-----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, UEaaoMv+ApPet5V1y0JGZ+nskyaeIG6P6jNQTXwOO+fuooXhzxWLdsXdA9x0YGR7 CWtJwiNJGqFfzX4P5LnSjQ== 0000950135-01-000866.txt : 20010323 0000950135-01-000866.hdr.sgml : 20010323 ACCESSION NUMBER: 0000950135-01-000866 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010322 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 SEC ACT: SEC FILE NUMBER: 000-21429 FILM NUMBER: 1576677 BUSINESS ADDRESS: STREET 1: 19 PRESIDENTIAL WAY CITY: WOBURN STATE: MA ZIP: 01801 BUSINESS PHONE: 6173954100 MAIL ADDRESS: STREET 1: 19 PRESIDENTIAL WAY CITY: WOBURN STATE: MA ZIP: 01801 10-K 1 b38132are10-k.txt ARQULE, INC. 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, 2000 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.)
19 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:
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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 9, 2001 was: $333,515,737. There were 20,197,924 shares of the registrant's Common Stock outstanding as of March 9, 2001. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS ArQule seeks to bridge the gap between genomics and clinical development by applying its proprietary technology platform and chemistry capabilities to drug discovery. Recent advances in genomics and the completion of the mapping of 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. Our goal is to shorten this period approximately by half. 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 chemistry capabilities to address these critical needs of drug discovery. In addition, ArQule will continue to integrate other technologies into its technology platform. We recently merged with Camitro Corporation to accelerate the integration of computational models of drug-like compound characteristics into our technology platform. THE DRUG DISCOVERY AND DEVELOPMENT PROCESS [FLOW CHART] 1 3 The drug discovery and development process 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; and - 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. Industry analysts estimate that pharmaceutical companies spend annually between $2 and $4 billion on compound discovery. 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 up to 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 $500 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 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 Chemistry Operating System, patented processes and chemistry capabilities to bridge the gap between targets and clinical candidates. In addition, our recent merger with Camitro Corporation will enable us to integrate computational ADMET models as part of our technology platform. 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 3 5 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. 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. We will enhance our abilities in this area with the integration of computational ADMET models from Camitro. 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 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 library contains a subset of representative compounds from our full Mapping Array 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. In addition, we will use the computational ADMET models from Camitro to screen compounds "in silico" to predict their ADMET properties before they are synthesized. These computational and experimental ADMET predictions 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, as with our recent merger with Camitro Corporation. - 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. 5 7 - 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 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 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 our proprietary ArQule Reactor and MapMaker 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 8 PROCESS CHEMISTRY. Before synthesizing an array of actual compounds, the recommended building blocks must be qualified, and reaction conditions developed by our Process Chemistry department. Using the list of recommended building blocks from Library Design, our 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 our 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 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 method, all fractions from a high performance liquid chromotography, or 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 fractions 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 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. CAMITRO'S TECHNOLOGY Camitro has developed various computational models for ADMET characterization of compounds based on their structure. These models will enable ArQule to profile "virtual libraries" of compounds to decide which compounds to make from among the thousands or millions of compounds that we could make. The Camitro models are also useful for compound redesign during lead optimization. For example, the metabolism models developed by Camitro are unique in their ability to direct a chemist to change particular sites on a compound to improve its metabolic stability. ARQULE'S 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. For example, our recent merger with Camitro adds the emerging technology of computational ADMET prediction to our integrated technology platform, which will improve our ability to identify the right compounds to make from among the thousands or millions that we could make. 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. Our products include: Mapping Array 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. 8 10 - 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 approximately 200,000 new compounds to our Mapping Array repository, including 60 or more new chemotypes. Compass Array 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 chemotype have been tested and that the structure-activity relationship patterns within the corresponding Mapping Array libraries have been thoroughly explored. Directed Array Program for Lead Optimization We offer Directed Array 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 9 11 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. Predictive ADMET Models Through our wholly owned subsidiary -- Camitro Corporation -- we intend to offer our customers access to a suite of predictive models for ADMET characterization of compounds. This suite will be initially focused on modeling for human intestinal absorption, blood brain barrier penetration and metabolism by the 3A4 isoenzyme of cytochrome P450. Additional components will be added to this integrated suite over time. Integrated Drug Discovery Platform By combining our AMAP(TM) technology for high throughput, automated chemistry; our intelligent design of compounds for optimal potency, selectivity and ADMET characteristics; and a parallel process for drug discovery we intend to offer an integrated drug discovery platform for potential collaboration with large pharmaceutical partners. 10 12 OUR COLLABORATIONS Pharmaceutical Collaborations The following table summarizes our collaborations with pharmaceutical companies:
COMPANY PRODUCTS/SERVICES PROVIDED - ------- -------------------------- Pfizer Inc. .................. Technology transfer of AMAP Chemistry Operating System and Custom Array libraries Bayer AG...................... Custom Array libraries American Home Products, Wyeth- Ayerst Division............. Mapping Array and Directed Array libraries Solvay Duphar B.V. ........... Mapping Array, Compass Array and Directed Array libraries and a non-exclusive license to our AMAP Chemistry Operating System G.D. Searle, a division of Pharmacia Corp. ............ Mapping Array, Directed Array and Compass Array libraries and lead optimization services Sankyo Company, Ltd. ......... Mapping Array and Directed Array libraries Johnson & Johnson, Inc. ...... Mapping Array libraries and Compass Array libraries GlaxoSmithKline............... Compass Array libraries and lead optimization services Abbott Laboratories(1)........ Mapping Array and Directed Array libraries Roche Bioscience(1)........... Directed Array libraries
- --------------- (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. Pfizer will own all rights in compounds produced at this facility. 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 $15.8 million upfront payment and will potentially receive up to $27 million per calendar year for compound production, technology access, and operating costs. As of December 31, 2000, we have received $40.4 million under this agreement. Pfizer may terminate the agreement after two and one half years for any reason, with payment of a termination fee and return of the AMAP Chemistry Operating System. 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 AG to produce Custom Array libraries. Bayer will own all rights in compounds for an initial period, after which we will co-own rights in compounds that Bayer has not claimed in a patent application. 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. As of December 31, 2000, we have received $5.0 million under this agreement. 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 a five-year 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, and is committed to make payments totaling $26.2 million during the course of the agreement. As of December 31, 2000, we have received $22.0 million under this agreement and we have not received any milestone or royalty payments. In addition, Wyeth-Ayerst has agreed to pay us development milestones and royalties from the sales of products resulting from the collaboration. 11 13 Solvay. In November 1995, we entered into a five-year agreement with Solvay Duphar B.V. Under this agreement, Solvay subscribed to our Mapping Array and Directed Array programs and received a non-exclusive license to our AMAP Chemistry Operating System. This agreement was superseded by an amended and restated agreement with Solvay Pharmaceuticals B.V., which became effective on January 1, 2001. The amended agreement extends the collaboration through December 31, 2003. Under the amended agreement, Solvay receives our Compass Array libraries and continues to access our Mapping Array libraries and Directed Array programs. We received a total of $18.1 million under the original agreement. Solvay is committed to make additional payments totalling $2.5 million under the amended agreement. 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. To date, we have not received any milestone or royalty payments. In connection with this collaboration, an affiliate of Solvay, Physica B.V., made a $7 million equity investment in ArQule. Pharmacia. We entered into a five-year collaboration with Monsanto Company (now Pharmacia Corporation) 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 this collaboration to cover life science applications, including pharmaceutical use by Monsanto's G.D. Searle division, 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. Pharmacia is committed to make payments totaling $12.7 million under this agreement. 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. On June 30, 2000, in connection with the merger between Monsanto and Pharmacia, we replaced our existing collaboration agreement with a new collaboration agreement with G.D. Searle & Co., a division of Pharmacia. The financial terms of the new agreement are substantially the same as the prior agreement. However, we expanded the scope of the agreement to enable Pharmacia and its affiliates to screen our compounds, which may result in milestone and royalty payments in the future. To date, we have received $12.3 million under this agreement. Sankyo. In November 1997, we entered into a three-year agreement with Sankyo Company, Ltd. to discover and optimize drug candidates. Under the terms of the agreement, Sankyo received a 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. To date, we have received $7.8 million under this agreement. Sankyo has also agreed to pay us developmental milestones and royalties resulting from sales of any products resulting from this collaboration. To date, we have not received any milestone or royalty payments under this agreement. 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. As of December 31,2000, we have received $6.0 million under this agreement. In addition, R.W. Johnson has agreed to pay us developmental milestones and royalties from sales of any products resulting from this collaboration. We have not received any milestone or royalty payments. On August 14, 2000, we amended our collaboration agreement with R.W. Johnson to discover new lead compounds for a variety of therapeutic areas. The amended agreement includes a subscription to our Compass Array libraries in lieu of other deliverables. The amendment did not alter the financial terms of the agreement. GlaxoSmithKline. In November 2000, we entered into a five-year collaboration and license agreement with SmithKline Beecham Corporation (now GlaxoSmithKline). Under the terms of the agreement, GlaxoSmithKline receives access to our Compass Array libraries and Mapping Array libraries for screening primarily in the anti-infective field. In addition, GlaxoSmithKline has committed to submit two drug discovery programs to us during the course of the agreement. We have initiated the first of the two drug 12 14 discovery programs based on a lead compound discovered in a GlaxoSmithKline compound library. We will initiate the second drug discovery program when and if GlaxoSmithKline decides to develop a lead compound discovered in an ArQule compound library. GlaxoSmithKline receives all rights in compounds developed in these drug discovery programs. As of December 31, 2000, we have received no payments under this collaboration. We will receive more than this minimum amount if GlaxoSmithKline continues the first drug discovery program beyond the minimum period and when and if GlaxoSmithKline begins the second drug discovery program. GlaxoSmithKline may terminate the agreement before the end of the five-year term. GlaxoSmithKline has agreed to pay us development milestones and royalties on sales of products resulting from the collaboration. To date, we have not received any milestone or royalty payments. Abbott Laboratories. In June 1995, we entered into an agreement with Abbott Laboratories. Under this agreement Abbott subscribed to our Mapping Array and Directed 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. We have not received any milestone or royalty payments from Abbott. 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 Bioscience 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 Investigational New Drug application, or IND, enabling toxicology studies. Biotechnology Collaborations In the past, we have entered into a number of collaborations with biotechnology companies, primarily providing them with access to our Mapping Array libraries. Going forward, we intend to enter into a select number of focused biotechnology collaborations with companies who can contribute significant numbers of important targets, generally around a specific target class or therapeutic area. These collaborations will pool the necessary resources from each company to conduct a drug discovery program aimed at delivering at least one IND candidate per collaboration. We intend to share equally in the costs and downstream benefits derived from these collaborations. Genome Therapeutics Corporation. On October 17, 2000, we entered into a collaborative drug discovery agreement with Genome Therapeutics Corporation to discover and develop anti-infective drug candidates. Under the agreement, we will use our Parallel Track Drug Discovery program to screen and optimize compounds against a significant number of proprietary validated anti-infective targets which Genome Therapeutics has derived from its PathoGenome(TM) Database. We will share equally in all downstream value created by the collaboration, including future milestone, royalty and upfront payments resulting from the outlicensing of clinical candidates or later stage compounds derived from the collaboration. Acadia Pharmaceuticals. On December 18, 2000, ArQule and ACADIA Pharmaceuticals entered into a drug discovery collaboration. Under the agreement ACADIA will combine its functional genomics platform with ArQule's Parallel Track(TM) Drug Discovery program to discover novel small molecule drug candidates directed at individual G-protein coupled receptor (GPCR) targets. We will share intellectual property resulting from the collaboration, and equally contribute to at least one joint drug discovery program. We will share revenues resulting from the commercialization of joint drug discovery programs. In addition to these joint drug discovery programs, each of us will receive exclusive rights to certain compounds that we have decided not to develop in a joint drug discovery program, subject to a royalty payment to the other party. On April 7, 1998, we entered into a material transfer and screening agreement with ACADIA. Under this agreement, we provided to ACADIA access to certain ArQule compound arrays for screening against their target collection. On May 10, 2000, we entered into a compound license agreement with ACADIA. Under this agreement, we granted to Acadia an exclusive license to certain of our compounds having activity against certain of their targets, in return for payments and royalties. 13 15 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. We also face competition related to the speed and costs of identifying and optimizing potential lead compounds and our patent position. We compete with many organizations that are engaged in attempting to identify and optimize compounds. For chemistry services, our competitors include Discovery Partners International, Array Biopharma, Medichem, Albany Molecular Research Institute and Biofocus. We compete with Vertex Phamaceuticals, Neurogen, and 3-Dimensional Pharmaceuticals for chemistry-based drug discovery. In addition, we also compete with 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 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 and biotechnology 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 products. In particular, human pharmaceutical products and biologics 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 products. The process of obtaining these approvals and the subsequent compliance with appropriate federal and foreign statutes and regulations are time consuming and require substantial resources. 14 16 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 several 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 pharmaceutical, we or our collaborator will be required to file a New Drug Application, or NDA, and receive approval before commercial marketing of the drug. Similarly, if the product is a new biologic, a biological license application, BLA, must be filed and must receive approval prior to commercial marketing of the product. The testing and approval processes require substantial time and effort. NDAs and BLAs 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 Good Manufacturing Practices, known as GMPs, 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 and biologics. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country. EMPLOYEES As of March 9, 2001, we employed 304 people, of whom 107 have Ph.D. degrees. 127 of our employees were engaged in operations, 141 were engaged in research and development, and 36 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. OUR TRADEMARKS The terms "ArQule", "Mapping Array", and "Directed Array" are trademarks of ArQule that are registered in the U.S. Patent and Trademark Office. The terms "Compass Array", "AMAP", "Custom Array", "ArQule Reactor", "MapMaker", "Parallel Track", and "PrepQule" are trademarks of ArQule. 15 17 ITEM 1A. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT Set forth below is certain information regarding our current executive officers and directors, including their respective ages, as of March 9, 2001:
NAME AGE POSITION - ---- --- -------- Dr. Stephen A. Hill................... 42 President, Chief Executive Officer and a Director Philippe Bey, Ph.D. .................. 58 Senior Vice President of Research and Development and Chief Scientific Officer David C. Hastings..................... 39 Vice President, Chief Financial Officer and Treasurer Harold E. Selick, Ph.D................ 46 President, Chief Executive Officer of Camitro Corporation L. Patrick Gage, Ph.D................. 58 Director Michael Rosenblatt, M.D. ............. 52 Director Werner Cautreels, Ph.D. .............. 47 Director Laura Avakian......................... 55 Director Tuan Ha-Ngoc.......................... 48 Director Ariel Elia............................ 65 Director
STEPHEN A. HILL, M.D. 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. 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 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 received his BA in Economics at the University of Vermont. HAROLD E. SELICK, PH.D. Harold E. Selick has served as President and Chief Executive Officer of Camitro since November 1999. Prior to his employment with Camitro, Dr. Selick was Vice President of Research of Affymax Research Institute, where he directed activities in combinatorial chemistry-based drug discovery, with particular emphasis on the development of technologies for improving the process of lead optimization. Prior to joining Affymax, Dr. Selick held scientific positions in two other biotech companies, one of which was Protein Design Labs, where he was co-inventor of the technology underlying the creation of fully 16 18 humanized antibodies. He applied this technology to the creation of the "Smart anti-TAC" antibody, which was successfully developed by Roche as "Zenapax", for treating kidney transplant rejection. Prior to working at Protein Design Labs, he was a Damon Runyon-Walter Winchell Cancer Fund Fellow with Professor Bruce Alberts and an American Cancer Society Fellow at the University of California, San Francisco, School of Medicine. Dr. Selick holds a Ph.D. in Molecular Biology and a B.A. in Biophysics from the University of Pennsylvania. L. PATRICK GAGE, PH.D. L. Patrick Gage, Ph.D. has been a director since January 1998. Since March 1998, Dr. Gage has been the President of Wyeth-Ayerst Research, a division of American Home Products Corporation, a pharmaceutical company. Prior to that, Dr. Gage was employed by Genetics Institute, Inc., a biopharmaceutical company, in a variety of positions including President. MICHAEL ROSENBLATT, M.D. Michael Rosenblatt, M.D. has been a director since April 1998. From 1992-1998, Dr. Rosenblatt served as the Robert H. Ebert Professor of Molecular Medicine at the Harvard Medical School, Chief of the Division of Bone and Mineral Metabolism at Beth Israel Hospital, and the director of the Harvard MIT Division of Health Sciences and Technology. Since 1993, he has also been a faculty member in the department of Biological Chemistry and Molecular Pharmacological, Biological and Biomedical Sciences Program of the Division of Medical Sciences at Harvard University. From 1996-1999, he has been the executive director of the Carl J. Shapiro Institute for Education and Research at Harvard Medical School and Beth Israel Deaconess Medical Center. Since 1996, he has been Harvard faculty dean for academic programs at the Beth Israel Deaconess Medical Center. He is now the President (interim) of Beth Israel Deaconess Medical Center and the George R. Minot Professor of Medicine at Harvard Medical School. Prior to 1992, Dr. Rosenblatt was the Senior Vice President for Research at Merck Research Laboratories, a pharmaceutical company. Dr. Rosenblatt serves as a director of Curis, Inc. and certain privately held companies. WERNER CAUTREELS, PH.D. Werner Cautreels, Ph.D. has been a director since September 1999. Since May 1998, Dr. Cautreels has been the Global Head of Research and Development of Solvay Pharmaceuticals. Prior to that, Dr. Cautreels had been employed by Nycomed Amersham Ltd., Sterling Winthrop, and Sanofi in a variety of positions in Research and Development. LAURA AVAKIAN Laura Avakian has been a director since March 2000. Ms. Avakian is currently Vice President for Human Resources for the Massachusetts Institute of Technology where she directs all human resource programs and oversees the institution's Medical Department. Prior to joining MIT, she was Senior Vice President, Human Resources, for Beth Israel Deaconess Medical Center and for its parent corporation CareGroup. She has previously served as President of the American Society for Healthcare Human Resources Administration, and has received the distinguished service award, literature award and chapter leadership award from that society. She received the 1996 Award for Professional Excellence in Human Resources Management from the Society for Human Resource Management. She has also served as editor of the Yearbook of Healthcare Management and authored numerous chapters and articles on human resources management. Ms. Avakian received her BA degree from the University of Missouri at Columbia and her MA degree from Northwestern University. TUAN HA-NGOC Tuan Ha-Ngoc has been a director since March 2000. Mr. Ha-Ngoc is the founder, Chief Executive Officer and a director of eHealthDirect, Inc., which provides an advanced business to business financial transactions platform for health care benefits administration. Mr. Ha-Ngoc was previously the Vice President of Strategic Development at American Home Products Corporation where he directed its corporate strategy in the pharmaceuticals industry. Prior to joining AHP, he was an Executive Vice President for Genetics Institute, Inc. Mr. Ha-Ngoc is a member of the Board of Fellows and Chairman of the Research Committee at the Harvard School of Dental Medicine. He is also a member of the Board of Trustees of the Lupus Foundation. Mr. Ha-Ngoc received an MBA from INSEAD and received a Master's Degree in Pharmacy from the University of Paris, France. ARIEL ELIA Ariel Elia has been a director since September 2000. Currently, Mr. Elia serves as Chairman of the European Advisory Board of E.Med Securities, a private, U.S.-based company providing investment banking services to emerging growth companies in the life science industry. Mr. Elia is a director of Altamir S.A., a French venture capital company, and of Yssum, the research and development company of 17 19 the Hebrew University of Jerusalem in Israel. Mr. Elia also serves as a Governor of both the Ben Gurion University and the Hebrew University of Jerusalem, in Israel. Prior to his current positions, Mr. Elia was the Chief Executive Officer of Jouveinal Laboratories, a privately held, French pharmaceutical company. Mr. Elia also spent 17 years with Merck & Co., serving both in Europe and in the U.S., most recently as Senior Vice President, International Division. Before joining Merck & Co., Mr. Elia spent 12 years with American Home Products Corp., serving as President of the International Household Products Division prior to his departure. Mr. Elia is a U.S. citizen born in Alexandria, Egypt. He graduated from Victoria College in Alexandria, Egypt with an Oxford and Cambridge degree as a bachelor of arts. His honors include Knight of the Order of the Crown in Belgium, and Doctor of Philosophy Honoris Causa of Ben Gurion University, Israel. 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. On November 28, 2000, we exercised our options to purchase the entire building and the adjacent lot, and on March 2, 2001 we closed the transaction. The total consideration paid for the properties was $20.5 million, of which $18.2 million represented the purchase price for the entire building and the land on which it sits and $2.3 million represented the purchase price for the adjacent lot. The purchase price was determined through an arms-length negotiation with Metro North Corporate Center LLC and Metro North Corporate Center LLC II, which are unaffiliated with us or any of our directors or executive officers. We paid $4.5 million in cash and granted a mortgage for the remainder of the purchase price through an extension of our existing term loan with Fleet Bank dated as of March 18, 1999, with an initial interest rate of 6.95%. The land upon which our facility sits is approximately 7.2 acres, including a parking lot, while the adjacent parcel of land represents approximately 5 acres. We plan to continue to use our facility in its current capacity and may develop the adjacent parcel at a presently undetermined time in the future. Our research facilities also include approximately 56,000 square feet of laboratory and office space in Medford, Massachusetts, the majority of which is dedicated to the Pfizer collaboration. We lease these facilities under two lease agreements, one of which expires on July 30, 2005 and one of which expires on July 30, 2006. We sublease these facilities pursuant to three sublease agreements. The monthly cost of these leases is entirely offset by our income from these subleases. In connection with our acquisition of Camitro Corporation on January 29, 2001, we assumed Camitro's existing lease for approximately 24,958 square feet of office space in Menlo Park, California, which will expire on September 30, 2002. Prior to expiration, we have the option to renew this lease for a term of 18 months. We sublease approximately 5,750 square feet of this space under an agreement which terminates on March 31, 2001. Our lease payments are $45,034 per month, and our income from the sublease is $11,271 per month. We believe that all of our facilities are adequate for our current operations. Subsequent to year-end, Camitro Corporation, through its wholly-owned subsidiary Camitro UK, Ltd. leased approximately 10,000 square feet of office and laboratory space in Cambridge, England for 15,416 British Pounds per month. We lease this facility under an agreement which expires in December 2005. In March 2001, we executed a two year sublease with a third party for approximately 4,000 square feet of the premises for 7,333 British Pounds per month. This sublease extends until March 2003. 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 2000. 18 20 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS ArQule's common stock is traded on The Nasdaq National Market 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:
HIGH LOW ----- ----- 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............................................... 37.50 8.25 Second Quarter.............................................. 19.88 6.25 Third Quarter............................................... 24.13 16.63 Fourth Quarter.............................................. 33.75 13.00 2001 First Quarter (through March 9, 2001)....................... 31.25 15.88
As of March 9, 2001, there were approximately 99 holders of record and approximately 5,159 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, for use in our business. 19 21 ITEM 6. SELECTED FINANCIAL DATA The following data, insofar as it relates to the years 1996, 1997, 1998, 1999 and 2000, have been derived from ArQule's audited financial statements, including the balance sheet as of December 31, 1999 and 2000 and the related statements of operations and of cash flows for the three years ended December 31, 2000 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.
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1996 1997 1998 1999 2000 ------- ------- ------- -------- ------- STATEMENT OF OPERATIONS DATA: Revenue................................. $ 7,255 $17,420 $22,193 $ 18,582 $50,296 Cost and expenses: Cost of revenue....................... 4,739 10,218 14,036 17,457 21,343 Research and development.............. 3,076 4,704 10,427 14,260 18,579 Marketing, general and administrative..................... 2,850 4,670 6,387 6,022 8,293 ------- ------- ------- -------- ------- Total costs and expenses...... 10,665 19,592 30,850 37,739 48,215 ------- ------- ------- -------- ------- Income (loss) from operations........... (3,410) (2,172) (8,657) (19,157) 2,081 Interest income (expense), net.......... 417 2,463 2,195 1,724 1,774 ------- ------- ------- -------- ------- Net income (loss)....................... $(2,993) $ 291 $(6,462) $(17,433) $ 3,855 ======= ======= ======= ======== ======= Basic net income (loss) per share....... $ (1.32) $ .03 $ (0.54) $ (1.38) $ 0.28 ======= ======= ======= ======== ======= Weighted average common shares outstanding -- basic.................. 2,272 11,282 12,031 12,606 13,911 ======= ======= ======= ======== ======= Diluted net income (loss) per share... $ (1.32) $ .02 $ (0.54) $ (1.38) $ 0.25 ======= ======= ======= ======== ======= Weighted average common shares outstanding -- diluted................ 2,272 12,394 12,031 12,606 15,208 ======= ======= ======= ======== =======
DECEMBER 31, ---------------------------------------------------- 1996 1997 1998 1999 2000 ------- ------- ------- ------- -------- BALANCE SHEET DATA: Cash, cash equivalents and marketable securities............................ $37,086 $49,282 $33,870 $36,421 $110,019 Working capital......................... 31,440 46,023 35,546 17,371 93,437 Total assets............................ 43,509 66,925 60,480 77,346 149,476 Long-term debt.......................... 1,728 1,213 306 10,700 7,200 Total stockholders' equity.... 34,621 57,340 54,267 38,753 120,420
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 and biotechnology 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 programs with biotechnology companies and academic institutions, and are pursuing a limited number of our own internal drug discovery programs. 20 22 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. While we expect our revenue to increase in 2001, our financial performance may vary from expectations, including quarterly variations in performance, 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. In November 2000 we sold 3,358,000 shares of common stock at $22.50 per share in a follow-on public offering. This included the exercise of the overallotment option of 438,000 shares. The offering resulted in net proceeds of approximately $70,867,000. We have incurred a cumulative net loss of $30.7 million through December 31, 2000. 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. While we were profitable in fiscal year 2000, we will not be profitable in 2001 and our ability to achieve sustained 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, timing of additional investments in technology and the realization of value from the development and commercialization of products in which we have an economic interest, all of which are difficult to anticipate. The Management's Discussion and Analysis of Financial Condition and Results of Operation contains forward-looking statements reflecting management's current expectations regarding our future performance. Such expectations are based on certain assumptions regarding the progress of product development efforts under collaborative agreements, the executions of new collaborative agreements and other factors relating to our growth. Such expectations may not materialize if product development efforts are delayed or suspended, if negotiations with potential collaborators are delayed or unsuccessful or if other assumptions prove incorrect. RESULTS OF OPERATIONS Years Ended December 31, 1999 and 2000 Revenue. Total revenues for 2000 were $50.3 million as compared to $18.6 million in 1999, an increase of $31.7 million or approximately 171 percent. This increase is primarily due to the amortization of upfront fees of approximately $15.3 million and fees for delivery of Custom Array(TM) sets of approximately $10.7 million to Pfizer Inc and Bayer AG and from other delivery fees earned from our collaborations. Cost of revenue. Cost of revenue in 2000 totaled $21.3 million, an increase of $3.8 million or 22 percent as compared to 1999. The increase in costs of revenue was attributable to increased costs for producing Custom Array(TM) sets for Pfizer Inc and Bayer AG. Our gross margin as a percentage of sales was 58 percent for the year ended December 31, 2000 as compared to 6 percent for the prior year. Our gross margin as a percentage of sales was higher in 2000 due to the higher gross margin on the Pfizer collaboration and other economies of scale. Research and development expenses. Research and development expenses in 2000 were $18.6 million, an increase of $4.3 million or 30 percent as compared to $14.3 million in 1999. This increase is the result of 21 23 our ongoing efforts to augment and enhance our chemistry capabilities and related proprietary technologies, including increased personnel, as we expand our lead optimization programs. Marketing, general and administrative expenses. Marketing and general administrative expenses in 2000 were $8.3 million in 2000, an increase of $2.3 million or 38 percent as compared to 1999. The increase was due primarily associated with increased administrative costs, including increased personnel, to support our growth during 2000. Net investment income. Net investment income consists primarily of interest income partially offset by interest expense and other non-operating income and expenses. Investment income in 2000 was $2.9 million as compared to $1.9 million in 1999, an increase of $1.0 million or approximately 50 percent. Interest expense in 2000 was $1.1 million as compared to $0.2 million in 1999, resulting primarily from our higher average debt balance on our term loan with Fleet National Bank. Net income (loss). Our net income for the year ended December 31, 2000 was $3.9 million, compared to a net loss of $(17.4) million for the same period in 1999. Our net income in 2000 has been primarily attributable to increased revenue from our collaborator base. 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. We recorded $0.8 million and $3.0 million of revenue from Roche in 1999 and 1998, respectively. We recorded no revenue from Abbott in 1999 compared to $1.7 million of revenue in 1998. 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 approximately $0.4 million of charges related to the relocation of our corporate headquarters in November 1999. These charges primarily related to direct moving expenses as well as charges incurred to reserve for vacated space in Medford. 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 primarily due to a $0.5 million reduction in the use of outside marketing and consulting services. Net investment income. Net investment 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. 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. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2000, we held cash, cash equivalents and marketable securities with a value of $110.0 million, compared to $36.4 million at December 31, 1999. Our working capital at December 31, 2000 was $93.4 million. We have funded operations through December 31, 2000 with sales of common stock, payments from corporate collaborators, and the utilization of bank financing. On March 18, 1999, we consummated a term loan agreement with Fleet National Bank to support our facilities expansion. Under this agreement, we 22 24 borrowed $14.0 million of the potential $15.0 million available. As of December 31, 2000, we have made principal payments of $3.3 million and had an outstanding balance of $10.7 million. Cash flows from operating activities for the year ended December 31, 2000 decreased $6.3 million to $6.5 million from $12.8 million for the same period in 1999. This decrease reflects primarily the timing of payments from our corporate collaborations. Cash flows provided by investing activities for the year ended December 31, 2000 increased $29.4 million to $1.3 million. We had a use of cash of $28.1 million from investing activities for the same period in 1999. During 1999 we completed our facility expansion in Woburn, which included approximately $18.4 million in tenant improvements. Cash flows from financing activities for the year ended December 31, 2000 increased $60.3 million to $74.1 million from $13.8 million for the same period in 1999. In November 2000, we completed a follow-on offering of 3.4 million shares of our common stock that raised $70.7 million net of expenses. 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 cannot guarantee that we will be able to obtain additional customers for our products and services, or that such 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 public or private sales of our securities, including equity securities. There can be no assurance that additional funding will be available when needed or on acceptable terms. 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. 101, "Revenue Recognition in Financial Statements," ("SAB 101") 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 adopted these SAB 101 during the fourth quarter of 2000 and results of operations were not affected. SUBSEQUENT EVENTS In January 2001, we acquired Camitro Corporation, a privately-held predictive modeling company based in Menlo Park, California. Under the terms of the merger agreement, we issued approximately 3.4 million shares of our common stock and $1.7 million in cash in exchange for all of Camitro's outstanding shares and the assumption of all of Camitro's outstanding stock options and warrants. The merger transaction was valued at $84.7 million based on our share price on the measurement date for the merger. The transaction will be accounted for as a purchase transaction. In November 2000, we exercised our options to purchase our building and the adjacent lot in Woburn, Massachusetts and in March 2001 we closed the transaction. The total consideration paid for the properties was $20.5 million, of which $18.2 million represented the purchase price for the entire building and the land on which it sits and $2.3 million represented the purchase price for the adjacent lot. The purchase price was 23 25 determined through an arms-length negotiation with Metro North Corporate Center LLC and Metro North Corporate Center LLC II, which are unaffiliated with us or any of our directors or executive officers. We paid $4.5 million in cash and granted a mortgage for the remainder of the purchase price through an extension of our existing term loan with Fleet Bank dated as of March 18, 1999, with an initial interest rate of 6.95%. The land upon which our facility sits is approximately 7.2 acres, including a parking lot, while the adjacent parcel of land represents approximately 5 acres. We plan to continue to use our facility in its current capacity and may develop the adjacent parcel at a presently undetermined time in the future. 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 We own financial instruments that are sensitive to market risk as part of our investment portfolio. Our investment portfolio is used to preserve our capital until it is used to fund operations, including our research and development activities. None of these market -- risk sensitive instruments are held for trading purposes. We invest our cash primarily in money market mutual funds and U.S. Government and other investment grade debt securities. These investments are evaluated quarterly to determine the fair value of the portfolio. Our investment portfolio includes only marketable securities with active secondary or resale markets to help insure liquidity. We have implemented policies regarding the amount and credit ratings of investments. Due to the conservative nature of these policies, we do not believe we have material exposure due to market risk. Additionally, we entered into an interest rate swap agreement with Fleet National Bank primarily to reduce the impact of changes in interest rates on our cash flows. The impact on our financial position and results of operations from likely changes in interest rates is not material. 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, 2000 due to the short-term maturities of these instruments. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants........................... 25 Consolidated Balance Sheet at December 31, 1999 and 2000.... 26 Consolidated Statement of Operations for the three years ended December 31, 2000................................... 27 Consolidated Statement of Stockholders' Equity for the three years ended December 31, 2000............................. 28 Consolidated Statement of Cash Flows for the three years ended December 31, 2000................................... 29 Notes to Consolidated Financial Statements.................. 30 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
24 26 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. at December 31, 1999 and 2000, and the results of operations and cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 of America 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 our opinion. /s/ PRICEWATERHOUSECOOPERS LLP Boston, Massachusetts January 11, 2001, except as to Footnote 14, which is as of March 14, 2001 25 27 ARQULE, INC. CONSOLIDATED BALANCE SHEET
DECEMBER 31, -------------------------- 1999 2000 ----------- ----------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ASSETS Current assets: Cash and cash equivalents................................. $ 4,208 $ 86,079 Marketable securities..................................... 32,213 23,940 Accounts receivable....................................... 2,529 1,564 Accounts receivable -- related party...................... 1,424 718 Inventory................................................. 486 400 Prepaid expenses and other current assets................. 579 1,326 -------- -------- Total current assets.............................. 41,439 114,027 Property and equipment, net................................. 34,093 33,699 Other assets................................................ 1,814 1,750 -------- -------- $ 77,346 $149,476 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of capital lease obligations.............. $ 316 $ -- Current portion of long term debt......................... 2,525 3,500 Accounts payable and accrued expenses..................... 5,719 4,171 Deferred revenue.......................................... 15,508 12,919 -------- -------- Total current liabilities......................... 24,068 20,590 Deferred revenue............................................ 3,825 1,266 Long term debt.............................................. 10,700 7,200 -------- -------- Total liabilities................................. 38,593 29,056 -------- -------- 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; 12,864,225 and 17,072,727 shares issued and outstanding at December 31, 1999 and 2000, respectively........................................... 129 171 Additional paid-in capital................................ 73,167 151,084 Accumulated deficit....................................... (34,538) (30,683) Unrealized gain on marketable securities.................. -- 29 Deferred compensation..................................... (5) (181) -------- -------- Total stockholders' equity........................ 38,753 120,420 -------- -------- $ 77,346 $149,476 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 26 28 ARQULE, INC. CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, --------------------------------------- 1998 1999 2000 ---------- ----------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenue Compound development revenue.............................. $11,868 $ 9,421 $40,507 Compound development revenue -- related party............. 10,325 9,161 9,789 ------- -------- ------- 22,193 18,582 50,296 ------- -------- ------- Costs and expenses: Cost of revenue........................................... 7,506 8,851 13,888 Cost of revenue -- related party.......................... 6,530 8,606 7,455 Research and development.................................. 10,427 14,260 18,579 Marketing, general and administrative..................... 6,387 6,022 8,293 ------- -------- ------- 30,850 37,739 48,215 ------- -------- ------- Income (loss) from operations.......................... (8,657) (19,157) 2,081 Investment income........................................... 2,364 1,915 2,865 Interest expense............................................ (169) (191) (1,091) ------- -------- ------- Net income (loss)...................................... $(6,462) $(17,433) $ 3,855 ======= ======== ======= Basic net income (loss) per share........................... $ (0.54) $ (1.38) $ 0.28 ======= ======== ======= Weighted average common shares outstanding -- basic......... 12,031 12,606 13,911 ======= ======== ======= Diluted net income (loss) per share......................... $ (0.54) $ (1.38) $ 0.25 ======= ======== ======= Weighted average common shares outstanding -- diluted....... 12,031 12,606 15,208 ======= ======== =======
The accompanying notes are an integral part of these consolidated financial statements. 27 29 ARQULE, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
UNREALIZED COMMON STOCK ADDITIONAL GAIN TOTAL ---------------------- PAID-IN ACCUMULATED DEFERRED MARKETABLE STOCKHOLDERS' SHARES PAR VALUE CAPITAL DEFICIT COMPENSATION SECURITIES EQUITY ---------- --------- ---------- ----------- ------------ ---------- ------------- (IN THOUSANDS, EXCEPT SHARE DATA) 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) 0 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) 0 38,753 Stock option exercises........... 758,403 8 5,670 5,678 Employee stock purchase plan..... 92,099 1 533 534 Issuance of common stock in connection with secondary public offering, net of insurance costs of $4,864...... 3,358,000 33 70,658 70,691 Compensation related to the grant of common stock options........ 1,056 (1,056) -- Amortization of deferred compensation................... 880 880 Unrealized gain on marketable securities..................... 29 29 Net income....................... 3,855 3,855 ---------- ---- -------- -------- ------- --- -------- Balance at December 31, 2000..... 17,072,727 $171 $151,084 $(30,683) $ (181) $29 $120,420 ========== ==== ======== ======== ======= === ========
