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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended June 30, 1998 Commission File No. 000-21429
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ARQULE, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 04-3221586
(State of Incorporation) (I.R.S. Employer Identification Number)
200 BOSTON AVENUE, MEDFORD, MASSACHUSETTS 02155
(Address of Principal Executive Offices)
(781) 395-4100
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Number of shares outstanding of the registrant's Common Stock as of August 10,
1998:
Common Stock, par value $.01 12,120,784 shares outstanding
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ARQULE, INC.
QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1 - Unaudited Condensed Financial Statements
Condensed Balance Sheet (Unaudited)
June 30, 1998 and December 31, 1997 ....................................... 2
Condensed Statement of Operations (Unaudited)
Three months ended June 30, 1998 and 1997 and
six months ended June 30, 1998 and 1997.................................... 3
Condensed Statement of Cash Flows (Unaudited)
Six Months Ended June 30, 1998 and 1997.................................... 4
Notes to Unaudited Condensed Financial Statements............................... 5
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................. 7
PART II - OTHER INFORMATION......................................................... 11
Item 1 - Legal Proceedings.......................................................... 11
Item 2 - Changes in Securities and Use of Proceeds from Registered Securities....... 11
Item 4 - Submission of Meeting to a Vote of Security Holders........................ 11
Item 5 - Other Information.......................................................... 12
Signatures ........................................................................ 13
</TABLE>
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ARQULE, INC.
CONDENSED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
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ASSETS
Current Assets:
Cash and cash equivalents $ 8,576 $ 15,137
Marketable securities 32,752 34,145
Accounts receivable 1,505 1,833
Accounts receivable - related party 2,370 1,300
Inventory 1,019 953
Prepaid expenses and other current assets 630 520
Notes receivable from related parties 30 30
-------- --------
Total current assets 46,882 53,918
Property and equipment, net 16,414 12,654
Other assets 906 156
Notes receivable from related parties 182 197
-------- --------
$ 64,384 $ 66,925
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 1,112 $ 1,174
Accounts payable and accrued expenses 1,013 2,804
Deferred revenue 1,587 3,917
-------- --------
Total current liabilities 3,712 7,895
-------- --------
Capital lease obligations 648 1,213
-------- --------
Deferred revenue 159 477
-------- --------
Shareholders' Equity:
Common stock, $0.01 par value; 30,000,000
shares authorized; 12,069,076 and
11,877,315 shares issued and outstanding at
June 30, 1998 and December 31, 1997, respectively 120 119
Additional paid-in capital 71,305 68,418
Accumulated deficit (11,210) (10,643)
-------- --------
60,215 57,894
Deferred compensation (350) (554)
-------- --------
Total stockholders' equity 59,865 57,340
-------- --------
$ 64,384 $ 66,925
======== ========
</TABLE>
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ARQULE, INC.
CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(UNAUDITED) (UNAUDITED)
1998 1997 1998 1997
------- ------- -------- -------
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REVENUE:
Compound development revenue $ 3,221 $ 2,364 $ 6,149 $ 4,728
Compound development
revenue -- related parties 2,784 895 5,542 1,790
------- -------- -------- --------
Total revenue 6,005 3,259 11,691 6,518
COSTS AND EXPENSES:
Cost of revenue 1,920 1,609 3,522 3,073
Cost of revenue -- related parties 1,660 635 3,175 1,253
Research and development 2,159 1,158 4,014 1,828
Marketing, general and
administrative 1,469 924 2,759 2,097
------- -------- -------- --------
Total costs and expenses 7,208 4,326 13,470 8,251
------- -------- -------- --------
Loss from operations (1,203) (1,067) (1,779) (1,733)
Interest income 610 702 1,312 1,146
Interest expense (45) (70) (100) (143)
------- -------- -------- --------
Net loss (638) (435) (567) (730)
======= ======== ======== ========
Net loss per share - basic and diluted $ (0.05) $ (0.04) $ (0.05) $ (0.07)
======= ======== ======== ========
Weighted average common shares
outstanding - basic and diluted 12,000 11,591 11,938 10,724
======= ======== ======== ========
</TABLE>
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ARGULE, INC.
CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1998 1997
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net loss $ (567) $ (730)
Adjustment to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,863 1,007
Amortization of deferred compensation 155 224
Increase in accounts receivable (742) (1,196)
Increase in inventory (66) 0
(Increase) decrease in prepaid expenses and other current assets (110) 225
Increase in other assets (750) (14)
Decrease in notes receivable from related party 15 15
(Decrease) increase in accounts payable and accrued expenses (1,791) 285
Decrease in deferred revenue (2,648) (2,623)
-------- --------
Net cash used in operating activities (4,641) (2,807)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale marketable securities (28,037) (40,093)
Proceeds from sale or maturity of marketable securities 29,430 0
Additions to property and equipment (5,623) (2,209)
-------- --------
Net cash used in investing activities (4,230) (42,302)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of capital lease obligation (627) (616)
Proceeds from issuance of common stock 2,937 21,627
-------- --------
Net cash used in financing activities 2,310 21,011
-------- --------
Net decrease in cash and cash equivalents (6,561) (24,098)
Cash and cash equivalents, beginning of period 15,137 36,586
-------- --------
Cash and cash equivalents, end of period $ 8,576 $ 12,488
======== ========
</TABLE>
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ARQULE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited, condensed financial statements have been
prepared by the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations. These
condensed financial statements should be read in conjunction with the
Company's audited financial statements and related footnotes for the year
ended December 31, 1997 thereto included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March 17,
1998 and the Company's amended Annual Report on Form 10-K/A filed with the
Securities and Exchange Commission on April 17, 1998. The unaudited
condensed financial statements include, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial position of the Company as of June 30, 1998,
and the results of its operations for the three month periods ended June
30, 1998 and 1997. The results of operations for such interim periods are
not necessarily indicative of the results to be achieved for the full
year.
