UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] 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: 0-22788
ARRIS PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 22-2969941
- -------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
385 OYSTER POINT BOULEVARD
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(Address of principal executive offices)
(415) 829-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
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.
[x] Yes [ ] No
The number of outstanding shares of the registrant's Common Stock, $0.001 par
value, was 14,274,985 as of October 31, 1996.
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ARRIS PHARMACEUTICAL CORPORATION
INDEX
PAGE
PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited) *
Consolidated Balance Sheets - September 30, 1996 and December 31, 1995 ...... 3
Consolidated Statements of Operations - Three and nine months
ended September 30, 1996 and 1995 ....................................... 4
Consolidated Statements of Cash Flows - Nine months ended
September 30, 1996 and 1995 ............................................. 5
Notes to Consolidated Financial Statements - September 30, 1996 ............. 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 9
PART II: OTHER INFORMATION ................................................. 14
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities
ITEM 3. Defaults Upon Senior Securities
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other Information
ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES................................................................... 15
* The financial information contained herein should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Report on Form 10-K for the year ended December 31, 1995, filed on
March 14, 1996.
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ARRIS PHARMACEUTICAL CORPORATION
PART 1: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1996 1995
(unaudited)
------------- ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 4,407 $ 21,706
Short-term marketable investments 41,148 9,399
Prepaid expenses and other current assets 2,438 798
-------- --------
Total current assets 47,993 31,903
Long-term marketable investments 16,586 --
Restricted investments 4,250 --
Property and equipment, net 8,217 7,423
Other assets 851 967
-------- --------
TOTAL ASSETS $ 77,897 $ 40,293
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,087 $ 872
Accrued compensation 1,519 1,718
Other accrued liabilities 1,434 2,651
Current portion of deferred revenue 9,556 8,585
Current portion of capital lease and debt obligations 2,147 2,699
-------- --------
Total current liabilities 15,743 16,525
Deferred revenue, noncurrent 2,667 5,472
Capital lease and debt obligations, net of current portion 5,986 3,263
Convertible acquisition liability 6,185 6,185
Minority interest payable -- 1,570
Stockholders' equity:
Preferred stock, $.001 par value; 10,000,000 shares authorized,
none issued or outstanding -- --
Common stock, $.001 par value; 30,000,000 shares authorized,
14,268,498 shares and 10,169,076 shares issued and outstanding
at September 30, 1996 and December 31, 1995, respectively 109,470 64,389
Note receivable from officer (950) (200)
Deferred compensation -- (35)
Accumulated deficit (61,204) (56,876)
-------- --------
Total stockholders' equity 47,316 7,278
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 77,897 $ 40,293
-------- --------
-------- --------
See accompanying notes to consolidated financial statements.
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ARRIS PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues $ 5,161 $ 4,445 $16,195 $12,266
Operating expenses:
Research and development 5,615 3,731 18,126 10,925
General and administrative 1,289 1,210 3,879 3,349
Acquired in-process research & development 230 -- 230 --
------- ------- ------- -------
Total operating expenses 7,134 4,941 22,235 14,274
------- ------- ------- -------
Operating loss (1,973) (496) (6,040) (2,008)
Interest income 879 305 2,198 947
Interest expense (208) (103) (486) (228)
------- ------- ------- -------
Net loss $(1,302) $ (294) $(4,328) $(1,289)
------- ------- ------- -------
------- ------- ------- -------
Net loss per share $ (0.09) $ (0.03) $ (0.34) $ (0.15)
------- ------- ------- -------
------- ------- ------- -------
Shares used in computing net loss per share 14,136 8,727 12,803 8,697
------- ------- ------- -------
------- ------- ------- -------
See accompanying notes to consolidated financial statements.
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ARRIS PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended
September 30,
--------------------
1996 1995
-------- -------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,328) $(1,289)
Adjustments to reconcile net loss to net cash and
cash equivalents used in operating activities:
Depreciation and amortization 2,981 1,822
Stock grants issuable to employees 21 50
Loss on fixed assets 184 50
Acquired in-process research and development 230 --
Changes in assets and liabilities:
Prepaid expenses and other current assets (1,665) 47
Other assets (15) (33)
Accounts payable, accrued liabilities and
deferred revenue (2,821) (1,803)
-------- -------
Net cash and cash equivalents used in operating activities (5,413) (1,156)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Note receivable from officer (750) --
Available-for-sale securities:
Purchases (10,915) (8,808)
Maturities -- 10,907
Purchase of held-to-maturity security
Purchases (59,323) (3,506)
Maturities 17,653 --
Expenditures for property and equipment (3,765) (2,883)
-------- -------
Net cash and cash equivalents used in investing activities (57,100) (4,290)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 43,043 349
Proceeds from notes payable and lease financing 6,164 1,820
Principal payments on notes payable and capital leases (3,993) (1,251)
-------- -------
Net cash and cash equivalents provided by financing
activities 45,214 918
-------- -------
Net decrease in cash and cash equivalents (17,299) (4,528)
Cash and cash equivalents, beginning of period 21,706 17,165
-------- -------
Cash and cash equivalents, end of period $ 4,407 $12,637
-------- -------
-------- -------
See accompanying notes to consolidated financial statements.
