<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER: 000-21429
ARQULE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 04-3221586
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
200 BOSTON AVENUE, MEDFORD, MASSACHUSETTS 02155
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(781) 395-4100
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
(TITLE OF EACH CLASS) ON WHICH REGISTERED
--------------------- ---------------------
<S> <C>
None None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
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 Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 5, 1998 was: $218,276,085.
There were 11,938,236 shares of the registrant's Common Stock outstanding
as of March 5, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement of the Registrant's 1998 Annual
Meeting of Shareholders to be held on May 14, 1998, which definitive proxy
statement will be filed with the Securities and Exchange Commission not later
than 120 days after the registrant's fiscal year of December 31, 1997, are
incorporated by reference into Part III of this Form 10-K.
================================================================================
<PAGE> 2
The following items and exhibits of ArQule Inc.'s Annual Report on Form
10-K for the fiscal year ended December 31, 1997 are being filed in this Form
10-K/A for the purpose of incorporating changes to financial information due to
a recent interpretation of accounting standard, SFAS 128 "Earnings per Share."
ITEM 6. SELECTED FINANCIAL DATA
The following data, insofar as it relates to the period from inception (May
6, 1993) through December 31, 1993 and for the years 1994, 1995, 1996 and 1997,
have been derived from the Company's audited financial statements, including the
balance sheet as of December 31, 1996 and 1997 and the related statements of
operations and of cash flows for the three years ended December 31, 1997 and
notes thereto appearing elsewhere herein. The data should be read in conjunction
with the Financial Statements and the Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere in this Form 10-K. The historical results are not necessarily
indicative of the results of operations to be expected in the future (in
thousands, except per share data).
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(MAY 6, 1993) THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, ----------------------------------------
1993 1994 1995 1996 1997
--------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue.......................... $ -- $ 85 $ 3,330 $ 7,255 $17,420
------- ------- ------- ------- -------
Cost and expenses:
Cost of revenue................ -- -- 1,644 4,739 10,218
Research and development....... 769 2,806 2,095 3,076 4,704
Marketing, general and
administrative.............. 687 1,346 1,557 2,850 4,670
------- ------- ------- ------- -------
Total costs and expenses.... 1,456 4,152 5,296 10,665 19,592
------- ------- ------- ------- -------
Loss from operations............. (1,456) (4,067) (1,966) (3,410) (2,172)
Interest income (expense), net... (9) (139) (286) 417 2,463
------- ------- ------- ------- -------
Net income (loss)................ $(1,465) $(4,206) $(2,252) $(2,993) $ 291
======= ======= ======= ======= =======
Basic net income (loss) per
share(1)....................... $ (7.93) $ (1.32) $ .03
======= ======= =======
Weighted average common shares
outstanding -- basic(1)........ 284 2,272 11,282
======= ======= =======
Diluted net income (loss) per
share(1)....................... $ (7.93) $ (1.32) $ .02
======= ======= =======
Weighted average common shares
and equivalents outstanding --
diluted(1)..................... 284 2,272 12,394
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1993 1994 1995 1996 1997
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and marketable
securities............................ $ 595 $ 425 $ 7,791 $37,086 $49,282
Working capital (deficit)................ 275 (2,108) 5,074 31,440 46,023
Total assets............................. 1,538 2,321 10,190 43,509 66,925
Capital lease obligations, less current
portion............................... 376 962 911 1,728 1,213
Series B mandatorily redeemable
convertible preferred stock........... -- -- 6,888 -- --
Total stockholders' equity (deficit)..... 771 (1,203) (1,000) 34,621 57,340
</TABLE>
- ---------------
(1) The Company adopted Statement of Financial Accounting Standards No.
128 -- "Earnings Per Share" ("SFAS 128") in the fourth quarter of 1997. SFAS
128 requires retroactive restatement of previously reported income (loss)
per share calculations. As a result of adopting SFAS 128, certain
anti-dilutive pro-forma share amounts and unvested shares of common stock
subject to restriction agreements
16
<PAGE> 3
previously included in the computation of the loss per share in 1995 and
1996 are no longer included in the weighted average common shares and
equivalents outstanding. Prior to the restatement required by SFAS 128, pro
forma net loss per share for the year ended December 31, 1995 was ($0.33),
based upon weighted average common shares outstanding of 6,853 and for the
year ended December 31, 1996 was ($0.39), based upon weighted average common
shares outstanding of 7,705.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 compound sets, which are arrays of novel, diverse
small molecule compounds used in screening for lead generation and (ii) Directed
Array 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 and Directed Array sets. The Company's revenue to date
is primarily attributable to seven major corporate collaborations: Amersham
Pharmacia Biotech AB, entered into in March 1995; Abbott Laboratories, entered
into in June 1995; Solvay Duphar B.V., entered into in November 1995; Roche
Bioscience, entered into in September 1996; Monsanto Company, entered into in
December 1996; American Home Products, entered into July 1997; and Sankyo Ltd,
entered into November 1997. Under these collaborations, the Company has received
payments of $29.1 million through December 31, 1997 and has recognized $28.1
million as revenue. The Company recognizes revenue under its corporate
collaborations as related work is performed and arrays are delivered. Payments
received from corporate partners prior to the completion of the related work 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 agreement. The Company is also entitled to receive
milestone and royalty payments if products generated under the collaborations
are developed. The Company has not received any milestone or 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 and
Directed Array sets in exchange for joint ownership interests of resulting drug
candidates. These agreements have not yet yielded any significant revenue for
the Company.
The Company experienced its first year of profitability in 1997, reflecting
the increase in revenues resulting from ArQule's growing collaborator base and
an increase in interest income. Quarterly variations in future financial
performance may be expected as increases in revenue are dependent on expanding
existing collaborations, additional corporate collaborations, and future
milestone payments, which may be 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.
RESULTS OF OPERATIONS
Years Ended December 31, 1997 and 1996
Revenue. The Company's revenue for the year ended December 31, 1997
increased $10.1 million to $17.4 million from $7.3 million for the same period
in 1996. This increase was primarily due to increased compound development
revenue from work performed on and the delivery of Mapping Array and Directed
Array sets under the Company's collaborative agreements. The Company began
recognizing revenue from
17
<PAGE> 4
Roche BioScience, Monsanto Company, American Home Products and Sankyo
collaborations in October 1996, December 1996, July 1997, and November 1997,
respectively.
Cost of revenue. The Company's cost of revenue for the year ended December
31, 1997 increased $5.5 million to $10.2 million from $4.7 million for the same
period in 1996. These increases are 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 and Directed Array 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 year ended December 31, 1997 increased $1.6 million to $4.7
million from $3.1 million for the same period in 1996. These increases are 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 year ended December 31, 1997
increased $1.8 million to $4.7 million from $2.9 million for the same period in
1996. These increases are primarily associated with increased marketing and
business development activities, expenses of being a public company for a full
year, and higher levels of administrative support in concert with the Company's
growth during 1997. 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 year ended
December 31, 1997 was $2.5 million, compared to $0.4 million for the same period
in 1996. Higher interest income in 1997 resulted primarily from the Company
holding higher cash and marketable securities balances following its initial and
follow-on offerings of common stock in October 1996 and April 1997,
respectively.
Net income (loss). The Company's net income for the year ended December
31, 1997 was $0.3 million as compared to a net loss of $3.0 million for the same
period in 1996. The net income for 1997 is primarily attributable to an increase
in revenues from the Company's growing collaborator base and higher net interest
income recognized during 1997. Quarterly variations in future financial
performance may be expected as increases in revenue are dependent on expanding
existing collaborations, additional corporate collaborations, and future
milestone and royalty payments, which may be inconsistent and difficult to
anticipate.
Years Ended December 31, 1996 and 1995
Revenue. The Company's revenue for the year ended December 31, 1996
increased $4.0 million to $7.3 million from $3.3 million for the same period in
1995. This was attributable to a $5.0 million increase in compound development
revenue related to the performance of work and the delivery of Mapping Array and
Directed Array sets under the Company's collaborative agreements, offset by a
$1.0 million decrease in license option fees during the same period. The Company
began recognizing revenue from the Amersham Pharmacia Biotech AB, Abbott
Laboratories and Solvay Duphar B.V. collaborations in March, June and November
1995, respectively and for Roche Bioscience and Monsanto Company in October and
December of 1996, respectively.