The accompanying notes are an integral part of these consolidated financial statements. 28 30 ARQULE, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------------- 1998 1999 2000 -------- -------- -------- (IN THOUSANDS) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Cash flows from operating activities: Net income (loss)........................................ $ (6,462) $(17,433) $ 3,855 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization......................... 4,620 7,690 7,350 Amortization of deferred compensation................. 213 486 880 (Increase) decrease in accounts receivable............ (2,575) 1,755 1,671 Decrease in inventory................................. 427 40 86 (Increase) decrease in prepaid expenses and other current assets...................................... (349) 290 (747) (Increase) decrease in other assets................... (1,500) (158) 64 Decrease in notes receivable from related parties..... 197 30 -- Increase (decrease) in accounts payable and accrued expenses............................................ (710) 3,625 (1,548) Increase (decrease) in deferred revenue............... (1,488) 16,427 (5,148) -------- -------- -------- Net cash provided by (used in) operating activities....................................... (7,627) 12,752 6,463 -------- -------- -------- Cash flows from investing activities: Purchases of marketable securities....................... (44,109) (57,731) (58,302) Proceeds from sale or maturity of marketable securities............................................ 50,164 53,608 66,604 Proceeds from tenant improvement allowance............... -- -- 2,335 Additions to property and equipment...................... (9,787) (23,962) (9,291) -------- -------- -------- Net cash (used in) provided by investing activities....................................... (3,732) (28,085) 1,346 -------- -------- -------- Cash flows from financing activities: Principal payments of capital lease obligations.......... (1,174) (897) (316) Borrowings of long term debt............................. -- 14,000 -- Principal payments of long term debt..................... -- (775) (2,525) Proceeds from issuance of common stock, net.............. 3,176 1,433 76,903 -------- -------- -------- Net cash provided by financing activities........... 2,002 13,761 74,062 -------- -------- -------- Net increase (decrease) in cash and cash equivalents....... (9,357) (1,572) 81,871 Cash and cash equivalents, beginning of period............. 15,137 5,780 4,208 -------- -------- -------- Cash and cash equivalents, end of period................... $ 5,780 $ 4,208 $ 86,079 ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: During 1998, 1999, and 2000 the Company paid approximately $169, $191 and $1,091, respectively, for interest expense. The accompanying notes are an integral part of these consolidated financial statements. 29 31 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 and biotechnology industries. Our operations are focused on the integration of combinatorial chemistry, structure-guided rational drug design, computational models of drug-like compound characteristics 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. As a matter of policy, ArQule determines on a quarterly basis the fair market value of its investment portfolio. Unrealized gains and losses on securities are included in the income of shareholders equity, net of related tax effects. If the fair market value of a marketable security declines below its cost basis, and, based upon our consideration of all available evidence, we conclude such decline is "other than temporary", we mark the investment to market through a charge to current earnings. At December 31, 1999 and 2000, we have classified these investments as available-for-sale. Fair Value of Financial Instruments At December 31, 1999 and 2000, our financial instruments consist of cash, cash equivalents, marketable securities, accounts receivable, notes receivable from a related party, accounts payable, accrued expenses and our interest rate swap. 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 terms of the contractual arrangement. 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 30 32 ARQULE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED delivery also includes technology transfer fees and fees based on the delivery of compounds. Since the technology transfer fees are included in agreements that also include compound delivery, the technology transfer fees are recognized ratably over the performance period. Fees related to the delivery of compounds are based upon the delivery of compounds. Milestone payments are recognized as revenue based upon the stage of completion of our performance obligations under the related contract. Accordingly, upon achievement of a milestone, an amount equal to the milestone payment multiplied by the percentage of our performance obligation completed through that date is recognized as revenue. The remainder will be recognized ratably over the remaining term of the performance period. Payments received under these arrangements prior to the completion of the related work are recorded as deferred revenue. We believe our revenue recognition policies are in full compliance with Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"). We did not change any of our revenue recognition policies as a result of implementing SAB 101. 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. These costs consist primarily of payroll and payroll-related costs, chemicals, software, supplies, and overhead expenses. Stock Compensation Options granted to employees and members of the Board of Directors are accounted for in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and related interpretations. Under APB No. 25, no compensation expense is recognized for options granted at fair market value with fixed terms. We have adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS No. 123). All stock-based awards granted to nonemployees, including members of the Scientific Advisory Board, are accounted for as prescribed by SFAS No. 123 and Emerging Issues Task Force 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." We believe our stock compensation policies are in compliance with FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation." 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 31 33 ARQULE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 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 1998 and 1999 financial statements to conform to the 2000 presentation. 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. Options to 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 income (loss) 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. 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 these Agreements is included in compound development revenue. 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, 1999 and 2000:
DECEMBER 31, ------------------ MATURITY 1999 2000 ------------- ------- ------- U.S. Government obligations.............. Within 1 year $ 3,950 $ 6,760 Corporate bonds.......................... Within 1 year 28,263 17,180 ------- ------- $32,213 $23,940 ======= =======
At December 31, 1999 and 2000, marketable securities are carried at fair market value. All of our marketable securities are classified as current at December 31, 1999 and 2000 as the 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, 1999 and 2000 were not significant. 32 34 ARQULE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
USEFUL LIFE DECEMBER 31, ESTIMATED ----------------- (YEARS) 1999 2000 ----------- ------- ------- Machinery and equipment........................ 5 $12,423 $17,185 Leasehold improvements......................... 3-15 28,050 26,785 Furniture and fixtures......................... 7 1,651 1,653 Computer equipment............................. 3 6,747 9,097 Construction-in-progress....................... -- 1,980 3,087 ------- ------- 50,851 57,807 Less -- accumulated depreciation and amortization................................. 16,758 24,108 ------- ------- $34,093 $33,699 ======= =======
Assets held under capital leases at December 31, 1999 and 2000 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 $4,179 and $4,495 at December 31, 1999 and 2000, respectively. For the years ended December 31, 1998, 1999 and 2000, amortization expense related to assets held under capital lease obligations was $1,083, $889 and $316 respectively. Total depreciation and amortization expense for the years ended December 31, 1998, 1999 and 2000 was $4,620, $7,690 and $7,350, 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:
DECEMBER 31, ---------------- 1999 2000 ------ ------ Accounts payable........................................... $3,636 $1,867 Accrued payroll............................................ 944 1,647 Accrued professional fees.................................. 264 182 Accrued lease termination.................................. 800 150 Other accrued expenses..................................... 75 325 ------ ------ $5,719 $4,171 ====== ======
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 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 33 35 ARQULE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED monthly in arrears beginning on the first day of the month following commencement of this agreement and accrues at one month LIBOR plus 1.75%. 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 two interest rate swaps with notional amounts of $6,200 and $7,800 respectively. Under this agreement, we will pay Fleet interest at weighted average fixed rates of 7.94% and 8.99%, respectively. Settlement accounting is used for these interest rate swaps which expire on June 2003 and June 2004, respectively. 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 these specific liabilities. As of December 31, 2000, we had total outstanding balances of $3,875 and $6,825, respectively, on our "Tranche A" and "Tranche B" loans. 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. Our principal amounts due under the term loan agreement are as follows:
YEAR ENDING DECEMBER 31, TRANCHE A TRANCHE B ------------ --------- --------- 2001................................................ $1,550 $1,950 2002................................................ 1,550 1,950 2003................................................ 775 1,950 2004................................................ -- 975 ------ ------ Total payments due............................... $3,875 $6,825 ====== ======
See note 14 for additional debt incurred subsequent to year end. 8. STOCKHOLDERS' EQUITY Preferred Stock We are authorized to issue up to 1.0 million shares of preferred stock. As of December 31, 1999 and 2000 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 November 15, 2000, we completed a follow-on offering of 3,358,000 shares of common stock at $22.50 per share, which included the underwriters' exercise of their over-allotment of 438,000 shares of common stock on November 21, 2000. We realized total net proceeds of approximately $70,867. At December 31, 2000, we have 4,025,705 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 2000, 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 awards under the Equity Incentive Plan to 5,700,000. 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 34 36 ARQULE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 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, 2000, no stock appreciation rights have been issued. At December 31, 2000, there were 1,527,617 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. Also during 2000, the stockholders approved an amendment to the 1996 Director Stock Option Plan (the "Director Plan") for nonemployee directors increasing the number of shares of common stock available for awards under the Director Plan to 190,500. 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 Director Plan have a term of ten years with exercise prices equal to fair market value on the date of grant. Through December 31, 2000, options to purchase 130,500 shares of common stock have been granted under this plan of which 108,000 shares are currently exercisable. As of December 31, 2000, 60,000 shares are available for future grant. During 1999 and 2000, we issued 45,500 and 25,500 options, respectively, to certain members of our Scientific Advisory Board (SAB) under the Equity Incentive Plan. In 1999, 18,000 shares were cancelled. Compensation expense in 1999 and 2000 was $486 and $660, respectively. Also during 2000, compensation expense of $220 was recorded for employees who received non-qualified stock options at below fair market value on the date of grant. The remaining deferred compensation of $181 was recorded at December 31, 2000 and is being amortized as compensation expense over the vesting period of the options. We apply APB No. 25 and related interpretations in accounting for employee grants under the Equity Incentive Plan. 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:
DECEMBER 31, ----------------------------------- 1998 1999 2000 -------- ------------ ------- Pro forma net loss........................ $(13,217) $(21,746) $(3,321) Pro forma basic and diluted net loss per share................................... $ (1.10) $ (1.73) $ (0.24)
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 our 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. The model was calculated using the following weighted-average assumptions: no dividend yield for all years; 75% volatility for 1998 and 1999, 95% for 2000; risk-free interest rates of 6.0% in 1998, 5.46% in 1999 and 6.0% in 2000; expected lives of 4 years in 1998, 1999 and 2000 for options granted. 35 37 ARQULE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Option activity under the Plans for the three years ended December 31, 2000 was as follows:
WEIGHTED AVERAGE NUMBER EXERCISE STOCK OPTIONS OF SHARES PRICE - ------------- ---------- -------- 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............................................... 1,050,755 4.65 Exercised............................................. (536,473) 1.67 Cancelled............................................. (243,125) 7.36 ---------- Outstanding at December 31, 1999...................... 2,609,743 6.83 Granted............................................... 597,658 18.05 Exercised............................................. (758,403) 7.39 Cancelled............................................. (182,112) 8.11 ---------- Outstanding as of December 31, 2000................... 2,266,886 $ 9.50 ========== Exercisable at December 31, 2000...................... 918,206 $ 8.22 ========== Weighted average estimated value of options granted during the year ended December 31, 2000............. $12.60
The following table summarizes information about options outstanding at December 31, 2000:
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 2000 LIFE PRICE 2000 PRICE - ------------------------ -------------- ----------- -------- ------------ -------- $ 0.0000 -- 2.8000.............. 32,500 4.7 $ 0.90 32,500 $ 0.90 2.8001 -- 5.6000.............. 1,250,392 7.9 4.73 490,323 4.78 5.6001 -- 8.4000.............. 205,885 6.5 6.51 153,884 6.39 8.4001 -- 11.2000.............. 54,000 7.2 10.56 29,500 10.82 11.2001 -- 14.0000.............. 7,500 5.9 12.00 7,500 12.00 14.0001 -- 16.8000.............. 40,600 6.6 15.34 39,975 15.36 16.8001 -- 19.6000.............. 366,259 8.3 17.88 97,024 17.76 19.6001 -- 22.4000.............. 249,750 7.9 20.20 50,000 20.91 22.4001 -- 25.2000.............. 60,000 9.0 23.07 17,500 22.94 --------- ------- 2,266,886 7.8 $ 9.50 918,206 $ 8.22 ========= =======
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 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 36 38 ARQULE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 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, 2000, 311,303 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 was approved 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, 1998, 1999 and 2000. 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:
DECEMBER 31, -------------------------------- 1998 1999 2000 -------- -------- -------- Deferred tax assets: Preoperating costs capitalized for tax purposes.............................. $ 210 $ 189 $ 164 Net operating loss carryforwards......... 7,068 6,671 11,417 Tax credit carryforwards................. 2,324 3,773 6,790 Equity based compensation................ 286 486 830 Book depreciation in excess of tax....... 411 1,361 411 Reserves and accruals.................... -- 329 138 Deferred revenue......................... -- 6,362 4,523 Other.................................... 39 18 6 -------- -------- -------- $ 10,338 $ 19,189 $ 24,279 Deferred tax liabilities: Valuation allowance........................ (10,338) (19,189) (24,279) -------- -------- -------- Net deferred tax assets.................. $ -- $ -- $ -- ======== ======== ========
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 $24,279 valuation allowance at December 31, 2000, $5,600 relates to deductions for disqualifying dispositions and non-qualified stock options that will be credited to paid in capital, if realized. 37 39 ARQULE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED A reconciliation between the statutory federal income tax rate (34%) and the effective rate of income tax expense for each of the three years during the period ended December 31, 2000 follows:
YEAR ENDED DECEMBER 31, ----------------------------- 1998 1999 2000 ------- ------- ------- Income tax benefit (expense) at statutory rate........................................ $ 2,262 $ 6,102 $(1,311) State tax benefit (expense), net.............. 399 1,076 (390) Losses and credits without current tax benefit..................................... (2,650) (7,170) -- Utilization of net operating loss carryforwards............................... -- -- 1,698 Other......................................... (11) (8) 3 ------- ------- ------- Tax Provision............................... $ -- $ -- $ -- ======= ======= =======
We have available net operating loss carryforwards of approximately $29,900 for tax purposes to offset future taxable income. The net operating loss carryforwards expire at various dates through 2020. Federal and state tax credit carryforwards of approximately $3,600 and $4,800 respectively, expire at various dates through 2020. 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:
YEAR ENDING OPERATING DECEMBER 31, LEASES - ------------ --------- 2001........................................................ $1,122 2002........................................................ 839 2003........................................................ 839 2004........................................................ 839 2005........................................................ 732 thereafter.................................................. 348 ------ Total minimum lease payments.............................. $4,719 ======
Rent expense under noncancelable operating leases was approximately $1,105, $1,420 and $2,228 for the years ended December 31, 1998, 1999 and 2000, respectively. Our research facilities also include approximately 56,000 square feet of laboratory and office space in Medford, Massachusetts, the majority of which is dedicated to the Pfizer collaboration. We lease these facilities under two lease agreements, one of which expires on July 30, 2005 and one of which expires on July 30, 2006. We sublease these facilities pursuant to three sublease agreements. The monthly cost of these leases is entirely offset by our income from these subleases. See note 14 for additional commitments incurred subsequent to year-end. 12. CONCENTRATION OF CREDIT RISK 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 38 40 ARQULE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED during 1999. Revenues from five of our customers accounted for 60%, 12%, 11%, 7% and 4% of total revenues during 2000. Three of our customers accounted for 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. Four of our customers accounted for 42%, 32%, 12%, and 11% of our accounts receivable balance at December 31, 2000. We do not require collateral on accounts receivable balances. 13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 2000 Net revenues........................................ $10,388 $12,084 $13,785 $14,039 Gross profit........................................ 4,982 6,767 8,744 8,460 Net income (loss)................................... (1,342) 609 2,978 1,610 Net income (loss) per share, (diluted).............. $ (0.10) $ 0.04 $ 0.20 $ 0.10 1999 Net revenues........................................ $ 4,012 $ 4,591 $ 4,860 $ 5,119 Gross profit........................................ 338 672 768 (653) Net income (loss)................................... (3,966) (3,594) (3,657) (6,216) Net income (loss) per share, (diluted).............. $ (0.32) $ (0.29) $ (0.29) $ (0.49)
14. SUBSEQUENT EVENTS In January 2001, we acquired Camitro Corporation, a privately-held predictive modeling company based in Menlo Park, California. Under the terms of the merger agreement, we issued 3,398,816 shares of our common stock and $1,733 in cash in exchange for all of Camitro's outstanding shares and the assumption of all of Camitro's outstanding stock options and warrants. The merger transaction was valued at $84,700 based on our share price on the measurement date for the merger. The transaction will be accounted for as a purchase transaction. In November 2000, we exercised our options to purchase our building and the adjacent lot in Woburn, Massachusetts and in March 2001 we closed the transaction. The total consideration paid for the properties was $20,512, of which $18,200 represented the purchase price for the entire building and the land on which it sits and $2,312 represented the purchase price for the adjacent lot. The purchase price was determined through an arms-length negotiation with Metro North Corporate Center LLC and Metro North Corporate Center LLC II, which are unaffiliated with us or any of our directors or executive officers. We paid $4,512 in cash and granted a mortgage for the remainder of the purchase price through an extension of our existing term loan with Fleet Bank dated as of March 18, 1999, with an initial interest rate of 6.95%. The land upon which our facility sits is approximately 7.2 acres, including a parking lot, while the adjacent parcel of land represents approximately 5 acres. We plan to continue to use our facility in its current capacity and may develop the adjacent parcel at a presently undetermined time in the future. 39 41 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 A portion of the response to this item is contained in part under the caption "Executive Officers and Directors of the Registrant" in Part I, Item 1A of this Annual Report on Form 10-K. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Our executive officers and directors are required under Section 16(a) of the Exchange Act to file reports of ownership and changes in ownership of our securities with the Securities and Exchange Commission. Copies of those reports must also be furnished to us. Based solely on a review of the copies of reports furnished to us and written representations that no other reports were required, we believe that during our 2000 fiscal year, our directors, executive officers and 10% beneficial owners complied with all application Section 16(a) filing requirements, except that two purchases of common stock by Ms. Avakian and her spouse in August 2000, totaling 500 shares, were reported on a Statement of Changes in Beneficial Ownership on Form 4 after the date on which such filing was required for such transactions. ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table summarizes the compensation paid to or earned during the fiscal year by our Chief Executive Officer and our four most highly paid executive officers whose salary and bonus exceeded $100,000 during the fiscal year ended December 31, 2000. We refer to these persons as the named executive officers.
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS -------------------------------------------- ------------ OTHER ANNUAL SECURITIES COMPENSATION UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS ($) OPTIONS(#) COMPENSATION($) - --------------------------- ---- --------- -------- ------------ ------------ --------------- Dr. Stephen A. Hill(1).................. 2000 $328,462 $125,000(3) $ 15,098(4) 40,000 -- President and Chief Executive Officer 1999 $213,462(2) $100,000(3) $102,581(4) 320,000 -- Philippe Bey, Ph.D.(5).................. 2000 $245,686 $ 84,000(7) $ 68,693(8) 20,000 -- Senior Vice President of Research 1999 $ 98,616(6) -- $ 15,539(8) 170,000 -- and Development and Chief Scientific Officer Michael D. Rivard....................... 2000 $169,208 $ 42,500(9) -- -- -- Vice President, Legal, and General 1999 $149,023 $ 10,000(9) -- 12,927 -- Counsel and Assistant Secretary 1998 $138,997 -- -- 34,531 -- James Kyranos, Ph.D. ................... 2000 $172,264 $ 35,640(10) -- -- -- Vice President of Systems 1999 $154,308 $ 10,000(10) -- 22,509 -- Technologies 1998 $128,077 -- -- 34,901 -- John Sorvillo, Ph.D. ................... 2000 $170,423 $ 34,000(11) -- -- -- Vice President of Business 1999 $147,734 $ 10,000(11) -- 22,509 -- Development 1998 $140,543 -- -- 12,099 --
- --------------- (1) Dr. Hill commenced employment with us in April 1999. Terms of his employment are described under "Executive Employment Agreements." (2) Dr. Hill joined us as President and Chief Executive Officer effective April 1, 1999 and this amount represents a pro rata portion of his 1999 annual base salary of $300,000. 40 42 (3) This amount consists of Dr. Hill's expected 2000 bonus to be paid in 2001 and 1999 bonus paid in 2000. (4) Pursuant to his employment agreement, we paid Dr. Hill $100,000, in 1999 as compensation for certain warrants he would have been entitled to receive had he remained with his prior employer. Dr. Hill was reimbursed for $15,098 and $2,581 of relocation expenses incurred by him during the fiscal year ended December 31, 2000 and 1999, respectively in connection with joining ArQule. (5) Dr. Bey commenced employment with us in August 1999. Terms of his employment are described under "Executive Employment Agreements." (6) Dr. Bey joined us as Senior Vice President of Research and Development and Chief Scientific Officer, August 16, 1999 and this amount represents a pro rata portion of his 1999 annual base salary of $240,000. (7) Pursuant to his employment agreement, we paid Dr. Bey a bonus of $60,000 on his anniversary of his employment, upon achievement of certain milestones. Also, $24,000 was paid to Dr. Bey in 2001 for an additional 2000 bonus. (8) This amount consists of reimbursement of relocation and temporary living expenses incurred by Dr. Bey during the fiscal year ended December 31, 2000 and 1999 in connection with joining ArQule. (9) This amount consists of Mr. Rivard's 2000 and 1999 bonuses paid in 2001 and 2000, respectively. (10) This amount consists of Dr. Kyranos' 2000 and 1999 bonuses paid in 2001 and 2000, respectively. (11) This amount consists of Dr. Sorvillo's 2000 and 1999 bonuses paid in 2001 and 2000, respectively. STOCK OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth certain information regarding options granted during the fiscal year ended December 31, 2000 by us to the named executive officers:
POTENTIAL REALIZABLE VALUE OF ASSUMED NUMBER OF PERCENT OF ANNUAL RATES OF STOCK SECURITIES TOTAL OPTIONS FAIR MARKET PRICE APPRECIATION FOR UNDERLYING GRANTED EXERCISE OR VALUE ON OPTION TERM(1) OPTIONS EMPLOYEES IN BASE PRICE GRANT DATE EXPIRATION ----------------------------- GRANTED(#) FISCAL YEAR ($/SHARE) ($/SHARE) DATE 0%($) 5%($) 10%($) ---------- ------------- ----------- ----------- ---------- ----- -------- ---------- Dr. Stephen A. Hill..... 40,000(2) 6.69% $20.0625(3) -- 3/16/2010 -- $504,688 $1,278,978 Philippe Bey, Ph.D. .... 20,000(4) 3.35% $ 19.875(3) -- 9/15/2010 -- $249,986 $ 633,513 Michael D. Rivard....... -- -- -- -- -- -- -- -- James Kyranos, Ph.D. ... -- -- -- -- -- -- -- -- John M. Sorvillo, -- Ph.D. ................ -- -- -- -- -- -- --
- --------------- (1) The dollar amounts under these columns are the result of calculations at 0%, 5% and 10% rates set by the Securities and Exchange Commission and, therefore, are not intended to forecast possible future appreciation, if any, in the price of the underlying common stock. (2) These options were granted under our Amended and Restated 1994 Equity Incentive Plan and become exercisable as to 25% of the shares on each of March 16, 2001, 2002, 2003 and 2004. (3) The exercise price of these options is equal to 100% of the fair market value of our common stock on the date the options were granted, as determined by our Compensation Committee. (4) These options were granted under our Amended and Restated 1994 Equity Incentive Plan and become exercisable as to 25% of the shares on each of September 15, 2001, 2002, 2003, and 2004. 41 43 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth certain information concerning exercisable and unexercisable stock options held by the named executive officers as of December 31, 2000.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(2) SHARES ACQUIRED VALUE --------------------------- --------------------------- ON EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE --------------- -------------- ----------- ------------- ----------- ------------- Dr. Stephen A. Hill...... -- $ -- 80,000 280,000 $2,190,000 $7,047,500 Philippe Bey, Ph.D. ..... -- $ -- 42,500 147,500 $1,166,073 $3,740,718 Michael D. Rivard........ -- $ -- 63,458 34,000 $1,137,070 $ 744,528 James Kyranos, Ph.D. .... 2,500 $19,656 37,744 25,000 $1,013,803 $ 686,555 John M. Sorvillo, Ph.D. ................. -- $ -- 86,083 17,500 $2,143,398 $ 479,368
- --------------- (1) Based on the difference between the option exercise price of options and the closing price of the underlying common stock on the date of exercise. (2) Based on the difference between the exercise price of options and the closing price of the underlying shares of common stock on December 29, 2000 as reported by the Nasdaq National Market ($32.00). EXECUTIVE EMPLOYMENT AGREEMENTS We currently have an employment agreement with Dr. Hill and Dr. Bey. We entered into an employment agreement with Dr. Hill, agreeing to employ him as our President and Chief Executive Officer, effective April 1, 1999, at an initial annual base salary of $300,000. Pursuant to the employment agreement, Dr. Hill was granted options, which vest over four years, to acquire 320,000 shares of common stock at $4.625 per share. The employment agreement provides that we pay Dr. Hill $100,000 for certain warrants he would have been entitled to had he remained with his prior employer. The agreement also requires (i) the payment of an annual bonus of up to $100,000 upon the achievement of certain milestones, which will be determined by our board of directors, and (ii) the payment of certain moving and relocation expenses. The agreement provides for continued employment until terminated by either party. If Dr. Hill is terminated without cause, as defined in the agreement, we will be required to make a one time payment to him equal to his annual base salary and to continue to provide him with insurance and other benefits for a period of one year. We entered into an employment agreement with Dr. Bey, agreeing to employ him as our Senior Vice President of Research and Development and Chief Scientific Officer, effective August 1999, at an initial annual base salary of $240,000. Pursuant to the employment agreement, Dr. Bey was granted options, which vest over four years, to acquire 170,000 shares of common stock at $4.56 per share. The agreement also requires (i) the payment of an annual bonus of up to $60,000, upon the achievement of certain milestones, and (ii) the payment of certain moving and relocation expenses. The agreement provides for continued employment until terminated by either party. If Dr. Bey is terminated without cause, as defined in the agreement, we will be required to make a one time payment to him equal to his annual base salary and to continue to provide him with insurance and other benefits for a period of one year. Upon our acquisition of Camitro in January 2001, we entered into an employment agreement with Dr. Selick, agreeing to employ him as the President and Chief Executive Officer of Camitro Corporation effective January 29, 2001, at an annual salary of $250,000. The agreement also provides for the payment of an annual bonus upon the one year anniversary of employment. If Dr. Selick is terminated by us for cause, or if he leaves for Good Reason, as defined in the agreement, then we will be required to (i) make a one time payment to him equal to his annual base salary, (ii) provide him with insurance and other benefits for a period of one year, and (iii) accelerate the vesting of all of his options and restricted stock that he received in our acquisition of Camitro. The agreement also requires Dr. Selick to refrain from competing with us and from soliciting our customers and employees during his employment and for a period of one year thereafter. 42 44 DIRECTOR COMPENSATION Our directors do not receive cash compensation for their services as directors. However, all directors who are not employees are currently eligible to participate in the Amended and Restated 1996 Director Stock Option Plan. The Director Stock Option Plan provides that each non-employee director who is serving as a director prior to and immediately after any annual meeting of stockholders (whether or not a director is being re-elected) receives an automatic grant of an option to purchase 3,500 shares of our common stock. This option is fully exercisable on the date of grant. In addition, upon the initial election to the board, each non-employee director receives an automatic grant of an option to purchase 7,500 shares of common stock. This option becomes exercisable with respect to 2,500 shares on the date of our next annual meeting of stockholders and each of the next two annual meetings of stockholders thereafter, so long as the director remains in office. The options have a term of ten years and an exercise price equal to the closing price of the common stock as reported by the Nasdaq National Market on the last trading day prior to the date of grant. All questions of interpretation with respect to the Director Stock Option Plan and the options granted thereunder are determined by the board of directors. The Director Stock Option Plan currently authorizes the grant of stock options to purchase up to a maximum of 190,500 shares of common stock (subject to adjustments for stock splits and similar capital changes). Mr. Elia received an option to purchase 10,000 shares of common stock upon his election to the board in September 2000, which includes the standard option to purchase 7,500 shares as well as an additional option to purchase 2,500 shares that vests as to one-third of the shares on each anniversary of date of grant. Ms. Avakian and Mr. Ha-Ngoc each received an option to purchase 7,500 shares of common stock upon their election to the board in March 2000 and each received an option to purchase 3,500 shares of common stock in May 2000. Dr. Cautreels, Dr. Gage and Dr. Rosenblatt each received grants of options to purchase 3,500 shares of common stock in May 2000. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION In 2000, the Compensation Committee consisted of Mr. Stephen Dow (until July 25, 2000), Dr. Cautreels, Dr. Gage and Ms. Avakian, who became a member in March 2000. None of the members of the Compensation Committee has been an officer or employee of ArQule. On March 5, 1998, Dr. Gage, was appointed the President of Wyeth-Ayerst Research, a division of American Home Products Corporation, after the merger of American Home Products and Genetics Institute, Inc., of which Mr. Gage was President. We entered into a collaborative agreement with Wyeth-Ayerst in July 1997, pursuant to which Wyeth-Ayerst subscribed to our Mapping Array(TM) Program and has committed to a minimum number of Directed Array(TM) 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. Dr. Cautreels has been the Global Head of Research and Development of Solvay Pharmaceuticals B.V. since May 1998, and has been one of our directors since September 1999. In November 1995, we entered into a five-year agreement with Solvay Duphar B.V., which was superseded by an amended and restated agreement with Solvay Pharmaceuticals B.V. in January 2001 and extends through December 31, 2003. We received a total of $18.1 million under the original agreement. Solvay is committed to make $2.5 million in additional payments and 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 with us. 43 45 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SHARE OWNERSHIP The following table and footnotes set forth certain information regarding the beneficial ownership of our common stock as of March 9, 2001 by (i) persons known by us to be beneficial owners of more than 5% of the common stock, (ii) our named executive officers and current executive officers, (iii) our directors and nominee for election as director, and (iv) all current executive officers and directors as a group.
SHARES BENEFICIALLY OWNED(1) -------------------- NUMBER PERCENT --------- ------- 5% STOCKHOLDERS Alloy Ventures(2)........................................... 1,267,775 6.28% 480 Cowper Street, 2nd Floor Palo Alto, California 94301 OrbiMed Advisors LLC(3)..................................... 1,130,000 5.60% 767 Third Avenue, 6th Floor New York, New York 10010 The PNC Financial Services Group, Inc.(4)................... 1,074,650 5.32% One PNC Plaza, 249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2707 DIRECTORS AND EXECUTIVE OFFICERS Laura Avakian(5)............................................ 12,500 * Werner Cautreels, Ph.D.(6).................................. 15,500 * Ariel Elia(7)............................................... 16,000 * L. Patrick Gage, Ph.D.(8)................................... 28,000 * Tuan Ha-Ngoc(9)............................................. 12,000 * Michael Rosenblatt, M.D.(10)................................ 21,500 * Philippe Bey(11)............................................ 42,845 * David C. Hastings(12)....................................... 15,000 * Stephen A. Hill(13)......................................... 173,236 * James Kyranos, Ph.D.(14).................................... 53,076 * Michael D. Rivard(15)....................................... 83,405 * Harold E. Selick............................................ 189,890 * John Sorvillo(16)........................................... 92,270 * All current directors and executive officers as a group (9 persons)(17).............................................. 526,471 2.60%
- --------------- * Indicates less than 1% (1) The persons and entities named in the table have sole voting and investment power with respect to the shares beneficially owned by them, except as noted below. (2) These shares include 301,413 shares beneficially owned by Asset Management Associates, 1996, L.P., a Delaware limited partnership, and by its general partner AMC Partners 96, L.P., a Delaware limited partnership. These shares also include 43,950 shares owned by AMA98 Partners, L.P., a Delaware limited partnership, 726,210 shares owned by AMA98 Ventures, L.P., a Delaware limited partnership, 87,144 shares owned by AMA98 Corporate, L.P., a Delaware limited partnership, and 109,036 shares owned by AMA98 Investors, L.P., a Delaware limited partnership, and by Alloy Ventures 1998, LLC, their general partner. Douglas E. Kelly, John F. Shoch, Craig C. Taylor, and Tony Di Bona are each general partners of AMC Partners 96, L.P., and are each managing members of AlloyVentures 1998, LLC, and may therefore be deemed to have investment and voting control over the shares listed. Each person disclaims beneficial ownership of the shares, except to the extent of their pecuniary interest therein. Based on shares issued by us in connection with our acquisition of Camitro on January 29, 2001. 44 46 (3) These shares are beneficially owned by OrbiMed Advisors Inc., a corporation organized under the laws of the British Virgin Islands, OrbiMed Advisors LLC, a Delaware limited liability company, Caduceus Capital Trust, a trust organized under the laws of Bermuda, Caduceus Capital II, L.P., a Delaware limited partnership, PaineWebber Eucalyptus Fund, LLC, a Delaware limited liability company, and PaineWebber Eucalyptus Fund, Ltd., a company organized under the laws of the Cayman Islands. Based on the Schedule 13G filed by OrbiMed Advisors LLC with the SEC on September 22, 2000. (4) These shares are beneficially owned by The PNC Financial Services Group, Inc. ("PNC"), a Pennsylvania corporation, PNC Bancorp, Inc., a Delaware corporation, and a wholly owned subsidiary of PNC, PNC Bank, National Association, a wholly owned subsidiary of PNC Bancorp, Inc., BlackRock Advisors, Inc., a Delaware corporation, and a wholly owned subsidiary of BlackRock, Inc., and BlackRock Financial Management, Inc. a Delaware corporation, and a wholly owned subsidiary of BlackRock Advisors, Inc. Based on the Schedule 13G filed by PNC with the SEC on February 14, 2001. (5) Consists of (i) 500 shares of common stock, (ii) 12,000 shares of common stock subject to options that are presently exercisable or will become exercisable within sixty (60) days of April 3, 2001. (6) Consists solely of 15,500 shares of common stock subject to options that are presently exercisable or will become exercisable within sixty (60) days of April 3, 2001. (7) Consists of (i) 10,000 shares of common stock, (ii) 6,000 shares of common stock subject to options that are presently exercisable or will become exercisable within sixty (60) days of April 3, 2001. (8) Consists of (i) 10,000 shares of common stock and (ii) 18,000 shares of common stock subject to options that are presently exercisable or will become exercisable within sixty (60) days of April 3, 2001. (9) Consists solely of 12,000 shares of common stock subject to options that are presently exercisable or will become exercisable within sixty (60) days of April 3, 2001. (10) Consists solely of 21,500 shares of common stock subject to options that are presently exercisable or will become exercisable within sixty (60) days of April 3, 2001. (11) Consists of (i) 345 shares of common stock, (ii) 42,500 shares of common stock subject to options that are presently exercisable or will become exercisable within sixty (60) days of April 3, 2001. (12) Consists solely of 15,000 shares of common stock subject to options that are presently exercisable or will become exercisable within sixty (60) days of April 3, 2001. (13) Consists of (i) 3,236 shares of common stock, (ii) 170,000 shares of common stock subject to options that are presently exercisable or will become exercisable within sixty (60) days of April 3, 2001. (14) Consists of (i) 5,332 shares of common stock, (ii) 47,744 shares of common stock subject to options that are presently exercisable or will become exercisable within sixty (60) days of April 3, 2001. (15) Consists of (i) 4,947 shares of common stock, (ii) 83,405 shares of common stock subject to options that are presently exercisable or will become exercisable within sixty (60) days of April 3, 2001. (16) Consists of (i) 1,187 shares of common stock, (ii) 91,083 shares of common stock subject to options that are presently exercisable or will become exercisable within sixty (60) days of April 3, 2001. (17) Includes 312,500 shares of common stock subject to options that are presently exercisable or will become exercisable within sixty (60) days of April 3, 2001. See footnotes (5) through (13), as well as Harold E. Selick's holdings. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See "Compensation Committee Interlocks and Insider Participation" under the caption "Executive Compensation" in Part III, Item 11 of this Annual Report on Form 10-K. 45 47 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 DURING FOURTH QUARTER OF 2000 On October 17, 2000, we filed on Form 8-K to file an Amendment No. 1 to a Compound Supply and License Agreement by and between ArQule, Inc. and R.W. Johnson Pharmaceuticals Research Institute. 46 48 (c) EXHIBITS
EXHIBIT NO. DESCRIPTION - ------- ----------- 2.1 Agreement and Plan of Merger among the Company, Camitro Acquisition Corporation, Camitro Corporation, and certain stockholders of Camitro Corporation dated as of January 16, 2001. Previously filed as Exhibit 2.1 to the Company's Current Report on Form 8-K (File No. 000-21429). Filed with the Commission on February 1, 2001 and incorporated herein by reference. 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 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. 10.6+ 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. 10.7+ 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. 10.8* 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. 10.9+ 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.
47 49
EXHIBIT NO. DESCRIPTION - ------- ----------- 10.10+ 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. 10.11+ 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. 10.12 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. 10.13+ 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. 10.14+ 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. 10.15+ 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. 10.16+ 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. 10.17+ 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. 10.18+ 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. 10.19+ 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. 10.20+ 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. 10.21 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. 10.22+ 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.
48 50
EXHIBIT NO. DESCRIPTION - ------- ----------- 10.23+ 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. 10.24 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. 10.25* 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. 10.26+ 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. 10.27+ 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. 10.28* 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. 10.29+ Amended and Restated Array Delivery and Testing 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 March 15, 2000 (File No. 000-21429) and incorporated herein by reference. 10.30+ Array Delivery and Testing Agreement between the Company and G.D. Searle & Co. dated June 20, 2000. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (File No. 000-21429) and incorporated herein by reference. 10.31+ Termination Agreement between the Company and Pharmacia Corporation dated June 30, 2000. Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (File No. 000-21429) and incorporated herein by reference. 10.32+ Technology Transfer and License Agreement between the Company and Amersham Pharmacia Biotech A.B. dated July 10, 2000. Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 2000 (File No. 000-21429) and incorporated herein by reference. 10.33* Employment agreement between the Company and Harold E. Selick Dated as of January 29, 2001. Filed herewith. 10.34 Lease between Camitro Corporation and WVP Income Plus 3 dated February 4, 1999, as amended. Filed herewith. 10.35+ Compound Discovery Collaboration Agreement between the Company and Genome Therapeutics Corporation dated October 17, 2000. Filed as Exhibit 10.1 to the Company's Registration Statement on Form S-3 filed With the Commission on October 20, 2000 (File No. 333-48358) and incorporated herein by reference. 10.36+ Collaboration and License Agreement between the Company and SmithKline Beecham Corporation dated November 27, 2000. Filed herewith.
49 51
EXHIBIT NO. DESCRIPTION - ------- ----------- 10.37+ Compound Discovery Collaboration Agreement between the Company and ACADIA Pharmaceuticals, Inc. dated December 18, 2000. Filed herewith. 10.38+ Amendment No. 1 to the 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 August 14, 2000. Filed as Exhibit 99.1 to the Company's Current Report on Form 8-K (File No. 000-21429) filed with the Commission on October 17, 2000 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. 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. 50 52 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 22, 2001. ARQULE, INC. By: /s/ STEPHEN A. HILL ------------------------------------ Stephen A. Hill President and Chief Executive Officer
SIGNATURE TITLE DATE --------- ----- ---- /s/ STEPHEN A. HILL President, Chief Executive March 22, 2001 - --------------------------------------------------- Officer and Director (Principal Stephen A. Hill Executive Officer) /s/ DAVID C. HASTINGS Vice President, Chief Financial March 22, 2001 - --------------------------------------------------- Officer and Treasurer David C. Hastings (Principal Financial Officer and Principal Accounting Officer) /s/ LAURA AVAKIAN Director March 22, 2001 - --------------------------------------------------- Laura Avakian /s/ WERNER CAUTREELS Director March 22, 2001 - --------------------------------------------------- Werner Cautreels /s/ ARIEL ELIA Director March 22, 2001 - --------------------------------------------------- Ariel Elia /s/ L. PATRICK GAGE Director March 22, 2001 - --------------------------------------------------- L. Patrick Gage /s/ TUAN HA-NGOC Director March 22, 2001 - --------------------------------------------------- Tuan Ha-Ngoc /s/ MICHAEL ROSENBLATT Director March 22, 2001 - --------------------------------------------------- Michael Rosenblatt
51 53 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- ----------- 2.1 Agreement and Plan of Merger among the Company, Camitro Acquisition Corporation, Camitro Corporation, and certain stockholders of Camitro Corporation dated as of January 16, 2001. Previously filed as Exhibit 2.1 to the Company's Current Report on Form 8-K (File No. 000-21429). Filed with the Commission on February 1, 2001 and incorporated herein by reference. 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 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. 10.6+ 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. 10.7+ 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. 10.8* 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. 10.9+ 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.
