<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER: 000-21429
ARQULE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3221586
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
PRESIDENTIAL WAY, WOBURN, MASSACHUSETTS 01801
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(781) 994-0300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) of the Act:
(TITLE OF EACH CLASS) NAME OF EACH EXCHANGE ON WHICH REGISTERED
--------------------- -----------------------------------------
None None
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. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 8, 2000 was: $199,537,249.
There were 13,472,538 shares of the registrant's Common Stock outstanding
as of March 8, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement of the Registrant's 1999 Annual
Meeting of Shareholders to be held on May 18, 2000, 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, 1999, are
incorporated by reference into Part III of this Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PART I
ITEM 1. BUSINESS
ArQule seeks to bridge the gap between genomics and clinical development by
applying its proprietary technology platform and world class chemistry
capabilities to drug discovery. Recent advances in genomics and the rapid
progress in mapping the human genome are bringing about a revolution in
scientists' understanding of the molecular mechanisms of disease. Genomics has
created explosive growth in the number of new biological targets for the
development of drugs. Fulfilling the promise of genomics, however, will require
similar advances in the technology and systems used to design and test new
chemical compounds which interact with these targets. Since these chemical
compounds will become the medicines of the future, advances in chemistry
technologies hold the key to unlocking the value of genomics.
Major pharmaceutical companies need to bring three to five new drugs to
market each year to sustain expected growth and profitability. Historically,
researchers have needed to evaluate at least 10,000 compounds for each drug that
ultimately reaches the market. Even if drug candidates make it through discovery
research into the first phase of human trials, up to ninety percent of these
candidates fail to gain final approval. At this level of attrition, large
pharmaceutical companies will need to add 30 to 50 drug candidates per company
per year to their clinical development portfolios. Currently, the discovery
research required to identify a drug candidate takes an average of six years to
complete. It then takes an average of eight more years for the drug candidate to
move through clinical development to the marketplace. The average investment
required to bring a drug to the market, including the cost of failed candidates,
is estimated to be in the range of $350 to $500 million. Consequently, the cost
of failure is high.
The continued success of the pharmaceutical industry will depend on its
ability to significantly reduce the time and cost required to bring a drug to
market, to increase the number of candidates entering clinical development, and
to improve the success rate of clinical testing. ArQule has built an integrated
technology platform incorporating our proprietary AMAP Chemistry Operating
System, patented processes and world class chemistry capabilities to address
these critical needs of drug discovery.
THE DRUG DISCOVERY AND DEVELOPMENT PROCESS
[FLOW CHART]
1
<PAGE> 3
The drug discovery and development process depicted above includes three
major components:
Target Identification: The Role of Genomics
Until recently, pharmaceutical researchers were limited to studying
how approximately 400 biological targets interact with chemical compounds.
Targets are proteins or other large molecules that play a fundamental role
in the onset or progression of a particular disease. The number of
available biological targets is being vastly expanded through genomics.
Genomics is the science of identifying genes and their role in biological
processes, including disease and other medical conditions. Scientists now
use genomics to identify genes and the proteins they encode, including
proteins that may become drug discovery targets. Advances in genomics are
accelerating the process of target identification, thereby creating the
potential for a wealth of new targets for drug discovery.
Compound Discovery: From Target to Drug Candidate
The many potential targets identified through genomics are only the
beginning of the process of discovering a potential drug. Through a process
called target selection, scientists seek to confirm that a given target
plays an important role in a disease process. Having identified an
appropriate target, researchers identify chemical compounds that interact
with the target in a process known as lead generation. Lead qualification
is the process of selecting from a group of lead compounds those which have
sufficient drug-like characteristics to justify further evaluation. In a
process known as lead optimization, researchers seek to maximize the
likelihood of a given lead compound becoming a drug by minimizing or
eliminating those characteristics that might interfere with the desired
effect. Researchers must consider a number of factors in optimizing a lead
compound to become a clinical candidate, including effectiveness against
the target and specificity for that target, as well as the following
factors which are referred to by the acronym "ADMET":
- Absorption: whether the compound will be absorbed properly in the
body
- Distribution: once absorbed, how the compound will be distributed
throughout the body
- Metabolism: how the compound will change within the body
- Elimination: whether the compound will be removed from the body
in a harmless way
- Toxicity: whether the compound might be toxic to the body and cause
harmful side effects
Traditionally, researchers have optimized compounds for these various
factors in a largely serial process. For example, researchers have
optimized first for potency, followed by selectivity, and then for various
ADMET properties.
Drug Development: From Drug Candidate to Medicine
Following the discovery process, optimized lead compounds must undergo
pre-clinical and clinical development and regulatory approval. This lengthy
and expensive process can take ten years, with up to a 90% failure rate.
Unfortunately, a high proportion of the failures occur in the latter, most
expensive phases of the drug development process. For each approved drug,
the total cost of discovery and development, including the cost of failed
clinical candidates, is estimated to be between $350 and $400 million.
These high risks are justified by the ultimate potential reward -- a share
of the worldwide market for approved drugs, which in 1998 was approximately
$300 billion.
THE COMPOUND DISCOVERY CHALLENGE
We believe that significant advances are being made in the productivity of
the genomics and clinical development phases of drug discovery and development.
However, for these advances to fulfill their potential to improve the efficiency
of the overall drug discovery and development process, similar advances are
required in the compound discovery phase. ArQule believes that the traditional
compound discovery process is
2
<PAGE> 4
extremely inefficient and therefore represents a significant opportunity for
value creation. ArQule seeks to use its integrated technology platform to
overcome the following problems:
- DIFFICULTIES IN SELECTING TARGETS. The proliferation of targets will
trigger a need to select those targets that a researcher should pursue
further. The traditional approach to target selection encompasses a
variety of molecular biology techniques which can be time consuming and
labor intensive.
- POOR QUALITY OF INITIAL LEAD COMPOUNDS. Early in the discovery process,
researchers typically lack information about the potential for a lead
compound to become a drug candidate. Consequently, they cannot
efficiently determine or predict which compounds have a greater chance of
success or what changes can be made in the structure of a particular
compound to improve its chances for success. The problems caused by this
lack of information are intensified by the lack of diversity of the
compounds screened. As a result, researchers typically select a single
chemotype for further evaluation and optimization. A chemotype is a core
chemical structure around which families of chemical compounds with
similar structures can be created. If a particular chemotype proves
difficult to optimize and no other chemotype is available, researchers
may waste time and money pursuing related compounds with the same
chemotype, which will share the same problems. Early availability of
alternative chemotypes could increase the likelihood of success against a
particular target.
- INEFFICIENT LEAD OPTIMIZATION PROCESS. Because researchers conduct lead
optimization in sequential steps, rather than in parallel, the
traditional compound discovery process is long and expensive. In the
conventional lead optimization process, medicinal chemists analyze a lead
compound's structure and use their experience to suggest changes that
might produce the desired result for potency or an ADMET characteristic.
Because changes to a compound's structure that enhance one desired
feature of a compound may impair other desired features, the traditional,
sequential lead optimization process is very inefficient, time-consuming
and unpredictable.
The shortcomings in the current compound discovery process create two major
problems for pharmaceutical researchers. First, due in part to the lack of early
information about lead compounds and the lack of alternative chemotypes, very
few lead compounds meet the minimum criteria to become clinical candidates.
Second, of the lead compounds that meet the minimum criteria, too many are only
marginally acceptable clinical candidates and are therefore more likely to fail
during clinical development. Without improvements in this process, the current
failure rate of drug candidates will continue and there will not be enough new
drugs to fuel continued revenue and profit growth of the major pharmaceutical
companies.
THE ARQULE INTEGRATED SOLUTION
ArQule has built an integrated technology platform incorporating our
proprietary AMAP(TM) Chemistry Operating System, patented processes and world
class chemistry capabilities to bridge the gap between targets and clinical
candidates. Our technology provides the following benefits:
Our AMAP Chemistry Operating System allows us to perform high-throughput,
automated production of new chemical compounds.
The compound discovery process requires efficient production of a wide
range of chemical compounds. Lead generation requires a large number of
screening compounds; lead optimization requires the rapid creation of
structurally similar compounds, or analogs. The growth in available targets
emerging from genomics will only increase these needs. Our AMAP Chemistry
Operating System allows us to address these issues. The AMAP system forms the
foundation of our parallel synthesis approach to combinatorial chemistry and
consists of an integrated series of automated workstations that perform tasks
such as weighing and dissolution, chemical synthesis, thermally-controlled
agitation and reaction process development. The AMAP system also incorporates
purification, quality control, the ability to re-format libraries and the
ability to replicate libraries for multiple customers. Our proprietary Array
Information Management and Process Control Management System (AIMS/PCMS)
software controls and monitors the overall production process within the system.
The AIMS/PCMS software allows us to capture information about every compound in
the library, as well as to process this information and to audit test data.
3
<PAGE> 5
Our AMAP Chemistry Operating System is highly modular, which makes it easy
to expand production capacity and to add new capabilities. In addition, because
the AMAP Chemistry Operating System incorporates proprietary processes,
software, and equipment, and relies on highly trained operators, we believe that
duplication of the system by others would be difficult or impossible. We hold
U.S. and foreign patents, and have several pending patent applications, covering
various aspects of the AMAP Chemistry Operating System.
We deliver discrete compounds of known structure, high purity and in sufficient
quantity for lead optimization.
Our proprietary AMAP Chemistry Operating System and parallel synthesis
capabilities enable us to produce:
- Discrete Compounds with Known Structures. Parallel synthesis allows us
to produce hundreds of thousands of individual compounds of known
structure every year. Consequently, we can immediately link target
screening data to specific chemical structures, accelerating subsequent
steps in the discovery process.
- Compounds with High Levels of Purity. In 1999, the compounds in each of
our screening libraries were at least 85% pure, on average, with many
libraries exceeding 90% purity. The compounds in our lead optimization
libraries routinely exceed 90% purity, and in many cases, exceed 95%
purity. This high level of purity minimizes the incidence of inaccurate
test results in the screening and optimization processes.
- Sufficient Quantities of Each Compound Using Reproducible Methods. We
produce milligram quantities of each compound, which are large quantities
in comparison to the output of other combinatorial compound production
methods. This amount allows researchers to conduct extensive screening
and follow-up work without synthesizing additional quantities. Moreover,
in the event that additional amounts of a compound are required, we can
easily reproduce our compounds in relatively large, highly pure amounts
needed for the later stages of drug discovery.
We can quickly understand how large and small variations in the chemical
structure of a compound will alter its profile as a lead compound.
Our AMAP Chemistry Operating System has allowed us to create compound
libraries based on more than one hundred distinct chemotypes. We continue to add
more than 60 chemotypes to our compound libraries each year. The AMAP system
also allows us to produce thousands of analogs for each chemotype. Screening
these logically designed libraries results in data showing the relationship of
large and small changes in compound structure to activity. With this
structure-activity relationship data, we can rapidly design successive
generations of compounds to accelerate the identification of a lead compound
with improved performance.
We design and produce compound libraries with pre-selected characteristics for
increased likelihood of generating marketable drugs.
Our scientists select chemotypes based on our understanding of drug-like
characteristics and, in some cases, our knowledge of the targets. We then use
proprietary software to evaluate and select building blocks to add to the core
structures with the goal of creating compounds with the desired properties and
diversity.
Currently, certain chemical structures with drug-like characteristics
cannot be produced in high-throughput processes. Over the past several years, we
have enhanced our AMAP system to enable us to expand the range of chemical
structures with drug-like characteristics that we can produce in high-throughput
processes.
4
<PAGE> 6
We reduce screening costs by utilizing smaller, more focused libraries of
compounds.
To streamline the screening process, we have developed a method of
accessing the complete chemical diversity of our compound collection using a
proportionally representative subset called a Compass Array library. The Compass
Array(TM) library contains a subset of representative compounds from our full
Mapping Array(TM) libraries in the same proportions as they exist in the full
libraries. The results of screening the Compass Array library will direct
subsequent screening to those portions of the full library that are more likely
to contain active compounds for that target. This enables our customers, by
screening the approximately 50,000 compounds in our Compass Array library, to
rapidly identify the most promising chemotypes for further evaluation without
screening our full repository of over half a million compounds.
In addition, to the extent that structural information about a target is
known, our AMAP system permits the creation of specialized, focused arrays of
compounds biased toward that target. These libraries have the capability to
streamline the lead generation and qualification process by allowing
collaborators to focus on compounds most likely to be effective against the
target.
We can perform cost-efficient profiling of compounds for desirable drug
characteristics.
We are supplementing our AMAP system with profiling screens to assess ADMET
characteristics in parallel with compound creation during the lead optimization
process. By enhancing the throughput and automation of these screens, we will
improve the cost-efficiency of generating ADMET data. This will allow us to have
early access to ADMET characteristics of compounds. Early access to this data
will allow us to optimize compounds for multiple ADMET properties in parallel,
which will expedite the optimization process and help reduce late stage
failures. Moreover, the relatively small size of our Compass Array library makes
it feasible for us to obtain and store ADMET profiling data on all of the
compounds in the library. This ADMET profiling data will lead to informed
decisions as to which initial screening hits should be pursued for further
optimization.
We can use our diverse chemistries to assist in target selection.
We have created compound libraries consisting of small molecules which
interact with a significant number of disease targets. In circumstances where
researchers have identified interesting targets of unknown function, we can
provide libraries which will allow researchers to clarify the role of these
targets in disease. Using chemistry in this way also allows rapid initiation of
the lead optimization process based on the compounds which have been identified.