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ARRIS PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Arris Pharmaceutical Corporation, a Delaware corporation ("Arris" or the
"Company"), uses an integrated drug discovery approach combining structure-based
drug design, combinatorial chemistry and its proprietary Delta Technology to
discover and develop a number of diverse synthetic small molecule therapeutics
for commercially important disease categories where existing therapies have
significant limitations. Arris' product development programs include: (1)
protease-based discovery programs targeting the inhibition of enzymes implicated
in inflammatory and other diseases, and (2) receptor-based discovery programs
including those designed to discover small molecule drugs that mimic important
therapeutic proteins that are already successful products.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Arris Protease, Inc., and Arris Pharmaceuticals
Canada, Inc. ("Arris Canada") (See Note 4). All significant intercompany
accounts and transactions have been eliminated.
BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared by the Company according to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in complete financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The financial statements reflect, in the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to state fairly the financial position and results of operations as of
and for the periods indicated. The results of operations for the three and nine
month periods ended September 30, 1996 are not necessarily indicative of the
results to be expected for subsequent quarters or the full fiscal year.
These financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Company's 1995 Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
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ARRIS PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all highly liquid investments with maturities of three
months or less at the date of purchase to be cash equivalents. Marketable
investments consist of U.S. treasury and agency securities, municipal
obligations and high-grade corporate obligations. Amortization of premiums and
accretion of discounts to maturity are included in interest income.
SECURITIES HELD-TO-MATURITY: Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at amortized
cost.
The following is a summary of held-to-maturity debt securities at September 30,
1996 and December 31, 1995:
HELD-TO-MATURITY SECURITIES
-------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ---------- ---------- ---------
(IN THOUSANDS)
Balances at September 30, 1996
U.S. treasury securities $24,009 $ 14 $ -- $24,023
U.S. agency securities 8,351 5 (7) 8,349
U.S. corporate securities 18,709 14 (7) 18,716
------- ----- ----- -------
$51,069 $ 33 $ (14) $51,088
------- ----- ----- -------
------- ----- ----- -------
Balances at December 31, 1995
U.S. treasury securities $ 5,015 $ -- $(101) $ 4,914
U.S. agency securities 7,392 -- (23) 7,369
U.S. corporate securities 11,487 -- (14) 11,473
------- ----- ----- -------
$23,894 $ -- $(138) $23,756
------- ----- ----- -------
------- ----- ----- -------
Of the $51,069,000 in held-to-maturity securities described above, at September
30, 1996, $41,148,000 were short-term marketable investments, $5,671,000 were
considered long-term marketable investments and $4,250,000 were long-term
restricted investments under the terms of a bank line of credit (See Note 3).
Of the $23,894,000 in held-to-maturity securities at December 31, 1995,
$14,495,000 were cash equivalents, and $9,399,000 were short-term marketable
investments. As of September 30, 1996, the average remaining portfolio duration
of held-to-maturity securities was approximately 8 months.
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ARRIS PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SECURITIES AVAILABLE-FOR-SALE: Debt securities not classified as
held-to-maturity are classified as available-for-sale. Available-for-sale
securities are stated at fair market value, with the unrealized gains and
losses included in accumulated deficit. The Company had $9,909,000 in U.S.
treasury notes and $1,006,000 in corporate securities at September 30, 1996
classified as available-for-sale. The fair value of these securities
approximated cost. These securities are included in long-term marketable
investments at September 30, 1996. The Company had no securities classified
as available-for-sale at December 31, 1995.
3. NOTE PAYABLE
In September, 1996, the Company contracted for a new $12 million revolving line
of credit with Bank of America National Trust and Savings Association. The
interest rate under the agreement is the bank's prime rate less 1% (6.75% at
September 30, 1996). Interest is payable monthly until April, 1998, at which
time the principal and interest become due over 20 quarterly installments. Any
borrowings under the agreement are collateralized by certain of the Company's
investment securities which are recorded as Restricted Investments at September
30, 1996. At September 30, 1996, the Company had borrowed $3.4 million and had
available $8.6 million on this line of credit.