54
EXHIBIT NO. DESCRIPTION - ------- ----------- 10.10+ 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. 10.11+ 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. 10.12 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. 10.13+ 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. 10.14+ 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. 10.15+ 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. 10.16+ 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. 10.17+ 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. 10.18+ 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. 10.19+ 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. 10.20+ 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. 10.21 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. 10.22+ 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.
55
EXHIBIT NO. DESCRIPTION - ------- ----------- 10.23+ 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. 10.24 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. 10.25* 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. 10.26+ 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. 10.27+ 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. 10.28* 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. 10.29+ Amended and Restated Array Delivery and Testing 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 March 15, 2000 (File No. 000-21429) and incorporated herein by reference. 10.30+ Array Delivery and Testing Agreement between the Company and G.D. Searle & Co. dated June 20, 2000. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (File No. 000-21429) and incorporated herein by reference. 10.31+ Termination Agreement between the Company and Pharmacia Corporation dated June 30, 2000. Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (File No. 000-21429) and incorporated herein by reference. 10.32+ Technology Transfer and License Agreement between the Company and Amersham Pharmacia Biotech A.B. dated July 10, 2000. Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 2000 (File No. 000-21429) and incorporated herein by reference. 10.33* Employment agreement between the Company and Harold E. Selick Dated as of January 29, 2001. Filed herewith. 10.34 Lease between Camitro Corporation and WVP Income Plus 3 dated February 4, 1999, as amended. Filed herewith. 10.35+ Compound Discovery Collaboration Agreement between the Company and Genome Therapeutics Corporation dated October 17, 2000. Filed as Exhibit 10.1 to the Company's Registration Statement on Form S-3 filed With the Commission on October 20, 2000 (File No. 333-48358) and incorporated herein by reference. 10.36+ Collaboration and License Agreement between the Company and SmithKline Beecham Corporation dated November 27, 2000. Filed herewith.
56
EXHIBIT NO. DESCRIPTION - ------- ----------- 10.37+ Compound Discovery Collaboration Agreement between the Company and ACADIA Pharmaceuticals, Inc. dated December 18, 2000. Filed herewith. 10.38+ Amendment No. 1 to the 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 August 14, 2000. Filed as Exhibit 99.1 to the Company's Current Report on Form 8-K (File No. 000-21429) filed with the Commission on October 17, 2000 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. 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. EX-10.33 2 b38132arex10-33.txt EMPLOYMENT AGREEMENT (HAROLD E. SELICK) 1 Exhibit 10.33 January 26, 2001 Harold E. Selick 11 Somerset Court Belmont, CA 94002 RE: EMPLOYMENT TERMS Dear Mr. Selick: This letter agreement (the "Agreement") sets forth the terms and conditions of your employment with Camitro Corporation (the "Company") as the surviving corporation of the merger of Camitro Corporation with a subsidiary of ArQule, Inc. ("ArQule"), pursuant to the Agreement and Plan of Merger, dated January 16, 2001 by and among ArQule, Camitro Corporation, Camitro Acquisition Corporation and certain principal shareholders of Camitro (the "Merger Agreement"). 1. TERM. Your employment with the Company will commence on the Closing Date (as defined in the Merger Agreement) and will continue until terminated by either you or the Company (the "Separation Date"). 2. DUTIES. You shall be employed with the Company in your current role/title and will perform all duties reasonably expected of you in that capacity. You shall devote your best efforts and substantially all of your business time and attention (except for vacation periods and reasonable periods of illness or other incapacity permitted by the Company's general employment policies) to the business of the Company. 3. SALARY. The Company shall pay you as compensation for your services hereunder an annual base salary equal to or greater than your current salary, subject to standard payroll deductions and withholdings. Your salary shall be paid on a bi-monthly basis, in accordance with the Company's standard payroll practices. You will be considered for annual increases in salary in accordance with Company policy, but in no event shall your base salary be reduced below the amount stated herein. 4. BONUS. You shall be eligible for an annual bonus, subject to standard payroll deductions and withholdings. This bonus shall be paid each year on the earlier of either (a) your employment anniversary date with the Company, or (b) the date the Company pays bonuses to other comparably-placed executives. 5. STANDARD COMPANY BENEFITS. You shall be entitled to all rights and benefits for which you are eligible under the terms and conditions of the standard Company benefits and compensation plans which may be in effect from time to time and provided by the Company to its employees generally. 2 6. TERMINATION OF EMPLOYMENT. 6.1 AT-WILL EMPLOYMENT. Both the Company and you shall have the right to terminate the employment relationship at any time, with or without Cause or Good Reason (defined below), and with or without advance notice. 6.1.1 DEFINITION OF CAUSE. For purposes of this Agreement, "Cause" shall mean that you have committed, or there has occurred, one or more of the following: (i) your continuing unsatisfactory job performance which you fail to correct after being given thirty (30) days written notice of, and opportunity to cure, such performance problems; (ii) your conviction of a felony by a court of competent jurisdiction under the laws of the United States or any state thereof or of the United Kingdom; (iii) your participation in any fraud or act of dishonesty against the Company that materially and adversely affects the Company's business; or (iv) you materially violate any material provision of this Agreement. 6.1.2 DEFINITION OF GOOD REASON. For purposes of this Agreement, "Good Reason" shall mean that any one of the following events occurs without your consent: (i) relocation of your place of employment by a distance of more than forty-five (45) miles; (ii) material diminution or alteration of your duties and responsibilities which diminution or alteration continues after you provide the Company with thirty (30) days written notice; (iii) any reduction in your base salary or benefits package, except if such change in benefits occurs on a Company-wide basis; or (iv) the Company's material violation of any material provision of this Agreement. You shall have sixty (60) days after the occurrence of the event which forms the basis for your resignation for Good Reason to terminate your employment on such grounds in order to receive the severance benefits set forth in Section 6.3 of this Agreement. 6.2 TERMINATION FOR CAUSE OR WITHOUT GOOD REASON. If the Company terminates you for Cause or you terminate your employment without Good Reason, you will be paid all salary and accrued unused vacation earned by you through the Separation Date as required by law. You shall not receive any additional compensation, severance or benefits from the Company after the Separation Date, except as required by law or by the terms of any governing Company benefit plan or program. 6.3 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If the Company terminates your employment without Cause or you resign for Good Reason, the Company shall provide you with the following severance benefits: (a) the Company will pay you a lump sum amount equal to one (1) year of your then-current base salary, subject to standard payroll deductions and withholdings; (b) the Company will pay all costs associated with continuing with your then-current level of benefits (including, but not necessarily limited to, all health, dental and vision insurance, life insurance, short and long-term disability insurance coverage), for a period of twelve months (12) months after the Separation Date; (c) all of your options to purchase Camitro common stock which were assumed by the Company and converted to options to purchase ArQule common stock as part of the Merger Agreement (the "Camitro Options") shall become one hundred percent (100%) vested as of the Separation Date; and (d) all of your shares of Camitro common and/or preferred stock which were subject to a right of repurchase (the "Repurchase Option") and which were assumed by the Company and converted to ArQule common stock as part of the Merger 3 Agreement (the "Camitro Stock"), shall become one hundred percent (100%) vested and released from the Repurchase Option as of the Separation Date. 6.4 TERMINATION DUE TO DEATH OR DISABILITY. In the event that your employment terminates because of your death or because of a physical or mental disability which renders you unable to perform your duties under this Agreement, you will receive the severance benefits provided under Section 6.3 of this Agreement (Termination Without Cause or for Good Reason). 7. NON-COMPETITION. 7.1 ACKNOWLEDGEMENTS. In connection with the merger of the Company with the subsidiary of ArQule pursuant to the Merger Agreement (the "Merger"), you disposed of all shares of Camitro stock held by you in exchange for shares of ArQule stock. You hereby acknowledge that you are voluntarily entering into this Agreement and that the terms and conditions of this Agreement (and specifically this Section 7) are fair and reasonable to you in all respects. 7.2 RESTRICTIONS. During your employment with the Company and for a period of one (1) year thereafter, you will not directly or indirectly, alone or through any other organization or entity, engage in any activity that competes with the protected business of the Company ("Competitive Activity"). For purposes of this Agreement, the "protected business of the Company" shall mean all business activities of ArQule or the Company in all geographic areas in which ArQule or the Company are performing business. Notwithstanding the above, you will not be deemed to be engaged directly or indirectly in any Competitive Activity if you participate in any such business solely as a passive investor in up to three percent (3%) of the equity securities of a company or partnership. 8. NON-SOLICITATION. During your employment with the Company and for (1) year thereafter, you agree that you will not: (i) solicit, divert or take away, or attempt to divert or take away, the business or patronage of any of the clients, customers or accounts, or prospective clients, customers or accounts of ArQule or the Company with whom ArQule or the Company has or is actively negotiating a written agreement as of the Separation Date; (ii) recruit, solicit or hire any person who is, or within the six (6) months preceding the Separation Date was, an officer, director or employee of ArQule or the Company or was a scientific consultant with an exclusive arrangement with ArQule or the Company; or (iii) induce or attempt to induce any officer, director, employee, consultant, agent or representative of ArQule or the Company to discontinue his or her relationship with ArQule or the Company to commence an employment or other business relationship with another entity. 9. TERMINATION OF AGREEMENT. This Agreement shall terminate and cease to be effective on the date the Camitro Options are fully vested. 10. GENERAL PROVISIONS. 10.1 NOTICES. Any notices provided hereunder must be in writing and shall be deemed effective upon the earlier of personal delivery (including, personal delivery by facsimile transmission), delivery by express delivery service (e.g. Federal Express), or the third day after 4 mailing by first class mail, to the Company at its primary office location and to you at your address as then-listed on the Company payroll. 10.2 SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but such invalid, illegal or unenforceable provision will be reformed, construed and enforced in such jurisdiction so as to render it valid, legal, and enforceable consistent with the intent of the parties insofar as possible. 10.3 WAIVER. If either party should waive any breach of any provisions of this Agreement, he or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. 10.4 ENTIRE AGREEMENT. This Agreement, along with the Merger Agreement and any employee non-disclosure and inventions agreements or other proprietary information agreements into which you have previously entered with Camitro and which were in effect as of the Closing Date, constitutes the entire agreement between you and the Company regarding the subject matter hereof and it supersedes any prior agreement, promise, representation, written or otherwise, between you and the Company with regard to this subject matter. It is entered into without reliance on any agreement, or promise, or representation, other than those expressly contained or incorporated herein, and it cannot be modified or amended except in a writing signed by you and a duly authorized officer of the Company. 10.5 COUNTERPARTS. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement. Signatures transmitted via facsimile shall be deemed the equivalent of originals. 10.6 HEADINGS AND CONSTRUCTION. The headings of the sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof or to affect the meaning thereof. For purposes of construction of this Agreement, any ambiguities shall not be construed against either party as the drafter. 10.7 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by you, the Company and their respective successors, assigns, heirs, executors and administrators, except that neither you or the Company may assign any rights or duties hereunder without the other party's express written consent. 10.8 GOVERNING LAW. All questions concerning the construction, validity and interpretation of this Agreement shall be governed by the law of the State of California. 5 Please sign and date the Agreement where noted below to indicate your agreement to the terms and conditions set forth herein. Very truly yours, ARQULE, INC. By: /s/ Stephen A. Hill ---------------------------------- Stephen A. Hill President & Chief Executive Officer Agreed and accepted: Signature: Harold E. Selick -------------------------- Printed Name: Harold E. Selick Date: 1/26/01 EX-10.34 3 b38132arex10-34.txt LEASE BETWEEN CAMITRO CORP & WVP INCOME PLUS 3 1 EXHIBIT 10.34 SECOND AMENDMENT OF LEASE This Second Amendment of Lease ("Amendment") is made and entered into this 5th day of May, 1999, by and between WVP Income Plus III, a California Limited Partnership ("Lessor"), and Camitro, Inc., a California Corporation ("Lessee"). RECITALS A. Lessor and Lessee entered into a lease dated February 4, 1999, and a First Amendment of Lease dated March 8, 1999 (collectively referred to as the "Lease") wherein Lessee agreed to lease from Lessor approximately 15,716 rentable square feet located at 4040 Campbell Ave., Menlo Park, California ("Premises"). B. Lessor and Lessee now desire to amend the terms of the Lease. NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt of which is hereby acknowledged, Lessor and Lessee agree as follows: 1. Commencing on the Effective Date (hereinafter defined), the Premises shall also include approximately 9,242 rentable square feet on the first floor, currently leased to Progenitor ("2nd Additional Space"). The Effective Date shall be defined as the later to occur of (a) Lessor's delivery of possession to Lessee of the 2nd additional space, or (b) October 1, 1999, (the "Effective Date"). The new total rentable square feet shall be approximately 24,958 rentable square feet. The revised Premises shall consist of the entire ground floor of the building located at 4040) Campbell Ave., excluding the lobby. The lobby shall be common area and shall be shared with other tenants in the building on a non-exclusive basis. Lessor and Lessee hereby agree that the rentable square footage of the Premises as defined in this Second Amendment of Lease is an approximation which Lessor and Lessee agree is reasonable and is not subject to revision whether or not the actual square footage is more or less. 2. The lease term shall be extended such that it shall end on September 30, 2002. 3. Commencing on the Effective Date, monthly installments of Rent shall be as stated on Exhibit "A" attached hereto. 4. The option in Paragraph #61 of the Lease Addendum is hereby modified such that if Lessee does exercise its option, it shall also include the 1st Additional Space and the 2nd Additional Space. The monthly rent during the option period shall be as stated on Exhibit "A". 5. Upon execution of this Lease Amendment, Lessee shall increase its security deposit to be equal to two (2) times the October 1, 1999 rent on the total space, which shall be $87,573.00. 6. Lessor, at Lessor's sole cost and expense, shall replace damaged ceiling tiles and defective lighting fixtures and paint and re-carpet the 2nd Additional Space. Lessor shall use its best efforts to match the existing paint and carpet, but Lessee acknowledges that it may not be possible to do so. Additionally, Lessor shall use its best efforts to complete these improvements as soon after October 1st as possible. However, rent on said 2nd Additional Space shall commence on the 2 Effective Date, even though these improvements may be in progress during the month of October. Lessor shall also give Lessee a credit of $500 towards the October 1999 rent for Lessee to use to replace any damaged floor tiles that Lessee should desire to replace. Except as provided herein, Lessee agrees to accept the 2nd Additional Space in "AS-IS" condition. Lessee shall not be responsible for any debris/chemicals left behind by previous tenants. 7. Notwithstanding any to the contrary contained herein, Lessee shall have the right, upon fourteen (14) days prior to written notice to Lessor, to occupy and commence rent on the 2nd Additional Space at any time prior to October 1, 1999. If Lessee does exercise this option, then the Effective Date shall be the date of Lessee's possession. Lessee's right in this paragraph is contingent upon Lessor receiving necessary termination agreements from the existing tenant, Progenitor. If Lessee should exercise this right, the rent shall be the same as the rent for October 1999 and the expiration date of the Lease shall not change. 8. All other terms of the Lease shall remain in full force and effect. The parties have signed this Second Amendment of Lease, which for reference purposes shall be deemed to be dated as of the date first written above. LESSOR LESSEE WVP Income Plus III, Camitro, Inc., A California Limited Partnership a California Corporation BY: West Valley Properties, Inc. Its General Partner By: /s/ By: /s/ -------------------------------- -------------------------------- Janet J. Swearson Vice President and CFO 2 3 Exhibit A Camitro Rent Calculation
Original 1st Addt'l 2nd Addt'l Space Space Space Total ----------------------------------------------------- Square Feet 12,100 3,616 9,242 24,958 Rent Rate 10/1/99 $ 1.95 $ 0.60 $ 1.95 Mo. Rent 10/1/99 $23,595.00 $ 2,169.60 $18,021.90 43,786.50 Rent Rate 4/1/00 $ 2.00 $ 0.65 $ 2.00 Mo. Rent 4/1/00 $24,200.00 $ 2,350.40 $18,484.00 45,034.40 Rent Rate 4/1/01 $ 2.05 $ 0.70 $ 2.05 Mo. Rent 4/1/01 $24,805.00 $ 2,531.20 $18,946.10 46,282.30 Rent Rate 4/1/02 $ 2.10 $ 0.75 $ 2.10 Mo. Rent 4/1/02 25,410.00 2,712.00 19,408.20 47,530.20 Option Period Rent Rate $ 2.15 $ 0.80 $ 2.15 Option Period Mo. Rent 26,015.00 2,892.80 19,870.30 48,778.10
3 4 FIRST AMENDMENT OF LEASE This First Amendment of Lease ("Amendment") is made and entered into this 8th day of March, 1999, by and between WVP Income Plus III, a California Limited Partnership ("Lessor") and Camitro, Inc., a California Corporation ("Lessee"). RECITALS A. Lessor and Lessee entered into a lease dated February 4, 1999 ("Lease") wherein Lessee agreed to lease from Lessor approximately 12,500 rentable square feet located at 4040 Campbell Ave., Menlo Park, California ("Premises"). B. Lessor and Lessee now desire to amend the terms of the Lease NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt of which is hereby acknowledged, Lessor and Lessee agree as follows: 1. The Premises shall also include approximately 3,500 rentable square feet ("Additional Space"). The revised Premises is shown on Exhibit "A" attached hereto. The new total rentable square feet shall be approximately 16,000 rentable feet and shall be measured by a space planner hired by Lessor, and the square footage shall be adjusted accordingly. 2. Commencing April 1, 1999, monthly installments of Rent on the Additional Space shall be as follows:
MONTHLY INSTALLMENT ------------------- Commencing April 1, 1999 $0.60 per rentable square foot Commencing April 1, 2000 $0.65 per rentable square foot Commencing April 1, 2001 $0.70 per rentable square foot
3. Lessee shall take the Additional Space in "AS IS" Condition. 4. The Option in Paragraph #61 of the Lease Addendum shall be amended such that if Lessee does exercise its option, it shall also include the Additional Space. The monthly rent on the Additional Space during the option period shall be at $0.75 per rentable square foot. 5. Security Deposit. Upon execution of this Amendment, Lessee shall increase its security deposit to be equal to two (2) times the first months rent on the total revised space. 6. All other terms of the Lease shall remain in full force and effect. 4 5 The parties have signed this First Amendment of Lease, which for reference purposes shall be deemed to be dated as of the date first written above. LESSOR LESSEE WVP Income Plus III, Camitro, Inc., A California Limited Partnership a California Corporation BY: West Valley Properties, Inc. Its General Partner By: /s/ By: /s/ ----------------------------- -------------------------------- 5 6 EXHIBIT A [DIAGRAM OF FLOOR PLAN OMITTED] 6 7 STANDARD OFFICE LEASE - GROSS AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1. BASIC LEASE PROVISIONS ("BASIC LEASE PROVISIONS"). 1.1 PARTIES: This Lease, dated, for reference purposes only, February 4, 1999 is made by and between WVP Income Plus 3, a California limited partnership (herein called "Lessor") and Camitro, Inc., a California corporation doing business under the name of _____________________ (herein called "Lessee"). 1.2 PREMISES: Suite Number(s) _____________________ floors, consisting of approximately 12,500 rentable square feet, more or less, defined in paragraph 2 and as shown on Exhibit "A" hereto (the "Premises"). 1.3 BUILDING: Commonly described as being located at 4040 Campbell Ave. in the city of Menlo Park, County of San Mateo, State of California, as more particularly described in Exhibit ___________ hereto, and as defined in paragraph ______________. 1.4 USE: General office, laboratory research and other legally related uses, subject to paragraph ___. 1.5 TERM: 36 months commencing April 1, 1999 ("Commencement Date") and ending March 31, 2002, as defined in paragraph ___. 1.6 BASE RENT: $24,375.00 per month, payable on the 1st day of each month per paragraph 4.1. 1.7 BASE RENT INCREASE: On ____* SEE ADDENDUM ______ the monthly Base Rent payable under paragraph 1.6 above shall be adjusted as provided in paragraph 4.3 below. 1.8 RENT PAID UPON EXECUTION: $24,375.00 for the first month's rent. 1.9 SECURITY DEPOSIT: $48,750.00 1.10 LESSEE'S SHARE OF OPERATING EXPENSE INCREASE: N/A % as defined in paragraph 4.2. 2. PREMISES, PARKING AND COMMON AREAS. 2.1 PREMISES: The Premises are a portion of a building, herein sometimes referred to as the "Building" Identified in paragraph 1.2 of the Basic Lease Provisions. "Building" shall include adjacent parking structures used in connection therewith. The Premises, the Building, the Common Areas, the land upon which the same are located, along with all other buildings and improvements thereon or thereunder, are herein collectively referred to as the "Office Building Project." Lessor hereby leases to Lessee and Lessee leases from Lessor for the term, at the rental, and upon all of the conditions set forth herein, the real property referred to in the Basic Lease Provisions, paragraph 1.2, as the "Premises," including rights to the Common Areas as hereinafter specified. 7 8 2.2 VEHICLE PARKING: So long as Lessee is not in default, and subject to the rules and regulations attached hereto, and as established by Lessor from to time, Lessee shall be entitled to rent and use N/A parking spaces in the Office Building Project at the monthly rate applicable from time to time for monthly parking as set by Lessor and/or its licensee. 2.2.1 If Lessee commits, permits or allows any of the prohibited activities described in the Lease or the rules then in effect, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.2.2 The monthly parking rate per parking space will be $ N/A per month at the commencement of the term of this Lease and is subject to change upon five (5) days prior written notice to Lessee. Monthly parking fees shall be payable one month in advance prior to the first day of each calendar month. 2.3 COMMON AREAS - DEFINITION: The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Office Building Project that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and of other lessees of the Office Building Project and their respective employees, suppliers, shippers, customers and invitees, including but not limited to common entrances, lobbies, corridors, stairways and stairwells, public restrooms, elevators, escalators, parking areas to the extent not otherwise prohibited by this Lease, loading and unloading areas, trash areas, roadways, sidewalks, parkways, ramps, driveways, landscaped areas and decorative walls. 2.4 COMMON AREAS - RULES AND REGULATIONS: Lessee agrees to abide by and conform to the rules and regulations attached hereto as Exhibit B with respect to the Office Building Project and Common Areas, and to cause its employees, suppliers, shippers, customers, and invitees to so abide and conform. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to modify, amend and enforce said rules and regulations. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees, their agents, employees and invitees of the Office Building Project. 2.5 COMMON AREAS - CHANGES: Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Building interior and exterior and Common Areas, including, without limitation, changes in the location, size, shape, number, and appearance thereof, including but not limited to the lobbies, windows, stairways, air shafts, elevators, escalators, restrooms, driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, decorative walls, landscaped areas and walkways; provided, however, Lessor shall at all times provide the parking facilities required by applicable law; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; 8 9 (c) To designate other land and improvements outside the boundaries of the Office Building Project to be a part of the Common Areas provided that such other land and improvements have a reasonable and functional relationship to the Office Building Project; (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Office Building Project, or any portion thereof; (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Office Building Project as Lessor may, in the exercise of sound business judgment deem to be appropriate. 3. TERM. 3.1 TERM. The term and Commencement Date of this Lease shall be as specified in paragraph 1.5 of the Basic Lease Provisions. 3.2 DELAY IN POSSESSION. Notwithstanding said Commencement Date, if for any reason Lessor cannot delivery possession of the Premises to Lessee on said date and subject to paragraph 3.2.2, Lessor shall not be subject to any liability therefore, nor shall such failure affect the validity of this Lease or the obligations of Lessee hereunder or extend the term hereof; but, in such case, Lessee shall not be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease, except as may be otherwise provided in this Lease, until possession of the Premises is tendered to Lessee, as hereinafter defined; provided, however, that if Lessor shall not have delivered possession of the Premises within sixty (60) days following said Commencement Date, as the same may be extended under the terms of a Work Letter executed by Lessor and Lessee, Lessee may, at Lessee's option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder; provided, however, that, as to Lessee's obligations, Lessee first reimburses Lessor for all costs incurred for Non-Standard Improvements and, as to Lessor's obligations, Lessor shall return any money previously deposited by Lessee (less any offsets due Lessor for Non-Standard Improvements); and provided further, that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. 3.2.1 POSSESSION TENDERED - DEFINED. Possession of the Premises shall be deemed tendered to Lessee ("Tender of Possession") when (1) the improvements to be provided by Lessor under this Lease are substantially completed, (2) the Building utilities are ready for use in the Premises, (3) Lessee has reasonable access to the Premises, and (4) ten (10) days shall have expired following advance written notice to Lessee of the occurrence of the matters described in (1), (2) and (3), above of this paragraph 3.2.1. 3.2.2 DELAYS CAUSED BY LESSEE. There shall be no abatement of rent, and the sixty (60) day period following the Commencement Date before which Lessee's right to cancel this Lease accrues under paragraph 3.2, shall be deemed extended to the extend of any delays caused by acts or omissions of Lessee, Lessee's agents, employees and contractors. 9 10 3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to said Commencement Date, such occupancy shall be subject to all provisions of this Lease, such occupancy shall not change the termination date, and Lessee shall pay rent for such occupancy. 3.4 UNCERTAIN COMMENCEMENT. In the event commencement of the Lease term is defined as the completion of the improvements, Lessee and Lessor shall execute an amendment to this Lease establishing the date of Tender of Possession (as defined in paragraph 3.2.1) or the actual taking of possession by Lessee, whichever first occurs, as the Commencement Date. 4. RENT. 4.1 BASE RENT. Subject to adjustment as hereinafter provided in paragraph 4.3, and except as may be otherwise expressly provided in this Lease, Lessee shall pay to Lessor the Base Rent for the Premises set forth in paragraph 1.6 of the Basic Lease Provisions, without offset or deduction, Lessee shall pay Lessor upon execution hereof the advance Base Rent described in paragraph 1.8 of the Basic Lease Provisions. Rent for any period during the term hereof which is for less than one month shall be prorated based upon the actual number of days of the calendar month involved. Rent shall be payable in lawful money of the United States to Lessor at the address stated herein or to such other persons or at such other places as Lessor may designate in writing. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the security deposit set forth in paragraph 1.9 of the Basic Lease Provisions as security for Lessee's faithful performance of Lessee's obligations hereunder. If Lessee fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Lessor may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default for the payment of any other sum to which Lessor may become obligated by reason of Lessee's default, or to compensate Lessor for any loss or damage which Lessor may suffer thereby. If Lessor so uses or applies all or any portion of said deposit, Lessee shall within ten (10) days after written demand therefor deposit cash with Lessor in an amount sufficient to restore said deposit to the full amount then required of Lessee. If the monthly Base Rent shall, from time to time, increase during the term of this Lease, Lessee shall, at the time of such increase, deposit with Lessor additional money as a security deposit so that the total amount of the security deposit held by Lessor shall at all times bear the same proportion to the then current Base Rent as the initial security deposit bears to the Initial Base Rent set forth in paragraph 1.6 of the Basic Lease Provisions. Lessor shall not be required to keep said security deposit separate from its general accounts. If Lessee performs all of Lessee's obligations hereunder, said deposit, or so much thereof as has not heretofore been applied by Lessor, shall be returned, without payment of interest or other increment for its use, to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest hereunder) at the expiration of the term hereof, and after Lessee has vacated the Premises. No trust relationship is created herein between Lessor and Lessee with respect to said Security Deposit. 6. USE. 10 11 6.1 USE. The Premises shall be used and occupied only for the purpose set forth in paragraph 1.4 of the Basic Lease Provisions or any other use which is reasonably comparable to that use and for one other purpose. 6.2 COMPLIANCE WITH LAW. (a) Lessor warrants to Lessee that the Premises, in the state existing on the date that the Lease term commences, but without regard to alterations or improvements made by Lessee or the use for which Lessee will occupy the Premises, does not violate any covenants or restrictions of record, or any applicable building code, regulation or ordinance in effect on such Lease term Commencement Date. In the event it is determined that this warranty has been violated, then it shall be the obligation of the Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and expense, rectify any such violation. (b) Except as provided in paragraph 6.2(a) Lessee shall, at Lessee's expense, promptly comply with all applicable statutes, ordinances, rules, regulations, orders, covenants and restrictions of record, and requirements of any first insurance underwriters or rating bureaus, now in effect or which may hereafter come into effect, whether or not they reflect a change in policy from that now existing, during the term or any part of the term hereof, relating in any manner to the Premises and the occupation and use by Lessee of the Premises. Lessee shall conduct its business in a lawful manner and shall not use or permit the use of the Premises or the Common Areas in any manner that will tend to create waste or a nuisance or shall tend to disturb other occupants of the Office Building Project. 6.3 CONDITION OF PREMISES. (a) Lessor shall delivery the Premises to Lessee in a clean condition on the Lease Commencement Date (unless Lessee is already in possession) and Lessor warrants to Lessee that the plumbing, lighting, air conditioning, and heating system in the Premises shall be in good operating condition. In the event that it is determined that this warranty has been violated, then it shall be the obligation of Lessor, after receipt of written notice from Lessee setting forth with specificity the nature of the violation, to promptly, at Lessor's sole cost, rectify such violation. (b) Except as otherwise provided in this Lease, Lessee hereby accepts the Premises and the Office Building Project in their condition existing as of the Lease Commencement Date or the date that Lessee takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and any easements, covenants or restrictions of record, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that it has satisfied itself by its own independent investigation that the Premises are suitable for its intended use, and that neither Lessor nor Lessor's agent or agents has made any representation or warranty as to the present or future suitability of the Premises, Common Areas, or Office Building Project for the conduct of Lessee's business. 7. MAINTENANCE, REPAIRS, ALTERATIONS AND COMMON AREA SERVICES. 7.1 LESSOR'S OBLIGATIONS. Lessor shall keep the Office Building Project, including the Premises, interior and exterior walls, roof, and common areas, and the equipment whether used 11 12 exclusively for the Premises or in common with other premises, in good condition and repair, provided, however, Lessor shall not be obligated to paint, repair or replace wall coverings, or to repair or replace any improvements that are not ordinarily a part of the Building or are above then Building standards. Except as provided in paragraph 9.5, there shall be no abatement of rent or liability of Lessee on account of any injury or interference with Lessee's business with respect to an improvements, alterations or repairs made by Lessor to the Office Building Project or any part thereof. Lessee expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Premises in good order, condition and repair. 7.2 LESSEE'S OBLIGATIONS. (a) Notwithstanding Lessor's obligation to keep the Premises in good condition and repair, Lessee shall be responsible for payment of the cost thereof to Lessor as additional rent for that portion of the cost of any maintenance and repair of the Premises, or any equipment (wherever located) that serves only Lessee or the Premises, to the extent such cost is attributable to causes beyond normal wear and tear. Lessee shall be responsible for the cost of painting, repairing or replacing wall coverings, and to repair or replace any Premises improvements that are not ordinarily a part of the Building or that are above then Building standards. Lessor may, at its option, upon reasonable notice, elect to have Lessee perform any particular such maintenance or repairs the cost of which is otherwise Lessee's responsibility hereunder. (b) On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the Premises to Lessor in the same condition as received, ordinary wear and tear excepted, clean and free of debris. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices by Lessee. Lessee shall repair any damage to the Premises occasioned by the installation or removal of Lessee's trade fixtures, alterations, furnishing and equipment. Except as otherwise stated in this Lease, Lessee shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, air conditioning, window coverings, wall coverings, carpets, wall paneling, ceilings and plumbing on the Premises and in good operation condition. 7.3 ALTERATIONS AND ADDITIONS. (a) Lessee shall not, without Lessor's prior written consent make any alterations, improvements, additions, Utility installations or repairs in, on or about the Premises, or the Office Building Project. As used in this paragraph 7.3 the term "Utility Installation" shall mean carpeting, window and wall coverings, power panels, electrical distribution systems, lighting fixtures, air conditioning, plumbing, and telephone and telecommunication wiring and equipment. At the expiration of the term, Lessor may require the removal of any or all of said alterations, improvements, additions or Utility installations, and the restoration of the Premises and the Office Building Project to their prior condition, at Lessee's expense. Should Lessor permit Lessee to make its own alterations, improvements, additions or Utility installations, Lessee shall use only such contractor as has been expressly approved by Lessor, and Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure 12 13 Lessor against any liability for mechanic's and materialmen's liens and to insure completion of the work. Should Lessee make any alterations, improvements, additions or Utility installations without the prior approval of Lessor, or use a contractor not expressly approved by Lessor, Lessor may, at any time during the term of this Lease, require that Lessee remove any part or all of the same. (b) Any alterations, improvements, additions or Utility installations in or about the Premises or the Office Building Project that Lessee shall desire to make shall be presented to Lessor in written form, with proposed detailed plans. If Lessor shall give its consent to Lessee's making such alteration, improvement, addition or Utility installation, the consent shall be deemed conditioned upon Lessee acquiring a permit to do so from the applicable governmental agencies, furnishing a copy thereof to Lessor prior to the commencement of the work, and compliance by Lessee with all conditions of said permit in a prompt and expeditious manner. (c) Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises, the Building or the Office Building Project, or any interest therein. (d) Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in the Premises by Lessee, and Lessor shall have the right to post notices of non-responsibility in or on the Premises or the Building as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend itself and Lessor against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises, the Building or the Office Building Project, upon the condition that if Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to such contested lien claim or demand indemnifying Lessor against liability for the same and holding the Premises, the Building and the Office Building Project free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's reasonable attorneys' fees and costs in participating in such action if Lessor shall decide it is to Lessor's best interest so to do. (e) All alterations, improvements, additions and Utility installations (whether or not such Utility installations constitute trade fixtures of Lessee), which may be made to the Premises by Lessee, including but not limited to, floor coverings, panelings, doors, drapes, built-ins, moldings, sound attenuation, and lighting and telephone or communication systems, conduit, wiring and outlets, shall be made and done in a good and workmanlike manner and of good and sufficient quality and materials and shall be the property of Lessor and remain upon and be surrendered with the Premises at the expiration of the Lease term, unless Lessor requires their removal pursuant to paragraph 7.3(a). Provided Lessee is not in default, notwithstanding the provisions of this paragraph 7.3(e), Lessee's personal property and equipment, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises or the Building, and other than Utility installations, shall remain the property of Lessee and may be removed by Lessee subject to the provisions of paragraph 7.2. (f) Lessee shall provide Lessor with as-built plans and specifications for any alterations, improvements, additions or Utility installations. 13 14 7.4 UTILITY ADDITIONS. Lessor reserves the right to install new or additional utility facilities throughout the Office Building Project for the benefit of Lessor or Lessee, or any other lessee of the Office Building Project, including, but not by way of limitation, such utilities as plumbing, electrical systems, communication systems, and fire protection and detection systems, so long as such installations do not unreasonably interfere with Lessee's use of the Premises. 8. INSURANCE; INDEMNITY. 8.1 LIABILITY INSURANCE - LESSEE. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease a policy of Comprehensive General Liability Insurance utilizing an Insurance Services Office standard form with Broad Form General Liability Endorsement (GL0404), or equivalent, in an amount of not less than $1,000,000 per occurrence of bodily injury and property damage combined or in a greater amount as reasonably determined by Lessor and shall insure Lessee with Lessor as an additional insured against liability arising out of the use, occupancy or maintenance of the Premises. Compliance with the above requirement shall not, however, limit the liability of Lessee hereunder. 8.2 LIABILITY INSURANCE - LESSOR. Lessor shall obtain and keep in force during the term of this Lease a policy of Combined Single Limit Bodily Injury and Broad Form Property Damage Insurance, plus coverage against such other risks Lessor deems advisable from time to time, insuring Lessor, but not Lessee, against liability arising out of the ownership, use, occupancy or maintenance of the Office Building Project in an amount not less than $5,000,000.00 per occurrence. 8.3 PROPERTY INSURANCE - LESSEE. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease for the benefit of Lessee, replacement cost fire and extended coverage insurance, with vandalism and malicious mischief, sprinkler leakage and earthquake sprinkler leakage endorsements, in an amount sufficient to cover not less than 100% of the full replacement cost, as the same may exist from time to time, of all of Lessee's personal property, fixtures, equipment and tenant improvements. 8.4 PROPERTY INSURANCE - LESSOR. Lessor shall obtain and keep in force during the term of this Lease a policy or policies or insurance covering loss or damage to the Office Building Project Improvements, but not Lessee's personal property, fixtures, equipment or tenant improvements, in the amount of the full replacement cost thereof, as the same may exist from time to time, utilizing Insurance Services Office standard form, or equivalent, providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, plate glass, and such other perils as Lessor deems advisable or may be required by a lender having a lien on the Office Building Project. In addition, Lessor shall obtain and keep in force, during the term of this lease, a policy of rental value insurance covering a period of one year, with loss payable to Lessor, which insurance shall also cover all Operating Expenses for said period. Lessee will not be named in any such policies carried by Lessor and shall have no right to any proceeds therefrom. The policies required by these paragraphs 8.2 and 8.4 shall contain such deductibles as Lessor or the aforesaid lender may determine. In the event that the Premises shall suffer an insured loss as defined n paragraph 9.1(f) hereof, the deductible amounts under the applicable insurance policies shall be deemed an Operating Expense. Lessee shall not do or permit to be done anything which shall invalidate the insurance policies carried by Lessor. 14 15 Lessee shall pay the entirety of any increase in the property insurance premium for the Office Building Project over what it was immediately prior to the commencement of the term of this Lease if the increase is specified by Lessor's insurance carrier as being caused by the nature of Lessee's occupancy or any act or omission of Lessee. 8.5 INSURANCE POLICIES. Lessee shall deliver to Lessor copies of liability insurance policies required under paragraph 8.1 or certificates evidencing the existence and amounts of such insurance within seven (7) days after the Commencement Date of this Lease. No such policy shall be cancelable or subject to reduction of coverage or other modification except after thirty (30) days' prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with renewals thereof. 8.6 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and relieve the other, and waive their entire right of recovery against the other, for direct or consequential loss or damage arising out of or incident to the perils covered by property insurance carried by such party, whether due to the negligence of Lessor or Lessee or their agents, employees, contractors and/or invitees. If necessary all property insurance policies required under this Lease shall be endorsed to so provide. 8.7 INDEMNITY. Lessee shall indemnify and hold harmless Lessor and its agents, Lessor's mater or ground lessor, partners and lenders, from and against any and all claims for damage to the person or property of anyone or any entity arising from Lessee's use of the Office Building Project, or from the conduct of Lessee's business or from any activity, work or things done, permitted or suffered by Lessee in or about the Premises or elsewhere and shall further indemnify and hold harmless Lessor from and against any and all claims, costs and expenses arising from any breach or default in the performance of any obligation on Lessee's part to be performed under the terms of this Lease, or arising from any act or omission of Lessee, or any of Lessee's agents, contractors, employees, or invitees, and from and against all costs, attorney's fees, expenses and liabilities incurred by Lessor as the result of any such use, conduct, activity, work, things done, permitted or suffered, breach, default or negligence, and in dealing reasonably therewith, including but not limited to the defense or pursuit of any claim or any action or proceeding involved therein; and in case any action or proceeding be brought against Lessor by reason of any such matter, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. Lessee, as a material part of the consideration to Lessor, hereby assumes all risk of damage to property of Lessee or injury to persons, in, upon, or about the Office Building Project arising from any cause and Lessee hereby waives all claims in respect thereof against Lessor. