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.
Research and Design: Tripos' scientific skills help the
Customer develop novel methods for drug discovery. We
have the inside edge for modifying and extending
existing Tripos drug discovery software to explore new
ideas. Our software engineers are skilled in data
modeling and object-oriented design, which reduce the
risks involved in engineering complex chemical and
biological information systems.
Implementation and Maintenance: Tripos' large staff of
Ph.D. scientists with real industry experience is
skilled in all vital web-related technologies. We
created the first significant, and industry recognized
chemistry applications to be written in Java and we are
an industry leader in providing high-quality and high-
value customer support for scientific software
applications. Our customers have always ranked us
highly when it comes to providing helpful and timely
assistance.
Discovery Research Services
With the rapid changes in technology and the fluctuating
demand for high-level capabilities driven by project
initiations and terminations, outsourcing chemistry in
discovery research is increasingly valuable to the life
science industries. Tripos provides discovery research
services in high-throughput and medicinal chemistry to
identify, refine, and optimize compounds for our customers
guided by our specialized design and analysis expertise.
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 information-dense
compounds by pharmaceutical, biotechnology and other life
science companies. These companies routinely acquire
thousands of compounds per year to screen in search of novel
classes of active compounds. By applying Tripos' compound
design technology in conjunction with its synthesis
capabilities, we have brought to market LeadQuestTM, a growing
compound library that now includes over 50,000 compounds that
meet our diversity and purity criteria. This library
provides an efficient source of compounds for screening
eliminating the redundant and impure samples from the
screening effort that are characteristic of other commercial
and internal screening collections. When LeadQuest compounds
demonstrate activity in pharmaceutical company assays, we can
quickly and efficiently provide hundreds of similar compounds
for follow-up screening, lead optimization and scale-up
synthesis for interesting compounds.
Tripos has invested substantially in state-of-the-art
chemistry in the form of screening libraries, follow-up
target-focused libraries and medicinal chemistry. In 1997,
we purchased Receptor Research Limited. Tripos Receptor
Research is now fully integrated into our worldwide
operations and is drawing strength from and providing
invaluable insights to the overall organization. This aspect
of the business is both product and service oriented. We
sell, broadly and non-exclusively, designed libraries of
chemicals for biological screening and also offer specialized
libraries designed to customer requirements based on the
results of their biological testing.
Tripos also uses the Tripos Receptor Research facilities to
participate with collaborators in its own therapeutic
discovery projects. Our unique position with respect to
informatics and analysis gives us a distinct advantage in
this competitive chemistry market.
The Collaborative Research group's focus is on internal
discovery collaborations with Arena Pharmaceuticals and the
Wolfson Institute. 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 leads 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.
Our goal is to partner these compounds with pharmaceutical
companies for an upfront license fee and milestones related
to any further development.
Tripos has developed a unique and proprietary technology for
the storage and searching of vast numbers of combinatorial
products and related data called ChemSpaceTM. The unique
searching methods enable the user to identify new compounds
that 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 two trillion per hour. The database can be
customized to include reactions and compounds that are
proprietary to an individual customer project. Tripos may
license this technology to a limited number of pharmaceutical
companies as a highly valuable part of contract research
relationships. ChemSpace has proven to be an invaluable tool
in performing the compound design activities in both contract
research and collaborative research relationships.
Hardware Sales
Tripos resells computer systems manufactured by Silicon
Graphics Inc. to its customers upon request. We do not have
an inventory of systems on-hand, but merely facilitate the
customers' orders. We provide this service as a convenience
to our customers and do not expect nor realize high margins
on these products.
Sales, Marketing and Distribution
Tripos sells its software products directly in the U.S. and
Europe, through an exclusive distributor arrangement in
Japan, and through non-exclusive agency relationships in
Korea, China, Singapore, India and Australia. On December
31, 1999, our sales force consisted of 39 management,
technical, sales and administrative employees: 17 for the
United States and Canada, 20 in Europe, and 2 for the Pacific
Rim. Our domestic sales and support center is located at our
headquarters in St. Louis, Missouri. We also maintain sales
offices in California, New Jersey, Massachusetts, and near
London, Paris and Munich.
Historically, for our software product lines for
workstations, Tripos employed separate teams selling each
product or service. These teams, which included scientists
working in collaboration with our sales employees, have
developed a consultative sales approach through which we have
created relationships with our key customers. We believe
these relationships enable us to understand and better serve
the needs of our customers. Because our customers frequently
have both domestic and international operations, our sales
staff and scientists in foreign locations work closely with
their counterparts in the United States to ensure that our
customers' international needs are met in a coordinated and
consistent fashion. For 2000, Tripos' sales organization
will leverage its customer contacts by having each team
represent all products and services.
Tripos sells its workstation-based software products 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. We have 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. We expect our customer base to migrate to
shorter-term license renewals based on the flexibility to
access more of our software products. These arrangements are
expected to 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 salespeople 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 is highly variable but current examples range
from two weeks up to two years. Tripos provides programming
and scientific expertise on a cost plus margin basis.
Services may include specifications, gap and risk assessment,
and full biological and chemical data integration.
Historically, sales of the compound libraries were made
through a staff dedicated to the product, however, beginning
in 2000, all sales representatives will offer these products.
The LeadQuest library now includes over 50,000 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.
Tripos' 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 we serve. Our sales
representatives are compensated through a combination of base
salary, commissions and bonuses based on quarterly and annual
sales performance. In addition, our 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 and software development relationships are
offered through a team comprised of salespeople, discovery
scientists and members of the senior management staff. This
approach is best suited for the long cycle required to
develop meaningful partnerships with key customers for the
outsourcing of discovery research.
Tripos exhibits its products and services at various
scientific conferences and trade exhibitions, including
national and regional conferences of the American Chemical
Society, at the IBC Drug Discovery Conference, Society for
Biomolecular Screening and the CHI High Throughput Screening
for Drug Discovery Conference. Tripos scientists frequently
publish and present results of original research at these and
other conferences throughout the world.
Tripos sells its personal computer software products
principally through direct mail and relationships with
distributors.
Customer Training, Service and Support
Tripos' licenses typically provide a limited warranty for a
90-day period. Thereafter, support of our software products
is provided for an annual fee. Approximately 85% of our
commercial customers and 68% of our academic customers have
contracted for support service. This service gives customers
access to telephone consultation with our 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 our products
effectively.
Tripos offers customer training in the use of its products
through staff knowledgeable in both chemistry and computer
science. We send technical newsletters, bulletins, and
advance notification about future software releases to our
customers to keep them informed and to help them with
resource allocation and scheduling. We also sponsor seminars
throughout the world for our customers, involving
presentations both by our personnel and guest lecturers.
These seminars are designed to enhance customer understanding
of our products and their potential utilization as an aid to
customer research requirements. We currently provide our
customers with advice on computer system configuration
management and frequently provide customers with consulting
advice in addressing particular research questions as part of
the normal pre- and post-sales process.