ARQULE'S STRATEGY
Using our proven technology platform and drug design expertise, we seek to
become the premier independent partner for lead generation, qualification and
optimization programs. We believe we can reduce the time and cost of the
compound discovery process and improve the quality of the compounds that advance
to the clinic. Our strategy includes the following:
- CONTINUE TO INVEST IN CORE TECHNOLOGIES. We will continue to design
improved compounds and to create libraries that streamline the process of
generating, qualifying and optimizing lead compounds. We believe we can
streamline these processes by (a) reducing the number of compounds that
need to be screened without sacrificing diversity, (b) providing early
structure-activity and ADMET data, and (c) performing optimization in
parallel rather than in the traditional serial process. We plan to
continue to build our drug discovery capabilities by developing our own
technologies and by in-licensing or acquiring complimentary technologies.
- BALANCE THE RISKS AND REWARDS OF DRUG DISCOVERY. We seek to balance risk
and reward over time by pursuing three types of collaborations with
different risk/reward profiles.
- Pharmaceutical Collaborations. We will continue to pursue
collaborations with pharmaceutical companies to provide near-term
revenues in the form of up-front payments and annual license
5
<PAGE> 7
fees. In comparison to typical biotechnology collaborations, these
collaborations offer lower long term royalties and milestones but higher current
cash flow.
- Biotechnology Collaborations. Our biotechnology collaborations offer
longer-term revenue potential, with a higher risk/reward profile. We
will seek to establish dedicated and focused partnerships with
companies that have a relatively large number of validated targets or
a strong proprietary position in a specific therapeutic area. In these
collaborations, we will seek to advance a compound through the
discovery process in conjunction with our partner on an equal cost-
sharing basis. We will then enter into commercialization agreements
with pharmaceutical company partners at an appropriate point in the
development process, sharing equally in future milestone and royalty
revenues with our biotechnology partner.
- Pursue In-House Drug Discovery. As the final part of our balanced
strategy, we plan to identify and in-license targets and to take these
compounds through the optimization process at our own risk and
expense. We would then out-license these optimized compounds as
clinical candidates to other companies in exchange for cash payments
plus potential milestone and royalty payments. We believe that
licensing drug candidates to outside companies at later stages of the
discovery process would make it possible to capture higher downstream
royalty rates for good clinical candidates.
ARQULE'S TECHNOLOGY
We offer solutions to the shortcomings of the compound discovery process
through our world class chemistry capabilities which integrate our scientific
personnel, proprietary computer informatics software, and customized robotic
workstations. Our AMAP Chemistry Operating System, which forms the foundation of
our technology, is a highly automated and integrated series of chemistry
workstations and processes designed to enable rapid, parallel generation of
thousands of novel, pure, diverse and spatially-addressed arrays of compounds.
The AMAP system represents the integration of proprietary and patented
technologies in seven areas that results in a consistent, well-defined,
well-monitored, reproducible and flexible process consisting of the following
steps:
- Library design
- Process chemistry
- Production
- Purification
- Quality control
- Culling and reformatting
- Replication
LIBRARY DESIGN. To design a library, we first select a chemotype that will
be represented within the library; the chemotype may be target-based or selected
to increase the diversity of the library. We select chemotypes based on input
from our scientists and scientific advisory board as well as information from
our collaborators, literature searches, and biological data. At this stage in
library design, we also identify the potential chemical components or building
blocks needed to create compounds in the library.
Our Library Design department uses proprietary ArQule Reactor(TM) and
MapMaker(TM) software to evaluate and then select those building blocks which
will create compounds with the desired properties and diversity. The software
then creates a virtual library of compounds resulting from the reaction of the
chosen building blocks. Our designers calculate the properties of these
compounds and assess their diversity. A resulting list of recommended building
blocks serves as the starting point for the Process Chemistry department.
6
<PAGE> 8
PROCESS CHEMISTRY. Before synthesizing an array of actual compounds, the
recommended building blocks must be qualified, and reaction conditions developed
by the Process Chemistry department. Using the list of recommended building
blocks from Library Design, the Process Chemistry department:
- assesses the solubility and reactivity of all building blocks;
- obtains full characterization of the resulting compounds;
- identifies optimal reaction conditions; and
- transitions the production process from bench-scale to an automated
process.
Our Process Chemistry department uses a series of automated workstations to
evaluate the solubility and reactivity of the building blocks. The automation
capabilities of the Process Chemistry department include the following
components:
- Small-Scale Weighing and Dissolution. Weighs and dissolves building
blocks and prepares racks of building block solutions for use in chemical
synthesis.
- Small-Scale Chemical Synthesis. Enables distribution of building blocks
to pre-defined reactors for multi-step chemical reactions.
- Reaction Workup. Removes catalysts, salts, bases, or other extraneous
elements of building blocks. Includes liquid-liquid extraction and
separation methods.
- Quality Control. Analyzes reaction products to confirm chemical
structure, yield and purity.
Once the building blocks and reaction conditions are optimized, the resulting
list of building blocks and synthetic protocols serves as the basis for
synthesis of the full library by the Production department.
PRODUCTION. Our Production department synthesizes libraries of compounds
using a series of automated workstations similar to those used in process
chemistry. Each workstation in the production process, however, has a higher
throughput capacity to support synthesis of a greater number of compounds.
The overall production process is controlled and monitored by our
proprietary Array Information Management and Process Control Management System
(AIMS/PCMS) software. With this software, we can track the production process
throughout synthesis, characterization, analysis, and final registration into
our library collection. In addition to controlling various aspects of the AMAP
system, the AIMS/PCMS software also collects and stores data in two databases,
one for storing information about compounds and a second for storing process
information and workstation audit data.
Following production, arrays are transferred to either our Quality Control
or Purification department. Some libraries need to be purified before Quality
Control, while other arrays move directly to Quality Control.
PURIFICATION. Our Purification department uses two separation methods to
purify compounds and confirm their structure. Using our proprietary PrepQule(TM)
method, all fractions from an HPLC run are collected and subjected to
flow-injection mass spectrometry analysis for identification of the fraction(s)
containing the desired compound. Using the commercially available
FractionLynx(TM) method, only those HPLC fraction(s) containing the expected
molecular weight are collected and analyzed by mass spectrometry.
Following identification of fractions containing desired product from
either method, samples are concentrated, quantified, reconstituted, and sent to
the Quality Control department for final analysis.
QUALITY CONTROL. Our Quality Control department develops the analytical
methods used to evaluate compound arrays and evaluates libraries as they arrive
from our Production and Purification departments. Once a library has arrived in
Quality Control, a sequence list is generated using the AIMS/PCMS software. This
list indicates which analytical method will be used to analyze the library and
interfaces with customized software that controls the liquid handling systems
enabling automated analyses. AIMS/PCMS software enables us to view quality
control data for individual compounds, plates, or entire libraries. The
AIMS/PCMS software also produces a customized report based on quality control
data. Data can be automatically compiled
7
<PAGE> 9
for all the plates in an array, a specific production run, a specific plate, or
for the original plates of building blocks.
CULLING AND REFORMATTING. Based on analytical results and purity selection
criteria, we may remove some compounds from an array. The AIMS/PCMS software
displays the analytical results for each compound in an array using color-coding
based on user defined thresholds to rapidly and efficiently select individual
compounds that should not be included in the array. Once we select individual
compounds to be culled, the plates are automatically reformatted. This
eliminates the spaces in the array formerly containing the undesired compounds.
REPLICATION. Following final quality control assessment, arrays that will
become part of our Mapping Array repository are sent to our Replication
department. Portions of each compound are removed from the master plates and
used to create sets of plates that are shipped to our collaborators. We then
replicate and store additional sets of plates in our cold room storage facility.
ARQULE'S COMPOUND DISCOVERY PRODUCTS
ArQule offers a range of products and services tailored to our customers'
needs for drug discovery assistance. Our products and programs provide solutions
for the lead generation, lead qualification and lead optimization components of
the compound discovery process. We focus on making the compound discovery
process more efficient, less expensive and more likely to result in better
clinical candidates. We believe that, while no single technology platform will
bridge the gap in the drug discovery process between genomics and the clinic,
the integration of multiple emerging technologies will result in major
efficiency gains. In the past, we focused primarily on production and licensing
of compound libraries. We intend to offer our range of products and services
both to customers who need assistance with a specific aspect of the discovery
process and to customers desiring a complete compound discovery solution. We
believe that our integrated technologies will enable our collaborators to
identify and optimize drug candidates in a faster, less-expensive and more
reliable way. The following diagram depicts the integration of our compound
discovery products.
Our Compound Discovery Products
[FLOW CHART]
8
<PAGE> 10
Mapping Array(SM) Program
We offer our Mapping Array libraries to our collaborators to screen against
their biological targets in order to identify lead compounds. Collaboration
partners can also use our Mapping Array libraries in conjunction with our
Compass Array library or our Target Biased Array libraries to screen compounds
in a more efficient and cost-effective way. We grant subscribers a non-exclusive
license for screening. We grant subscribers an exclusive license on active
compounds identified. We also use our Mapping Array libraries for our own
discovery programs.
Our Mapping Array program provides:
- LARGE NUMBERS OF HIGHLY PURE COMPOUNDS IN SPATIALLY ADDRESSABLE
ARRAYS. Using a combination of technologies including the AMAP Chemistry
Operating System, we produce significant numbers of highly pure, small,
drug-like compounds in spatially addressable arrays of 96-well plates
with a single compound in each well.
- HIGHLY ORGANIZED ARRAYS ALLOW RAPID SCREENING AND OPTIMIZATION. We
design Mapping Array compounds with systematic variation of diverse
building blocks on multiple scaffolds. As a result, each compound in the
array differs from adjacent compounds by a single structural
modification.
This allows structure-activity relationship data to be generated from
primary screening data. This patented, proprietary process allows
researchers to rapidly navigate through a logically organized series of
modifications to the core chemical structure of the compound and to
rapidly optimize active molecules.
- INCREASED CHEMICAL DIVERSITY EACH YEAR. Each year, we add 200,000 new
compounds to our Mapping Array repository, including 60 or more new
chemotypes.
Compass Array(SM) Program
We offer our Compass Array program to our collaborators as a focused and
streamlined approach to lead generation and qualification. We designed the
Compass Array library to identify rapidly those arrays contained within our
Mapping Array repository that warrant further evaluation without the need to
screen the entire compound library. Our Compass Array library contains
approximately 50,000 compounds representing a 12.5% subset of the entire
chemical diversity contained in our Mapping Array repository.
Compass Array Screening Advantage
[FLOW CHART]
Researchers can use screening results from the Compass Array library to
identify arrays from the Mapping Array repository that are of interest. We then
supply our collaborator with the arrays that they identify, which average 3,000
compounds per array. Further screening of these full arrays identifies
additional potent, selective compounds of interest. This process ensures that
the related compounds within any active
9
<PAGE> 11
chemotype have been tested and that the structure-activity relationship patterns
within the corresponding Mapping Array libraries have been thoroughly explored.
Directed Array(SM) Program for Lead Optimization
We offer Directed Array(TM) libraries for use in lead optimization. We
create Directed Array libraries as focused collections containing between 1,000
and 2,500 analogs of the lead compound. The collaborator receives each compound
in a single well format, and we arrange the library in accordance with our
patented, spatially-addressable array format to facilitate collection and
analysis of structure-activity relationship data. We also send information files
with each library that define the structures and molecular weights for all of
the compounds along with their exact location (plate, column, row) within the
array.
In the past, we have used the Directed Array program to take a lead
compound provided by our collaborator through a parallel process of systematic
structural modifications to enhance and maximize the potency of the compound. In
the future, we intend to offer a Directed Array program as part of an integrated
process for general lead optimization, which would seek to optimize a lead
compound for selectivity and ADMET criteria in addition to potency. Under this
proposed program, we envision taking a collaborator's lead compound through a
parallel process of systematic structural modifications and testing to select
and optimize many of the desired compound features, including potency,
selectivity and ADMET criteria. By using lead compounds derived from our
libraries, we anticipate that we will have greater flexibility in pursuing lead
optimization because:
- we will have more usable information about the structure of the compound;
- we will have easier access to analogs from our own libraries; and
- we will have greater knowledge of possible back-up compounds and
alternative structures generated from "hits" detected in our libraries
during the screening and lead generation and qualification process.
Target-Biased Array
We also intend to develop and offer specialized, focused arrays of
compounds biased toward particular targets. Under this program, we envision
collaborators providing us with information about their own proprietary targets
so that we can then use our expertise in combinatorial chemistry and library
building to assemble focused libraries of compounds most likely to have an
affinity for that target. These libraries would streamline the lead generation
and qualification process by allowing collaborators to focus on compounds most
likely to be effective against that target.
Custom Array Program
Our Custom Array program generates custom compound libraries based on
specifications provided by a collaborator. This results in compounds which are
exclusively available to an individual collaborator.
AMAP Technology Transfer
We offer our customers an option of licensing our AMAP Chemistry Operating
System on a non-exclusive basis, allowing them to produce their own
combinatorial libraries.
Two sizes of the AMAP Chemistry Operating System are available: a
large-scale AMAP Chemistry Operating System capable of producing more than
200,000 compounds per year; and a small-scale AMAP Chemistry Operating System
capable of producing between 50,000 and 100,000 compounds per year. Transfers of
both the large-scale and small-scale systems include equipment, training and
installation.
10
<PAGE> 12
OUR COLLABORATIONS
Pharmaceutical Collaborations
The following table summarizes our collaborations with pharmaceutical
companies.
