<PAGE>
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 June 30, 1997
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)
180 KIMBALL WAY
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(Address of principal executive offices)
(650) 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 15,067,114 as of July 31, 1997.
1
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ARRIS PHARMACEUTICAL CORPORATION
INDEX
PAGE
PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited) *
Consolidated Balance Sheets - June 30, 1997 and December 31, 1996. . . . 3
Consolidated Statements of Operations - Three and six months
ended June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows - Six months ended
June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements - June 30, 1997 . . . . . . . 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . 8
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, 1996, filed on
March 31, 1997.
2
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ARRIS PHARMACEUTICAL CORPORATION
PART 1: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
(unaudited) (1)
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,451 $ 10,822
Short-term marketable investments 28,222 37,021
Prepaid expenses and other current assets 2,831 2,217
-------- --------
Total current assets 50,504 50,060
Long-term marketable investments 969 11,627
Restricted investments 11,250 7,250
Property and equipment, net 12,717 10,446
Other assets 1,422 1,449
-------- --------
TOTAL ASSETS $ 76,862 $ 80,832
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,941 $ 1,439
Accrued compensation 1,291 1,480
Other accrued liabilities 1,622 1,570
Current portion of deferred revenue 8,296 10,783
Current portion of capital lease
and debt obligations 1,387 1,984
-------- --------
Total current liabilities 14,537 17,256
Deferred revenue, noncurrent 801 1,973
Capital lease and debt obligations, net of current
portion 12,361 8,703
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, 14,981,478 shares and 14,831,975 shares
issued and outstanding at June 30, 1997 and
December 31, 1996, respectively 116,432 115,904
Note receivable from officer (200) (200)
Accumulated deficit (67,069) (62,804)
-------- --------
Total stockholders' equity 49,163 52,900
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 76,862 $ 80,832
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
(1) The balance sheet at December 31, 1996 has been derived from the audited
financial statement at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
3
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ARRIS PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues $ 6,176 $ 5,990 $ 12,865 $ 11,034
Operating expenses:
Research and development 7,467 6,867 15,314 12,511
General and administrative 1,588 1,385 3,203 2,590
--------- --------- --------- ---------
Total operating expenses 9,055 8,252 18,517 15,101
--------- --------- --------- ---------
Operating loss (2,879) (2,262) (5,652) ( 4,067)
Interest income 819 962 1,768 1,319
Interest expense (159) (163) (381) (278)
--------- --------- --------- ---------
Net loss $ (2,219) $ (1,463) $ (4,265) $ (3,026)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net loss per share $ (0.15) $ (0.11) $ (0.29) $ (0.25)
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in computing net loss per share 14,966 13,870 14,932 12,137
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
4
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ARRIS PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,265) $ (3,026)
Adjustments to reconcile net loss to net cash and
cash equivalents used in operating activities:
Depreciation and amortization 2,112 2,021
Loss on disposal of fixed assets -- 182
Changes in assets and liabilities:
Prepaid expenses and other current assets (613) (1,616)
Other assets (63) 98
Accounts payable, accrued liabilities and
deferred revenue (3,294) (1,197)
-------- --------
Net cash and cash equivalents used in operating activities (6,123) (3,538)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Purchases -- (9,973)
Maturities 749 --
Purchase of held-to-maturity security
Purchases (9,683) (67,071)
Maturities 28,392 28,221
Purchase of restricted cash (4,000) --
Purchase of property and equipment (4,295) (2,749)
-------- --------
Net cash and cash equivalents provided by
(used in) investing activities 11,163 (51,572)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 528 42,827
Proceeds from notes payable and lease financing 4,350 2,886
Principal payments on notes payable and capital leases (1,289) (1,888)
-------- --------
Net cash and cash equivalents provided by financing
activities 3,589 43,825
-------- --------
Net increase (decrease) in cash and cash equivalents 8,629 (11,285)
Cash and cash equivalents, beginning of period 10,822 21,706
-------- --------
Cash and cash equivalents, end of period $ 19,451 $ 10,421
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
5
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ARRIS PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(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 protease discovery programs targeting the inhibition of
enzymes implicated in asthma, inflammatory disease, osteoporosis, cancer and
autoimmune disease. The Company's technology platform also includes
receptor-based discovery programs 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"). 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 six month periods ended June 30, 1997
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 1996
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
6
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ARRIS PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. NOTE PAYABLE
In September, 1996, the Company obtained a line of credit from Bank of
America to borrow up to $12 million by December 1997. During the six months
ended June 30, 1997, the Company borrowed $6.0 million, bringing the total
borrowings under this line of credit to $10.4 million as of June 30, 1997.