Product Development
Tripos 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 third-party products and meet a rapidly
evolving range of customer requirements. We intend to
continue to make substantial investments in product and
technology development to meet our customers' demands.
We have 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 we will be able to
introduce our products on a timely basis in the future, or
that our new products and product enhancements will
adequately meet the requirements of the marketplace or
achieve market acceptance.
Tripos' research and development activities are undertaken by
its Discovery Software group and its 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 our 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, Tripos
funds research at certain academic institutions. We believe
that this funding allows us to gain access to significant
technology not otherwise available. We enter into funded
research and development arrangements with major
pharmaceutical customers to develop software tools crucial to
data capture and management in high throughput environments.
Tripos derives Discovery Service revenues from its compound
library product, LeadQuestTM, and Discovery Contract Research
services. Through an alliance with MDS Panlabs, Inc., we
sold the OptiverseTM compound library in 1997 and the first
quarter of 1998. Optiverse was a general screening library
of over 100,000 diverse chemical compounds. In early 1997, a
shift in the market demanded an increase in the level of
purity of this product. 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 early 1998,
we restructured our agreement with MDS Panlabs terminating
our distribution of the Optiverse product. Simultaneously,
we shifted the focus of our newly acquired laboratory, Tripos
Receptor Research in Bude, England, from contract research
synthesis to synthesis for general screening libraries and
announced the launch of our own LeadQuest compound library
product. In June 1998, we 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, we opened our first laboratory facility
suitable for all chemical synthesis operations. We began
production of newly designed screening libraries, started
pilot projects for contract research and generated focused
libraries in our internal therapeutic collaborative work with
Arena Pharmaceuticals and the Wolfson Institute. In May 1999
we opened our second and larger laboratory facility,
providing us with the capacity to accommodate large library
synthesis and contract research operations simultaneously.
By the end of 1999, we had reached our targeted monthly
synthesis and purification rate. The inventory of compounds
of the LeadQuest library has increased to over 50,000 highly
pure compounds available for sale and we completed several
contract research projects.
Research and development expenses include all costs of
software development and maintenance, all necessary expenses
to deliver upon software consulting service contracts, all
non-capitalized costs associated with the production of
compound libraries and all costs of fulfilling discovery
research projects. In accordance with Statement of Financial
Accounting Standards No. 86 and SOP 98-1, Tripos capitalizes
software development costs for both external and internal
use.
Tripos has entered into consulting contracts with certain
customers that provide for collaboration in customizing
chemical compound libraries for drug discovery in specific
therapeutic areas. We recognize revenue related to such
agreements as contractual milestones are achieved and
delivered or, absent such contractual milestones, on a
completed contract basis.
Our software consulting services consist of building
customized systems solutions for our customers. Chemical
research teams require improved information access and usage
in their discovery process. We help our customers meet these
needs by applying our 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. Revenue is recognized as
technology is delivered or services are performed.
Proprietary Rights
Tripos relies upon a combination of patent, copyright,
trademark and trade secret laws. License and non-disclosure
agreements are used to establish and protect the proprietary
rights in our products. We hold two key patents in the area
of analysis of the relationship of chemical structure to
activity; one issued in the early 1990's on our SYBYL QSAR
product and the other issued in 1998 on our Hologram QSAR.
From 1996 to 1998, Tripos applied for nine (9) other software
patents and, jointly with collaborators, for an additional
four (4) composition-of-matter or related use patents, all of
which are patent-pending. The source code for our products
is protected both as a trade secret and as an unpublished,
copyrighted work. In addition, our core software products
are developed and manufactured only at our St. Louis
facility. Tripos does not disclose the source code for its
products to any of its distributors. We supply our source
code under special, restrictive license provisions to a very
limited number of customers only on special request, none of
which has been received in the last five years. Also, upon
request, Tripos has placed source code in escrow for use by a
minimal number of designated customers for limited support
purposes on a contingency basis. All major software products
are shipped from our St. Louis facility under a technical
license management system that governs access. Despite these
precautions, it may be possible for a third party to gain use
of our products or technology without prior authorization, or
to develop similar technology independently. Effective
copyright and trade secret protection may be unavailable or
limited in certain foreign countries where Tripos does
business. The markets in which we compete are characterized
by rapid technological change. While we believe that legal
protection of our technology is an important competitive
factor, we are aware that such factors as the technological
and creative skills of our personnel, new product
development, frequent product enhancements, name recognition
and reliable product support are important in maintaining a
sustained technology leadership position.
Tripos licenses its workstation software through the
execution of license agreements. We license our personal
computer software products by use of a "shrinkwrap" license.
A "shrinkwrap" 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.
Tripos has a number of contracts with academic institutions
and individuals providing it the right to license, market and
use technology developed outside the company. These products
enhance our ability to offer an enriched product line and
represent a material percentage of our annual revenue.
Tripos' general screening and targeted compound libraries,
which are manufactured and shipped by Tripos Receptor
Research from its Bude, England facilities, and the related
synthesis methods and approaches, are protected by non-
disclosure agreements during the prospective customer's
evaluation and/or use. Compound, consulting, contract
research and collaborative agreements entered into by Tripos
require specific documentation regarding defined proprietary
rights, responsibilities of the parties, and/or allowed use
of any related compounds or libraries of compounds.
Competition
Tripos operates in a highly competitive industry
characterized by rapidly changing technology, frequent new
product introductions and enhancements, and evolving industry
standards. We compete 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. Our 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 we experience in our 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 us. A number of our existing
competitors have significantly greater financial, technical
and marketing resources than we do. We believe that the
principal factors affecting competition in our markets are
product quality, performance, reliability, ease of use,
technical service, support, and price. We expect 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 we believe that we currently compete
favorably with respect to these factors, there can be no
assurance that we will be able to compete successfully
against current and future competitors or that the
competitive pressures we face will not have a material effect
on our business, operating results or financial condition.
Production
Our software production operations consist of assembling,
packaging, shipping of software and database products along
with documentation needed to fulfill orders. Outside vendors
provide printing of documentation, manufacturing of packaging
materials and assembly of our desktop products. We typically
ship our software products promptly after the acceptance of a
customer purchase order and the execution of a software
license agreement. Accordingly, we do not generally have any
significant software backlog, and we believe that a 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
Tripos does not derive 10% or more of its total sales from
any single customer.
International Sales
Tripos 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 41%, 48% and 55% of total net sales in 1997,
1998, and 1999, respectively. Net sales in Europe accounted
for 32%, 40% and 46% of net sales in 1997, 1998, and 1999,
respectively, with the balance from customers in the Pacific
Rim. We believe that revenues from our foreign activities
will continue to account for a significant percentage of
total net sales. See Note 7 to the consolidated financial
statements, Geographic Segment Data, later in this Annual
Report.