4. ARRIS CANADA
On July 9, 1996, in connection with the Company's acquisition of Khepri
Pharmaceuticals, Inc. in December, 1995, the minority interest investors in
Arris Canada exercised their right to exchange their interest in Arris Canada
for 161,418 shares of the Company's common stock. Upon conversion of their
shares in Arris Canada, Arris Canada became a wholly owned subsidiary of the
Company. The fair value of the shares issued to those minority interest
investors on the date of exercise exceeded the book value of the minority
interest in Arris Canada by $230,000. This amount has been recorded as expense
for Acquired in-process research and development.
5. RELATED PARTY TRANSACTIONS
On September 3, 1996, the Company loaned $750,000 to an executive officer for
the purpose of assisting in the purchase of a residence. The loan is
full-recourse and is secured by 130,236 shares of the Company's common stock
owned by the executive. The loan is subject to an interest rate of 6.02%
per annum. All accrued interest and principal are due September 3, 1998.
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ARRIS PHARMACEUTICAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
THE COMPANY'S ACTUAL RESULTS COULD DIFFER SIGNIFICANTLY FROM THE RESULTS
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
BELOW AS WELL AS THOSE DISCUSSED IN THE COMPANY'S PROSPECTUS DATED MARCH 22,
1996.
OVERVIEW
Since its inception in April 1989, the Company has devoted substantially all of
its resources to its research and development programs. To date, the Company's
only source of revenue has been its corporate collaborations with Pharmacia &
Upjohn, Inc. and its predecessors ("PNU"), Amgen, Inc. ("Amgen"), Bayer AG
("Bayer") and SmithKline Beecham Corporation ("SB").
In September, 1996, Bayer informed the Company that it had initiated the
development of a tryptase inhibitor, BAY 17-1998, with the goal of entering into
clinical trials for the treatment of asthma. As a result, the Company
recognized a milestone payment as revenue in September 1996.
The Company has not been profitable since inception and expects to incur
substantial losses for at least the next several years, primarily due to the
cost of its research and development programs, including preclinical studies and
human clinical trials. The Company expects that losses will fluctuate from
quarter to quarter, that such fluctuations may be substantial, and that
results from prior quarters may not be indicative of future operating results.
As of September 30, 1996, the Company's accumulated deficit was approximately
$61.2 million.
RESULTS OF OPERATIONS
The Company's revenues increased to $5.2 million and $16.2 million for the
three- and nine-month periods ended September 30, 1996, respectively, as
compared to $4.4 million and $12.3 million, respectively for the comparable
periods in 1995. All of the Company's revenues presently are attributable to
Collaborations with PNU, Amgen, Bayer and SB. These increases in 1996 were
primarily due to: (i) the full effect of research funding in the nine-month
period ended September 30, 1996 of the high throughput screening
collaboration with PNU which commenced in April 1995, (ii) the full effect of
research funding in both the three-month and nine-month periods ended
September 30, 1996 of the collaboration with PNU for the discovery and
development of oral antithrombotics which commenced in August 1995, (iii) the
up-front fee and research funding for the combinatorial chemistry
collaboration with PNU, which commenced in March 1996, (iv) the up-front fee
and research funding for the collaboration with SB to apply Arris' Delta
technology to certain viral proteases, which commenced in June 1996, and (v)
the recognition of a milestone payment from Bayer under the tryptase program.
These increases were partially offset by lower revenues recognized under the
erythropoetin collaboration with Amgen and the human growth hormone
collaboration with PNU. Revenues in the fourth quarter of 1996 are expected
to approximate those in the third quarter.
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ARRIS PHARMACEUTICAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Research and development expenses increased to $5.6 million and $18.1 million
for the three- and nine-month periods ended September 30, 1996 respectively,
from $3.7 and $10.9 million in the comparable periods in 1995. This increase
was primarily due to the expansion of the Company's research efforts in new and
existing programs and the expenses of programs and facilities added as part of
the December 22, 1995 acquisition of Khepri Pharmaceuticals, Inc. ("Khepri").
The Company expects its research and development costs to increase during the
remainder of 1996 and into 1997 due to expansion of its research programs and
the conduct of preclinical studies and clinical trials.
