-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cf+DygJ3zqye4Q0YkFnX0aUINQeuy367jg3F/E72yblH7BneXevplPMXiDhfVJoZ MBWYK/1TQHD87KHY5ORTUA== 0000950135-98-002506.txt : 19980420 0000950135-98-002506.hdr.sgml : 19980420 ACCESSION NUMBER: 0000950135-98-002506 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980417 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARQULE INC CENTRAL INDEX KEY: 0001019695 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 043221586 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-21429 FILM NUMBER: 98596821 BUSINESS ADDRESS: STREET 1: 200 BOSTON AVE CITY: MEDFORD STATE: MA ZIP: 02155 BUSINESS PHONE: 6173954100 MAIL ADDRESS: STREET 1: 200 BOSTON AVE CITY: MEDFORD STATE: MA ZIP: 02155 10-K/A 1 ARQULE, INC. 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER: 000-21429 ARQULE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 04-3221586 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
200 BOSTON AVENUE, MEDFORD, MASSACHUSETTS 02155 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 395-4100 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE (TITLE OF EACH CLASS) 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. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant as of March 5, 1998 was: $218,276,085. There were 11,938,236 shares of the registrant's Common Stock outstanding as of March 5, 1998. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement of the Registrant's 1998 Annual Meeting of Shareholders to be held on May 14, 1998, which definitive proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the registrant's fiscal year of December 31, 1997, are incorporated by reference into Part III of this Form 10-K. ================================================================================ 2 The following items and exhibits of ArQule Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1997 are being filed in this Form 10-K/A for the purpose of incorporating changes to financial information due to a recent interpretation of accounting standard, SFAS 128 "Earnings per Share." ITEM 6. SELECTED FINANCIAL DATA The following data, insofar as it relates to the period from inception (May 6, 1993) through December 31, 1993 and for the years 1994, 1995, 1996 and 1997, have been derived from the Company's audited financial statements, including the balance sheet as of December 31, 1996 and 1997 and the related statements of operations and of cash flows for the three years ended December 31, 1997 and notes thereto appearing elsewhere herein. The data should be read in conjunction with the Financial Statements and the Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Form 10-K. The historical results are not necessarily indicative of the results of operations to be expected in the future (in thousands, except per share data).
PERIOD FROM INCEPTION (MAY 6, 1993) THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, ---------------------------------------- 1993 1994 1995 1996 1997 --------------------- ------- ------- ------- ------- Statement of Operations Data: Revenue.......................... $ -- $ 85 $ 3,330 $ 7,255 $17,420 ------- ------- ------- ------- ------- Cost and expenses: Cost of revenue................ -- -- 1,644 4,739 10,218 Research and development....... 769 2,806 2,095 3,076 4,704 Marketing, general and administrative.............. 687 1,346 1,557 2,850 4,670 ------- ------- ------- ------- ------- Total costs and expenses.... 1,456 4,152 5,296 10,665 19,592 ------- ------- ------- ------- ------- Loss from operations............. (1,456) (4,067) (1,966) (3,410) (2,172) Interest income (expense), net... (9) (139) (286) 417 2,463 ------- ------- ------- ------- ------- Net income (loss)................ $(1,465) $(4,206) $(2,252) $(2,993) $ 291 ======= ======= ======= ======= ======= Basic net income (loss) per share(1)....................... $ (7.93) $ (1.32) $ .03 ======= ======= ======= Weighted average common shares outstanding -- basic(1)........ 284 2,272 11,282 ======= ======= ======= Diluted net income (loss) per share(1)....................... $ (7.93) $ (1.32) $ .02 ======= ======= ======= Weighted average common shares and equivalents outstanding -- diluted(1)..................... 284 2,272 12,394 ======= ======= =======
DECEMBER 31, -------------------------------------------------- 1993 1994 1995 1996 1997 ------ ------- ------- ------- ------- Balance Sheet Data: Cash, cash equivalents and marketable securities............................ $ 595 $ 425 $ 7,791 $37,086 $49,282 Working capital (deficit)................ 275 (2,108) 5,074 31,440 46,023 Total assets............................. 1,538 2,321 10,190 43,509 66,925 Capital lease obligations, less current portion............................... 376 962 911 1,728 1,213 Series B mandatorily redeemable convertible preferred stock........... -- -- 6,888 -- -- Total stockholders' equity (deficit)..... 771 (1,203) (1,000) 34,621 57,340
- --------------- (1) The Company adopted Statement of Financial Accounting Standards No. 128 -- "Earnings Per Share" ("SFAS 128") in the fourth quarter of 1997. SFAS 128 requires retroactive restatement of previously reported income (loss) per share calculations. As a result of adopting SFAS 128, certain anti-dilutive pro-forma share amounts and unvested shares of common stock subject to restriction agreements 16 3 previously included in the computation of the loss per share in 1995 and 1996 are no longer included in the weighted average common shares and equivalents outstanding. Prior to the restatement required by SFAS 128, pro forma net loss per share for the year ended December 31, 1995 was ($0.33), based upon weighted average common shares outstanding of 6,853 and for the year ended December 31, 1996 was ($0.39), based upon weighted average common shares outstanding of 7,705. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW ArQule is engaged in the discovery and development of novel chemical compounds with commercial potential in the pharmaceutical, biotechnology and agrochemical industries. ArQule manufactures and delivers two types of arrays of synthesized compounds to its pharmaceutical, biotechnology and agrochemical partners: (i) Mapping Array compound sets, which are arrays of novel, diverse small molecule compounds used in screening for lead generation and (ii) Directed Array compound sets, which are arrays of analogs of a particular lead compound (identified from a Mapping Array set or otherwise), synthesized for the purpose of optimizing such lead compounds. The Company currently generates revenue primarily through compound development from collaborative agreements, which provide for the development and delivery of Mapping Array and Directed Array sets. The Company's revenue to date is primarily attributable to seven major corporate collaborations: Amersham Pharmacia Biotech AB, entered into in March 1995; Abbott Laboratories, entered into in June 1995; Solvay Duphar B.V., entered into in November 1995; Roche Bioscience, entered into in September 1996; Monsanto Company, entered into in December 1996; American Home Products, entered into July 1997; and Sankyo Ltd, entered into November 1997. Under these collaborations, the Company has received payments of $29.1 million through December 31, 1997 and has recognized $28.1 million as revenue. The Company recognizes revenue under its corporate collaborations as related work is performed and arrays are delivered. Payments received from corporate partners prior to the completion of the related work are recorded as deferred revenue. License option fees are recognized as the options are granted because such fees are nonrefundable and the Company has no further obligations to fulfill. Technology access fees are recognized over the length of the research and development agreement. The Company is also entitled to receive milestone and royalty payments if products generated under the collaborations are developed. The Company has not received any milestone or royalty payments to date. The Company has additionally entered into joint discovery agreements with a number of biotechnology companies to which it has provided Mapping Array and Directed Array sets in exchange for joint ownership interests of resulting drug candidates. These agreements have not yet yielded any significant revenue for the Company. The Company experienced its first year of profitability in 1997, reflecting the increase in revenues resulting from ArQule's growing collaborator base and an increase in interest income. Quarterly variations in future financial performance may be expected as increases in revenue are dependent on expanding existing collaborations, additional corporate collaborations, and future milestone payments, which may be inconsistent and difficult to anticipate. In addition, the Company will continue to aggressively invest in new technologies to expand its drug discovery capabilities. The Company also expects that strategic opportunities will arise to broaden the Company's participation in drug discovery and to extend the Company's proprietary technology platform to industry segments beyond pharmaceutical and agrochemical product discovery. Strategic investments of this nature have the potential for enhancing longer term equity value but may result in near term earnings fluctuations or impact profitability. RESULTS OF OPERATIONS Years Ended December 31, 1997 and 1996 Revenue. The Company's revenue for the year ended December 31, 1997 increased $10.1 million to $17.4 million from $7.3 million for the same period in 1996. This increase was primarily due to increased compound development revenue from work performed on and the delivery of Mapping Array and Directed Array sets under the Company's collaborative agreements. The Company began recognizing revenue from 17 4 Roche BioScience, Monsanto Company, American