Employees
As of December 31, 1999, Tripos had a total of 206 employees,
of whom 114 were based in the United States and 92 were based
internationally. Of that total, 59 were engaged in
marketing, sales and related customer-support services, 49 in
product development, 58 in chemistry laboratory activities
and 40 in operations, administration, MIS and finance. Our
future success is significantly dependent on the continued
service of our key technical and senior management personnel
and our continuing ability to attract and retain highly
qualified technical and managerial personnel. None of our
employees are represented by a labor union nor covered by a
collective bargaining agreement. We have not experienced any
work stoppages and consider our relations with employees to
be good.
Executive Officers of the Registrant
The information required by this item is included in the
Tripos' Proxy Statement in connection with its Annual Meeting
of Shareholders to be held on May 11, 2000 under the caption
"Management", and is incorporated herein by reference.
Item 2. Properties
Tripos' principal administrative, sales, marketing and
product development facilities are located in St. Louis,
Missouri. Tripos owns these facilities which are financed by
a mortgage note. Laboratory facilities in Bude, England are
owned by the Company. Tripos leases two domestic sales and
service offices in Shrewsbury, New Jersey and South San
Francisco, California. Our European subsidiaries lease sales
and service offices in the United Kingdom, France and
Germany. We believe that our existing facilities are
adequate for our current needs and that additional space will
be available as needed.
Item 3. Legal Proceedings
Tripos 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
its 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 Tripos' shareholders
during the fourth quarter of its fiscal year ended December
31, 1999.
Part II
Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters
Tripos' 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 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.
1999 High Low
First quarter...... $11.250 $7.625
Second quarter..... $ 9.000 $7.125
Third quarter...... $ 8.250 $6.000
Fourth quarter..... $15.250 $6.375
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
Tripos had approximately 1,000 shareholders of record and
2,600 street name holders as of December 31, 1999. We have
not declared or paid any dividends on our Common Stock. We
currently intend to retain earnings for use in our business,
therefore, we do not anticipate paying cash dividends in the
foreseeable future to common shareholders. Subsequent to
December 31, 1999, Tripos sold 409,091 shares of Series B
Convertible Preferred Stock in a private placement
transaction. The Series B shares carry a dividend rate of 5%
payable in cash or stock at the holder's option, are
redeemable in February 2005, and are initially convertible
into shares of Commons Stock on a one-for-one basis.
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, Dec 31, Dec 31,
of Operations
In thousands, except per 1999 1998 1997 1996 1995
share amounts
Net Sales:
Software licenses.............. $10,909 $11,639 $10,117 $9,186 $8,651
Support........................ 8,154 7,928 7,209 6,715 6,510
Discovery services............. 5,185 2,831 7,737 9,053 2,111
Hardware....................... 3,001 3,174 5,125 3,832 3,825
Total net sales............. 27,249 25,572 30,188 28,786 21,097
Cost of sales.................... 6,755 6,685 9,999 9,990 6,458
Gross profit..................... 20,494 18,887 20,189 18,796 14,639
Operating expenses:
Sales and marketing............ 9,673 9,737 10,065 10,705 9,951
Research and development....... 8,450 6,263 3,810 2,796 2,978
General and administrative..... 5,569 4,182 2,940 2,991 2,030
Restructuring charge........... - - - - 2,165
Total operating expenses......... 23,692 20,182 16,815 16,492 17,124
Income (loss) from operations.... (3,198) (1,295) 3,374 2,304 (2,485)
Other income (expense), net...... 1,183 1,404 511 408 450
Income (loss) before income taxes (2,015) 109 3,885 2,712 (2,035)
Income tax expense (benefit)..... 274 38 1,305 760 (339)
Net income (loss)................ $(2,289) $71 $2,580 $1,952 $(1,696)
Basic earnings (loss) per share(1) $(0.70) $0.02 $0.84 $0.67 $(0.59)
Basic weighted average number
of shares...................... 3,277 3,208 3,085 2,923 2,860
Diluted earnings (loss) per
share (1)...................... $(0.70) $0.02 $0.74 $0.61 $(0.59)
Diluted weighted average
number of shares............... 3,277 3,480 3,504 3,222 2,860
Consolidated Balance Sheet Data
(at year end) (2)
Working capital.................. $ 6,351 $ 9,115 $9,544 $10,589 $ 8,800
Total assets..................... $40,390 $36,810 $32,610 $24,509 $19,059
Long-term obligations,
less current portion........... $ 8,224 $ 5,514 $ 3,367 $ - $ -
Total shareholders' equity....... $17,583 $19,509 $18,909 $14,367 $11,322
(1) Earnings per share for 1996 and prior periods has been restated
to reflect the adoption of FAS 128.
(2) 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 leading provider of an integrated array of
discovery software, software consulting services, and
discovery research services to the pharmaceutical,
biotechnology, agrochemical, and other life sciences
industries. Tripos combines information technology and
scientific research to optimize and accelerate molecular
research for the discovery of new products by its clients.
Tripos generates its revenues from a diversified offering of
products and services. Our foundation is the software license
and support products we sell to the life sciences industries.
In 1999, over 80% of software license revenues were sold to
the pharmaceutical and biotechnology industries; however, no
single customer represented more than 10% of revenues to
Tripos. Tripos licenses its software and support in the form
of one to three year renewable contracts for any of its more
than 50 software modules available for sale. In 1999, 70% of
revenues were derived from the sale of software licenses and
support.
Tripos' integration of chemistry and biological data in the
life sciences industries creates a revenue stream for
software consulting services. Tripos maintains a staff of
specialists who use its proprietary data integration
framework to configure customized solutions for data
management. Revenues in 1999 were 2% of total revenues, and
we expect to increase sales activity to support future
revenue growth. Revenue is generated on a billable rate per
day and is recognized as services are performed.
Tripos leverages its expertise in chemical compound library
design technology to develop and manufacture general
screening libraries for sale to the life sciences industries.
Its current library of over 50,000 highly pure and diverse
compounds, is marketed under the name LeadQuestTM. In 1999,
12% of revenues were derived from the sale of this product.
Tripos' sale and manufacture of chemical compound libraries
has created the opportunity to offer follow-up contract
research services to customers for design and synthesis of
focused libraries for lead optimization. A contract of this
nature may be derived from the follow-up of positive
biological activity in a LeadQuest compound sold to a
customer or may come from compounds originated by the
customer. In 1999, 7% of Tripos revenues were generated by
this activity.
In 2000, Tripos plans to market a comprehensive research
process to its life sciences customers for rapid and cost
effective discovery. The process combines advanced
informatics, chemistry and biology products and services, and
proprietary discovery technologies for efficient lead
development, refinement, and optimization. Tripos will also
work with its collaborators to achieve the milestones
associated with this type of contract. These would be multi-
million dollar contracts and may include royalties and
milestones.
In February 2000, Tripos entered into a strategic alliance
with LION Biosciences AG to integrate LION's bioinformatics
with Tripos' cheminformatics expertise. The companies intend
to jointly market their products and services to the life
sciences industry. As part of this alliance, LION made a
$9.0 million investment in convertible preferred stock of
Tripos. These funds are being used for general corporate
purposes.
