<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
FILED BY THE REGISTRANT /X/ FILED BY A PARTY OTHER THAN THE REGISTRANT / /
- --------------------------------------------------------------------------------
Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
ArQule, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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<PAGE> 2
ARQULE, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
The 1997 Annual Meeting of Stockholders of ArQule, Inc., a Delaware
corporation, will be held at The DoubleTree Guest Suites Hotel, Charles River
Ballroom, 400 Soldiers Field Road, Boston, Massachusetts 02134 at 8:30 a.m. on
Wednesday, May 14, 1997 for the following purposes:
1. To elect two directors to hold office for a term of three years and
until their respective successors are elected and qualified.
2. To transact such other business as may be in furtherance of or
incidental to the foregoing or as may otherwise properly come before
the meeting.
Only stockholders of record at the close of business on April 8, 1997 will
be entitled to vote at the meeting or any adjournment thereof. A list of such
stockholders will be open for examination by any stockholder for any purpose
germane to the meeting for ten days before the meeting during ordinary business
hours at the offices of Palmer & Dodge LLP, One Beacon Street, Boston,
Massachusetts 02108.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING. THEREFORE,
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE YOUR PROXY AND
RETURN IT IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE
UNITED STATES. IF YOU ATTEND THE MEETING AND WISH TO VOTE IN PERSON, YOUR PROXY
WILL NOT BE USED.
By order of the Board of Directors,
MICHAEL LYTTON, Secretary
Dated: April 15, 1997
<PAGE> 3
ARQULE, INC.
200 Boston Avenue
Medford, Massachusetts 02155
Telephone: (617) 395-4100
---------------
Proxy Statement
---------------
The enclosed proxy is solicited on behalf of the Board of Directors of
ArQule, Inc. (the "Company") for use at the 1997 Annual Meeting of Stockholders
to be held on Wednesday, May 14, 1997, and at any adjournments thereof. The
approximate date on which this proxy statement and accompanying proxy are first
being sent or given to security holders is April 15, 1997.
The principal business expected to be transacted at the meeting, as more
fully described below, will be the election of two directors.
The authority granted by an executed proxy may be revoked at any time
before its exercise by filing with the Secretary of the Company a written
revocation or a duly executed proxy bearing a later date or by voting in person
at the meeting.
The Company will bear the cost of the solicitation of proxies, including
the charges and expenses of brokerage firms and others for forwarding
solicitation material to beneficial owners of stock. In addition to the use of
mails, proxies may be solicited by officers and employees of the Company in
person or by telephone.
VOTING SECURITIES AND VOTES REQUIRED
Only stockholders of record at the close of business on April 8, 1997 will
be entitled to vote at the meeting. On that date, the Company had outstanding
9,857,112 shares of Common Stock, $0.01 par value (the "Common Stock"), each of
which is entitled to one vote. A majority in interest of the outstanding Common
Stock, represented at the meeting in person or by proxy, constitutes a quorum
for the transaction of business. A plurality of the votes cast is required to
elect the nominees for director. Broker non-votes will not be counted in
determining the shares entitled to vote nor treated as votes cast. (A "broker
non-vote" occurs when a registered broker holding a customer's shares in the
name of the broker has not received voting instructions on the matter from the
customer, is barred by applicable rules from exercising discretionary voting
authority in the matter, and so indicates on the proxy.) Abstentions will not be
treated as votes cast in the election of directors.
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<PAGE> 4
ELECTION OF DIRECTORS
The number of directors is fixed at five for the coming year and is divided
into three classes. At the meeting, two directors will be elected to hold office
for three years and until their successors are elected and qualified. Stephen M.
Dow and Eric B. Gordon, who are presently serving as directors, have been
nominated for re-election by the Board of Directors. Unless the enclosed proxy
withholds authority to vote for one or more of the nominees or is a broker
non-vote, the shares represented by such proxy will be voted for the election as
directors of the Board's nominees. If either nominee is unable to serve, which
is not expected, the shares represented by the enclosed proxy will be voted for
such other candidate as may be nominated by the Board of Directors.
<TABLE>
The following table contains certain information about the nominees for
director and each other person whose term of office as a director will continue
after the meeting.
<CAPTION>
PRESENT
DIRECTOR TERM
NAME AND AGE BUSINESS EXPERIENCE AND OTHER DIRECTORSHIPS SINCE EXPIRES
------------ ------------------------------------------- ----- -------
<S> <C> <C> <C>
Stephen M. Dow* Stephen M. Dow has been a director of the Company 1993 1997
Age: 41 since its inception in December 1993. Since 1983, he has
been a general partner of Sevin Rosen Funds, a venture
capital investment firm. Mr. Dow serves as a director of
Citrix Systems, Inc., ViroPharma, Inc. and several privately
held companies.
Allan R. Ferguson Allan R. Ferguson has been a director of the Company 1993 1998
Age: 54 since its inception in December 1993. He has been a general
partner of Atlas Venture since 1993 and managing partner of
Aspen Ventures since 1991, both venture capital firms. From
1986 through 1991, Mr. Ferguson was the President of 3i
Venture , a venture capital firm. Prior to his venture capital
experience, Mr. Ferguson held senior level positions in
operations at Johnson & Johnson and Damon Biotech. Mr.
Ferguson serves as a director of AutoImmune Inc. and
several privately held companies.
Eric B. Gordon* Eric B. Gordon has been the Presid nt, Chief Executive 1996 1997
Age: 49 Officer and a director of the Company since January 1996.