2. CASH EQUIVALENTS AND MARKETABLE SECURITIES
The following is a summary of cash equivalents held by the Company at June
30, 1998 and December 31, 1997 which are carried at amortized cost
approximating fair market value: (In thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED)
<S> <C> <C>
--------------------------------------
U.S. Government Obligations $ 400 $ 2,200
Corporate Notes 32,352 31,945
--------------------------------------
$32,752 $34,145
======================================
</TABLE>
All of the Company's marketable securities are classified as current at
June 30, 1998 and December 31, 1997 as these funds are highly liquid and
are available to meet working capital needs and to fund current
operations.
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ARQULE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTIES
In January 1998, the Company elected an individual to its Board of
Directors who is also an employee of Wyeth-Ayerst Pharmaceuticals (a
division of American Home Products). Solvay Duphar BV remains a related
party.
4. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Standards, No. 130, "Reporting Comprehensive Income" (SFAS No.
130) and No. 131, "Disclosures About Segments of an Enterprise and Related
Information" (SFAS No. 131) effective for fiscal years beginning after
December 15, 1997. To date, the Company has not had any material
adjustments as defined by SFAS No. 130 or SFAS No. 131.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 is
effective for all fiscal quarters of all fiscal years beginning after June
15, 1999 (January 1, 2000 for the Company). To date, the Company does not
use derivative instruments and does not anticipate the adoption of SFAS
No. 133 to have any effect on the Company's results of operations or its
financial position.
5. WYETH-AYERST $2 MILLION INVESTMENT IN ARQULE, INC.
In June 1998, through MDP Holdings, Inc., Wyeth-Ayerst invested $2.0
million in ArQule, Inc. in accordance with the Common Stock Purchase
Agreement and the Research and License Agreement, both dated July 3, 1997.
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<PAGE> 8
ARQULE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
OVERVIEW
ArQule is engaged in the discovery and development of novel chemical
compounds with commercial potential in the pharmaceutical, biotechnology
and agrochemical industries. ArQule manufactures and delivers two types of
arrays of synthesized compounds to its pharmaceutical, biotechnology and
agrochemical partners: (i) Mapping Array(TM) compound sets, which are
arrays of novel, diverse small molecule compounds used for generating
leads and (ii) Directed Array(TM) compound sets, which are arrays of
analogs of a particular lead compound (identified from a Mapping Array set
or otherwise), synthesized for the purpose of optimizing such lead
compounds.
The Company currently generates revenue primarily through compound
development from collaborative agreements, which provide for the
development and delivery of Mapping Array(TM) and Directed Array(TM) sets.
The Company's revenues to date are primarily attributable to six major
corporate collaborations: Abbott Laboratories; Solvay Duphar B.V.; Roche
Bioscience; Monsanto Company; American Home Products; and Sankyo Ltd. The
Company recognizes revenue under its corporate collaborations as related
work is performed or as arrays are delivered. Payments received from
corporate partners prior to the completion of the related work or before
array delivery are recorded as deferred revenue. License option fees are
recognized as the options are granted because such fees are nonrefundable
and the Company has no further obligations to fulfill. Technology access
fees are recognized over the length of the research and development
agreements. The Company is also entitled to receive milestone and royalty
payments if products generated under the collaborations are developed. The
Company has received one milestone and no royalty payments to date. The
Company has additionally entered into joint discovery agreements with a
number of biotechnology companies to which it has provided Mapping
Array(TM) and Directed Array(TM) sets in exchange for joint ownership
interests in any resulting drug candidates. These arrangements have not
yet yielded any significant revenue for the Company.
Quarterly variations in future financial performance may be expected as
levels of revenue are dependent on expanding or continuing existing
collaborations, additional corporate collaborations, and future milestone
payments, which are inconsistent and difficult to anticipate. In addition,
the Company will continue to aggressively invest in new technologies to
expand its drug discovery capabilities. The Company also expects that
strategic opportunities will arise to broaden the Company's participation
in drug discovery and to extend the Company's proprietary technology
platform to industry segments beyond pharmaceutical and agrochemical
product discovery. Strategic investments of this nature have the potential
for enhancing longer term equity value but may result in near term
earnings fluctuations or impact profitability.