Cost of revenue. The Company's cost of revenue for the year ended December
31, 1996 increased $3.1 million to $4.7 million from $1.6 million for the same
period in 1995. This increase was primarily attributable to the costs of
additional scientific personnel and the necessary supplies and overhead expenses
related to the performance of the work and the delivery of the Mapping Array and
Directed Array sets pursuant to its collaborative agreements.
Research and development expenses. The Company's research and development
expenses for the year ended December 31, 1996 increased $1.0 million to $3.1
million from $2.1 million from the same period in 1995. This increase was the
result of the Company's expansion of its chemistry capabilities and related
proprietary technologies.
18
<PAGE> 5
Marketing, general and administrative expenses. The Company's marketing,
general and administrative expenses for the year ended December 31, 1996
increased $1.3 million to $2.9 million from $1.6 million for the same period in
1995. The increase was primarily associated with increased business development
activities, expenses of being a public company, and higher levels of
administrative support for the Company's growth during 1996.
Net interest income (expense). The Company's net interest income for the
year ended December 31, 1996 was $0.4 million, which compared to a net interest
expense of $0.3 million for the same period in 1995. Higher interest income in
1996 resulted primarily from the Company holding higher cash balances following
its initial public offering of common stock in October 1996.
Net loss. The Company's net loss for the year ended December 31, 1996
increased $0.7 million to $3.0 million from $2.3 million for 1995. The increase
was primarily attributable to operating and development expenses exceeding the
increase in revenue generated from corporate collaborations during 1996.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company held cash and cash equivalents and
marketable securities with a value of $49.3 million. The Company's working
capital at December 31, 1997 was $46.0 million. The Company has funded
operations through December 31, 1997 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 December
31, 1997, the Company had utilized $4.5 million of the available $8.5 million
financing facility.
Net cash provided by operating activities was $0.6 million, $0.8 million
and $0.7 million for each of the years ended December 31, 1997, 1996 and 1995,
respectively. The positive cash flow from operating activities primarily
reflects payments received from the seven corporate collaborators.
Net cash used by investing activities during the year ended December 31,
1997 was $42.7 million, resulting primarily from the proceeds of the purchase of
marketable securities and from the proceeds of the initial and secondary public
offerings. Net cash provided by investing activities during the year ended
December 31, 1996 was $2.0 million, resulting primarily from the sale of
marketable securities offset by the purchases of property and equipment. Net
cash used in investing activities for the year ended December 31, 1995 was $5.3
million. This increase primarily reflects purchases of marketable securities.
Net cash provided by financing activities for the year ended December 31,
1997 and 1996 was $20.7 and $30.8 million, respectively, primarily reflecting
proceeds from the Company's April 1997 secondary public offering and October
1996 initial public offering. Net cash provided by financing activities for the
year ended December 31, 1995 was $7.2 million, largely due to a $7.0 million
equity investment by Solvay Duphar B.V.
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. If the Company experiences increased losses, the Company may
have to seek additional financing from the public or private sale of its
securities, including equity securities. There can be no assurance that
additional funding will be available when needed or on acceptable terms.
The Company has evaluated its computer software and database software to
identify modifications, if any, that may be required to address year 2000
compliance. Management does not expect the financial impact of any required
modifications to have a material impact on its results of operations of
financial position.
19
<PAGE> 6
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... 21
Balance Sheet at December 31, 1996 and 1997................. 22
Statement of Operations for the three years ended December
31, 1997.................................................. 23
Statement of Redeemable Preferred Stock and Stockholders'
Equity (Deficit) for the three years ended December 31,
1997...................................................... 24
Statement of Cash Flows for the three years ended December
31, 1997.................................................. 25
Notes to Financial Statements............................... 27
Financial Statement Schedules:
Schedules are not included because they are not applicable
or the information is included in the Notes to
Financial Statements.
</TABLE>
20
<PAGE> 7
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of ArQule, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of redeemable preferred stock and stockholders' equity (deficit)
and of cash flows present fairly, in all material respects, the financial
position of ArQule, Inc. at December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide reasonable basis for the opinion expressed
above.
As discussed in Note 2, the Company has restated the reported amounts of
net loss per share for the years ended December 31, 1996 and 1995.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 9, 1998, except as to the
last paragraph of Note 2
which is as of April 17, 1998
21
<PAGE> 8
ARQULE, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 36,586,000 $ 15,137,000
Marketable securities..................................... 500,000 34,145,000
Accounts receivable....................................... 250,000 3,133,000
Inventory................................................. -- 953,000
Prepaid expenses and other current assets................. 338,000 520,000
Notes receivable from related parties..................... 176,000 30,000
------------ ------------
Total current assets.............................. 37,850,000 53,918,000
Property and equipment, net................................. 5,293,000 12,654,000
Other assets................................................ 139,000 156,000
Notes receivable from related parties....................... 227,000 197,000
------------ ------------
$ 43,509,000 $ 66,925,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations.............. $ 1,138,000 $ 1,174,000
Accounts payable and accrued expenses..................... 1,109,000 2,804,000
Deferred revenue.......................................... 4,163,000 3,917,000
------------ ------------
Total current liabilities......................... 6,410,000 7,895,000
------------ ------------
Capital lease obligations................................... 1,728,000 1,213,000
------------ ------------
Deferred revenue............................................ 750,000 477,000
------------ ------------
Stockholders' equity
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; no shares issued or outstanding at December
31, 1996 and 1997...................................... -- --
Common stock, $0.01 par value; 30,000,000 shares
authorized; 9,851,487 and 11,877,315 shares issued and
outstanding at December 31, 1996 and 1997,
respectively........................................... 99,000 119,000
Additional paid-in capital................................ 46,102,000 68,418,000
Accumulated deficit....................................... (10,934,000) (10,643,000)
------------ ------------
35,267,000 57,894,000
Deferred compensation..................................... (646,000) (554,000)
------------ ------------
Total stockholders' equity............................. 34,621,000 57,340,000
------------ ------------
Commitments and contingency (Note 13)....................... -- --
------------ ------------
$ 43,509,000 $ 66,925,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 9
ARQULE, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenue
Compound development revenue...................... $ 1,830,000 $ 4,255,000 $13,840,000
Compound development revenue -- related party..... 500,000 3,000,000 3,580,000
License option fees............................... 1,000,000 -- --
----------- ----------- -----------
3,330,000 7,255,000 17,420,000
----------- ----------- -----------
Costs and expenses:
Cost of revenue................................... 1,367,000 2,683,000 8,039,000
Cost of revenue -- related party.................. 277,000 2,056,000 2,179,000
Research and development.......................... 2,095,000 3,076,000 4,704,000
Marketing, general and administrative............. 1,557,000 2,850,000 4,670,000
----------- ----------- -----------
5,296,000 10,665,000 19,592,000
----------- ----------- -----------
Loss from operations........................... (1,966,000) (3,410,000) (2,172,000)
Interest income..................................... 133,000 607,000 2,686,000
Interest expense.................................... (419,000) (190,000) (223,000)
----------- ----------- -----------
Net (loss) income.............................. $(2,252,000) $(2,993,000) $ 291,000
=========== =========== ===========
Basic net income (loss) per share (1995 and 1996
restated)......................................... $ (7.93) $ (1.32) $ .03
=========== =========== ===========
Weighted average common shares
outstanding -- basic.............................. 284,000 2,272,000 11,282,000
=========== =========== ===========
Diluted net income (loss) per share (1995 and 1996
restated)......................................... $ (7.93) $ (1.32) $ .02
=========== =========== ===========
Weighted average common shares and equivalents
outstanding -- diluted............................ 284,000 2,272,000 12,394,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 10
ARQULE, INC.
STATEMENT OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
SERIES B MANDATORILY ----------------------------------------------------------------
REDEEMABLE CONVERTIBLE SERIES A CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ ------------------------- ---------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES PAR VALUE CAPITAL
---------- ----------- ----------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994....... 8,591,000 $ 86,000 554,597 $ 6,000 $4,376,000
Employee restricted stock
purchases......................... 68,200 -- 1,000
Issuance of common stock purchase
warrants under bridge financing... 57,000
Cancellation of unvested portion on
restricted stock upon employee
termination....................... (100,000) (1,000) 1,000
Conversion of bridge notes into
Series A convertible preferred
stock............................. 1,920,000 2,400,000
Issuance of Series B mandatorily
redeemable convertible preferred
stock, net of issuance costs of
$115,000.......................... 1,800,000 $ 6,885,000
Accretion of Series B mandatorily
redeemable preferred stock to
redemption value.................. 3,000
Net loss...........................