In 1999, Tripos created a strategic alliance with Cyprotex, a
newly formed company whose focus is development of in-vitro
screens and data modeling capabilities to predict biological
reactions of new chemical entities. These reactions are
essential in determining the survival of new drug candidates.
Tripos and Cyprotex will jointly market their services to the
drug discovery market.
In 1999, Tripos completed its investment in collaborative
internal drug discovery programs with Arena Pharmaceuticals
and the Wolfson Institute. These collaborations generated,
in a relatively brief nine-month period, patented lead
compounds that are actively being marketed for commercial
development in partnership with a pharmaceutical company.
Tripos does not expect to receive revenues from the licensing
of these compounds before the second half of 2000.
Tripos also acts as a reseller of computer hardware in
conjunction with software sales. Hardware sales are
generally made to facilitate integration of Tripos' software
into customer research activities and are not a focus of
Tripos' sales activities. Tripos acts merely as an
authorized reseller for a single vendor and does not maintain
any inventory. Accordingly, margins on these sales are
relatively modest.
Tripos licenses its discovery software tools to customers,
provides ongoing support, including upgrades selected by
customers, and provides consulting services to its customers
that enable integration of Tripos' discovery tools to
customers' discovery operations. Certain long-term software
licenses may, subject to certain rules of SOP 97-2 and SOP 98-
4, be recognized over the life of the contract. Tripos
generally expenses its research and development costs
associated with software enhancements and new software tools.
Thus, a significant portion of the costs associated with
development and enhancement of software is accounted for as
research and development and not as a cost of software sales.
Over the past two years, Tripos has staffed its worldwide
operations to efficiently execute its current business plan.
The quarterly expenses include the fixed costs of research
and development for software development, software consulting
services, and contract research. Tripos believes that its
selling and administrative costs will remain constant on a
quarterly basis. Variability in quarterly expenses primarily
occurs in relation to the level of revenues for sales
compensation and bonuses.
Over the past two years Tripos has used its capital resources
to fund investments in the building of chemistry production
facilities, chemical compound library inventories,
collaborative drug discovery programs, staffing new business
segments, and investments in Arena Pharmaceuticals. In the
future, Tripos expects to dedicate available cash to maintain
capital infrastructure and conduct operations.
Tripos' revenues and expenses vary from quarter to quarter
depending upon, among other things, the timing of customers
budget processes, the success of our sales efforts, the
lengthy sales cycle and Tripos' ability to influence
customers and prospective customers to make decisions to
outsource portions of their discovery process, the size of
the customers' capital expenditure budgets, the ability to
produce compound libraries in a timely manner, market
acceptance of new products and enhanced versions of existing
products, the timing of new product introductions by Tripos
and other vendors, changes in pricing policies by Tripos,
partners and other vendors, consolidation in customer base,
and changes in general economic and competitive conditions.
In addition, Tripos may choose to negotiate a long-term
software license contract that may, subject to certain rules
of SOP 97-2 and SOP 98-4, 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 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. Tripos' quarterly results can be effected by
the mix of its revenue components.
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." Tripos 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.
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):
1999 1998 1997
Net sales:
Software licenses 40% 46% 33%
Support 30 31 24
Discovery services 19 11 26
Hardware 11 12 17
Total net sales 100 100 100
Cost of sales:
Software licenses 17 21 17
Support 2 1 2
Discovery services 37 44 45
Hardware 93 91 91
Total cost of sales 25 26 33
Gross profit 75 74 67
Operating expenses:
Sales and marketing 36 38 33
Research and development 31 25 13
General and administrative 20 16 10
Total operating expenses 87 79 56
Income (loss) from operations (12) (5) 11
Interest income 1 2 2
Interest expense (3) (1) -
Other income (expense), net 7 5 -
Net income (loss)
before income taxes (7) 1 13
Income tax expense 1 0 4
Net income (loss) (8)% 1% 9%
Net Sales. Net sales decreased approximately 15% from $30.2
million in 1997 to $25.6 million in 1998, and increased 7% in
1999 to $27.2 million. These fluctuations in net sales were
principally attributable to sales of diverse chemical
compound libraries and contract research in the Discovery
Services business. The increases in the Discovery Services
business in 1999 were offset by declines in sales in the
software license business. New product sales represented 17%
of sales in 1997, 8% in 1998, and 11% in 1999. Tripos
generates a substantial portion of its revenues from the
pharmaceutical industry. Net sales to this industry
accounted for approximately 62%, 52%, and 57% of total net
sales in 1997, 1998, and 1999, respectively.
Net sales from activities outside of North America
represented approximately 41%, 48% and 53% of total net sales
in 1997, 1998 and 1999, respectively. Net sales in Europe
accounted for 32%, 40%, and 44% of net sales in 1997, 1998,
and 1999, respectively, with the balance from customers in
the Pacific Rim area, principally Japan. Tripos believes that
revenues from its foreign activities will continue to account
for a significant percentage of its total net sales.
List prices for Tripos' software products have remained
relatively stable over the last few years. In 1997, Tripos
started selling token software licenses in addition to term
licenses. A token license includes a minimum level of
modules for a minimum total price. In 1997, 1998 and 1999,
18%, 38%, and 54%, 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. In 1999, Tripos' new product offering which guaranteed
greater than 70% purity for every compound, allowed the price
per compound to increase as the value of the compounds to
customers increased. Existing customers represented 85% of
total net sales in 1997 and 1998 and increased to 89% in
1999. Increasing net sales from period to period is
dependent, in part, on Tripos' ability to introduce new
products and services, which are accepted by the market, and
on Tripos' ability to penetrate new and existing markets.
Software license sales increased 15% from $10.1 million in
1997 to $11.6 million in 1998 and decreased 6% to $10.9
million in 1999. The increase from 1997 to 1998 was due to
the strength of the sales to the biotechnology customer base
in 1998. The decrease in 1999 was due to a decline in sales
to the West Coast biotechnology customer base which was not
entirely offset by the increase in sales due to a new
software development contract, the introduction of four new
software products, and an increase in European and Japanese
software sales of 21%.
Support sales increased 10% from $7.2 million in 1997 to $7.9
million in 1998, and increased 3% to $8.2 million in 1999.
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.
Tripos derives Discovery Service revenues from its compound
library product, LeadQuestT, and Discovery Contract Research
services. Discovery Services sales decreased 63% to $2.8
million in 1998 from $7.7 million in 1997 and increased 83%
to $5.2 million in 1999. Fluctuations in these sales are
attributable to the repositioning of this business from the
distribution of compounds manufactured by third parties to
the distribution of compounds designed and manufactured with
Tripos staff and facilities. Prior to mid-1998, Tripos
distributed a series of chemical compounds manufactured by a
third party. Since that time, Tripos has constructed a
chemistry laboratory facility and produced a library of
chemical compounds with the purity and in amounts sufficient
to meet Tripos' projected sales needs. Tripos also offers
contract research and other services for customers through
these facilities. See the "Business - Product Development"
section of this Form 10-K for further discussion.