The Company has incurred a cumulative net loss of $11.2 million through
June 30, 1998. Losses have resulted principally from costs incurred in
research and development activities related to the Company's efforts to
develop its technologies
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<PAGE> 9
and from the associated administrative costs required to support those
efforts. The Company's ability to achieve continued profitability is
dependent on its ability to market its Mapping Array(TM) and Directed
Array(TM) programs to pharmaceutical, biotechnology and agrichemical
companies and the joint development and commercialization of products in
which it has an economic interest.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements reflecting
management's current expectations regarding the Company's future financial
performance. Such expectations are based on certain assumptions regarding
the progress of product development efforts under collaborative
agreements, the execution of new collaborative agreements and other
factors relating to the Company's growth. Such expectations may not
materialize if product development efforts are delayed or suspended, if
negotiations with potential collaborators are delayed or unsuccessful or
if other assumptions prove incorrect. See also "Important Factors
Regarding Forward-Looking Statements" described more fully in Exhibit 99.1
to the Company's Annual Report on Forms 10-K and 10K/A for the year ended
December 31, 1997.
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<PAGE> 10
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
REVENUE. The Company's revenue for the three months ended June 30, 1998
increased $2.7 million to $6.0 million from $3.3 million for the same
period in 1997. Revenue was $11.7 million and $6.5 million for the six
months ended June 30, 1998 and 1997, respectively. This increase is
primarily due to increased compound development revenue from work
performed on and the delivery of Mapping Array(TM) and Directed Array(TM)
sets under the Company's collaborative agreements. The increase is
primarily attributable to the addition of collaborative agreements with
American Home Products and Sankyo in July 1997 and November 1997,
respectively.
COST OF REVENUE. The Company's cost of revenue for the three months ended
June 30, 1998 increased $1.4 million to $3.6 million from $2.2 million for
the same period in 1997. Cost of revenue was $6.7 million and $4.3 million
for the six months ended June 30, 1998 and 1997, respectively. This
increase is primarily attributable to the costs of additional facilities
and scientific personnel and the necessary supplies and overhead expenses
related to the performance of the work and the delivery of the Mapping
Array(TM) and Directed Array(TM) sets pursuant to the Company's
collaborative agreements. The Company anticipates that the aggregate cost
of revenue will increase over the next several years as its business
expands.
RESEARCH AND DEVELOPMENT EXPENSES. The Company's research and development
expenses for the three months ended June 30, 1998 increased $1.0 million
to $2.2 million from $1.2 million for the same period in 1997. Research
and development expenses were $4.0 million and $1.8 million for the six
months ended June 30, 1998 and 1997, respectively. This increase is the
result of the Company's expansion of its chemistry capabilities and
related proprietary technologies. The Company expects research and
development spending to increase over the next several years as the
Company further expands its chemistry discovery and development programs.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's marketing,
general and administrative expenses for the three months ended June 30,
1998 increased $0.6 million to $1.5 million from $0.9 million for the same
period in 1997. Marketing, general and administrative expenses were $2.8
million and $2.1 million for the six months ended June 30, 1998 and 1997,
respectively. This increase is primarily associated with increased
marketing and business development activities and higher levels of
administrative support related to the Company's growth. These expenses
will likely increase in the aggregate in future periods to support the
projected growth of the Company.
NET INTEREST INCOME. The Company's net interest income for the three
months ended June 30, 1998 and 1997 was $0.6 million. Net interest income
was $1.2 million and $1.0 million for the six months ended June 30, 1998
and 1997, respectively. Higher interest income in 1998 resulted primarily
from the Company
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<PAGE> 11
holding higher cash and marketable securities balances following its
follow-on offering of Common Stock in April 1997.
NET LOSS. The Company's net loss for the three months ended June 30, 1998
was $(0.6) million as compared to a net loss of $(0.4) for the same period
in 1997. Net loss was $(0.6) and $(0.7) for the six months ended June 30,
1998 and 1997, respectively. The net loss for 1998 is primarily
attributable to aggressive investments in new technologies in order to
expand drug discovery capabilities.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company held cash and cash equivalents and
marketable securities with a value of $41.3 million. The Company's working
capital at June 30, 1998 was $43.2 million. The Company has funded
operations through June 30, 1998 with sales of Common Stock, payments from
corporate collaborators, and the utilization of capital equipment lease
financing. The Company has maintained a master lease agreement since
February 1994. Under the terms of this agreement, the Company has funded
certain capital expenditures through leases with terms of 42 months in
duration. As of June 30, 1998, the Company had utilized $4.5 million of
the available $8.5 million financing facility.
The Company expects that its available cash and marketable securities,
together with operating revenues, investment income and lease financing
arrangements, will be sufficient to finance its working capital and
capital requirements for the foreseeable future. The Company's cash
requirements may vary materially from those now planned depending upon the
results of its drug discovery and development strategies, the ability of
the Company to enter into any corporate collaborations in the future and
the terms of such collaborations, the results of research and development,
the need for currently unanticipated capital expenditures, competitive and
technological advances, acquisitions and other factors. There can be no
assurance that the Company will be able to obtain additional customers for
the Company's products and services, or that such products and services
will produce revenues adequate to fund the Company's operating expenses.