---------- ----------- ----------- ----------- ---------- -------- -----------
BALANCE AT DECEMBER 31, 1995....... 1,800,000 6,888,000 10,511,000 2,486,000 522,797 5,000 4,435,000
Conversion of interest on bridge
notes to Series A convertible
preferred stock................... 113,429 142,000
Issuance of Series B mandatorily
redeemable convertible preferred
stock to maintain ownership
percentage (Note 9)............... 15,468
Cancellation of unvested portion of
restricted stock upon employee
termination....................... (1,875) --
Employee option exercise........... 625 --
Accretion of Series B mandatorily
redeemable preferred stock to
redemption value.................. 15,000
Conversion of Series B mandatorily
redeemable preferred stock to
common stock...................... (1,815,468) (6,903,000) 907,734 9,000 6,894,000
Conversion of Series A convertible
preferred stock to common stock... (10,624,429) (2,628,000) 5,312,214 54,000 2,574,000
Exercise of warrants pursuant to a
cashless exercise provision....... 234,992 2,000 (2,000)
Issuance of common stock in
connection with initial public
offering, net of issuance costs of
$2,979,000........................ 2,875,000 29,000 31,492,000
Compensation related to the grant
of common stock options........... 709,000
Amortization of deferred
compensation......................
Net loss...........................
---------- ----------- ----------- ----------- ---------- -------- -----------
BALANCE AT DECEMBER 31, 1996....... -- -- -- -- 9,851,487 99,000 46,102,000
Cancellation of unvested portion of
restricted stock stock upon
employee termination.............. (49,219) --
Employee stock option exercises.... 133,374 1,000 352,000
Employee stock purchase plan....... 9,173 -- 110,000
Issuance of common stock in
connection with secondary public
offering, net of issuance costs of
$1,645,000........................ 1,932,500 19,000 21,526,000
Compensation related to the grant
of common stock options........... 328,000
Amortization of deferred
compensation......................
Net income.........................
---------- ----------- ----------- ----------- ---------- -------- -----------
BALANCE AT DECEMBER 31, 1997....... -- $ -- -- $ -- 11,877,315 $119,000 $68,418,000
========== =========== =========== =========== ========== ======== ===========
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
TOTAL
ACCUMULATED DEFERRED STOCKHOLDERS'
DEFICIT COMPENSATION EQUITY (DEFICIT)
------------ ------------ ----------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994....... $(5,671,000) $(1,203,000)
Employee restricted stock
purchases......................... 1,000
Issuance of common stock purchase
warrants under bridge financing... 57,000
Cancellation of unvested portion on
restricted stock upon employee
termination....................... --
Conversion of bridge notes into
Series A convertible preferred
stock............................. 2,400,000
Issuance of Series B mandatorily
redeemable convertible preferred
stock, net of issuance costs of
$115,000..........................
Accretion of Series B mandatorily
redeemable preferred stock to
redemption value.................. (3,000) (3,000)
Net loss........................... (2,252,000) (2,252,000)
------------ --------- -----------
BALANCE AT DECEMBER 31, 1995....... (7,926,000) -- (1,000,000)
Conversion of interest on bridge
notes to Series A convertible
preferred stock................... 142,000
Issuance of Series B mandatorily
redeemable convertible preferred
stock to maintain ownership
percentage (Note 9)...............
Cancellation of unvested portion of
restricted stock upon employee
termination....................... --
Employee option exercise........... --
Accretion of Series B mandatorily
redeemable preferred stock to
redemption value.................. (15,000) (15,000)
Conversion of Series B mandatorily
redeemable preferred stock to
common stock...................... 6,903,000
Conversion of Series A convertible
preferred stock to common stock... --
Exercise of warrants pursuant to a
cashless exercise provision....... --
Issuance of common stock in
connection with initial public
offering, net of issuance costs of
$2,979,000........................ 31,521,000
Compensation related to the grant
of common stock options........... $(709,000) --
Amortization of deferred
compensation...................... 63,000 63,000
Net loss........................... (2,993,000) (2,993,000)
------------ --------- -----------
BALANCE AT DECEMBER 31, 1996....... (10,934,000) (646,000) 34,621,000
Cancellation of unvested portion of
restricted stock stock upon
employee termination.............. --
Employee stock option exercises.... 353,000
Employee stock purchase plan....... 110,000
Issuance of common stock in
connection with secondary public
offering, net of issuance costs of
$1,645,000........................ 21,545,000
Compensation related to the grant
of common stock options........... (328,000) --
Amortization of deferred
compensation...................... 420,000 420,000
Net income......................... 291,000 291,000
------------ --------- -----------
BALANCE AT DECEMBER 31, 1997....... $(10,643,000) $(554,000) $57,340,000
============ ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE> 11
ARQULE, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net (loss) income................................ $(2,252,000) $(2,993,000) $ 291,000
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization................. 506,000 1,171,000 2,580,000
Amortization of debt discount................. 164,000 -- --
Amortization of deferred compensation......... -- 63,000 420,000
Increase in accounts receivable............... -- (250,000) (2,883,000)
Increase in inventory......................... -- -- (953,000)
Increase in prepaid expenses and other current
assets...................................... (94,000) (215,000) (182,000)
(Increase) decrease in other assets........... 203,000 (40,000) (17,000)
(Increase) decrease in notes receivable from
related parties............................. (120,000) (220,000) 176,000
Increase in accounts payable and accrued
expenses.................................... 141,000 482,000 1,695,000
Increase (decrease) in deferred revenue....... 2,108,000 2,805,000 (519,000)
----------- ----------- ------------
Net cash provided by operating
activities............................. 656,000 803,000 608,000
----------- ----------- ------------
Cash flows from investing activities:
Purchases of marketable securities............... (9,052,000) -- (61,447,000)
Proceeds from sale or maturity of marketable
securities.................................... 4,250,000 4,302,000 27,802,000
Additions to property and equipment.............. (495,000) (2,292,000) (9,085,000)
----------- ----------- ------------
Net cash (used in) provided by investing
activities............................. (5,297,000) 2,010,000 (42,730,000)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from bridge financing -- related
party......................................... 700,000 -- --
Principal payments of capital lease
obligations................................... (381,000) (737,000) (1,335,000)
Proceeds from issuance of mandatorily redeemable
convertible preferred stock, net.............. 6,885,000 -- --
Proceeds from issuance of common stock, net...... 1,000 31,521,000 22,008,000
----------- ----------- ------------
Net cash provided by financing
activities............................. 7,205,000 30,784,000 20,673,000
----------- ----------- ------------
Net (decrease) increase in cash and cash
equivalents...................................... 2,564,000 33,597,000 (21,449,000)
Cash and cash equivalents, beginning of period..... 425,000 2,989,000 36,586,000
----------- ----------- ------------
Cash and cash equivalents, end of period........... $ 2,989,000 $36,586,000 $ 15,137,000
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 12
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations of $503,000, $2,178,000 and $856,000 were
incurred in 1995, 1996 and 1997, respectively, when the Company entered into
leases for various machinery and equipment, furniture and fixtures, and
leasehold improvements.
During 1995, the Company converted $2,400,000 of bridge loans into
1,920,000 shares of Series A convertible preferred stock (Note 9). In addition,
during 1996, the Company converted $142,000 of interest relating to the bridge
loans into 113,429 shares of Series A convertible preferred stock.
During 1996, 12,439,897 shares of Series A and Series B preferred stock
were converted into 6,219,948 shares of common stock, in connection with the
Company's initial public offering of common stock (Note 10). In addition,
234,992 shares of common stock were issued in connection with the cashless
exercise of outstanding warrants.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
During 1995, 1996 and 1997, the Company paid approximately $254,000,
$190,000 and $223,000 respectively, for interest.
26
<PAGE> 13
ARQULE, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
ArQule, Inc. (the "Company") is engaged in the discovery, development and
production of novel chemical compounds primarily for the pharmaceutical,
biotechnology and agrochemical industries. Its operations are focused on the
integration of combinatorial chemistry, structure-guided rational drug design
and other proprietary technologies which automate the process of chemical
synthesis to produce arrays of novel small organic chemical compounds used to
generate and optimize product development candidates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of these
financial statements are as follows:
Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments purchased within three
months of maturity date to be cash equivalents. The Company invests its
available cash primarily in money market mutual funds and U.S. government and
other investment grade debt securities which have strong credit ratings. These
investments are subject to minimal credit and market risks. At December 31, 1996
and 1997, the Company has classified its investments as available-for-sale.