The interest rate at June 30, 1997 was a combination of the LIBOR plus 1.5%
and the bank's reference rate, which were 7.5% and 7.0%, respectively. At
June 30, 1997, $1.6 million remains available under this line of credit.
Borrowings under this agreement are secured by cash and marketable securities
held by Bank of America. Accordingly, such marketable securities are
classified as noncurrent, restricted cash and investments.
3. 1989 STOCK OPTION PLAN
On May 21, 1997, stockholders approved the Company's 1989 stock option plan,
as amended to increase the aggregate number of shares of common stock
authorized for issuance under such plan by 750,000 shares, to 3,417,500
shares.
4. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating basic earnings per
share, the dilutive effect of stock options will be excluded. The
requirement is expected to have no effect on earnings per share for the six
months ended June 30, 1997 and 1996. The impact of Statement 128 on the
calculation of diluted earnings per share for these periods is also expected
to have no effect.
5. OTHER RECENT PRONOUNCEMENTS
In 1997, Statement of Financial Accounting Standard No. 130 (SFAS 130)
"Reporting Comprehensive Income" and Statement of Financial Accounting
Standard No. 131 (SFAS 131), "Disclosures About Segments of an Enterprise and
Related Information" were issued and are effective for fiscal years
commencing after December 15, 1997. The Company will comply with the
requirements of SFAS 130 and SFAS 131 in fiscal year 1998.
7
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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 UNDER "CERTAIN BUSINESS RISKS" BELOW AS WELL AS ELSEWHERE HEREIN,
TOGETHER WITH THOSE DISCUSSED IN "ITEM 1. BUSINESS" AND "BUSINESS RISKS" IN
THE COMPANY'S REPORT ON FORM 10-K, FILED MARCH 31, 1997.
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"), SmithKline Beecham Corporation ("SB"), Merck & Co.
("Merck") and its latest collaboration with Abbott Laboratories ("Abbott").
Its collaborations have taken a variety of forms including in each case
certain of the following elements: payments to the Company of an up-front
license fee, purchase of the Company's common stock (PNU human growth hormone
collaboration only), research funding payments, purchase of compounds
produced, milestone payments, if and when milestones are achieved, and
royalties upon the sale of any resulting products. Where appropriate, the
up-front license fees have been recorded as deferred revenue until earned.
In June 1997, the Company announced a new collaboration with Abbott for the
transfer of a specialized drug discovery technology to be used by Abbott in a
proprietary research program. This collaboration is different from earlier
collaborations in that Arris has retained certain rights to transfer the
technology to other pharmaceutical companies in the future. The contract
provides for a license fee and royalties upon the commercialization of
products, if any, resulting from the technology.
In June 1997, the Company announced the preliminary results from a Phase IIa
study of APC-366, a tryptase inhibitor for asthma. The study reported
statistical significance in the achievement of the study's primary endpoint,
protection against the late airway response phase of asthma as measured three
to nine hours after an allergen challenge and as compared to a placebo.
Arris is developing APC-366 as part of a research and development
collaboration with Bayer. Bayer is developing a second-generation inhaled
tryptase inhibitor, and expects to initiate Phase I safety studies of that
compound later this year.
In July 1997, the Company announced that Arris and Bayer intend to modify
their collaboration agreement for the development of inhibitors of the
protease tryptase. Under the agreement, when amended, Arris will reacquire
the rights to exploit tryptase inhibitors against two indications:
inflammatory bowel disease and psoriasis. Bayer reserves the right, subject
to certain financial conditions, to reenter those programs at the end of
Phase IIb studies. Separately, beginning December 1997, Bayer will assume
all responsibilities to pursue the collaboration's research plans for the
discovery and
8
<PAGE>
ARRIS PHARMACEUTICAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
development of an oral tryptase inhibitor. As a consequence, research funding
to Arris will cease at that time.