The Company may have to seek additional financing from public or private
sales of its securities, including equity securities. There can be no
assurance that additional funding will be available when needed or on
acceptable terms.
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ARQULE, INC.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The litigation represented in the Company's Annual Report on Form 10-K
and Form 10K/A for the year ended December 31, 1997 has been settled.
The Company will not incur any significant additional expense as a
result of this settlement.
Item 2 - Changes in Securities and Use of Proceeds from Registered Securities
CHANGES IN SECURITIES
On June 3, 1998 the Company sold 104,987 shares of Common Stock for an
aggregate offering price of $2,000,000 to MDP Holdings, Inc. pursuant to
a Common Stock Purchase Agreement between the Company and American Home
Products Corporation dated July 3, 1997 in a private placement exempt
from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended.
USE OF PROCEEDS
A Registration Statement on Form S-1 (File No. 333-11105) registering
2,875,000 shares of the Company's Common Stock, filed in connection with
the Company's initial public offering (the "IPO") was declared effective
by the Securities and Exchange Commission on October 16, 1996. Exercise
of the over-allotment option was initiated on November 13, 1996 and was
closed on November 18, 1996.
The Company and its selling shareholders sold, in aggregate, all
2,875,000 shares registered in the IPO, with an aggregate-offering price
to the public of $34.5 million. The managing underwriters of the IPO
were Hambrecht & Quist LLC, Oppenheimer & Co., Inc. and Vector
Securities International Inc.
In connection with the IPO, the Company incurred total expenses of $3.0
million, including underwriting discounts and commissions of $2.4
million and other expenses of $0.6 million. After such expenses, the
Company's net proceeds from the IPO were $31.5 million. The amount of
net offering proceeds used by the Company as of June 30, 1998 was as
follows: approximately $15.1 million for the fixed asset additions and
approximately $1.8 million for capital lease obligations.
Item 3 - None
Item 4 - Submission of Meeting to a Vote of Security Holders
At the Annual Meeting of stockholders held on May 14, 1998, the
Company's stockholders voted to re-elect Messrs. Allan R. Ferguson and
Joseph C. Hogan, Jr., Ph.D. to the Board of Directors, each for a three
year term.
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NOMINEES TOTAL VOTE "FOR" TOTAL VOTE "WITHHELD"
-------------------------------------------------------------------------
Allan R. Ferguson 10,681,200 19,900
Joseph C. Hogan, Jr., Ph.D. 10,681,200 19,900
The terms in office of Adrian deJonge, Ph.D., Stephen M. Dow, Eric B.
Gordon, L. Patrick Gage, Ph.D., and Michael Rosenblatt, M.D. continued
after the meeting.
Also, on May 14, 1998, the Company's stockholders voted to increase the
Company's Amended and Restated 1994 Equity Incentive Plan by 1,500,000
shares to 4,700,000 shares.
TOTAL VOTE "FOR" TOTAL VOTE "AGAINST" TOTAL VOTE "WITHHELD"
-------------------------------------------------------------------------
7,373,704 678,332 42,630
Item 5 - Other Information
Pursuant to the Research and License Agreement between the Company and
Roche Bioscience (a unit of Hoffman-LaRoche AG) dated September 13, 1996,
the Company has received notice that Roche Bioscience elected not to
continue the existing collaboration in its current configuration
effective September 1998. The Company and Roche Bioscience are currently
in discussions regarding the continuation of the collaboration in a
different form. Roche Bioscience has the right to continue testing and
developing delivered compounds, subject to payment of milestone and
royalties as set forth in the Agreement.
The Company announced a senior management succession plan to guide the
Company through its next stage of development. The ArQule Board of
Directors, including current Chief Executive Officer and President Eric
B. Gordon, has initiated a search for a new chief executive officer with
extensive experience in leading large scale drug discovery activities.
During this transition period, Mr. Gordon will continue to fulfill all of
his current responsibilities, including serving on the Board of
Directors. Once a new CEO has been appointed, Mr. Gordon will resign,
although he will continue to serve on the Board of Directors.
Item 6(a) - Exhibits:
EXHIBITS DESCRIPTION
-------- -----------
10.1 Amended and Restated 1994 Equity Incentive Plan
11.1 Statement Re Computation of Unaudited Net Income (Loss)
Per Share
27 Financial Data Schedule
Item 6(b) - Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which this
report is filed.
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<PAGE> 14
ARQULE, INC.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
ArQule, Inc.
/s/ James R. Fitzgerald, Jr.
Date: August 14, 1998 -------------------------------------
James R. Fitzgerald, Jr.
(Vice President, Chief Financial Officer
and Treasurer)
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<PAGE> 15
ARQULE, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1* Amended and Restated 1994 Equity Incentive Plan
11.1 Statement Re Computation of Unaudited Net Loss Per Share
27 Financial Data Schedule
* Indicates a compensatory plan.