Hardware revenues decreased 38% to $3.2 million in 1998 from
$5.1 million in 1997 and decreased by 5% to $3.0 million in
1999. The decrease in 1998 and 1999 reflects the absence of
new models of hardware offered during the past two years 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 $10.0
million in 1997 to $6.7 million in 1998, and increased 1% to
$6.8 million in 1999, which represents 33%, 26% and 25%,
respectively, of total net sales. The decrease in 1998 was
due to the decrease in costs of diverse compound libraries as
a result of the decline in sales of compound libraries. In
1999, the slight increase in cost of sales was caused by a
50% increase in costs of sales corresponding to the increase
in the compound library sales offset by a 20% decrease in
software license costs based on lower software amortization
and royalty costs.
Costs of software licenses represented 17%, 21% and 17% of
software license sales in 1997, 1998, and 1999, 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 increased in 1998 due to an increase in third-party
royalties based on an increase in the number of third-party
software modules sold during the year. In 1999, the costs of
software licenses as a percentage of sales declined based on
a decrease in amortization in previously capitalized software
and a decrease in third-party royalties based on the mix of
software modules sold.
Costs of support represented 2%, 1% and 2% of support sales
in 1997, 1998, and 1999, respectively. Cost of support
principally consists of software product packaging, media and
updates to documentation. The decrease in costs of sales for
support in 1998 is due to lowered costs of documentation and
electronic delivery of software applications. The increase
in 1999 is due to the costs of the release of a major upgrade
to software.
Costs of Discovery Services represented 45%, 44% and 37% of
Discovery Service sales in 1997, 1998, and 1999,
respectively. The cost of the Discovery Services business is
represented by the costs of compound libraries. In 1999, the
decrease in the costs as a percentage of Discovery Services
sales was due to the significant increase in contract
research sales, costs of which are reflected in R&D.
Costs of hardware represented 93%, 91% and 91% of hardware
sales in 1997, 1998 and 1999, respectively. Cost of hardware
consists 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 $20.2 million in 1997, $18.9
million in 1998, and $20.4 million in 1999, which represents
gross profits of 67%, 74% and 75%, respectively. 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
slight improvement in the gross margin in 1999 was due to the
increase in contract research revenues in the Discovery
Services business.
Sales and Marketing Expenses. Sales and marketing expenses
decreased 3% from $10.1 million in 1997 to $9.7 million in
1998, and decreased 1% to $9.67 million in 1999. The
decrease in 1998 and 1999 was due to the overall decrease in
commission-based revenues and efficiencies created in sales
management expenses. Sales and marketing expenses as a
percentage of net sales increased from 33% in 1997 to 38% in
1998, and decreased to 36% in 1999. The fluctuation in sales
and marketing expenses as a percentage of sales is a function
of the overall fluctuation in sales.
Research and Development Expenses. Research and development
expenses increased 64% from $3.8 million in 1997 to $6.3
million in 1998, and increased 35% to $8.5 million in 1999,
representing 13%, 25%, and 31% of net sales, respectively.
The increases in 1998 and 1999 are due to 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 1997, $6.3 million in
1998 and $10.9 million in 1999 which represents 21%, 25%,
and 40% 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. In 1997, the capitalized
costs of compound development were classified on the balance
sheet under "Capitalized Discovery Services". Beginning in
1998, Tripos capitalized compound library production and
design costs to inventory. The total amount of costs
capitalized were $2.6 million, $1.3 million, and $2.4
million in 1997, 1998 and 1999, respectively. This
represented 41%, 21% and 22% of total product research and
development expenditures in these periods. Tripos anticipates
that its investment in new product research will increase
significantly as Tripos continues to develop four new
software modules per year, works on funded software
development contracts with customers, increases diverse
compound library production and performs contract research
and software consulting services. Tripos reflects costs to
fulfill discovery research, funded software development and
software consulting service agreements in R&D to better
reflect the synergies of staff interaction, variability of
staff utilization and of the outcomes from certain of these
consulting contracts.
General and Administrative Expenses. General and
administrative expenses increased 42% from $2.9 million in
1997 to $4.2 million in 1998 and increased 33% to $5.6
million in 1999, representing 10%, 16%, and 20% of net sales,
respectively. The increase as a percentage of sales in 1998
and 1999 is due to the addition of Tripos Receptor Research
administrative staff, worldwide infrastructure and IT
expansion, and a bonus reserve. Tripos expects general and
administrative expenses to remain at comparable levels to
1999 in the future.
Interest Income. Interest income of $543,000 in 1997,
$471,000 in 1998 and $347,000 in 1999, was from interest
earned on investments.
Interest Expense. Interest expense of $50,000 in 1997,
$304,000 in 1998, and $976,000 in 1999 was from interest due
on the long-term note payable for the corporate building, the
line-of-credit, the term loan, and interest on capital
leases.
Other Income (Expense). Other income (expense) was $18,000
in 1997, $1.2 million in 1998, and $1.8 million in 1999. In
1998, other income was primarily from the recognition of the
guaranteed settlement payment attributable to the transfer by
Tripos of the marketing and distribution rights of the
Optiverse product to MDS Panlabs. In 1999, other income was
primarily from the gain on the sale of all of Tripos' equity
holdings in Phase-1 Molecular Toxicology, Inc.
Income Tax Expense. Tripos' tax expense was $1.3 million in
1997, $38,000 in 1998 and $274,000 in 1999. The effective
tax rate was 34%, 35% and (14%) for 1997, 1998 and 1999,
respectively. The effective tax rate in 1999 reflects a 100%
valuation allowance on the net operating losses for
subsidiaries in the United Kingdom. Tripos believes that it
will fully utilize these losses to offset future income tax
expenses in the United Kingdom. The estimated tax benefit of
these losses, to be realized in a future period, is
approximately $1.1 million. The tax expense in 1999 is
attributable to taxes on net income in the United States,
France and Germany.
Liquidity and Capital Resources
Tripos' working capital decreased from $10.3 million in 1998
to $7.5 million in 1999. The decrease in working capital is
the result of the expansion of Tripos Receptor Research
Limited and build-up of compound inventories.
Net cash used by operating activities in 1999 increased to
$1.5 million from $0.4 million in 1998. This was primarily
due to an increase in prepaid and other current assets of
$1.1 million, an increase in accounts payable and accrued
expenses of $1.1 million, an increase in amortization of $0.5
million, an increase in depreciation of $1.7 million offset
by a decrease in net income of $2.3 million and a decrease in
short-term receivables of $1.9 million along with a gain from
the disposition of Tripos' equity interest in Phase-1
Molecular Toxicology of $1.5 million. In 1998, net cash
provided by operating activities decreased from $4.4 million
in 1997 to net cash used of $0.4 million. 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.