From 1987 until he joined the Company, Mr. Gordon
served in various capacities in the United States
and Europe with Pasteur Merieux Connaught--U.S., a
pharmaceutical company, most recently as Vice
President and Chief Financial Officer. In addition,
since 1993 he held the additional position of Chief
Executive Officer of Virogenetics Corporation, a
partially owned joint venture company and since
1994 Vice President and Treasurer of Pasteur
Merieux. Mr. Gordon received his A.M.P. from the
Wharton School of Business of the University of
Pennsylvania and his B.S. in Accounting and Finance
from Syracuse University.
</TABLE>
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<PAGE> 5
<TABLE>
<CAPTION>
PRESENT
DIRECTOR TERM
NAME AND AGE BUSINESS EXPERIENCE AND OTHER DIRECTORSHIPS SINCE EXPIRES
------------ ------------------------------------------- ----- -------
<S> <C> <C> <C>
Joseph C. Hogan, Jr., Joseph C. Hogan, Jr., Ph.D. is a founde of the 1993 1998
Ph.D. Company and has served as the Chief Scientific Officer and
Age: 55 Senior Vice President of Research and Development since its
inception in December 1993. Dr. Hogan has served as the
Chairman of the Board since January 1996. From 1990 until
he founded the Company, Dr. Hogan was the founder and
president of Applied Modular Chemistries, Inc., a chemistry
company. Dr. Hogan received his M.S. and B.S. in
Chemistry from Boston College and his Ph.D. from Boston
College and the Max Planck Institut fuer Kohlenforschung,
Muelheim/Ruhr, Germany.
Adrian de Jonge, Adrian de Jonge, Ph.D. has been a director of the 1995 1999
Ph.D. Company since November 1995. Dr. de Jonge is the Vice
Age: 41 President of Research of Solvay Duphar B.V.'s
Pharmaceuticals Division and has held such position since
1994. Fr m 1987 through 1993, Dr. de Jonge was employed
by Solvay Duphar B.V. in a variety of positions, most
recently as Sector Manager of Drug Discovery.
</TABLE>
* Nominee for election as director
COMMITTEES OF THE BOARD
The Audit Committee, which in 1996 consisted of Messrs. Ferguson and de
Jonge, is responsible for providing the Board of Directors with an independent
review of the financial health of the Company and its financial controls and
reporting. Its primary functions are to recommend independent auditors to the
Board of Directors, review the results of the annual audit and the auditors'
reports, and ensure the adequacy of the Company's financial controls and
procedures. The Audit Committee met two times in 1996. The Compensation
Committee, whose members are Messrs. Ferguson and Dow, acts for the Board of
Directors with respect to the Company's compensation practices and their
implementation. It sets and implements the compensation of the Company's
officers and administers the Amended and Restated 1994 Equity Incentive Plan and
the 1996 Employee Stock Purchase Plan. The Compensation Committee held eight
meetings in 1996. The entire Board of Directors functions as a nominating
committee, considering nominations submitted to the Chairman of the Board. The
Board of Directors held eight meetings during 1996, and each director attended
at least 75% of all meetings of the Board and of all committees of the Board on
which he served.
DIRECTOR COMPENSATION
The directors of the Company do not receive additional compensation for
their services as directors. However, all directors who are not employees of the
Company are currently eligible to participate in the 1996 Director Stock Option
Plan described below under the heading "1996 Director Stock Option Plan."
- 3 -
<PAGE> 6
STOCK PERFORMANCE GRAPH
The following graph shows the cumulative total stockholder return on the
Company's Common Stock over the period from October 31, 1996 (the end of the
first trading month of the Company's Common Stock) to December 31, 1996, as
compared with that of the Nasdaq Stock Market Index and the Nasdaq
Pharmaceuticals Index, based on an initial investment of $100 in each on October
31, 1996. Total stockholder return is measured by dividing share price change
plus dividends, if any, for each period by the share price at the beginning of
the respective period, and assumes reinvestment of dividends.
COMPARISON OF CUMULATIVE TOTAL RETURN OF
ARQULE, INC., NASDAQ STOCK MARKET (U.S. COMPANIES) INDEX AND
AND NASDAQ PHARMACEUTICALS INDEX
[Graph]
<TABLE>
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<CAPTION>
10/31/96 12/31/96
- --------------------------------------------------------------------------------
<S> <C> <C>
ArQule, Inc. 100 118.868
- --------------------------------------------------------------------------------
Nasdaq Stock Market (U.S. Companies) 100 102.905
- --------------------------------------------------------------------------------
Nasdaq Pharmaceuticals Index 100 100.244
- --------------------------------------------------------------------------------
</TABLE>
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<PAGE> 7
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee Report set forth below describes the
compensation policies applicable to executive officers of the Company, including
Mr. Gordon, the Company's Chief Executive Officer.
OVERALL POLICY. The Company's executive compensation program is designed to
be closely linked to corporate performance and returns to stockholders. To this
end, the Company has developed an overall compensation strategy and specific
compensation plan that tie a portion of executive compensation to the Company's
success in meeting specified performance goals. In addition, through the use of
stock options, the Company ensures that a part of the executives' compensation
is closely tied to appreciation in the Company's stock price. The overall
objectives of this strategy are to attract and retain the best possible
executive talent, to motivate these executives to achieve the goals inherent in
the Company's business strategy, to link executive and stockholder interests
through equity based plans and, finally, to provide a compensation package that
recognizes individual contributions as well as overall business results.