Home Products and Sankyo collaborations in October 1996, December 1996, July 1997, and November 1997, respectively. Cost of revenue. The Company's cost of revenue for the year ended December 31, 1997 increased $5.5 million to $10.2 million from $4.7 million for the same period in 1996. These increases are primarily attributable to the costs of additional facilities and scientific personnel and the necessary supplies and overhead expenses related to the performance of the work and the delivery of the Mapping Array and Directed Array sets pursuant to the Company's collaborative agreements. The Company anticipates that the aggregate cost of revenue will increase over the next several years as its business expands. Research and development expenses. The Company's research and development expenses for the year ended December 31, 1997 increased $1.6 million to $4.7 million from $3.1 million for the same period in 1996. These increases are the result of the Company's expansion of its chemistry capabilities and related proprietary technologies. The Company expects research and development spending to increase over the next several years as the Company further expands its chemistry discovery and development programs. Marketing, general and administrative expenses. The Company's marketing, general and administrative expenses for the year ended December 31, 1997 increased $1.8 million to $4.7 million from $2.9 million for the same period in 1996. These increases are primarily associated with increased marketing and business development activities, expenses of being a public company for a full year, and higher levels of administrative support in concert with the Company's growth during 1997. These expenses will likely increase in the aggregate in future periods to support the projected growth of the Company. Net interest income. The Company's net interest income for the year ended December 31, 1997 was $2.5 million, compared to $0.4 million for the same period in 1996. Higher interest income in 1997 resulted primarily from the Company holding higher cash and marketable securities balances following its initial and follow-on offerings of common stock in October 1996 and April 1997, respectively. Net income (loss). The Company's net income for the year ended December 31, 1997 was $0.3 million as compared to a net loss of $3.0 million for the same period in 1996. The net income for 1997 is primarily attributable to an increase in revenues from the Company's growing collaborator base and higher net interest income recognized during 1997. Quarterly variations in future financial performance may be expected as increases in revenue are dependent on expanding existing collaborations, additional corporate collaborations, and future milestone and royalty payments, which may be inconsistent and difficult to anticipate. Years Ended December 31, 1996 and 1995 Revenue. The Company's revenue for the year ended December 31, 1996 increased $4.0 million to $7.3 million from $3.3 million for the same period in 1995. This was attributable to a $5.0 million increase in compound development revenue related to the performance of work and the delivery of Mapping Array and Directed Array sets under the Company's collaborative agreements, offset by a $1.0 million decrease in license option fees during the same period. The Company began recognizing revenue from the Amersham Pharmacia Biotech AB, Abbott Laboratories and Solvay Duphar B.V. collaborations in March, June and November 1995, respectively and for Roche Bioscience and Monsanto Company in October and December of 1996, respectively. Cost of revenue. The Company's cost of revenue for the year ended December 31, 1996 increased $3.1 million to $4.7 million from $1.6 million for the same period in 1995. This increase was primarily attributable to the costs of additional scientific personnel and the necessary supplies and overhead expenses related to the performance of the work and the delivery of the Mapping Array and Directed Array sets pursuant to its collaborative agreements. Research and development expenses. The Company's research and development expenses for the year ended December 31, 1996 increased $1.0 million to $3.1 million from $2.1 million from the same period in 1995. This increase was the result of the Company's expansion of its chemistry capabilities and related proprietary technologies. 18 5 Marketing, general and administrative expenses. The Company's marketing, general and administrative expenses for the year ended December 31, 1996 increased $1.3 million to $2.9 million from $1.6 million for the same period in 1995. The increase was primarily associated with increased business development activities, expenses of being a public company, and higher levels of administrative support for the Company's growth during 1996. Net interest income (expense). The Company's net interest income for the year ended December 31, 1996 was $0.4 million, which compared to a net interest expense of $0.3 million for the same period in 1995. Higher interest income in 1996 resulted primarily from the Company holding higher cash balances following its initial public offering of common stock in October 1996. Net loss. The Company's net loss for the year ended December 31, 1996 increased $0.7 million to $3.0 million from $2.3 million for 1995. The increase was primarily attributable to operating and development expenses exceeding the increase in revenue generated from corporate collaborations during 1996. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997, the Company held cash and cash equivalents and marketable securities with a value of $49.3 million. The Company's working capital at December 31, 1997 was $46.0 million. The Company has funded operations through December 31, 1997 with sales of common stock, payments from corporate collaborators and the utilization of capital equipment lease financing. The Company has maintained a master lease agreement since February 1994. Under the terms of this agreement, the Company has funded certain capital expenditures through leases with terms of 42 months in duration. As of December 31, 1997, the Company had utilized $4.5 million of the available $8.5 million financing facility. Net cash provided by operating activities was $0.6 million, $0.8 million and $0.7 million for each of the years ended December 31, 1997, 1996 and 1995, respectively. The positive cash flow from operating activities primarily reflects payments received from the seven corporate collaborators. Net cash used by investing activities during the year ended December 31, 1997 was $42.7 million, resulting primarily from the proceeds of the purchase of marketable securities and from the proceeds of the initial and secondary public offerings. Net cash provided by investing activities during the year ended December 31, 1996 was $2.0 million, resulting primarily from the sale of marketable securities offset by the purchases of property and equipment. Net cash used in investing activities for the year ended December 31, 1995 was $5.3 million. This increase primarily reflects purchases of marketable securities. Net cash provided by financing activities for the year ended December 31, 1997 and 1996 was $20.7 and $30.8 million, respectively, primarily reflecting proceeds from the Company's April 1997 secondary public offering and October 1996 initial public offering. Net cash provided by financing activities for the year ended December 31, 1995 was $7.2 million, largely due to a $7.0 million equity investment by Solvay Duphar B.V. The Company expects that its available cash and marketable securities, together with operating revenues, investment income and lease financing arrangements, will be sufficient to finance its working capital and capital requirements for the foreseeable future. The Company's cash requirements may vary materially from those now planned depending upon the results of its drug discovery and development strategies, the ability of the Company to enter into any corporate collaborations in the future and the terms of such collaborations, the results of research and development, the need for currently unanticipated capital expenditures, competitive and technological advances, acquisitions, and other factors. There can be no assurance that the Company will be able to obtain additional customers for the Company's products and services, or that such products and services will produce revenues adequate to fund the Company's operating expenses. If the Company experiences increased losses, the Company may have to seek additional financing from the public or private sale of its securities, including equity securities. There can be no assurance that additional funding will be available when needed or on acceptable terms. The Company has evaluated its computer software and database software to identify modifications, if any, that may be required to address year 2000 compliance. Management does not expect the financial impact of any required modifications to have a material impact on its results of operations of financial position. 19 6 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants........................... 21 Balance Sheet at December 31, 1996 and 1997................. 22 Statement of Operations for the three years ended December 31, 1997.................................................. 23 Statement of Redeemable Preferred Stock and Stockholders' Equity (Deficit) for the three years ended December 31, 1997...................................................... 24 Statement of Cash Flows for the three years ended December 31, 1997.................................................. 25 Notes to Financial Statements............................... 27 Financial Statement Schedules: Schedules are not included because they are not applicable or the information is included in the Notes to Financial Statements.