Net cash used in investing activities decreased from $5.6
million in 1998 to $4.5 million in 1999. The decrease
relates to the proceeds from the disposal of the Phase-1
investment partially offset by the note receivable from Phase-
1 and the reduced level of investment in property and
equipment at the laboratory facility in England. Tripos
invests available cash in bank deposits, investment-grade
securities and, short-term interest-producing investments,
including government obligations and other money market
instruments. Tripos anticipates that fiscal 2000 capital
purchases will decrease substantially below those of 1999 as
the expansion of the facilities at Tripos Receptor Research
have been completed.
Net cash provided by financing activities increased from $2.5
million in 1998 to $5.1 million in 1999 as Tripos increased
its utilization of its line-of-credit, issued a $4.0 million
term loan and financed equipment additions with capital
leases. The debt issuance was partially offset by principal
payments on the long-term debt and capital leases.
On February 4, 2000, LION Biosciences AG invested $9.0
million in the form of a convertible preferred private
placement. The proceeds from this investment were used to
pay off the $1.0 million term loan outstanding with LaSalle
Bank. The balance of the investment will be used to fund
short-term liabilities or to pay down the existing line-of-
credit if warranted by changes in interest rates.
Tripos believes that with its cash and accounts receivable
balances, projected cash flow from operations, availability
under a $4 million line-of-credit, and the recent funding by
LION BioSciences, it 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 Tripos.
Tripos may seek to obtain additional financing in the future
in connection with its product development efforts and its
efforts to penetrate existing and new markets for its
products and services. Decisions to access additional
capital will reflect projected working capital needs,
business expansion needs, possible acquisitions of
complimentary business entities, and the availability of
attractive financing alternatives.
Foreign Currency Translations
Tripos' foreign operations transact the majority of their
business in their respective local currencies and are
generally not exposed to foreign currency gains or losses.
Due to the relative stability of the currency of the
countries in which it operates and the level of investment in
each country, Tripos' current intent is to retain assets
within its foreign operations to fund those operations.
Tripos' foreign currency transaction gains and losses have
not been significant to date, and it believes the exposure to
future foreign currency transaction gains and losses is
minimal.
Cautionary Statements-Additional Important Factors to be Considered
Tripos' future results could differ materially from those
discussed in this Annual Report. Factors that could
contribute to such differences, include, but are not limited
to, the following:
Expansion of services and sales activities. Tripos' strategy
of providing direct integration of sophisticated information
technology with the experimental sciences in the form of
chemical laboratories to produce faster, more cost-effective
new product discovery has not yet garnered widespread
commercial acceptance. This integrated approach also requires
Tripos' sales force to broaden their existing knowledge base
in selling discovery software to include selling software
consulting services and discovery research services. There
can be no assurance that the market will accept Tripos'
integrated approach or that competitors will not offer other
approaches that gain greater technological acceptance.
Future capital needs. Tripos may be required to raise
additional capital in the near future to conduct operations
through additional public or private equity financings,
collaborative arrangements, borrowings or other available
sources. There can be no assurance that additional funding,
if necessary, will be available on favorable terms, if at
all. If additional capital is raised through the sale of
equity or securities convertible into equity, the issuance of
these securities could result in dilution to our existing
stockholders.
Dependence on pharmaceutical and biotechnology industries.
Tripos has benefited to date from the increasing trend among
pharmaceutical and biotechnology companies to outsource
chemical research and development projects. A reversal or
slowing down of this trend, a general economic downturn in
these industries, could have a material adverse effect on our
business, financial condition and results of operations.
Competition. Tripos competes with the research departments
of pharmaceutical companies, biotechnology companies,
combinatorial chemistry companies, contract research
companies and research and academic institutions in size,
relative expertise and sophistication, speed and costs of
identifying and optimizing potential lead compounds and
developing and optimizing chemical processes. These
competitors may have greater financial and other resources
and more experience than Tripos in certain research and
development methods.
Protection of proprietary technology. Tripos' success will
depend, in part, on our ability to obtain and enforce
patents, protect trade secrets and copyrights, enforce
restrictive licenses granted to third parties, obtain
licenses to technology owned by third parties when necessary
or developed in collaboration with us, and conduct our
business without infringing the proprietary rights of others.
Variations in quarterly operating results. Tripos
historically has experienced stronger financial performance
in the third and fourth quarters of each fiscal year followed
by a comparative decline in the first and second quarters.
Quarterly operating results may continue to fluctuate as a
result of a number of factors, including lengthy sales
cycles, market acceptance of new products and upgrades,
timing of new product introductions, changes in pricing
policies, changes in general economic and competitive
conditions, seasonal slowdowns, and the timing and
integration of acquisitions.
Dependence on collaborators. Tripos' commercial success
depends on its ability to enter into joint venture or other
collaborative arrangements with third parties. To date, we
have entered into numerous such arrangements with large
pharmaceutical companies and emerging biotechnology
companies. There can be no assurance that we will be able to
continue to establish these collaborations, that any such
collaborations will be on favorable terms, or that current or
future collaborations will ultimately be successful.
Dependence on key personnel. Tripos' future success depends
to a significant degree upon the continued service of key
technical and senior management personnel, in particular, its
President and Chief Executive Officer, Dr. John P. McAlister,
as well as key technical personnel on the software and
laboratory side. None of our key personnel is bound by an
employment agreement or covered by an insurance policy where
Tripos is the beneficiary. The loss of one or more key
members could have a material adverse effect on the Company's
business, financial condition and results of operations.
Competitive market for experienced scientists and
programmers. Tripos competes with the research departments
of pharmaceutical companies, biotechnology companies,
combinatorial chemistry companies, contract research
companies and research and academic institutions for new
scientific personnel. We compete with consulting companies
for experienced computer programmers to carry out our
software consulting services. We cannot assure that we will
continue to be successful in attracting and retaining
qualified personnel should the worldwide demand for these
skilled individuals increase.
Potential adverse impact of pharmaceutical and health care
reform. Tripos expects that a substantial portion of its
revenues in the foreseeable future will be derived from
services provided to the pharmaceutical and biotechnology
industries. If legislative proposals or reforms are adopted
that have a material adverse effect on the businesses,
financial condition, and results of operations of
pharmaceutical and biotechnology companies that are actual or
prospective customers, Tripos' business, financial condition
and results of operations could be materially and adversely
effected as well.
Year 2000 compliance. In prior years, Tripos discussed the
nature and progress of its plans to become Year 2000 ready.
In late 1999, we completed our remediation and testing of
systems. As a result of those planning and implementation
efforts, we experienced no significant disruptions in mission
critical information technology systems and believe those
systems successfully responded to the Year 2000 date change.
The cost of remediating our systems was included in the
capital and expense budgets for 1999 and did not materially
differ from prior years. We are not aware of any material
problems resulting from Year 2000 issues, either with
products, internal systems, or the products and services of
third parties. Tripos will continue to monitor mission
critical systems throughout the Year 2000 to ensure that any
latent Year 2000 matters that may arise are addressed
promptly.