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that Lessor shall not be liable for injury to Lessee's business or any loss of income therefrom or for loss of or damage to the goods, wares, merchandise or other property of Lessee, Lessee's employees, invitees, customers, or any other person in or about the Premises or the Office Building Project, nor shall Lessor be liable for injury to the person of Lessee, Lessee's employees, agents or contractors, whether such damage or injury is caused by or results from theft, first, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said damage or 15 16 injury results from conditions arising upon the Premises or upon other portions of the Office Building Project, or from other sources or places, or from new construction or the repair, alteration or improvement of any part of the Office Building Project, or of the equipment, fixtures or appurtenances applicable thereto, and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible, Lessor shall not be liable for any damages arising from any act or neglect of any other lessee, occupant or user of the Office Building Project, nor from the failure of Lessor to enforce the provisions of any other lease of any other lessee of the Office Building Project. 8.9 NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no representation that the limits or forms of coverage of insurance specified in this paragraph 8 are adequate to cover Lessee's property or obligations under this Lease. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "Premises Damage" shall mean if the Premises are damaged or destroyed to any extent. (b) "Premises Building Partial Damage" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is less than fifty percent (50%) of the then Replacement Cost of the building. (c) "Premises Building Total Destruction" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is fifty percent (50%) or more of the then Replacement Cost of the Building. (d) "Office Building Project Buildings" shall mean all of the buildings on the Office Building Project site. (e) "Office Building Project Buildings Total Destruction" shall mean if the Office Building Project Buildings are damaged or destroyed to the extent that the cost of repair is fifty percent (50%) or more of the then Replacement Cost of the Office Building Project Buildings. (f) "Insured Loss" shall mean damage or destruction which was caused by an event required to be covered by the insurance described in paragraph 8. The fact that an Insured Loss has a deductible amount shall not make the loss an uninsured loss. (g) "Replacement Cost" shall mean the amount of money necessary to be spent in order to repair or rebuild the damaged area to the condition that existed immediately prior to the damage occurring, excluding all improvements made by lessees, other than those installed by Lessor at Lessee's expense. 9.2 PREMISES DAMAGE; PREMISES BUILDING PARTIAL DAMAGE. (a) Insured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is an Insured Loss and which falls into the classification of either Premises Damage or Premises Building Partial Damage, then Lessor shall, 16 17 as soon as reasonably possible and to the extent the required materials and labor are readily available through usual commercial channels, at Lessor's expense repair such damage (but not Lessee's fixtures, equipment or tenant improvements originally paid for by Lessee) to its condition existing at the time of the damage, and this Lease shall continue in full force and effect. (b) Uninsured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is not an Insured Loss and which falls within the classification of Premises Damage or Premises Building Partial Damage, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), which damage prevents Lessee from making any substantial use of the Premises. Lessor may at Lessor's option either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of the occurrence of such damage of Lessor's intention to cancel and terminate this Lease as of the date of the occurrence of such damage, in which event this Lease shall terminate as of the date of the occurrence of such damage. 9.3 PREMISES BUILDING TOTAL DESTRUCTION; OFFICE BUILDING PROJECT TOTAL DESTRUCTION. Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage, whether or not it is an Insured Loss, which falls into the classifications of either (i) Premises Building Total Destruction, or (ii) Office Building Project Total Destruction, then Lessor may at Lessor's option either (i) repair such damage or destruction as soon as reasonably possible at Lessor's expense (to the extent the required materials are readily available through usual commercial channels) to its condition existing at the time of the damage, but not Lessee's fixtures, equipment or tenant improvements, and this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of occurrence of such damage of Lessor's intention to cancel and terminate this Lease, in which case this Lease shall terminate as of the date of the occurrence of such damage. 9.4 DAMAGE NEAR END OF TERM. (a) Subject to paragraph 9.4(b), if at any time during the last twelve (12) months of the term of this Lease there is substantial damage to the Premises, Lessor may at Lessor's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within 30 days after the date of occurrence of such damage. (b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an option to extend or renew this Lease, and the time within which said option may be exercised has not yet expired, Lessee shall exercise such option, if it is to be exercised at all, no later than twenty (20) days after the occurrence of an Insured Loss failing within the classification of Premises Damage during the last twelve (12) months of the term of this Lease. If Lessee duly exercises such option during said twenty (20) day period, Lessor shall, at Lessor's expense, repair such damage, but not Lessee's fixture, equipment or tenant improvements, as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option during said twenty (20) day period, then Lessor may at Lessor's option terminate and cancel this Lease as of the expiration of said twenty (20) day period by giving written notice to Lessee of Lessor's 17 18 election to do so within ten (10) days after the expiration of said twenty (20) day period, notwithstanding any term or provision in the grant of option to the contrary. 9.5 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) In the event Lessor repairs or restores the Building or Premises pursuant to the provisions of this paragraph 9, and any part of the Premises are not usable (including loss of use due to loss of access or essential services), the rent payable hereunder (including Lessee's Share of Operating Expense Increase) for the period during which such damage, repair or restoration continues shall be abated, provided (1) the damage was not the result of the negligence of Lessee, and (2) such abatement shall only be to the extent the operation and profitability of Lessee's business as operated from the Premises is adversely affected. Except for said abatement of rent, if any, Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises or the Building under the provisions of this Paragraph 9 and shall not commence such repair or restoration within ninety (90) days after such occurrence, of if Lessor shall not complete the restoration and repair within six (6) months after such occurrence, Lessee may at Lessee's option cancel and terminate this Lease by giving Lessor written notice of Lessee's election to do so at any time prior to the commencement or completion, respectively, of such repair or restoration. In such event this Lease shall terminate as of the date of such notice. (c) Lease agrees to cooperate with Lessor in connection with any such restoration and repair, including but not limited to the approval and/or execution of plans and specifications required. 9.6 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this paragraph 9, an equitable adjustment shall be made concerning advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's security deposit as has not theretofore been applied by Lessor. 9.7 WAIVER. Lessor and Lessee waive the provisions of any statute which relate to termination of leases when leased property is destroyed and agree that such event shall be governed by the terms of this Lease. 10. REAL PROPERTY TAXES. 10.1 PAYMENT OF TAXES. Lessor shall pay the real property tax, as defined n paragraph 10.3, applicable to the Office Building Project subject to reimbursement by Lessee of Lessee's Share of such taxes in accordance with the provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2. 10.2 ADDITIONAL IMPROVEMENTS. Lessee shall not be responsible for payment any increase in real property tax specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Office Building Project by other lessees or by Lessor for the exclusive enjoyment of any other lessee. Lessee shall, however, pay to Lessor at the time that Operating Expenses are payable under paragraph 4.2(c) the entirety of any increase in real 18 19 property tax if assessed solely by reason of additional improvements placed upon the Premises by Lessee or at Lessee's request. 10.3 DEFINITION OF "REAL PROPERTY TAX". As used herein, the term "real property tax" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed on the Office Building Project or any portion thereof by any authority having the direct or indirect power to tax, including any city, county, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, as against any legal or equitable interest of Lessor in the Office Building Project of in any portion thereof, as against Lessor's right to rent or other income therefrom, and as against Lessor's business of leasing the Office Building Project. The term "real property tax" shall also include any tax, fee, levy, assessment or charge (i) in substitution of, partially or totally, any tax, fee, levy, assessment or charge hereinabove included within the definition of "real property tax," or (ii) the nature of which was hereinbefore included within the definition of "real property tax," or (iii) which is imposed for a service or right not charged prior to June 1, 1978, or, if previously charged, has been increased since June 1, 1978, or (iv) which is imposed as a result of a change in ownership, as defined by applicable local statutes for property tax purposes, of the Office Building Project or which is added to a tax or charge hereinbefore included within the definition of real property tax by reason of such change of ownership, or (v) which is imposed by reason of this transaction, any modifications or changes hereto, or any transfers hereof. 10.4 JOINT ASSESSMENT. If the improvements or property, the taxes for which are to be paid separately by Lessee under paragraph 10.2 or 10.5 are not separately assessed, Lessee's portion of that tax shall be equitably determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information (which may include the cost of construction) as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 PERSONAL PROPERTY TAXES. (a) Lessee shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Lessee contained in the Premises or elsewhere. (b) If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay to Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. UTILITIES. 11.1 SERVICES PROVIDED BY LESSOR. Lessor shall provide heating, ventilation, air conditioning, and janitorial service as reasonably required, reasonable amounts of electricity for normal lighting and office machines, water for reasonable and normal drinking and lavatory use, and replacement light bulbs and/or fluorescent tubes and ballasts for standard overhead fixtures. 19 20 11.2 SERVICES EXCLUSIVE TO LESSEE. Lessee shall pay for all water, gas, heat, light, power, telephone and other utilities and services specially or exclusively supplied and/or metered exclusively to the Premises or to Lessee, together with any taxes thereon. If any such services are not separately metered to the Premises, Lessee shall pay at Lessor's option, either Lessee's Share or a reasonable proportion to be determined by Lessor of all charges jointly metered with other premises in the Building. 11.3 HOURS OF SERVICE. Said services and utilities shall be provided during generally accepted business days and hours or such other days or hours as may hereafter be set forth. Utilities and services required at other times shall be subject to advance request and reimbursement by Lessee to Lessor of the cost thereof. 11.4 EXCESS USAGE BY LESSEE. Lessee shall not make connection to the utilities except by or through existing outlets and shall not install or use machinery or equipment in or about the Premises that uses excess water, lighting or power, or suffer or permit any act that causes extra burden upon the utilities or services, including but not limited to security services, over standard office usage for the Office Building Project. Lessor shall require Lessee to reimburse Lessor for any excess expenses or costs that may arise out of a breach of this subparagraph by Lessee. Lessor may, in its sole discretion, install at Lessee's expense supplemental equipment and/or separate metering applicable to Lessee's excess usage or loading. 11.5 INTERRUPTIONS. There shall be no abatement of rent or Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage, interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor's reasonable control or in cooperation with governmental request or directions. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Lessee's interest in the Lease or in the Premises, without Lessor's prior written consent, which Lessor shall not unreasonably withhold. Lessor shall respond to Lessee's request for consent hereunder in a timely manner and any attempted assignment, transfer, mortgage, encumbrance or subletting without such consent shall be void, and shall constitute a material default and breach of this Lease, without the need for notice to Lessee under paragraph 13.1 "Transfer" within the meaning of this paragraph 12 shall include the transfer or transfers aggregating (a) if Lessee is a corporation, more than twenty-five percent (25%) of the voting stock of such corporation, or (b) if Lessee is a partnership, more than twenty-five percent (25%) of the profit and loss participation in such partnership. 12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph 12 hereof, Lessee may assign or sublet the Premises, or any portion thereof, without Lessor's consent, to any corporation which controls, is controlled by or is under common control with Lessee, or to any corporation resulting from the merger or consolidation with Lessee, or to any person or entity which acquires all the assets of Lessee as a going concern of the business that is being conducted on the Premises, all of which are referred to as "Lessee Affiliate"; provided that before such assignment shall be effective, (a) said assignee shall assume, in full, the obligations of Lessee 20 21 under this Lease and (b) lessor shall be given written notice of such assignment and assumption. Any such assignment shall not, in any way, affect or limit the liability of Lessee under the terms of this Lease even if after such assignment or subletting the terms of this Lease are materially changed or altered without the consent of Lessee, the consent of whom shall not be necessary. 12.3 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, no assignment or subletting shall release Lessee of Lessee's obligations hereunder or alter the primary liability of Lessee to pay the rent and other sums due Lessor hereunder including Lessee's Share of Operating Expense Increase and to perform all other obligations to be performed by Lessee hereunder. (b) Lessor may accept rent from any person other than Lessee pending approval or disapproval of such assignment. (c) Neither a delay in the approval or disapproval of such assignment or subletting, nor the acceptance of rent, shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the breach of any of the terms or conditions of this paragraph 12 of this Lease. (d) If Lessee's obligations under this Lease have been guaranteed by third parties, then an assignment or sublease, and Lessor's consent thereto, shall not be effective unless said guarantors give their written consent to such sublease and the terms thereof. (e) The consent by Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent and such action shall not relieve such persons from liability under this Lease or said sublease; however, such persons shall not be responsible to the extent any such amendment or modification enlarges or increases the obligations of the Lessee or sublessee under this Lease or such sublease. (f) In the event of any default under this Lease, Lessor may proceed directly against Lessee, any guarantors or any one else responsible for the performance of this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (g) Lessor's written consent to any assignment or subletting of the Premises by Lessee shall not constitute an acknowledgement that no default then exists under this Lease of the obligations to be performed by Lessee nor shall such consent be deemed a waiver of any then existing default, except as may be otherwise stated by Lessor at the time. (h) The discovery of the fact that any financial statement relied upon by Lessor in giving its consent to an assignment or subletting was materially false shall, at Lessor's election, render Lessor's said consent null and void. 21 22 12.4 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. Regardless of Lessor's consent, the following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rental and income arising from any sublease heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease, provided, however, that until a default shall occur in the performance of Lessee's obligations under this Lease, Lessee may receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a default exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents due and to become due under the sublease. Lessee agrees that such sublessee shall have the right to rely upon any such statement and request from Lessor, and that such sublessee shall pay such rents to Lessor without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee or Lessor for any such rents so paid by said sublessee to Lessor. (b) No sublease entered into by Lessee shall be effective unless and until it has been approved in writing by Lessor in entering into any sublease. Lessee shall use only such form of sublessee as is satisfactory to Lessor, and once approved by Lessor, such sublease shall not be changed or modified without Lessor's prior written consent. Any sublease shall, by reason of entering into a sublease under this Lease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every obligation herein to be performed by Lessee other than such obligations as are contrary to or inconsistent with provisions contained in a sublease to which Lessor has expressly consented in writing. (c) In the event Lessee shall default in the performance of its obligations under this Lease, Lessor at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of Lessee under such sublease from the time of the exercise of said option to the termination of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to Lessee or for any other prior defaults of Lessee under such sublease. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) With respect to any subletting to which Lessor has consented, Lessor agrees to deliver a copy of any notice of default by Lessee to the sublessee. Such sublessee shall have the right to cure a default of Lessee within three (3) days after service of said notice of default upon such sublessee, and the sublessee shall have a right of reimbursement and offset from and against Lessee for any such defaults cured by the sublessee. 22 23 12.5 LESSOR'S EXPENSES. In the event Lessee shall assign or sublet the Premises or request the consent of Lessor to any assignment or subletting or if Lessee shall request the consent of Lessor for any act Lessee proposes to do then Lessee shall pay Lessor's reasonable costs and expenses incurred in connection therewith, including attorneys', architects', engineers' or other consultants' fees. 12.6 CONDITIONS TO CONSENT. Lessor reserves the right to condition any approval to assign or sublet upon Lessor's determination that (a) the proposed assignee or sublessee shall conduct a business on the Premises of a quality substantially equal to that of Lessee and consistent with the general character of the other occupants of the Office Building Project and not in violation of any exclusives or rights then held by other tenants, and (b) the proposed assignee or sublessee be at least as financially responsible as Lessee was expected to be at the time of the execution of this Lease or of such assignment or subletting, whichever is greater. 13. DEFAULT; REMEDIES. 13.1 DEFAULT. The occurrence of any one or more of the following events shall constitute a material default of this Lease by Lessee. (a) The vacation or abandonment of the Premises by Lessee. Vacation of the Premises shall include the failure to occupy the Premises for a continuous period of sixty (60) days or more, whether or not the rent is paid. (b) The breach by Lessee of any of the covenants, conditions or provisions of paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment or subletting), 13.1(a) vacation or abandonment), 13.1(e) (insolvency), 13.1(f) (false statement), 16(a) (estoppel certificate), 30(b) (subordination), 33 (auctions), or 41.1 (easements), all of which are hereby deemed to be material, non-curable defaults without the necessity of any notice by Lessor to Lessee thereof. (c) The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder, as and when due, where such failure shall continue for a period of three (3) days after written notice thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to Pay Rent or Quit shall also constitute the notice required by this subparagraph. (d) The failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Lessee other than those referenced in subparagraphs (b) and(c), above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Lessor to Lessee; provided, however, that if the nature of Lessee's noncompliance is such that more than thirty (30) days are reasonably required for its cure, then Lessee shall not be deemed to be in default of Lessee commenced such cure within said thirty (30) day period and thereafter diligently pursues such cure to completion. To the extent permitted by law, such thirty (30) day notice shall constitute the sole and exclusive notice required to be given to Lessee under applicable Unlawful Detainer statutes. (e) (i) The making by Lessee of any general arrangement or general assignment for the benefit of creditors, (ii) Lessee becoming a "debtor" as defined in 11 USC Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty 23 24 (60) days, (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to lessee within thirty (30) days, or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days in the event that any provision of this paragraph 13.1(e) is, contrary to any applicable law, such provision shall be of no force or effect. (f) The discovery by Lessor that any financial statement given to Lessor by lessee, or its successor in interest or by any guarantor of Lessee's obligation hereunder, was materially false. 13.2 REMEDIES. In the vent of any material default or breach of this Lease by Lessee, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such default. (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee all damages incurred by Lessor by reason of Lessee's default including, but not limited to, the cost of recovering possession of the Premises, expenses of reletting including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and any real estate commission actually paid; the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonably avoided; that portion of the leasing commission paid by Lessor pursuant to paragraph 15 applicable to the unexpired term of this Lease. (b) Maintain Lessee's right to possession in which case this Lease shall continue in effect whether or not Lessee shall have vacated or abandoned the Premises. In such event Lessor shall be entitled to enforce all of Lessor's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. Unpaid installments of rent and other unpaid monetary obligations of Lessee under the terms of this Lease shall bear interest form the date due at the maximum rate then allowable by law. 13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor fails to perform obligations required of Lessor within a reasonable time, but in no event later than thirty (30) days after written notice by Lessee to Lessor and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have theretofore been furnished to Lessee in writing, specifying wherein Lessor has failed to perform such obligation, provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance then Lessor shall not be in default if lessor commences performance within such 30-day period and thereafter diligently pursues the same to completion. 24 25 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of Base Rent, Lessee's Share of Operating Expense Increase or other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Lessor by the terms of any mortgage or trust deed covering the Office Building Project. Accordingly, if any installment of Base Rent, Operating Expense Increase, or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to 6% of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. 14. CONDEMNATION. If the Premises or any portion thereof or the Office Building Project are taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are herein called "condemnation") this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs, provided that if so much of the Premises or the Office Building Project are taken by such condemnation as would substantially and adversely affect the operation and profitability of Lessee's business conducted from the Premises, Lessee shall have the option, to be exercised only in writing within thirty (30) days after lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within thirty (30) days after the condemning authority shall have taken possession), to terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the rent and Lessee's Share of Operating Expense Increase shall be reduced in the proportion that the floor area of the Premises taken bears to the total floor area of Premises Common Areas taken shall be excluded from the Common Areas usable by Lessee and no reduction of rent shall occur with respect thereto or by reason thereof. Lessor shall have the option in its sole discretion to terminate this Lease as of the taking of possession by the condemning authority, by giving written notice to Lessee of such election within thirty (30) days after receipt of notice of a taking by condemnation of any part of the Premises or the Office Building Project. Any award for the taking of all or any part of the Premises or the Office Building Project under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages, provided, however, that Lessee shall be entitled to any separate award for loss of or damage to Lessee's trade fixtures, removable personal property and unamortized tenant improvements that have been paid for by Lessee. For that purpose the cost of such Improvements shall be amortized over the original term of this Lease excluding any options in the event that this Lease is not terminated by reason of such condemnation. Lessor shall to the extent of severance damages received by Lessor in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall pay any amount in excess of such severance damages required to complete such repair. 25 26 15. BROKER'S FEE. (a) The brokers involved in this transaction are _West Valley Properties, Inc. and Cornish and Carey __as "listing broker" and _ Cornish and Carey _ as "cooperating broker," licensed real estate broker(s). A "cooperating broker" is defined as any broker other than the listing broker entitled to a share of any commission arising under this Lease. Upon execution of this Lease by both parties, Lessor shall pay to said brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set froth in a separate agreement between Lessor and said broker(s), or in the event there is no separate agreement between Lessor and said broker(s), the sum of $___ n/a _____, for brokerage services rendered by said broker(s) to lessor in this transaction. (b) Lessor further agrees that (i) if Lessee exercises any Option, as defined in paragraph 39.1 of this Lease, which is granted to Lessee under this Lease, or any subsequently granted option which is substantially similar to an Option granted to lessee under this Lease, or (ii) if Lessee acquires any rights to the Premises or other premises described in this Lease which are substantially similar to what Lessee would have acquired had an Option herein granted to lessee been exercised, or (iii) if Lessee remains in possession of the Premises after the expiration of the term of this Lease after having failed to exercise an Option, or (iv) if said broker(s) are the procuring cause of any other lease or sale entered into between the parties pertaining to the Premises and/or any adjacent property in which Lessor has an interest, or (v) if the Base Rent is increased, whether by agreement or operation of an escalation clause contained herein, then as to any of said transactions or rent increases, Lessor shall pay said broker(s) a fee in accordance with the schedule of said broker(s) in effect at the time of execution of this Lease. Said fee shall be paid at the time such increased rental is determined. (c) Lessor agrees to pay said fee not only on behalf of Lessor but also on behalf of any person, corporation, association, or other entity having an ownership interest in said real property or any part thereof, when such fee is due hereunder. Any transferee of Lessor's interest in this Lease, whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this paragraph 15. Each listing and cooperating broker shall be a third party beneficiary of the provisions of this paragraph 15 to the extent of their interest in any commission arising under this Lease and may enforce that right directly against Lessor, provided, however, that all brokers having a right to any part of such total commission shall be a necessary party to any suit with respect thereto. (d) Lessee and Lessor each represent and warrant to the other that neither has had any dealings with any person, firm, broker or finder (other that the person(s), if any, whose names are set forth in paragraph 15(a), above) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and no other broker or other person, firm or entity is entitled to any commission or finder's fee in connection with said transaction and Lessee and Lessor do each hereby indemnify and hold the other harmless from and against any costs, expenses attorneys' fees or liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying party. 16. ESTOPPEL CERTIFICATE. 26 27 (a) Each party (as "responding party") shall at any time upon not less than ten (10) days' prior written notice form the other party ("requesting party") execute, acknowledge and deliver to the requesting party a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to the responding party's knowledge, any uncured defaults on the part of the requesting party, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Office Building or of the business of Lessee. (b) At the requesting party's option, the failure to deliver such statement within such time shall be a material default of this Lease by the party who is to respond, without any further notice to such party, or it shall be conclusive upon such party that (i) this Lease is in full force and effect without modification except as may be represented by the requesting party, (ii) there are no uncured defaults in the requesting party's performance and (iii) if Lessor is the requesting party, not more than one month's rent has been paid in advance. (c) If Lessor desires to finance, refinance, or sell the Office Building Project, or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor such financial statements of Lessee as may be reasonably required by such lender or purchaser. Such statements shall include the past three (3) years' financial statements of Lessee. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the owner or owners, at the time in question, of the fee title or a lessee's interest in a ground lease of the Office Building Project, and except as expressly provided in paragraph 15, in the event of any transfer of such file or interest, Lessor herein named (and in case of any subsequent transfers then the grantor) shall be relieved from and after the date of such transfer of all liability as respects Lessor's obligations thereafter to be performed, provided that any funds in the hands of Lessor or the then grantor at the time of such transfer, in which Lessee has an interest, shall be delivered to the grantee. The obligations contained in this Lease to be performed by Lessor shall, subject as aforesaid, be binding on Lessor's successors and assigns, only during their respective periods of ownership. 18. SEVERABILITY. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction shall in no way affect the validity of any other provision hereof. 19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided, any amount due to Lessor not paid when due shall bear interest at the maximum rate then allowable by law or judgments from the date due. Payment of such interest shall not excuse or cure any default by Lessee under this Lease; provided, however, that interest shall not be payable on late charges incurred by Lessee nor on any amounts upon which late charges are paid by Lessee. 20. TIME OF ESSENCE. Time is of the essence with respect to the obligations to be performed under this Lease. 27 28 21. ADDITIONAL RENT. All monetary obligations of Lessee to Lessor under the terms of this Lease, including but not limited to Lessee's Share of Operating Expense increase and any other payable by Lessee hereunder shall be deemed to be rent. 22. INCORPORATION OF PRIOR AGREEMENT; AMENDMENTS. This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior or contemporaneous agreement or understanding pertaining to any such matter shall be effective. This Lease may be modified in writing only, signed by the parties in interest at the time of the modification. Except as otherwise stated in this Lease. Lessee hereby acknowledges that neither the real estate broker listed in paragraph 15 hereof nor any cooperating broker on this transaction nor the Lessor or any employee or agents o any of said persons has made any oral or written warranties or representations to Lessee relative to the condition or use by Lessee of the Premises or the Office Building Project and Lessee acknowledges that Lessee assumes all responsibility regarding the Occupational Safety Health Act. The legal use and adaptability of the Premises and the compliance thereof with all applicable laws and regulations in effect during the term of this Lease. 23. NOTICES. Any notice required or permitted to be given hereunder shall be in writing and may be given by personal delivery or by certified or registered mail, and shall be deemed sufficiently given if delivered or addressed to Lessee or to Lessor at the address noted below or adjacent to the signature of the respective parties, as the case may be. Mailed notices shall be deemed given upon actual receipt of the address required, or forty-eight hours following deposit in the mail, postage prepaid, whichever first occurs. Either party may by notice to the other specify a different address for notice purposes except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice purposes. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such parties at such addresses as Lessor may from time to time hereafter designate by notice to Lessee. 24. WAIVERS. No waiver by Lessor of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Lessee of the same or any other provision. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval of any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a "short form" memorandum of this Lease for recording purposes. 26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession of the Premises or any part thereof after the expiration of the term hereof, such occupancy shall be a tenancy from month to month upon all the provisions of this Lease pertaining to the obligations of Lessee, except that the rent payable shall be two hundred percent (200%) of the rental payable immediately preceding the termination date of this Lease, and all Options, if any, granted under 28 29 the terms of this Lease shall be deemed terminated and be of no further effect during said month to month tenancy. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by Lessee shall be deemed both a covenant and a condition. 29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof restricting assignment or subletting by Lessee and subject to the provisions of paragraph 17, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of the State where the Office Building Project is located and any litigation concerning this Lease between the parties hereto shall be initiated in the county in which the Office Building Project is located. 30. SUBORDINATION. (a) This Lease, and any Option or right of first refusal granted hereby, at Lessor's option, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation or security now or hereafter placed upon the Office Building Project and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Lessee's right to quiet possession of the Premises shall not be disturbed if Lessee s not in default and so long as Lessee shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee or ground lessor shall elect to have this Lease and any Options granted hereby prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Lessee. This Lease and such Options shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease or such Options are dated prior to subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. (b) Lessee agrees to execute any documents required to effectuate an attornment, or subordination, or to make this Lease or any Option granted herein prior to the lien of any mortgage, deed of trust or ground lease, as the case may be. Lessee's failure to execute such documents within ten (10) days after written demand shall constitute a material default by Lessee hereunder without further notice to Lessee or, at Lessor's option, Lessor shall execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to execute such documents in accordance with this paragraph 30(b). 31. ATTORNEYS' FEES. 31.1 If either party or the broker(s) named herein bring an action to enforce the terms hereof or declare rights herein, the prevailing party in any such action, trail or appeal thereon, shall be entitled to his reasonable attorney's fees to be paid by the losing party as fixed by the court in the same or a separate suit, and whether or not such action is pursue to decision or judgment. The 29 30 provisions of this paragraph shall insure to the benefit of the broker named herein who seeks to enforce a right hereunder. 31.2 The attorneys' fee aware shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred in good faith. 31.3 Lessor shall be entitled to reasonable attorneys' fees and all other costs and expenses incurred in the preparation and service of notice of default and consultations in connection therewith, whether or not a legal transaction is subsequently commence in connection with such default. 32. LESSOR'S ACCESS. 32.1 Lessor and Lessor's agents shall have the right to enter the Premises at reasonable times for the purpose of inspecting the same, performing any services required of Lessor, showing the same to prospective purchasers, lenders, or lessees taking such safety measures, erecting such scaffolding or other necessary structures, making such alterations, repairs, improvements or additions to the Premises or the Office Building Project as Lessor may reasonably deem necessary or desirable and the erecting, using and maintaining of utilities, services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect to Lessee's use of the Premises. Lessor may at any time place on or about the Premises or the Building any ordinary "For Sale" signs and Lessor may at any time during the last 120 days of the term hereof place on or about the Premises any ordinary "For Lease" signs. 32.2 All activities of Lessor pursuant to this paragraph shall be without abatement of rent, nor shall Lessor have any liability to Lessee for the same. 32.3 Lessor shall have the right to retain keys to the Premises and to unlock all doors in or upon the Premises other than to files, vaults and sales, and in the case of emergency to enter the Premises by any reasonably appropriate means, and any such entry shall not be deemed a forceable or unlawful entry or detainer of the Premises or an eviction. Lessee waives any charges for damages or injuries or interference with Lessee's property or business in connection therewith. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises or the Common Areas without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. The holding of any auction on the Premises or Common Areas in violation of its paragraph shall constitute a material default of this Lease. 34. SIGNS. Lessee shall not place any sign upon the Premises or the Office Building Project without Lessor's prior written consent. Under no circumstances shall Lessee place a sign on any roof of the Office Building Project. 35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, or a termination by Lessor, shall not work a merger, and shall, at the option of Lessor, 30 31 terminate all or any existing subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all of such subtenancies. 36. CONSENTS. Except for paragraphs 33 (auctions) and 34 (signs) hereof, wherever in this Lease the consent of one party is required to an act of the other party such consent shall not be unreasonably withheld or delayed. 37. GUARANTOR. In the event that there is a guarantor of this Lease, said guarantor shall have the same obligations as Lessee under the Lease. 38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and observing and performing all of the covenants, conditions and provisions on Lessee's part to be observed and performed hereunder, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. The Individuals executing this Lease on behalf of Lessor represent and warrant to Lessee that they are fully authorized and legally capable of executing this Lease on behalf of Lessor and that such execution is binding upon all parties holding an ownership interest in the Office Building Project. 39. OPTIONS. 39.1 DEFINITION. As used in this paragraph the word "Option" has the following meaning: (1) the right or option to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (2) the option of right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other space within the Office Building Project or other property of Lessor or the right of first offer to lease other space within the Office Building Project or other property of Lessor; (3) the right or option to purchase the Premises or the Office Building Project, or the right of first refusal to purchase the Premises or the Office Building Project or the right of first offer to purchase the Premises or the Office Building Project, or the right or option to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor or the right of first offer to purchase other property of Lessor. 39.2 OPTIONS PERSONAL. Each Option granted to Lessee in this Lease is personal to the original Lessee and may be exercised only by the original Lessee while occupying the Premises who does so without the intent of thereafter assigning this Lease or subletting the Premises or any portion thereof, and may not be exercised or be assigned, voluntarily or involuntarily, by or to any person or entity other than Lessee; provided, however, that an Option may be exercised by or assigned to any Lessee Affiliate as defined in paragraph 12.2 of this Lease. The Options, if any, herein granted to Lessee are not assignable separate and apart from this Lease, nor may any Option be separated from this Lease in any manner, either by reservation or otherwise. 39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple options to extend or renew this Lease a later option cannot be exercised unless the prior option to extend or renew this Lease has been so exercised. 39.4 EFFECT OF DEFAULT ON OPTIONS. 31 32 (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary, (i) during the time commencing from the date Lessor gives to Lessee a notice of default pursuant to paragraph 13.1(c) or 13.1(d) and continuing until the noncompliance alleged in said notice of default is cured, or (iii) during the period of time commencing on the day after a monetary obligation to Lessor is due from Lessee and unpaid (without any necessity for notice thereof to Lessee) and continuing until the obligation is paid, or (iii) in the event that Lessor has given to Lessee three or more notices of default under paragraph 13.1(c), or paragraph 13.1(d), whether or not the defaults are cured, during the 12 month period of time immediately prior to the time that Lessee attempts to exercise the subject Option, (iv) if Lessee has committed any non-curable breach, including without limitation those described in paragraph 13.1(b), or is otherwise in default of any of the terms, covenants or conditions of this Lease. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to commence to cure a default specified in paragraph 13.1(d) within thirty (30) days after the date that Lessor gives notice to Lessee of such default and/or Lessee fails thereafter to diligently prosecute said cure to completion, or (iii) Lessor gives to Lessee three or more notices of default under paragraph 13.1(c), or paragraph 13.1(d), whether or not the defaults are cured, or (iv) if Lessee has committed any non-curable breach, including without limitation those described in paragraph 13.1(b), or is otherwise in default of any of the terms, covenants and conditions of this Lease including without limitation those described in paragraph 13.1(b), or is otherwise in default of any of the terms, covenants and conditions of this Lease. 40. SECURITY MEASURES - LESSOR'S RESERVATIONS. 40.1 Lessee hereby acknowledged that Lessor shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Office Building Project. Lessee assumes all responsibility for the protection of Lessee, its agents, and invitees and the property of Lessee and of Lessee's agents and invitees from acts of third parties. Nothing herein contained shall prevent Lessor, at Lessor's sole option, from providing security protection for the Office Building Project or any part thereof, in which event the cost thereof shall be included within the definition of Operating Expenses, as set forth in paragraph 4.2(b). 40.2 LESSOR SHALL HAVE THE FOLLOWING RIGHTS. (a) To change the name, address or title of the Office Building Project or building in which the Premises are located upon not less than 90 days prior written notice; 32 33 (b) To, at Lessee's expense, provide and Install Building standard graphics on the door of the Premises and such portions of the Common Areas as Lessor shall reasonably deem appropriate; (c) To permit any lessee the exclusive right to conduct any business as long as such exclusive does not conflict with any rights expressly given herein; (d) To place such signs, notices or displays as Lessor reasonably deems necessary or advisable upon the roof, exterior of the buildings or the Office Building Project or on pole signs in the Common Areas; 40.3 LESSEE SHALL NOT. (a) Use a representation (photographic or otherwise) of the Building or the Office Building Project or their name(s) in connection with Lessee's business; (b) Suffer or permit anyone, except in emergency, to go upon the roof of the Building. 