<TABLE>
<CAPTION>
COMPANY PRODUCTS/SERVICES PROVIDED
- ------- --------------------------
<S> <C>
Pfizer........................ Technology transfer of AMAP Chemistry Operating System and
Custom Array libraries
Bayer......................... Custom Array libraries
American Home Products, Wyeth-
Ayerst Division............. Mapping Array and Directed Array libraries
Solvay Duphar................. Mapping Array and Directed Array libraries and a
non-exclusive license to our AMAP Chemistry Operating System
Monsanto/G.D. Searle.......... Mapping Array, Directed Array and Compass Array libraries
and lead optimization services
Sankyo........................ Mapping Array and Directed Array libraries
Johnson & Johnson............. Mapping Array libraries
Abbott Laboratories(1)........ Mapping Array and Directed Array libraries
Roche Bioscience(1)........... Directed Array libraries
</TABLE>
- ---------------
(1) The collaboration portion of these agreements ended in March 1999, but the
collaboration partner is still obligated to make payments upon the
achievement of specified milestones and to pay royalties on sales of drugs
that may result from the collaboration.
Pfizer. In July 1999, we entered into a four and one half year technology
acquisition agreement with Pfizer, Inc. We will manage and staff a dedicated
facility containing an AMAP Chemistry Operating System for Pfizer in Medford,
Massachusetts. The facility will produce Custom Array libraries exclusively for
Pfizer. In addition, we will train Pfizer staff to use our AMAP Chemistry
Operating System. At the end of the collaboration, Pfizer will receive a
non-exclusive license to the AMAP Chemistry Operating System. We expect to
receive up to $117 million dollars over the term of the agreement. We have
received a $16 million upfront payment and will potentially receive up to $27
million per year for compound production, technology access, and operating
costs. Pfizer will pay no milestones or royalties to us on compounds which they
develop and market.
Bayer. In October 1999, we entered into a three-year collaboration with
Bayer to produce Custom Array libraries. We received a $3 million upfront
payment and will receive up to an additional $27 million during the term of the
agreement in delivery and success fees. Bayer will pay no milestones or
royalties to us on compounds which they develop and market.
American Home Products, Wyeth-Ayerst Division. In July 1997, we entered
into an agreement with Wyeth-Ayerst Pharmaceuticals, a division of American Home
Products Corporation. Under this agreement, Wyeth-Ayerst subscribed to our
Mapping Array program and has committed to a minimum number of Directed Array
Programs. Wyeth-Ayerst made a $2 million equity investment in ArQule in June
1998. The total value of this agreement is up to $26.2 million in committed
payments. In addition, Wyeth-Ayerst has agreed to pay us development milestones
and royalties from the sales of products resulting from the collaboration.
Solvay Duphar. In November 1995, we entered into an agreement with Solvay
Duphar B.V. Under this agreement, Solvay subscribed to our Mapping Array and
Directed Array programs. Solvay has a non-exclusive license to our AMAP
Chemistry Operating System. The total value of the agreement is up to $17.5
million in committed payments. Solvay has also agreed to make additional
payments if we achieve certain development milestones and to pay royalties on
sales of any drugs that result from the relationship. In connection with this
collaboration, an affiliate of Solvay, Physica B.V., made a $7 million equity
investment.
11
<PAGE> 13
Monsanto. We entered into a five-year collaboration with Monsanto in
December 1996. Under this agreement, we provided Monsanto with access to our
Mapping and Directed Array programs for use in the development of agrochemicals.
In January 2000, we expanded the Monsanto collaboration to cover life science
applications, including pharmaceutical use by G.D. Searle, and extended the term
until 2002. We also agreed to provide Monsanto with Compass Array and Mapping
Array libraries through 2001 and Compass Array libraries only through 2002. We
also converted the Monsanto agrochemical Directed Array Program into a credit
for pharmaceutical lead optimization services. The total value of this agreement
is up to $12.7 million in committed payments. In addition, Monsanto has agreed
to pay us development milestones and royalties from the sales of products
resulting from the collaboration. In July 1998, we received a milestone payment
for a Mapping Array compound selected by Monsanto for entry into field trials.
Sankyo. In November 1997, we entered into an agreement with Sankyo
Company, Ltd. to discover and optimize drug candidates. Under the terms of the
agreement, Sankyo received a three-year subscription to our Mapping Array
program to discover new lead compounds. Sankyo has also committed to a minimum
number of Directed Array Programs during the term of the agreement. The total
value of the agreement is up to $9 million in committed payments. Sankyo has
also agreed to pay us developmental milestones and royalties resulting from
sales of any products resulting from this collaboration.
Johnson & Johnson. In December 1998, we entered into a four-year
collaboration with R.W. Johnson Pharmaceutical Research Institute, a division of
Johnson & Johnson, Inc., in which R.W. Johnson subscribed to our Mapping Array
program. During the term of the agreement, R.W. Johnson has committed to pay us
an aggregate of $8.1 million to deliver Mapping Array libraries. In addition,
R.W. Johnson has agreed to pay us developmental milestones and royalties from
sales of any products resulting from this collaboration.
Abbott Laboratories. In June 1995, we entered into an agreement with
Abbott Laboratories. Under this agreement, Abbott subscribed to our Mapping
Array programs. This collaboration was extended on two occasions and ended
successfully in March 1999. Abbott has agreed to pay us developmental milestones
and royalties from sales of any products resulting from this collaboration.
Roche Bioscience. In September 1996, we entered into an agreement with
Roche Bioscience. Under this agreement, we synthesized Directed Array compounds.
Our obligations under this agreement ended in March 1999. Roche has agreed to
pay us developmental milestones and royalties from sales of any products
resulting from this collaboration. In May 1999, we received a milestone payment
from Roche Bioscience for a Directed Array compound that was chosen for IND
enabling toxicology studies.
Biotechnology Collaborations
The following table summarizes our collaborations with biotechnology
companies:
<TABLE>
<CAPTION>
COMPANY AREA OF FOCUS
- ------- -------------
<S> <C>
ACADIA Pharmaceuticals, Inc. ..................... Cell-Based Assays
Genzyme Corporation............................... Cancer
Immunex Corporation............................... Inflammatory Disorders
Scriptgen Pharmaceuticals, Inc. .................. RNA/Protein Interaction
Genome Therapeutics Corp. ........................ Functional Genomic Targets
</TABLE>
Under these agreements, we provide the biotechnology companies with access
to our screening libraries and agree to collaborate with them to conduct drug
discovery research. We seek to partner with biotechnology companies because they
have access to a wealth of proprietary targets. We structure these agreements
differently from our collaborations with pharmaceutical companies.
In our collaborations to date, we have supplied our Mapping Array libraries
to our biotechnology partners under a material transfer and screening agreement
which permitted the partner to use our libraries to screen against a limited
number of their targets. If they identified and confirmed any active compounds,
we would enter into a research collaboration agreement to develop promising
compounds up to IND status. Under these
12
<PAGE> 14
agreements, we provided our partner with a chemistry resource for lead
generation, qualification and optimization and the partner typically provided
target discovery, screening and secondary testing of compounds. In this model,
each party bore its own costs through commercialization of the drug candidate.
After commercialization, we agreed to share all revenues equally with our
partner.
PATENTS AND PROPRIETARY RIGHTS
We have a number of issued U.S. and foreign patents, and numerous patent
applications in the U.S. and other countries. We depend, in part, on these
patents to protect our technology and products. We also rely upon our trade
secrets, know-how and continuing technological advances to develop and maintain
our competitive position. In an effort to maintain the confidentiality and
ownership of our trade secrets and proprietary information, we require our
employees and consultants to sign confidentiality and invention assignment
agreements. We intend these agreements to protect our proprietary information by
controlling the disclosure and use of technology to which we have rights. These
agreements also provide that we will own all the proprietary technology
developed at ArQule or developed using our resources.
COMPETITION
The biotechnology industry is highly competitive. Our services and products
face competition based on several factors, including size, diversity and ease of
use of compound libraries; speed and costs of identifying and optimizing
potential lead compounds; and patent position. We compete with many
organizations that are engaged in attempting to identify and optimize compounds.
They include biotechnology, pharmaceutical, agrochemical, combinatorial
chemistry and other companies; academic and scientific institutions;
governmental agencies; and public and private research organizations.
Smaller companies may also prove to be significant competitors,
particularly through arrangements with large corporate collaborators. In
addition to competition for our customers, these organizations also compete with
us in recruiting and retaining highly qualified scientific and management
personnel.
Historically, pharmaceutical and agrochemical companies have maintained
close control over their research activities, including the synthesis, screening
and optimization of chemical compounds. Many of these companies, which represent
a significant potential market for our products and services, are developing in-
house combinatorial chemistry and other methodologies to improve productivity,
including major investments in robotics technology to permit the automated
parallel synthesis of compounds. In addition, these companies may already have
large collections of compounds previously synthesized or ordered from chemical
supply catalogs or other sources against which they may screen new targets.
Other sources of compounds include extracts from natural products such as plants
and microorganisms and compounds created using rational design. Academic
institutions, governmental agencies and other research organizations are also
conducting research in areas in which we are working either on their own or
through collaborative efforts.
GOVERNMENT REGULATION
Our research and development processes involve the controlled use of
hazardous materials. Although we are subject to federal, state and local laws
and regulations governing the use, manufacture, storage, handling and disposal
of these materials and waste products, the license or sale of our products is
not subject to significant government regulations. Our future profitability,
however, depends on our collaborators selling pharmaceuticals and other products
developed from our compounds that may be subject to government regulation.
Virtually all pharmaceutical products developed by our collaborative
partners will require regulatory approval by governmental agencies prior to
commercialization. The nature and the extent to which these regulations apply to
our collaborative partners varies depending on the nature of their
pharmaceutical products. In particular, human pharmaceutical products are
subject to rigorous preclinical and clinical testing and other approval
procedures by the FDA and by foreign regulatory authorities. Various federal
and, in some cases, state statutes and regulations also govern or influence the
manufacturing, safety, labeling, storage, record keeping and marketing of these
pharmaceutical products. The process of obtaining these approvals and
13
<PAGE> 15
the subsequent compliance with appropriate federal and foreign statutes and
regulations are time consuming and require substantial resources.
Generally, in order to gain FDA approval, a company first must conduct
preclinical studies in the laboratory and in animal models to gain preliminary
information on a compound's efficacy and to identify any safety problems. The
results of these studies are submitted as a part of an IND that the FDA must
review before human clinical trials of an investigational drug can start. In
order to commercialize any products, we or our collaborator will be required to
sponsor and file an IND and will be responsible for initiating and overseeing
the clinical studies to demonstrate the safety and efficacy that are necessary
to obtain FDA approval. Clinical trials are normally done in three phases and
generally take many years, but may take longer, to complete. After completion of
clinical trials of a new product, FDA and foreign regulatory authority marketing
approval must be obtained. If the product is classified as a new drug, we or our
collaborator will be required to file an NDA and receive approval before
commercial marketing of the drug. The testing and approval processes require
substantial time and effort. NDAs submitted to the FDA can take several years to
obtain approval.
Even if FDA regulatory clearances are obtained, a marketed product is
subject to continual review. If and when the FDA approves any of our
collaborators' products under development, the manufacture and marketing of
these products will be subject to continuing regulation, including compliance
with current Quality Systems Regulations and Good Manufacturing Practices, known
as QSR/GMP, adverse event reporting requirements and prohibitions on promoting a
product for unapproved uses. Later discovery of previously unknown problems or
failure to comply with the applicable regulatory requirements may result in
restrictions on the marketing of a product or withdrawal of the product from the
market as well as possible civil or criminal sanctions.
For marketing outside the United States, we will be subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for pharmaceutical products. The requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursement vary widely from country to
country.
Fertilizers, pesticides and other agrochemical products sold by our
collaborators will also be subject to regulation.
EMPLOYEES
As of March 1, 2000, we employed 250 people of whom 84 have Ph.D. degrees.
111 of our employees were engaged in operations, 116 were engaged in research
and development and 23 were engaged in marketing and general administration.
None of our employees are covered by collective bargaining agreements. We
believe that we have good relations with our employees.
14
<PAGE> 16
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
Our current executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Dr. Stephen A. Hill.................... 41 President, Chief Executive Officer and
Director
Dr. Philippe Bey, Ph.D................. 57 Senior Vice President of Research and
Development and Chief Scientific Officer
David C. Hastings...................... 38 Vice President, Chief Financial Officer
and Treasurer
James N. Kyranos, Ph.D. ............... 38 Vice President, Systems Technologies
Anthony S. Messina..................... 53 Vice President, Human Development
Michael D. Rivard...................... 34 Vice President, Legal, General Counsel and
Assistant Secretary
John M. Sorvillo, Ph.D. ............... 45 Vice President, Business Development
Robert F. Tilton, Ph.D. ............... 42 Vice President, Information Management
</TABLE>
Stephen A. Hill, B.M., B.Ch., M.A., F.R.C.S. has served as our President
and CEO since April 1999. Prior to his employment with us, Dr. Hill was the Head
of Global Drug Development at F. Hoffmann-La Roche Ltd. He joined Roche in 1989
as Medical Adviser to Roche Products in the United Kingdom. He held several
senior positions there, including that of Medical Director, with responsibility
for clinical trials of compounds across a broad range of therapeutic areas,
including those of CNS, HIV, cardiovascular, metabolic, and oncology products.
Dr. Hill also served as Head of International Drug Regulatory Affairs at Roche
headquarters in Basel, Switzerland, where he led the regulatory submissions for
seven major new chemical entities globally. He also was a member of Roche's
Portfolio Management, Research, Development and Pharmaceutical Division
Executive Boards. Prior to Roche, Dr. Hill served for seven years with the
National Health Service in the United Kingdom, in General and Orthopedic
Surgery. Dr. Hill is a Fellow of the Royal College of Surgeons of England, and
holds his scientific and medical degrees from St. Catherine's College at Oxford
University.