Item 7a. Market Risks
Tripos' 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 Tripos.
Tripos' 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. Tripos' 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 and $4.3
million at December 31, 1998 and 1999, respectively. The
potential loss in fair value resulting from a hypothetical
10% adverse change in foreign currency exchange rates would
be approximately $0.25 million and $0.43 million at December
31, 1998 and 1999, respectively. Any loss in fair value
would be reflected in Other Comprehensive Income and would
not impact Tripos' net income. Tripos' foreign currency
transaction gains and losses for 1998 and 1999 were
immaterial.
Tripos' interest rate risk is attributable to its outstanding
borrowings under its line-of-credit and mortgage loan. Tripos
has fixed its floating rate interest risk on the mortgage
loan through the purchase of a swap instrument. Tripos 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
In thousands December December
31, 31,
1999 1998
Assets:
Current assets:
Cash and cash equivalents................. $ 813 $ 1,774
Accounts receivable, less allowance for
doubtful accounts of $127 in 1999
and $99 in 1998.......................... 14,182 12,451
Inventory................................. 2,595 2,389
Prepaid expenses.......................... 242 1,278
Deferred income taxes..................... 1,418 1,434
Total current assets................... 19,250 19,326
Notes receivable-trade..................... 2,448 2,304
Notes receivable-other..................... 1,764 863
Property and equipment,
less accumulated depreciation............ 13,899 11,076
Capitalized development costs, net of
accumulated amortization of $2,372
in 1999 and $1,858 in 1998............... 572 877
Goodwill, net of accumulated amortization
of $200 in 1999 and $109 in 1998........... 1,082 1,147
Investment in unconsolidated affiliates.... 2,423 1,982
Other, net................................. 144 427
Total assets........................... $ 41,582 $ 38,002
Liabilities and shareholders' equity:
Current liabilities:
Current portion of long-term debt
capital leases.......................... $ 2,245 $ 328
Accounts payable.......................... 1,443 828
Accrued expenses.......................... 3,187 2,858
Deferred revenue.......................... 4,832 5,005
Total current liabilities.............. 11,707 9,019
Long-term portion of capital leases........ 1,223 225
Long-term debt............................. 7,001 5,289
Long-term deferred revenue................. 2,485 2,303
Deferred income taxes...................... 1,583 1,657
Shareholders' equity
Common stock, $.01 par value; authorized
20,000 shares; issued and outstanding 3,314
shares in 1999 and 3,257 shares in 1998... 33 33
Additional paid-in capital................ 18,431 17,980
Retained earnings (deficit)............... (1,020) 1,269
Other comprehensive income................ 139 227
Total shareholders' equity................ 17,583 19,509
Total liabilities and shareholders' equity. $ 41,582 $ 38,002
See notes to consolidated financial statements
Consolidated Statements of Operations
Year ended Year ended Year ended
In thousands, except per share December December December
amounts 31, 31, 31,
1999 1998 1997
Net sales:
Software licenses.......... $ 10,909 $ 11,639 $ 10,117
Support.................... 8,154 7,928 7,209
Discovery services......... 5,185 2,831 7,737
Hardware................... 3,001 3,174 5,125
Total net sales......... 27,249 25,572 30,188
Cost of sales:
Software licenses.......... 1,900 2,436 1,679
Support.................... 136 113 163
Discovery services......... 1,928 1,248 3,519
Hardware................... 2,791 2,888 4,638
Total cost of sales..... 6,755 6,685 9,999
Gross profit................. 20,494 18,887 20,189
Operating expenses:
Sales and marketing........ 9,673 9,737 10,065
Research and development... 8,450 6,263 3,810
General and administrative. 5,569 4,182 2,940
Total operating expenses 23,692 20,182 16,815
Income (loss) from operations (3,198) (1,295) 3,374
Interest income.............. 347 471 543
Interest expense............. (976) (304) (50)
Gain on sale of unconsolidated
affiliate.................. 1,581 - -
Marketing rights settlement.. - 977 -
Other income (expense), net.. 231 260 18
Income (loss) before income taxes (2,015) 109 3,885
Income tax expense........... 274 38 1,305
Net income (loss)............ $ (2,289) $ 71 $ 2,580
Basic earnings (loss) per share $(0.70) $0.02 $0.84
Basic weighted average number
of shares.................. 3,277 3,208 3,085
Diluted earnings (loss)
per share.................. $(0.70) $0.02 $0.74
Diluted weighted average
number of shares........... 3,277 3,480 3,504
See notes to consolidated financial statements
Consolidated Statements of Cash Flows
Year Year Year
ended ended ended
In thousands December December December
31, 31, 31,
1999 1998 1997
Operating activities:
Net income (loss)...................... $(2,289) $ 71 $ 2,580
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Depreciation of property and equipment 1,749 970 826
Amortization of capitalized development
costs and goodwill.................. 542 2,890 2,303
Deferred income taxes................. (58) (496) 234
Change in operating assets and liabilities:
Accounts receivable................... (1,930) (2,189) 67
Notes receivable, trade............... (144) (601) (1,703)
Inventories........................... (271) (2,017) (396)
Prepaid expenses and other current assets 1,058 (776) 346
Accounts payable and accrued expenses. 1,085 (860) (1,225)
Deferred revenue...................... 298 2,606 1,383
Gain from the sale of equity investment (1,551) - -
Net cash provided (used) by
operating activities................ (1,511) (402) 4,415
Investing activities:
Purchases of investments.............. - - (851)
Notes receivable, other............... (901) (72) (791)
Sales and maturities of investments... - 1,647 2,539
Purchases of property and equipment... (4,758) (5,690) (5,687)
Capitalized development costs......... (209) (224) (2,342)
Proceeds from the sale of
equity investment................... 1,820 - -
Acquisition, including investments
in unconsolidated affiliates........ (441) (1,232) (1,488)
Net cash used in investing activities.. (4,489) (5,571) (8,620)
Financing activities:
Proceeds from stock issuance pursuant
to stock purchase and option plans.. 451 638 657
Proceeds from capital lease
financing transaction............... 2,354 439 -
Proceeds from issuance of long-term debt 5,870 2,100 3,560
Payments on long-term debt and
capital lease obligations........... (3,533) (669) (15)
Net cash provided by financing activities 5,142 2,508 4,202
Effect of foreign exchange rate
changes on cash and cash equivalents.. (102) (38) (113)
Net (decrease) in cash and
cash equivalents.................... (960) (3,503) (116)
Cash and cash equivalents at
beginning of year................... 1,774 5,277 5,393
Cash and cash equivalents at
end of year......................... $ 813 $ 1,774 $ 5,277
See notes to consolidated financial statements
Consolidated Statements of Shareholders' Equity
In thousands Additional Retained Other Total
Common Stock Paid-in Earnings Comprehensive Shareholders'
Shares Amount Capital (Deficit) Income Equity
Balance at
December 31, 1996 3,012 $ 30 $ 15,220 $(1,382) $ 499 $14,367
Stock issued under
stock purchase plan 42 - 361 - - 361
Stock issued under
stock option plan 85 1 540 - - 541
Stock issued under
director compensation
plan 3 - 44 - - 44
Stock and warrants
issued related to
acquisition 30 1 1,178 - - 1,179
Comprehensive income:
Translation adjustment - - - - (164) (164)
Net income - - - 2,580 - 2,580
Total comprehensive
income 2,416
Balance at
December 31, 1997 3,172 32 17,343 1,198 335 18,908
Stock issued under
stock purchase plan 43 1 376 - - 377
Stock issued under
stock option plan 39 - 229 - - 229
Stock issued under
director compensation
plan 3 - 32 - - 32
Comprehensive income:
Translation adjustment - - - - (108) (108)
Net income - - - 71 - 71
Total comprehensive
income (37)
Balance at
December 31, 1998 3,257 33 17,980 1,269 227 19,509
Stock issued under
stock purchase plan 48 - 384 - - 384
Stock issued under
stock option plan 5 - 35 - - 35
Stock issued under
director compensation
plan 4 - 32 - - 32
Comprehensive income:
Translation adjustment - - - - (88) (88)
Net loss - - - (2,289) - (2,289)
Total comprehensive
income (2,377)
Balance at
December 31, 1999 3,314 $ 33 $ 18,431 $(1,020) $ 139 $ 17,583
See notes to consolidated financial statements
Notes to Consolidated Financial Statements December 31, 1999
In thousands, except per share data
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. We are also a value-added reseller of third-party
hardware products required to operate our software products.