The Compensation Committee determines the compensation of the three most
highly compensated corporate executives, including the individuals named in the
Summary Compensation Table. The Compensation Committee takes into account the
views of Mr. Gordon, the Company's Chief Executive Officer and reviewed a
number of compensation surveys to insure the competitiveness of the
compensation offered by the Company for the purposes of recruiting and
retaining key management.
The key elements of the Company's executive compensation consist of base
salary and stock options. The Compensation Committee's policies with respect to
each of these elements, including the bases for the compensation awarded to Mr.
Gordon, are discussed below. In addition, while the elements of compensation
described below are considered separately, the Compensation Committee takes into
account the full compensation package afforded by the Company to the individual,
including insurance and other employee benefits.
BASE SALARIES. Base salaries for new executive officers are initially
determined by evaluating the responsibilities of the position held and the
experience of the individual. In making determinations regarding base salaries,
the Compensation Committee considers generally available information regarding
salaries prevailing in the industry, but does not utilize any particular indices
or peer groups.
Annual salary adjustments are determined by evaluating the financial
performance of the Company and of particular aspects of the business under the
control of the particular executive officer. The Compensation Committee, where
appropriate, also considers non-financial performance measures. These
non-financial performance measures may include such factors as efficiency gains,
new responsibilities assumed by the executive, quality improvements and
improvements in relations with collaborators and employees. No particular weight
is given to any of these non-financial factors.
Mr. Gordon joined the Company in January 1996 and his initial base salary
of $219,808 for 1996 was based on his past experience and information available
to the Committee regarding salaries paid to Chief Executive Officers of
comparable companies.
STOCK OPTIONS. Under the Company's Amended and Restated 1994 Equity
Incentive Plan, stock options are granted to the Company's executive officers.
Stock options are designed to align the interests of executives with those of
the stockholders. Stock options are granted with an exercise price equal to the
fair market value of the Common Stock on the date of grant and vest over various
periods of time, normally four years or upon the achievement of specified
milestones. Stock option grants are designed to encourage the creation of
stockholder value over the long term since the full benefit of the compensation
package cannot be realized unless stock price appreciation is achieved, and,
once achieved, is maintained and improved upon. In determining the amount of
such grants, the Compensation Committee evaluates the job level of the
executive, responsibilities to be assumed in the upcoming year, and
responsibilities in prior years, and also takes into account the size of the
officer's awards in the past. Based on these factors and in connection with Mr.
Gordon's employment agreement, in January 1996
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<PAGE> 8
Mr. Gordon was granted options to acquire 464,920 shares of Common Stock at
$0.80 per share, representing the fair market value of the Common Stock of
Company at that time as determined by the Committee.
CONCLUSION. As described above, a very significant portion of the Company's
executive compensation is linked directly to individual and corporate
performance and stock appreciation. The Compensation Committee intends to
continue the policy of linking executive compensation to Company performance and
returns to stockholders, recognizing that the ups and downs of the business
cycle from time to time may result in an imbalance for a particular period.
By the Compensation Committee,
Stephen M. Dow
Allan R. Ferguson
- 6 -
<PAGE> 9
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
The following table provides summary information on the cash compensation
and certain other compensation paid, awarded, or accrued by the Company and its
subsidiaries to or for the Chief Executive Officer of the Company and each of
the Company's other executive officers whose total salary and bonus exceeded
$100,000 during the fiscal year ended December 31, 1996 (collectively, the
"Named Executive Officers").
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
------------------------------------------- COMPENSATION
AWARDS
------
OTHER ANNUAL SECURITIES
COMPENSATION UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS ($) OPTIONS(#) COMPENSATION($)
- --------------------------- ---- ------ ----- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Eric B. Gordon(1).......................... 1996 $219,808 -- $126,195(2) 464,920 --
President and Chief Executive Officer ... 1995 -- -- -- -- --
Joseph C. Hogan, Jr., Ph.D................. 1996 171,308 -- 435(3) -- $30,000(4)
Chairman of the Board, Senior Vice ...... 1995 150,000 -- -- -- --
President of Research and Development
and Chief Scientific Officer
James R. Fitzgerald, Jr.(5)................ 1996 51,346 -- -- 50,000 --
Vice President, Chief Financial ........... 1995 -- -- -- --
Officer and Treasurer
<FN>
- ---------------------
(1) Mr. Gordon commenced employment with the Company in January 1996. Terms of
his employment are described under "--Executive Employment Agreements."
(2) Consists of reimbursement of relocation expenses incurred by Mr. Gordon
during the fiscal year ended December 31, 1996 in connection with his
becoming an employee of the Company.
(3) Consists of Medicare taxes owed by Dr. Hogan that were paid by the Company.
(4) Consists of amount of indebtedness owed by Dr. Hogan to the Company that
was forgiven by the Company during the fiscal year ended December 31, 1996.
(5) Mr. Fitzgerald commenced employment with the Company in July 1996. Terms of
his employment are described under "--Executive Employment Agreements."