Philippe Bey, Ph.D. has served as our Chief Scientific Officer and Senior
Vice President of Research and Development since August 1999. Dr. Bey has
previously held various senior management positions at Hoechst Marion Roussel
(HMR), Marion Merrell Dow, Inc. and Selectide, a combinatorial chemistry company
fully owned by HMR. While at HMR, he coordinated U.S. Research & Development
programs and participated in a task force that defined HMR's strategic plans. At
Marion Merrell Dow, where he served as Vice President of Global Research, he
designed research strategies to incorporate new technologies and internal
organizational competencies while improving productivity. Dr. Bey also served as
President of Selectide. Dr. Bey earned his BS and Ph.D. Chemistry qualifications
at the Louis Pasteur University in Strasbourg, France, and conducted
post-doctoral training at the California Institute of Technology in Pasadena.
David C. Hastings has served as our Vice President and Chief Financial
Officer since February 2000. Prior to his employment with us, Mr. Hastings was
Vice President and Corporate Controller at Genzyme, Inc. where he was
responsible for the management of the finance department. Prior to his
employment with Genzyme, Mr. Hastings was the Director of Finance at Sepracor,
Inc. where he was primarily responsible for Sepracor's internal and external
reporting. Mr. Hastings is a Certified Public Accountant and he received his BA
in Economics at the University of Vermont.
James N. Kyranos, Ph.D. has served as our Vice President of Systems
Technologies since September 1998 and prior to that was our Senior Director of
Analytical Chemistry. His responsibilities include the development of automated
workstations for high-throughput parallel synthesis of combinatorial libraries,
as well as high-throughput techniques for compound characterization and
purification. Prior to his employment with us, Dr. Kyranos was Director of
Analytical Chemistry at Biodevelopment Laboratories, Inc. and worked at Arthur
D. Little, Inc., where he was involved in conducting contract research in
support of pharmaceutical
15
<PAGE> 17
and agrochemical registration. Dr. Kyranos received his Ph.D. in Mass
Spectrometry with Professor Paul Vouros at Northeastern University and has a BA
in Chemistry and Biology from Boston University.
Anthony S. Messina has served as our Vice President of Human Development
since June 1999 when he joined us in 1997 and was promoted from Senior Director
of Human Development. His responsibilities include working with the senior
leadership team to ensure our culture is one in which each employee can develop
their skills and talents, contribute to the business in meaningful ways and be
recognized and rewarded appropriately for their contributions. Prior to joining
us, he was Vice President for Camden Consulting where he specialized in
executive coaching. Prior to that, he was Human Resources Manager for Varian
Associates. Mr. Messina received his BBA in management from the University of
Massachusetts.
Michael D. Rivard has served as our Vice President, Legal, General Counsel
and Assistant Secretary since 1997. Prior to his employment with us, he served
as Associate Counsel at the University of Massachusetts, where he was
responsible for legal matters relating to intellectual property, technology
transfer, and sponsored research for the five-campus University System. Prior to
his position at the University of Massachusetts, Mr. Rivard was employed as a
corporate attorney at the law firm of Palmer & Dodge LLP, practicing mainly in
the area of intellectual property law and corporate law for biotechnology
companies. He received his JD from the UCLA School of Law and his BA in
Biochemistry from Bowdoin College.
John M. Sorvillo, Ph.D. joined us as our as Vice President of Business
Development in 1995 after performing consulting services for us for several
months. Prior to his employment with us, Dr. Sorvillo was employed by Oncogene
Science, Inc., a biotechnology company, in a variety of positions, most recently
as Vice President and General Manager. Dr. Sorvillo attended the Massachusetts
Institute of Technology Program for Senior Executives. He received his Ph.D. in
Immunology from the New York University Medical Center and his BA in Biology
from the City University of New York, Hunter College.
Robert F. Tilton, Ph.D. joined us in 1997 and is our Vice President of
Information Management. Prior to his employment with us, Dr. Tilton was employed
at Bayer Inc. for nine years, where he was responsible for initiating and
developing a comprehensive and integrated group consisting of Structural
Biology, Protein Biochemistry, Computational Chemistry and Analytical Chemistry.
Prior to joining Bayer, Dr. Tilton was Assistant Professor in the Department of
Molecular Biology at Scripps Research Institute. Dr. Tilton received his
doctorate degree in pharmaceutical chemistry from the University of California
at San Francisco, under the direction of Professor I.D. Kuntz and did his
post-doctoral work in the laboratory of Professor G.A. Petsko in the Department
of Chemistry at the Massachusetts Institute of Technology.
ITEM 2. PROPERTIES
In November 1999, we moved our main operations to a new facility in Woburn,
Massachusetts, which includes approximately 128,000 square feet of laboratory
and office space. This facility was designed to our specific requirements and we
believe represents a state-of-the-art chemistry-based drug discovery facility.
We have a 15 year lease on these facilities, with options to extend the original
lease term by two additional five-year periods. Further, we have options to
expand our operations into approximately 130,000 square feet of additional space
to be constructed on an adjacent lot. We also have options to purchase the
entire building and the adjacent lot.
Our research facilities include approximately 68,000 square feet of
laboratory and office space in Medford, Massachusetts. We lease these facilities
under three lease agreements, one of which expires on July 30, 2000, one of
which expires on July 30, 2005 and one of which expires on July 30, 2006. We
believe our facilities are adequate for our current operations.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to stockholders for a vote during the fourth
quarter of 1999.
16
<PAGE> 18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
ArQule's Common Stock is traded on The NASDAQ Stock Market(R) under the
symbol "ARQL".
The following table sets forth, for the periods indicated, the range of the
high and low closing sale prices for ArQule's Common Stock:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1998
First Quarter............................................... 24.75 16.38
Second Quarter.............................................. 20.63 10.81
Third Quarter............................................... 13.25 4.22
Fourth Quarter.............................................. 7.38 4.50
1999
First Quarter............................................... 7.50 4.38
Second Quarter.............................................. 5.25 3.66
Third Quarter............................................... 7.06 4.25
Fourth Quarter.............................................. 11.13 5.13
2000
First Quarter (through March 8, 2000)....................... 37.50 8.25
</TABLE>
As of March 8, 2000, there were approximately 89 holders of record and
approximately 3,522 beneficial shareholders of our Common Stock.
We have never paid cash dividends on our Common Stock and we do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, will be retained for use in our
business.
17
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
The following data, insofar as it relates to the years 1995, 1996, 1997,
1998 and 1999, have been derived from ArQule's audited financial statements,
including the balance sheet as of December 31, 1998 and 1999 and the related
statements of operations and of cash flows for the three years ended December
31, 1999 and notes thereto appearing elsewhere in this Annual Report on Form
10-K. This 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 Annual Report
on Form 10-K. The historical results are not necessarily indicative of the
results of operations to be expected in the future. This data is in thousands,
except per share data.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................. $ 3,330 $ 7,255 $17,420 $22,193 $ 18,582
Cost and expenses:
Cost of revenue....................... 1,644 4,739 10,218 14,036 17,457
Research and development.............. 2,095 3,076 4,704 10,427 14,260
Marketing, general and
administrative..................... 1,557 2,850 4,670 6,387 6,022
------- ------- ------- ------- --------
Total costs and expenses...... 5,296 10,665 19,592 30,850 37,739
------- ------- ------- ------- --------
Loss from operations.................... (1,966) (3,410) (2,172) (8,657) (19,157)
Interest income (expense), net.......... (286) 417 2,463 2,195 1,724
------- ------- ------- ------- --------
Net income (loss)....................... $(2,252) $(2,993) $ 291 $(6,462) $(17,433)
======= ======= ======= ======= ========
Basic net income (loss) per share....... $ (7.93) $ (1.32) $ .03 $ (0.54) $ (1.38)
======= ======= ======= ======= ========
Weighted average common shares
outstanding -- basic.................. 284 2,272 11,282 12,031 12,606
======= ======= ======= ======= ========
Diluted net income (loss) per share... $ (7.93) $ (1.32) $ .02 $ (0.54) $ (1.38)
======= ======= ======= ======= ========
Weighted average common shares
outstanding -- diluted................ 284 2,272 12,394 12,031 12,606
======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities............................. $ 7,791 $37,086 $49,282 $33,870 $36,421
Working capital.......................... 5,074 31,440 46,023 35,546 17,371
Total assets............................. 10,190 43,509 66,925 60,480 77,346
Long-term debt........................... 911 1,728 1,213 306 10,700
Total stockholders' equity
(deficit).................... (1,000) 34,621 57,340 54,267 38,753
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are engaged in the production and development of novel chemical
compounds with commercial potential in the pharmaceutical, biotechnology,
bioseparations and agrochemical industries. We primarily manufacture arrays of
synthesized compounds for delivery to our customers for use in lead compound
generation and lead compound optimization activities. We also offer other
research and development services to meet the needs of our customers. In
addition, we have established a number of joint drug discovery
18
<PAGE> 20
programs with biotechnology companies and academic institutions, and pursue a
limited number of our own internal drug discovery programs.
We primarily generate revenue through our collaborative agreements for
production and delivery of compound arrays and other research and development
services. Under most of these collaborative agreements, we are also entitled to
receive milestone and royalty payments if the customer develops products
resulting from the collaboration. To date, we have received two milestone
payments and no royalty payments. In addition, we have not yet realized any
significant revenue from our joint discovery programs with biotechnology
companies and academic institutions, or from our internal drug discovery
programs. Quarterly variations in financial performance may be expected because
levels of revenue are dependent on expanding or continuing existing
collaborations, entering into additional corporate collaborations, receiving
future milestones and royalty payments, and realizing value from ongoing drug
discovery programs, all of which are difficult to anticipate.
We will continue to invest in technologies that enhance and expand our
capabilities in drug discovery. These continued investments in technology are
intended to enhance the novelty, diversity, and medical relevance of our
compound arrays and to augment the power and scope of our chemistry
capabilities. In addition to investments in technology, we may invest in
internal lead optimization programs with the goal of delivering clinical
candidates. In November 1999, we moved our main operations to a new facility in
Woburn, Massachusetts, which includes 128,000 square feet of laboratory and
office space. Investments of this nature may result in near term earnings
fluctuations or impact the magnitude of profitability or loss.
We have incurred a cumulative net loss of $34.5 million through December
31, 1999. Losses have resulted principally from costs incurred in research and
development activities related to our efforts to develop our technologies and
from the associated administrative costs required to support those efforts. Our
ability to achieve profitability is dependent on a number of factors, including
our ability to perform under our collaborations at the expected cost, expand or
continue existing collaborations, and realize value from the development and
commercialization of products in which we have an economic interest, all of
which are difficult to anticipate.
RESULTS OF OPERATIONS
Years Ended December 31, 1998 and 1999
Revenue. Revenue for 1999 decreased $3.6 million to $18.6 million from
$22.2 million for the same period in 1998. This decrease reflected the
completion of our collaborative agreements with Roche and Abbott, while not yet
recognizing significant revenues from the collaborative agreements entered into
with Pfizer and Bayer in 1999.
Cost of revenue. Cost of revenue for 1999 increased $3.5 million to $17.5
million from $14.0 million for the same period in 1998. This increase is
primarily attributable to the overhead and depreciation related to additional
facilities and scientific personnel and the necessary supplies and overhead
expenses related to the delivery of the Mapping Array and Directed Array sets
pursuant to our collaborative agreements, as well as charges related to the
relocation of our corporate headquarters in November 1999.
Research and development expenses. Research and development expenses for
1999 increased $3.9 million to $14.3 million from $10.4 million for the same
period in 1998. This increase is the result of our ongoing efforts to augment
and enhance our chemistry capabilities and related proprietary technologies.
Marketing, general and administrative expenses. Marketing, general and
administrative expenses for 1999 decreased $0.4 million to $6.0 million from
$6.4 million for the same period in 1998. This decrease is the result of a
reduction in the use of outside marketing and consulting services.
Net interest income. Net interest income for 1999 decreased $0.5 million
to $1.7 million from $2.2 million for the same period in 1998. Lower interest
income in 1999 resulted primarily from lower amounts available for investment in
1999.
19
<PAGE> 21
Net loss. The net loss for 1999 was $17.4 million as compared to a net
loss of $6.5 million for the same period in 1998. The net loss for 1999 is
primarily attributable to decreased revenue, increased expenditures as we
invested in new technologies to expand our drug discovery capabilities, and
charges related to the relocation of our headquarters.
Years Ended December 31, 1997 and 1998
Revenue. Revenue for 1998 increased $4.8 million to $22.2 million from
$17.4 million for the same period in 1997. 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 our collaborative agreements.
Cost of revenue. Cost of revenue for 1998 increased $3.8 million to $14.0
million from $10.2 million for the same period in 1997. The increase is
primarily attributable to the costs of additional facilities and scientific
personnel and the necessary supplies and overhead expenses related to the
performance of work and the delivery of the Mapping Array and Directed Array
sets pursuant to our collaborative agreements.
Research and development expenses. Research and development expenses for
1998 increased $5.7 million to $10.4 million from $4.7 million for the same
period in 1997. These increases are the result of our expansion of our chemistry
capabilities and related proprietary technologies.
Marketing, general and administrative expenses. Marketing, general and
administrative expenses for 1998 increased $1.7 million to $6.4 million from
$4.7 million for the same period in 1997. These increases are primarily
associated with increased marketing and business development activities, and
higher levels of administrative support in concert with our growth during 1998.
Net interest income. Net interest income for 1998 decreased $0.3 million
to $2.2 million from $2.5 million for the same period in 1997. Lower interest
income in 1998 resulted primarily from our need to utilize cash and marketable
securities balances to finance operations and capital additions.