Fair Value of Financial Instruments
At December 31, 1996 and 1997, the Company's financial instruments consist
of cash, cash equivalents, marketable securities, accounts receivable, notes
receivable from related party, accounts payable and accrued expenses. The
carrying amount of these instruments approximate their fair values.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives. Assets under capital
leases and leasehold improvements are amortized over the shorter of their
estimated useful lives or the term of the respective leases by use of the
straight-line method. Maintenance and repair costs are expensed as incurred.
Revenue Recognition
Compound development revenue relates to revenue from significant
collaborative agreements (Note 3) and from licensing of compound arrays. Revenue
from collaborative agreements relates to the delivery of compounds and to
compound development work and is recognized using the percentage of completion
method. The application of this revenue recognition method is dependent on the
contractual arrangement of either compound delivery or development. Accordingly,
revenue is recognized on the proportional achievement of deliveries against a
compound delivery schedule or as development labor is expended against a total
research and development labor plan. Payments received under these arrangements
prior to the completion of the related work are recorded as deferred revenue.
Revenue from licensing of compound arrays with no additional obligations is
recognized upon delivery of the compound array. License option fees represent
payments made to the Company for a right to evaluate and negotiate the terms of
potential licensing arrangements and are recognized as revenue as the options
are granted, as the Company has no further obligations and as payments are
nonrefundable.
Cost of Revenue
Cost of revenue represents the actual costs incurred in connection with
performance pursuant to collaborative agreements and the costs incurred to
produce compound arrays. These costs consist primarily of payroll and
payroll-related costs, chemicals, supplies and overhead expenses.
27
<PAGE> 14
ARQULE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock Compensation
Options granted to employees and directors are accounted for in accordance
with Accounting Principles Board No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). Under APB No. 25, no compensation expense is
recognized for options granted at fair market value. The Company has adopted the
disclosure requirements of SFAS No. 123, "Accounting for Stock Based
Compensation" ("SFAS No. 123"). Options granted to nonemployees are accounted
for using the fair value method and are recognized as compensation expense over
their respective service periods.
Inventories
Inventory consists of costs associated with the Company's Mapping Array
libraries and is stated at the lower of cost, on a first-in, first-out basis, or
market. Such costs are capitalized after achieving technological feasibility.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Reclassifications
Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform to the 1997 presentation. These reclassifications had no
effect on the net loss for 1995 and 1996.
Net Income (Loss) per Share
During the fourth quarter of 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 replaced primary and fully diluted earnings per share with basic and diluted
earnings per share. The adoption of this standard requires retroactive
restatement of previously reported loss per share calculations in 1995 and 1996.
During the implementation of SFAS 128, the Company had previously included
unvested shares of common stock subject to restriction agreements in its
computation of basic and diluted net loss per share of $3.76 and $1.23 for the
years ended December 31, 1995 and 1996, respectively. The basic and diluted net
loss per share for the years ended December 31, 1995 and 1996 have been restated
to $7.93 and $1.32, reflecting the removal of certain unvested shares of common
stock subject to restriction agreements which are anti-dilutive.
3. SIGNIFICANT AGREEMENTS
The Company has entered into a number of license, research and development
agreements (the "Agreements") with seven corporate collaborators who accounted
for substantially all of the Company's 1997 revenue. One Agreement was entered
into with Solvay Duphar B.V. ("Solvay"), a related party (Note 9). Revenue
related to the Solvay Agreement is included in compound development
revenue -- related party.
28
<PAGE> 15
ARQULE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Under the terms of these Agreements, the Company will provide a certain number
of compounds per year and has granted the right to screen these compounds
against targets to identify biological activity (an "Active Compound") and will
provide research and development services. The collaborators have the right to
enter into an exclusive, worldwide license (the "License") for any Active
Compound identified. The initial terms of these Agreements generally range from
two to five years during which period the collaborators make payments to the
Company for technology access, delivery of compounds and for its research and
development services. In exchange for a License, the Company will receive
milestone payments during product development and royalty payments based on the
sales of the product. Solvay exercised its right to license certain of the
Company's technologies on a non-exclusive basis in December 1997.
Additionally, the Company has entered into a number of agreements with
biotechnology companies (the "biotech collaborators"). Under the terms of
material transfer agreements with biotech collaborators, the Company has granted
the biotech collaborator the nonexclusive, royalty-free license to test certain
compound arrays supplied by the Company. Upon identification of an active
compound, the Company will negotiate a joint drug development program with the
biotech collaborator to develop the compound, provided the Company has not
previously licensed the compound. Under these joint drug development programs,
the Company and the biotech collaborator will each bear the costs and expenses
of their respective activities. Proceeds received on sales or a third party
license of the jointly developed compound will be allotted between the parties
in accordance with the individual agreements, after, in some instances, the
reimbursement of direct research costs incurred by the respective parties.
4. CASH EQUIVALENTS AND MARKETABLE SECURITIES
The following is a summary of the fair market value of available-for-sale
marketable securities held by the Company at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
MATURITY 1996 1997
------------- -------- -----------
<S> <C> <C> <C>
U.S. Government obligations................. Within 1 year $500,000 $ 2,200,000
Corporate bonds............................. Within 1 year -- 31,945,000
-------- -----------
$500,000 $34,145,000
======== ===========
</TABLE>
At December 31, 1996 and 1997, marketable securities are carried at
amortized cost, which approximates fair market value. All of the Company's
marketable securities are classified as current at December 31, 1996 and 1997 as
funds are highly liquid and are available to meet working capital needs and to
fund current operations. Gross unrealized gains and losses on sales of
securities for the years ended December 31, 1996 and 1997 were not significant.
5. INVENTORY
Inventories at December 31, 1997 consists of the following:
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Raw Materials............................................... $361,000
Finished Goods.............................................. 592,000
--------
$953,000
========
</TABLE>
29
<PAGE> 16
ARQULE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIFE -------------------------
(YEARS) 1996 1997
----------- ---------- -----------
<S> <C> <C> <C>
Machinery and equipment........................ 3-7 $3,053,000 $ 5,997,000
Leasehold improvements......................... 5 2,728,000 4,183,000
Furniture and fixtures......................... 7 178,000 178,000
Computer equipment............................. 3 1,197,000 3,253,000
Construction-in-progress....................... -- 5,000 3,491,000
---------- -----------
7,161,000 17,102,000
Less -- accumulated depreciation and
amortization................................. 1,868,000 4,448,000
---------- -----------
$5,293,000 $12,654,000
========== ===========
</TABLE>
Assets held under capital leases at December 31, 1997 and 1996 consisted of
$2,416,000 in 1996 and $3,272,000 in 1997 of machinery and equipment, $832,000
of leasehold improvements, $746,000 in computer equipment and $107,000 of
furniture and fixtures. Accumulated amortization of these assets totaled
$1,305,000 and $2,503,000 at December 31, 1996 and 1997, respectively. For the
years ended December 31, 1995, 1996 and 1997, amortization expense related to
assets held under capital lease obligations was $300,000, $751,000 and
$1,198,000, respectively.
7. NOTES RECEIVABLE FROM RELATED PARTIES
Notes receivable from related parties consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Note receivable due from an officer of the Company, due in
full on November 3, 1997.................................. $ 63,000 $ --
Note receivable due from the same officer of the Company,
payable in four equal annual installments commencing on
November 2, 1996, principal due on each installment date
will be forgiven so long as the officer is employed by the
Company on the installment date, secured by the officer's
beneficial interest in 48,000 shares of common stock of
the Company............................................... 90,000 60,000
Note receivable due from another officer of the Company,
payable in three equal annual installments commencing on
February 16, 1998, secured by shares of common stock of
the Company issuable to the officer upon the exercise of
options................................................... 250,000 167,000
-------- --------
403,000 227,000
Less current portion........................................ 176,000 30,000
-------- --------
$227,000 $197,000
======== ========
</TABLE>
Interest on the notes receivable from related parties accrues on the unpaid
principal and interest at 5.9%. Interest due on the notes at December 31, 1996
and 1997, $6,000 and $13,248, respectively, was included in prepaid expenses and
other current assets.