</TABLE>
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<PAGE> 10
STOCK OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 1996 by the Company to the
Named Executive Officers:
<CAPTION>
POTENTIAL REALIZABLE
VALUE OF ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED EXERCISE OR OPTION TERM(1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
GRANTED(#) FISCAL YEAR ($/SHARE)(2) DATE 5%($) 10%($)
---------- ------------- ------------ ------------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Eric B. Gordon................... 77,486(3) 8.3% $0.80 1/23/06 $ 38,984 $ 98,794
387,434(4) 41.5 0.80 1/23/06 194,924 493,976
Joseph C. Hogan, Jr., Ph.D....... -- -- -- -- -- --
James R. Fitzgerald, Jr.......... 50,000(4) 5.4 6.00 7/09/06 188,668 478,123
<FN>
- ---------------------
(1) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates set by the Securities and Exchange Commission and,
therefore, are not intended to forecast possible future appreciation, if
any, in the price of the underlying Common Stock. No gain to the optionees
is possible without an increase in price of the underlying Common Stock,
which will benefit all stockholders proportionately.
(2) The exercise price of these options is equal to the fair market value of
the Company's Common Stock on the date of grant, as determined by the
Company's Compensation Committee.
(3) Options granted under the Company's Amended and Restated 1994 Equity
Incentive Plan. The shares subject to this option have fully vested.
(4) Options granted under the Company's Amended and Restated 1994 Equity
Incentive Plan. These options become exercisable as to 25% of the shares on
each of the first four anniversaries of January 23, 1996 for Mr. Gordon and
of July 9, 1996 for Mr. Fitzgerald.
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
The following table sets forth certain information concerning exercisable
and unexercisable stock options held by the Named Executive Officers as of
December 31, 1996:
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END(1) AT FISCAL YEAR-END(2)
------------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Eric B. Gordon................... 77,486 387,434 $1,158,416 $5,792,138
Joseph C. Hogan, Jr., Ph.D....... -- -- -- --
James R. Fitzgerald, Jr.......... -- 50,000 -- 487,500
<FN>
- ---------------------
(1) No options were exercised during the fiscal year ended December 31, 1996 by
the Named Executive Officers.
(2) Based on the difference between closing price of the underlying shares of
Common Stock on December 31, 1996 as reported by the Nasdaq National Market
($15.75) and the option exercise price.
</TABLE>
- 8 -
<PAGE> 11
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Mr. Gordon and Mr.
Fitzgerald. The Company agreed to employ Mr. Gordon as President and Chief
Executive Officer of the Company, effective January 2, 1996, at an annual salary
of $225,000. In connection with this agreement, Mr. Gordon was granted options
to acquire 387,434 shares of Common Stock at $0.80 per share, which vest over
four years, and options to acquire 77,486 shares of Common Stock at $0.80 per
share, which vested upon the achievement of certain milestones. Mr. Gordon was
also provided with moving and relocation allowances. The agreement provides for
continued employment until termination by either party. If Mr. Gordon is
terminated by the Company without cause, the agreement provides that he will be
entitled to receive his base salary, plus any benefits to which he is entitled
and any options granted to Mr. Gordon which would have otherwise vested, for a
period of up to six months following such termination of employment. In July
1996, the Company also made a loan in the principal amount of $250,000 to Mr.
Gordon. The principal amount of the loan will be repaid in three equal annual
installments beginning in October 1997 and bears interest at the lowest
applicable federal rate of interest as published by the Internal Revenue
Service.
Under Mr. Fitzgerald's Agreement, the Company agreed to employ Mr.
Fitzgerald as Vice President and Chief Financial Officer of the Company,
effective July 9, 1996, at an annual salary of $150,000. In connection with the
greement, Mr. Fitzgerald was granted options, which vest over four years, to
acquire 50,000 shares of Common Stock at $6.00 per share. The agreement provides
for continued employment until termination by either party. If Mr. Fitzgerald is
terminated without cause by the Company during the first year of the agreement,
he will be entitled to receive his base salary, plus any benefits to which he is
entitled and any options granted to Mr. Fitzgerald which would have otherwise
vested, for a period of up to six months.
STOCK OPTION AND STOCK PURCHASE PLANS
The following is certain information relating to the Company's equity
compensation plans under which officers and/or directors may acquire shares of
Common Stock. These plans were approved by the stockholders of the Company prior
to the Company's initial public offering and, therefore, the Company is not
soliciting any votes with respect to these plans. The closing price of the
Company's Common Stock on April 8, 1997 as reported by the Nasdaq National
Market was $13.75.
AMENDED AND RESTATED 1994 EQUITY INCENTIVE PLAN
General
The Company's Amended and Restated 1994 Equity Incentive Plan (the "Equity
Plan") was readopted by the Board of Directors on October 17, 1994 and amended
June 25, 1996 and was readopted by the stockholders on August 15, 1996. The
Equity Plan was further amended by action of the Board of Directors on September
9, 1996, which amendment was approved by the stockholders on September 11, 1996.
The purpose of the Equity Plan is to attract and retain key employees and
consultants of the Company and its affiliates. The Equity Plan provides for the
grant of incentive and nonstatutory stock options (the "Options") to employees
and consultants of the Company and its affiliates ("Eligible Persons").
Currently, Options may be made under the Equity Plan for up to a total of
3,200,000 shares of Common Stock, subject to adjustment for stock splits and
similar capital changes, to employees of the Company and, in the case of
nonstatutory options, to consultants of the Company or any Affiliate (as defined
in the Equity Plan) capable of contributing to the Company's performance.
As of April 8, 1997, 80 employees were eligible to participate in the
Equity Plan and Options to purchase an aggregate of 1,765,354 shares of Common
Stock had been granted. Pursuant to the Equity Plan, 466,547 restricted shares
of Common Stock have been issued. Options to purchase 111,500 shares had been
- 9 -
<PAGE> 12
cancelled, Options to purchase 35,625 shares had been exercised, and Options to
purchase 1,618,229 shares remained outstanding, leaving 1,079,599 shares
available for new Options under the Equity Plan.