20 7 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of ArQule, Inc. In our opinion, the accompanying balance sheet and the related statements of operations, of redeemable preferred stock and stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of ArQule, Inc. at December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide reasonable basis for the opinion expressed above. As discussed in Note 2, the Company has restated the reported amounts of net loss per share for the years ended December 31, 1996 and 1995. PRICE WATERHOUSE LLP Boston, Massachusetts February 9, 1998, except as to the last paragraph of Note 2 which is as of April 17, 1998 21 8 ARQULE, INC. BALANCE SHEET
DECEMBER 31, ---------------------------- 1996 1997 ------------ ------------ ASSETS Current assets: Cash and cash equivalents................................. $ 36,586,000 $ 15,137,000 Marketable securities..................................... 500,000 34,145,000 Accounts receivable....................................... 250,000 3,133,000 Inventory................................................. -- 953,000 Prepaid expenses and other current assets................. 338,000 520,000 Notes receivable from related parties..................... 176,000 30,000 ------------ ------------ Total current assets.............................. 37,850,000 53,918,000 Property and equipment, net................................. 5,293,000 12,654,000 Other assets................................................ 139,000 156,000 Notes receivable from related parties....................... 227,000 197,000 ------------ ------------ $ 43,509,000 $ 66,925,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of capital lease obligations.............. $ 1,138,000 $ 1,174,000 Accounts payable and accrued expenses..................... 1,109,000 2,804,000 Deferred revenue.......................................... 4,163,000 3,917,000 ------------ ------------ Total current liabilities......................... 6,410,000 7,895,000 ------------ ------------ Capital lease obligations................................... 1,728,000 1,213,000 ------------ ------------ Deferred revenue............................................ 750,000 477,000 ------------ ------------ Stockholders' equity Preferred stock, $0.01 par value; 1,000,000 shares authorized; no shares issued or outstanding at December 31, 1996 and 1997...................................... -- -- Common stock, $0.01 par value; 30,000,000 shares authorized; 9,851,487 and 11,877,315 shares issued and outstanding at December 31, 1996 and 1997, respectively........................................... 99,000 119,000 Additional paid-in capital................................ 46,102,000 68,418,000 Accumulated deficit....................................... (10,934,000) (10,643,000) ------------ ------------ 35,267,000 57,894,000 Deferred compensation..................................... (646,000) (554,000) ------------ ------------ Total stockholders' equity............................. 34,621,000 57,340,000 ------------ ------------ Commitments and contingency (Note 13)....................... -- -- ------------ ------------ $ 43,509,000 $ 66,925,000 ============ ============
The accompanying notes are an integral part of these financial statements. 22 9 ARQULE, INC. STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------------------------- 1995 1996 1997 ----------- ----------- ----------- Revenue Compound development revenue...................... $ 1,830,000 $ 4,255,000 $13,840,000 Compound development revenue -- related party..... 500,000 3,000,000 3,580,000 License option fees............................... 1,000,000 -- -- ----------- ----------- ----------- 3,330,000 7,255,000 17,420,000 ----------- ----------- ----------- Costs and expenses: Cost of revenue................................... 1,367,000 2,683,000 8,039,000 Cost of revenue -- related party.................. 277,000 2,056,000 2,179,000 Research and development.......................... 2,095,000 3,076,000 4,704,000 Marketing, general and administrative............. 1,557,000 2,850,000 4,670,000 ----------- ----------- ----------- 5,296,000 10,665,000 19,592,000 ----------- ----------- ----------- Loss from operations........................... (1,966,000) (3,410,000) (2,172,000) Interest income..................................... 133,000 607,000 2,686,000 Interest expense.................................... (419,000) (190,000) (223,000) ----------- ----------- ----------- Net (loss) income.............................. $(2,252,000) $(2,993,000) $ 291,000 =========== =========== =========== Basic net income (loss) per share (1995 and 1996 restated)......................................... $ (7.93) $ (1.32) $ .03 =========== =========== =========== Weighted average common shares outstanding -- basic.............................. 284,000 2,272,000 11,282,000 =========== =========== =========== Diluted net income (loss) per share (1995 and 1996 restated)......................................... $ (7.93) $ (1.32) $ .02 =========== =========== =========== Weighted average common shares and equivalents outstanding -- diluted............................ 284,000 2,272,000 12,394,000 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 23 10 ARQULE, INC. STATEMENT OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
STOCKHOLDERS' EQUITY (DEFICIT) SERIES B MANDATORILY ---------------------------------------------------------------- REDEEMABLE CONVERTIBLE SERIES A CONVERTIBLE PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL ------------------------ ------------------------- ---------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT SHARES PAR VALUE CAPITAL ---------- ----------- ----------- ----------- ---------- --------- ----------- BALANCE AT DECEMBER 31, 1994....... 8,591,000 $ 86,000 554,597 $ 6,000 $4,376,000 Employee restricted stock purchases......................... 68,200 -- 1,000 Issuance of common stock purchase warrants under bridge financing... 57,000 Cancellation of unvested portion on restricted stock upon employee termination....................... (100,000) (1,000) 1,000 Conversion of bridge notes into Series A convertible preferred stock............................. 1,920,000 2,400,000 Issuance of Series B mandatorily redeemable convertible preferred stock, net of issuance costs of $115,000.......................... 1,800,000 $ 6,885,000 Accretion of Series B mandatorily redeemable preferred stock to redemption value.................. 3,000 Net loss........................... ---------- ----------- ----------- ----------- ---------- -------- ----------- BALANCE AT DECEMBER 31, 1995....... 1,800,000 6,888,000 10,511,000 2,486,000 522,797 5,000 4,435,000 Conversion of interest on bridge notes to Series A convertible preferred stock................... 113,429 142,000 Issuance of Series B mandatorily redeemable convertible preferred stock to maintain ownership percentage (Note 9)............... 15,468 Cancellation of unvested portion of restricted stock upon employee termination....................... (1,875) -- Employee option exercise........... 625 -- Accretion of Series B mandatorily redeemable preferred stock to redemption value.................. 15,000 Conversion of Series B mandatorily redeemable preferred stock to common stock...................... (1,815,468) (6,903,000) 907,734 9,000 6,894,000 Conversion of Series A convertible preferred stock to common stock... (10,624,429) (2,628,000) 5,312,214 54,000 2,574,000 Exercise of warrants pursuant to a cashless exercise provision....... 234,992 2,000 (2,000) Issuance of common stock in connection with initial public offering, net of issuance costs of $2,979,000........................ 2,875,000 29,000 31,492,000 Compensation related to the grant of common stock options........... 709,000 Amortization of deferred compensation...................... Net loss........................... ---------- ----------- ----------- ----------- ---------- -------- ----------- BALANCE AT DECEMBER 31, 1996....... -- -- -- -- 9,851,487 99,000 46,102,000 Cancellation of unvested portion of restricted stock stock upon employee termination.............. (49,219) -- Employee stock option exercises.... 133,374 1,000 352,000 Employee stock purchase plan....... 9,173 -- 110,000 Issuance of common stock in connection with secondary public offering, net of issuance costs of $1,645,000........................ 1,932,500 19,000 21,526,000 Compensation related to the grant of common stock options........... 328,000 Amortization of deferred compensation...................... Net income......................... ---------- ----------- ----------- ----------- ---------- -------- ----------- BALANCE AT DECEMBER 31, 1997....... -- $ -- -- $ -- 11,877,315 $119,000 $68,418,000 ========== =========== =========== =========== ========== ======== =========== STOCKHOLDERS' EQUITY (DEFICIT) ---------------------------------------------- TOTAL ACCUMULATED DEFERRED STOCKHOLDERS' DEFICIT COMPENSATION EQUITY (DEFICIT) ------------ ------------ ---------------- BALANCE AT DECEMBER 31, 1994....... $(5,671,000) $(1,203,000) Employee restricted stock purchases......................... 1,000 Issuance of common stock purchase warrants under bridge financing... 57,000 Cancellation of unvested portion on restricted stock upon employee termination....................... -- Conversion of bridge notes into Series A convertible preferred stock............................. 2,400,000 Issuance of Series B mandatorily redeemable convertible preferred stock, net of issuance costs of $115,000.......................... Accretion of Series B mandatorily redeemable preferred stock to redemption value.................. (3,000) (3,000) Net loss........................... (2,252,000) (2,252,000) ------------ --------- ----------- BALANCE AT DECEMBER 31, 1995....... (7,926,000) -- (1,000,000) Conversion of interest on bridge notes to Series A convertible preferred stock................... 142,000 Issuance of Series B mandatorily redeemable convertible preferred stock to maintain ownership percentage (Note 9)............... Cancellation of unvested portion of restricted stock upon employee termination....................... -- Employee option exercise........... -- Accretion of Series B mandatorily redeemable preferred stock to redemption value.................. (15,000) (15,000) Conversion of Series B mandatorily redeemable preferred stock to common stock...................... 6,903,000 Conversion of Series A convertible preferred stock to common stock... -- Exercise of warrants pursuant to a cashless exercise provision....... -- Issuance of common stock in connection with initial public offering, net of issuance costs of $2,979,000........................ 31,521,000 Compensation related to the grant of common stock options........... $(709,000) -- Amortization of deferred compensation...................... 63,000 63,000 Net loss........................... (2,993,000) (2,993,000) ------------ --------- ----------- BALANCE AT DECEMBER 31, 1996....... (10,934,000) (646,000) 34,621,000 Cancellation of unvested portion of restricted stock stock upon employee termination.............. -- Employee stock option exercises.... 353,000 Employee stock purchase plan....... 110,000 Issuance of common stock in connection with secondary public offering, net of issuance costs of $1,645,000........................ 21,545,000 Compensation related to the grant of common stock options........... (328,000) -- Amortization of deferred compensation...................... 420,000 420,000 Net income......................... 291,000 291,000 ------------ --------- ----------- BALANCE AT DECEMBER 31, 1997....... $(10,643,000) $(554,000) $57,340,000 ============ ========= ===========