30
<PAGE> 17
ARQULE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Accounts payable............................................ $ 485,000 $2,161,000
Accrued professional fees................................... 469,000 379,000
Other accrued expenses...................................... 155,000 264,000
---------- ----------
$1,109,000 $2,804,000
========== ==========
</TABLE>
9. CONVERTIBLE PREFERRED STOCK
On November 5, 1995, as part of a collaborative agreement (Note 3), the
Company sold to Solvay Duphar B.V. ("Solvay") 1,800,000 shares of Series B
preferred stock which resulted in net proceeds to the Company of $6,885,000. In
April 1996, the Company issued to Solvay an additional 15,468 shares of Series B
preferred stock in connection with the conversion of the bridge financing
interest into Series A preferred stock to maintain the original, agreed-upon
ownership percentage.
At December 31, 1995, the Company had 15,000,000 shares of convertible
preferred stock authorized. Upon the closing of the Company's initial public
offering on October 16, 1996 (Note 10), all outstanding shares of Series A and
Series B preferred stock automatically converted into 6,219,948 shares of common
stock, and the number of authorized shares of preferred stock was reduced to
1,000,000 shares.
10. COMMON STOCK
On October 4, 1996, the Company effected a 1-for-2 reverse stock split on
the common stock of the Company. Accordingly, all common share and per share
data have been restated to give retroactive effect to the stock split for all
periods presented.
In October and November 1996, the Company completed its initial public
offering of 2,875,000 shares of common stock. Proceeds to the Company, net of
issuance costs, amounted to $31,521,000. In connection with its initial public
offering, the stockholders approved an amendment to the Company's Certificate of
Incorporation to increase the number of authorized common shares to 30,000,000.
On April 4, 1997, the Company completed a follow-on offering of 1,932,500
shares of common stock, which included the underwriters' exercise of their
over-allotment of 300,000 shares of common stock on April 14, 1997. Proceeds to
the Company, net of issuance costs, amounted to $21,545,000.
Stock Restriction Agreements
The Company has common stock issued pursuant to the Equity Incentive Plan
which is subject to stock restriction agreements whereby the stockholder
automatically forfeits to the Company the unvested portion of shares of common
stock in the event of termination of their employment with the Company. All such
forfeited shares shall immediately be retired by the Company. Shares subject to
this agreement vest over two to four year periods. At December 31, 1996 and
1997, the approximate number of unvested common shares is 96,500 and 13,500,
respectively. Each stock restriction agreement may be terminated at the election
of the Company.
11. EQUITY INCENTIVE AND STOCK PURCHASE PLANS
During 1996, the stockholders approved an amendment to the 1994 Amended and
Restated Equity Incentive Plan (the "Equity Incentive Plan") increasing the
number of shares of common stock available for awards under the Equity Incentive
Plan to 2,600,000. All shares are awarded at the discretion of a Committee
31
<PAGE> 18
ARQULE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of the Board of Directors (the "Committee") in a variety of stock-based forms
including stock options and restricted stock. Pursuant to the Equity Incentive
Plan, incentive stock options may not be granted at less than the fair market
value of the Company's common stock at the date of the grant, and the option
term may not exceed ten years. For holders of 10% or more of the Company's
voting stock, options may not be granted at less than 110% of the fair market
value of the common stock at the date of the grant, and the option term may not
exceed five years. Stock appreciation rights granted in tandem with an option
shall have an exercise price not less than the exercise price of the related
option. As of December 31, 1997, no stock appreciation rights have been issued.
Subject to the restrictions above, the Committee is authorized to designate
the options, awards, and purchases under the Equity Incentive Plan, the number
of shares covered by each option, award and purchase, and the related terms,
exercise dates, prices and methods of payment.
In 1996, the stockholders approved the 1996 Director Stock Option Plan (the
"1996 Director Plan") for nonemployee directors. Under this plan, eligible
directors are automatically granted once a year, at the annual meeting of
stockholders of the Company, options to purchase 3,500 shares of common stock
which are exercisable on the date of grant. Upon initial election of an eligible
director, options to purchase 7,500 shares of common stock will be granted which
will become exercisable in three equal annual installments commencing on the
date of the Company's next annual stockholders' meeting held after the date of
grant. All options granted pursuant to the 1996 Director Plan have a term of ten
years with exercise prices equal to fair market value on the date of grant.
Through December 31, 1997, options to purchase 33,000 shares of common stock
have been granted under this plan. A maximum of 125,000 shares of common stock
of the Company is reserved for issuance in accordance with the terms of this
plan, of which 92,000 are available for future grant.
The Company applies APB No. 25 and related interpretations in accounting
for employee grants under the Equity Incentive Plan and the 1996 Director Plan
(collectively the "Plans"). No compensation expense has been recognized under
the Plans for employee grants. Had compensation cost been determined based on
the estimated value of options at the grant date consistent with the provisions
of SFAS No. 123, the Company's pro forma net loss, pro forma basic net loss per
share and diluted net loss per share would have been as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Pro Forma net loss.......................... $(2,254,000) $(3,186,000) $(2,583,000)
Pro Forma basic and diluted net loss per
share..................................... (7.94) (1.40) (0.23)
</TABLE>
During 1996 and 1997, the Company issued 117,500 and 69,000 options to
certain consultants and members of its Scientific Advisory Board (SAB) under the
Equity Incentive Plan. In April 1997, 11,000 shares were cancelled. The
estimated value of these options totaled $709,000 and $328,000 in 1996 and 1997,
respectively, was recorded as deferred compensation and is being amortized as
compensation expense over the vesting period of the options. Compensation
expense in 1996 and 1997 was $63,000 and $420,000, respectively.
For the purposes of pro forma disclosure, the estimated value of each
employee and nonemployee option grant was calculated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions: no
dividend yield for both years; 45% volatility for 1995 and 1996 and 50%
volatility for 1997 for nonemployee grants and employee grants subsequent to the
initial filing of the Registration Statement in connection with the Company's
initial public offering; no volatility for employee grants prior to the initial
public offering; risk-free interest rates of 5.2% to 7.1% in 1995 and 1996 and
6.0% in 1997; expected lives of 3 to 6 years in 1995 and 1996 and 4 years in
1997 for options granted.
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the use of highly
subjective assumptions, including the expected stock price volatility. Because
the corporation's employee stock options have characteristics significantly
different from those of traded options,
32
<PAGE> 19
ARQULE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and because changes in the subjective assumptions can materially affect the fair
value estimates, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock-based
compensation.
Option activity under the Plans for the three years ended December 31, 1997
was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
STOCK OPTIONS OF SHARES PRICE
- ------------- --------- --------
<S> <C> <C>
Outstanding at December 31, 1994............................ 2,500 $ .02
Granted..................................................... 298,500 .22
---------
Outstanding at December 31, 1995............................ 301,000 .22
Granted..................................................... 1,073,920 4.39
Exercised................................................... (625) .02
Cancelled................................................... (101,625) .49
---------
Outstanding at December 31, 1996............................ 1,272,670 3.72
Granted..................................................... 1,016,912 16.63
Exercised................................................... (133,374) 2.64
Cancelled................................................... (44,456) 9.57
---------
Outstanding at December 31, 1997............................ 2,111,752 $ 9.88
=========
Exercisable at December 31, 1997............................ 373,025
=========
Weighted average estimated value of options granted during
the year ended December 31, 1997.......................... $ 4.17
======
</TABLE>
The following table summarizes information about options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
--------------------------------------- -----------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED EXERCISABLE WEIGHTED
OUTSTANDING AT REMAINING AVERAGE AS OF AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1997 LIFE PRICE 1997 PRICE
- ------------------------ -------------- ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$ 0.0000 - 2.4000........................ 602,820 7.9 $ 0.74 203,617 $ 0.68
4.8001 - 7.2000........................ 359,875 8.5 6.00 71,125 6.00
9.6001 - 12.0000........................ 157,250 8.8 10.86 44,216 10.95
12.0001 - 14.4000........................ 490,807 9.3 14.13 43,567 14.13
14.4001 - 16.8000........................ 35,500 9.1 15.70 -- --
16.8001 - 19.2000........................ 276,000 9.3 17.84 10,500 17.63
19.2001 - 21.6000........................ 133,000 9.7 20.88 -- --
21.6001 - 24.0000........................ 56,500 9.9 24.00 -- --
--------- -------
2,111,752 8.8 $ 9.88 373,025 $ 4.96
========= === ====== ======= ======
</TABLE>
At December 31, 1997, there were 515,546 shares available for future grant
under the Equity Incentive Plan.