Net income (loss). The net loss for 1998 was $6.5 million as compared to
net income of $0.3 million for the same period in 1997. The net loss for 1998 is
primarily attributable to increased expenditures as we invested in new
technologies to expand our drug discovery capabilities.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, we held cash, cash equivalents and marketable
securities with a value of $36.4 million. Our working capital at December 31,
1999 was $17.4 million. We have funded operations through December 31, 1999 with
sales of common stock, revenue from corporate collaborators and the utilization
of capital equipment lease financing. We have maintained a master lease
agreement since February 1994. Under the terms of this agreement, we funded
certain capital expenditures through leases with terms of 42 months. As of
December 31, 1999, we had utilized $4.5 million of the $8.5 million aggregate
amount available under this lease financing facility. On March 18, 1999, we
consummated a term loan agreement with Fleet National Bank to support our
facilities expansion. As of December 31, 1999 we had utilized $14.0 million of
the $15.0 million available under our term loan agreement with Fleet. We made
our first two principal payments of $0.4 million each during 1999.
Net cash provided by operating activities was $12.8 million in 1999. Net
cash used by operating activities was $7.6 million in 1998. Net cash provided by
operating activities was $0.6 million in 1997. The positive cash from operating
activities in 1999 primarily reflects payments received under our collaborative
agreements. The negative cash flow from operating activities primarily reflects
the net operating loss in 1998. The positive cash flow from operating activities
in 1997 primarily reflects payments received from corporate collaborators.
Net cash used by investing activities for the years ended December 31, 1999
and 1998 was $28.1 and $3.7 million, respectively, primarily from fixed asset
additions. Net cash used by investing activities during the year ended December
31, 1997 was $42.7 million, resulting primarily from the purchase of marketable
securities from the proceeds of public offering of our common stock.
20
<PAGE> 22
Net cash provided by financing activities for the years ended December 31,
1999, 1998 and 1997 was $13.8 million, $2.0 million and $20.7 million,
respectively. The increase in 1999 primarily reflects proceeds from borrowings
under the Fleet term loan, the increase in 1998 primarily reflects proceeds from
the $2.0 million equity investment by American Home Products Corporation and the
increase in 1997 primarily reflects proceeds from our April 1997 follow-on
public offering of our common stock.
We expect that our available cash and marketable securities, together with
operating revenues and investment income, will be sufficient to finance our
working capital and capital requirements for the foreseeable future. Our cash
requirements may vary materially from those now planned depending upon the
results of our drug discovery and development strategies, our ability to enter
into any additional 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. We can not guarantee that we will be able to
obtain additional customers for our products and services, or that our products
and services will produce revenues adequate to fund our operating expenses. If
we experience increased losses, we may have to seek additional financing from
the public or private sale of our securities, including equity securities. There
can be no assurance that additional funding will be available when needed or on
acceptable terms.
YEAR 2000 COMPLIANCE
We did not experience significant Year 2000 compliance issues with our
internal systems. We established a project team to address Year 2000 risks. We
also initiated various information technology enhancement projects intended to
improve access to and dissemination of scientific and business information
throughout our company to enhance development and operational efficiencies. As
the costs associated with these initiatives were part of our continuing
improvement process, they were recognized as incurred in 1999.
We do not currently have any formal information concerning Year 2000
compliance status of our customers and suppliers but we have received
indications that most of our significant customers and suppliers successfully
achieved Year 2000 compliance.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities", was issued,
which establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. We are required to adopt SFAS No. 133, as amended by SFAS
No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Dates of FASB Statement 133," on a
prospective basis for interim periods and fiscal years beginning January 1,
2001. Had we implemented SFAS No. 133 in the current period, financial position
and results of operations would not have been affected.
SEC Staff Accounting Bulletin No. 100, "Restructuring and Impairment
Charges," issued in November 1999, expresses views of the Staff regarding the
accounting for and disclosure of certain expenses commonly reported in
connection with exit activities and business combinations. This includes accrual
of exit and employee termination costs pursuant to Emerging Issues Task Force
(EITF) Issues No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring), and No. 95-3, Recognition of Liabilities in Connection with
a Purchase Business Combination, and the recognition of impairment charges
pursuant to Accounting Principles Board (APB) Opinion No. 17, Intangible Assets,
and Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," issued in December 1999, summarizes certain of the Staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. The statements in the staff accounting bulletins represent
interpretations and practices followed by the Division of Corporation Finance
and the Office of the Chief Accountant in administering the disclosure
requirements of the Federal securities laws.
21
<PAGE> 23
We are currently reviewing the impact of this pronouncement and these Staff
Accounting Bulletins on us.
FACTORS AFFECTING FUTURE OPERATING RESULTS
Our future operating results could differ materially from the results
described above due to the risks and uncertainties described in exhibit 99.1 to
this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In January 1997, the Securities and Exchange Commission issued Financial
Reporting Release No. 48, which expands the disclosure requirements for certain
derivatives and other financial instruments. We entered into an interest rate
swap agreement with Fleet National Bank primarily to reduce the impact of
changes in interest rates on our term loan agreement. The impact on our
financial position and results of operations from likely changes in interest
rates is not material as our hedging of transactions is limited to this specific
liability.
See Notes 2 and 7 to the Consolidated Financial Statements for a
description of the Company's use of derivatives and other financial instruments.
The carrying amounts reflected in the consolidated balance sheet of cash and
cash equivalents, trade receivables, and trade payables approximates fair value
at December 31, 1999 due to the short-term maturities of these instruments.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... 23
Consolidated Balance Sheet at December 31, 1998 and 1999.... 24
Consolidated Statement of Operations for the three years
ended December 31, 1999................................... 25
Consolidated Statement of Stockholders' Equity for the three
years ended December 31, 1999............................. 26
Consolidated Statement of Cash Flows for the three years
ended December 31, 1999................................... 27
Notes to Consolidated Financial Statements.................. 29
Consolidated Financial Statement Schedules:
Schedules are not included because they are not applicable
or the information is included in the Notes to
Consolidated Financial Statements
</TABLE>
22
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of ArQule, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of ArQule, Inc.
and its subsidiary at December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. 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 auditing standards generally accepted in the
United States 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 a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
January 27, 2000
23
<PAGE> 25
ARQULE, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
--------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,780 $ 4,208
Marketable securities..................................... 28,090 32,213
Accounts receivable....................................... 3,028 2,529
Accounts receivable -- related party...................... 2,680 1,424
Inventory................................................. 526 486
Prepaid expenses and other current assets................. 869 579
Notes receivable from related parties..................... 30 --
-------- --------
Total current assets.............................. 41,003 41,439
Property and equipment, net................................. 17,821 34,093
Other assets................................................ 1,656 1,814
-------- --------
$ 60,480 $ 77,346
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations.............. $ 907 $ 316
Current portion of long term debt......................... -- 2,525
Accounts payable and accrued expenses..................... 2,094 5,719
Deferred revenue.......................................... 2,456 15,508
-------- --------
Total current liabilities......................... 5,457 24,068
Capital lease obligations................................... 306 --
Deferred revenue............................................ 450 3,825
Long term debt.............................................. -- 10,700
-------- --------
Total liabilities................................. 6,213 38,593
-------- --------
Commitments (Note 11)....................................... -- --
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; no shares issued or outstanding............ -- --
Common stock, $0.01 par value; 30,000,000 shares
authorized; 12,171,335 and 12,864,225 shares issued and
outstanding at December 31, 1998 and 1999,
respectively........................................... 122 129
Additional paid-in capital................................ 71,432 73,167
Accumulated deficit....................................... (17,105) (34,538)
-------- --------
54,449 38,758
Deferred compensation..................................... (182) (5)
-------- --------
Total stockholders' equity........................ 54,267 38,753
-------- --------
$ 60,480 $ 77,346
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE> 26
ARQULE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
------- ------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Revenue
Compound development revenue.............................. $13,840 $11,868 $ 9,421
Compound development revenue -- related party............. 3,580 10,325 9,161
------- ------- --------
17,420 22,193 18,582
------- ------- --------
Costs and expenses:
Cost of revenue........................................... 8,039 7,506 8,851
Cost of revenue -- related party.......................... 2,179 6,530 8,606
Research and development.................................. 4,704 10,427 14,260
Marketing, general and administrative..................... 4,670 6,387 6,022
------- ------- --------
19,592 30,850 37,739
------- ------- --------
Loss from operations................................... (2,172) (8,657) (19,157)
Interest income............................................. 2,686 2,364 1,915
Interest expense............................................ (223) (169) (191)
------- ------- --------
Net income (loss)...................................... $ 291 $(6,462) $(17,433)
======= ======= ========
Basic net income (loss) per share........................... $ .03 $ (0.54) $ (1.38)
======= ======= ========
Weighted average common shares outstanding -- basic......... 11,282 12,031 12,606
======= ======= ========
Diluted net income (loss) per share......................... $ .02 $ (0.54) $ (1.38)
======= ======= ========
Weighted average common shares outstanding -- diluted....... 12,394 12,031 12,606
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE> 27
ARQULE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------------- PAID-IN ACCUMULATED DEFERRED STOCKHOLDERS'
SHARES PAR VALUE CAPITAL DEFICIT COMPENSATION EQUITY
---------- --------- ---------- ----------- ------------ -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996........................ 9,851,487 $ 99 $46,102 $(10,934) $(646) $ 34,621
Cancellation of unvested
portion of restricted stock
stock upon employee
termination................. (48,444) -- --
Stock option exercises........ 133,374 1 352 353
Employee stock purchase
plan........................ 9,173 -- 110 110
Issuance of common stock in
connection with secondary
public offering, net of
issuance costs of $1,645.... 1,932,500 19 21,526 21,545
Compensation related to the
grant of common stock
options..................... 328 (328) --
Amortization of deferred
compensation................ 420 420
Net income.................... 291 291
---------- ---- ------- -------- ----- --------
Balance at December 31,
1997........................ 11,878,090 119 68,418 (10,643) (554) 57,340
Stock option exercises........ 134,639 1 793 794
Employee stock purchase
plan........................ 53,619 1 381 382
Issuance of common stock in
connection with American
Home Products investment in
ArQule, Inc................. 104,987 1 1,999 2,000
Compensation related to the
grant of common stock
options..................... (159) 159 --
Amortization of deferred
compensation................ 213 213
Net loss...................... (6,462) (6,462)
---------- ---- ------- -------- ----- --------
Balance at December 31,
1998........................ 12,171,335 122 71,432 (17,105) (182) 54,267
Stock option exercises........ 536,473 5 888 893
Employee stock purchase
plan........................ 156,417 2 538 540
Compensation related to the
grant of common stock
options..................... 309 (309) --
Amortization of deferred
compensation................ 486 486
Net loss...................... (17,433) (17,433)
---------- ---- ------- -------- ----- --------
Balance at December 31,
1999........................ 12,864,225 $129 $73,167 $(34,538) $ (5) $ 38,753
========== ==== ======= ======== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 28
ARQULE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net income (loss)........................................ $ 291 $ (6,462) $(17,433)
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 2,580 4,620 7,690
Amortization of deferred compensation................. 420 213 486
(Increase) decrease in accounts receivable............ (2,883) (2,575) 1,755
(Increase) decrease in inventory...................... (953) 427 40
(Increase) decrease in prepaid expenses and other
current assets...................................... (182) (349) 290
Increase in other assets.............................. (17) (1,500) (158)
Decrease in notes receivable from related parties..... 176 197 30
Increase (decrease) in accounts payable and accrued
expenses............................................ 1,695 (710) 3,625
Increase (decrease) in deferred revenue............... (519) (1,488) 16,427
-------- -------- --------
Net cash provided by (used in) operating
activities....................................... 608 (7,627) 12,752
-------- -------- --------
Cash flows from investing activities:
Purchases of marketable securities....................... (61,447) (44,109) (57,731)
Proceeds from sale or maturity of marketable
securities............................................ 27,802 50,164 53,608
Additions to property and equipment...................... (9,085) (9,787) (23,962)
-------- -------- --------
Net cash used in investing activities............... (42,730) (3,732) (28,085)
-------- -------- --------
Cash flows from financing activities:
Principal payments of capital lease obligations.......... (1,335) (1,174) (897)
Borrowings of long term debt............................. -- -- 14,000
Principal payments of long term debt..................... -- -- (775)
Proceeds from issuance of common stock, net.............. 22,008 3,176 1,433
-------- -------- --------
Net cash provided by financing activities........... 20,673 2,002 13,761
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... (21,449) (9,357) (1,572)
Cash and cash equivalents, beginning of period............. 36,586 15,137 5,780
-------- -------- --------
Cash and cash equivalents, end of period................... $ 15,137 $ 5,780 $ 4,208
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE> 29
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations of $856 were incurred in 1997 when the Company
entered into leases for various machinery and equipment, furniture and fixtures,
and leasehold improvements.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
During 1997, 1998 and 1999 the Company paid approximately $223, $169 and
$191, respectively, for interest expense.
28
<PAGE> 30
ARQULE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION AND NATURE OF OPERATIONS
ArQule, Inc. is engaged in the discovery, development and production of
novel chemical compounds primarily for the pharmaceutical, biotechnology and
agrochemical industries. Our 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 drug development and product development candidates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of these
financial statements are as follows:
Basis of Consolidation
The consolidated financial statements include the accounts of ArQule, Inc.
and its majority-owned subsidiary ArQule Catalytics, Inc., which was
incorporated in February 1998 (collectively, "we", "us", "our" and the
"Company"). All intercompany transactions and balances have been eliminated.
Cash Equivalents and Marketable Securities
We consider all highly liquid investments purchased within three months of
maturity date to be cash equivalents. We invest our available cash primarily in
money market mutual funds and U.S. government and other investment grade debt
securities that have strong credit ratings. These investments are subject to
minimal credit and market risks. At December 31, 1998 and 1999, we have
classified these investments as available-for-sale.