41. EASEMENTS. 41.1 Lessor reserves to itself the right, from time to time, to grant such easements, rights and dedications that Lessor deems necessary or desirable and to cause the recordation of Parcel Maps and restrictions, so long as such easements, rights, dedications. Maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee shall sign any of the aforementioned documents upon request of Lessor and failure to do so shall constitute a material default of this Lease by Lessee without the need for further notice to Lessee. 41.2 The obstruction of Lessee's view, air, or light by any structure erected in the vicinity of the Building, whether by Lessor or third parties, shall in no way affect this Lease or impose any liability upon Lessor. 42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one party to the other under the provisions hereof, the party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment, and there shall survive the right on the part of said party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said party to pay such sum or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 43. AUTHORITY. If Lessee is a corporation, trust, or general or limited partnership, Lessee, and each individual executing this Lease on behalf of such entity represent and warrant that such individual is duly authorized to execute and deliver this Lease on behalf of said entity. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty(30) days after execution of this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor. 44. CONFLICT. Any conflict between the printed provisions, Exhibits or Addenda of this Lease and the typewritten or handwritten provisions, if any, shall be controlled by the typewritten or handwritten provisions. 33 34 45. NO OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to Lessee to lease. This Lease shall become binding upon Lessor and Lessee only when fully executed by both parties. 46. LENDER MODIFICATION. Lessee agrees to make such reasonable modifications to this Lease as may be reasonably required by an institutional lender in connection with the obtaining of normal financing or refinancing of the Office Building Project. 47. MULTIPLE PARTIES. If more than one person or entity is named as either Lessor or Lessee herein, except as otherwise expressly provided herein, the obligations of the Lessor or Lessee herein shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee, respectively. 48. WORK LETTER. This lease is supplemented by that certain Work Letter of even date executed by Lessor and Lessee, attached hereto as Exhibit C and incorporated herein by this reference. 49. ATTACHMENTS. Attached hereto are the following documents which constitute a part of this Lease: LEASE ADDENDUM 34 35 LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. LESSOR LESSEE WVP Income Plus #3 Camitro Corp. By: West Valley Properties, Inc. By: /s/ By: /s/ Harold E. Selick ---------------------------- ---------------------------- Its: President Its: President & CEO By: By: ----------------------------- -------------------------- Its: Its: Executed at: Executed at: -------------------- -------------------- on: on: ----------------------------- ----------------------------- Address: ------------------------ ----------------------------- - -------------------------------- ----------------------------- 35 36 EXHIBIT A [DIAGRAM OF FLOOR PLAN OMITTED] 36 37 EXHIBIT B RULES AND REGULATIONS FOR STANDARD OFFICE LEASE Dated February 4, 1999 By and Between WVP Income Plus 3, a California limited partnership and Camitro, Inc., a California corporation. GENERAL RULES 1. Lessee shall not suffer or permit the obstruction of any Common Areas, including driveways, walkways and sidewalks. 2. Lessor reserves the right to refuse access to any persons Lessor in good faith judges to be a threat to the safety, reputation, or property of the Office Building Project and its occupants. 3. Lessee shall not make or permit any noise or odors that annoy or interfere with other lessees or persons having business within the Office Building Project. 4. Lessee shall not keep animals or birds within the Office Building Project, and shall not bring bicycles, motorcycles or other vehicles into areas not designated as authorized for same. 5. Lessee shall not make, suffer or permit litter except in appropriate receptacles for that purpose. 6. Lessee shall not alter any lock or install new or additional locks or bolts. 7. Lessee shall be responsible for the inappropriate use of any toilet rooms, plumbing or other utilities. No foreign substances of any kind are to be inserted therein. 8. Lessee shall not deface the walls, partitions or other surfaces of the premises or Office Building Project. 9. Lessee shall not suffer or permit any thing in or around the Premises or Building that causes excessive vibration or floor loading in any part of the Office Building Project. 10. Furniture, significant freight and equipment shall be moved into or out of the building only with the Lessor's knowledge and consent, and subject to such reasonable limitations, techniques and timing, as may be designated by Lessor. Lessee shall be responsible for any damage to the Office Building Project arising from any such activity. 11. Lessee shall not employ any service or contractor for services or work to be performed in the Building, except as approved by Lessor. 37 38 12. Lessor reserves the right to close and lock the Building on Saturdays, Sundays and legal holidays, and on other days between the hours of P.M. and A.M. of the following day. If Lessee uses the Premises during such periods, Lessee shall be responsible for securely locking any doors it may have opened for entry. 13. Lessee shall return all keys at the termination of its tenancy and shall be responsible for the cost of replacing any keys that are lost. 14. No window coverings, shades or awnings shall be installed or used by Lessee. 15. No Lessee, employee or Invitee shall go upon the roof of the Building. 16. Lessee shall not suffer or permit smoking or carrying of lighted cigars or cigarettes in areas reasonably designated by Lessor or by applicable governmental agencies as non-smoking areas. 17. Lessee shall not use any method of heating or air conditioning other than as provided by Lessor. 18. Lessee shall not install, maintain or operate any vending machines upon the Premises without Lessor's written consent. 19. The Premises shall not be used for lodging or manufacturing, cooking or food preparation. 20. Lessee shall comply with all safety, fire protection and evacuation regulations establishes by Lessor or any applicable governmental agency. 21. Lessor reserves the right to waive any one of these rules or regulations, and/or as to any particular Lessee, and any such waiver shall not constitute a waiver of any other rule or regulation or any subsequent application thereof to such Lessee. 22. Lessee assumes all risks from theft or vandalism and agrees to keep its Premises locked as may be requires. 23. Lessor reserves the right to make such other reasonable rules and regulations as it may from time to time deem necessary for the appropriate operation and safety of the Office Building Project and its occupants. Lessee agrees to abide by these and such rules and regulations. PARKING RULES 1. Parking areas shall be used only for parking by vehicles no longer than full size, passenger automobiles herein called "Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles are herein referred to as "Oversize Vehicles." 2. Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. 38 39 3. Parking stickers or identification devices shall be the property of Lessor and be returned to Lessor by the holder thereof upon termination of the holder's parking privileges. Lessee will pay such replacement charges as is reasonably established by Lessor for the loss of such devices. 4. Lessor reserves the right to refuse the sale of monthly identification devices to any person or entity that willfully refuses to comply with the applicable rules, regulations, laws and/or agreements. 5. Lessor reserves the right to relocate all or a part of parking spaces from floor to floor, within one floor, and/or to reasonably adjacent offsite location(s), and to reasonably allocate them between compact and standard size spaces, as long as the same complies with applicable laws, ordinances and regulations. 6. Users of the parking area will obey all posted signs and park only in the areas designated for vehicle parking. 7. Unless otherwise instructed, every person using the parking areas is required to park and lock his own vehicle. Lessor will not be responsible for any damage to vehicles, injury to persons or loss of property, all of which risks are assumed by the party using the parking area. 8. Validation, if established, will be permissible only by such method or methods as Lessor and/or its licensee may establish at rates generally applicable to visitor parking. 9. The maintenance, washing, waxing or cleaning of vehicles in the parking structure or Common Areas is prohibited. 10. Lessee shall be responsible for seeing that all of its employees, agents and invitees comply with the applicable parking rules, regulations, laws and agreements. 11. Lessor reserves the right to modify these rules and/or adopt such other reasonable and non-discriminatory rules and regulations as it may deem necessary for the proper operation of the parking area. 12. Such parking use as is herein provided is intended merely as a license only and no bailment is intended or shall be created hereby. 39 40 LEASE ADDENDUM This Lease Addendum ("Addendum") is made pursuant to and in connection with that certain lease agreement ("Lease") dated as of February 4, 1999 by and between WVP Income Plus 3, a California Limited Partnership ("Lessor") and Camitro, Inc. a California Corporation, ("Lessee") covering certain premises more particularly described in Paragraph 2 of the Lease. In consideration of the mutual covenants contained below, Lessor and Lessee hereby agree as follows: 50. Lessee agrees to accept the premises under this new lease in "as is" condition and Lessor shall have no responsibility to perform any Lessee Improvements, except those as specified in this new lease. Except as expressly provided herein. Lessee acknowledges that Lessor, including Lessor's Agent, has made no representations or warranty regarding the condition of the Premises or the Building, and that in entering into this lease Lessee is not relying on any statements b y Lessor or by Agent. Notwithstanding the above, Lessor agrees to keep all operating systems, including but not limited to, plumbing, electrical, HVAC, and the roof, in good working condition. 51. The Premises are a part of the Building which is a part of the Office Building Project and in this connection, Lessee agrees to abide by, keep and observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, care and cleanliness of the industrial center. Without limiting the foregoing, Lessee shall not use, keep or permit to be kept, any foul or noxious gas or substance in the Premises, or permit or suffer the Premises to be occupied or used in a manner that unreasonably interferes in any way with other lessees or those having business in the Office Building Project. 52. Any claim by Lessee against Lessor shall be limited as described in the lease, and furthermore, Lessee expressly waives any and all rights to proceed against the individual partners, General Partners, officers or agents of Lessor, and shall look solely to the assets of the Partnership, WVP Income Plus 3, for any liability that Lessor may have to Lessee. 53. Lessee acknowledges Lessor's representation that the existing Lessees may be using hazardous materials under legal permits from Menlo Park. Lessor will not indemnify Lessee of any such hazardous materials. 54. Lessor shall supply HVAC to the Premises Monday - Saturday 7:00 am. to 6:00 p.m. Lessor reserves the option to install an HVAC measuring meter, to monitor HVAC costs beyond the provided hours to the building (Monday - Saturday 7:00 am. to 6:00 PM.). In such event, Lessee agrees to pay for after hours use at the rate of $25 per hour. 55. This Lease Agreement, and the obligations of Lessor, shall be subject to and contingent upon the receipt by Lessor of approval of this Lease from Lessor's 1st mortgage holder, no later than 21 days after mutual execution of this Lease. Lessor agrees to use its best efforts to obtain said approval by said date. 56. Lessor shall, at Lessor's sole cost and expense, shall paint and carpet the Premises and shall clean all tiled floors. Lessor shall make reasonable efforts to commence these improvements when the existing Tenant, Progenitor, vacates the Premises. However, subject to section 3.2, in 40 41 the event that the improvements are not completed by the Commencement Date, the Commencement Date shall not change and Lessee shall commence paying rent on the Commencement Date. Tenant shall be responsible for moving any furniture to enable Landlord to complete these improvements. Landlord shall not be responsible for any inconvenience to Tenant or damage caused by the construction of or the installation of these improvements. 57. The Security Deposit and the first month's rent shall be paid upon execution of this Lease. 58. Lessee shall have the right to use, on a non-exclusive basis, the common lobby, lunch area and the kitchen, common areas, and the existing parking lot of 4005 Bohannon Drive. 59. Lessee, at Lessee's sole cost and expense, subject to Lessor's approval, and subject to governmental approvals, shall have the right to (a) place a lobby sign directing people to Lessee's Premises; and (b) place a sign on the exterior of the building. 60. Lessor, at Lessor's sole cost and expense, shall be responsible for the Building complying with Title 24 and The Americans with Disabilities Act (ADA), as well as all California Life, Safety, and Handicap Access Laws. However, notwithstanding the above, Lessee shall be responsible and shall pay for any improvements, repairs, or modifications that are required which are triggered by any action of Lessee including but not limited to any improvements performed by Lessee. 61. Providing that Lessee is not in default under the Lease, lessor hereby grants to Lessee one (1) option to renew the Lease for a period of eighteen (18) months, under the same terms and conditions as set forth in the Lease, except rent, which shall be at the rate of $2.15 per rentable square foot per month, full service. Lessee shall give Lessor written notice, no less than 6 months prior to the termination of its Lease, that Lessee is exercising its option. Failure to give said notice within said timeframe shall make this option null and void. 62. The total rentable square feet shall be approximately 12,500 rentable square feet and shall be measured by a space planner hired by Lessor, and the square footage shall be adjusted accordingly. 63. This Lease Amendment shall be subject to and contingent upon Lessor obtaining from Progenitor a release of the Premises from Lessor's current lease with Progenitor, Inc. 64. The monthly base rent payable under the lease shall be increased as follows: Commencing April 1, 2000 - $2.00 per rentable square foot Commencing April 1, 2001 - $2.05 per rentable square foot 65. HAZARDOUS MATERIALS A. DEFINITIONS. As used herein, the term "Hazardous Materials" shall mean any hazardous wastes, materials or substances and other pollutants or contaminates, which are or become regulated by any federal, state or local laws, ordinances, regulations, rules or requirements, including but not limited to, 41 42 the Resource Conservation and Recovery Act, as amended, (42 U.S.C. Sections 6901 et. seq.), the Comprehensive Environmental Response, Compensation and Liability Act, as amended, (42 U.S.C.Sections 9601 et seq.), the California Hazardous Materials Control Act, as amended, (Cal. Health & Safety Code Sections 25100 et seq.), the California Hazardous Substance Account Act, as amended, (Cal. Health & Safety Code Sections 25300 et seq.), and the Safe Drinking Water and Toxic Enforcement Act (Cal. Health & Safety Code Sections 25249.8) (Proposition 65). Without limiting the above, the term "Hazardous Materials" also includes petroleum (including crude oil and any of its fractions), radioactive materials, asbestos, pesticides, PCB's, and medical or biologic wastes. B. COMPLIANCE WITH LAW. (1) Lessee shall comply with all federal, state and local laws, ordinances, regulations, rules or requirements relating to the Lessee's use and occupancy of the Leased Premises, including but not limited to those relating to worker safety, public health and the environment ("Applicable Laws"). Specifically, but without limiting Lessee's obligations described above, Lessee shall establish and adhere to any hazardous material management plan (the "Plan") required by the County of San Mateo, City of Menlo Park or any other federal, state or local governmental agency having jurisdiction ("Agency"), and if a Plan is required, Lessee shall, not later than six months from the commencement of this Lease, allow Lessor and Agency Representatives to inspect the Leased Premises for compliance with the Plan, and correct any items not in compliance with the Plan, and correct any items not in compliance with Applicable Laws. Lessor may require that Lessee coordinate its Plan with other occupants of the Building. Lessee also shall not cause, maintain or permit any nuisance in, on or about the Premises, and shall not install any tanks outside or within the Premises, above or below ground, without the express written consent of Lessor. (2) If any Agency directs Lessee or Lessor to take any action with respect to the presence, release or threatened release of any Hazardous Materials on, under or about the Premises, and that directive arises out of Lessee's use of Hazardous Materials at the Premises or at any common areas, Lessee shall promptly commence and thereafter diligently prosecute to completion, at Lessee's sole expense, any and all actions required by the Agency. Lessor shall retain the right to review and approve any remediation action proposed by Lessee. Lessee shall notify Lessor prior to taking any action in response to the directive. C. LESSEE'S USE OF HAZARDOUS MATERIALS. (1) Lessee shall not, and Lessee shall not permit its employees, agents, contractors, sublessees, licensees, customers, invitees or parties permitted to enter the Premises by any of the foregoing (Lessee and such persons, collectively, "Lessee Parties") to, manage, handle, store or use in any way on the Premises any Hazardous Materials other than those necessary or useful for Lessee's business, and all activity involving Hazardous Materials must be in full and strict compliance with all Applicable Laws. Lessee parties shall not spill, leak, pump, pour, emit, empty, discharge, inject, leach, dump or dispose (hereinafter "Release") any Hazardous Materials onto, into or about the Premises, except to the extent permitted under Applicable Laws. Upon Lessor's request, Lessee shall provide Lessor with a list of all Hazardous Materials managed, handled, stored, used, or located on the Leased Premises at any time during the Lease Term, together with evidence that Lessee has complied with all Applicable Laws, including obtainment 42 43 of a state identification number for Hazardous Materials uses, if Applicable Laws require that Lessee obtain the same. Lessee shall comply fully, including the completion of any corrective or remediation action, with any premises closure requirements under Applicable Laws relating to Lessee's or Lessee Parties use of Hazardous Materials not later than the end of the Lease Term. (2) Lessee shall have an individual on staff (on at least a part-time basis) who is trained and assigned to handle environmental, health and safety matters, such as, but not limited to, radiation safety and emergency planning. D. LESSOR'S RIGHT TO INSPECT. Upon prior written notice to Lessee, Lessor shall have the right at all times during the Lease Term to conduct a reasonable inspection of the Premises, including performing reasonable tests and investigations to determine if Lessee is in compliance with the terms of this Lease. In conducting these inspections, Lessor shall use its best efforts not to unreasonably disrupt Lessee's business operations. Lessor shall bear the cost of any tests and/or investigations, except that the cost of such test and/or investigations shall be borne by Lessee if (a) the tests and/or investigations indicate that Hazardous Materials are present on or under the Premises at concentrations exceeding levels for which remediation is required under any Applicable Law, and (b) Lessee is responsible for the presence of such Hazardous Materials. E. NOTICES. Lessee will immediately notify Lessor orally (with a written follow-up notice within five days) if Lessee knows or has reasonable cause to believe that a Release of Hazardous Material has come or will come to be located on, in, about, or beneath the Premises in violation of Applicable Laws, provided that such notification obligations shall not in itself imply the existence of a remediation obligation on the part of Lessee. Lessee also shall notify Lessor of (a) any formal or informal correspondence or communication from any Agency concerning the release of Hazardous Materials on or migrating to or from the Premises, or the violation or possible violation of any Applicable Law; or (b) any claims made or threatened by any third party relating to loss, damage or injury claimed to have been caused by and Lessee Party's handling, storage or use of any kind of Hazardous Materials on the Premises or any Leased Party's alleged violation of any Applicable Laws. F. INDEMNIFICATION. (1) Lessee shall indemnify, defend (with Legal counsel acceptable to Lessor) and hold Lessor, its shareholders, officers, agents, employees, successor's and assigns harmless from any and all claims, demands, judgments, damages, liabilities or losses (including diminution in value of the Premises or damages from loss or restriction on use of the Premises), costs and expenses (including attorney's fees, consulting fees and expert fees), response and/or removal costs (including costs associated with site restoration, monitoring, corrective action, or closure), penalties, fines and punitive damages arising out of or in connection with the handling, storage, use, generation, treatments, manufacture, or other management or Release of any Hazardous Materials by any Lessee Party. 43 44 (2) Lessor shall indemnify, defend and hold Lessee, its shareholders, officers, agents, employees, successors and assigns harmless from any and all claims, demands, judgments, liabilities or losses, penalties, fines and punitive damages arising out of or in connection with the handling, storage, use, generation, treatment, manufacture, or other management or Release of any Hazardous Materials in or about the Premises, the Building or Industrial Center caused by any person or entity other than a Lessee Party. Without limiting the generality of the foregoing, Lessor acknowledges that the Premises room 1123 may contain trace elements of radioactivity which were not caused by Lessee. Lessee shall have no responsibility or liability for the clean up of such radioactivity. G. REMEDIATION OF HAZARDOUS MATERIALS. If a Release of any Hazardous Materials occurs on the Leased Premises during the term of the Lease as a result of any act or omission of any Lessee Party, Lessee, at its sole expense, shall (a) promptly make all reasonable efforts to contain and mitigate such Release, (b) provide prompt notification to the proper authorities if required by an Applicable Law, and (c) upon notice to Lessor and with Lessor's approval, investigate and take all appropriate removal or remedial actions necessary to comply with any Applicable Law. This provision shall survive the expiration or termination of this Lease. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE LESSOR OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTIONS RELATING THERETO. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date of the Lease. "LESSOR" "LESSEE" WVP Income Plus III, Camitro, Inc., a California Limited Partnership a California Corporation By: West Valley Properties, Inc., General Partner By /s/ By /s/ --------------------------------- ------------------------------- 44 45 RIDER TO A.I.R.E.A. STANDARD OFFICE LEASE - GROSS - DATED, FOR REFERENCE PURPOSES FEBRUARY 4, 1999, BY AND BETWEEN WVP INCOME PLUS ("LESSOR"), AND CAMITRO, INC. ("LESSEE"). This Rider is attached to and made a part of the above-referenced Lease. In the event of any conflict between the Lease and this Rider, the terms and provisions of this Rider shall govern. If any addenda or amendments are also attached to the Lease, such addenda or amendments shall govern to the extent of any conflict between the terms and provisions of this Rider and such addenda or amendments. All references in the following paragraphs are to corresponding sections of the typeset portion of the Lease, except as otherwise expressly provided herein. INSERT 3.2.1: POSSESSION TENDERED - DEFINED. (3) the Premises is free from equipment and debris and in a broom-clean condition, (4) Lessor or Lessee's predecessor has obtained regulatory closure of its operations at the Premises, including having performed any necessary cleanup or remediation and having received all necessary authorizations and approvals from regulatory authorities having jurisdiction over such site closure, and (5) INSERT 6.2(a): COMPLIANCE WITH LAW. Lessor makes no representations or warranties respecting the existence of Hazardous Materials in the Premises. However, Lessor hereby releases Lessee from any liability in connection with any Hazardous Materials in the Premises that are not caused by Lessee. Additionally, in the event that any third party regulatory agency or governmental agency requires any work done to or about the Premises, and such work is not the result of any Hazardous Materials caused by Lessee, such work shall be done at the sole expense of Lessor. INSERT 6.2(b): COMPLIANCE WITH LAW. Notwithstanding anything to the contrary contained in this Lease, throughout the term hereof, Lessee shall not be responsible for compliance with any laws, codes, or ordinances where such compliance (i) is not related specifically to Lessee's use and occupancy of the Premises. For example, if any governmental authority should require buildings to be structurally strengthened against earthquake, such compliance shall be performed by and at the sole cost of Lessor, or (ii) is not triggered by any alterations or improvements done by, or at the direction of, Lessee to the Premises. INSERT 7.1: LESSOR'S OBLIGATIONS. Notwithstanding the provisions of Paragraph 7.1, if Lessor fails to perform its maintenance and repair obligations (with respect to the roof or the plumbing, electricity or HVAC systems) in compliance with its obligations under Paragraph 13.3 and, as a consequence, Lessee's use of the Premises is substantially impaired, Lessee will provide Lessor with written notice that a repair is needed. If within 30 days following the notice the repair has not been commenced, Lessee shall have the right to solicit three competitive bids for the repair and shall deliver copies of such bids to Lessor. Lessor shall have seven calendar days within which to either commence such work, or to approve of one of the submitted bids. If Lessor fails to either commence such work or 45 46 approve a bid within the seven calendar day period, then Lessee shall be entitled to choose any one of the three bids and cause such repair or maintenance to be performed at Lessor's expense and Lessor agrees to reimburse Lessee, upon demand, for the costs thereof. INSERT 8.7: INDEMNITY. Notwithstanding anything to the contrary in this Lease, Lessee shall not be required to indemnify, defend, or hold Lessor harmless from or against any claims, liability, loss, cost, or expense arising out of (i) the breach by Lessor, or Lessor's agents, employees, licensees, invitees, or independent contractors (collectively Lessor's Agents), of any covenant, representation or warranty under this Lease, or (ii) any negligence or willful misconduct of Lessor or Lessor's Agents. INSERT 12.2: LESSEE AFFILIATE. Additionally, "Lessee Affiliate" shall include any entity which acquires substantially all of the assets of Tenant, as a going concern, with respect to the business that is being conducted in the Premises; or any entity that acquires any stock, the beneficial ownership, or effective voting control of Tenant from the person(s) having effective voting control as of the date of Tenant's execution of this Lease. INSERT 32: LESSOR'S ACCESS. Notwithstanding anything in this Lease to the contrary, Lessor shall provide Lessee with at least 24 hours' prior actual notice before entering the Premises and such entry shall be subject to Lessee's reasonable security requirements. In the event of an emergency, the determination of which shall require Lessor to be reasonable, Lessor shall not be required to provide such notice. In the event of any entry by Lessor onto the Premises, Lessor shall use its best efforts not to interfere with the conduct of Lessee's business. INSERT 50: RIGHT OF FIRST REFUSAL. Subject to the currently existing rights of any other tenant(s) in the building, in the event that the balance of the first floor of the Building becomes available for lease (the "Available Space"), Lessor shall give Lessee written notice of such availability, identifying the same and specifying the basic terms and conditions on which Lessor proposes to lease the Available Space (the "Availability Notice"). Lessee shall have five (5) business days after its receipt of the Availability Notice in which Lessee may either give Lessor written notice of Lessee's acceptance of the Available Space on the terms and conditions specified in the Availability Notice (the "Acceptance Notice") or written notice of a counteroffer by Lessee for the lease of the Available Space (the "Counter Notice"). Prior to giving the Availability Notice to Lessee and for five (5) business days thereafter, Lessor shall not enter into any agreement for the Available Space with any other person. If during such five (5) business day period Lessee gives Lessor an Acceptance Notice, Lessor and Lessee shall then promptly enter into a lease for the Available Space on the terms and conditions specified in the Availability Notice (and otherwise on the terms and conditions contained in this Lease). If during such five (5) business day period Lessee gives Lessor a Counteroffer Notice, Lessor shall 46 47 then give Lessee written notice either accepting such counteroffer (in which event, Lessor and Lessee shall promptly enter into a lease for the Available Space of the terms and conditions specified in the Counteroffer Notice and otherwise on the terms and conditions set forth in this Lease) or rejecting such counteroffer. After the expiration of such five (5) business day period, if Lessee has not given Lessor a timely Acceptance Notice or a timely Counteroffer Notice, then Lessor shall be free to enter into a lease for the use of the Available Space to any other person or entity on any terms and conditions. After the expiration of such five (5) business day period, if Lessee has given Lessor a timely Counteroffer Notice which Lessor has rejected, Lessor shall be free to enter into a lease for the use of the Available Space to any other person or entity on any terms and conditions; provided, however, that Lessor shall not enter into a lease for the use of the Available Space with any other person or entity on basic terms materially less favorable to Lessor (i.e. greater than a 10% discount) than those set forth in the Counteroffer Notice (or, if more than one Counteroffer Notice was timely given, then in the last such Counteroffer Notice) without giving Lessee at least five (5) business days prior written notice of such proposed lease and the opportunity (during such five (5) business day period by delivery of written notice to Lessor) to agree to lease the Available Space on the same terms and conditions as those of such proposed lease. In determining whether "lease terms" are materially less favorable than the terms offered to Lessee, no terms other than rent, improvement allowance (if any) and minimum term shall be considered. WVP INCOME PLUS III CAMITRO CORPORATION By: West Valley Properties, Inc. By: /s/ ------------------------------------- -------------------------------- (signature) (signature) By: /s/ By: Harold E. Selick -------------------------------------- --------------------------------- (printed name) (printed name) Title: President Title: President & CEO ----------------------------------- ------------------------------ Date: 3/11/99 Date: 3/10/99 ------------------------------------- ------------------------------ 47 EX-10.36 4 b38132arex10-36.txt COLLABORATION & LICENSE AGREEMENT 1 Exhibit 10.36 COLLABORATION AND LICENSE AGREEMENT This Collaboration and License Agreement dated as of November 27, 2000 (the "Effective Date") is between SmithKline Beecham Corporation ("SB"), a Pennsylvania corporation, and ArQule, Inc. ("ArQule"), a Delaware corporation. R E C I T A L S WHEREAS, ArQule has expertise relating to the discovery and optimization of compounds for use in the Field; and WHEREAS, SB has expertise with respect to certain biological targets within the Field; and WHEREAS, SB desires to collaborate with ArQule to screen certain compounds within ArQule's compound libraries and certain compounds produced by SB against SB's biological targets in the Field to identify, optimize and develop compounds that exhibit activity against such targets. NOW, THEREFORE, in consideration of the mutual covenants set forth in this Agreement, SB and ArQule hereby agree as follows: 1. Certain Definitions. The following meanings shall be ascribed to capitalized terms used herein without definition: 1.1. "Active Compound" means an ArQule Compound that exhibits significant functional activity against a Target, as determined by SB in a manner consistent with the manner SB uses to evaluate other similarly situated compounds being developed by SB within the Field. 1.2. "Affiliate" means any legal entity (such as a corporation, partnership, or limited liability company) that control, is controlled by or is under common control with a party to this Agreement. For the purposes of this definition, the term "control" means (i) beneficial ownership of at least fifty percent (50%) of the voting securities of a corporation or other business organization with voting securities (or such lesser percentage which is the maximum allowed by a foreign corporation in a particular jurisdiction), (ii) a fifty percent (50%) or greater interest in the net assets or profits of a partnership or other business organization without voting securities, or (iii) the ability to direct the affairs of any such entity. 1.3. "Analog Compound" means a chemical compound that ***** "ArQule Analog Compound" shall mean an Analog Compound developed from an ArQule Compound (as the parent compound) in the course of an optimization program by ArQule or SB as contemplated by this Agreement ***** For the avoidance of doubt, a compound is not an ArQule Analog Compound if that compound is acquired, discovered, or developed by or on behalf of SB independent of this Agreement. "SB Analog Compound " means an Analog Compound developed from an SB Compound (as the parent compound) in the course of an optimization ***** Confidential Treatment has been requested for the marked portion. 1 2 program by ArQule or SB as contemplated by this Agreement ***** For the avoidance of doubt, a compound is not an SB Analog Compound if that compound is acquired, discovered, or developed by or on behalf of SB independent of this Agreement. 1.4. "ArQule Compound" means a chemical compound owned or controlled by ArQule provided by ArQule to SB pursuant to this Agreement as part of a screening library, including without limitation the compounds provided in the Compass Array Library and Mapping Array Libraries. 1.5. "Available Compound" means an Active Compound which ArQule has determined in good faith is not (i) licensed or otherwise committed to a third party in the Field or (ii) committed to an internal ArQule program in the Field. For purposes of (i) above, "committed" shall mean a third party with contractual or other legal rights to claim such compound for development and commercialization has notified ArQule in writing that such third party has claimed such compound for development and commercialization. For purposes of (ii) above, "committed" shall mean that the compound has been designated by ArQule as committed to an internal development program at ArQule (initiated and conducted without use of any information generated in the course of this Agreement) in accordance with its ordinary procedures, as evidenced by the status of such compound in its corporate database, and is under bona fide evaluation or is the subject of an active and funded internal development program at ArQule. 1.6. "Compass Array(TM) Library" means a collection of ArQule Compounds that is a diverse representative subset of the Mapping Array Libraries used for initial screening of the Mapping Array Libraries. The description of, and the specifications for, the Compass Array(TM) Library are set forth in Schedule A attached hereto. 1.7. "Confidential Information" means any non-public technical or business information furnished by one party (the "Disclosing Party") to the other party (the "Receiving Party") in connection with this Agreement or generated pursuant to this Agreement. Such Confidential Information may include, without limitation, the identity or use of a chemical compound, the identity or use of a biological target, computer models, trade secrets, know-how, inventions, technical data or specifications, testing methods, business or financial information, collaboration and development activities, JSC reports, royalty reports, product and marketing plans, clinical development plans, customer and supplier information, compound locations within Compass Array Libraries and the Markush structures of ArQule Compounds. 1.8. "Field" means all applications in *****. 1.9. "Full-Time Equivalent" or "FTE" shall mean the effort equivalent to one (1) qualified full-time employee of ArQule working on a specific project or task for a period of one year. 1.10. "Inactive ArQule Compound" means an ArQule Compound (i) which is selected by SB from the same Mapping Array Library as one or more Active Compounds with activity for the same Target, and (ii) which is not active against the same Target as such Active Compounds, ***** Confidential Treatment has been requested for the marked portion. 2 3 as determined by SB in a manner consistent with the manner SB uses to evaluate other similarly situated compounds being developed by SB within the Field. 1.11. "IND" means an investigational new drug application filed with the United States Food and Drug Administration (or its foreign equivalent) prior to beginning clinical trials in humans or any comparable application filed with the regulatory authorities of a country other than the United States, prior to beginning clinical trials in humans in that country; provided however, that for purposes of this definition, an IND shall not include an investigational new drug application regarding the testing of several closely related compounds, or formulations or other adaptations of the same compound, to aid in the selection of a lead compound for further human clinical development. 1.12. "IND Candidate Compound" means any Royalty-Bearing Product that is designated by SB as an IND Candidate pursuant to Section 4.4. 1.13. "Lead Optimization Array" means a set of ArQule Analog Compounds or SB Analog Compounds synthesized by ArQule pursuant to Section 4.2. of this Agreement. 1.14. "Licensed Compound" means any Available Compound or Inactive ArQule Compound that has been designated as a Licensed Compound as provided in Subsection 4.1.4 below. 1.15. "Licensed Compound Set" means a set of one or more Licensed Compounds from the same Mapping Array Library that have biological activity for the same Target, as well as any ArQule Analog Compounds of such Licensed Compounds that are synthesized by a party in the course of optimizing those Licensed Compounds. 1.16. "Mapping Array(TM) Library" means a set of ArQule Compounds consisting of diverse, structurally related small organic chemical compounds arranged in a spatially addressable format, such as a microtiter screening plate, which ArQule makes available to its collaborators for screening on a non-exclusive basis. The description of, and the specifications for, the Mapping Array(TM) Libraries are set forth in Exhibit A attached hereto. 1.17. "Net Sales" means the gross amount billed or invoiced on sales by SB, its Affiliates and sublicensees of Royalty-Bearing Products, less the following: *****. In any transfers of Royalty-Bearing Products among SB, an Affiliate and/or a sublicensee, Net Sales shall be calculated based on the final sale of the Royalty-Bearing Product to an independent third party. In the event that SB, an Affiliate or a sublicensee receives non-monetary consideration for any Royalty-Bearing Products, Net Sales shall be calculated based on the average price charged by that party for such Royalty-Bearing Products during the preceding Royalty Period or, in the absence of such sales, the fair market value of the non-monetary consideration as determined by the parties in good faith. 1.18. "Patent Rights" means any United States and foreign patent application and any divisional, continuation, or continuation-in-part of such patent application (to the extent the claims are directed to subject matter specifically described therein), as well as any patent issued thereon and any reissue or reexamination of such patent, and any foreign counterparts to such ***** Confidential Treatment has been requested for the marked portion. 3 4 patents and patent applications. "ArQule Patent Rights" means Patent Rights that are either (i) assigned solely to ArQule, (ii) assigned jointly to ArQule and a party other than SB, or (iii) licensed to or otherwise controlled by ArQule, in each case to the extent that ArQule has the ability to license or sublicense the rights required under this Agreement without payment to a third party. "SB Patent Rights" means Patent Rights that are either (i) assigned solely to SB (including Patent Rights in Analog Compounds pursuant to Section 6.1.), (ii) assigned jointly to SB and a party other than ArQule, or (iii) licensed to or otherwise controlled by SB, in each case to the extent that SB has the ability to license or sublicense the rights required under this Agreement without payment to a third party. "Joint Patent Rights" means Patent Rights assigned to both ArQule and SB as joint owners. Joint Patent Rights will include (i) Patent Rights claiming Joint Technology and (ii) Patent Rights claiming both ArQule Technology and SB Technology in a single filing, but will not include Patent Rights in Analog Compounds assigned by ArQule to SB pursuant to Section 6.1. 1.19. "Program Status Compound" means any Royalty-Bearing Product that is designated by SB as eligible to enter the Program Phase pursuant to Section 4.3. 1.20. "Proprietary Materials" means any tangible materials, whether biological, chemical, physical, or otherwise, that one party (the "Provider") furnishes to the other party (the "Recipient") under this Agreement and designates as proprietary or confidential including, without limitation all ArQule Compounds and SB Compounds. 1.21. "Royalty Period" means the partial calendar quarter commencing on the date on which the first Royalty-Bearing Product is sold and every complete or partial calendar quarter thereafter during which SB has the obligation to pay a royalty pursuant to Section 7.6. 1.22. "Royalty-Bearing Product" means a product containing as one of its constituents, *****. 1.23. "SB Compound" means any chemical molecule owned or controlled by SB that is provided by SB or its Affiliates to ArQule for lead optimization under this Agreement. 1.24. "Screening Phase" means the period commencing on the Effective Date and continuing for ***** years thereafter during the term of this Agreement, as extended by the parties through the Steering Committee or pursuant to Section 4.2.6. 1.25. "Target" means any biological target selected by SB in its discretion including, without limitation (a) any genetic material, gene, nucleotide, protein, or peptide, (b) any collections of genetic material, genes, proteins or peptides, and (c) any cellular activity in the Field that, in any case, SB selects for screening against ArQule Compounds. ***** Target" means any Target within the Field that has utility in the treatment, prophylaxis or diagnosis of ***** diseases. ***** Target" means any Target within the Field that has utility in the treatment, prophylaxis or diagnosis of disease caused by *****. The term "Target" shall include all ***** Targets and ***** Targets. 1.26. "Technology" means any proprietary development, information, know-how, idea, design, concept, technique, process, invention, compound, discovery, improvement whether or not patentable or copyrightable. "ArQule Technology" means Technology that is either (i) ***** Confidential Treatment has been requested for the marked portion. 4 5 assigned solely to ArQule, (ii) assigned jointly to ArQule and a party other than SB, or (iii) licensed to or otherwise controlled by ArQule, in each case to the extent that ArQule has the ability to license or sublicense the rights required under this Agreement without payment to a third party. "SB Technology" means Technology that is either (i) assigned solely to SB, (ii) assigned jointly to SB and a party other than ArQule, or (iii) licensed to or otherwise controlled by SB, in each case to the extent that SB has the ability to license or sublicense the rights required under this Agreement without payment to a third party. "Joint Technology" means Technology that is developed or discovered jointly by one or more employees or consultants of SB and one or more employees or consultants of ArQule in connection with this Agreement. 1.27. "Valid Claim" means either (i) a claim of an issued patent that has not been held unenforceable or invalid by an agency or a court of competent jurisdiction in any unappealable or unappealed decision or (ii) a claim of a pending patent application that has not been abandoned or finally rejected without the possibility of appeal or refiling. 2. Nature and Objective of Collaboration. The primary objective of the collaboration is to discover and develop compounds provided by both ArQule and SB that demonstrate potential as human therapeutic products for the treatment, prophylaxis or diagnosis of infectious diseases caused by bacterial organisms. In order to achieve this objective, the parties shall (i) perform compound screening activities using ArQule Compounds to identify Active Compounds, (ii) perform lead qualification activities on Active Compounds that are determined to be Available Compounds to prioritize such compounds for lead optimization, (iii) perform lead optimization activities on Licensed Compounds to develop one or more Program Status Compounds that may result in Royalty-Bearing Products, and (iv) perform lead optimization activities on SB Compounds to develop one or more Program Status Compounds that may result in Royalty-Bearing Products, in each case as further described below. 5 6 3. Management of Collaboration. 3.1. Establishment of Joint Steering Committee. The parties hereby establish a Joint Steering Committee (the "JSC") comprised of six (6) members, with three (3) representatives appointed by each party, one of whom from each party shall fulfill the role of alliance manager for the collaboration. The members initially designated by SB are John Elliott, Gary Woodnutt, and Mitchell Gross. The members initially designated by ArQule are Norton Peet, David Hartsough, and Sheila DeWitt. The JSC shall be chaired by one of the SB representatives. A party may change any of its representatives to the JSC at any time upon written notice to the other party. 