Stock Purchase Plan
In 1996, the stockholders adopted the 1996 Employee Stock Purchase Plan
(the "Purchase Plan"). This plan enables eligible employees to exercise rights
to purchase the Company's common stock at 85% of the fair
33
<PAGE> 20
ARQULE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
market value of the stock on the date the right was granted or the date the
right is exercised, whichever is lower. Rights to purchase shares under the
Purchase Plan are granted by the Board of Directors. The rights are exercisable
during a period determined by the Board of Directors; however, in no event will
the period be longer than twenty-seven months. The Purchase Plan is available to
substantially all employees, subject to certain limitations. The Company has
reserved 120,000 shares of common stock for purchases under the Purchase Plan.
At December 31, 1997, 9,173 shares have been purchased pursuant to the Purchase
Plan.
12. INCOME TAXES
There is no current or deferred tax expense for the years ended December
31, 1995, 1996 and 1997.
The deferred tax consequences of temporary differences in reporting items
for financial statement and income tax purposes are recognized, if appropriate.
Realization of the future tax benefits related to the deferred tax assets is
dependent on many factors, including the company's ability to generate taxable
income within the net operating loss carryforward period. Management has
considered these factors in reaching its conclusion as to the valuation
allowance for financial reporting purposes. The income tax effect of temporary
differences comprising the deferred tax assets and deferred tax liabilities on
the accompanying balance sheets is a result of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Preoperating costs capitalized for tax purposes......... $ 370,000 $ 288,000
Net operating loss carryforwards........................ 3,906,000 4,506,000
Tax credit carryforwards................................ 311,000 811,000
Non-employee equity based compensation.................. -- 173,000
Other................................................... 30,000 40,000
----------- -----------
$ 4,617,000 $ 5,818,000
Deferred tax liabilities:
Tax depreciation in excess of book...................... -- (135,000)
Valuation allowance....................................... (4,617,000) (5,683,000)
----------- -----------
Net deferred tax assets................................. $ -- $ --
=========== ===========
</TABLE>
The Company has provided a full valuation allowance for the deferred tax
assets as the realization of these future benefits is not sufficiently assured
as of the end of each related year. If the Company achieves profitability, the
deferred tax assets will be available to offset future income tax liabilities
and expense. Of the $5.7 million valuation allowances at December 31, 1997,
$615,000 relates to deductions for disqualifying dispositions and non qualified
stock options which will be credited to paid in capital, if realized.
34
<PAGE> 21
ARQULE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the statutory federal income tax rate (35%) and
the effective rate of income tax expense for each of the three years during the
period ended December 31, 1997 follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
--------- ----------- ---------
<S> <C> <C> <C>
Income tax benefit (expense) at statutory
rate......................................... $ 788,000 $ 1,048,000 $(102,000)
State tax benefit (expense), net............... 135,000 180,000 (18,000)
Losses without current tax benefit............. (907,000) (1,180,000) --
Utilization of net operating loss
carryforwards................................ -- -- 133,000
Other.......................................... (16,000) (48,000) (13,000)
--------- ----------- ---------
Tax Provision............................. $ -- $ -- $ --
========= =========== =========
</TABLE>
The Company has available net operating loss carryforwards of approximately
$11.0 million for tax purposes to offset future taxable income. The net
operating loss carryforwards expire principally in 2009 to 2012. General tax
credit carryforwards of approximately $811,000 expire principally in 2009 to
2012. Under the Internal Revenue Code, certain substantial changes in the
Company's ownership could result in an annual limitation on the amount of net
operating loss and tax credit carryforwards which can be utilized in future
years.
13. COMMITMENTS AND CONTINGENCY
Leases
The Company leases facilities and equipment under noncancelable operating
and capital leases. The future minimum lease commitments under these leases are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING CAPITAL
DECEMBER 31, LEASES LEASES
- ------------ ---------- ----------
<S> <C> <C>
1998........................................................ $ 838,000 $1,174,000
1999........................................................ 780,000 907,000
2000........................................................ 721,000 305,000
2001........................................................ 315,000 1,000
---------- ----------
2,387,000
Interest due on capital leases.............................. 243,000
---------- ----------
Total minimum lease payments................................ $2,654,000 $2,630,000
========== ==========
</TABLE>
The Company has a lease line agreement with a financial institution (the
"Lessor") for $8,500,000 of which approximately $4,000,000 was available for
future leases at December 31, 1997. The term for each lease under the agreement
is forty-two months, commencing on the purchase date of the asset, and the lease
bears interest at a rate determined by the Lessor at the transaction date.
Rent expense under noncancelable operating leases was approximately
$163,000, $283,000 and $582,000 for the years ended December 31, 1995, 1996, and
1997, respectively.
Employment Agreements
The Company has employment agreements with an officer who is also a member
of the board of directors. The agreement provides that if employment is
terminated without cause, the officer is entitled to receive up to six months'
salary.
35
<PAGE> 22
ARQULE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Contingency
On July 21, 1997, a complaint was filed in the United States District Court
of Connecticut against the Company and two of the Company's stockholders by two
individuals alleging that they were entitled to compensation from the Company
and these two stockholders equal to approximately five percent of the equity
interests in the Company for services in connection with the initial financing
of ArQule Partners, L.P. in 1993. In addition, one of the plaintiffs is alleging
that he was denied the opportunity to make a five percent investment in the
Company at the time of its incorporation. Prior to the Company's initial public
offering of its Common Stock, ArQule Partners, L.P. was a major stockholder of
the Company. An answer was filed on September 15, 1997 denying the material
allegations in the complaint and Phase I of the discovery process has been
completed. Although the parties to this lawsuit have had mediation proceedings,
the Company intends to continue to contest this lawsuit vigorously. No assurance
can be given regarding the outcome of this lawsuit. The Company is currently
unable to estimate the range of potential loss, if any, that might result as a
consequence of this action.
36
<PAGE> 23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The financial statements are listed under Item 8 of this report.
2. FINANCIAL STATEMENT SCHEDULES
The financial statement schedules listed under Item 8 of this report are
omitted because they are not applicable or required information and are shown in
the financial statements of the footnotes thereto.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 1997.
37
<PAGE> 24
(C) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the
Company. Filed as Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (File No. 333-22945) and incorporated
herein by reference.
3.2 Amended and Restated By-laws of the Company. Filed as
Exhibit 3.5 to the Company's Registration Statement on Form
S-1 (File No. 333-11105) and incorporated herein by
reference.
4.1 Specimen Common Stock Certificate. Filed as Exhibit 4.1 to
the Company's Registration Statement on Form S-1 (File No.
333-11105) and incorporated herein by reference.
10.1* Amended and Restated 1994 Equity Incentive Plan, as amended
through October 17, 1994. Filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-1 (File No.
333-11105) and incorporated herein by reference.
10.2* 1996 Employee Stock Purchase Plan. Filed as Exhibit 10.2 to
the Company's Registration Statement on Form S-1 (File No.
333-11105) and incorporated herein by reference.
10.3* Amended and Restated 1996 Director Stock Option Plan. Filed
as Exhibit 10.3 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 filed with the
Commission on March 17, 1998 (File No. 000-21429) and
incorporated herein by reference.
10.4 Form of Indemnification Agreement between the Company and
its directors. Such agreements are materially different only
as to the signing directors and the dates of execution.
Filed as Exhibit 10.4 to the Company's Registration
Statement on Form S-1 (File No. 333-11105) and incorporated
herein by reference.
10.5 Investors' Rights Agreement among the Company and certain
stockholders of the Company dated November 2, 1995. Filed as
Exhibit 10.5 to the Company's Registration Statement on Form
S-1 (File No. 333-11105) and incorporated herein by
reference.
10.6 Lease Agreement dated September 29, 1993 between the Company
and Beautyrest Property, Inc. and WRB, Inc. Filed as Exhibit
10.6 to the Company's Registration Statement on Form S-1
(File No. 333-11105) and incorporated herein by reference.
10.7 Lease Agreement, dated July 27, 1995, between the Company
and Cummings Properties Management, Inc. as amended. Filed
as Exhibit 10.7 to the Company's Registration Statement on
Form S-1 (File No. 333-11105) and incorporated herein by
reference.
10.8* Employment Agreement effective as of January 2, 1996,
between the Company and Eric B. Gordon. Filed as Exhibit
10.8 to the Company's Registration Statement on Form S-1
(File No. 333-11105) and incorporated herein by reference.
10.9* Employment Agreement effective as of July 9, 1996, between
the Company and James R. Fitzgerald, Jr. Filed as Exhibit
10.9 to the Company's Registration Statement on Form S-1
(File No. 333-11105) and incorporated herein by reference.