Administration and Eligibility
Awards are made by the Compensation Committee which has been designated by
the Board of Directors to administer the Equity Plan. The Compensation Committee
may delegate to one or more officers the power to make awards under the Equity
Plan to persons other than officers of the Company who are subject to the
reporting requirements of Section 16 of the Securities Exchange Act of 1934 (the
"Exchange Act").
Options under the Equity Plan are granted at the discretion of the
Compensation Committee, which determines the recipients and establishes the
terms and conditions of each award, including the exercise price, the form of
payment of the exercise price, the number of shares subject to Option and the
time at which such Options become exercisable. However, the exercise price of
any incentive stock option granted under the Equity Plan may not be less than
the fair market value of the Common Stock on the date of grant. The exercise
price of any nonstatutory stock option is determined by the Compensation
Committee.
Federal Income Tax Consequences Relating to Stock Options
Incentive Stock Options. An optionee does not realize taxable income upon
the grant or exercise of an incentive stock option ("ISO") under the Equity
Plan.
If no disposition of shares issued to an optionee pursuant to the exercise
of an ISO is made by the optionee within two years from the date of grant or
within one year from the date of exercise, then (a) upon sale of such shares,
any amount realized in excess of the option price (the amount paid for the
shares) is taxed to the optionee as long-term capital gain and any loss
sustained will be a long-term capital loss and (b) no deduction is allowed to
the Company for Federal income tax purposes. The exercise of ISOs gives rise to
an adjustment in computing alternative minimum taxable income that may result in
alternative minimum tax liability for the optionee.
If shares of Common Stock acquired upon the exercise of an ISO are disposed
of prior to the expiration of the two-year and one-year holding periods
described above (a "disqualifying disposition") then (a) the optionee realizes
ordinary income in the year of disposition in an amount equal to the excess (if
any) of the fair market value of the shares at exercise (or, if less, the amount
realized on a sale of such shares) over the option price thereof and (b) the
Company is entitled to deduct such amount. Any further gain realized is taxed as
a short-term or long-term capital gain and does not result in any deduction to
the Company. A disqualifying disposition in the year of exercise will generally
avoid the alternative minimum tax consequences of the exercise of an ISO.
Nonstatutory Stock Options. No income is realized by the optionee at the
time a nonstatutory option is granted. Upon exercise, (a) ordinary income is
realized by the optionee in an amount equal to the difference between the option
price and the fair market value of the shares on the date of exercise and (b)
the Company receives a tax deduction for the same amount. Upon disposition of
the shares, appreciation or depreciation after the date of exercise is treated
as a short-term or long-term capital gain or loss and will not result in any
deduction by the Company.
1996 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors on August 14, 1996 and by the stockholders of
the Company on August 15, 1996. Under the Purchase Plan, full time employees of
the Company or its subsidiaries may purchase shares of Common Stock at a
discount from fair market value. 120,000 shares of Common Stock (subject to
adjustments for stock-splits and similar capital changes) are reserved for
issuance under the Purchase Plan. As of April 8, 1997, approximately 80
employees were eligible to participate under the Purchase Plan. To date, no
shares of
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<PAGE> 13
Common Stock have been issued under the Purchase Plan, but the first
participation period began in February 1997. The Purchase Plan is intended to
qualify as an employee stock purchase plan within the meaning of Section 423 of
the Code. Rights to purchase Common Stock under the Purchase Plan are granted at
the discretion of the Compensation Committee, which determines the frequency and
duration of individual offerings under the Purchase Plan and the dates when
stock may be purchased. Eligible employees participate voluntarily and may
withdraw from any offering at any time before stock is purchased. Participation
terminates automatically upon termination of employment. The purchase price per
share of Common Stock in an offering is 85% of the lesser of its fair market
value at the beginning of the offering period or on the applicable exercise date
and may be paid through payroll deductions, periodic lump sum payments or a
combination of both. The Purchase Plan terminates on August 14, 2006.
In accordance with Section 423 of the Code, no employee may subscribe for
shares under the Purchase Plan if, immediately after having subscribed, the
employee would own 5% or more of the voting stock of the Company (including
stock that may be purchased through subscriptions under the Purchase Plan or any
other options), nor may an employee buy more than $25,000 worth of stock
(determined by the fair market value of the Common Stock at the time the
offering begins) through the Purchase Plan in any calendar year. The Purchase
Plan provides that no employee may allocate more than 15%, or such lesser
percentage as the Board of Directors may fix, of the employee's annual rate of
compensation to the purchase of stock through the Purchase Plan.
Federal income tax consequences of the Purchase Plan participation are as
follows. Participants do not realize taxable income at the commencement of an
offering or at the time shares are purchased under the Purchase Plan. If a
participant does not dispose of shares purchased under the Purchase Plan within
two years from the offering commencement date or within one year from the
purchase date, upon sale of such shares 15% of the fair market value of the
stock at the commencement of the offering period (or, if less, the amount
realized on sale of such shares in excess of the purchase price) is taxed to the
participant as ordinary income with any additional gain taxed as a long-term
capital gain and any loss sustained is treated as a long-term capital loss, and
no deduction is allowed to the Company for Federal income tax purposes. If the
participant dies at any time while owning shares purchased under the Plan, then
(a) 15% of the fair market value of the stock at the commencement of the
offering period (or, if less, the fair market value of such shares on the date
of death in excess of the purchase price) is taxed to the participant as
ordinary income in the year of death and (b) no deduction is allowed to the
Company for Federal income tax purposes. If shares of Common Stock purchased
under the Purchase Plan are disposed of before the expiration of the two-year
and one-year holding periods described above, the participant will realize
ordinary income in the year of disposition in an amount equal to the excess (if
any) of the fair market value of the shares on the date of purchase (or, if
less, the amount realized on sale of such shares) over the purchase price
thereof, and the Company will be entitled to deduct such amount. Any further
gain realized would be taxed as a short-term or long-term capital gain and would
not result in any deduction by the Company.