The accompanying notes are an integral part of these financial statements. 24 11 ARQULE, INC. STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------ 1995 1996 1997 ----------- ----------- ------------ Increase (Decrease) in Cash and Cash Equivalents Cash flows from operating activities: Net (loss) income................................ $(2,252,000) $(2,993,000) $ 291,000 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization................. 506,000 1,171,000 2,580,000 Amortization of debt discount................. 164,000 -- -- Amortization of deferred compensation......... -- 63,000 420,000 Increase in accounts receivable............... -- (250,000) (2,883,000) Increase in inventory......................... -- -- (953,000) Increase in prepaid expenses and other current assets...................................... (94,000) (215,000) (182,000) (Increase) decrease in other assets........... 203,000 (40,000) (17,000) (Increase) decrease in notes receivable from related parties............................. (120,000) (220,000) 176,000 Increase in accounts payable and accrued expenses.................................... 141,000 482,000 1,695,000 Increase (decrease) in deferred revenue....... 2,108,000 2,805,000 (519,000) ----------- ----------- ------------ Net cash provided by operating activities............................. 656,000 803,000 608,000 ----------- ----------- ------------ Cash flows from investing activities: Purchases of marketable securities............... (9,052,000) -- (61,447,000) Proceeds from sale or maturity of marketable securities.................................... 4,250,000 4,302,000 27,802,000 Additions to property and equipment.............. (495,000) (2,292,000) (9,085,000) ----------- ----------- ------------ Net cash (used in) provided by investing activities............................. (5,297,000) 2,010,000 (42,730,000) ----------- ----------- ------------ Cash flows from financing activities: Proceeds from bridge financing -- related party......................................... 700,000 -- -- Principal payments of capital lease obligations................................... (381,000) (737,000) (1,335,000) Proceeds from issuance of mandatorily redeemable convertible preferred stock, net.............. 6,885,000 -- -- Proceeds from issuance of common stock, net...... 1,000 31,521,000 22,008,000 ----------- ----------- ------------ Net cash provided by financing activities............................. 7,205,000 30,784,000 20,673,000 ----------- ----------- ------------ Net (decrease) increase in cash and cash equivalents...................................... 2,564,000 33,597,000 (21,449,000) Cash and cash equivalents, beginning of period..... 425,000 2,989,000 36,586,000 ----------- ----------- ------------ Cash and cash equivalents, end of period........... $ 2,989,000 $36,586,000 $ 15,137,000 =========== =========== ============
The accompanying notes are an integral part of these financial statements. 25 12 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Capital lease obligations of $503,000, $2,178,000 and $856,000 were incurred in 1995, 1996 and 1997, respectively, when the Company entered into leases for various machinery and equipment, furniture and fixtures, and leasehold improvements. During 1995, the Company converted $2,400,000 of bridge loans into 1,920,000 shares of Series A convertible preferred stock (Note 9). In addition, during 1996, the Company converted $142,000 of interest relating to the bridge loans into 113,429 shares of Series A convertible preferred stock. During 1996, 12,439,897 shares of Series A and Series B preferred stock were converted into 6,219,948 shares of common stock, in connection with the Company's initial public offering of common stock (Note 10). In addition, 234,992 shares of common stock were issued in connection with the cashless exercise of outstanding warrants. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: During 1995, 1996 and 1997, the Company paid approximately $254,000, $190,000 and $223,000 respectively, for interest. 26 13 ARQULE, INC. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND NATURE OF OPERATIONS ArQule, Inc. (the "Company") is engaged in the discovery, development and production of novel chemical compounds primarily for the pharmaceutical, biotechnology and agrochemical industries. Its operations are focused on the integration of combinatorial chemistry, structure-guided rational drug design and other proprietary technologies which automate the process of chemical synthesis to produce arrays of novel small organic chemical compounds used to generate and optimize product development candidates. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies followed in the preparation of these financial statements are as follows: Cash Equivalents and Marketable Securities The Company considers all highly liquid investments purchased within three months of maturity date to be cash equivalents. The Company invests its available cash primarily in money market mutual funds and U.S. government and other investment grade debt securities which have strong credit ratings. These investments are subject to minimal credit and market risks. At December 31, 1996 and 1997, the Company has classified its investments as available-for-sale. Fair Value of Financial Instruments At December 31, 1996 and 1997, the Company's financial instruments consist of cash, cash equivalents, marketable securities, accounts receivable, notes receivable from related party, accounts payable and accrued expenses. The carrying amount of these instruments approximate their fair values. Property and Equipment Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Assets under capital leases and leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the respective leases by use of the straight-line method. Maintenance and repair costs are expensed as incurred. Revenue Recognition Compound development revenue relates to revenue from significant collaborative agreements (Note 3) and from licensing of compound arrays. Revenue from collaborative agreements relates to the delivery of compounds and to compound development work and is recognized using the percentage of completion method. The application of this revenue recognition method is dependent on the contractual arrangement of either compound delivery or development. Accordingly, revenue is recognized on the proportional achievement of deliveries against a compound delivery schedule or as development labor is expended against a total research and development labor plan. Payments received under these arrangements prior to the completion of the related work are recorded as deferred revenue. Revenue from licensing of compound arrays with no additional obligations is recognized upon delivery of the compound array. License option fees represent payments made to the Company for a right to evaluate and negotiate the terms of potential licensing arrangements and are recognized as revenue as the options are granted, as the Company has no further obligations and as payments are nonrefundable. Cost of Revenue Cost of revenue represents the actual costs incurred in connection with performance pursuant to collaborative agreements and the costs incurred to produce compound arrays. These costs consist primarily of payroll and payroll-related costs, chemicals, supplies and overhead expenses. 27 14 ARQULE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Stock Compensation Options granted to employees and directors are accounted for in accordance with Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Under APB No. 25, no compensation expense is recognized for options granted at fair market value. The Company has adopted the disclosure requirements of SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS No. 123"). Options granted to nonemployees are accounted for using the fair value method and are recognized as compensation expense over their respective service periods. Inventories Inventory consists of costs associated with the Company's Mapping Array libraries and is stated at the lower of cost, on a first-in, first-out basis, or market. Such costs are capitalized after achieving technological feasibility. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Reclassifications Certain reclassifications have been made to the 1995 and 1996 financial statements to conform to the 1997 presentation. These reclassifications had no effect on the net loss for 1995 and 1996. Net Income (Loss) per Share During the fourth quarter of 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 replaced primary and fully diluted earnings per share with basic and diluted earnings per share. The adoption of this standard requires retroactive restatement of previously reported loss per share calculations in 1995 and 1996. During the implementation of SFAS 128, the Company had previously included unvested shares of common stock subject to restriction agreements in its computation of basic and diluted net loss per share of $3.76 and $1.23 for the years ended December 31, 1995 and 1996, respectively. The basic and diluted net loss per share for the years ended December 31, 1995 and 1996 have been restated to $7.93 and $1.32, reflecting the removal of certain unvested shares of common stock subject to restriction agreements which are anti-dilutive. 