10.10* Promissory Note dated November 2, 1995 between Dr. Joseph C.
Hogan, Jr. and the Company. Filed as Exhibit 10.10 to the
Company's Registration Statement on Form S-1 (File No.
333-11105) and incorporated herein by reference.
10.11* Pledge Agreement dated November 2, 1995 between Dr. Joseph
C. Hogan, Jr. and the Company. Filed as Exhibit 10.11 to the
Company's Registration Statement on Form S-1 (File No.
333-11105) and incorporated herein by reference.
10.12* Promissory Note and Pledge Agreement dated July 9, 1996
between Eric B. Gordon and the Company. Filed as Exhibit
10.12 to the Company's Registration Statement on Form S-1
(File No. 333-11105) and incorporated herein by reference.
10.13* Promissory Note dated November 4, 1993 between Dr. Joseph C.
Hogan, Jr. and the Company. Filed as Exhibit 10.13 to the
Company's Registration Statement on Form S-1 (File No.
333-11105) and incorporated herein by reference.
</TABLE>
38
<PAGE> 25
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.14+ Research, Development and License Agreement between the
Company and Solvay Duphar B.V. dated November 2, 1995. Filed
as Exhibit 10.14 to the Company's Registration Statement on
Form S-1 (File No. 333-11105) and incorporated herein by
reference.
10.15+ Research & Development and License Agreement between the
Company and Abbott Laboratories dated June 15, 1995, as
amended. Filed as Exhibit 10.15 to the Company's
Registration Statement on Form S-1 (File No. 333-11105) and
incorporated herein by reference.
10.16+ Research & Development Agreement between the Company and
Amersham Pharmacia Biotech AB dated March 10, 1995, as
amended. Filed as Exhibit 10.16 to the Company's
Registration Statement on Form S-1 (File No. 333-11105) and
incorporated herein by reference.
10.17+ Option Agreement between the Company and Amersham Pharmacia
Biotech AB dated March 10, 1995, as amended. Filed as
Exhibit 10.17 to the Company's Registration Statement on
Form S-1 (File No. 333-11105) and incorporated herein by
reference.
10.18* Adoption Agreement for Fidelity Management and Research
Company (the Company's 401(k) plan). Filed as Exhibit 10.18
to the Company's Registration Statement on Form S-1 (File
No. 333-11105) and incorporated herein by reference.
10.19 Research and License Agreement between the Company and Roche
Bioscience dated September 13, 1996. Filed as Exhibit 10.19
to the Company's Registration Statement on Form S-1 (File
No. 333-11105) and incorporated herein by reference.
10.20+ Array Delivery and Testing Agreement between the Company and
Monsanto Company dated as of December 23, 1996. Filed as
Exhibit 10.20 to the Company's Registration Statement on
Form S-1 (File No. 333-22945) and incorporated herein by
reference.
10.21+ Amendment No. 2 to Research & Development License Agreement
between the Company and Abbott Laboratories dated as of
December 24, 1996. Filed as Exhibit 10.21 to the Company's
Registration Statement on Form S-1 (File No. 333-22945) and
incorporated herein by reference.
10.22 Lease Agreement, dated December 20, 1996 between the Company
and Cummings Property Management, Inc. Filed as Exhibit
10.22 to the Company's Registration Statement on Form S-1
(File No. 333-22945) and incorporated herein by reference.
10.23+ Research and License Agreement between the Company and
American Home Products Corporation acting through its
Wyeth-Ayerst Research Division dated July 3, 1997. Filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997 (File No. 000-21249) and
incorporated herein by reference.
10.24 Common Stock Purchase Agreement between the Company and
American Home Products Corporation Dated July 3, 1997. Filed
as Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997 (File No.
000-21429) and incorporated herein by reference.
10.25+ Second Amendment to Option Agreement and Research and
Development Agreement between the Company and Amersham
Pharmacia Biotech AB dated September 23, 1996. Filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997 (File No.
000-21429) and incorporated herein by reference.
10.26+ Third Amendment to Option Agreement and Research and
Development Agreement between the Company and Amersham
Pharmacia Biotech AB dated June 24, 1997. Filed as Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 (File No. 000-21429) and
incorporated herein by reference.
10.27* First Allonge to Promissory Note between the Company and
Eric B. Gordon dated July 16, 1997. Filed as Exhibit 10.3 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997 (File No. 000-21429) and
incorporated herein by reference.
10.28 Intentionally omitted.
</TABLE>
39
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.29+ Research and Development Agreement between the Company and
Sankyo Co., Ltd. dated November 1, 1997. Filed as Exhibit
10.29 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, filed with the
Commission on March 17, 1998 (File No. 000-21429) and
incorporated herein by reference.
10.30+ Amendment No. 3 to Research & Development and License
Agreement between the Company and Abbott Laboratories dated
December 23, 1997. Filed as Exhibit 10.30 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 filed with the Commission on March 17,
1998 (File No. 000-21249) and incorporated herein by
reference.
11.1 Statement re computation of per share net income (loss).
Filed herewith.
23.1 Consent of Price Waterhouse LLP. Filed herewith.
99.1 Important Factors Regarding Forward-Looking Statements.
Filed as Exhibit 99.1 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997 filed with
the Commission on March 17, 1998 (File No. 000-21249) and
incorporated herein by reference.
</TABLE>
- ---------------
* Indicates a management contract or compensatory plan.
+ Certain confidential material contained in the document has been omitted and
filed separately, with the Securities and Exchange Commission pursuant to Rule
406 of the Securities Act of 1933, as amended or Rule 246-2 of the Securities
and Exchange Act of 1934, as amended.
40
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of Amendment to the
Securities Exchange Act of 1934, the Registration has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Medford, Commonwealth of Massachusetts, on April 17, 1998.
ARQULE, INC.
By: /s/ ERIC B. GORDON
------------------------------------
Eric B. Gordon
President and Chief Executive
Officer
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ERIC B. GORDON President, Chief Executive Officer and April 17, 1998
- ------------------------------------------ Director (Principal Executive Officer)
Eric B. Gordon
/s/ JAMES R. FITZGERALD, JR. Vice President, Chief Financial Officer April 17, 1998
- ------------------------------------------ and Treasurer (Principal Financial Officer
James R. Fitzgerald, Jr. and Principal Accounting Officer)
/s/ JOSEPH C. HOGAN, JR. Chairman of the Board, Senior Vice April 17, 1998
- ------------------------------------------ President of Research and Development,
Joseph C. Hogan, Jr. Chief Scientific Officer and Director
Director April 17, 1998
- ------------------------------------------
Adrian de Jonge
/s/ ALLAN R. FERGUSON Director April 17, 1998
- ------------------------------------------
Allan R. Ferguson
/s/ STEPHEN M. DOW Director April 17, 1998
- ------------------------------------------
Stephen M. Dow
Director April 17, 1998
- ------------------------------------------
L. Patrick Gage
/s/ MICHAEL ROSENBLATT Director April 17, 1998
- ------------------------------------------
Michael Rosenblatt
</TABLE>
41
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the
Company. Filed as Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (File No. 333-22945) and incorporated
herein by reference.
3.2 Amended and Restated By-laws of the Company. Filed as
Exhibit 3.5 to the Company's Registration Statement on Form
S-1 (File No. 333-11105) and incorporated herein by
reference.
4.1 Specimen Common Stock Certificate. Filed as Exhibit 4.1 to
the Company's Registration Statement on Form S-1 (File No.
333-11105) and incorporated herein by reference.
10.1* Amended and Restated 1994 Equity Incentive Plan, as amended
through October 17, 1994. Filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-1 (File No.
333-11105) and incorporated herein by reference.
10.2* 1996 Employee Stock Purchase Plan. Filed as Exhibit 10.2 to
the Company's Registration Statement on Form S-1 (File No.
333-11105) and incorporated herein by reference.
10.3* Amended and Restated 1996 Director Stock Option Plan. Filed
as Exhibit 10.3 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 filed with the
Commission on March 17, 1998 (File No. 000-21429) and
incorporated herein by reference.
10.4 Form of Indemnification Agreement between the Company and
its directors. Such agreements are materially different only
as to the signing directors and the dates of execution.
Filed as Exhibit 10.4 to the Company's Registration
Statement on Form S-1 (File No. 333-11105) and incorporated
herein by reference.
10.5 Investors' Rights Agreement among the Company and certain
stockholders of the Company dated November 2, 1995. Filed as
Exhibit 10.5 to the Company's Registration Statement on Form
S-1 (File No. 333-11105) and incorporated herein by
reference.