3.2. Duties of Joint Steering Committee. The JSC shall plan, monitor, manage, and administer the collaboration under this Agreement. In general, the JSC will act on behalf of the parties and, subject to Section 3.3, will be responsible for approving specific research and development objectives and milestones, determining when and if milestones are met, and recommending resource allocation requirements. In particular, the activities of the JSC will include reviewing progress made in the various phases of the collaboration and recommending necessary changes to the collaboration. The JSC will be responsible for research data, i.e. any laboratory notes, technical data or specifications, test results, or other information or materials that arise as a result of the collaboration. The JSC may also establish one or more Research Committees to assist in project management. 3.3. Decisions Reserved to SB. Notwithstanding anything to the contrary in this Agreement, the parties agree that SB shall have the final decision on the following matters: (i) approval of all material research allocation (e.g., FTE funding); (ii) definition of criteria for selection and identification of qualified lead compounds suitable for optimization; (iii) the minimum eligibility requirements for a compound to be considered an Active Compound, Inactive Compound, Program Status Compound (subject to Section 4.3.), and IND Candidate Compound (subject to Section 4.4.). 3.4. Meetings of Joint Steering Committee. Unless otherwise determined by the JSC, the JSC shall meet at least once each calendar quarter alternately at the location of each party, or at other times, locations, or manner (e.g., telephone conferences) determined by the JSC. Dates for the next meeting will be decided within fifteen (15) days after the previous meeting. A representative of the JSC jointly appointed by its members shall provide each member with five (5) business days notice of the time and location of each quarterly meeting, unless such notice is waived by all members. If a designated representative of a party cannot attend a meeting of the JSC, such party may designate a different representative for that meeting without notice to the other party, and the substitute member will have full power to vote on behalf of the permanent member. Except as otherwise provided in this Agreement, all actions and decisions reserved for the JSC will require the unanimous consent of all of its members. If the JSC fails to reach agreement upon any matter that is not subject to a final decision by SB as set forth in Section 3.3, 6 7 the dispute will be resolved in accordance with the procedures set forth in Article 13 below. Within ten (10) business days following each quarterly meeting of the JSC, a representative of the JSC jointly appointed by its members shall prepare and deliver, to both parties, a written report describing the program status and the issues, decisions, conclusions, and other actions taken by the JSC. SB will appoint an SB person as chairperson for the JSC. 3.5. Cooperation. Each party agrees to provide the JSC with information and documentation as reasonably required for the JSC and each party to fulfill its duties under this Agreement. In addition, each party agrees to make available its employees and consultants as reasonably requested by the JSC. The parties anticipate and intend that members of the JSC will communicate informally with each other and with employees and consultants of the parties on matters relating to the collaboration. 4. Conduct of Collaboration. 4.1. Screening Phase. All activities described in this Section 4.1 shall end when the Screening Phase ends. SB may extend the Screening Phase upon six (6) months written notice to ArQule, provided that the parties reach agreement on terms and conditions for such extension during the six-month notice period. The Screening Phase may also extend automatically as provided in Subsection 4.2.6. 4.1.1. Compass Array Library. Within ten (10) business days of the Effective Date, ArQule will supply SB with one (1) copy of the Compass Array Library in accordance with the specifications set forth in Schedule A attached hereto. During the Screening Phase, SB will screen the ArQule Compounds within the Compass Array Library against ***** Targets using efforts consistent with its normal scientific and business practices. In addition, SB may also screen the Compass Array Library against ***** Targets and other Targets as set forth in Subsection 4.1.6 below. SB shall periodically submit to ArQule a list containing the array plate number and well number of all Active Compounds by facsimile transmission followed by a confirmatory letter. ArQule will promptly determine whether the listed Active Compounds are Available Compounds and notify SB of such determination. If any Active Compound is not an Available Compound, ArQule shall not disclose the structure and SB shall have no rights under this Agreement with respect to that Active Compound; provided however, that ArQule shall promptly notify SB if such Active Compound later becomes an Available Compound. If an Active Compound is an Available Compound, ArQule shall reserve such Active Compound as an Available Compound to SB under this Agreement and, promptly thereafter, ArQule shall disclose to SB the structure of such Available Compound correlated to its well location. Upon request of SB, ArQule shall disclose which Mapping Array Library corresponds to any Active Compound whether or not such ArQule Compound is an Available Compound, including the Markush structure of the Mapping Array Library, as described in Schedule A. 4.1.2. Mapping Array Library. After SB screens the Compass Array Library and thereafter at any point during additional screening activities (as described below) on Available Compounds from the Compass Array Library, and as determined by SB in consultation with the JSC, SB may screen one or more Mapping Array Libraries corresponding to any Active Compound(s) identified from the Compass Array Library to obtain initial structure-activity ***** Confidential Treatment has been requested for the marked portion. 7 8 relationship ("SAR") data with respect to those Active Compounds and to identify additional Active Compounds for development. If SB elects to access these Mapping Array Libraries, SB shall provide ArQule with written notice identifying the Mapping Array Libraries selected for such purposes. ArQule shall provide SB with the relevant Mapping Array Libraries within ten (10) business days of receipt of such notice. Initially, ArQule will not identify the structures of the individual ArQule Compounds within any delivered Mapping Array Library. ArQule will, however, provide SB with Markush structures of each Mapping Array Library furnished to SB upon shipment. SB shall periodically submit to ArQule a list containing the array plate number and well number of all Active Compounds with the Mapping Array Library by facsimile transmission followed by a confirmatory letter. ArQule will promptly determine whether the listed Active Compounds are Available Compounds and notify SB of such determination. If any Active Compound is not an Available Compound, ArQule shall not disclose the structure and SB shall have no rights under this Agreement with respect to that Active Compound; provided however, that ArQule shall promptly notify SB if such Active Compound later becomes an Available Compound. If an Active Compound is an Available Compound, ArQule shall reserve such Active Compound as an Available Compound to SB under this Agreement and, promptly thereafter, ArQule shall disclose to SB (i) the structure of such Available Compound correlated to its well location, and (ii) upon request of SB, the structures but not the locations of inactive ArQule Compounds in the same Mapping Array Library. ***** 4.1.3. Resynthesis and Additional Screening. (a) Resynthesis. ArQule shall resynthesize and deliver to SB an additional quantity of any Available Compound requested by SB to enable SB to conduct screening activities. The Available Compounds may come from the Compass Array Library or a Mapping Array Library. SB shall provide ArQule with written notice of the Available Compounds that SB desires to have resynthesized by ArQule, in accordance with the specifications set forth in Schedule A. In each case the amount of, and delivery schedule for, resynthesized Available Compounds will be determined by SB, subject to approval by the JSC. (b) Additional Screening. SB will promptly conduct additional screening of the resynthesized Available Compounds and submit such results as necessary to the JSC. 4.1.4. Designation of Licensed Compounds. At any time after SB has screened the Compass Array Library and the Mapping Array Libraries corresponding to Available Compounds identified in the Compass Array Library (i.e., confirmation in secondary screens is unnecessary), SB may select any reserved Available Compound or reserved Inactive ArQule Compound as a Licensed Compound under this Agreement. In such event, SB shall provide ArQule with written notice of its selection and ArQule will change the status of such ArQule Compounds from "reserved" to "licensed". Upon the designation of an ArQule Compound as a Licensed Compound, the licenses set forth in Subsection 5.2 shall automatically become effective. All Licensed Compounds from a Mapping Array Library that share activity for the same Target, ***** shall form a Licensed Compound Set for the purposes of this Agreement. 4.1.5. Optimization Rights. SB shall have the right to conduct lead optimization of any Licensed Compound Set, provided that SB shall submit one Licensed Compound Set to ***** Confidential Treatment has been requested for the marked portion. 8 9 ArQule for optimization as provided below. In the event that SB conducts optimization of a Licensed Compound Set, then at the request of SB, ArQule will provide SB with synthetic protocols to enable SB to make those Licensed Compounds. In addition, SB may request that ArQule provide additional resynthesized quantities of those Licensed Compounds and, subject to the availability of chemists and reagents, ArQule will provide SB with such resynthesized quantities at the rates set forth in Section 7.2 (but, for clarity, only during the Screening Phase). 4.1.6. Screening Rights for Targets other than ***** Targets. (a) ***** Targets. SB may screen the Compass Array Library against ***** Targets and then conduct the activities described in this Section 4 with respect to Available Compounds identified in such screens; provided that before the parties commence such activities, the parties shall negotiate in good faith the commercially reasonable financial terms pertaining to such compounds as described in Sections 7.5. and 7.6. below, which terms shall be set forth in a separate agreement. In addition, if SB desires to conduct an optimization project with ArQule on any resulting Licensed Compounds, the parties shall negotiate in good faith the applicable commercially reasonable FTE rate unless the project is a substitute project as described in Subsection 4.2.6. (b) Other Targets. In the event that (i) SB fails to identify any Active Compounds from the Compass Array Library in its screens against ***** Targets and, if applicable, ***** Targets and decides not to initiate any additional screening activities of ArQule Compounds against ***** Targets or ***** Targets, or (ii) SB identifies fewer than ***** Available Compounds from the Compass Array Library in its screens against ***** Targets and, if applicable, ***** Targets, then SB may screen the unused quantities of any ArQule Compounds from the Compass Array Library retained by SB against other Targets for the duration of the Screening Phase; provided that, SB shall give ArQule written notice prior to undertaking such additional screening activities, which notice shall identify such other Targets; and, provided further that before the parties commence such activities, the parties shall negotiate in good faith the commercially reasonable financial terms pertaining to such compounds as described in Section 7.5. and 7.6. below, which terms shall be set forth in a separate agreement. In addition, if SB desires to conduct an optimization project with ArQule on any resulting Licensed Compounds, the parties shall negotiate in good faith the applicable commercially reasonable FTE rate unless the project is a substitute project as described in Subsection 4.2.6. 4.1.7. Reverse Engineering. SB shall not attempt to reverse engineer, or attempt to determine the structure of, any ArQule Compound until the structure of such compound has been disclosed to SB by ArQule pursuant to this Section 4. ***** Confidential Treatment has been requested for the marked portion. 9 10 4.2. Lead Optimization Phase. 4.2.1. Committed Lead Optimization Projects. ArQule agrees to perform, and SB agrees to perform and fund, two lead optimization projects in accordance with the terms and conditions of this Agreement. One of the committed projects will come from a Licensed Compound Set with activity for an ***** Target, which project will be selected as described in Subsection 4.2.2 (b) should SB desire to optimize an Available Compound. For the avoidance of doubt, in the event SB does not elect to optimize an Available Compound, SB shall have no obligation to fund or perform an optimization project for any Licensed Compound Set for an ***** Target and, as a result, SB shall only have an obligation to fund and perform the optimization project described in the next sentence. The other committed project will come from a series of SB Compounds that SB has determined to have activity for an ***** Target, which project will be selected by SB and submitted to ArQule as described in Subsection 4.2.2 (a). SB will define the general guidelines and goals of the project and the JSC will develop a defined workplan for each project in accordance with such guidelines and goals, including project deliverables, and then the JSC will coordinate and monitor the projects. The project deliverables are subject to approval by both parties through the JSC, but SB has the final decision for all other aspects of the lead optimization projects. Each lead optimization project under this Section will commence not later than the end of the Screening Phase and shall continue for the initial periods set forth in Section 4.2.4 and such extension as set forth in Section 4.2.5, but not more than ***** years, unless earlier terminated as described in Subsection 4.2.6. 4.2.2 Selection of Projects. (a) SB Compounds. On or before the Effective Date, SB shall disclose to ArQule the structures of the SB Compounds that SB will submit to ArQule for lead optimization, together with all data, synthetic protocols, and other information in the possession of SB which may assist ArQule in the project. ArQule shall commence work on this project within thirty (30) days after the JSC develops and approves a workplan. (b) ArQule Compounds. At any time during the Screening Phase, SB will provide a list of Licensed Compound Sets with ***** activity to the JSC for consideration as lead optimization projects. The JSC will select one of these Licensed Compound Sets for optimization by ArQule under this Agreement. ArQule shall commence work on this project promptly after the JSC develops and approves a workplan. 4.2.3. Responsibilities of Parties. Subject to modification by the JSC and in accordance with the applicable workplan, ArQule will generally perform ***** activities associated with lead optimization projects including, without limitation, ***** as described in Schedule A, and SB will generally perform ***** activities associated with lead optimization projects, including without limitation, ***** SB shall also perform such other activities as it deems necessary or appropriate in connection with the lead optimization project. Either party may perform ***** as directed from time to time by the JSC. The specific responsibilities of each party shall be described in the applicable workplan. Each party will promptly report all research results related to such lead optimization activities to the JSC. 4.2.4. Initial Resource Commitments. SB commits to fund the two (2) projects ***** Confidential Treatment has been requested for the marked portion. 10 11 described in Section 4.2.1 in the following manner. On the Effective Date, ArQule will initially allocate at least ***** for ***** to a project derived from the series of SB Compounds for an ***** Target as described in Subsection 4.2.2(a). In addition, upon selection by the JSC of a Licensed Compound Set for a lead optimization project, ArQule will initially allocate at least ***** for ***** to the project derived from the Licensed Compound Set for an ***** Target as described in Subsection 4.2.2(b). SB agrees to fund the FTEs for these two projects at the rates set forth in Section 7.4 for at least a ***** period for each project, subject to early termination as set forth in Subsection 4.2.6 below. 4.2.5. Ongoing Resource Commitments. When a project begins, the JSC will, subject to Section 3.3, agree to an estimated number of FTEs per project to complete the approved workplan and timeline to add those FTEs. ArQule agrees to provide a maximum of ***** FTEs per project in the following manner. The JSC will determine the actual number of FTEs for each project at any given time, subject to SB approval. Actual changes to the FTE commitment beyond the project minimum detailed in Subsection 4.2.4 will require sixty (60) days written notice by SB to ArQule. If an FTE increase is required, ArQule will make a reasonable effort to increase the FTEs at the rate of at least ***** per quarter. If an FTE decrease is required, SB will make a reasonable effort to reduce FTEs at the rate of no more than ***** per quarter. SB will fund the FTEs applied to each project at the rates set forth in Section 7.4. SB may extend a project beyond the ***** minimum at its discretion, for additional ***** -month periods not to exceed a total of ***** additional years. SB will give ArQule at least ninety (90) days written notice before the ***** anniversary date of project commencement if SB desires to extend, and will estimate the additional time period in ***** month increments. Thereafter, SB will give ArQule at least ninety (90) days written notice before the end of the extension period for any subsequent extensions. In the event SB elects not to extend a project, SB shall have no further funding obligations with respect to such project. 4.2.6. Project Termination. At any time after a period of ***** from the initiation of a lead optimization project, SB may terminate the project for any reason upon ninety (90) days prior written notice to ArQule; provided that such notice period shall be reduced to sixty (60) days if SB reasonably determines that ArQule is not proceeding diligently to meet the deliverables defined in the corresponding workplan. In the event of termination, SB will have no further obligation to fund the FTEs involved in that project except for accrued expenses and subject to the following. If SB terminates the project based on a Licensed Compound Set during the first year of the project and such termination is not due to a lack of diligence by ArQule to meet the deliverables defined in the workplan, then (i) ArQule will have no obligation to refund any payments for FTEs actually received from SB and SB shall have an obligation to make any remaining quarterly payments for the FTEs committed by ArQule during the first year of the project, but ArQule shall apply the unused balance to other services and products under this Agreement (e.g., resynthesis fees, Mapping Array Library access fees, or another project) and (ii) the parties will endeavor to identify another mutually acceptable Licensed Compound Set to submit to ArQule as a lead optimization project. If the parties identify a mutually acceptable substitute project within ninety (90) days after SB terminates the original project, then SB shall have the benefit of the FTE rates in this Agreement for the balance of such ***** year period (plus the delay of up to ninety days while the parties decided on the substitute project). If the parties identify a substitute project after this ninety-day period expires, the FTE rate in the ***** Confidential Treatment has been requested for the marked portion. 11 12 Agreement will not apply but SB may still apply any unused credits of FTE payments to the new project. If SB terminates the project based on a Licensed Compound Set during the first year of the project and such termination is due to a lack of diligence by ArQule to meet the deliverables defined in the workplan, then SB shall have no further obligation to fund that project. 4.3. Program Phase. SB may declare Program Status for Royalty-Bearing Products using the criteria set forth in Schedule B or other criteria subsequently agreed upon by the parties. SB may select a Program Status Compound at any time. SB will make its selections of Program Status Compounds in its sole discretion under the criteria in Schedule B or other criteria subsequently agreed upon by the parties, however SB will not treat Licensed Compounds or ArQule Analog Compounds differently from other compounds that SB considers for Program Status. SB shall promptly furnish ArQule with written notice upon the selection of a Royalty-Bearing Product as a Program Status Compound. Effective upon receipt of this notice by ArQule, the Program Status Compound and all other ArQule Compounds and Analog Compounds in the same Licensed Compound Set will no longer be subject to reversion as described in Section 9.3. At the request of SB, ArQule will transfer synthetic protocols for Program Status Compounds if transfer did not previously occur. 4.4. IND Candidate. SB may designate a Royalty-Bearing Product as an IND Candidate Compound using the criteria set forth in Schedule C or other criteria subsequently agreed upon by the parties. SB may select an IND Candidate Compound at any time. SB will make its selections of IND Candidate Compounds in its sole discretion under the criteria in Schedule C or other criteria subsequently agreed upon by the parties, however SB will not treat Licensed Compounds or ArQule Analog Compounds differently from other compounds that SB considers as IND Candidates. SB shall promptly furnish ArQule with written notice upon the selection of a Royalty-Bearing Product as an IND Candidate Compound. 5. License Grants. 5.1. Screening Licenses. 5.1.1. Primary Targets. Subject to the terms and conditions of this Agreement, ArQule hereby grants to SB a nonexclusive, worldwide, royalty-free license (without the right to sublicense) under the ArQule Patent Rights and other rights in the ArQule Technology to screen ArQule Compounds delivered under the collaboration against ***** Targets and ***** Targets in the Field, but only during the Screening Phase. 5.1.2. Other Targets. Subject to the terms and conditions of this Agreement, and specifically subject to the limitations set forth in Subsection 4.1.6(b) above, ArQule hereby grants to SB a nonexclusive, worldwide, royalty-free license (without the right to sublicense) under the ArQule Patent Rights and other rights in ArQule Technology to screen ArQule Compounds delivered under the collaboration against Targets in the Field other than ***** Targets and ***** Targets, but only during the Screening Phase. 5.2 Development and Commercialization License. Subject to the terms and conditions of this Agreement, ArQule hereby grants to SB and its Affiliates the following licenses: ***** Confidential Treatment has been requested for the marked portion. 12 13 (i) an exclusive, worldwide license (with the right to sublicense) under the ArQule Patent Rights and other rights in ArQule Technology to conduct development of Licensed Compounds in the Field, including the right to develop Analog Compounds based on Licensed Compounds.; (ii) an exclusive, worldwide license (with the right to sublicense) under the ArQule Patent Rights and other rights in ArQule Technology to make, have made, use, have used, sell, and import Licensed Compounds and certain identified Analog Compounds, as described below, in the Field; and (iii) a non-exclusive, worldwide license (with the right to sublicense) under the ArQule Patent Rights and other rights in ArQule Technology to use chemical synthesis methods within the ArQule Patent Rights and ArQule Technology to make and have made Royalty-Bearing Products. SB and ArQule acknowledge and agree that the exclusive license granted under clause (i) of this Section prohibits ArQule from granting any third party any right or license to develop Analog Compounds based on Licensed Compounds in the Field, but does not extend to the composition or use of Analog Compounds except as follows. At any time during the term of this Agreement, SB may disclose to ArQule the structure of one or more Analog Compounds that SB desires to include within the license grant set forth in clause (ii) above. In such event, ArQule will promptly determine in good faith whether the identified Analog Compound(s) are not (a) licensed or otherwise committed to a third party in the Field or (b) committed to an internal ArQule program in the Field,. For purposes of (a) above, "committed" shall mean a third party with contractual or other legal rights to claim such compound for development and commercialization has notified ArQule in writing that such third party has claimed such compound for development and commercialization. For purposes of (b) above, "committed" shall mean that the compound has been designated by ArQule as committed to an internal development program at ArQule in accordance with its ordinary procedures, as evidenced by the status of such compound in its corporate database, and is under bona fide evaluation or is the subject of an active and funded internal development program at ArQule (without any use of information under this Agreement). If the identified Analog Compound(s) are not licensed or "committed", as defined above, in the Field, then ArQule shall include such Analog Compound(s) within the license grant set forth in clause (ii) above; otherwise, such Analog Compound(s) shall not be included in such license grant. SB further acknowledges and agrees that the license grant in clause (iii) of this Section is subject to the terms, conditions, and limitations of any agreement under which ArQule has acquired rights in a chemical synthesis method from a third party and, in such event, ArQule may require SB to enter into a separate sublicense agreement before such license grant shall take effect. Notwithstanding the definitions of ArQule Patent Rights and ArQule Technology, ArQule represents and warrants that SB will not incur any payment obligation to a third party as a result of the practice of the license grant in clause (iii) of this Section for third party licenses that ArQule has executed as of the Effective Date and ArQule covenants that ArQule shall notify SB prior to implementation of any ArQule Technology that would subject SB to a payment obligation to a third party as a result of the practice of the license grant in clause (iii) of this Section for third party licenses that ArQule executes after the Effective Date. In the event that SB decides to sublicense its rights under this 13 14 Section to a third party, SB shall furnish ArQule with written notice of the sublicense grant and shall ensure that all sublicense agreements conform to this Agreement. 6. Intellectual Property Rights. 6.1. Rights in Compounds. SB shall have the sole right to prepare, file, prosecute, and maintain Patent Rights that claim the composition or use of ArQule Analog Compounds or SB Analog Compounds developed by either party under this Agreement. ArQule shall assign to SB all right, title, and interest in any Patent Rights filed by SB that claim the composition or use of such ArQule Analog Compounds or SB Analog Compounds. Therefore, such Patent Rights are considered SB Patent Rights under this Agreement rather than Joint Patent Rights. 6.2. Ownership of Intellectual Property. Other than as expressly provided herein, neither party shall have any rights in Patent Rights and Technology that is invented, developed or discovered by the other party prior to the Effective Date or outside the research performed under this Agreement. Ownership of Patent Rights and Technology arising from the research performed under this Agreement shall be allocated in accordance with US patent law. 6.3. Management of Patent Rights. SB shall have sole responsibility for, and control over, the management of SB Patent Rights and ArQule shall have sole responsibility for, and control over, the management of ArQule Patent Rights; provided, however, that ArQule shall consult with SB with respect to any ArQule Patent Rights that claim an ArQule Compound that is part of a Licensed Compound Set. Each party will bear its own expenses in connection with such Patent Rights. In the case of Joint Technology, the JSC will decide whether to seek Joint Patent Rights claiming that Technology. If the JSC decides to seek any Joint Patent Rights under this Section 6.3, the parties shall jointly prepare, file, prosecute, and maintain such Patent Rights, and all related expenses shall be borne equally by the parties. In the event that one party declines to pay or desires to cease further payment of patent-related expenses for such Joint Patent Rights in any country and the other party desires to maintain the Joint Patent Rights, the withdrawing party may assign to the continuing party all rights in such Joint Patent Rights in such country and thereafter have no further obligation to pay such expenses. 6.4. Cooperation. Each party agrees to cooperate fully with the other in the preparation, filing, and prosecution of any Joint Patent Rights. ArQule agrees to cooperate fully with SB in the preparation, filing, and prosecution of any Patent Rights that ArQule has assigned to SB pursuant to Section 6.1. Such cooperation includes, but is not limited to: (i) executing all papers and instruments, or requiring its employees or agents, to execute such papers and instruments, so as to effectuate the ownership of Patent Rights as established under this Agreement and to enable the other party to apply for and to prosecute patent applications in any country; (ii) promptly informing the other party of any matters coming to such party's attention that may affect the preparation, filing, or prosecution of any such patent applications; and (iii) undertaking no actions that are potentially deleterious to the preparation, filing, or 14 15 prosecution of such patent applications. 6.5. Infringement. 6.5.l. Offensive Actions. With respect to infringement of any SB Patent Right or ArQule Patent Right claiming the composition or use of a Licensed Compound, Analog Compound, or Royalty-Bearing Product, SB shall have the primary right, but not the obligation, to enforce such Patent Right under its sole control and at its sole expense. In such event, SB shall be exclusively entitled to all proceeds or recoveries resulting therefrom, but from such proceeds or recoveries SB shall pay ArQule a royalty in accordance with Section 7.6. on sales lost to the infringer. In the event that SB declines to enforce such Patent Right with respect to a Royalty-Bearing Product where the sales of the alleged infringer are at least ***** percent ***** of the worldwide market for said product, then ArQule shall have the secondary right to enforce such Patent Right under its sole control and at its sole expense. In such event, ArQule shall be exclusively entitled to all proceeds or recoveries resulting therefrom. 6.5.2. Defensive Actions. SB will indemnify, defend, and hold harmless ArQule, its Affiliates, and their respective officers, directors, employees, and agents from any and all loss, damage, cost, and expense (including reasonable attorneys fees) and amounts paid in settlement arising from any actual or alleged infringement claim brought by a third party, in law or in equity, based on activities undertaken by SB or by ArQule at the direction of SB pursuant to this Agreement (except for claims based solely on the practice of an ArQule Patent Right or the use of ArQule Technology) or based on the manufacture or sale of a Royalty-Bearing Product. In the event that ArQule intends to claim indemnification under this Subsection, ArQule shall promptly notify SB of the infringement action and SB shall assume the defense of the action under its sole control, including the right to effect a settlement. A failure by ArQule to deliver notice to SB within a reasonable time shall relieve SB of its indemnity obligation under this Subsection to the extent such failure prejudices the ability of SB to defend such action. ArQule shall cooperate fully with SB and its legal representatives in the investigation and defense of the action. In the event of a settlement, SB shall obtain the consent of ArQule before agreeing to any settlement that imposes restrictions which are inconsistent with the rights and obligations of the parties under this Agreement. 6.6. ArQule Representation and Warranty. ArQule represents and warrants to SB that, to the best of ArQule's knowledge and belief, the practice of the combinatorial library design, synthesis, and analysis technology within the ArQule Technology (commonly referred to and collectively defined herein as the "AMAP Chemistry Operating System") as of the Effective Date does not infringe any Valid Claim of any Patent Right of a third party in a manner that would have a material adverse effect on SB as a result of this Agreement. In addition, ArQule covenants that, during the term of this Agreement, ArQule will use its best efforts to ensure that the practice of the AMAP Chemistry Operating System will not infringe any Valid Claim of any Patent Right of a third party in a manner that would have a material adverse effect on SB as a result of this Agreement. In the event that the preceding representation and warranty is untrue, or if ArQule breaches the preceding covenant, then upon written notice by SB to ArQule of such event: ***** Confidential Treatment has been requested for the marked portion. 15 16 (i) ArQule shall use its reasonable best efforts to modify the ArQule Technology such that the practice of the ArQule Technology no longer infringes the relevant Patent Right or to secure a license to such Patent Right at no cost to SB. (ii) ArQule will indemnify, defend, and hold harmless SB, its Affiliates, and their respective officers, directors, employees, and agents from any and all loss, damage, cost, and expense (including reasonable attorneys fees) and amounts paid in settlement arising from any claim brought by a third party, in law or in equity, based on such material breach. In the event that SB intends to claim indemnification under this Section, SB shall promptly notify ArQule of the infringement action and ArQule shall assume the defense of the action under its sole control, including the right to effect a settlement. A failure by SB to deliver notice to ArQule within a reasonable time shall relieve ArQule of its indemnity obligation under this Section to the extent such failure prejudices the ability of ArQule to defend such action. SB shall cooperate fully with ArQule and its legal representatives in the investigation and defense of the action. In the event of a settlement, ArQule shall obtain the consent of SB before agreeing to any settlement that imposes restrictions which are inconsistent with the rights and obligations of the parties under this Agreement. SB agrees that the maximum liability of ArQule under this Section, including without limitation legal expenses, damages, and settlement payments resulting from the indemnity granted in clause (ii) above, shall be limited to ***** dollars (*****). 7. Payments. 7.1. Compass Array Access Fee. In partial consideration of SB obtaining access to the Compass Array Library as set forth in Subsection 4.1.1 of this Agreement, SB shall pay to ArQule an access fee in the amount of *****, payable within forty-five (45) days of the Effective Date, upon invoice from ArQule. If SB, at its sole discretion, obtains a second copy of the Compass Array Library, SB shall pay to ArQule a fee in the amount of ***** payable within forty-five (45) days after SB receives the second copy, upon invoice from ArQule. 7.2. Compound Resynthesis Fees. In partial consideration of the production and delivery by ArQule of resynthesized Available Compounds pursuant to Subsection 4.1.3(a) and 4.1.5. or any applicable workplan, SB agrees to pay ArQule ***** per ***** mg and ***** for up to ***** mg of resynthesized Available Compound, payable within forty-five (45) days of delivery; provided, that, the aggregate funding for the resynthesis of all Available Compounds for each fiscal quarter shall not, unless SB expressly authorizes an increase, exceed ***** per fiscal quarter or ***** per fiscal year. 7.3. Mapping Array Delivery Fee. In partial of consideration of the delivery by ArQule to SB of Mapping Array Libraries in accordance with Subsection 4.1.2 hereof, SB shall pay ArQule ***** per Mapping Array Library, payable within forty-five (45) days of delivery, upon invoice from ArQule. ***** Confidential Treatment has been requested for the marked portion. 16 17 7.4. Optimization Program Funding. In partial consideration of the performance by ArQule of the lead optimization projects described in Section 4.2 hereof, SB shall pay ArQule for the FTEs assigned to such projects at the "Applicable FTE Rate" (as defined below) payable in advance in equal quarterly installments, with the first such payment to be made within forty-five (45) days of notification to the JSC of project initiation, and with each installment thereafter payable within five (5) business days of the first day of each fiscal quarter thereafter, upon invoice from ArQule. The "Applicable FTE Rate" will be determined as follows: (i) For the lead optimization project on an SB Compound (as described in Subsection 4.2.2(a)), the Applicable FTE Rate from project initiation through ***** shall be ***** per FTE for the first ***** FTEs and ***** for the next ***** FTEs, and the Applicable FTE rate from ***** onwards shall be ***** per FTE for up to ***** FTEs. SB and ArQule will negotiate a separate Applicable FTE Rate if the number of FTEs employed by ArQule for a project exceeds ***** at any time. (ii) For the lead optimization project on a Licensed Compound Set (as described in Subsection 4.2.2(b)), the Applicable FTE Rate from project initiation through ***** shall be ***** per FTE for the first ***** FTEs and ***** for the next ***** FTEs, and the Applicable FTE rate thereafter shall be ***** per FTE for up to ***** FTEs. SB and ArQule will negotiate a separate Applicable FTE Rate if the number of FTEs employed by ArQule for a project exceeds ***** at any time. The parties hereby acknowledge and agree that the FTE rate for any additional optimization programs will be negotiated in good faith by the parties and set forth in a separate agreement to be executed by the parties. 7.5. Milestone Payments. 7.5.1. *****Milestone Payments. (a) Payments. In partial consideration of the performance by ArQule of the activities described in Section 4.2., SB shall pay ArQule the following amount within forty-five (45) days after a compound resulting from such a project (whether synthesized by ArQule or SB) in which ArQule participated achieves *****. The amount to be paid upon achievement of each ***** will be calculated in accordance with the formula set forth below: ***** The above milestone payments shall be non-refundable and shall not be credited against royalties payable to ArQule under this Agreement. (b) Exception. No payment for achievement of the ***** Milestone will be made under this Subsection with respect to a particular optimization project if SB terminates that project due to lack of diligent efforts by ArQule pursuant to Subsection 4.2.6. hereof, regardless of whether such compound meets the criteria for an ***** ***** Confidential Treatment has been requested for the marked portion. 17 18 In addition, the parties agree that the ***** Milestone shall only be paid on the initial Royalty-Bearing Product to achieve such milestone within the same activity profile previously defined by SB and agreed by the JSC. 7.5.2. Other Development Milestone Payments. (a) Payments. In partial consideration of the delivery of the Compass Array Library and Mapping Array Libraries and the performance by ArQule of the optimization activities described in Section 4.2. of this Agreement, SB shall pay ArQule the following development milestone payments within forty-five (45) days after each occurrence of each event for each Royalty-Bearing Product, upon invoice from ArQule: ***** (b) Exceptions. The above milestone payments shall be non-refundable and shall not be credited against royalties payable to ArQule under this Agreement. However, the parties agree that development milestones shall only be paid on the initial Royalty-Bearing Product to achieve such milestone within the same activity profile previously defined by SB and agreed by the JSC; provided, that, if a second Royalty-Bearing Product within the same activity profile reaches a given milestone which would have resulted in a greater milestone payment, SB shall pay such difference. 7.5.3. Other Milestones. The parties shall negotiate in good faith the commercially reasonable financial terms pertaining to payments for achievement of development milestones relating to Royalty-Bearing Products based on compounds resulting from the screening described in Section 4.1.6 or for uses of a Royalty-Bearing Product within the Field for purposes other than as a human therapeutic or prophylactic for *****, which terms shall be set forth in a separate agreement. 7.6. Product Royalties. 7.6.1. Earned Royalties within the Field. In partial consideration of the performance by ArQule of the activities set forth in Article 4, SB shall pay to ArQule the following royalties on the incremental Net Sales of Royalty-Bearing Products within the Field in accordance with the procedures set forth in Article 8 hereof. ***** 7.6.2 Royalty Term. The foregoing royalty obligations shall commence with the first commercial sale of a Royalty-Bearing Product in any country and shall continue on a country-by-country basis for a period of ***** years after the first commercial sale (i.e. the date of first sale of a Royalty-Bearing Product in the ordinary course of business in any country by SB or an Affiliate or sublicensee of SB) of the Royalty-Bearing Product in such country. Upon expiration of the ***** year royalty payment obligations in a country, SB shall thereafter have, in perpetuity, a fully paid up license under Section 5.2 of this Agreement. ***** Confidential Treatment has been requested for the marked portion. 18 19 7.6.3. Other Royalties. The parties shall negotiate in good faith the financial terms pertaining to royalty payments for sales of Royalty-Bearing Products based on compounds resulting from the screening described in Subsection 4.1.6 or for uses of a Royalty-Bearing Product within the Field for purposes other than as a human therapeutic or prophylactic for *****, which terms shall be set forth in a separate agreement. 7.6.4 Third Party Royalties. SB shall be responsible for procuring such licenses as it deems, in its sole discretion, appropriate for the manufacture, use, marketing, sale or distribution of Royalty-Bearing Products by SB and its Affiliates and sublicensees, and for the payment of any amounts due third parties under such licenses; provided SB may offset, against the royalties owed to ArQule with respect to a Royalty-Bearing Product in a country, ***** of royalties that SB pays to a third party in order to license in the relevant country a Valid Claim covering the composition of a Licensed Compound contained in that Royalty-Bearing Product or the use of a synthetic protocol provided by ArQule to SB under this Agreement to manufacture that Royalty-Bearing Product, up to (i) in the case of an issued patent, a maximum of ***** or (ii) in the case of a patent application, a maximum of *****, of the royalty owed to ArQule in any quarter with respect to the applicable Royalty-Bearing Product in the applicable country. Any such amounts which are not credited in a quarter may be carried forward until expended. 8. Reports, Records, and Payment Procedures. 8.1. Royalty Reports and Payments. Within sixty (60) days after the conclusion of each Royalty Period, SB shall deliver to ArQule a report containing the following information: (i) the gross sales of Royalty-Bearing Products during the applicable Royalty Period in each country of sale in sufficient detail to permit confirmation of the accuracy of the royalty payment; (ii) adjustments and calculation of Net Sales for the applicable Royalty Period in each country of sale; and (iii) total Net Sales in U.S. dollars, together with the exchange rates used for conversion. If no payment is due to ArQule for any reporting period, the report shall so state. All such reports shall be considered Confidential Information under this Agreement. Concurrent with this report, SB shall remit to ArQule any payment due for the applicable Royalty Period. 8.2. Method and Currency of Payment. All amounts payable by SB to ArQule under this Agreement shall be by check or wire transfer for immediately available funds. All payments due to ArQule under this Agreement shall be payable in United States dollars. Conversion of foreign currency to U.S. dollars shall be made using the actual average exchange rates for such currency as used by SB in producing its quarterly and annual accounts, as confirmed by SB's auditors. Subject to Section 8.5, such payments shall be without deduction of exchange, collection, or other charges. If by law, regulation, or fiscal policy of a particular country, conversion into United States dollars or transfer of funds of a convertible currency to the United States is restricted or forbidden, SB shall give ArQule prompt written notice of such restriction, ***** Confidential Treatment has been requested for the marked portion. 19 20 which notice shall satisfy the payment deadlines in this Agreement. SB shall pay any amounts due to ArQule through whatever lawful methods ArQule reasonably designates; provided, however, that if ArQule fails to designate such payment method within thirty (30) days after being notified of the restriction, SB may deposit such payment in local currency to the credit of ArQule in a recognized banking institution selected by SB and identified by written notice to ArQule, and such deposit shall fulfill all obligations of SB to ArQule with respect to such payment. 8.3. Late Payments. Any payment by SB that is not paid on or before the date such payment is due under this Agreement shall bear interest, to the extent permitted by law, at two percentage points above the "Prime Rate" of interest as reported in the Wall Street Journal on the date payment is due, with interest calculated based on the number of days that payment is delinquent. 8.4. Records. SB shall maintain, and shall require its Affiliates and other authorized sellers of Royalty-Bearing Products to maintain, complete and accurate records of Royalty-Bearing Products made, used, or sold under this Agreement, and any amounts payable to ArQule in relation to such Royalty-Bearing Products, which records shall contain sufficient information to permit ArQule to confirm the accuracy of any reports delivered to ArQule in accordance with Section 8.1. SB shall retain such records relating to a given Royalty Period for at least five (5) years after the conclusion thereof. ArQule shall have the right, at its own expense, to cause an independent certified public accountant reasonably acceptable to SB to inspect such records during normal business hours for the sole purpose of verifying any reports and payments delivered under this Agreement. The accountant shall conduct the audit at a date and time reasonably acceptable to SB but not later than fifteen (15) business days after ArQule notifies SB of the audit. Such accountant shall not disclose to ArQule any information other than information relating to accuracy of reports and payments delivered under this Agreement and shall provide SB with a copy of any report given to ArQule. The parties shall reconcile any underpayment or overpayment within sixty (60) days after the accountant delivers the results of the audit. In the event that any audit performed under this Section reveals an underpayment in excess of five percent (5%) in any Royalty Period, SB shall bear the full cost of such audit. ArQule shall not exercise its audit right under this Section more than once in any twelve-month period. 