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 June 30, 1997, the Company's accumulated deficit was
approximately $67.1 million.
RESULTS OF OPERATIONS
Contract revenue
The Company's revenues increased to $6.2 million and $12.9 million for the
three- and six-month periods ended June 30, 1997, respectively, compared to
$6.0 million and $11.0 million, respectively, for the comparable periods in
1996. All of the Company's revenues presently are attributable to
collaborations with PNU, Amgen, Bayer, SB, Merck and Abbott. The increases
in 1997 were primarily due to: (i) the full effects of the research funding
for the collaboration with SB to develop inhibitors using Arris' Delta
technology targeting intracellular viral proteases, which commenced in June
1996; (ii) the research funding for the collaboration with Merck to
develop small molecule inhibitors of proteases involved in osteoporosis,
which commenced in November 1996; (iii) the shipment of small molecule
synthetic organic compounds under the combinatorial chemistry collaboration
with PNU (250,000 total compounds are due under the three year agreement),
which commenced in March 1996; and (iv) the recognition of a portion of a
license fee from Abbott for the transfer of technology, which commenced in
June 1997. These increases were partially offset by lower revenues
recognized under the erythropoetin collaboration with Amgen, in which the
research funded portion ended during the first quarter of 1997 and the human
growth hormone collaboration with PNU, in which the research funded portion
will end in 1997.
Research and development
Research and development expenses increased to $7.5 million and $15.3 million
for the three- and six-month periods ended June 30, 1997, respectively, from
$6.9 and $12.5 million in the comparable periods in 1996. This increase was
primarily due to the expansion of the Company's research efforts in new and
existing programs. Research and development expenses as a percentage of
total expenses has remained relatively constant at approximately 83% for the
three- and six-months ended June 30, 1997 and 1996. The Company expects its
research and development costs will increase for the remainder of 1997 in
absolute dollars when compared to 1996 as a result of further expansion of
its research programs and conduct of preclinical studies and clinical trials.
9
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ARRIS PHARMACEUTICAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
General and administrative
The Company's general and administrative expenses increased to $1.6 million
and $3.2 million for the three- and six-month periods ended June 30, 1997,
from $1.4 and $2.6 million in the comparable periods in 1996. The increase
in expenses for the three- and six-month periods was primarily due to 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
remained relatively constant at approximately 17% for the three- and
six-month periods ended June 30, 1997 and 1996. The Company expects its
general and administrative costs will increase for the remainder of 1997 in
absolute dollars when compared to 1996 in order to provide corporate support
for expanding research and development efforts.
Interest income and expense
Interest income decreased to $819,000 for the three-months ended June 30,
1997, from $962,000 for the same period in 1996 and increased to $1.8 million
for the six-months ended June 30, 1997 from $1.3 million for the same period
in 1996. The decrease for the three-months ended June 30, 1997 compared to
the same period in 1996 was primarily due to the decrease in average cash
balances between the periods. The increase for the six-months ended June 30,
1997 compared to the same period in 1996 was primarily due to the increase in
average cash balances between the periods, resulting from receipt of net
proceeds of approximately $36 million from the public offering of 3,000,000
shares of the Company's common stock which closed on March 27, 1996, and
approximately $5.5 million from the exercise on April 24, 1996 by the
underwriters of the over allotment option of 450,000 shares in the public
offering. The receipt of up-front fees collected under new collaborations,
proceeds from research funding and collection of revenues from the shipment
of compounds under the collaboration with PNU have helped to sustain the cash
levels. Interest expense decreased to $159,000 for the three-month period
ended June 30, 1997, from $163,000 for the same period in 1996, and increased
to $382,000 for the six-months ended June 30, 1997, from $278,000 for the
same period in 1996. The decrease for the three-month period compared to
the increase in the six-month period was the result of capital leases
expiring at different times within the six-month period. The capital leases
have a higher interest rate than the Bank of America line of credit. The
Company has only used draw downs from this line for capital acquisitions
during the six-months ended June 30, 1997. The Company expects interest
expense to flucuate as financing needs change for further expansion of the
Company's facilities and acquisition of lab equipment.