A substantial portion of the Tripos' business is conducted
with pharmaceutical companies, however, Tripos 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 Tripos, distributed all
outstanding shares of the common stock of the Tripos (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, we
changed our company name to Tripos, Inc.
Basis of Consolidation The accompanying consolidated
financial statements include the accounts of Tripos 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 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 our 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,
costs associated with the design and creation of diverse
compound libraries, within the Company's Discovery Services
relationship with MDS Panlabs, were capitalized. Amortization
of capitalized software development costs is provided on a
product-by-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, Tripos 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.
Tripos 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, we 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, Tripos 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
97-2 ("SOP 97-2"), "Software Revenue Recognition" and updated
it in early 1998 with SOP 98-4. These SOPs became effective
for us for transactions entered into after January 1, 1998.
Tripos 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. Tripos 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, we allocate 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
our vendor to the customer.
Tripos has entered into contract research agreements and
software consulting arrangements with certain customers which
provide for collaboration with us in defining related software
products, early access to the products, discounts on licenses
for the products developed and compound library design. We
recognize 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 Tripos is a reseller of hardware and passes through
to its customers the standard warranties provided by the
hardware supplier. We warrant our application software
products to perform in accordance with written user
documentation and the agreements negotiated with our
customers. Since Tripos 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 each of our 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 Tripos 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.
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 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, Tripos 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. Tripos has
adopted the disclosure-only provisions of SFAS 123 as shown in
Note 5 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. The FASB has since
delayed the effective date until years beginning after June
15, 2000, with the issuance of FAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FAS No. 133". FAS 133 permits early
adoption as of the beginning of any fiscal quarter after its
issuance. Tripos expects to adopt the new Statement
effective January 1, 2001. FAS 133 will require us to
recognize all derivatives on the balance sheet at fair value.
We have not yet determined what the effect FAS 133 will be on
earnings and financial position.
2. Property and Equipment
Property and equipment at the end of each year are summarized
below:
1999 1998
Computer equipment................. $ 5,801 $ 5,204
Capital leases-laboratory equipment 765 469
Furniture and fixtures............. 4,565 3,106
Purchased software................. 648 1,336
Company vehicles................... 25 25
Land............................... 1,593 1,593
Buildings.......................... 8,375 6,293
21,772 18,026
Less accumulated depreciation...... (7,873) (6,950)
$13,899 $11,076
3. Accrued Expenses
Accrued expenses consist of the following at the end of each year:
1999 1998
Payroll related................ $ 1,383 $ 1,224
Income taxes refundable........ (304) (714)
Product royalties.............. 730 798
Compound development........... - 105
Other............................. 1,378 1,445
$ 3,187 $ 2,858
4. Income Taxes
The components of income (loss) before income taxes for the
years ended were as follows:
1999 1998 1997
Domestic................... $ 634 $ 712 $3,871
Foreign.................... (2,649) (603) 14
$(2,015) $109 $3,885
The components of income tax expense (benefit) for the years
ended were as follows:
1999 1998 1997
Current tax expense (benefit)
Federal.................... $ 146 $ 344 $ 862
State and local............ 71 83 183
Foreign.................... 129 107 26
Total current............. 346 534 1,071
Deferred tax expense (benefit) (72) (496) 234
Total provision $ 274 $ 38 $1,305
The difference between the effective income tax rate and the
U.S. federal income tax rate for the years ended is explained
as follows:
1999 1998 1997
Tax at U.S. federal
statutory rate........... 34.00 % 34.00 % 34.00 %
Effect of foreign operations
(net of foreign taxes).... (48.89) 18.26 0.54
State taxes................. (1.15) 13.04 5.62
R&D tax credits............. 3.44 (39.04) (5.15)
Other....................... (1.00) 8.94 (1.41)
(13.60)% 35.20 % 33.60 %
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:
1999 1998
Current deferred income tax asset:
Allowance for doubtful accounts... $ 32 $ 25
Vacation accrual.................. 161 129
NOL carryforward.................. 2,322 1,452
Other............................. 36 46
Tax credit carryforward........... - 45
Valuation allowance............... (1,133) (263)
$ 1,418 $ 1,434
Noncurrent deferred income tax liability:
Capitalized development costs..... $ (413) $ (516)
Property and equipment............ (1,178) (1,188)
Other............................. 8 47
$(1,583) $(1,657)
Income tax payments for 1999, 1998 and 1997 were $123, $361, and
$1,010, respectively.
Three of the Tripos' foreign subsidiaries had loss
carryforwards at December 31, 1999, totaling approximately
$7,740 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 $319 at December 31, 1999.
5. Stock-based Compensation Plans
In 1994, Tripos 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 to 350 shares, is in
effect for ten years unless terminated or amended sooner by
the Board of Directors. At December 31, 1999, 198 shares have
been purchased under this plan.
In 1994, Tripos 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 our employees and
consultants. 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 to 1,280, is in effect
for ten years unless terminated or amended sooner by the Board
of Directors.
In 1994, Tripos 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 to 240,
is in effect for ten years unless terminated or amended
sooner by the Board of Directors.
Tripos 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 our
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
Tripos 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 Black-Scholes option pricing model with the
following weighted average assumptions: risk-free interest
rates ranging from 5.45% to 6.50% for