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<PAGE> 1
ARQULE, INC.
AMENDED AND RESTATED
1994 EQUITY INCENTIVE PLAN
As amended by the Board of Directors on April 8, 1998,
and approved by the Stockholders
Section 1. PURPOSE
This ArQule, Inc. Amended and Restated 1994 Equity Incentive Plan (the
"Plan") amends and restates the ArQule, Inc. Amended and Restated 1994 Equity
Incentive Plan by providing for the grant of equity incentives of various forms
in the Company. The purpose of the Plan is to attract and retain key employees
and consultants of the Company and its Affiliates, to provide an incentive for
them to achieve long-range performance goals, and to enable them to participate
in the long-term growth of the Company.
Section 2. DEFINITIONS
"Affiliate" means any business entity that directly, or indirectly through
one or more intermediaries, controls, is controlled by or is under common
control with the Company. For purposes hereof, "Control" (and with correlative
meanings, the terms "controlled by" and "under common control with") shall mean
the possession of the power to direct or cause the direction of the management
and policies of the Company, whether through the ownership of voting stock, by
contract or otherwise. In the case of a corporation "control" shall mean, among
other things, the direct or indirect ownership of more than fifty percent (50%)
of its outstanding voting stock.
"Award" means any Option, Stock Appreciation Right, Performance Share,
Restricted Stock, Stock Unit or Other Stock-Based Award awarded under the Plan
or any Award previously granted under the 1994 Equity Incentive Plan of the
Company or the Amended and Restated 1994 Equity Incentive Plan of the Company as
in effect prior to date this Plan was adopted by the Board of Directors.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor to such Code.
"Committee" means a committee of not less than two members of the Board
appointed by the Board to administer the Plan. If a Committee is authorized to
grant Options to a Reporting Person or a "covered employee" within the meaning
of Section 162(m) of the Code, each member shall be a "non-employee director" or
the equivalent within the meaning of Rule 16b-3 under the Securities Exchange
Act of 1934 and an "outside director" or the equivalent
<PAGE> 2
within the meaning of Section 162(m) of the Code, respectively. Until such
committee is appointed, "Committee" means the Board.
"Common Stock" or "Stock" means the Common Stock, $0.01 par value, of the
Company.
"Company" means ArQule, Inc.
"Designated Beneficiary" means the beneficiary designated by a Participant,
in a manner determined by the Committee, to receive amounts due or exercise
rights of the Participant in the event of the Participant's death. In the
absence of an effective designation by a Participant, "Designated Beneficiary"
shall mean the Participant's estate.
"Effective Date" means October 28, 1994.
"Fair Market Value" means, with respect to Common Stock or any other
property, the fair market value of such property as determined by the Committee
in good faith or in the manner established by the Committee from time to time.
"Incentive Stock Option" means an option to purchase shares of Common Stock
awarded to a Participant under Section 6 that is intended to meet the
requirements of Section 422 of the Code or any successor provision.
"Nonstatutory Stock Option" means an option to purchase shares of Common
Stock awarded to a Participant under Section 6 that is not intended to be an
Incentive Stock Option.
"Option" means an Incentive Stock Option or a Nonstatutory Stock Option.
"Other Stock-Based Award" means an Award, other than an Option, Stock
Appreciation Right, Performance Share, Restricted Stock or Stock Unit, having a
Common Stock element and awarded to a Participant under Section 11.
"Participant" means a person selected by the Committee to receive an Award
under the Plan.
"Performance Cycle" or "Cycle" means the period of time selected by the
Committee during which performance is measured for the purpose of determining
the extent to which an award of Performance Shares has been earned.
"Performance Shares" mean shares of Common Stock, which may be earned by
the achievement of performance goals, awarded to a Participant under Section 8.
"Reporting Person" means a person subject to Section 16 of the Securities
Exchange Act of 1934 or any successor provision.
"Restricted Period" means the period of time selected by the Committee
during which an Award may be forfeited to the Company pursuant to the terms and
conditions of such Award.
<PAGE> 3
"Restricted Stock" means shares of Common Stock subject to forfeiture
awarded to a Participant under Section 9.
"Stock Appreciation Right" or "SAR" means a right to receive any excess in
value of shares of Common Stock over the exercise price awarded to a Participant
under Section 7.
"Stock Unit" means an award of Common Stock or units that are valued in
whole or in part by reference to, or otherwise based on, the value of Common
Stock, awarded to a Participant under Section 10.
Section 3. ADMINISTRATION
The Plan shall be administered by the Committee. The Committee shall have
authority to adopt, alter and repeal such administrative rules, guidelines and
practices governing the operation of the Plan as it shall from time to time
consider advisable, and to interpret the provisions of the Plan. The Committee's
decisions shall be final and binding. To the extent permitted by applicable law,
the Committee may delegate to one or more executive officers of the Company the
power to make Awards to Participants who are not Reporting Persons or covered
employees and all determinations under the Plan with respect thereto, provided
that the Committee shall fix the maximum amount of such Awards for all such
Participants and a maximum for any one Participant.