3. SIGNIFICANT AGREEMENTS The Company has entered into a number of license, research and development agreements (the "Agreements") with seven corporate collaborators who accounted for substantially all of the Company's 1997 revenue. One Agreement was entered into with Solvay Duphar B.V. ("Solvay"), a related party (Note 9). Revenue related to the Solvay Agreement is included in compound development revenue -- related party. 28 15 ARQULE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Under the terms of these Agreements, the Company will provide a certain number of compounds per year and has granted the right to screen these compounds against targets to identify biological activity (an "Active Compound") and will provide research and development services. The collaborators have the right to enter into an exclusive, worldwide license (the "License") for any Active Compound identified. The initial terms of these Agreements generally range from two to five years during which period the collaborators make payments to the Company for technology access, delivery of compounds and for its research and development services. In exchange for a License, the Company will receive milestone payments during product development and royalty payments based on the sales of the product. Solvay exercised its right to license certain of the Company's technologies on a non-exclusive basis in December 1997. Additionally, the Company has entered into a number of agreements with biotechnology companies (the "biotech collaborators"). Under the terms of material transfer agreements with biotech collaborators, the Company has granted the biotech collaborator the nonexclusive, royalty-free license to test certain compound arrays supplied by the Company. Upon identification of an active compound, the Company will negotiate a joint drug development program with the biotech collaborator to develop the compound, provided the Company has not previously licensed the compound. Under these joint drug development programs, the Company and the biotech collaborator will each bear the costs and expenses of their respective activities. Proceeds received on sales or a third party license of the jointly developed compound will be allotted between the parties in accordance with the individual agreements, after, in some instances, the reimbursement of direct research costs incurred by the respective parties. 4. CASH EQUIVALENTS AND MARKETABLE SECURITIES The following is a summary of the fair market value of available-for-sale marketable securities held by the Company at December 31, 1996 and 1997:
DECEMBER 31, ----------------------- MATURITY 1996 1997 ------------- -------- ----------- U.S. Government obligations................. Within 1 year $500,000 $ 2,200,000 Corporate bonds............................. Within 1 year -- 31,945,000 -------- ----------- $500,000 $34,145,000 ======== ===========
At December 31, 1996 and 1997, marketable securities are carried at amortized cost, which approximates fair market value. All of the Company's marketable securities are classified as current at December 31, 1996 and 1997 as funds are highly liquid and are available to meet working capital needs and to fund current operations. Gross unrealized gains and losses on sales of securities for the years ended December 31, 1996 and 1997 were not significant. 5. INVENTORY Inventories at December 31, 1997 consists of the following:
1997 -------- Raw Materials............................................... $361,000 Finished Goods.............................................. 592,000 -------- $953,000 ========
29 16 ARQULE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 6. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
ESTIMATED DECEMBER 31, USEFUL LIFE ------------------------- (YEARS) 1996 1997 ----------- ---------- ----------- Machinery and equipment........................ 3-7 $3,053,000 $ 5,997,000 Leasehold improvements......................... 5 2,728,000 4,183,000 Furniture and fixtures......................... 7 178,000 178,000 Computer equipment............................. 3 1,197,000 3,253,000 Construction-in-progress....................... -- 5,000 3,491,000 ---------- ----------- 7,161,000 17,102,000 Less -- accumulated depreciation and amortization................................. 1,868,000 4,448,000 ---------- ----------- $5,293,000 $12,654,000 ========== ===========
Assets held under capital leases at December 31, 1997 and 1996 consisted of $2,416,000 in 1996 and $3,272,000 in 1997 of machinery and equipment, $832,000 of leasehold improvements, $746,000 in computer equipment and $107,000 of furniture and fixtures. Accumulated amortization of these assets totaled $1,305,000 and $2,503,000 at December 31, 1996 and 1997, respectively. For the years ended December 31, 1995, 1996 and 1997, amortization expense related to assets held under capital lease obligations was $300,000, $751,000 and $1,198,000, respectively. 7. NOTES RECEIVABLE FROM RELATED PARTIES Notes receivable from related parties consist of the following:
DECEMBER 31, -------------------- 1996 1997 -------- -------- Note receivable due from an officer of the Company, due in full on November 3, 1997.................................. $ 63,000 $ -- Note receivable due from the same officer of the Company, payable in four equal annual installments commencing on November 2, 1996, principal due on each installment date will be forgiven so long as the officer is employed by the Company on the installment date, secured by the officer's beneficial interest in 48,000 shares of common stock of the Company............................................... 90,000 60,000 Note receivable due from another officer of the Company, payable in three equal annual installments commencing on February 16, 1998, secured by shares of common stock of the Company issuable to the officer upon the exercise of options................................................... 250,000 167,000 -------- -------- 403,000 227,000 Less current portion........................................ 176,000 30,000 -------- -------- $227,000 $197,000 ======== ========
Interest on the notes receivable from related parties accrues on the unpaid principal and interest at 5.9%. Interest due on the notes at December 31, 1996 and 1997, $6,000 and $13,248, respectively, was included in prepaid expenses and other current assets. 30 17 ARQULE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses include the following:
DECEMBER 31, ------------------------ 1996 1997 ---------- ---------- Accounts payable............................................ $ 485,000 $2,161,000 Accrued professional fees................................... 469,000 379,000 Other accrued expenses...................................... 155,000 264,000 ---------- ---------- $1,109,000 $2,804,000 ========== ==========
9. CONVERTIBLE PREFERRED STOCK On November 5, 1995, as part of a collaborative agreement (Note 3), the Company sold to Solvay Duphar B.V. ("Solvay") 1,800,000 shares of Series B preferred stock which resulted in net proceeds to the Company of $6,885,000. In April 1996, the Company issued to Solvay an additional 15,468 shares of Series B preferred stock in connection with the conversion of the bridge financing interest into Series A preferred stock to maintain the original, agreed-upon ownership percentage. At December 31, 1995, the Company had 15,000,000 shares of convertible preferred stock authorized. Upon the closing of the Company's initial public offering on October 16, 1996 (Note 10), all outstanding shares of Series A and Series B preferred stock automatically converted into 6,219,948 shares of common stock, and the number of authorized shares of preferred stock was reduced to 1,000,000 shares. 10. COMMON STOCK On October 4, 1996, the Company effected a 1-for-2 reverse stock split on the common stock of the Company. Accordingly, all common share and per share data have been restated to give retroactive effect to the stock split for all periods presented. In October and November 1996, the Company completed its initial public offering of 2,875,000 shares of common stock. Proceeds to the Company, net of issuance costs, amounted to $31,521,000. In connection with its initial public offering, the stockholders approved an amendment to the Company's Certificate of Incorporation to increase the number of authorized common shares to 30,000,000. On April 4, 1997, the Company completed a follow-on offering of 1,932,500 shares of common stock, which included the underwriters' exercise of their over-allotment of 300,000 shares of common stock on April 14, 1997. Proceeds to the Company, net of issuance costs, amounted to $21,545,000. Stock Restriction Agreements The Company has common stock issued pursuant to the Equity Incentive Plan which is subject to stock restriction agreements whereby the stockholder automatically forfeits to the Company the unvested portion of shares of common stock in the event of termination of their employment with the Company. All such forfeited shares shall immediately be retired by the Company. Shares subject to this agreement vest over two to four year periods. At December 31, 1996 and 1997, the approximate number of unvested common shares is 96,500 and 13,500, respectively. Each stock restriction agreement may be terminated at the election of the Company. 