1996 DIRECTOR STOCK OPTION PLAN
General
The Company's 1996 Director Stock Option Plan (the "Director Plan") was
adopted, by the Board of Directors on August 14, 1996 and approved by the
stockholders of the Company on August 15, 1996. The purpose of the Director Plan
is to attract and retain highly qualified non-employee directors of the Company
and to encourage ownership of stock of the Company by such directors so as to
provide additional incentives to promote the success of the Company. The
Director Plan presently authorizes the grant of nonstatutory stock options for
the purchase of a maximum of 125,000 shares (subject to adjustment for stock
splits and similar capital changes) of Common Stock to Eligible Directors as
defined below.
Grant of Rights and Administration of the Plan
Awards made pursuant to the Director Plan are intended to be "formula
awards" within the meaning of Rule 16b-3 of the Exchange Act. All directors of
the Company who are not employees of the Company or of
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<PAGE> 14
any subsidiary of the Company ("Eligible Directors") are eligible to participate
in the Director Plan, unless such director irrevocably elects not to
participate. Currently, three of the Company's five directors are Eligible
Directors.
On August 14, 1996, the date on which the Director Plan was adopted, each
Eligible Director, being Messrs. Dow, Ferguson and de Jonge were automatically
granted an option to purchase 7,500 shares of Common Stock (the "Initial
Options"). The Initial Options become exercisable with respect to 2,500 shares
on the date of the Company's next annual meeting of stockholders following the
date of grant and on the date of each annual meeting of stockholders thereafter.
Upon the election of an Eligible Director after August 14, 1996, such new
Eligible Director will receive an Initial Option. In addition, options under the
Director Plan are automatically granted once a year, at the annual meeting of
stockholders of the Company, to Eligible Directors elected or reelected at the
meeting ("Annual Options"). Annual Options cover 3,500 shares of Common Stock
for each year of the term of office to which the director is elected (normally,
10,500 shares for election to a three-year term of office). The Annual Options
become exercisable with respect to 3,500 shares on the date on which the Annual
Option was granted and on the date of each annual meeting of stockholders
thereafter, so long as the optionee is then an Eligible Director of the Company.
The Initial Options and Annual Options have a term of ten years, and an exercise
price payable in cash or shares of Common Stock.
The exercise price for the Initial Options granted in August 1996 was
$11.00, the fair market value on such date as determined by the Board of
Directors. The exercise price for the Initial Options and the Annual Options
will equal the last sale price for the Common Stock on the business day
immediately preceding the date of grant, as reported on the Nasdaq National
Market. As of April 8, 1997, options to purchase a total of 22,500 shares of
Common Stock were outstanding under the Director Plan, and 102,500 shares of
Common Stock were reserved for future option grants under the Director Plan.
Federal Income Tax Consequences
Initial Options and Annual Options granted under the Director Plan are
nonstatutory options not intended to qualify under Section 422 of the Code. The
exercise of an option by a director results in taxable ordinary income to the
director and a corresponding deduction for the Company, in each case equal to
the difference between the fair market value of the shares on the date the
option was granted (the option exercise price) and their fair market value on
the date the option is exercised.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1996, the Company's Compensation
Committee consisted of Messrs. Dow and Ferguson. None of the members of the
Compensation Committee has been an officer or employee of the Company.
Mr. Dow is a general partner of SRB Associates IV L.P., which is the
general partner of Sevin Rosen Fund IV L.P., a venture capital firm and a
principal stockholder of the Company. Mr. Ferguson is a general partner of Atlas
Venture Associates II, L.P., which is the general partner of Atlas Venture Fund
II, L.P., a venture capital firm and a principal stockholder of the Company. See
"Principal Stockholders."
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<PAGE> 15
SHARE OWNERSHIP
<TABLE>
The following table and footnotes set forth certain information regarding
the beneficial ownership of the Company's Common Stock as of April 8, 1997, by
(i) persons known by the Company to be beneficial owners of more than 5% of the
Common Stock, (ii) the Named Executive Officers, (iii) the directors and
nominees for election as directors of the Company, and (iv) all current
executive officers and directors as a group.