The Company's general and administrative expenses increased to $1.3 million and
$3.9 million for the three- and nine-month periods ended September 30, 1996 from
$1.2 and $3.3 million in the comparable periods in 1995. The increase in
expenses for the three- and nine-month periods was primarily due to the
acquisition of Khepri, and the addition of general and administrative personnel
in support of the Company's expanded research and development efforts. In spite
of the overall increase, general and administrative expenses as a percentage of
total expenses has decreased in the three-month period to 18% in 1996 from 24%
in 1995 and in the nine-month period to 17% in 1996 from 23% in 1995. The
Company expects its general and administrative costs to increase for the
remainder of 1996 and into 1997 in support of expanded research and development.
On July 9, 1996, in connection with the Company's acquisition of Khepri
Pharmaceuticals, Inc. in December, 1995, the minority interest investors in
Arris Pharmaceuticals Canada, Inc. ("Arris Canada"), exercised their right to
exchange their interest in Arris Canada for 161,418 shares of the Company's
common stock. Upon conversion of their shares in Arris Canada, Arris Canada
became a wholly owned subsidiary of the Company. The fair value of the shares
issued to those minority interest investors on the date of exercise exceeded the
book value of the minority interest in Arris Canada by $230,000. This amount
has been expensed as Acquired in-process research and development.
Interest income increased to $879,000 and $2.2 million, respectively, for the
three- and nine-month periods ended September 30, 1996 from $305,000 and
$947,000 in the comparable periods in 1995. The increase was largely due to
the higher average cash balances in 1996 resulting from receipt of net
proceeds of approximately $36 million from the follow-on offering of
3,000,000 shares of the Company's common stock which closed on March 27,
1996, approximately $5.5 million from the exercise on April 24, 1996 by the
underwriters of the over allotment option in the offering of 450,000 shares
and to the receipt of up-front fees collected under new collaborations.
Interest expense increased to $208,000 and $486,000, respectively for the
three- and nine-month periods ended September 30, 1996 from $103,000 and
$228,000 in the comparable periods of 1995 as a result of higher average debt
balances incurred to finance the expansion of the Company's facilities and
acquisition of lab equipment.
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ARRIS PHARMACEUTICAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
private and public offerings of its capital stock and through corporate
collaborations. As of September 30, 1996, the Company had realized
approximately $89.9 million in net proceeds from offerings of its capital
stock.
In addition, the Company has realized $55.8 million from its corporate
collaborations (excluding the $5.4 million equity investment in the Company made
by PNU).
The Company's principal sources of liquidity are its cash and investments, which
totaled $66.4 million as of September 30, 1996.
In September 1996, the Company contracted for a $12 million line of credit from
Bank of America. As of September 30, 1996 the Company had borrowed $3.4 million
and had $8.6 million remaining available under this line of credit.
Net cash used by operating activities during the nine-month period ended
September 30, 1996 was $5.4 million compared to $1.2 million in the same period
in 1995. This included receipt of an up-front commitment fee from PNU in
connection with the combinatorial chemistry collaboration agreement initiated in
March 1996 and one from SB in connection with the antiviral collaboration begun
in June 1996. Cash used in operating activities is expected to fluctuate from
quarter to quarter depending, in part, upon the timing and amounts, if any, of
cash received from existing and any new collaboration agreements.
The Company also spent approximately $3.8 million for the purchase of property,
plant and equipment during the nine months ended September 30, 1996. Additional
equipment will be needed as the Company increases its research and development
activities. The Company received net financing of $2.2 million, net of
principal repayments under new and existing credit instruments and lease
agreements during the nine-months ended September 30, 1996.
The Company's revenues presently are attributable to collaborations with PNU,
Amgen, Bayer and SB. The PNU human growth hormone collaboration extends through
April 1997. The Amgen erythropoetin collaboration extends through mid-February
1997. The proof of concept phase of the SB collaboration ends in June 1997 and
can be extended by SB beyond that into a research phase. All of the Company's
other collaborations extend beyond the next 12 months. If the Company is unable
to renew any of these collaborations or extend the SB collaboration into the
research phase, such events may have a material adverse effect on the Company's
business and financial condition.
The cash received by the Company under all collaborations for the nine months
ended September 30, 1996 was approximately $14.1 million. This includes
up-front payments from PNU in connection with the combinatorial chemistry
agreement which commenced in March, 1996 and from SB in connection with the
antiviral collaboration which commenced in June 1996.