11. EQUITY INCENTIVE AND STOCK PURCHASE PLANS During 1996, the stockholders approved an amendment to the 1994 Amended and Restated Equity Incentive Plan (the "Equity Incentive Plan") increasing the number of shares of common stock available for awards under the Equity Incentive Plan to 2,600,000. All shares are awarded at the discretion of a Committee 31 18 ARQULE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) of the Board of Directors (the "Committee") in a variety of stock-based forms including stock options and restricted stock. Pursuant to the Equity Incentive Plan, incentive stock options may not be granted at less than the fair market value of the Company's common stock at the date of the grant, and the option term may not exceed ten years. For holders of 10% or more of the Company's voting stock, options may not be granted at less than 110% of the fair market value of the common stock at the date of the grant, and the option term may not exceed five years. Stock appreciation rights granted in tandem with an option shall have an exercise price not less than the exercise price of the related option. As of December 31, 1997, no stock appreciation rights have been issued. Subject to the restrictions above, the Committee is authorized to designate the options, awards, and purchases under the Equity Incentive Plan, the number of shares covered by each option, award and purchase, and the related terms, exercise dates, prices and methods of payment. In 1996, the stockholders approved the 1996 Director Stock Option Plan (the "1996 Director Plan") for nonemployee directors. Under this plan, eligible directors are automatically granted once a year, at the annual meeting of stockholders of the Company, options to purchase 3,500 shares of common stock which are exercisable on the date of grant. Upon initial election of an eligible director, options to purchase 7,500 shares of common stock will be granted which will become exercisable in three equal annual installments commencing on the date of the Company's next annual stockholders' meeting held after the date of grant. All options granted pursuant to the 1996 Director Plan have a term of ten years with exercise prices equal to fair market value on the date of grant. Through December 31, 1997, options to purchase 33,000 shares of common stock have been granted under this plan. A maximum of 125,000 shares of common stock of the Company is reserved for issuance in accordance with the terms of this plan, of which 92,000 are available for future grant. The Company applies APB No. 25 and related interpretations in accounting for employee grants under the Equity Incentive Plan and the 1996 Director Plan (collectively the "Plans"). No compensation expense has been recognized under the Plans for employee grants. Had compensation cost been determined based on the estimated value of options at the grant date consistent with the provisions of SFAS No. 123, the Company's pro forma net loss, pro forma basic net loss per share and diluted net loss per share would have been as follows:
DECEMBER 31, ----------------------------------------- 1995 1996 1997 ----------- ----------- ----------- Pro Forma net loss.......................... $(2,254,000) $(3,186,000) $(2,583,000) Pro Forma basic and diluted net loss per share..................................... (7.94) (1.40) (0.23)
During 1996 and 1997, the Company issued 117,500 and 69,000 options to certain consultants and members of its Scientific Advisory Board (SAB) under the Equity Incentive Plan. In April 1997, 11,000 shares were cancelled. The estimated value of these options totaled $709,000 and $328,000 in 1996 and 1997, respectively, was recorded as deferred compensation and is being amortized as compensation expense over the vesting period of the options. Compensation expense in 1996 and 1997 was $63,000 and $420,000, respectively. For the purposes of pro forma disclosure, the estimated value of each employee and nonemployee option grant was calculated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: no dividend yield for both years; 45% volatility for 1995 and 1996 and 50% volatility for 1997 for nonemployee grants and employee grants subsequent to the initial filing of the Registration Statement in connection with the Company's initial public offering; no volatility for employee grants prior to the initial public offering; risk-free interest rates of 5.2% to 7.1% in 1995 and 1996 and 6.0% in 1997; expected lives of 3 to 6 years in 1995 and 1996 and 4 years in 1997 for options granted. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option pricing models require the use of highly subjective assumptions, including the expected stock price volatility. Because the corporation's employee stock options have characteristics significantly different from those of traded options, 32 19 ARQULE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) and because changes in the subjective assumptions can materially affect the fair value estimates, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock-based compensation. Option activity under the Plans for the three years ended December 31, 1997 was as follows:
WEIGHTED AVERAGE NUMBER EXERCISE STOCK OPTIONS OF SHARES PRICE - ------------- --------- -------- Outstanding at December 31, 1994............................ 2,500 $ .02 Granted..................................................... 298,500 .22 --------- Outstanding at December 31, 1995............................ 301,000 .22 Granted..................................................... 1,073,920 4.39 Exercised................................................... (625) .02 Cancelled................................................... (101,625) .49 --------- Outstanding at December 31, 1996............................ 1,272,670 3.72 Granted..................................................... 1,016,912 16.63 Exercised................................................... (133,374) 2.64 Cancelled................................................... (44,456) 9.57 --------- Outstanding at December 31, 1997............................ 2,111,752 $ 9.88 ========= Exercisable at December 31, 1997............................ 373,025 ========= Weighted average estimated value of options granted during the year ended December 31, 1997.......................... $ 4.17 ======
The following table summarizes information about options outstanding at December 31, 1997:
OPTIONS OPTIONS OUTSTANDING EXERCISABLE --------------------------------------- ----------------------- WEIGHTED NUMBER AVERAGE WEIGHTED EXERCISABLE WEIGHTED OUTSTANDING AT REMAINING AVERAGE AS OF AVERAGE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE RANGE OF EXERCISE PRICES 1997 LIFE PRICE 1997 PRICE - ------------------------ -------------- ----------- -------- ------------ -------- $ 0.0000 - 2.4000........................ 602,820 7.9 $ 0.74 203,617 $ 0.68 4.8001 - 7.2000........................ 359,875 8.5 6.00 71,125 6.00 9.6001 - 12.0000........................ 157,250 8.8 10.86 44,216 10.95 12.0001 - 14.4000........................ 490,807 9.3 14.13 43,567 14.13 14.4001 - 16.8000........................ 35,500 9.1 15.70 -- -- 16.8001 - 19.2000........................ 276,000 9.3 17.84 10,500 17.63 19.2001 - 21.6000........................ 133,000 9.7 20.88 -- -- 21.6001 - 24.0000........................ 56,500 9.9 24.00 -- -- --------- ------- 2,111,752 8.8 $ 9.88 373,025 $ 4.96 ========= === ====== ======= ======
At December 31, 1997, there were 515,546 shares available for future grant under the Equity Incentive Plan. Stock Purchase Plan In 1996, the stockholders adopted the 1996 Employee Stock Purchase Plan (the "Purchase Plan"). This plan enables eligible employees to exercise rights to purchase the Company's common stock at 85% of the fair 33 20 ARQULE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) market value of the stock on the date the right was granted or the date the right is exercised, whichever is lower. Rights to purchase shares under the Purchase Plan are granted by the Board of Directors. The rights are exercisable during a period determined by the Board of Directors; however, in no event will the period be longer than twenty-seven months. The Purchase Plan is available to substantially all employees, subject to certain limitations. The Company has reserved 120,000 shares of common stock for purchases under the Purchase Plan. At December 31, 1997, 9,173 shares have been purchased pursuant to the Purchase Plan. 12. INCOME TAXES There is no current or deferred tax expense for the years ended December 31, 1995, 1996 and 1997. The deferred tax consequences of temporary differences in reporting items for financial statement and income tax purposes are recognized, if appropriate. Realization of the future tax benefits related to the deferred tax assets is dependent on many factors, including the company's ability to generate taxable income within the net operating loss carryforward period. Management has considered these factors in reaching its conclusion as to the valuation allowance for financial reporting purposes. The income tax effect of temporary differences comprising the deferred tax assets and deferred tax liabilities on the accompanying balance sheets is a result of the following:
DECEMBER 31, -------------------------- 1996 1997 ----------- ----------- Deferred tax assets: Preoperating costs capitalized for tax purposes......... $ 370,000 $ 288,000 Net operating loss carryforwards........................ 3,906,000 4,506,000 Tax credit carryforwards................................ 311,000 811,000 Non-employee equity based compensation.................. -- 173,000 Other................................................... 30,000 40,000 ----------- ----------- $ 4,617,000 $ 5,818,000 Deferred tax liabilities: Tax depreciation in excess of book...................... -- (135,000) Valuation allowance....................................... (4,617,000) (5,683,000) ----------- ----------- Net deferred tax assets................................. $ -- $ -- =========== ===========
The Company has provided a full valuation allowance for the deferred tax assets as the realization of these future benefits is not sufficiently assured as of the end of each related year. If the Company achieves profitability, the deferred tax assets will be available to offset future income tax liabilities and expense. Of the $5.7 million valuation allowances at December 31, 1997, $615,000 relates to deductions for disqualifying dispositions and non qualified stock options which will be credited to paid in capital, if realized. 34 21 ARQULE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation between the statutory federal income tax rate (35%) and the effective rate of income tax expense for each of the three years during the period ended December 31, 1997 follows:
YEAR ENDED DECEMBER 31, ------------------------------------- 1995 1996 1997 --------- ----------- --------- Income tax benefit (expense) at statutory rate......................................... $ 788,000 $ 1,048,000 $(102,000) State tax benefit (expense), net............... 135,000 180,000 (18,000) Losses without current tax benefit............. (907,000) (1,180,000) -- Utilization of net operating loss carryforwards................................ -- -- 133,000 Other.......................................... (16,000) (48,000) (13,000) --------- ----------- --------- Tax Provision............................. $ -- $ -- $ -- ========= =========== =========