Section 4. ELIGIBILITY
All employees and, in the case of Awards other than Incentive Stock
Options, and consultants of the Company or any Affiliate, capable of
contributing significantly to the successful performance of the Company, other
than a person who has irrevocably elected not to be eligible, are eligible to be
Participants in the Plan.
Section 5. STOCK AVAILABLE FOR AWARDS
(a) Subject to adjustment under subsection (b), Awards may be made under
the Plan for up to 4,700,000 shares of Common Stock. If any Award in respect of
shares of Common Stock expires or is terminated unexercised or is forfeited
without the Participant having had the benefits of ownership (other than voting
rights), the shares subject to such Award, to the extent of such expiration,
termination or forfeiture, shall again be available for award under the Plan.
Common Stock issued through the assumption or substitution of outstanding grants
from an acquired company shall not reduce the shares available for Awards under
the Plan. Shares issued under the Plan may consist in whole or in part of
authorized but unissued shares or treasury shares.
(b) In the event that the Committee determines that any stock dividend,
extraordinary cash dividend, creation of a class of equity securities,
recapitalization, reorganization, merger, consolidation, split-up, spin-off,
combination, exchange of shares, warrants or rights offering to purchase Common
Stock at a price substantially below fair market value, or other similar
transaction affects the Common Stock such that an adjustment is required in
order to preserve the benefits or potential benefits intended to be made
available under the Plan, then the
-3-
<PAGE> 4
Committee (subject, in the case of Incentive Stock Options, to any limitation
required under the Code) shall equitably adjust any or all of (i) the number and
kind of shares in respect of which Awards may be made under the Plan, (ii) the
number and kind of shares subject to outstanding Awards, and (iii) the award,
exercise or conversion price with respect to any of the foregoing, and if
considered appropriate, the Committee may make provision for a cash payment with
respect to an outstanding Award, provided that the number of shares subject to
any Award shall always be a whole number.
Section 6. STOCK OPTIONS
(a) Subject to the provisions of the Plan, the Committee may award
Incentive Stock Options and Nonstatutory Stock Options and determine the number
of shares to be covered by each Option, the option price therefor and the
conditions and limitations applicable to the exercise of the Option. The terms
and conditions of Incentive Stock Options shall be subject to and comply with
Section 422 of the Code or any successor provision and any regulations
thereunder, and no Incentive Stock Option may be granted hereunder more than ten
years after the Effective Date.
(b) The Committee shall establish the option price at the time each Option
is awarded, which price shall not be less than 100% of the Fair Market Value of
the Common Stock on the date of award with respect to Incentive Stock Options.
Nonstatutory Stock Options may be granted at such prices as the Committee may
determine.
(c) Each Option shall be exercisable at such times and subject to such
terms and conditions as the Committee may specify in the applicable Award or
thereafter. The Committee may impose such conditions with respect to the
exercise of Options, including conditions relating to applicable federal or
state securities laws, as it considers necessary or advisable.
(d) No shares shall be delivered pursuant to any exercise of an Option
until payment in full of the option price therefor is received by the Company.
Such payment may be made in whole or in part in cash or, to the extent permitted
by the Committee at or after the award of the Option, by delivery of a note or
shares of Common Stock owned by the optionee, including Restricted Stock, or by
retaining shares otherwise issuable pursuant to the Option, in each case valued
at their Fair Market Value on the date of delivery or retention, or such other
lawful consideration as the Committee may determine.
(e) The Committee may provide that, subject to such conditions as it
considers appropriate, upon the delivery or retention of shares to the Company
in payment of an Option, the Participant automatically be awarded an Option for
up to the number of shares so delivered.
Section 7. STOCK APPRECIATION RIGHTS
(a) Subject to the provisions of the Plan, the Committee may award SARs in
tandem with an Option (at or after the award of the Option), or alone and
unrelated to an Option. SARs in tandem with an Option shall terminate to the
extent that the related Option is exercised, and the related Option shall
terminate to the extent that the tandem SARs are exercised. SARs
-4-
<PAGE> 5
granted in tandem with Options shall have an exercise price not less than the
exercise price of the related Option. SARs granted alone and unrelated to an
Option may be granted at such exercise prices as the Committee may determine.
(b) An SAR related to an Option, which SAR can only be exercised upon or
during limited periods following a change in control of the Company, may entitle
the Participant to receive an amount based upon the highest price paid or
offered for Common Stock in any transaction relating to the change in control or
paid during the thirty-day period immediately preceding the occurrence of the
change in control in any transaction reported in the stock market in which the
Common Stock is normally traded.
Section 8. PERFORMANCE SHARES
(a) Subject to the provisions of the Plan, the Committee may award
Performance Shares and determine the number of such shares for each Performance
Cycle and the duration of each Performance Cycle. There may be more than one
Performance Cycle in existence at any one time, and the duration of Performance
Cycles may differ from each other. The payment value of Performance Shares shall
be equal to the Fair Market Value of the Common Stock on the date the
Performance Shares are earned or, in the discretion of the Committee, on the
date the Committee determines that the Performance Shares have been earned.