Fair Value of Financial Instruments
At December 31, 1998 and 1999, our financial instruments consist of cash,
cash equivalents, marketable securities, accounts receivable, notes receivable
from a related party, accounts payable and accrued expenses. The carrying
amounts 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 and from licensing of compound arrays. Revenue from
collaborative agreements includes the delivery of compounds and compound
development work 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. Revenue from compound delivery also includes
technology transfer fees and fees realized based on the achievement of
production levels. Since the technology transfer fees are included in agreements
that also include compound delivery, the technology transfer fees are recognized
ratably upon the commencement of delivery. Contingent fees related to the
achievement of production levels are recognized when such levels are
29
<PAGE> 31
ARQULE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
achieved. Payments received under these arrangements prior to the completion of
the related work are recorded as deferred revenue.
Cost of Revenue
Cost of revenue represents the actual costs incurred in connection with
performance pursuant to collaborative agreements and the costs incurred to
develop and produce compound arrays. These costs consist primarily of payroll
and payroll-related costs, chemicals, supplies and overhead expenses.
Research and Development Costs
Research and development costs are expensed as incurred.
Stock Compensation
Options granted to employees 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. We have adopted the disclosure
requirements of Statement of Financial Accounting Standards 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, consisting only of raw materials, comprises costs associated
with our 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.
Segment Data
We are principally engaged in one industry segment. We also operate
principally in one geographic location, the United States. See Note 12 with
respect to significant customers.
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 1997 and 1998 financial
statements to conform to the 1999 presentation. These reclassifications had no
effect on the net income for 1997 or the net loss for 1998.
Earnings (Loss) Per Share
We compute and report earnings per share in accordance with the provisions
of SFAS No. 128, "Earnings Per Share". The computations of basic and diluted
earnings (loss) per common share are based upon the weighted average number of
common shares outstanding and potentially dilutive securities. Potentially
dilutive securities include stock options and warrants. Stock options for the
purchase of 2,338,586 and 2,604,493 shares of common stock were not included in
the 1998 and 1999 computation of diluted net loss
30
<PAGE> 32
ARQULE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
per share, respectively, because inclusion of such shares would have an
anti-dilutive effect on net loss per share.
Recent Accounting Pronouncements
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", was issued, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. We are required to
adopt SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Dates of FASB
Statement 133," on a prospective basis for interim periods and fiscal years
beginning January 1, 2001. Had we implemented SFAS No. 133 in the current
period, financial position and results of operations would not have been
affected.
SEC Staff Accounting Bulletin No. 100, "Restructuring and Impairment
Charges," issued in November 1999, expresses views of the Staff regarding the
accounting for and disclosure of certain expenses commonly reported in
connection with exit activities and business combinations. This includes accrual
of exit and employee termination costs pursuant to Emerging Issues Task Force
(EITF) Issues No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring), and No. 95-3, Recognition of Liabilities in Connection with
a Purchase Business Combination, and the recognition of impairment charges
pursuant to Accounting Principles Board (APB) Opinion No. 17, Intangible Assets,
and Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," issued in December 1999, summarizes certain of the Staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. The statements in the Staff Accounting Bulletins represent
interpretations and practices followed by the Division of Corporation Finance
and the Office of the Chief Accountant in administering the disclosure
requirements of the Federal securities laws.
We are currently reviewing the impact of this pronouncement and these Staff
Accounting Bulletins on us.
3. RELATED PARTIES
We have entered into a number of license, research and development
agreements (the "Agreements") with corporate collaborators. Two agreements were
entered into with Solvay Duphar B.V. ("Solvay") and Wyeth-Ayerst
Pharmaceuticals, a division of American Home Products Corporation
("Wyeth-Ayerst"). Revenue related to the Solvay Agreement is included in
compound development revenue -- related party from 1997 through 1999. In 1998,
Wyeth-Ayerst became a related party. Solvay and Wyeth-Ayerst are related parties
as they each have a representative on our Board of Directors.
4. CASH EQUIVALENTS AND MARKETABLE SECURITIES
The following is a summary of the fair market value of available-for-sale
marketable securities we held at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
MATURITY 1998 1999
------------- ------- -------
<S> <C> <C> <C>
U.S. Government obligations.............. Within 1 year $ 2,002 $ 3,950
Corporate bonds.......................... Within 1 year 26,088 28,263
------- -------
$28,090 $32,213
======= =======
</TABLE>
At December 31, 1998 and 1999, marketable securities are carried at
amortized cost, which approximates fair market value. All of our marketable
securities are classified as current at December 31, 1998 and 1999 as the funds
are highly liquid and are available to meet working capital needs and to fund
current operations.
31
<PAGE> 33
ARQULE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Gross unrealized gains and losses on sales of securities for the years ended
December 31, 1998 and 1999 were not significant.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
USEFUL LIFE DECEMBER 31,
ESTIMATED ------------------
(YEARS) 1998 1999
----------- ------- -------
<S> <C> <C> <C>
Machinery and equipment...................... 5 $ 9,083 $12,423
Leasehold improvements....................... 3-15 9,548 28,050
Furniture and fixtures....................... 7 606 1,651
Computer equipment........................... 3 4,527 6,747
Construction-in-progress..................... -- 3,125 1,980
------- -------
26,889 50,851
------- -------
Less -- accumulated depreciation and
amortization............................... 9,068 16,758
------- -------
$17,821 $34,093
======= =======
</TABLE>
Assets held under capital leases at December 31, 1998 and 1999 consisted of
$1,900 of machinery and equipment, $1,785 of leasehold improvements, $703 in
computer equipment and $107 of furniture and fixtures. Accumulated amortization
of these assets totaled $3,290 and $4,179 at December 31, 1998 and 1999,
respectively. For the years ended December 31, 1997, 1998 and 1999, amortization
expense related to assets held under capital lease obligations was $1,198,
$1,083 and $889, respectively. Total depreciation and amortization expense for
the years ended December 31, 1997, 1998 and 1999, was $2,580, $4,620 and $7,690,
respectively.
Included in the above amounts of Property and Equipment is interest which
was capitalized in accordance with the provisions of Statement of Financial
Accounting Standards No. 34 ("SFAS 34"), "Capitalization of Interest Costs".
Interest is capitalized by applying an interest rate to the average amount of
accumulated expenditures for an asset during a period which we have borrowings.
Accordingly, we capitalized $440 of interest costs during 1999.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1999
------ ------
<S> <C> <C>
Accounts payable........................................... $ 818 $3,636
Accrued payroll............................................ 916 944
Accrued professional fees.................................. 360 264
Accrued lease termination.................................. -- 800
Other accrued expenses..................................... -- 75
------ ------
$2,094 $5,719
====== ======
</TABLE>
7. DEBT
In March 1999, we entered into a term loan agreement with Fleet National
Bank ("Fleet"). The terms of this agreement allow for borrowings up to a maximum
of $15,000 based on 80% of qualifying property and equipment purchases, provided
that we comply with certain covenants, including the maintenance of specified
financial ratios. Borrowings under this facility are classified as either
"Tranche A" (term loans entered into
32
<PAGE> 34
ARQULE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
before June 30, 1999) or "Tranche B" (term loans entered into between July 1,
1999 and June 30, 2000). Principal amounts due are payable in 16 equal quarterly
installments beginning on September 30, 1999 and September 30, 2000 for "Tranche
A" and "Tranche B" borrowings, respectively. Interest payments are made monthly
in arrears beginning on the first day of the month following commencement of
this agreement and accrues at 7.94% and 7.92% at December 31, 1999 for "Tranche
A" and "Tranche B", respectively. We entered into an interest rate swap
agreement with Fleet primarily to reduce the impact of changes in interest rates
on our term loan agreement. At December 31, 1999, we had an interest rate swap
with a notional amount of $6.2 million. Under this agreement, we will pay Fleet
interest at a weighted average fixed rate of 7.94%. Settlement accounting is
used for this interest rate swap which expires in June 2003. The impact on our
financial position and results of operations from likely changes in interest
rates is not material as our hedging of transactions is limited to this specific
liability. As of December 31, 1999, we had borrowed $6,200 and $7,800 of
"Tranche A" and "Tranche B" loans, respectively, and has a total outstanding
balance of $13,225. This facility is collateralized by all of our property and
equipment.
On February 23, 1994, we entered into a lease line agreement with
BankBoston allowing for eligible equipment purchases of up to $8,500. Based on
the terms of the agreement, each lease extends for a period of forty-two equal
monthly payments. At December 31, 1999, we had $4,000 available for future
purchases.
Our principal amounts due under the term loan agreement are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, TRANCHE A TRANCHE B
------------ --------- ---------
<S> <C> <C>
2000................................................ $1,550 $ 975
2001................................................ 1,550 1,950
2002................................................ 1,550 1,950
2003................................................ 775 1,950
2004................................................ -- 975
------ ------
Total payments due............................... $5,425 $7,800
====== ======
</TABLE>
8. STOCKHOLDERS' EQUITY
Preferred Stock
We are authorized to issue up to 1.0 million shares of preferred stock. As
of December 31, 1998 and 1999 there were no outstanding shares of preferred
stock. Our Board of Directors will determine the terms of the preferred stock if
and when the shares are issued.
Common Stock
Our amended Certificate of Incorporation authorized the issuance of up to
30 million shares of $0.01 par value common stock.
On April 4, 1997, we 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.
At December 31, 1999, we have 3,337,604 common shares reserved for purchase
of common stock under the Employee Stock Purchase Plan and for the exercise of
common stock options pursuant to the Equity Incentive Plan and the 1996
Directors Plan.
9. STOCK OPTION PLANS
During 1998, our 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
33
<PAGE> 35
ARQULE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
awards under the Equity Incentive Plan to 4,700,000. All shares are awarded at
the discretion of our Board of Directors 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 our common stock at the date of the grant, and the option term may not
exceed ten years. For holders of 10% or more of our 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,
1999, no stock appreciation rights have been issued. At December 31, 1999, there
were 899,913 shares available for future grant under the Equity Incentive Plan.
Subject to the restrictions above, the Board of Directors 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 our annual meeting of
stockholders, 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
our 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, 1999, options to purchase 79,500 shares of common stock have been
granted under this plan of which 74,500 shares are currently exercisable. A
maximum of 125,000 shares of our common stock is reserved for issuance in
accordance with the terms of this plan, of which 45,500 shares are available for
future grant as of December 31, 1999.
We apply APB No. 25 and related interpretations in accounting for employee
grants under the Equity Incentive Plan. No compensation expense has been
recognized under the Equity Incentive Plan 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, our 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,
-----------------------------------
1997 1998 1999
------- ------------ --------
<S> <C> <C> <C>
Pro forma net loss........................ $(2,583) $(13,217) $(21,746)
Pro forma basic and diluted net loss per
share................................... $ (0.23) $ (1.10) $ (1.73)
</TABLE>
Valuation of Stock Plans
During 1998 and 1999, we issued 45,500 and 45,500 options, respectively, to
certain members of our Scientific Advisory Board (SAB) under the Equity
Incentive Plan. In 1999, 18,000 shares were cancelled. A total of $182 and $5 at
December 31, 1998 and 1999, respectively, was recorded as deferred compensation
and is being amortized as compensation expense over the vesting period of the
options. Compensation expense in 1998 and 1999 was $213 and $486, 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. 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, 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.
34
<PAGE> 36
ARQULE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The model was calculated using the following weighted-average assumptions: no
dividend yield for all years; 50% volatility for 1997, and 75% volatility for
1998 and 1999 for nonemployee grants and employee grants; risk-free interest
rates of 6.0% in 1997 and 1998, 5.46% in 1999; expected lives of 4 years in
1997, 1998 and 1999 for options granted.
Option activity under the Plans for the three years ended December 31, 1999
was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
STOCK OPTIONS OF SHARES PRICE
------------- ---------- --------
<S> <C> <C>
Outstanding at December 31, 1996...................... 1,272,670 $ 3.72
Granted............................................... 1,016,412 16.62
Exercised............................................. (133,374) 2.64
Cancelled............................................. (44,456) 9.57
----------
Outstanding at December 31, 1997...................... 2,111,252 9.87
Granted............................................... 1,606,265 9.06
Exercised............................................. (134,639) 5.90
Cancelled............................................. (1,244,292) 15.25
----------
Outstanding at December 31, 1998...................... 2,338,586 6.68
Granted............................................... 1,043,005 4.65
Exercised............................................. (536,473) 1.67
Cancelled............................................. (243,125) 7.36
----------
Outstanding as of December 31, 1999................... 2,601,993 $ 6.84
==========
Exercisable at December 31, 1999...................... 990,391 $ 9.06
==========
Weighted average estimated value of options granted
during the year ended December 31, 1999............. $ 3.28
</TABLE>
The following table summarizes information about options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS 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 1999 LIFE PRICE 1999 PRICE
- ------------------------ -------------- ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$ 0.0000 -- 2.4000.............. 51,625 5.7 $ 1.05 46,749 $ 0.95
2.4001 -- 4.8000.............. 765,500 8.1 4.47 114,000 4.09
4.8001 -- 7.2000.............. 1,325,266 8.1 5.21 438,790 5.35
9.6001 -- 12.0000.............. 117,834 3.1 10.83 117,834 10.83
12.0001 -- 14.4000.............. 70,320 3.7 14.13 69,070 14.13
14.4001 -- 16.8000.............. 42,500 5.3 16.07 40,000 16.10
16.8001 -- 19.2000.............. 129,448 7.1 17.71 91,948 17.66
19.2001 -- 21.6000.............. 57,500 7.7 21.00 30,000 21.00
21.6001 -- 24.0000.............. 42,000 4.8 22.94 42,000 22.94
--------- -------
2,601,993 7.6 $ 6.84 990,391 $ 9.06
========= =======
</TABLE>
On September 8, 1998 we determined that certain stock options issued to our
employees had an exercise price significantly higher than the fair market value
of our common stock. In light of our conclusions that such options were not
providing the desired incentive, we provided employees with the opportunity to
exchange
35
<PAGE> 37
ARQULE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
options previously granted to them under the Equity Incentive Plan on or after
June 25, 1996 for new options ("the Replacement Options") to purchase the same
number of shares of common stock at an exercise price of $4.875 per share, the
then fair market value of our common stock. A total of 985,059 options were
exchanged. Employees (other than those individuals designated as "officers" by
the Company, including those officers subject to Section 16 of the Securities
Exchange Act of 1934) were given the choice of retaining their existing options,
with the original vesting schedule, or accepting the Replacement Options, with a
vesting schedule extended by one year.