The Company has available net operating loss carryforwards of approximately $11.0 million for tax purposes to offset future taxable income. The net operating loss carryforwards expire principally in 2009 to 2012. General tax credit carryforwards of approximately $811,000 expire principally in 2009 to 2012. Under the Internal Revenue Code, certain substantial changes in the Company's ownership could result in an annual limitation on the amount of net operating loss and tax credit carryforwards which can be utilized in future years. 13. COMMITMENTS AND CONTINGENCY Leases The Company leases facilities and equipment under noncancelable operating and capital leases. The future minimum lease commitments under these leases are as follows:
YEAR ENDING OPERATING CAPITAL DECEMBER 31, LEASES LEASES - ------------ ---------- ---------- 1998........................................................ $ 838,000 $1,174,000 1999........................................................ 780,000 907,000 2000........................................................ 721,000 305,000 2001........................................................ 315,000 1,000 ---------- ---------- 2,387,000 Interest due on capital leases.............................. 243,000 ---------- ---------- Total minimum lease payments................................ $2,654,000 $2,630,000 ========== ==========
The Company has a lease line agreement with a financial institution (the "Lessor") for $8,500,000 of which approximately $4,000,000 was available for future leases at December 31, 1997. The term for each lease under the agreement is forty-two months, commencing on the purchase date of the asset, and the lease bears interest at a rate determined by the Lessor at the transaction date. Rent expense under noncancelable operating leases was approximately $163,000, $283,000 and $582,000 for the years ended December 31, 1995, 1996, and 1997, respectively. Employment Agreements The Company has employment agreements with an officer who is also a member of the board of directors. The agreement provides that if employment is terminated without cause, the officer is entitled to receive up to six months' salary. 35 22 ARQULE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Contingency On July 21, 1997, a complaint was filed in the United States District Court of Connecticut against the Company and two of the Company's stockholders by two individuals alleging that they were entitled to compensation from the Company and these two stockholders equal to approximately five percent of the equity interests in the Company for services in connection with the initial financing of ArQule Partners, L.P. in 1993. In addition, one of the plaintiffs is alleging that he was denied the opportunity to make a five percent investment in the Company at the time of its incorporation. Prior to the Company's initial public offering of its Common Stock, ArQule Partners, L.P. was a major stockholder of the Company. An answer was filed on September 15, 1997 denying the material allegations in the complaint and Phase I of the discovery process has been completed. Although the parties to this lawsuit have had mediation proceedings, the Company intends to continue to contest this lawsuit vigorously. No assurance can be given regarding the outcome of this lawsuit. The Company is currently unable to estimate the range of potential loss, if any, that might result as a consequence of this action. 36 23 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (A) 1. FINANCIAL STATEMENTS The financial statements are listed under Item 8 of this report. 2. FINANCIAL STATEMENT SCHEDULES The financial statement schedules listed under Item 8 of this report are omitted because they are not applicable or required information and are shown in the financial statements of the footnotes thereto. (B) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the fourth quarter of 1997. 37 24 (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 3.5 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 4.1 Specimen Common Stock Certificate. Filed as Exhibit 4.1 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.1* Amended and Restated 1994 Equity Incentive Plan, as amended through October 17, 1994. Filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.2* 1996 Employee Stock Purchase Plan. Filed as Exhibit 10.2 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.3* Amended and Restated 1996 Director Stock Option Plan. Filed as Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 filed with the Commission on March 17, 1998 (File No. 000-21429) and incorporated herein by reference. 10.4 Form of Indemnification Agreement between the Company and its directors. Such agreements are materially different only as to the signing directors and the dates of execution. Filed as Exhibit 10.4 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.5 Investors' Rights Agreement among the Company and certain stockholders of the Company dated November 2, 1995. Filed as Exhibit 10.5 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.6 Lease Agreement dated September 29, 1993 between the Company and Beautyrest Property, Inc. and WRB, Inc. Filed as Exhibit 10.6 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.7 Lease Agreement, dated July 27, 1995, between the Company and Cummings Properties Management, Inc. as amended. Filed as Exhibit 10.7 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.8* Employment Agreement effective as of January 2, 1996, between the Company and Eric B. Gordon. Filed as Exhibit 10.8 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.9* Employment Agreement effective as of July 9, 1996, between the Company and James R. Fitzgerald, Jr. Filed as Exhibit 10.9 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.10* Promissory Note dated November 2, 1995 between Dr. Joseph C. Hogan, Jr. and the Company. Filed as Exhibit 10.10 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.11* Pledge Agreement dated November 2, 1995 between Dr. Joseph C. Hogan, Jr. and the Company. Filed as Exhibit 10.11 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.12* Promissory Note and Pledge Agreement dated July 9, 1996 between Eric B. Gordon and the Company. Filed as Exhibit 10.12 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.13* Promissory Note dated November 4, 1993 between Dr. Joseph C. Hogan, Jr. and the Company. Filed as Exhibit 10.13 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference.
38 25
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.14+ Research, Development and License Agreement between the Company and Solvay Duphar B.V. dated November 2, 1995. Filed as Exhibit 10.14 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.15+ Research & Development and License Agreement between the Company and Abbott Laboratories dated June 15, 1995, as amended. Filed as Exhibit 10.15 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.16+ Research & Development Agreement between the Company and Amersham Pharmacia Biotech AB dated March 10, 1995, as amended. Filed as Exhibit 10.16 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.17+ Option Agreement between the Company and Amersham Pharmacia Biotech AB dated March 10, 1995, as amended. Filed as Exhibit 10.17 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.18* Adoption Agreement for Fidelity Management and Research Company (the Company's 401(k) plan). Filed as Exhibit 10.18 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.19 Research and License Agreement between the Company and Roche Bioscience dated September 13, 1996. Filed as Exhibit 10.19 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.20+ Array Delivery and Testing Agreement between the Company and Monsanto Company dated as of December 23, 1996. Filed as Exhibit 10.20 to the Company's Registration Statement on Form S-1 (File No. 333-22945) and incorporated herein by reference. 10.21+ Amendment No. 2 to Research & Development License Agreement between the Company and Abbott Laboratories dated as of December 24, 1996. Filed as Exhibit 10.21 to the Company's Registration Statement on Form S-1 (File No. 333-22945) and incorporated herein by reference. 10.22 Lease Agreement, dated December 20, 1996 between the Company and Cummings Property Management, Inc. Filed as Exhibit 10.22 to the Company's Registration Statement on Form S-1 (File No. 333-22945) and incorporated herein by reference. 10.23+ Research and License Agreement between the Company and American Home Products Corporation acting through its Wyeth-Ayerst Research Division dated July 3, 1997. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 000-21249) and incorporated herein by reference. 10.24 Common Stock Purchase Agreement between the Company and American Home Products Corporation Dated July 3, 1997. Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 000-21429) and incorporated herein by reference. 10.25+ Second Amendment to Option Agreement and Research and Development Agreement between the Company and Amersham Pharmacia Biotech AB dated September 23, 1996. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (File No. 000-21429) and incorporated herein by reference. 10.26+ Third Amendment to Option Agreement and Research and Development Agreement between the Company and Amersham Pharmacia Biotech AB dated June 24, 1997. Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (File No. 000-21429) and incorporated herein by reference. 10.27* First Allonge to Promissory Note between the Company and Eric B. Gordon dated July 16, 1997. Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (File No. 000-21429) and incorporated herein by reference. 10.28 Intentionally omitted.
39 26
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.29+ Research and Development Agreement between the Company and Sankyo Co., Ltd. dated November 1, 1997. Filed as Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, filed with the Commission on March 17, 1998 (File No. 000-21429) and incorporated herein by reference. 10.30+ Amendment No. 3 to Research & Development and License Agreement between the Company and Abbott Laboratories dated December 23, 1997. Filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 filed with the Commission on March 17, 1998 (File No. 000-21249) and incorporated herein by reference. 11.1 Statement re computation of per share net income (loss). Filed herewith. 23.1 Consent of Price Waterhouse LLP. Filed herewith. 99.1 Important Factors Regarding Forward-Looking Statements. Filed as Exhibit 99.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 filed with the Commission on March 17, 1998 (File No. 000-21249) and incorporated herein by reference.