<CAPTION>
SHARES BENEFICIALLY OWNED (1)
-----------------------------
5% STOCKHOLDERS NUMBER PERCENT
- --------------- ------ -------
<S> <C> <C>
Atlas Venture (2)..................................... 1,366,250 11.89%
222 Berkeley Street
Boston, MA 02116
Physica B.V. (3)...................................... 907,734 7.90%
C.J. van Houtenlaan, 36
1381 CD Weiss
The Netherlands
Sevin Rosen Fund IV L.P. (4).......................... 2,368,832 20.62%
13455 Noel Road, Suite 1670
Dallas, TX 75240
EXECUTIVE OFFICERS AND DIRECTORS
- --------------------------------
Adrian de Jonge, Ph.D. (5)............................ 910,234 7.92%
Stephen M. Dow (6).................................... 2,371,332 20.63%
Allan R. Ferguson (7)................................. 1,368,750 11.91%
Eric B. Gordon (8).................................... 175,844 1.51%
Joseph C. Hogan, Jr., Ph.D. (9)....................... 1,057,412 9.19%
James R. Fitzgerald, Jr. (10)......................... 4,750 *
All current executive officers and directors
as a group (6 persons) (11)......................... 5,888,322 50.38%
</TABLE>
- ---------------------
* Indicates less than 1%
(1) On April 9, 1997, the Company issued 1,632,500 shares of Common Stock in a
public offering registered with the Securities and Exchange Commission (the
"Public Offering"). Dr. Hogan sold 180,000 shares of Common Stock in such
Public Offering. The above table reflects the Public Offering and the sale
of Common Stock by Dr. Hogan. The persons and entities named in the table
have sole voting and investment power with respect to the shares
beneficially owned by them, except as noted below. Share numbers include
shares of Common Stock issuable pursuant to the outstanding options that
may be exercised within 60 days after April 8, 1997.
(2) Consists of (i) 938,766 shares owned by Atlas Venture Fund II, L.P. and
(ii) 427,484 shares owned by Atlas Venture Europe Fund B. V. (collectively,
"Atlas Venture"). The voting and investment discretion over the shares
owned by Atlas Venture Fund II, L.P. is exercised by the general partners
of Atlas Venture Associates II, L.P., its general partner. The general
partners of Atlas Venture Associates II, L.P. are Allan R. Ferguson, Barry
J. Fidelman, Jean-Francois Formela and Christopher J. Spray. Because of
this relationship, Allan R. Ferguson, a director of the Company, shares
voting and investment discretion over such shares. Atlas Venture Europe
Fund B.V. is a corporation wholly-owned by Atlas InvesteringsGroep N.V.
("AIG"). The voting and investment discretion over the shares owned by
Atlas Venture Europe Fund B.V. is exercised by the managing directors of
AIG, Michiel A. de Haan and Evert H. Smid. Three officers of AIG, Gerard H.
Montanus, Hans Bosman and Jaap van Hellemond, share voting and investment
discretion with these two managing directors over the shares held by Atlas
Venture Europe Fund B.V. The
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<PAGE> 16
number of shares of Common Stock attributed to Atlas Venture assumes a pro
rata distribution of the shares currently owned by Legomer Investors, Inc.
("LII") to its stockholders (which include Atlas Venture).
(3) The voting and investment discretion over the shares owned by Physica B.V.
is exercised by the sole director of Physica B.V., J.W.F. van Ingen.
(4) Consists of 2,368,832 shares owned by Sevin Rosen Fund IV L.P. ("Sevin
Rosen"). The voting and investment discretion over the shares owned by
Sevin Rosen is exercised by the general partner of SRB Associates IV L.P.,
its general partner. The general partners of SRB Associates L.P. are
Stephen M. Dow, Jon W. Bayless, Charles H. Phipps, Dennis J. Gorman, and
John V. Jaggers. Because of this relationship, Stephen M. Dow, a director
of the Company, shares voting and investment discretion over such shares.
The number of shares of Common Stock attributed to Sevin Rosen assumes a
pro rata distribution of the shares currently owned by LII to its
stockholders (which include Sevin Rosen).
(5) Consists of (i) 2,500 shares of Common Stock subject to options that will
become exercisable within sixty (60) days of April 8, 1997 and (ii) 907,734
shares of Common Stock owned by Physica B.V. Dr. de Jonge is Vice President
of Research of Solvay Duphar B.V.'s Pharmaceuticals Division, an affiliate
of Physica B.V. Dr. de Jonge disclaims beneficial ownership of the shares
held by Physica B.V.
(6) Consists of (i) 2,500 shares of Common Stock subject to options that will
become exercisable within sixty (60) days of April 8, 1997 and (ii)
2,368,832 shares owned by or attributed to Sevin Rosen. Mr. Dow is a
general partner of SRB Associates IV L.P. which is the general partner of
Sevin Rosen. Mr. Dow disclaims beneficial ownership of the shares owned by
or attributed to Sevin Rosen, except to the extent of his pecuniary
interest therein. See footnote (4).
(7) Consists of (i) 2,500 shares of Common Stock subject to options that will
become exercisable within sixty (60) days of April 8, 1997 and (ii)
1,366,250 shares owned by Atlas Venture. Mr. Ferguson is a general partner
of Atlas Venture Associates II, L.P., which is the general partner of Atlas
Venture Fund II, L.P. Mr. Ferguson disclaims beneficial ownership of the
shares owned by Atlas Venture, except to the extent of his pecuniary
interest therein. See footnote (2).
(8) Consists of (i) 174,344 shares of Common Stock subject to options that are
presently exercisable and (ii) 1,500 shares of Common Stock held in trust
for the benefit of his children.
(9) Consists of (i) 927,514 shares held by The Hogan Family Limited
Partnership, of which Dr. Hogan and his wife are the general partners, (ii)
117,398 shares that represent Dr. Hogan's pro rata ownership interest in
the shares currently owned by Legomer Technologies, Inc., and (iii) 12,500
shares of Common Stock subject to options that are presently exercisable.
(10) Includes 3,750 shares of Common Stock subject to options that are presently
exercisable.