Employee 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 our common stock at 85% of the fair 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. At December 31, 1999, 219,209 shares
have been purchased pursuant to the Purchase Plan. In May 1999 the Board of
Directors approved an increase from 120,000 shares reserved to 420,000 shares
reserved of common stock for purchase under the Purchase Plan. This increase is
subject to approval at the May 2000 annual meeting of stockholders.
10. INCOME TAXES
There is no current or deferred tax expense for the years ended December
31, 1997, 1998 and 1999.
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 our 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,
-------------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Preoperating costs capitalized for tax
purposes............................... $ 288 $ 210 $ 189
Net operating loss carryforwards.......... 4,506 7,068 6,671
Tax credit carryforwards.................. 811 2,324 3,773
Equity based compensation................. 173 286 486
Book depreciation in excess of tax........ -- 411 1,361
Reserves and accruals..................... -- -- 329
Deferred revenue.......................... -- -- 6,362
Other..................................... 40 39 18
------- -------- -------
$ 5,818 $ 10,338 $19,189
Deferred tax liabilities:
Tax depreciation in excess of book........ (135) -- --
Valuation allowance......................... (5,683) (10,338) (19,189)
------- -------- -------
Net deferred tax assets................... $ -- $ -- $ --
======= ======== =======
</TABLE>
36
<PAGE> 38
ARQULE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
We have 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 we achieve profitability, the deferred tax assets
will be available to offset future income tax liabilities and expense. Of the
$19.2 million valuation allowances at December 31, 1999, $1.2 million relates to
deductions for disqualifying dispositions and non-qualified stock options that
will be credited to paid in capital, if realized.
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, 1999 follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1998 1999
----- ------- -------
<S> <C> <C> <C>
Income tax benefit (expense) at statutory
rate.......................................... $(102) $ 2,262 $ 6,102
State tax benefit (expense), net................ (18) 399 1,076
Losses and credits without current tax
benefit....................................... -- (2,650) (7,170)
Utilization of net operating loss
carryforwards................................. 133 -- --
Other........................................... (13) (11) (8)
----- ------- -------
Tax Provision................................. $ -- $ -- $ --
===== ======= =======
</TABLE>
We have available net operating loss carryforwards of approximately $16.4
million for tax purposes to offset future taxable income. The net operating loss
carryforwards expire principally in 2009 to 2019. Federal and state tax credit
carryforwards of approximately $1.9 million and $2.9 million, respectively,
expire principally in 2009 to 2019. Under the Internal Revenue Code, certain
substantial changes in our 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.
11. COMMITMENTS
Leases
We lease 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>
2000...................................................... $ 2,560 305
2001...................................................... 2,502 --
2002...................................................... 2,502 --
2003...................................................... 2,502 --
2004...................................................... 2,502 --
thereafter................................................ 17,755 --
------- ----
305
Interest due on capital leases............................ 11
------- ----
Total minimum lease payments.................... $30,323 $316
======= ====
</TABLE>
Rent expense under noncancelable operating leases was approximately $582,
$1,105 and $1,420 for the years ended December 31, 1997, 1998, and 1999,
respectively.
37
<PAGE> 39
ARQULE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
12. CONCENTRATION OF CREDIT RISK
Revenues from five of our customers accounted for 12%, 13%, 21%, 21% and
22% of total revenues during 1997. Revenues from five of our customers accounted
for 12%, 13%, 14%, 16% and 30% of total revenues during 1998. Revenues from five
of our customers accounted for 12%, 13%, 16%, 20% and 30% of total revenues
during 1999. Three of our customers accounted for 21%, 37% and 42% of our
accounts receivable balance at December 31, 1997, 21%, 31% and 41% of our
accounts receivable balance at December 31, 1998, and 23%, 31% and 46% of our
accounts receivable balance at December 31, 1999. We do not require collateral
on accounts receivable balances.
38
<PAGE> 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is contained in part under the caption "Executive
Officers of the Registrant" in Part I, Item 1A of this Annual Report on Form 8-K
and the remainder is incorporated by reference into this Annual Report on Form
10-K from the discussion responsive thereto under the caption "Election of
Directors" in the our Proxy Statement relating to our 2000 Annual Meeting of
Stockholders scheduled for May 18, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated by reference into this Annual
Report on Form 10-K from the discussion responsive thereto under the caption
"Executive Compensation" in our Proxy Statement relating to our 2000 Annual
Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated by reference into this Annual
Report on Form 10-K from the discussion responsive thereto under the caption
"Share Ownership" in our Proxy Statement relating to our 2000 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the captions, "Compensation Committee
Interlocks and Insider Participation" and "Certain Relationships and Related
Transactions" in our Proxy Statement relating to our 2000 Annual Meeting of
Stockholders and from Note 9 to the Financial Statements included in this Annual
Report on Form 10-K.
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 1999.
39
<PAGE> 41
(c) EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
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 3.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999 (File No. 000-21429) 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 ended
through April 8, 1998. Filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
amended June 30, 1998 (File No. 000-21429) and incorporated
herein by reference.
10.2* Amended and Restated 1996 Employee Stock Purchase Plan.
Filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999 (File No.
000-21429) 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.
40
<PAGE> 42
EXHIBIT
NO. DESCRIPTION
- ------- -----------
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.
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
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.
41
<PAGE> 43
EXHIBIT
NO. DESCRIPTION
- ------- -----------
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.
10.31+ Research Collaboration and License Agreement between the
Company and Amersham Pharmacia Biotech AB dated August 13,
1998. Filed as Exhibit 10.1 to the Company's Registration
Statement on Form S-3 (File No. 333-62203) and incorporated
herein by reference.
10.32+ Commercialization Agreement between the Company and Amersham
Pharmacia Biotech AB dated August 13, 1998. Filed as Exhibit
10.2 to the Company's Registration Statement on Form S-3
(File No. 333-62203) and incorporated herein by reference.
10.33+ Amendment No. 1 to Research and License Agreement between
the Company and Roche Bioscience, a division of Syntex,
Inc., dated as of September 30, 1998. Filed as Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 (File No. 000-21429) and
incorporated herein by reference.
10.34* Resignation Agreement between Eric Gordon and the Company
dated as of September 11, 1998. Filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 (File No. 000-21429) and
incorporated herein by reference.
10.35 Lease by and between MetroNorth Corporate Center LLC and the
Company dated as of May 29, 1998. Filed as Exhibit 10.3 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 (File No. 000-21429) and
incorporated herein by reference.
10.36+ Compound Supply and License Agreement between the Company
and R.W. Johnson Pharmaceutical Research Institute, a
division of Ortho-McNeil Pharmaceutical, Inc., dated as of
December 15, 1998. Filed as Exhibit 10.36 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, filed with the Commissioner on March 29,
1999 (File No. 000-21429) and incorporated herein by
reference.
10.37+ Employment agreement between Dr. Stephen A. Hill and the
Company dated as of December 8, 1998, as amended. Filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999 (File No. 000-21429)
and incorporated herein by reference.
10.38 Term loan agreement between Fleet National Bank and the
Company, dated as of March 18, 1999. Filed as Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 (File No. 000-21429) and
incorporated herein by reference.
42
<PAGE> 44
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.39* Technology Acquisition Agreement between Pfizer Inc. and the
Company, dated as of July 19, 1999. Filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999 (File No. 000-21429) and
incorporated herein by reference.
10.40+ Sublease between Pfizer Inc. and the Company, dated July 16,
1999. Filed as Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999
(File No. 000-21429) and incorporated herein by reference.
10.41+ Research Cooperation Agreement between Bayer AG and the
Company, dated October 1, 1999. Filed as Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999 (File No. 000-21429) and
incorporated herein by reference.
10.42* Employment Agreement with Philippe Bey, dated July 21, 1999.
Filed as Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999 (File No.
000-21429) and incorporated herein by reference.
10.43+ Agreement between the Company and Monsanto Company dated as
of January 11, 2000. Filed as Exhibit 10.1 to the Company's
Current Report on Form 8-K filed with the Commission on
(File No. 000-21429) and incorporated herein by reference.
11.1 Statement re computation of per share net income (loss).
Filed herewith.
21.1 Subsidiaries of the Company. Filed herewith.
23.1 Consent of PricewaterhouseCoopers LLP. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
99.1 Important Factors Regarding Forward-Looking Statements.
Filed herewith.
---------------
* 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 24b-2 of the Securities
and Exchange Act of 1934, as amended.
43
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Woburn,
Commonwealth of Massachusetts, on March 23, 2000.
ARQULE, INC.
By: /s/ STEPHEN A. HILL
------------------------------------
Stephen A. Hill
President and Chief Executive
Officer
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ STEPHEN A. HILL President, Chief Executive March 23, 2000
- --------------------------------------------------- Officer and Director (Principal
Stephen A. Hill Executive Officer)
/s/ DAVID C. HASTINGS Vice President, Chief Financial March 23, 2000
- --------------------------------------------------- Officer and Treasurer
David C. Hastings (Principal Financial Officer
and Principal Accounting
Officer)
/s/ LAURA AVAKIAN Director March 23, 2000
- ---------------------------------------------------
Laura Avakian
/s/ WERNER CAUTREELS Director March 23, 2000
- ---------------------------------------------------
Werner Cautreels
/s/ STEPHEN M. DOW Director March 23, 2000
- ---------------------------------------------------
Stephen M. Dow
/s/ L. PATRICK GAGE Director March 23, 2000
- ---------------------------------------------------
L. Patrick Gage
/s/ TUAN HA-NGOC Director March 23, 2000
- ---------------------------------------------------
Tuan Ha-Ngoc
/s/ MICHAEL ROSENBLATT Director March 23, 2000
- ---------------------------------------------------
Michael Rosenblatt
</TABLE>
44
<PAGE> 46
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
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 ended
through April 8, 1998. Filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
amended June 30, 1998 (File No. 000-21429) 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.
<PAGE> 47
EXHIBIT
NO. DESCRIPTION
- ------- -----------
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.
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
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.
<PAGE> 48
EXHIBIT
NO. DESCRIPTION
- ------- -----------
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.
10.31+ Research Collaboration and License Agreement between the
Company and Amersham Pharmacia Biotech AB dated August 13,
1998. Filed as Exhibit 10.1 to the Company's Registration
Statement on Form S-3 (File No. 333-62203) and incorporated
herein by reference.
10.32+ Commercialization Agreement between the Company and Amersham
Pharmacia Biotech AB dated August 13, 1998. Filed as Exhibit
10.2 to the Company's Registration Statement on Form S-3
(File No. 333-62203) and incorporated herein by reference.
10.33+ Amendment No. 1 to Research and License Agreement between
the Company and Roche Bioscience, a division of Syntex,
Inc., dated as of September 30, 1998. Filed as Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 (File No. 000-21429) and
incorporated herein by reference.
10.34* Resignation Agreement between Eric Gordon and the Company
dated as of September 11, 1998. Filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 (File No. 000-21429) and
incorporated herein by reference.
10.35 Lease by and between MetroNorth Corporate Center LLC and the
Company dated as of May 29, 1998. Filed as Exhibit 10.3 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 (File No. 000-21429) and
incorporated herein by reference.
10.36+ Compound Supply and License Agreement between the Company
and R.W. Johnson Pharmaceutical Research Institute, a
division of Ortho-McNeil Pharmaceutical, Inc., dated as of
December 15, 1998. Filed as Exhibit 10.36 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, filed with the Commissioner on March 29,
1999 (File No. 000-21429) and incorporated herein by
reference.
10.37+ Employment agreement between Dr. Stephen A. Hill and the
Company dated as of December 8, 1998, as amended. Filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999 (File No. 000-21429)
and incorporated herein by reference.
10.38 Term loan agreement between Fleet National Bank and the
Company, dated as of March 18, 1999. Filed as Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 (File No. 000-21429) and
incorporated herein by reference.
10.39* Technology Acquisition Agreement between Pfizer Inc. and the
Company, dated as of July 19, 1999. Filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999 (File No. 000-21429) and
incorporated herein by reference.
10.40+ Sublease between Pfizer Inc. and the Company, dated July 16,
1999. Filed as Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999
(File No. 000-21429) and incorporated herein by reference.
<PAGE> 49
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.41+ Research Cooperation Agreement between Bayer AG and the
Company, dated October 1, 1999. Filed as Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999 (File No. 000-21429) and
incorporated herein by reference.
10.42* Employment Agreement with Philippe Bey, dated July 21, 1999.
Filed as Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999 (File No.
000-21429) and incorporated herein by reference.
10.43+ Agreement between the Company and Monsanto Company dated as
of January 11, 2000. Filed as Exhibit 10.1 to the Company's
Current Report on Form 8-K filed with the Commission on
(File No. 000-21429) and incorporated herein by reference.
11.1 Statement re computation of per share net income (loss).
Filed herewith.
21.1 Subsidiaries of the Company. Filed herewith.
23.1 Consent of PricewaterhouseCoopers LLP. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
99.1 Important Factors Regarding Forward-Looking Statements.
Filed herewith.