8.5. Withholding and Similar Taxes. Any tax required to be withheld by SB or any Affiliate or sublicensee of SB under the laws of any foreign country for the account of ArQule under this Section 8 shall be promptly paid by SB or said Affiliate or sublicensee for and on behalf of ArQule to the appropriate governmental authority, and SB or said Affiliate or sublicensee shall furnish ArQule with proof of payment of such tax together with official or other appropriate evidence issued by the appropriate governmental authority sufficient to enable ArQule to support a claim for income tax credit in respect of any sum so withheld. 9. Diligence. 9.1. Diligence. SB shall use reasonable efforts to develop, manufacture, market, and sell a Royalty-Bearing Product based on each Licensed Compound Set in accordance with its scientific, medical, business and legal judgment. 20 21 9.2. Status Reports. SB will furnish ArQule with a brief ***** statement, within thirty (30) days after ***** of each calendar year, that describes the status of each Licensed Compound Set which remains under development by SB as a Royalty-Bearing Product. After SB completes development of a Royalty-Bearing Product, SB will promptly notify ArQule of the first commercial sale of that Royalty-Bearing Product in each country. In addition, SB agrees to inform ArQule at least ***** regarding the status of any SB Analog Compounds that SB develops based on SB Analog Compounds developed by the parties under this Agreement. 9.3. Return of ArQule Compounds. For a period of ***** after an ArQule Compound is designated as a Licensed Compound under this Agreement, or such longer period as ArQule is conducting a lead optimization project with respect to such Licensed Compound, SB shall be deemed to comply with the diligence requirements of Section 9.1. Thereafter, in the event that SB ceases to use reasonable efforts to develop at least one Licensed Compound or Analog Compound within a Licensed Compound Set as a Royalty-Bearing Product in accordance with Section 9.1, including without limitation the cessation of efforts to optimize such Licensed Compound Set prior to reaching Program Status (other than for lack of diligence by ArQule), then (i) rights in any ArQule Compounds within such Licensed Compound Set shall revert to ArQule, (ii) all licenses granted to SB under this Agreement with respect to such ArQule Compounds shall terminate, and (iii) SB shall assign to ArQule the ownership of such ArQule Compounds and all SB Patent Rights and Joint Patent Rights in the composition of such ArQule Compounds. Notwithstanding the foregoing, once SB designates a Licensed Compound within a Licensed Compound Set as a Program Status Compound, then the entire Licensed Compound Set will no longer be subject to this Section 9.3. 10. Confidential Information. 10.1. Designation of Confidential Information. Confidential Information that is disclosed in writing or by electronic transmission which can be converted into writing shall be marked with a legend indicating its confidential status. Confidential Information that is disclosed orally or visually shall be documented in a written notice prepared by the Disclosing party and delivered to the Receiving party within thirty (30) days of the date of disclosure; such notice shall summarize the Confidential Information disclosed to the Receiving Party and reference the time and place of disclosure. 10.2. Obligations. The Receiving Party agrees that it shall: (i) maintain all Confidential Information in strict confidence, except that the Receiving Party may disclose or permit the disclosure of any Confidential Information to its, and its Affiliates, directors, officers, employees, consultants, and advisors who are obligated to maintain the confidential nature of such Confidential Information and who need to know such Confidential Information for the purposes set forth in this Agreement; (ii) use all Confidential Information solely for the purposes set forth in, or as permitted by, this Agreement; and ***** Confidential Treatment has been requested for the marked portion. 21 22 (iii) allow its directors, officers, employees, consultants, and advisors to reproduce the Confidential Information only to the extent necessary to effect the purposes set forth in this Agreement, with all such reproductions being considered Confidential Information. 10.3. Exceptions. The obligations of the Receiving Party under Section 10.2. above shall not apply to the extent that the Receiving Party can demonstrate that certain Confidential Information: (i) was in the public domain prior to the time of its disclosure under this Agreement; (ii) entered the public domain after the time of its disclosure under this Agreement through means other than an unauthorized disclosure resulting from an act or omission by the Receiving Party; (iii) was independently developed or discovered by the Receiving Party without use of the Confidential Information; (iv) is or was disclosed to the Receiving Party at any time, whether prior to or after the time of its disclosure under this Agreement, by a third party having no fiduciary relationship with the Disclosing Party and having no obligation of confidentiality to the Disclosing Party with respect to such Confidential Information; or (v) is required to be disclosed to comply with applicable laws or regulations (such as disclosure to the FDA or the United States Patent and Trademark Office or to their foreign equivalents), or to comply with a court or administrative order, provided that the Disclosing Party receives prior written notice of such disclosure and that the Receiving Party takes all reasonable and lawful actions to obtain confidential treatment for such disclosure and, if possible, to minimize the extent of such disclosure. 10.4. Return of Confidential Information. Upon the termination of this Agreement, at the request of the Disclosing Party, the Receiving Party shall destroy or return to the Disclosing Party all originals, copies, and summaries of documents, materials, and other tangible manifestations of Confidential Information in the possession or control of the Receiving Party, except that the Receiving Party may retain one copy of the Confidential Information in the possession of its Legal Department solely for the purpose of monitoring its obligations under this Agreement. 10.5. Survival of Obligations. The obligations set forth in this Section shall remain in effect for a period of ***** years after termination of this Agreement, except that the obligations of the Receiving Party to destroy or return Confidential Information to the Disclosing Party shall survive until fulfilled. ***** Confidential Treatment has been requested for the marked portion. 22 23 11. Proprietary Materials. 11.1. Ownership. SB acknowledges and agrees that the ArQule Compounds and any other Proprietary Materials provided to SB and its Affiliates under this Agreement are and shall remain the property of ArQule. ArQule acknowledges and agrees that any SB Compounds and any other Proprietary Materials provided to ArQule under this Agreement are and shall remain the property of SB. The foregoing notwithstanding, the parties agree that ownership of any intellectual property rights in ArQule Analog Compounds and SB Analog Compounds shall be determined in accordance with Section 6. 11.2. Restrictions on Use and Transfer. SB shall use the ArQule Compounds only for the purposes contemplated by this Agreement, and, except as permitted under Section 5.2 above, shall not transfer the ArQule Compounds to any third party without the prior written consent of ArQule. Except as expressly permitted herein, SB shall not attempt to identify the ArQule Compounds in the Mapping Array Libraries or Compass Array Libraries. ArQule shall use the SB Compounds and SB Analog Compounds only for the purposes contemplated by this Agreement, and shall not transfer the SB Compounds or any SB Analog Compounds to any third party without the prior written consent of SB. In the case of Proprietary Materials other than Compounds, the Recipient agrees to use such Proprietary Materials only for the purposes indicated by the Provider, and shall not transfer the Proprietary Materials to any third party without the prior written consent of the Provider. The Recipient further agrees to inform its employees and consultants about the proprietary nature of the Proprietary Materials and to take reasonable precautions, at least as stringent as those observed by the Recipient to protect its own Proprietary Materials, to ensure that such employees and consultants observe the obligations of the Recipient under this Article 11. 11.3. Disposition of Unused Materials. At the request of the Provider, the Recipient will return or destroy any unused Proprietary Materials furnished by the Provider; provided, however, that subject to Section 4.1.6(b), the disposition of unused ArQule Compounds shall be made in accordance with Section 12.4. 11.4. Compliance with Law. The Recipient agrees to comply with all federal, state, and local laws and regulations applicable to the use, storage, disposal, and transfer of Proprietary Materials furnished by the provider, including without limitation the Toxic Substances Control Act (15 USC 2601 et seq.) and implementing regulations (in particular, 40 CFR 720.36 [Steering and Development Exemption]), the Food, Drug, and Cosmetic Act (21 USC 301 et seq.) and implementing regulations, and all Export Administration Regulations of the Department of Commerce. The Recipient assumes sole responsibility for any violation of such laws or regulations by the Recipient or any of its Affiliates. 11.5. Limitation of Liability. Any Proprietary Materials delivered pursuant to this Agreement are understood to be experimental in nature and may have hazardous properties. The Recipient should assume that the materials are dangerous and should use appropriate precautions. THE PROVIDER MAKES NO REPRESENTATIONS, AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, WITH RESPECT TO THE PROPRIETARY MATERIALS FURNISHED TO THE RECIPIENT. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A 23 24 PARTICULAR PURPOSE. EXCEPT AS SET FORTH IN SECTION 7.6.4, THE PROVIDER DISCLAIMS ANY WARRANTY, EXPRESS OR IMPLIED, THAT THE USE OF ANY PROPRIETARY MATERIALS WILL NOT INFRINGE ANY PATENT OR OTHER INTELLECTUAL PROPERTY RIGHTS OF A THIRD PARTY, AND THE PROVIDER SHALL HAVE NO LIABILITY RELATING THERETO. 24 25 12. Term and Termination. 12.1. Term. This Agreement shall commence on the Effective Date and shall remain in effect for a period of five (5) years, subject to extension by agreement of the parties or pursuant to Subsection 4.2.5 or unless earlier terminated as provided in this Article 12. 12.2. Material Breach. In the event that either party commits a material breach of any of its obligations under this Agreement and such party fails (i) to remedy that breach within sixty (60) days after receiving written notice thereof from the other party or (ii) to commence dispute resolution pursuant to Article 13, within sixty (60) days after receiving written notice of that breach from the other party, the other party may immediately terminate this Agreement upon written notice to the breaching party. 12.3. Force Majeure. Neither party will be responsible for delays resulting from acts beyond the control of such party, provided that the nonperforming party uses commercially reasonable efforts to avoid or remove such causes of nonperformance and continues performance hereunder with reasonable dispatch whenever such causes are removed. 12.4. Termination of Activities. In the event that all activities under Article 4 have been completed or terminated prior to the five-year expiration of the Agreement set forth in Section 12.1 above, including without limitation in the event of early termination of all activities pursuant to Subsection 4.2.6., this Agreement shall automatically terminate. 12.5. Effect of Termination. Termination of this Agreement shall not relieve the parties of any obligation accruing prior to such termination. The following provisions shall survive the expiration or termination of this Agreement: Articles 6, 8, 9, 10, 11, 13, 14; Sections 5.2., 7.5., 7.6., 12.5., 15.8., and 15.10.,. Notwithstanding the foregoing, if ArQule terminates this Agreement pursuant to Section 12.2., then (i) SB shall have no further right to screen or optimize ArQule Compounds pursuant to Article 4, or to develop and commercialize Program Status Compounds and (ii) SB shall immediately return all unused ArQule Compounds in a manner directed by ArQule. 13. Dispute Resolution. 13.1. Procedures Mandatory. The parties agree that any dispute arising out of or relating to this Agreement shall be resolved solely by means of the procedures set forth in this Article 13, and that such procedures constitute legally binding obligations that are an essential provision of this Agreement; provided, however, that all procedures and deadlines specified in this Article 13 may be modified by written agreement of the parties. If either party fails to observe the procedures of this Article 13, as modified by their written agreement, the other party may bring an action for specific performance in any court of competent jurisdiction. 25 26 13.2. Dispute Resolution Procedures. 13.2.1 Negotiation. In the event of any dispute arising out of or relating to this Agreement, the affected party shall notify the other party, and the JSC shall attempt in good faith to resolve the matter, subject to the approval of the senior management of both parties, within ten (10) days after the date such notice is received by the other party (the "Notice Date"). Any disputes not resolved by good faith discussions by the JSC shall be referred to the Chief Executive Officer of ArQule and the Chairman of Research and Development of SB, who shall meet at a mutually acceptable time and location within thirty (30) days after the Notice Date and attempt to negotiate a settlement. 13.2.2. Mediation. If the matter remains unresolved within sixty (60) days after the Notice Date, or if the senior executives fail to meet within thirty (30) days after the Notice Date, either party may initiate mediation upon written notice to the other party, whereupon both parties shall be obligated to engage in a mediation proceeding under the then current Center for Public Resources ("CPR") Model Procedure for Mediation of Business Disputes, except that specific provisions of this Section shall override inconsistent provisions of the CPR Model Procedure. The mediator will be selected from the CPR Panels of Neutrals. If the parties cannot agree upon the selection of a mediator within ninety (90) days after the Notice Date, then upon the request of either party, the CPR shall appoint the mediator. The parties shall attempt to resolve the dispute through mediation until one of the following occurs: (i) the parties reach a written settlement; (ii) the mediator notifies the parties in writing that they have reached an impasse; (iii) the parties agree in writing that they have reached an impasse; or (iv) the parties have not reached a settlement within one hundred and twenty (120) days after the Notice Date. 13.2.3. Trial without Jury. If the parties fail to resolve the dispute through mediation, or if neither party elects to initiate mediation, each party shall have the right to pursue any other remedies legally available to resolve the dispute, provided, however, that the parties expressly waive any right to a jury trial in any legal proceeding under this Article 13. 13.3. Preservation of Rights pending Resolution. 13.3.1. Performance to Continue. Each party shall continue to perform its obligations under this Agreement pending final resolution of any dispute arising out or relating to this Agreement; provided, however, that a party may suspend performance of its obligations during any period in which the other party fails or refuses to perform its obligations. 13.3.2. Provisional Remedies. Although the procedures specified in this Section 13 are the sole and exclusive procedures for the resolution of disputes arising out of relating to this Agreement, either party may seek a preliminary injunction or other provisional equitable relief if, in its reasonable judgment, such action is necessary to avoid irreparable harm to itself or to preserve its rights under this Agreement. 13.3.4. Statute of Limitations. The parties agree that all applicable statutes of limitation and time-based defenses (such as estoppel and laches) shall be tolled while the 26 27 procedures set forth in Subsections 13.2.1. and 13.2.2. are pending. The parties shall take any actions necessary to effectuate this result. 14. Indemnification and Insurance. 14.1. Indemnification. SB agrees to defend, indemnify and hold ArQule, its Affiliates and their respective directors, officers, employees, and agents (the "Indemnitees") harmless from all costs, judgments, liabilities, and damages assessed by a court of competent jurisdiction arising from claims asserted by a third party against ArQule, its Affiliates, or their respective directors, officers, employees, or agents as a result of any of the following: (i) actual or asserted violations by SB or its Affiliates, sublicensees, or third party manufacturers of any applicable law or regulation that relates to the manufacture, distribution, or sale of any Royalty-Bearing Product, including without limitation, any alleged or actual claim that such product was adulterated, misbranded, or mislabeled; (ii) claims for bodily injury, death, or property damage attributable to the manufacture, distribution, sale, or use by SB or its Affiliates, sublicensees, or third party manufacturers of any Royalty-Bearing Product; or (iii) a recall ordered by a governmental agency, or required by a confirmed failure, of any Royalty-Bearing Product, that is manufactured, distributed, or sold by SB, its Affiliates, sublicensees, or third party manufacturers. 14.2. Procedure. The Indemnitees agree to provide SB with prompt written notice of any claim, suit, action, demand, or judgment for which indemnification is sought under this Agreement. SB agrees, at its own expense, to provide attorneys reasonably acceptable to ArQule to defend against any such claim. The Indemnitees shall cooperate fully with SB in such defense and will permit SB to conduct and control such defense and the disposition of such claim, suit, or action (including all decisions relative to litigation, appeal, and settlement); provided, however, that any Indemnitee shall have the right to retain its own counsel, at the expense of SB, if representation of such Indemnitee by the counsel retained by SB would be inappropriate because of actual or potential differences in the interests of such Indemnitee and any other party represented by such counsel. SB agrees to keep ArQule informed of the progress in the defense and disposition of such claim and to consult with ArQule with regard to any proposed settlement. 14.3. Insurance. SB shall maintain appropriate product liability insurance or self-insurance with respect to development, manufacture, and sales of Royalty-Bearing Product in such amount as SB customarily maintains with respect to sales of its other products. SB shall each maintain such insurance for so long as it continues to manufacture or sell such products, and thereafter for so long as SB maintains insurance for itself covering such manufacture or sales. 15. Miscellaneous. 15.1. Publicity. Neither party shall reveal the terms of this Agreement or use the name of the other party in connection with any promotional statements to the public about the work performed under this Agreement or the relationship between the parties, whether in a press release, advertisement, promotional sales literature, or other promotional oral or written statements, without the prior written approval of the other party, which consent shall not be 27 28 unreasonably withheld or delayed, except for restatements of previously-approved statements and disclosures required by applicable law or regulation. 15.2. Relationship of Parties. For the purposes of this Agreement, each party is an independent contractor and not an agent or employee of the other party. Neither party shall have authority to make any statements, representations, or commitments of any kind, or to take any action which shall be binding on the other party, except as may be explicitly provided for herein or otherwise authorized in writing. 15.3. Representations and Warranties. Each party represents and warrants to the other party (i) that it has the legal right, power, and authority to enter into this Agreement, to extend the rights and licenses granted to the other party in this Agreement, and to fully perform its obligations under this Agreement, and (ii) that the performance of such obligations will not conflict with its charter documents or any agreements, contracts, or other arrangements to which it is a party. In the event that a party becomes aware that any of its representations and warranties under this Section 15.3 become untrue during the term of this Agreement, such party shall immediately furnish the other party with written notice which describes the facts in reasonable detail. 15.4. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument. 15.5. Headings. All headings in this Agreement are for convenience only and shall not affect the meaning of any provision hereof. 15.6. Binding Effect. This Agreement shall inure to the benefit of and be binding upon the parties and their respective lawful successors and permitted assigns. 15.7. Assignment. Neither party may assign this Agreement without the prior written consent of the other party, except that a party may assign this Agreement to an Affiliate or to a successor in connection with the merger, consolidation, or sale of all or substantially all of its assets or that portion of its business pertaining to the subject matter of this Agreement. 15.8. Notices. All notices, requests, demands and other communications required or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed to have been duly given upon the date of receipt if delivered by hand, recognized national overnight courier, confirmed facsimile transmission, or registered or certified mail, return receipt requested, postage prepaid, to the following addresses or facsimile numbers: 28 29 If to SB: SmithKline Beecham Pharmaceuticals 709 Swedeland Road P.O. Box 1539 King of Prussia, PA 19406-0939 Attn: Alliance Management Tel: 610-270-4800 Fax: 610-270-5964 with a copy (which shall not constitute notice) to: SmithKline Beecham Corporation One Franklin Plaza P.O. Box 7929 Philadelphia, PA 19101 Attn: US General Counsel Tel: 215-7514000 Fax: 215-751-3935 If to ArQule: ArQule, Inc. 19 Presidential Way Woburn, MA 01801-5140 Attn: President Tel: (781) 994-0300 Fax: (781) 994-0676 with a copy (which shall not constitute notice) to: ArQule, Inc. 19 Presidential Way Woburn, MA 01801-5140 Attn: Legal Department Tel: (781) 994-0300 Fax: (781) 994-0676 Either party may change its designated address and facsimile number by notice to the other party in the manner provided in this Section 15.8. 15.9. Amendment and Waiver. This Agreement may be amended, supplemented, or otherwise modified at any time, but only by means of a written instrument signed by both parties. Any waiver of any rights or failure to act in a specific instance shall relate only to such instance and shall not be construed as an agreement to waive any rights or fail to act in any other instance, whether or not similar. 29 30 15.10. Governing Law. This Agreement and the legal relations among the parties shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts irrespective of any conflict of laws principles. 15.11 Hart-Scott-Rodino Act. If required by law, the parties shall, at their own expense, prepare and make appropriate filings under Title II of the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, and the rules and regulations promulgated thereunder (16 C.F.R. 801.1 et. seq.) (the "Act") as soon as reasonably practicable. The parties shall co-operate in the antitrust clearance process and agree to furnish promptly to the FTC and the Antitrust Division of the Department of Justice any additional information reasonably requested by them in connection with such filings. 15.12. Severability. In the event that any provision of this Agreement shall, for any reason, be held to be invalid or unenforceable in any respect, such invalidity or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid or unenforceable provision had not been included herein. 15.13. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes any and all prior or contemporaneous oral and prior written agreements and understandings. 30 31 IN WITNESS WHEREOF, the undersigned have duly executed and delivered this Agreement as a sealed instrument effective as of the date first above written. SMITHKLINE BEECHAM CORPORATION By: /s/ Donald F. Parman ----------------------------------------- Name: Donald F. Parman Title: Chief Executive Officer ARQULE, INC. By: /s/ Stephen A. Hill, M.D. ----------------------------------------- Stephen A. Hill, M.D. President and Chief Executive Officer 31 32 Schedule A ARQULE COMPOUND CRITERIA The JSC shall have authority to modify any of the ArQule Compound criteria set forth herein. ***** Schedule B ACTIVITY PROFILE CRITERIA FOR PROGRAM STATUS Definition of Program Stages: ***** ***** Confidential Treatment has been requested for the marked portion. 32 33 Schedule C ***** ***** Confidential Treatment has been requested for the marked portion. 33 EX-10.37 5 b38132arex10-37.txt COMPOUND DISCOVERY COLLABORATION AGREEMENT 1 EXHIBIT 10.37 COMPOUND DISCOVERY COLLABORATION AGREEMENT This Research Collaboration and License Agreement (this "AGREEMENT") is entered into as of December 18, 2000 (the "EFFECTIVE DATE") by and between ArQule, Inc. ("ARQULE"), a Delaware corporation, and ACADIA Pharmaceuticals, Inc. ("ACADIA"), a Delaware corporation. RECITALS WHEREAS, ArQule and ACADIA previously entered into a Material Transfer and Screening Agreement dated April 7, 1998 (the "MTA") pursuant to which ArQule delivered certain of its Mapping Array(TM) compounds to ACADIA, and ACADIA screened those compounds against certain of its targets; WHEREAS, ACADIA detected activity of certain ArQule compounds against certain ACADIA targets; and WHEREAS, pursuant to the terms of the MTA, ArQule and ACADIA have negotiated this Agreement to expand their joint research activities and to pursue further development of the active compounds discovered by ACADIA. NOW, THEREFORE, ArQule and ACADIA hereby agree as follows: 1. DEFINITIONS. 1.1 "ACADIA TARGET" means each biological target nominated by ACADIA, accepted by ArQule, and selected by the Research Committee for use in the Collaboration, as further described in Subsection 3.3.1. below. 1.2 "ACTIVE COMPOUND" means any ArQule Compound, Targeted Compound, or Analog Compound which exhibits confirmed significant functional activity against an ACADIA Target in a primary screen, as determined by the Research Committee. 1.3 "AFFILIATE" means any legal entity (such as a corporation, partnership, or limited liability company) that is controlled by a party. For the purposes of this definition, the term "control" means (i) beneficial ownership of at least fifty percent (50%) of the voting securities of a corporation or other business organization with voting securities or (ii) a fifty percent (50%) or greater interest in the net assets or profits of a partnership or other business organization without voting securities. 1.4 "ANALOG COMPOUND" means a chemical compound that (i) exhibits ***** to an identified Active Compound or Targeted Compound, (ii) was discovered or developed using information obtained by screening one or more Active Compounds or Targeted Compounds, or (iii) was ***** parent ArQule Compound or Targeted Compound *****. ***** Confidential Treatment has been requested for the marked portion. 2 1.5 "ARQULE COMPOUND" means a small organic chemical molecule in a Mapping Array Set, Compass Array Set, or Biased Array Set (as described in the Collaboration Plan) and provided by ArQule to ACADIA as directed by the Research Committee under this Agreement or previously provided to ACADIA under the MTA. 1.6 "AVAILABLE COMPOUND" means an ArQule Compound or Analog Compound that is neither: (i) licensed or otherwise committed by ArQule or ACADIA to a third party in the Field nor (ii) committed to an internal ArQule or ACADIA program in the Field. In addition, all Targeted Compounds are Available Compounds. "AVAILABLE ACTIVE COMPOUND" means an Active Compound that is also an Available Compound. 1.7 "AVAILABLE TARGET" means an ACADIA Target that is neither: (i) licensed or otherwise committed by ACADIA or ArQule to a third party in the Field nor (ii) committed to an internal ACADIA or ArQule program in the Field. 1.8 "COLLABORATION" means the activities of ACADIA and ArQule carried out in performance of, and the relationship, rights and obligations of the parties established by, Articles 2 and 3 of this Agreement. 1.9 "COLLABORATION PLAN" means the overall plan for research and development activities for typical projects in the Collaboration, as set forth on EXHIBIT A. The Steering Committee may modify the Collaboration Plan as needed to advance the goals of the Collaboration. 1.10 "COLLABORATION PRODUCT" means any product containing as one of its constituents any Committed Compound or any Analog Compound based on a Committed Compound. 1.11 "COLLABORATION WORK PRODUCT" means, individually or collectively, (i) any Committed Target or Committed Target Set and its corresponding Committed Compounds or Committed Compound Set(s), GLP Toxicology Candidate, or IND Candidate, as well as all Technology pertaining to any of the foregoing or the manufacture, use or sale thereof, and (ii) all libraries of Targeted Compounds. 1.12 "COMMERCIALIZATION PLAN" means a plan developed and approved by the Steering Committee for the sale, license, or other transfer of commercial rights in Collaboration Work Product to a third party, as described in Section 3.7. 1.13 "COMMITTED COMPOUND" means (i) any Available Active Compound designated by the Research Committee as a Committed Compound pursuant to Subsection 3.4.2. and (ii) any Analog Compound developed by the parties in the course of an optimization program as described in Section 3.5., provided that such Analog Compound is an Available Compound as required under Section 3.5. 1.14 "COMMITTED COMPOUND SET" means a set of Committed Compounds that ***** as determined by the Research Committee. 1.15 "COMMITTED TARGET" means any Available Target designated by the Research Committee as a Committed Target pursuant to Subsection 3.4.2. ***** Confidential Treatment has been requested for the marked portion. 2 3 1.16 "COMMITTED TARGET SET" means a set of Committed Targets that are so closely related that the Research Committee has decided to group those Committed Targets into one optimization program under Section 3.5. or allocation under Subsection 9.6.2. 1.17 "CONFIDENTIAL INFORMATION" means any technical or business information furnished by one party (the "DISCLOSING PARTY") to the other party (the "RECEIVING PARTY") in connection with this Agreement. Such Confidential Information may include, without limitation, the identity or use of a chemical compound, the identity or use of a biological target, trade secrets, know-how, inventions, technical data or specifications, testing methods, business or financial information, research and development activities, Steering Committee reports, Research Committee reports, royalty reports, product and marketing plans, clinical development plans, and customer and supplier information. 1.18 "FIELD" means applications in *****. 1.19 "GLP TOXICOLOGY CANDIDATE" means a Committed Compound that meets or exceeds the criteria established by the Research Committee for a compound that is ready for submission to IND enabling toxicology studies, as documented in the Research Plan. 1.20 "GROSS REVENUES" means the aggregate amount of consideration received from a third party by either party in connection with an agreement to commercialize any Collaboration Work Product, including without limitation license fees, milestone payments, royalties, and the premium portion of equity payments at a premium to fair market value, but excluding funds specifically allocated to and actually used for the research and development of Collaboration Work Product. Gross Revenues shall be calculated without deduction of any costs, fees, or expenses (e.g., legal fees or finders fees) paid by a party in connection with the transaction. To the extent that any Gross Revenues are transferred to a party in a form other than cash, the amount of such Gross Revenues payable to the other party shall be based on the fair market value of such non-monetary consideration on the date of transfer, as determined in good faith by the parties. 1.21 "IND" means an investigational new drug application filed with the FDA prior to beginning clinical trials in humans or any comparable application filed with the regulatory authorities of a country other than the United States, prior to beginning clinical trials in humans in that country. 1.22 "IND CANDIDATE" means a Committed Compound that meets or exceeds the criteria established by the Research Committee for a compound that is ready for human clinical trials, including data sufficient to support the filing of an IND, as documented in the Research Plan. 1.23 "PATENT RIGHTS" means any United States patent application and any divisional, substitution, continuation, or continuation-in-part of such patent application (to the extent the claims are directed to subject matter specifically described therein) or inventor's certificate relating to such patent application, as well as any patent issued thereon and any reissue, reexamination, renewal, extension or term restoration of such patent, and any foreign counterparts to such patents and patent applications. "ARQULE PATENT RIGHTS" means Patent ***** Confidential Treatment has been requested for the marked portion. 3 4 Rights that are either (i) assigned solely to ArQule, (ii) assigned jointly to ArQule and a party other than ACADIA, or (iii) licensed to ArQule, in each case to the extent that ArQule has the ability to license or sublicense the rights required under this Agreement without payment to a third party. "ACADIA PATENT RIGHTS" means Patent Rights that are either (i) assigned solely to ACADIA, (ii) assigned jointly to ACADIA and a party other than ArQule, or (iii) licensed to ACADIA, in each case to the extent that ACADIA has the ability to license or sublicense the rights required under this Agreement without payment to a third party. "JOINT PATENT RIGHTS" means Patent Rights (i) in Committed Compounds and their use against Committed Targets; (ii) in Targeted Compounds and their uses; or (iii) that are assigned to both ArQule and ACADIA as joint owners or are otherwise jointly invented by one or more employees or consultants of ACADIA and one or more employees or consultants of ArQule in connection with the Collaboration. 1.24 "RESEARCH COMMITTEE" means the Research Committee described in Section 2.1. The Research Committee manages and directs the research and development activities in the Collaboration. 1.25 "RESEARCH MATERIALS" means any tangible research materials, whether biological, chemical, physical, or otherwise. "PROPRIETARY RESEARCH MATERIALS" means any Research Materials that a party designates as proprietary or confidential, including without limitation (a) all ArQule Compounds, and (b) all expressed proteins for ACADIA Targets provided by ACADIA in the Collaboration. 1.26 "RESEARCH PLAN" means the specific, detailed plan for research and development activities in the Collaboration that is developed by the Research Committee and approved by the Steering Committee. The parties anticipate that they will update the Research Plan on at least a quarterly basis. 1.27 "RESERVED COMPOUND" means an Available Compound that has been reserved by the parties for the Collaboration as described in Subsection 3.4.1. 1.28 "RESERVED COMPOUND SET" means a set of Reserved Compounds that share substantial chemical or structure homology, and which exhibit significant functional activity for the same Reserved Target, or which share other common characteristics such that the Research Committee has decided, in its discretion, to group those Reserved Compounds for evaluation under Section 3.4. or for allocation under Subsection 9.6.2. 1.29 "RESERVED TARGET" means an Available Target that has been reserved by the parties for the Collaboration as described in Subsection 3.4.1. 1.30 "RESERVED TARGET SET" means a set of Reserved Targets that are so closely related that the Research Committee has decided, in its discretion, to group those Reserved Targets for evaluation under Section 3.4. or allocation under Subsection 9.6.2. 1.31 "STEERING COMMITTEE" means the Steering Committee described in Section 2.2. of this Agreement. The Steering Committee has overall authority within the Collaboration, and specifically has approval authority over financial decisions. 4 5 1.32 "TARGETED COMPOUND" means a compound in a library focused on a target class, which library is developed jointly by the parties within the Collaboration, as more particularly described in the Collaboration Plan and Research Plan. 1.33 "TECHNOLOGY" means any proprietary development, idea, design, concept, technique, process, invention, Research Material, discovery, or improvement, whether or not patentable or copyrightable. "ARQULE TECHNOLOGY" means Technology that is either (i) assigned solely to ArQule, (ii) assigned jointly to ArQule and a party other than ACADIA, or (iii) licensed to ArQule, in each case to the extent that ArQule has the ability to license or sublicense the rights required under this Agreement without payment to a third party. "ACADIA TECHNOLOGY" means Technology that is either (i) assigned solely to ACADIA, (ii) assigned jointly to ACADIA and a party other than ArQule, or (iii) licensed to ACADIA, in each case to the extent that ACADIA has the ability to license or sublicense the rights required under this Agreement without payment to a third party. "COLLABORATION TECHNOLOGY" means (i) all Committed Compounds and their use against Committed Targets, (ii) all Targeted Compounds and their uses, and (iii) any Technology that is developed, invented, or discovered jointly by one or more employees or consultants of ACADIA and one or more employees or consultants of ArQule in connection with the Collaboration. 2. MANAGEMENT OF COLLABORATION. 2.1 RESEARCH COMMITTEE. 2.1.1 CREATION OF RESEARCH COMMITTEE. The parties hereby create a Research Committee with at least four (4) members, with equal representation from each party. The members initially designated by ACADIA are ***** and *****, and the members initially designated by ArQule are ***** and *****. Either party may change its representatives on the Research Committee at any time upon written notice to the other party. The chairperson of the Research Committee shall be designated annually on an alternating basis between the parties. The chairperson shall initially be *****. The party not designating the chairperson shall designate one of its representatives as secretary to the Research Committee for such *****. 2.1.2 MEETINGS OF THE RESEARCH COMMITTEE. Regular meetings of the Research Committee shall be held within ***** of the end of each calendar quarter, or at such other times as the parties may deem appropriate, at such times and places as the members of the Research Committee shall from time to time agree. Special meetings of the Research Committee may be called by either party on ***** written notice to the other party unless notice is waived by the parties. All meetings shall alternate between the offices of the parties unless the parties otherwise agree. The chairperson shall be responsible for sending notice of meetings to all members. In the event a Research Committee member is unable to attend a meeting of the Research Committee, such Research Committee member may designate an alternate member who will serve solely for that Research Committee meeting. 2.1.3 DECISIONS OF RESEARCH COMMITTEE. A quorum of the Research Committee shall be present at any meeting of the Research Committee if at least one representative of each party is present at such meeting in person or by telephone. If a quorum ***** Confidential Treatment has been requested for the marked portion. 5 6 exists at any meeting, the unanimous consent of all members of the Research Committee present at such meeting is required to take any action on behalf of the Research Committee. 2.1.4 RESPONSIBILITIES OF RESEARCH COMMITTEE. The Research Committee shall be responsible for the day-to-day conduct and progress of the Collaboration, including without limitation: (i) preparing, approving, and updating the Research Plan and the annual budget; (ii) managing all technical aspects of the Collaboration, including all research and development activities; (iii) providing a forum for the exchange of scientific information among the scientists participating in the Collaboration; (iv) resolving matters involving scientific questions; (v) determining the criteria of significant functional activity necessary for an ArQule Compound, Targeted Compound, or Analog Compound to qualify as an Active Compound and confirming that an ArQule Compound, Targeted Compound, or Analog Compound qualifies as an Active Compound; (vi) maintaining records of Reserved Compounds and Reserved Targets and establishing Reserved Compound Sets and Reserved Target Sets; (vii) designating Available Active Compounds as Committed Compounds, establishing Committed Compound Sets, and adding and removing compounds from Committed Compound Sets; and (viii) designating Available Targets as Committed Targets, establishing Committed Target Sets, and adding and removing targets from Committed Target Sets. 2.1.5 RESEARCH COMMITTEE REPORTS. Within ***** following each meeting of the Research Committee held pursuant to Subsection 2.1.2., the secretary of the Research Committee shall prepare and send to each party a written report of actions taken at the meeting in such form and containing such detail as shall be determined by the Research Committee. 2.1.6 DEADLOCK. In the event that the Research Committee cannot reach agreement with respect to any matter that is subject to its decision-making authority, then the matter shall be referred to the Steering Committee for resolution. 2.2 STEERING COMMITTEE. 2.2.1 CREATION OF STEERING COMMITTEE. The parties hereby also create a Steering Committee with at least six 6) members, with equal representation from each party. The members initially designated by ACADIA are *****. The members initially designated by ArQule are *****. Either party may change its representatives on the Steering Committee at any ***** Confidential Treatment has been requested for the marked portion. 6 7 time upon written notice to the other party. The chairperson of the Steering Committee shall be designated annually on an alternating basis between the parties. The initial chairperson of the Steering Committee shall be *****. The party not designating the chairperson shall designate one of its representatives as secretary of the Steering Committee for such *****. 2.2.2 MEETINGS OF THE STEERING COMMITTEE. Regular meetings of the Steering Committee shall be held within ***** of the end of each calendar year, or at such other times as the parties may deem appropriate, at such times and places as the members of the Steering Committee shall from time to time agree. Special meetings of the Steering Committee may be called by either party on ***** written notice to the other party unless notice is waived by the parties. All meetings shall alternate between the offices of the parties unless the parties otherwise agree. In the event a Steering Committee member is unable to attend a meeting of the Steering Committee, such Steering Committee member may designate an alternate member who will serve solely for that Steering Committee meeting. 2.2.3 DECISIONS OF THE STEERING COMMITTEE. Unless otherwise specifically designated as a responsibility of the Research Committee pursuant to Subsection 2.1.4., all decisions regarding the contractual and financial relationship created by this Agreement shall be made by the Steering Committee acting in accordance with this Agreement or by agents duly authorized in writing by the Steering Committee. A quorum of the Steering Committee shall be present at any meeting of the Steering Committee if at least one representative of each party is present at such meeting in person or by telephone. If a quorum exists at any meeting, the unanimous consent of all members of the Steering Committee present at such meeting is required to take any action on behalf of the Steering Committee. 2.2.4 RESPONSIBILITY OF STEERING COMMITTEE. The Steering Committee shall be responsible for approving long-term objectives for, and evaluating the progress of, the Collaboration, including without limitation: (i) approving all updates to the Research Plan and any changes to the Collaboration Plan; (ii) approving the annual budget for the Collaboration; (iii) reviewing and approving involvement of third parties in the Collaboration; (iv) developing Commercialization Plans and managing commercialization of Collaboration Work Product; (v) resolving deadlocks of the Research Committee; and (vi) determining the number of members for both the Research Committee and Steering Committee, beyond the minimum of four members. 2.2.5 STEERING COMMITTEE REPORTS. Within ten (10) days following each meeting of the Steering Committee held pursuant to Subsection 2.2.2., the secretary of the Steering Committee shall prepare and send to the members of the Steering Committee a detailed ***** Confidential Treatment has been requested for the marked portion. 7 8 written report of actions taken at the meeting in such form and containing such detail as shall be determined by the Steering Committee. 2.2.6 DEADLOCK. In the event that the Steering Committee declares a deadlock with respect to, or fails to reach agreement within sixty (60) days as to, any matter relating only to specific activities under the Collaboration (such as designation of Active Available Compounds as Committed Compounds; designation of ACADIA Targets as Committed Targets; the initiation or conduct of lead optimization or preclinical development activities; approval of the annual budget or changes to the Research Plan; or approval of a Commercialization Plan) the matter shall not be subject to dispute resolution under Article 10, but shall be referred to the Chief Executive Officers of each party for resolution within sixty (60) days after the date the deadlock is reached, subject to extension by mutual agreement. If the Chief Executive Officers fail to resolve the matter within the sixty-day period, or such other period that the parties mutually establish, the Agreement will terminate pursuant to Section 9.3. Any other unresolved disagreements within the Steering Committee and relating to this Agreement shall be referred to dispute resolution in accordance with the procedures set forth in Article 10. 3. CONDUCT OF COLLABORATION 3.1 SCOPE OF COLLABORATION. During the Collaboration, the parties will (i) perform lead generation activities using ArQule Compounds and multiple ACADIA Targets to identify Active Compounds, (ii) perform lead qualification activities on Reserved Compounds and Reserved Targets to select Committed Compounds and Committed Targets for lead optimization efforts, (iii) perform lead optimization activities on Committed Compound Sets to develop one or more GLP Toxicology Candidates, and (iv) if appropriate, conduct work on one or more GLP Toxicology Candidates to develop IND Candidates, in each case as further described below. The parties may also develop libraries of Targeted Compounds that are focused on a particular target class, and then use the Targeted Compounds for lead generation, as described below. The overall objective of the Collaboration is to discover and develop compounds that demonstrate potential as human therapeutic products, and to sell, license, or otherwise transfer commercial rights to those compounds to third parties. 