(b) The Committee shall establish performance goals for each Cycle, for the
purpose of determining the extent to which Performance Shares awarded for such
Cycle are earned, on the basis of such criteria and to accomplish such
objectives as the Committee may from time to time select. During any Cycle, the
Committee may adjust the performance goals for such Cycle as it deems equitable
in recognition of unusual or non-recurring events affecting the Company, changes
in applicable tax laws or accounting principles, or such other factors as the
Committee may determine.
(c) As soon as practicable after the end of a Performance Cycle, the
Committee shall determine the number of Performance Shares that have been earned
on the basis of performance in relation to the established performance goals.
The payment values of earned Performance Shares shall be distributed to the
Participant or, if the Participant has died, to the Participant's Designated
Beneficiary, as soon as practicable thereafter. The Committee shall determine,
at or after the time of award, whether payment values will be settled in whole
or in part in cash or other property, including Common Stock or Awards.
Section 9. RESTRICTED STOCK
(a) Subject to the provisions of the Plan, the Committee may award shares
of Restricted Stock and determine the duration of the Restricted Period during
which, and the conditions under which, the shares may be forfeited to the
Company and the other terms and conditions of such Awards. Shares of Restricted
Stock may be issued for no cash consideration or such minimum consideration as
may be required by applicable law.
(b) Shares of Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered, except as permitted by the Committee, during
the Restricted Period.
-5-
<PAGE> 6
Shares of Restricted Stock shall be evidenced in such manner as the Committee
may determine. Any certificates issued in respect of shares of Restricted Stock
shall be registered in the name of the Participant and unless otherwise
determined by the Committee, deposited by the Participant, together with a stock
power endorsed in blank, with the Company. At the expiration of the Restricted
Period, the Company shall deliver such certificates to the Participant or if the
Participant has died, to the Participant's Designated Beneficiary.
Section 10. STOCK UNITS
(a) Subject to the provisions of the Plan, the Committee may award Stock
Units subject to such terms, restrictions, conditions, performance criteria,
vesting requirements and payment rules as the Committee shall determine.
(b) Shares of Common Stock awarded in connection with a Stock Unit Award
shall be issued for no cash consideration or such minimum consideration as may
be required by applicable law.
Section 11. OTHER STOCK-BASED AWARDS
(a) Subject to the provisions of the Plan, the Committee may make other
awards of Common Stock and other awards that are valued in whole or in part by
reference to, or are otherwise based on, Common Stock, including without
limitation convertible preferred stock, convertible debentures, exchangeable
securities and Common Stock awards or options. Other Stock-Based Awards may be
granted either alone or in tandem with other Awards granted under the Plan
and/or cash awards made outside of the Plan.
(b) The Committee may establish performance goals, which may be based on
performance goals related to book value, subsidiary performance or such other
criteria as the Committee may determine, Restricted Periods, Performance Cycles,
conversion prices, maturities and security, if any, for any Other Stock-Based
Award. Other Stock-Based Awards may be sold to Participants at the face value
thereof or any discount therefrom or awarded for no consideration or such
minimum consideration as may be required by applicable law.
Section 12. GENERAL PROVISIONS APPLICABLE TO AWARDS
(a) Documentation. Each Award under the Plan shall be evidenced by a
writing delivered to the Participant specifying the terms and conditions thereof
and containing such other terms and conditions not inconsistent with the
provisions of the Plan as the Committee considers necessary or advisable to
achieve the purposes of the Plan or to comply with applicable tax and regulatory
laws and accounting principles.
(b) Committee Discretion. Each type of Award may be made alone, in addition
to or in relation to any other type of Award. The terms of each type of Award
need not be identical, and the Committee need not treat Participants uniformly.
Except as otherwise provided by the Plan or a particular Award, any
determination with respect to an Award may be made by the Committee at the time
of award or at any time thereafter.
-6-
<PAGE> 7
(c) Settlement. The Committee shall determine whether Awards are settled in
whole or in part in cash, Common Stock, other securities of the Company, Awards
or other property. The Committee may permit a Participant to defer all or any
portion of a payment under the Plan, including the crediting of interest on
deferred amounts denominated in cash and dividend equivalents on amounts
denominated in Common Stock.
(d) Dividends and Cash Awards. In the discretion of the Committee, any
Award under the Plan may provide the Participant with (i) dividends or dividend
equivalents payable currently or deferred with or without interest, and (ii)
cash payments in lieu of or in addition to an Award.
(e) Termination of Employment. The Committee shall determine the effect on
an Award of the disability, death, retirement or other termination of employment
of a Participant and the extent to which, and the period during which, the
Participant's legal representative, guardian or Designated Beneficiary may
receive payment of an Award or exercise rights thereunder.