10
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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 June 30, 1997, the Company had realized approximately
$91.5 million in net proceeds from offerings of its capital stock. In
addition, the Company has realized $71.4 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 $59.9 million as of June 30, 1997. In September 1996, the
Company arranged for a $12 million line of credit from Bank of America. As
of June 30, 1997 the Company had borrowed $10.4 million and had $1.6 million
remaining available under this line of credit.
Net cash used by operating activities during the six-month period ended June
30, 1997 was $6.1 million compared to $3.5 million in the same period in
1996. The increase is primarily due to the increase in net loss for the six
months ended June 30, 1997 and the timing of cash received under the
Company's collaboration agreements. 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 $4.3 million for the purchase of
property, plant and equipment during the six months ended June 30, 1997.
Additional equipment will be needed as the Company increases its research and
development activities. The Company received net financing of $3.1 million,
which was comprised of borrowings under existing credit instruments and
payments under lease agreements, during the six-months ended June 30, 1997.
The Company's revenues presently are attributable to collaborations with
PNU, Amgen, Bayer SB, Merck and Abbott. The PNU human growth hormone
collaboration extends through the end of 1997. The research phase of the
Amgen erythropoetin collaboration ended in February 1997. The proof of
concept phase of the SB collaboration has been extended through the end of
1997 and can be extended by SB for an additional six month period, at which
time it may enter into a research phase. The research support of the Bayer
collaboration for an oral tryptase inhibitor extends through November 1997.
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 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
45 months. The Company may need to raise substantial additional capital to
fund its operations beyond 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.
11
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ARRIS PHARMACEUTICAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
There can be no assurance that additional financing will be available on
acceptable terms or at all. Any additional funds raised by issuing equity
securities, may result in further dilution to stockholders. 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.
CERTAIN BUSINESS RISKS
The Company is at an early stage of development. The Company's technologies
are, in many cases, new and all are 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 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 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.
12
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ARRIS PHARMACEUTICAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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.
These risks and uncertainties are discussed further in "Item 1. - Business -
Business Risks" on Form 10-K, filed by the Company March 31, 1997.
13
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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
The Company's 1997 Annual Meeting of Stockholders was held on May 21, 1997.
Stockholders were asked (i) to elect directors to serve for the ensuing year
and until their successors are elected; (ii) to approve the Company's 1989
Stock Plan, as amended to increase the aggregate number of shares of Common
Stock authorized for issuance under such plan by 750,000 shares, to 3,417,500
shares; (iii) to ratify the selection of Ernst & Young LLP as independent
auditors of the Company for its fiscal year ending December 31, 1997.
All of the matters were approved by the stockholders of the Company. The
number of shares voted for, against and withheld for each matter were:
In Favor Withheld
-------- --------
Election of Directors:
John P. Walker 11,064,650 506,522
Brook H. Byers 11,061,350 509,822
Anthony B. Evnin 11,064,550 506,622
Vaughn M. Kailian 11,061,350 509,822
Donald Kennedy 11,061,286 509,886
Hans U. Sievertsson 11,064,550 506,622
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-votes
--- ------- ------- ---------
<S> <C> <C> <C> <C>
Approve Amendment to the
1989 Stock Plan: 6,277,919 1,420,976 12,100 3,860,177
Selection of Ernst & Young LLP 11,537,383 5,400 28,389 0
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27 Financial Data Schedule.
b) Reports on Form 8-K
The Company filed no reports on Form 8-K for the quarter ended
June 30, 1997.
14
<PAGE>
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: August 14, 1997 By: /s/ John P. Walker
------------------------------
John P. Walker
President, Chief Executive Officer and Director
Date: August 14, 1997 By: /s/ Frederick J. Ruegsegger
------------------------------
Frederick J. Ruegsegger
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, STATEMENTS OF OPERATIONS AND STATEMENTS OF CASH
FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND
NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 19,451
<SECURITIES> 28,222
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 50,504
<PP&E> 24,070
<DEPRECIATION> (11,352)
<TOTAL-ASSETS> 76,862
<CURRENT-LIABILITIES> 14,537
<BONDS> 0
0
0
<COMMON> 14,981
<OTHER-SE> 49,163
<TOTAL-LIABILITY-AND-EQUITY> 76,862
<SALES> 0
<TOTAL-REVENUES> 12,865
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 18,517
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 382
<INCOME-PRETAX> (4,265)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,265)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,265)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