- ---------------
* 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 24b-2 of the Securities
and Exchange Act of 1934, as amended.
<PAGE> 1
EXHIBIT 11.1
ARQULE, INC.
STATEMENT RE COMPUTATION OF UNAUDITED PRO FORMA NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net income (loss) .......................... $ 291 $(6,462) $(17,433)
======= ======= ========
Weighted average shares outstanding:
Common Stock .............................. 11,282 12,031 12,606
Weighted average common shares outstanding.. 11,282 12,031 12,606
======= ======= ========
Basic net income (loss) per share .......... $ 0.03 $ (0.54) $ (1.38)
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net income (loss) ............................... $ 291 $(6,462) $(17,433)
Weighted average shares outstanding:
Common Stock ............................... 11,282 12,031 12,606
Common Stock equivalents ................... 1,112 -- --
------- ------- --------
Weighted average common shares and equivalents
outstanding .................................... 12,394 12,031 12,606
Diluted net income (loss) per share ............ $ 0.02 $ (0.54) $ (1.38)
======= ======= ========
</TABLE>
<PAGE> 1
EXHIBIT 21.1
ARQULE, INC.
SUBSIDIARIES OF THE COMPANY
ArQule Catalytics, Inc., a majority-owned subsidiary of ArQule, is incorporated
in Delaware.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Forms S-8 (File Nos. 333-82113 and 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 Nos. 333-25371 and 333-55705)
pertaining to the Amended and Restated 1994 Equity Incentive Plan of ArQule,
Inc., of our report dated January 27, 2000 with respect to the financial
statements of ArQule, Inc., included in the Annual Report on Form 10-K for the
year ended December 31, 1999.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 23, 2000
<PAGE> 1
EXHIBIT 99.1
ARQULE, INC.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
MARCH 2000
From time to time, ArQule through its management may make forward-looking
public statements, such as statements concerning then expected future revenues
or earnings or concerning anticipated collaborative agreements, projected plans,
performance, product development and commercialization as well as other
estimates relating to future operations. Forward-looking statements may be in
reports filed under the Securities Exchange Act of 1934, as amended, in press
releases or in oral statements made with the approval of an authorized executive
officer. The words or phrases "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project," or similar expressions are
intended to identify "forward-looking statements" within the meaning of Section
21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act
of 1933, as enacted by the Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on these
forward-looking statements that speak only as of the date on which they are
made. In addition, the Company wishes to advise readers that the factors listed
below, as well as other factors not currently identified by management, could
affect the Company's financial or other performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods or events in any
current statement.
The Company will not undertake and specifically declines any obligation to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events which may cause management to re-evaluate such forward-looking
statements.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing cautionary
statements identifying important factors that could cause the Company's actual
results to differ materially from those projected in forward-looking statements
of the Company made by or on behalf of the Company.
WE ARE AT AN EARLY STAGE OF DEVELOPMENT AND MAY NEVER BECOME PROFITABLE.
From our inception in 1993 to December 31, 1999, we have incurred
cumulative losses of approximately $34.5 million and we expect losses to
continue for the next several years. These losses have resulted principally from
the costs of our research activities and enhancements to our technology. We have
derived our revenue primarily from:
- license fees;
- payments for product deliveries;
- milestone payments; and
- research and development funding paid under our agreements with our
collaboration partners.
To date, except for during 1997, these revenues have not generated profits,
nor have we realized any revenue from royalties from the sale by any of our
collaboration partners of a commercial product developed using our technology.
We cannot be certain that we will ever become profitable.
WE CANNOT GUARANTEE THAT OUR STRATEGY OF USING OUR INTEGRATED COMPOUND DISCOVERY
TECHNOLOGIES TO ASSIST IN THE DEVELOPMENT OF NEW DRUGS AND OTHER PRODUCTS WILL
EVER BE COMMERCIALLY SUCCESSFUL.
Our approach to compound discovery has not yet yielded a commercially
successful drug or agrochemical product.
Our strategy is to use our technology platform to rapidly identify,
optimize and obtain financial interest in as many compounds with commercial
potential as possible. This approach has not yet yielded any commercially
successful drug or agrochemical product. In addition, we have recently
reoriented our business and technology strategies to offer an integrated
compound discovery solution, in addition to combinatorial chemistry products and
services. Our new strategy may not be accepted by our potential customers. In
particular, we have not proven that we can use our products successfully to
assist our customers to conduct lead optimization. Our ability to succeed
depends on our potential customers accepting our approach to combinatorial
chemistry and integrated compound discovery as an effective tool in the
discovery and development of compounds with commercial potential. If we cannot
demonstrate that our approach can result in successful products, we may not be
able to attract additional customers or to retain our existing customers.
Because of the specialized nature and high price of our services, our
potential customer base is limited, and these potential customers may decide
to try to use our approach themselves without our assistance or try other
methods.
Because we offer specialized assistance in the development of drugs and
agrochemicals, our potential customer base consists of a limited number of
pharmaceutical, biotechnology and agrochemical companies and research
institutions. These companies have historically conducted lead compound
identification and optimization within their own research departments. Because
of the high cost of our products and programs, they may decide to conduct these
activities without our assistance.
<PAGE> 2
WE DEPEND ON COLLABORATION ARRANGEMENTS WITH THIRD PARTIES FOR OUR REVENUE AND
CANNOT BE SURE WHETHER OUR COLLABORATIONS WILL SUCCEED OR WHETHER WE WILL
REALIZE MUCH OF THE POTENTIAL REVENUE FROM OUR COLLABORATIONS.
We depend on our collaborations for most of our revenues, and we will only
realize much of the potential revenue under these collaborations if we satisfy
milestones and earn royalties.
Our revenue stream and our business strategy depend largely on the
formation of collaborative arrangements with third parties, initially
pharmaceutical, biotechnology and agrochemical companies and research
institutions. To date, we have entered into many of these arrangements. Much of
the potential revenue from our collaborations consists of contingent payments,
such as payments for achieving development milestones and royalties payable on
sales of drugs or agrochemicals developed using our products. We cannot
guarantee that these milestones will be achieved or that commercial drugs or
other products will be developed on which royalties will be payable.
Our ability to realize potential revenue from our collaborations depends, in
large part, on the efforts of our partners, over which we have little control.
Much of the revenue that we may receive under these collaborations will
depend upon our partners' ability to successfully develop, introduce, market and
sell new drugs and agrochemicals developed using our products. Our products will
result in commercialized drugs and agrochemicals generating milestone payments
and royalties only after, among other things:
- significant preclinical and clinical development efforts or the
completion of preliminary field trials;
- the receipt of the required regulatory approvals;
- developing manufacturing capabilities; and
- successful marketing efforts.
With the exception of certain aspects of preclinical drug development, we
do not currently intend to perform any of these activities. Accordingly, we will
depend on our partners having the necessary expertise and dedicating sufficient
resources to develop and commercialize products. Our collaboration partners may
fail to develop or commercialize a compound or product to which they have
obtained rights from us, because, among other reasons:
- they decide not to devote the necessary resources because of internal
constraints or other development priorities;
- they decide to pursue a competitive potential drug or compound developed
outside of the collaboration; or
- they cannot obtain the necessary regulatory approvals.
For our strategy to be successful, we must continue to enter into collaboration
agreements with new partners and we may not be able to do so at all or on
favorable enough terms.
To be successful, we must continue to enter into agreements with new
partners to use our technology to develop potential drugs and agrochemicals. We
may not be able to establish collaboration agreements with new partners, and we
cannot guarantee that we will establish our arrangements on commercially
acceptable terms.
2
<PAGE> 3
OUR COMPETITORS MAY HAVE GREATER RESOURCES OR RESEARCH AND DEVELOPMENT
CAPABILITIES THAN WE HAVE AND WE MAY NOT HAVE THE RESOURCES REQUIRED TO
SUCCESSFULLY COMPETE WITH THEM.
The drug development business is highly competitive. We compete with many
organizations that are engaged in attempting to identify and optimize compounds
as potential drugs or agrochemicals. Many of these competitors have greater
financial and human resources and more experience in research and development
than we have. They include:
- biotechnology, pharmaceutical, agrochemical, combinatorial chemistry and
other companies;
- academic and scientific institutions;
- governmental agencies; and
- public and private research organizations.
Historically, pharmaceutical and agrochemical companies have maintained
close control over their research activities, including the synthesis, screening
and optimization of potential drugs and agrochemicals. Many of these companies,
which represent a significant potential market for our products and services,
have developed or are developing internal combinatorial chemistry and other
capabilities to improve productivity. We anticipate that we will face increased
competition in the future as new companies enter the market and alternative
technologies become available.
WE DEPEND ON OUR KEY PERSONNEL, THE LOSS OF WHOM WOULD HURT OUR ABILITY TO
COMPETE.
We are highly dependent on the principal members of our scientific and
management staff. The loss of one or more members of our staff could have a
material adverse effect on our business. We do not maintain key person life
insurance coverage on the life of any employee. Our success will depend in part
on our ability to identify, attract and retain qualified managerial and
scientific personnel. We face intense competition for qualified personnel in our
industry. We may not be able to continue to attract and retain personnel with
the advanced technical qualifications or managerial expertise necessary for the
development of our business.
WE FACE UNCERTAINTY IN RAISING ADDITIONAL FUNDS THAT MAY BE NECESSARY TO FUND
OUR OPERATIONS.
Our capital requirements depend on many factors. If our operations do not
become profitable before we exhaust existing resources, we will need to obtain
additional financing, either through public or private financings, including
debt or equity financings, or through collaboration or other arrangements with
corporate partners. We may not be able to obtain adequate funds for our
operations from these sources when needed or on acceptable terms. If we raise
additional capital through the sale of equity, or securities convertible into
equity, your proportionate ownership in ArQule may be diluted. If we cannot
obtain additional financing, we could be forced to delay or scale back our
research and development programs. If adequate funds are not available, we may
be required to curtail operations significantly or to obtain funds by entering
into arrangements with collaboration partners or others that may require that we
relinquish rights to certain technologies, product candidates, products or
potential markets.
OUR SUCCESS DEPENDS ON OUR ABILITY TO SCALE UP AND MANAGE OUR GROWTH.
Our success depends on the expansion and proper management of our
operations. To be cost-effective in our delivery of services and products, we
must enhance productivity by further automating our processes and technology. We
also must successfully structure and manage multiple collaborative
relationships. We may not succeed in our engineering efforts to further automate
these processes. Also, we may not succeed in managing and meeting the staffing
requirements of additional collaborative relationships.
WE DEPEND ON PATENTS AND OTHER PROPRIETARY RIGHTS THAT MAY FAIL TO PROTECT OUR
BUSINESS.
Our success will depend on our ability to obtain and protect patents on our
technology and to protect our trade secrets. We cannot be certain that we will
receive any additional patents, that the claims of our patents will offer
significant protection of our technology, or that our patents will not be
challenged, narrowed,
3
<PAGE> 4
invalidated or circumvented. In order to protect or enforce our patent rights,
we may initiate patent litigation against third parties, such as infringement
suits or interference proceedings. These lawsuits could be expensive, take
significant time and divert management's attention from other business concerns.
We may also provoke these third parties to assert claims against us. The patent
position of biotechnology firms is generally highly uncertain, involves complex
legal and factual questions, and has recently been the subject of much
litigation. No consistent policy has emerged from the U.S. Patent and Trademark
Office or the courts regarding the breadth of claims allowed or the degree of
protection afforded under many biotechnology patents. In addition, there is a
substantial backlog of biotechnology patent applications at the U.S. Patent and
Trademark Office, and the approval or rejection of patent applications may take
several years.
In an effort to protect our trade secrets, we require our employees,
consultants and advisors to execute confidentiality agreements. We cannot
guarantee, however, that these agreements will provide us with adequate
protection against improper use or disclosure of confidential information. In
addition, in some situations, these agreements may conflict with, or be subject
to, the rights of third parties with whom our employees, consultants or advisors
have previous employment or consulting relationships. Also, others may
independently develop substantially equivalent proprietary information and
techniques, or otherwise gain access to our trade secrets.
OUR SUCCESS WILL DEPEND PARTLY ON OUR ABILITY TO OPERATE WITHOUT INFRINGING ON
OR MISAPPROPRIATING THE PROPRIETARY RIGHTS OF OTHERS.
Others may sue us for infringing on their patent rights. Intellectual
property litigation is costly, and, even if we prevail, the cost of such
litigation could adversely affect our business, financial condition and results
of operations. In addition, litigation is time consuming and could divert
management attention and resources away from our business. If we do not prevail
in litigation, in addition to any damages we might have to pay, we could be
required to stop the infringing activity or obtain a license. Any required
license may not be available to us on acceptable terms, or at all. In addition,
some licenses may be non-exclusive and, accordingly, our competitors may have
access to the same technology licensed to us. If we fail to obtain a required
license or are unable to design around a patent, we may be unable to sell some
of our products.
4
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 4,208
<SECURITIES> 32,213
<RECEIVABLES> 3,953
<ALLOWANCES> 0
<INVENTORY> 486
<CURRENT-ASSETS> 41,439
<PP&E> 50,851
<DEPRECIATION> 16,758
<TOTAL-ASSETS> 77,346
<CURRENT-LIABILITIES> 24,068
<BONDS> 0
0
0
<COMMON> 129
<OTHER-SE> 38,624
<TOTAL-LIABILITY-AND-EQUITY> 77,346
<SALES> 18,582
<TOTAL-REVENUES> 18,582
<CGS> 17,457
<TOTAL-COSTS> 37,739
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,724
<INCOME-PRETAX> (17,433)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,433)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,433)
<EPS-BASIC> (1.38)
<EPS-DILUTED> (1.38)
</TABLE>