10.6 Lease Agreement dated September 29, 1993 between the Company
and Beautyrest Property, Inc. and WRB, Inc. Filed as Exhibit
10.6 to the Company's Registration Statement on Form S-1
(File No. 333-11105) and incorporated herein by reference.
10.7 Lease Agreement, dated July 27, 1995, between the Company
and Cummings Properties Management, Inc. as amended. Filed
as Exhibit 10.7 to the Company's Registration Statement on
Form S-1 (File No. 333-11105) and incorporated herein by
reference.
10.8* Employment Agreement effective as of January 2, 1996,
between the Company and Eric B. Gordon. Filed as Exhibit
10.8 to the Company's Registration Statement on Form S-1
(File No. 333-11105) and incorporated herein by reference.
10.9* Employment Agreement effective as of July 9, 1996, between
the Company and James R. Fitzgerald, Jr. Filed as Exhibit
10.9 to the Company's Registration Statement on Form S-1
(File No. 333-11105) and incorporated herein by reference.
10.10* Promissory Note dated November 2, 1995 between Dr. Joseph C.
Hogan, Jr. and the Company. Filed as Exhibit 10.10 to the
Company's Registration Statement on Form S-1 (File No.
333-11105) and incorporated herein by reference.
10.11* Pledge Agreement dated November 2, 1995 between Dr. Joseph
C. Hogan, Jr. and the Company. Filed as Exhibit 10.11 to the
Company's Registration Statement on Form S-1 (File No.
333-11105) and incorporated herein by reference.
10.12* Promissory Note and Pledge Agreement dated July 9, 1996
between Eric B. Gordon and the Company. Filed as Exhibit
10.12 to the Company's Registration Statement on Form S-1
(File No. 333-11105) and incorporated herein by reference.
10.13* Promissory Note dated November 4, 1993 between Dr. Joseph C.
Hogan, Jr. and the Company. Filed as Exhibit 10.13 to the
Company's Registration Statement on Form S-1 (File No.
333-11105) and incorporated herein by reference.
10.14+ Research, Development and License Agreement between the
Company and Solvay Duphar B.V. dated November 2, 1995. Filed
as Exhibit 10.14 to the Company's Registration Statement on
Form S-1 (File No. 333-11105) and incorporated herein by
reference.
</TABLE>
42
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.15+ Research & Development and License Agreement between the
Company and Abbott Laboratories dated June 15, 1995, as
amended. Filed as Exhibit 10.15 to the Company's
Registration Statement on Form S-1 (File No. 333-11105) and
incorporated herein by reference.
10.16+ Research & Development Agreement between the Company and
Amersham Pharmacia Biotech AB dated March 10, 1995, as
amended. Filed as Exhibit 10.16 to the Company's
Registration Statement on Form S-1 (File No. 333-11105) and
incorporated herein by reference.
10.17+ Option Agreement between the Company and Amersham Pharmacia
Biotech AB dated March 10, 1995, as amended. Filed as
Exhibit 10.17 to the Company's Registration Statement on
Form S-1 (File No. 333-11105) and incorporated herein by
reference.
10.18* Adoption Agreement for Fidelity Management and Research
Company (the Company's 401(k) plan). Filed as Exhibit 10.18
to the Company's Registration Statement on Form S-1 (File
No. 333-11105) and incorporated herein by reference.
10.19 Research and License Agreement between the Company and Roche
Bioscience dated September 13, 1996. Filed as Exhibit 10.19
to the Company's Registration Statement on Form S-1 (File
No. 333-11105) and incorporated herein by reference.
10.20+ Array Delivery and Testing Agreement between the Company and
Monsanto Company dated as of December 23, 1996. Filed as
Exhibit 10.20 to the Company's Registration Statement on
Form S-1 (File No. 333-22945) and incorporated herein by
reference.
10.21+ Amendment No. 2 to Research & Development License Agreement
between the Company and Abbott Laboratories dated as of
December 24, 1996. Filed as Exhibit 10.21 to the Company's
Registration Statement on Form S-1 (File No. 333-22945) and
incorporated herein by reference.
10.22 Lease Agreement, dated December 20, 1996 between the Company
and Cummings Property Management, Inc. Filed as Exhibit
10.22 to the Company's Registration Statement on Form S-1
(File No. 333-22945) and incorporated herein by reference.
10.23+ Research and License Agreement between the Company and
American Home Products Corporation acting through its
Wyeth-Ayerst Research Division dated July 3, 1997. Filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997 (File No. 000-21249) and
incorporated herein by reference.
10.24 Common Stock Purchase Agreement between the Company and
American Home Products Corporation Dated July 3, 1997. Filed
as Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997 (File No.
000-21429) and incorporated herein by reference.
10.25+ Second Amendment to Option Agreement and Research and
Development Agreement between the Company and Amersham
Pharmacia Biotech AB dated September 23, 1996. Filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997 (File No.
000-21429) and incorporated herein by reference.
10.26+ Third Amendment to Option Agreement and Research and
Development Agreement between the Company and Amersham
Pharmacia Biotech AB dated June 24, 1997. Filed as Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 (File No. 000-21429) and
incorporated herein by reference.
10.27* First Allonge to Promissory Note between the Company and
Eric B. Gordon dated July 16, 1997. Filed as Exhibit 10.3 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997 (File No. 000-21429) and
incorporated herein by reference.
10.28 Intentionally omitted.
10.29+ Research and Development Agreement between the Company and
Sankyo Co., Ltd. dated November 1, 1997. Filed as Exhibit
10.29 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, filed with the
Commission on March 17, 1998 (File No. 000-21429) and
incorporated herein by reference.
10.30+ Amendment No. 3 to Research & Development and License
Agreement between the Company and Abbott Laboratories dated
December 23, 1997. Filed as Exhibit 10.30 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 filed with the Commission on March 17,
1998 (File No. 000-21249) and incorporated herein by
reference.
</TABLE>
43
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
11.1 Statement re computation of per share net income (loss).
Filed herewith.
23.1 Consent of Price Waterhouse LLP. Filed herewith.
99.1 Important Factors Regarding Forward-Looking Statements.
Filed as Exhibit 99.1 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997 filed with
the Commission on March 17, 1998 (File No. 000-21249) and
incorporated herein by reference.
</TABLE>
- ---------------
* Indicates a management contract or compensatory plan.
+ Certain confidential material contained in the document has been omitted and
filed separately, with the Securities and Exchange Commission pursuant to Rule
406 of the Securities Act of 1933, as amended or Rule 246-2 of the Securities
and Exchange Act of 1934, as amended.
44
<PAGE> 1
EXHIBIT 11.1
ARQULE, INC.
STATEMENT RE COMPUTATION OF PER SHARE NET INCOME (LOSS)
Basic Net Income (Loss) Per Share
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
------------ ------------- -----------
<S> <C> <C> <C>
Net income (loss) $(2,252,000) $(2,993,000) $ 291,000
----------- ----------- -----------
Weighted average shares outstanding:
Common Stock 284,000 2,272,000 11,282,000
Weighted average common shares outstanding 284,000 2,272,000 11,282,000
----------- ----------- -----------
Basic net income (loss) per share $ (7.93) $ (1.32) $ 0.03
----------- ----------- -----------
</TABLE>
Diluted Net Income (Loss) Per Share
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss) $(2,252,000) $(2,993,000) $ 291,000
Weighted average shares outstanding:
Common Stock 284,000 2,272,000 11,282,000
Stock option common stock equivalents -- -- 1,057,000
Unvested restricted common stock equivalents -- -- 55,000
----------- ----------- -----------
Weighted average common shares and equivalents
outstanding 284,000 2,272,000 12,394,000
----------- ----------- -----------
Diluted net income (loss) per share $ (7.93) $ (1.32) $ 0.02
----------- ----------- -----------
</TABLE>
39
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 333-19469) pertaining to the 1996 Employee Stock
Purchase Plan, the Registration Statement on Form S-8 (File No. 333-25369)
pertaining to the 1996 Director Stock Option Plan and the Registration Statement
on Form S-8 (File No. 333-25371) pertaining to the Amended and Restated 1994
Equity Incentive Plan of ArQule, Inc., of our report dated February 9, 1998,
except as to the last paragraph of Note 2 which is as of April 17, 1998,
appearing on page 21 on this Form 10-K.
PRICE WATERHOUSE LLP
Boston, Massachusetts
April 17, 1998
40