(f) Change in Control. In order to preserve a Participant's rights under an
Award in the event of a change in control of the Company, the Committee in its
discretion may, at the time an Award is made or at any time thereafter, take one
or more of the following actions: (i) provide for the acceleration of any time
period relating to the exercise or realization of the Award, (ii) provide for
the purchase of the Award upon the Participant's request for an amount of cash
or other property that could have been received upon the exercise or realization
of the Award had the Award been currently exercisable or payable, (iii) adjust
the terms of the Award in a manner determined by the Committee to reflect the
change in control, (iv) cause the Award to be assumed, or new rights substituted
therefor, by another entity, or (v) make such other provision as the Committee
may consider equitable and in the best interests of the Company.
(g) Loans. The Committee may authorize the making of loans or cash payments
to Participants in connection with any Award under the Plan, which loans may be
secured by any security, including Common Stock, underlying or related to such
Award (provided that such Loan shall not exceed the Fair Market Value of the
security subject to such Award), and which may be forgiven upon such terms and
conditions as the Committee may establish at the time of such loan or at any
time thereafter.
(h) Withholding Taxes. The Participant shall pay to the Company, or make
provision satisfactory to the Committee for payment of, any taxes required by
law to be withheld in respect of Awards under the Plan no later than the date of
the event creating the tax liability. In the Committee's discretion, such tax
obligations may be paid in whole or in part in shares of Common Stock, including
shares retained from the Award creating the tax obligation, valued at their Fair
Market Value on the date of delivery. The Company and its Affiliates may, to the
extent permitted by law, deduct any such tax obligations from any payment of any
kind otherwise due to the Participant.
(i) Foreign Nationals. Awards may be made to Participants who are foreign
nationals or employed outside the United States on such terms and conditions
different from those
-7-
<PAGE> 8
specified in the Plan as the Committee considers necessary or advisable to
achieve the purposes of the Plan or to comply with applicable laws.
(j) Amendment of Award. The Committee may amend, modify or terminate any
outstanding Award, including substituting therefor another Award of the same or
a different type, changing the date of exercise or realization and converting an
Incentive Stock Option to a Nonstatutory Stock Option, provided that the
Participant's consent to such action shall be required unless the Committee
determines that the action, taking into account any related action, would not
materially and adversely affect the Participant.
(k) Transferability. In the discretion of the Committee, any Award may be
made transferable upon such terms and conditions and to such extent as the
Committee determines, provided that Incentive Stock Options may be transferable
only to the extent permitted by the Code. The Committee may in its discretion
waive any restriction on transferability.
Section 13. MISCELLANEOUS
(a) No Right To Employment. No person shall have any claim or right to be
granted an Award, and the grant of an Award shall not be construed as giving a
Participant the right to continued employment. The Company expressly reserves
the right at any time to dismiss a Participant free from any liability or claim
under the Plan, except as expressly provided in the applicable Award.
(b) No Rights As Stockholder. Subject to the provisions of the applicable
Award, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed under
the Plan until he or she becomes the holder thereof. A Participant to whom
Common Stock is awarded shall be considered the holder of the Stock at the time
of the Award except as otherwise provided in the applicable Award.
(c) Effective Date. Subject to the approval of the stockholders of the
Company, the Plan shall be effective on the Effective Date. Before such
approval, Awards may be made under the Plan expressly subject to such approval.
(d) Amendment of Plan. The Board may amend, suspend or terminate the Plan
or any portion thereof at any time, subject to any stockholder approval that the
Board determines to be necessary or advisable.
(e) Governing Law. The provisions of the Plan shall be governed by and
interpreted in accordance with the laws of Delaware.
-----------------------------------------
This Plan was approved by the Board of Directors on April 8, 1998.
This Plan was approved by the stockholders at the Annual Meeting of Stockholders
on May 14, 1998.
-8-
<PAGE> 1
Exhibit 11.1
ArQule, Inc.
Statement Re Computation of Unaudited Net Loss Per Share
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30
1998 1997 1998 1997
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Net loss $ (638) $ (435) $ (567) $ (730)
======== ======== ======= ========
Weighted average shares outstanding:
Common Stock 12,000 11,591 11,938 $ 10,724
Weighted average common shares outstanding 12,000 11,591 11,938 10,724
======== ======= ======= ========
Net loss per share - basic and diluted $ (0.05) $ (0.04) $ (0.05) $ (0.07)
======== ======= ======= ========
</TABLE>
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 8,576
<SECURITIES> 32,752
<RECEIVABLES> 3,875
<ALLOWANCES> 0
<INVENTORY> 1,019
<CURRENT-ASSETS> 46,882
<PP&E> 22,724
<DEPRECIATION> 6,310
<TOTAL-ASSETS> 64,384
<CURRENT-LIABILITIES> 3,712
<BONDS> 0
0
0
<COMMON> 120
<OTHER-SE> 59,745
<TOTAL-LIABILITY-AND-EQUITY> 64,384
<SALES> 11,691
<TOTAL-REVENUES> 11,691
<CGS> 6,697
<TOTAL-COSTS> 13,470
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,212
<INCOME-PRETAX> (567)
<INCOME-TAX> 0
<INCOME-CONTINUING> (567)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (567)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