- --------------- * Indicates a management contract or compensatory plan. + Certain confidential material contained in the document has been omitted and filed separately, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended or Rule 246-2 of the Securities and Exchange Act of 1934, as amended. 40 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of Amendment to the Securities Exchange Act of 1934, the Registration has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Medford, Commonwealth of Massachusetts, on April 17, 1998. ARQULE, INC. By: /s/ ERIC B. GORDON ------------------------------------ Eric B. Gordon President and Chief Executive Officer
SIGNATURE TITLE DATE --------- ----- ---- /s/ ERIC B. GORDON President, Chief Executive Officer and April 17, 1998 - ------------------------------------------ Director (Principal Executive Officer) Eric B. Gordon /s/ JAMES R. FITZGERALD, JR. Vice President, Chief Financial Officer April 17, 1998 - ------------------------------------------ and Treasurer (Principal Financial Officer James R. Fitzgerald, Jr. and Principal Accounting Officer) /s/ JOSEPH C. HOGAN, JR. Chairman of the Board, Senior Vice April 17, 1998 - ------------------------------------------ President of Research and Development, Joseph C. Hogan, Jr. Chief Scientific Officer and Director Director April 17, 1998 - ------------------------------------------ Adrian de Jonge /s/ ALLAN R. FERGUSON Director April 17, 1998 - ------------------------------------------ Allan R. Ferguson /s/ STEPHEN M. DOW Director April 17, 1998 - ------------------------------------------ Stephen M. Dow Director April 17, 1998 - ------------------------------------------ L. Patrick Gage /s/ MICHAEL ROSENBLATT Director April 17, 1998 - ------------------------------------------ Michael Rosenblatt
41 28 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 amended through October 17, 1994. Filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.2* 1996 Employee Stock Purchase Plan. Filed as Exhibit 10.2 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.3* Amended and Restated 1996 Director Stock Option Plan. Filed as Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 filed with the Commission on March 17, 1998 (File No. 000-21429) and incorporated herein by reference. 10.4 Form of Indemnification Agreement between the Company and its directors. Such agreements are materially different only as to the signing directors and the dates of execution. Filed as Exhibit 10.4 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.5 Investors' Rights Agreement among the Company and certain stockholders of the Company dated November 2, 1995. Filed as Exhibit 10.5 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.6 Lease Agreement dated September 29, 1993 between the Company and Beautyrest Property, Inc. and WRB, Inc. Filed as Exhibit 10.6 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.7 Lease Agreement, dated July 27, 1995, between the Company and Cummings Properties Management, Inc. as amended. Filed as Exhibit 10.7 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.8* Employment Agreement effective as of January 2, 1996, between the Company and Eric B. Gordon. Filed as Exhibit 10.8 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.9* Employment Agreement effective as of July 9, 1996, between the Company and James R. Fitzgerald, Jr. Filed as Exhibit 10.9 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.10* Promissory Note dated November 2, 1995 between Dr. Joseph C. Hogan, Jr. and the Company. Filed as Exhibit 10.10 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.11* Pledge Agreement dated November 2, 1995 between Dr. Joseph C. Hogan, Jr. and the Company. Filed as Exhibit 10.11 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.12* Promissory Note and Pledge Agreement dated July 9, 1996 between Eric B. Gordon and the Company. Filed as Exhibit 10.12 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.13* Promissory Note dated November 4, 1993 between Dr. Joseph C. Hogan, Jr. and the Company. Filed as Exhibit 10.13 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.14+ Research, Development and License Agreement between the Company and Solvay Duphar B.V. dated November 2, 1995. Filed as Exhibit 10.14 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference.
42 29
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.15+ Research & Development and License Agreement between the Company and Abbott Laboratories dated June 15, 1995, as amended. Filed as Exhibit 10.15 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.16+ Research & Development Agreement between the Company and Amersham Pharmacia Biotech AB dated March 10, 1995, as amended. Filed as Exhibit 10.16 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.17+ Option Agreement between the Company and Amersham Pharmacia Biotech AB dated March 10, 1995, as amended. Filed as Exhibit 10.17 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.18* Adoption Agreement for Fidelity Management and Research Company (the Company's 401(k) plan). Filed as Exhibit 10.18 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.19 Research and License Agreement between the Company and Roche Bioscience dated September 13, 1996. Filed as Exhibit 10.19 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference. 10.20+ Array Delivery and Testing Agreement between the Company and Monsanto Company dated as of December 23, 1996. Filed as Exhibit 10.20 to the Company's Registration Statement on Form S-1 (File No. 333-22945) and incorporated herein by reference. 10.21+ Amendment No. 2 to Research & Development License Agreement between the Company and Abbott Laboratories dated as of December 24, 1996. Filed as Exhibit 10.21 to the Company's Registration Statement on Form S-1 (File No. 333-22945) and incorporated herein by reference. 10.22 Lease Agreement, dated December 20, 1996 between the Company and Cummings Property Management, Inc. Filed as Exhibit 10.22 to the Company's Registration Statement on Form S-1 (File No. 333-22945) and incorporated herein by reference. 10.23+ Research and License Agreement between the Company and American Home Products Corporation acting through its Wyeth-Ayerst Research Division dated July 3, 1997. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 000-21249) and incorporated herein by reference. 10.24 Common Stock Purchase Agreement between the Company and American Home Products Corporation Dated July 3, 1997. Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 000-21429) and incorporated herein by reference. 10.25+ Second Amendment to Option Agreement and Research and Development Agreement between the Company and Amersham Pharmacia Biotech AB dated September 23, 1996. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (File No. 000-21429) and incorporated herein by reference. 10.26+ Third Amendment to Option Agreement and Research and Development Agreement between the Company and Amersham Pharmacia Biotech AB dated June 24, 1997. Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (File No. 000-21429) and incorporated herein by reference. 10.27* First Allonge to Promissory Note between the Company and Eric B. Gordon dated July 16, 1997. Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (File No. 000-21429) and incorporated herein by reference. 10.28 Intentionally omitted. 10.29+ Research and Development Agreement between the Company and Sankyo Co., Ltd. dated November 1, 1997. Filed as Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, filed with the Commission on March 17, 1998 (File No. 000-21429) and incorporated herein by reference. 10.30+ Amendment No. 3 to Research & Development and License Agreement between the Company and Abbott Laboratories dated December 23, 1997. Filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 filed with the Commission on March 17, 1998 (File No. 000-21249) and incorporated herein by reference.
43 30
EXHIBIT NO. DESCRIPTION ----------- ----------- 11.1 Statement re computation of per share net income (loss). Filed herewith. 23.1 Consent of Price Waterhouse LLP. Filed herewith. 99.1 Important Factors Regarding Forward-Looking Statements. Filed as Exhibit 99.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 filed with the Commission on March 17, 1998 (File No. 000-21249) and incorporated herein by reference.
- --------------- * Indicates a management contract or compensatory plan. + Certain confidential material contained in the document has been omitted and filed separately, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended or Rule 246-2 of the Securities and Exchange Act of 1934, as amended. 44 EX-11 2 STATEMENT RE COMPUTATION OF PER SHARE LOSS 1 EXHIBIT 11.1 ARQULE, INC. STATEMENT RE COMPUTATION OF PER SHARE NET INCOME (LOSS) Basic Net Income (Loss) Per Share
YEAR ENDED DECEMBER 31, ----------------------- 1995 1996 1997 ------------ ------------- ----------- Net income (loss) $(2,252,000) $(2,993,000) $ 291,000 ----------- ----------- ----------- Weighted average shares outstanding: Common Stock 284,000 2,272,000 11,282,000 Weighted average common shares outstanding 284,000 2,272,000 11,282,000 ----------- ----------- ----------- Basic net income (loss) per share $ (7.93) $ (1.32) $ 0.03 ----------- ----------- -----------
Diluted Net Income (Loss) Per Share
YEAR ENDED DECEMBER 31, ----------------------- 1995 1996 1997 ------------- ------------- ------------- Net income (loss) $(2,252,000) $(2,993,000) $ 291,000 Weighted average shares outstanding: Common Stock 284,000 2,272,000 11,282,000 Stock option common stock equivalents -- -- 1,057,000 Unvested restricted common stock equivalents -- -- 55,000 ----------- ----------- ----------- Weighted average common shares and equivalents outstanding 284,000 2,272,000 12,394,000 ----------- ----------- ----------- Diluted net income (loss) per share $ (7.93) $ (1.32) $ 0.02 ----------- ----------- -----------
39 EX-23.1 3 CONSENT OF PRICE WATERHOUSE LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (File No. 333-19469) pertaining to the 1996 Employee Stock Purchase Plan, the Registration Statement on Form S-8 (File No. 333-25369) pertaining to the 1996 Director Stock Option Plan and the Registration Statement on Form S-8 (File No. 333-25371) pertaining to the Amended and Restated 1994 Equity Incentive Plan of ArQule, Inc., of our report dated February 9, 1998, except as to the last paragraph of Note 2 which is as of April 17, 1998, appearing on page 21 on this Form 10-K. PRICE WATERHOUSE LLP Boston, Massachusetts April 17, 1998 40 -----END PRIVACY-ENHANCED MESSAGE-----