(11) Includes 198,094 shares of Common Stock subject to options that are
presently exercisable. See footnotes (5), (6), (7), (8), (9) and (10).
SECURITIES EXCHANGE ACT REPORTING
The Company's executive officers and directors are required under Section
16(a) of the Exchange Act to file reports of ownership of Company securities and
changes in ownership with the Securities and Exchange Commission. Copies of
those reports must also be furnished to the Company.
Based solely on a review of the copies of reports furnished to the Company
and written representations that no other reports were required, the Company
believes that during 1996 the executive officers and directors
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<PAGE> 17
of the Company compiled with all applicable Section 16(a) filing requirements,
except that (i) each of Messrs. Dow, Ferguson and de Jonge, directors of the
Company, reported in a Form 5 filed on February 14, 1997 stock options to each
purchase 7,500 shares of Common Stock which should have been reported in a Form
3 filed on October 16, 1996, (ii) Mr. Gordon, the President and Chief Executive
Officer of the Company, reported in a Form 4 filed on March 19, 1997 the
purchase of 1,500 shares of Common Stock, for which a Form 4 was due on November
10, 1996 and (iii) Mr. Fitzgerald, the Chief Financial Officer of the Company,
reported in a Form 4 filed on March 19, 1997 the purchase of 1,000 shares of
Common Stock, for which a Form 4 was due on November 10, 1996.
INFORMATION CONCERNING AUDITORS
The firm of Price Waterhouse LLP, independent accountants, has audited the
Company's accounts since the inception of the Company and will do so for 1997.
Representatives of Price Waterhouse LLP have been invited to attend the Annual
Meeting.
STOCKHOLDER PROPOSALS
The Company's Bylaws require a stockholder who wishes to bring business
before or propose director nominations at an annual meeting to give written
notice to the Secretary of the Company not less than 45 days nor more than 60
days before the meeting, unless less than 60 days' notice or public disclosure
of the meeting is given, in which case the stockholder's notice must be received
within 15 days after such notice or disclosure is given. The notice must contain
specified information about the proposed business or nominee and the stockholder
making the proposal or nomination. If any stockholder intends to present a
proposal at the 1998 Annual Meeting of Stockholders and desires that it be
considered for inclusion in the Company's proxy statement and form of proxy, it
must be received by the Company at 200 Boston Avenue, Medford, Massachusetts,
02155, attention: James R. Fitzgerald, Jr., no later than March 31, 1998.
OTHER MATTERS
The Board of Directors does not know of any business to come before the
meeting other than the matters described in the notice. If other business is
properly presented for consideration at the meeting, the enclosed proxy
authorizes the persons named therein to vote the shares in their discretion.
IN ADDITION TO THE COMPANY'S ANNUAL REPORT, WHICH HAS BEEN MAILED TO
STOCKHOLDERS, ANY HOLDER OR BENEFICIAL OWNER OF THE COMPANY'S COMMON STOCK MAY
OBTAIN A COPY OF THE COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDING DECEMBER 31,
1996, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. WRITTEN REQUESTS FOR
COPIES OF THE COMPANY'S FORM 10-K SHOULD BE ADDRESSED TO JAMES R. FITZGERALD,
JR., CHIEF FINANCIAL OFFICER, 200 BOSTON AVENUE, MEDFORD, MASSACHUSETTS, 02155.
- 15 -
<PAGE> 18
PLEASE DATE, SIGN AND MAIL YOUR
PROXY CARD BACK AS SOON AS POSSIBLE!
ANNUAL MEETING OF STOCKHOLDERS
ARQULE, INC.
MAY 14, 1997
Please Detach and Mail in the Envelope Provided
<TABLE>
<S> <C>
A |X| PLEASE MARK YOUR
VOTES AS IN THIS EXAMPLE
WITHHELD
FOR from both
both nominees nominees NOMINEES: Eric B. Gordon THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED
1. Proposal to | | | | Stephen M. Dow IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED
elect directors STOCKHOLDERS. IF NO SPECIFICATION IS MADE, THIS
PROXY WILL BE VOTED FOR PROPOSAL 1. IN THEIR
FOR, except vote withheld from the following nominee: DISCRETION, THE PROXIES ARE ALSO AUTHORIZED TO
VOTE UPON SUCH MATTERS AS MAY PROPERLY COME
- ----------------------------------------------------- BEFORE THE MEETING.
Signature Date 1997 Signature Date 1997
----------------------------------- -------------- ------------------------- -----------
(IF HELD JOINTLY)
NOTE: Please sign exactly as name appears on stock certificate. When shares are held by joint tenants, both should sign. When
signing as attorney, executor, administrator, trustee or [illegible] please give full title as such. If a corporation,
please sign in full corporate name by President or other authorized officer. If a partner, please sign in partnership name
by authorized [illegible].
</TABLE>
<PAGE> 19
8888
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
ARQULE, INC.
PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS MAY 14, 1997
The undersigned stockholder of Arqule, Inc. (the "Company") hereby
appoints James R. Fitzgerald, Michael Lytton, and Lynnette C. Fallon, and each
of them acting singly, the attorneys and proxies of the undersigned, with full
power of substitution, to vote on behalf of the undersigned all the shares of
capital stock of the Company entitled to vote at the Annual Meeting of
Stockholders of the Company to be held on May 14, 1997, and at all adjournments
thereof, hereby revoking any proxy heretofore given with respect to such
shares.
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
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|SEE REVERSE|
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