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ARRIS PHARMACEUTICAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The aggregate collaboration funding to be received by the Company in 1996 is
expected to be approximately $17.3 million, excluding all future payments which
may be received upon the achievement of future milestones. There can be no
assurance that the research support or any milestone payments will be realized
on a timely basis or at all.
The Company expects that its existing capital resources, including research and
development revenues from existing collaborations, will enable the Company to
maintain current and planned operations through at least the next 48 months.
The Company may need to raise substantial additional capital to fund its
operations before the end of such period. The Company expects that it will seek
such additional funding through new collaborations, through the extension of
existing collaborations or through public or private equity or debt financing.
There can be no assurance that additional financing will be available on
acceptable terms or at all. All additional funds are raised by issuing equity
securities, further dilution to stockholders may result. If adequate funds are
not available, the Company may be required to delay, to reduce the scope of or
to eliminate one or more of its research or development programs or to obtain
funds through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its technologies or
products that the Company would otherwise seek to develop or commercialize
itself.
RECENT EVENTS
In August, 1996, the Company entered into a 10-year lease for additional
laboratory and office space in South San Francisco, California. In October,
1996 the Company agreed to sublet to a third party the facility it had acquired
in the acquisition of Khepri in December, 1995. Upon implementation of these
arrangements, the Company's facilities increased in net size from approximately
84,000 square feet to approximately 121,000 square feet.
CERTAIN BUSINESS RISKS
The Company is at an early stage of development. The Company's technologies
are, in many cases, new and still under development. All of the Company's
proposed products are in research or development and will require significant
additional research and development efforts prior to any commercial use,
including extensive preclinical and clinical testing as well as lengthy
regulatory approval. There can be no assurance that the Company's research and
development efforts will be successful, that any of its proposed products will
prove to be safe and efficacious in the clinical trials or that any commercially
successful products will ultimately be developed by the Company. In addition,
many of the Company's currently proposed
12
ARRIS PHARMACEUTICAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
products are subject to development and licensing arrangements with the
Company's collaborators. Therefore, the Company is dependent on the research
and development efforts of these collaborators. Moreover, the Company is
entitled only to a portion of the revenues, if any, realized from the
commercial sale of any of the proposed products covered by the
collaborations. The Company has experienced significant operating losses
since its inception and expects to incur significant operating losses over at
least the next several years. The development of the Company's technology
and proposed products will require a commitment of substantial funds to
conduct these costly and time consuming activities. All of the Company's
revenues to date have been received pursuant to the Company's collaborations.
Should the Company or its collaborators fail to perform in accordance with the
terms of any of their agreements, any consequent loss of revenue under the
agreements could have a material adverse effect on the Company's results of
operations. The proposed products under development by the Company have never
been manufactured on a commercial scale and there can be no assurance that such
products can be manufactured at a cost or in quantities necessary to make them
commercially viable. The Company has no sales, marketing or distribution
capability. If any of its products subject to collaborative agreements are
successfully developed, the Company must rely on its collaborators to market
such products.
If the Company develops any products which are not subject to collaborative
agreements, it must either rely on other large pharmaceutical companies to
market such products or must develop a marketing and sales force with
technical expertise and supporting distribution capability in order to market
such products directly. The foregoing risks reflect the Company's early
stage of development and the nature of the Company's industry and products.
Also inherent in the Company's stage of development is a range of additional
risks, including competition, uncertainties regarding protection of patents
and proprietary rights, government regulation and uncertainties regarding
health care reform.
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ARRIS PHARMACEUTICAL CORPORATION
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.39 Standard Industrual Lease between the Registrant and
The Equitable Life Assurance Society of the United
States, dated August 5, 1996.
10.40 Business Loan Agreement between Registrant and
Bank of America National Trust and Savings
Association, dated September 24, 1996.
10.41 Sublease Agreement between Registrant and Fibrogen,
Inc., dated September 30, 1996.
10.42 Promissory Note and Pledge Agreement, dated
September 3, 1996, by John P. Walker in favor
of Registrant.
27 Financial Data Schedule.
b) Reports on Form 8-K
The Company filed no reports on Form 8-K for the quarter
ended September 30, 1996.
14
ARRIS PHARMACEUTICAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARRIS PHARMACEUTICAL CORPORATION
Date: November 14, 1996 By: /s/ John P. Walker
-------------------------------------
John P. Walker
President, Chief Executive Officer and Director
Date: November 14, 1996 By: /s/ Daniel H. Petree
-------------------------------------
Daniel H. Petree
Executive Vice President, Corporate
Development and Chief Financial Officer
(Principal Financial and Accounting
Officer)
15