3.2 GENERAL RESPONSIBILITIES OF EACH PARTY. In general, the parties intend that ACADIA will be responsible for biology-related tasks relating to the ACADIA Targets and ArQule will be responsible for chemistry-related tasks relating to the ArQule Compounds, but only until identification of a GLP Toxicology Candidate. If the parties decide to develop a GLP Toxicology Candidate into an IND Candidate, they will share responsibility for the necessary preclinical activities through the Research Committee and Steering Committee. This allocation of responsibilities reflects the expected contributions from each party. However, the Research Committee has discretion to allocate specific research and development tasks on a case-by-case basis to the party that has the best current capability and capacity to complete the task and advance the project. The actual responsibilities of each party will be determined by the Research Committee and Steering Committee and described in the Collaboration Plan or Research Plan. 8 9 3.3 LEAD GENERATION. 3.3.1 TARGET SELECTION. The Research Committee will select which ACADIA Targets to screen in the Collaboration from among those nominated by ACADIA and accepted by ArQule. ACADIA will only nominate Available Targets for ACADIA. ArQule will decline to accept any ACADIA Targets that are not Available Targets for ArQule. The initial ACADIA Targets selected by the Research Committee are set forth in the initial Research Plan. After the Research Committee selects an ACADIA Target, ACADIA and ArQule agree to notify the Research Committee as soon as possible before taking any actions which could remove the status of that ACADIA Target as an Available Target. In such event, the Research Committee will immediately remove that ACADIA Target from the Collaboration. 3.3.2 COMPOUND SELECTION. The Research Committee will decide which libraries of ArQule Compounds to screen in the Collaboration (e.g., Compass Array Sets, Biased Array Sets, or Mapping Array Sets, as described in the Collaboration Plan). The Research Committee may also decide to screen Targeted Compounds in focused libraries developed by the parties for a target class, if any, as described in the Collaboration Plan. The Research Committee may also decide to screen Analog Compounds developed by the parties for a different ACADIA Target. 3.3.3 PROCEDURES FOR ARQULE COMPOUNDS. The parties will screen ArQule Compounds against ACADIA Targets as directed by the Research Committee and described in the Collaboration Plan and Research Plan. Initially, ArQule will not disclose structures of individual ArQule Compounds. ArQule will disclose to ACADIA the structures of Active Compounds that are Available Compounds for ArQule. ACADIA will then determine whether those Active Compounds are Available Compounds for ACADIA. If an Active Compound is an Available Compound for both parties, each party will preserve the availability of the Active Compound and the corresponding ACADIA Target and proceed to confirm activity as described in Section 3.4. and in the Collaboration Plan. In contrast, if a party determines that an Active Compound is not an Available Compound for such party, the parties shall immediately cease all information disclosure and activities under this Agreement with respect to that Active Compound; however, the parties shall use reasonable efforts to monitor whether that Active Compound later becomes an Available Compound and, in such event, shall notify the other party and then proceed in accordance with Section 3.4. Any information regarding the activity of these Active Compounds that are not Available Compounds for the ACADIA Targets shall remain subject to the restrictions on Confidential Information set forth in Article 7. 3.3.4 PROCEDURES FOR TARGETED COMPOUNDS. If the parties develop or one or more focused compound libraries of Targeted Compounds for a target class, as described in the Collaboration Plan, the parties will screen those Targeted Compounds against ACADIA Targets as directed by the Research Committee and described in the Collaboration Plan and Research Plan. Both parties shall have access to the structures of all Targeted Compounds and shall maintain Targeted Compounds as Available Compounds during the Collaboration. Therefore, unlike the procedures for ArQule Compounds, a determination of availability is unnecessary. 9 10 3.4 LEAD QUALIFICATION. 3.4.1 SELECTION OF RESERVED COMPOUNDS AND RESERVED TARGETS. The parties expect to discover multiple series of Available Active Compounds with activity for multiple ACADIA Targets in the course of screening under the Research Plan. The Research Committee will group the various ACADIA Targets in multiple batches for screening. After each batch of ACADIA Targets is screened, the Research Committee will review the various combinations of Available Active Compounds and ACADIA Targets for which activity was detected and decide which Available Active Compounds and ACADIA Targets from that batch of screening, if any, should progress to further qualification in secondary screens and ADMET assays as described in the Collaboration Plan and Research Plan. For those Available Active Compounds and ACADIA Targets that the Research Committee decides to pursue, the parties will designate the Available Active Compounds as Reserved Compounds and the ACADIA Targets as Reserved Targets under this Agreement and reserve those compounds and targets exclusively for the Collaboration for a period of *****, subject to extension by the Research Committee, while secondary screens and ADMET assays are conducted. The Research Committee may also group Reserved Compounds as a Reserved Compound Set and Reserved Targets as a Reserved Target Set. All remaining Available Active Compounds and ACADIA Targets that the Research Committee has declined to advance to secondary screening shall automatically be released from their reserved status; however, any information regarding the activity of these Available Compounds for the ACADIA Targets shall remain subject to the restrictions on Confidential Information set forth in Article 7. 3.4.2 SELECTION OF COMMITTED COMPOUNDS AND COMMITTED TARGETS. The parties expect that the Research Committee will further qualify and prioritize the various opportunities presented by the combinations of Reserved Compounds and Reserved Targets as described in the Collaboration Plan and Research Plan. In order to facilitate this process, ArQule shall disclose to ACADIA the structures, but not the locations, of inactive ArQule Compounds from each Mapping Array Set from which Reserved Compounds are selected. ArQule shall also produce and deliver to ACADIA resynthesized samples of selected Reserved Compounds, as directed by the Research Committee. ACADIA shall test the resynthesis samples of Reserved Compounds in various assays as directed by the Research Committee and in accordance with the Research Plan. The Research Committee shall then review the data and, after consideration, designate ***** Reserved Targets and their corresponding Reserved Compounds as Committed Targets and Committed Compounds under this Agreement. The Research Committee has discretion to replace ***** Committed Targets and their corresponding Committed Compounds at any time as new batches of ACADIA Targets and ArQule Compounds and Targeted Compounds are screened and new Reserved Targets and Reserved Compounds are identified. The Research Committee may increase the number of Committed Targets and their Committed Compounds at any time, with approval of the Steering Committee. Any Reserved Targets and their corresponding Reserved Compounds, if any, that have met the predefined criteria for consideration as Committed Targets and Committed Compounds but which were not selected by the Research Committee shall be allocated between the parties as provided in Section 9.6. All other Reserved Targets and Reserved Compounds, if any, shall automatically be released from their reserved status; however, any information regarding the activity of these Reserved Compounds for the Reserved Targets shall remain subject to the restrictions on Confidential Information set forth in Article 7. ***** Confidential Treatment has been requested for the marked portion. 10 11 3.5 LEAD OPTIMIZATION. The Research Committee will update the Research Plan to provide for the accelerated lead optimization of the selected Committed Compound Sets with Committed Targets in the Collaboration, subject to Steering Committee approval. The Research Plan will set project priorities and define success criteria for a GLP Toxicology Candidate. As described in the Collaboration Plan, in a typical project the parties will iteratively develop and test Analog Compounds based on Committed Compounds. The parties will determine whether a proposed Analog Compound is an Available Compound before synthesis, and only Available Compounds will proceed to synthesis and testing in the Collaboration. The Analog Compounds developed by the parties shall automatically become Committed Compounds under this Agreement and, therefore, the Committed Compound Set for the Committed Target will likely expand as a result of the lead optimization efforts. At the discretion of the Research Committee, the parties may also use such Analog Compounds in primary screens against other ACADIA Targets. The parties anticipate that lead optimization of Committed Compounds will occur in two stages: (i) In the first stage, the parties will develop Analog Compounds as combinatorial libraries to explore the promise of the Committed Compound Set for the Committed Target. The parties will test these Analog Compounds for various properties determined by the Research Committee to predict whether the Committed Compound Set may eventually meet the defined success criteria for a GLP Toxicology Candidate. The parties will decide whether to proceed to stage two for a given Committed Compound Set within *****. (ii) In the second stage, the parties intend to concentrate their efforts on developing ***** and ***** corresponding Committed Compound Set(s) to identify a GLP Toxicology Candidate, with ***** from the first stage. The parties shall maintain a level of effort determined by the Research Committee for the *****. The Research Committee may release Committed Targets and the corresponding Committed Compound Set(s) that are no longer of interest to the Collaboration or which are no longer the subject of the active efforts by the parties, as determined by the Research Committee and subject to Steering Committee approval, in which case the allocation provisions of Section 9.6. shall apply. Lead optimization activities will continue with respect to a Committed Target until the Research Committee and Steering Committee decide to stop further efforts. The parties anticipate that lead optimization activities will continue with respect to a Committed Target until the parties (i) develop an acceptable GLP Toxicology Candidate, (ii) determine that they are unlikely to develop an acceptable GLP Toxicology Candidate, or (iii) decide to seek commercialization of the Committed Compound Set(s) and Committed Target as described below. 3.6 PRECLINICAL DEVELOPMENT. At the discretion of the Steering Committee, the parties may decide to conduct the necessary preclinical development activities to advance one or more GLP Toxicology Candidates to become IND Candidates, as described in the Collaboration Plan. In such event, the Research Committee will update the Research Plan to provide for such activities, subject to approval of the Steering Committee. These preclinical development activities will continue with respect to a GLP Toxicology Candidate until the Research Committee and Steering Committee decide to stop further efforts. The parties anticipate that ***** Confidential Treatment has been requested for the marked portion. 11 12 these preclinical development activities will continue with respect to a GLP Toxicology Candidate until the parties (i) develop an acceptable IND Candidate, (ii) determine that they are unlikely to develop an acceptable IND Candidate, or (iii) decide to seek commercialization of the GLP Toxicology Candidate and the corresponding Committed Target as described below. 3.7 COMMERCIALIZATION. At any time during the Collaboration, the Steering Committee may decide to sell, license, or otherwise transfer commercial rights in Collaboration Work Product to a third party. In such event, the Steering Committee will develop and approve a Commercialization Plan for such Collaboration Work Product. Unless otherwise determined by the Steering Committee, the Commercialization Plan will (i) describe the expectations of the parties regarding the commercial value of the Collaboration Work Product and potential Collaboration Products, (ii) set forth a marketing plan for the Collaboration Work Product (e.g., best potential customers), and (iii) state the respective responsibilities of each party for commercialization of the Collaboration Work Product (e.g., lead negotiator). The Steering Committee will manage the commercialization process. Alternatively, one party may purchase the interest of the other party in particular Collaboration Work Product on negotiated terms in a voluntary transaction. In such event, the separately negotiated agreement shall supersede the terms of this Agreement with respect to that Collaboration Work Product. The Steering Committee may also decide to sell, license, or otherwise transfer commercial rights in one or more focused libraries of Targeted Compounds developed by the parties during the Collaboration. In such event, the Steering Committee will develop and approve a Commercialization Plan for this Collaboration Work Product. 3.8 REPORTS AND RECORDS. Each party agrees to promptly and regularly communicate to the other party all research results from the Collaboration, including quarterly reports to the Research Committee detailing all tests conducted and results obtained by such party in connection with the Collaboration. Each party shall prepare and maintain adequate records, including bound laboratory notebooks maintained in accordance with standard scientific procedures, containing all appropriate data reflecting all research results from the Collaboration. In addition, each party shall retain under appropriate conditions any necessary or desirable samples of research materials that are developed or used in the Collaboration. 4. ALLOCATION OF EXPENSES AND REVENUES. 4.1 EXPENSES. The Research Committee shall establish an annual budget for all activities in the Collaboration, subject to Steering Committee approval. Each party shall bear the expenses of its respective activities under the Research Plan in accordance with the annual budget, except that the parties will share equally any expenses payable (i) to third party service providers or (ii) incurred in connection with preclinical development activities under Section 3.6. above, provided such expenses are approved in advance by the Steering Committee and included in the annual budget. The Research Committee and Steering Committee shall use their best efforts to ensure that the resource and value contributions of each party are approximately equal on an annual basis. Any significant deviations from the annual budget must receive Steering Committee approval. Each party shall also pay fifty percent (50%) of all direct expenses (e.g., legal fees, travel) incurred by either party in connection with commercialization activities approved by the Steering Committee pursuant to Section 3.7. The Steering Committee has the right to refuse payment of expenses that are not properly documented or are unreasonably 12 13 excessive. Each party shall promptly make payments to third parties, or reimburse the other party, for expenses owed by such party as set forth in this Section. 4.2 REVENUES. Each party shall receive fifty percent (50%) of all Gross Revenues received in connection with Collaboration Work Product sold, licensed or transferred to a third party under Section 3.7, provided that each party has contributed approximately equal resources and value to the Collaboration in accordance with the Research Plan and the annual budget. In the event that one party expends greater resources or contributes greater value than the other party in the Collaboration, as formally recognized by the Steering Committee and documented in the Research Plan or annual budget, the Steering Committee will compensate the party with the greater resource expenditure or value contribution in a manner reasonably acceptable to both parties. 4.3 RECORDS. Each party shall establish separate and distinct accounting records (but not necessarily separate general ledgers) such that the expenditures for the Collaboration are direct and transparent. As a guideline, each party should have separate project records supported by time records and records of direct expenses attributable to the Collaboration. Each party shall maintain these records for a period of at least ***** after the conclusion of the applicable calendar year. Each party shall have the right, at its own expense, to cause an independent certified public accountant reasonably acceptable to the other party to inspect such records during normal business hours for the sole purpose of verifying the expenditures reported under this Agreement. The accountant shall conduct the audit at a date and time reasonably acceptable to the audited party but not later than ***** after the audited party is notified of the audit. Such accountant shall not disclose to the requesting party any information other than information relating to the accuracy of expenditures reported under this Agreement and shall provide the audited party with a copy of any report given to the requesting party. In the event of any discrepancy, the parties shall promptly reconcile the discrepancy to achieve the results set forth in Sections 4.1. and 4.2. Each party may exercise its audit right not more than *****. 5. INTELLECTUAL PROPERTY RIGHTS. 5.1 LICENSE GRANTS. 5.1.1 CROSS-LICENSES AND CROSS-ASSIGNMENT. (i) ArQule hereby grants ACADIA a worldwide, royalty-free, non-exclusive license under the ArQule Patent Rights, Joint Patent Rights, and other rights in ArQule Technology and Collaboration Technology to *****. (ii) ACADIA hereby grants ArQule a worldwide, royalty-free, non-exclusive license under the ACADIA Patent Rights, Joint Patent Rights, and other rights in ACADIA Technology and Collaboration Technology to *****. (iii) To the extent that any Patent Rights in any Committed Compound or its use against any Committed Target or in any Targeted Compound or its use are not assigned to, or controlled by, both ArQule and ACADIA as joint owners or are not otherwise jointly invented by one or more employees or consultants of ACADIA and one or more employees or consultants of ArQule in connection with the Collaboration, *****. ***** Confidential Treatment has been requested for the marked portion. 13 14 5.1.2 COMMERCIALIZATION LICENSES. In the event that the parties sell, license, or otherwise transfer commercialization rights in Collaboration Work Product to a third party pursuant to Section 3.7. above, each party hereby covenants and agrees to grant to such third party any rights and licenses under such party's Patent Rights and Technology as are reasonably necessary for such third party to exploit such Collaboration Work Product in accordance with the terms of a written agreement between the parties and such third party that is consistent with the Commercialization Plan applicable to such Collaboration Work Product, and to provide reasonable warranties of title, further assurances, and similar customary provisions in connection with such grant of rights or licenses. 5.2 INTELLECTUAL PROPERTY DEVELOPED OUTSIDE OF THE COLLABORATION. Except as expressly set forth in this Agreement, neither party shall have any rights in Patent Rights and Technology that are developed or discovered by the other party prior to the Effective Date or outside of the Collaboration. Therefore, ArQule shall have no rights in ACADIA Targets other than as provided in the Agreement, and ACADIA shall have no rights in ArQule Compounds other than as provided in the Agreement. Each party shall have sole responsibility for and control over Patent Rights claiming any of its Technology that was developed or discovered prior to the Effective Date or outside of the Collaboration. Neither party shall have any right to review or comment on such Patent Rights of the other party. 5.3 INTELLECTUAL PROPERTY ARISING FROM THE COLLABORATION. 5.3.1 COMMITTED COMPOUNDS AND COMMITTED TARGETS. Committed Compounds and Committed Targets are exclusive to the Collaboration, which means that except as otherwise expressly provided in this Agreement: (i) ArQule shall not engage in any research and development activities on Committed Compounds outside of the Collaboration; (ii) ArQule shall not knowingly engage in any research and development activities on Committed Targets outside of the Collaboration except to the extent that a third party requires ArQule to perform such activities under a binding contract (which ArQule will disclose in advance to ACADIA); (iii) ACADIA shall not engage in any research and development activities on Committed Targets outside of the Collaboration; and (iv) ACADIA shall not knowingly engage in any research and development activities on Committed Compounds outside of the Collaboration except to the extent that a third party requires Acadia to perform such activities under a binding contract (which ACADIA will disclose in advance to ArQule). In the event that a party engages in research and development activities with a third party with respect to Committed Compounds or Committed Targets under the limited circumstances permitted under this Subsection, such party shall establish and observe strict procedures to ensure that no information crosses from one project to the other project. The other party shall have the right to audit such procedures upon reasonable prior written notice. All Committed Compounds and Committed Targets shall remain exclusive to the Collaboration until the ***** Confidential Treatment has been requested for the marked portion. 14 15 Collaboration terminates or the Steering Committee releases a particular Committed Compound, Committed Compound Set, Committed Target, or Committed Target Set. 5.3.2 RIGHT TO USE. Except as provided in Section 5.1. above or otherwise expressly provided in this Agreement, each party shall have the following rights and restrictions for the use of Patent Rights and Technology arising from the Collaboration: (i) ArQule shall not have any right or license under ACADIA Patent Rights or other rights in ACADIA Technology arising from the Collaboration. (ii) ACADIA shall not have any right or license under ArQule Patent Rights or other rights in ArQule Technology arising from the Collaboration. (iii) During the Collaboration, neither party may use Targeted Compounds outside of the Collaboration without the prior written consent of the other party. After the expiration or termination of this Agreement, the parties shall have co-exclusive rights to Targeted Compounds (other than Targeted Compounds that are subject to the provisions of Section 9.6.2) as follows. *****. (iv) Except as otherwise provided in this Agreement, each party shall have the right to use Joint Patent Rights and Collaboration Technology consistent with the provisions of Article 7 without accounting to the other party. 5.3.3 OWNERSHIP. Ownership of Patent Rights and Technology arising from the Collaboration shall be allocated in the following manner: (i) ArQule shall have sole ownership of all right, title, and interest in ArQule Patent Rights and ArQule Technology; (ii) ACADIA shall have sole ownership of all right, title, and interest in ACADIA Patent Rights and ACADIA Technology; and (iii) ArQule and ACADIA shall have joint ownership of all right, title, and interest in Joint Patent Rights and Collaboration Technology. Each party shall ensure that its employees, consultants, agents, and representatives are contractually required to disclose and to assign to such party all Patent Rights and other rights in Technology arising from the Collaboration. 5.3.4 NOTICE. Each party shall provide prompt written notice to the Research Committee of the internal disclosure of any significant Technology developed by its personnel in connection with the Collaboration. 5.3.5 RESPONSIBILITY FOR PATENT RIGHTS. ArQule shall be responsible for and shall control, at its expense, the preparation, filing, prosecution, grant, and maintenance of any Patent Rights claiming only ArQule Technology arising from the Collaboration and shall consult with ACADIA on, and give ACADIA a reasonable opportunity to review, all such filings to the extent they directly relate to the Collaboration. ACADIA shall be responsible for and shall ***** Confidential Treatment has been requested for the marked portion. 15 16 control, at its expense, the preparation, filing, prosecution, grant, and maintenance of all Patent Rights claiming only ACADIA Technology arising from the Collaboration and shall consult with ArQule on, and give ArQule a reasonable opportunity to review, all such filings to the extent they relate directly to the Collaboration. In the case of Collaboration Technology, the Research Committee will decide whether to seek Joint Patent Rights claiming that Technology or to maintain that Technology as a trade secret, subject to approval of the Steering Committee. The Research Committee will also decide whether to seek Patent Rights claiming both ArQule Technology and ACADIA Technology in one filing (which also constitutes a Joint Patent Right), subject to approval of the Steering Committee. If the parties decide to seek any Joint Patent Rights, the parties shall jointly prepare, file, prosecute, and maintain such Patent Rights, and all related expenses shall be borne equally by the parties. Notwithstanding the foregoing, neither party shall file any Joint Patent Rights claiming the composition or use of any Active Compound until the Research Committee has properly designated that Active Compound as a Committed Compound in accordance with Subsection 3.4.2. 5.3.6 ASSUMPTION OF RIGHTS BY OTHER PARTY. In the event that a party desires to decline responsibility for obtaining or maintaining Patent Rights in a country for any of its Technology that arises from the Collaboration, such party will notify the other party before taking such action and, upon request, will allow the other party to assume responsibility for, and all expenses relating to, the relevant Patent Rights in those countries; provided, however, that neither party shall have the right to seek patent protection for any Technology that a party has decided, in its discretion, to maintain as a trade secret. In the event that a party desires to cease further payment of patent-related expenses for a Joint Patent Right in any country, such party may assign to the other party all rights in that Joint Patent Right in such country and thereafter have no further obligation to pay such expenses. 5.3.7 COOPERATION. Each party agrees to cooperate fully in the preparation, filing, prosecution, and maintenance of all Patent Rights claiming Technology arising from the Collaboration. Such cooperation includes, without limitation, (i) promptly executing all papers and instruments, or requiring its employees, consultants, and agents to execute such papers and instruments, as reasonable and appropriate so as to enable one or both parties to file, prosecute, and maintain such Patent Rights in any country; (ii) promptly informing the other party of matters that may affect the preparation, filing, prosecution, or maintenance of any such Patent Rights; and (iii) undertaking no actions that are potentially deleterious to the preparation, filing, or prosecution of any such Patent Rights. 6. RESEARCH MATERIALS. 6.1 OWNERSHIP OF RESEARCH MATERIALS. In the course of this Collaboration, one party (the "PROVIDER") may transfer to the other party (the "RECIPIENT") certain of its Research Materials. The Recipient acknowledges and agrees that such Research Materials are and shall be owned by the Provider. The Recipient agrees to execute and deliver any documents of assignment or conveyance to effectuate the ownership rights of the Provider in such Research Materials. Specifically, ACADIA acknowledges and agrees that all ArQule Compounds provided to ACADIA in the Collaboration and, previously, under the MTA are proprietary to and owned by ArQule and are or may be covered by claims of ArQule Patent Rights, and ArQule acknowledges and agrees that all expressed proteins for ACADIA Targets provided by ACADIA 16 17 in the Collaboration are proprietary to and owned by ACADIA and are or may be covered by claims of ACADIA Patent Rights. 6.2 USE AND TRANSFER OF RESEARCH MATERIALS. Except as otherwise agreed by the Research Committee, the Recipient agrees to use Research Materials provided by the Provider solely for purposes set forth in this Agreement and shall not distribute such Research Materials to any third party other than its employees and consultants who are working on the Collaboration; provided that the parties may provide Research Materials specific to Collaboration Work Product to a third party for the purposes described in Section 3.7 and may provide Research Materials specific to Targeted Compounds to a sublicensee of such party's rights to such Targeted Compounds under Section 5.3.2(iii). 6.3 ADDITIONAL RESTRICTIONS FOR PROPRIETARY RESEARCH MATERIALS. In the case of Proprietary Research Materials furnished by a Provider, Recipient agrees (i) not to transfer such Proprietary Research Materials to any third party without the prior written consent of the Provider, (ii) to permit access to the Proprietary Research Materials only to its employees and consultants requiring such access, (iii) to inform such employees and consultants of the proprietary nature of the Proprietary Research Materials, and (iv) to take reasonable precautions, at least as stringent as those observed by Recipient to protect its own proprietary materials, to ensure that such employees and consultants observe the obligations of Recipient under this Section. 6.4 DISPOSITION OF UNUSED RESEARCH MATERIALS. At the request of Provider, Recipient will return or destroy any unused Research Materials furnished by Provider. 6.5 COMPLIANCE WITH LAW. Recipient agrees to comply with all federal, state, and local laws and regulations applicable to the use, storage, disposal, and transfer of Research Materials furnished by Provider, including without limitation the Toxic Substances Control Act (15 USC 2601 et seq.) and implementing regulations (in particular, 40 CFR 720.36 [Research and Development Exemption]), the Food, Drug, and Cosmetic Act (21 USC 301 et seq.) and implementing regulations, and all Export Administration Regulations of the Department of Commerce. Recipient assumes sole responsibility for any violation of such laws or regulations by Recipient or any of its Affiliates or sublicensees. 6.6 LIMITATION OF LIABILITY. Any Research Materials delivered pursuant to this Agreement are understood to be experimental in nature and may have hazardous properties. Recipient should assume that the compounds are dangerous and should use appropriate precautions. PROVIDER MAKES NO REPRESENTATIONS, AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, WITH RESPECT TO THE RESEARCH MATERIALS FURNISHED TO RECIPIENT. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR THAT THE USE OF THE RESEARCH MATERIALS WILL NOT INFRINGE ANY PATENT OR OTHER INTELLECTUAL PROPERTY RIGHTS OF A THIRD PARTY. 17 18 7. CONFIDENTIAL INFORMATION. 7.1 DESIGNATION OF CONFIDENTIAL INFORMATION. Confidential Information that is disclosed in writing or electronically shall be marked with a legend indicating its confidential status. Confidential Information that is disclosed orally or visually shall be documented in a written notice prepared by the Disclosing Party and delivered to the Receiving Party within ***** of the date of disclosure; such notice shall summarize the Confidential Information disclosed to the Receiving Party and reference the time and place of disclosure. 7.2 OBLIGATIONS OF RECEIVING PARTY. The Receiving Party agrees that it shall: (i) maintain all Confidential Information in strict confidence, except that the Receiving Party may disclose or permit the disclosure of any Confidential Information to (A) its Affiliates, directors, officers, employees, consultants, and advisors, (B) solely with respect to Confidential Information specific to Collaboration Work Product, a third party for the purposes described in Section 3.7 and (C) solely with respect to Confidential Information specific to Targeted Compounds, a sublicensee of such party's rights to such Targeted Compounds under Section 5.3.2(iii), in each case which recipients are obligated to maintain the confidential nature of such Confidential Information and need to know such Confidential Information for the purposes set forth in this Agreement; (ii) use all Confidential Information solely for the purposes of this Agreement and the permitted uses set forth in Section 7.6.; and (iii) allow permitted recipients under Section 7.2(i) to reproduce the Confidential Information only to the extent necessary to effect the purposes set forth in this Agreement, with all such reproductions being considered Confidential Information. 7.3 EXCEPTIONS. The obligations of the Receiving Party under Section 7.2. above shall not apply to the extent that the Receiving Party can demonstrate that certain Confidential Information: (i) was in the public domain prior to the time of its disclosure under this Agreement; (ii) entered the public domain after the time of its disclosure under this Agreement through means other than an unauthorized disclosure resulting from an act or omission by the Receiving Party; (iii) was independently developed or discovered by the Receiving Party without use of any Confidential Information of the Disclosing Party; or (iv) is or was disclosed to the Receiving Party at any time, whether prior to or after the time of its disclosure under this Agreement, by a third party having no fiduciary relationship with the Disclosing Party and having no obligation of ***** Confidential Treatment has been requested for the marked portion. 18 19 confidentiality or non-use to the Disclosing Party with respect to such Confidential Information. 7.4 PERMITTED DISCLOSURE. Notwithstanding any other provision of this Agreement, disclosure of Confidential Information shall not be precluded if such disclosure is required to comply with applicable laws or regulations (such as disclosure to the FDA or the United States Patent and Trademark Office or to their foreign equivalents), or to comply with a court or administrative order, provided that the Disclosing Party receives prior written notice of such disclosure and that the Receiving Party takes all reasonable and lawful actions to obtain confidential treatment for such disclosure and, if possible, to minimize the extent of such disclosure. 7.5 RETURN OF CONFIDENTIAL INFORMATION. Upon the termination of this Agreement, or earlier at the request of the Disclosing Party, the Receiving Party shall return to the Disclosing Party all originals, copies, and summaries of documents, materials, and other tangible manifestations of Confidential Information in the possession or control of the Receiving Party, except that the Receiving Party may retain one copy of the Confidential Information in the possession of its legal counsel solely for the purpose of monitoring its obligations under this Agreement. 7.6 PERMITTED USE OF INFORMATION. ACADIA and ArQule *****. Under no circumstances may either party use any information from lead optimization activities or preclinical development activities for any purpose other than the Collaboration. 7.7 SURVIVAL OF OBLIGATIONS. The obligations set forth in this Article shall remain in effect for an item of Confidential Information for a period of ***** after the date upon which a Receiving Party first received that Confidential Information, except that the obligation of the Receiving Party to return Confidential Information to the Disclosing Party shall survive until fulfilled. 8. INDEMNIFICATION AND INSURANCE. 8.1 GENERAL INDEMNIFICATION. Each party (the "INDEMNIFYING PARTY") shall indemnify and hold harmless the other party, its Affiliates, and their respective directors, officers, employees and agents (collectively, the "INDEMNITEES") from and against all claims, expenses or liability of whatever nature arising from any default, act, omission, or negligence of the Indemnifying Party, its agents or employees, or others exercising rights by, through, or under the Indemnifying Party, or the failure of the Indemnifying Party or such persons to comply with any applicable laws, rules, regulations, codes, ordinances or directives of governmental authorities, in each case to the extent the same are related, directly or indirectly, to the Collaboration described herein; provided, however, that in no event shall the Indemnifying Party be obligated under this section to indemnify the Indemnitees to the extent that such claim, expense or liability results from any omission, fault, negligence, or other misconduct of any of the Indemnitees. 8.2 PRODUCT LIABILITY INDEMNIFICATION. Each Indemnifying Party further agrees to defend, indemnify, and hold the Indemnitees harmless from all costs, judgments, liabilities, and 19 20 damages assessed by a court of competent jurisdiction arising from claims asserted by a third party against the Indemnitees as a result of (i) actual or asserted violations of any applicable law or regulation by the Indemnifying Party, its Affiliates, sublicensees, or third party manufacturers by virtue of which the Collaboration Products, or any product containing as one of its constituents any Targeted Compound, manufactured, distributed, or sold shall be alleged or determined to be adulterated, misbranded, mislabeled, or otherwise not in compliance with such applicable law or regulation; (ii) claims for bodily injury, death, or property damage attributable to the manufacture, distribution, sale, or use of the Collaboration Products, or any product containing as one of its constituents any Targeted Compound, by the Indemnifying Party, or by its Affiliates, sublicensees, or third party manufacturers; or (iii) a recall ordered by a governmental agency, or required by a confirmed failure, as reasonably determined by the parties, of Collaboration Products, or any product containing as one of its constituents any Targeted Compound, manufactured, distributed, or sold by the Indemnifying Party, or by its Affiliates, sublicensees or third party manufacturers; provided, however, that in no event shall the Indemnifying Party be obligated under this section to indemnify the Indemnitees to the extent that such claim, expense or liability results from any omission, fault, negligence, or other misconduct of any of the Indemnitees. 8.3 PROCEDURE. The Indemnitees agree to provide the Indemnifying Party with prompt written notice of any claim, suit, action, demand, or judgment for which indemnification is sought under this Agreement. If an Indemnitee fails to provide such notice within a reasonable time, and if such failure prejudicially affects the ability of the Indemnifying Party to defend such action, the Indemnifying Party shall be relieved of its liability to such Indemnitee under this Article 8. The Indemnifying Party agrees, at its own expense, to provide attorneys reasonably acceptable to the Indemnitees to defend against any such claim. The Indemnitees shall cooperate fully with the Indemnifying Party in such defense and will permit the Indemnifying Party to conduct and control such defense and the disposition of such claim, suit, or action (including all decisions relative to litigation, appeal, and settlement); provided, however, that any Indemnitee shall have the right to retain its own counsel, at the expense of the Indemnifying Party, if representation of such Indemnitee by the counsel retained by the Indemnifying Party would be inappropriate because of actual or potential differences in the interests of such Indemnitee and any other party represented by such counsel. The Indemnifying Party agrees to keep the other party informed of the progress in the defense and disposition of such claim and to consult with such party with regard to any proposed settlement. Neither party may settle a claim or action for which indemnification is sought under this Agreement without the consent of the other party if such settlement would impose any monetary obligation on the other party or require the other party to submit to an injunction or otherwise limit the other party, its Affiliates or their respective directors, officers, employees or agents. 8.4 INSURANCE. Each party shall maintain, and shall require its Affiliates and sublicensees to maintain, adequate product liability insurance or self insurance with respect to development, manufacture, and sale of Collaboration Products, or any product containing as one of its constituents any Targeted Compound, by such party in such amount as that party customarily maintains with respect to sales of its other products, and in no event less than a reasonable amount. Each party shall maintain, and shall require its Affiliates and sublicensees to maintain, such insurance for so long as that party continues to manufacture or sell the ***** Confidential Treatment has been requested for the marked portion. 20 21 Collaboration Products, and thereafter for so long as that party maintains insurance for itself covering such manufacture or sale. 9. TERM AND TERMINATION. 9.1 TERM. This Agreement shall commence on the Effective Date and shall continue for a period of five (5) years unless earlier terminated pursuant to this Article 9. 9.2 TERMINATION BY PARTY. Either party may terminate this Agreement for any reason upon ninety (90) days written notice to the other party. In addition, the Steering Committee may terminate this Agreement at any time by mutual agreement of the parties. 9.3 DEADLOCK. As described in Subsection 2.2.6., this Agreement shall automatically terminate sixty (60) days (or such longer period as the parties mutually agree) after the Steering Committee deadlocks on any matter relating only to specific activities under the Collaboration, unless the matter is resolved by the Chief Executive Officers of each party during such time period. 9.4 TERMINATION FOR DEFAULT. In the event that either party commits a material breach of its obligations under this Agreement and fails to cure that breach within ***** after receiving written notice thereof, the other party may terminate this Agreement immediately upon written notice to the party in breach. 9.5 FORCE MAJEURE. Neither party will be responsible for delays resulting from acts beyond the control of such party, provided that the nonperforming party uses commercially reasonable efforts to avoid or remove such causes of nonperformance and continues performance hereunder with reasonable dispatch whenever such causes are removed. 9.6 DISPOSITION OF COLLABORATION WORK PRODUCT. Except as otherwise agreed by the parties, the following provisions shall apply under the circumstances specified in this Agreement or upon the expiration or termination of this Agreement. 9.6.1 COMMERCIAL PRODUCTS. If any Collaboration Work Product has been successfully commercialized pursuant to Section 3.7., the parties shall share Gross Revenues attributable to that Collaboration Work Product as set forth in Section 4.2. 9.6.2 RESIDUAL VALUE IN TARGETS AND COMPOUNDS. Except for Collaboration Work Product that has been commercialized pursuant to Section 3.7., the parties will apportion rights in Reserved Targets, Reserved Compounds, Committed Targets, and Committed Compounds as follows. (i) The Research Committee will establish Reserved Target Sets, Committed Target Sets, Reserved Compound Sets, and Committed Compound Sets as necessary or desirable to prevent significant overlap between the rights granted to each party under this Subsection. For example, if two ACADIA Targets are receptor subtypes and if the Available Active Compounds for those two ACADIA Targets are similar enough to form a single Reserved Compound Set or Committed Compound Set, the Research Committee may group the ACADIA Targets into a single Reserved Target Set or Committed Target Set to minimize the risk of 21 22 conflicting Patent Rights filed by each party. As another example, if two dissimilar ACADIA Targets are found to have activity with respect to Available Active Compounds that are within a single chemotype and have substantial homology, the Research Committee has discretion to establish two Reserved Compound Sets or Committed Compound Sets (i.e., one for each ACADIA Target) based on different structure-activity profiles that are identified for each ACADIA Target. (ii) For Reserved Targets and the corresponding Reserved Compounds that have met the requisite criteria for consideration as Committed Targets and Committed Compounds but which the Research Committee has declined to designate as Committed Targets and Committed Compounds, as described in Subsection 3.4.2., *****. (iii) For Committed Targets and the corresponding Committed Compound Set(s) that the Research Committee has removed from the Collaboration as described in Subsection 3.4.2. or Section 3.5. or which have not been commercialized pursuant to Section 3.7. when the Agreement expires or terminates, *****. (iv) Each party hereby agrees to assign, transfer, and convey to the other party, or to grant such other party *****. Finally, each party agrees to provide reasonable warranties of title, further assurances, and similar customary provisions in connection with the grant of rights or licenses under this Subsection. (v) The parties shall enter into a Compound License Agreement in substantially the form of the Compound License Agreement dated May 10, 2000 between ACADIA and ArQule for each (a) Reserved Target or Reserved Target Set and its corresponding Reserved Compounds or Reserved Compound Set and (b) Committed Target or Committed Target Set and its corresponding Committed Compounds or Committed Compound Set, for which such party obtains rights under this Subsection. Each party acknowledges and agrees that the Compound License Agreement provides for, among other things, an annual license maintenance fee in the amount of ***** and a royalty of either *****. 9.6.3 RIGHTS IN TARGETED COMPOUNDS. Except for Collaboration Work Product that has been commercialized pursuant to Section 3.7., the rights of each party to use Targeted Compounds continues after the Collaboration ends as provided in Subsection 5.3.2., clause (iii), subject to the other provisions of this Section 9.6. 9.7 SURVIVAL. The following provisions shall survive the expiration or termination of this Agreement: Articles 4, 6, 7, 8, and 10; Sections 5.1.2., 5.3. (except 5.3.1), 9.6., 9.7., 11.7., and 11.9. 10. DISPUTE RESOLUTION. 10.1 PROCEDURES MANDATORY. Except as otherwise provided in Subsection 2.2.6., the parties agree that any dispute arising out of or relating to this Agreement shall be resolved solely by means of the procedures set forth in this Article, and that such procedures constitute legally binding obligations that are an essential provision of this Agreement; provided, however, that all procedures and deadlines specified in this Article may be modified by written agreement of the parties. If either party fails to observe the procedures of this Article, as modified by their written ***** Confidential Treatment has been requested for the marked portion. 22 23 agreement, the other party may bring an action for specific performance in any court of competent jurisdiction. 10.2 DISPUTE RESOLUTION PROCEDURES. 10.2.1 NEGOTIATION. Except as otherwise provided in Subsection 2.2.6., in the event of any dispute arising out of or relating to this Agreement, the affected party shall notify the other party, and the Steering Committee shall attempt in good faith to resolve the matter within ***** after the date such notice is received by the other party (the "NOTICE DATE"). Any disputes not resolved by good faith discussions within the Steering Committee shall be referred to senior executives of each party, who shall meet at a mutually acceptable time and location within thirty ***** after the Notice Date and attempt to negotiate a settlement. 10.2.2 MEDIATION. If the matter remains unresolved within ***** days after the Notice Date, or if the senior executives fail to meet within ***** after the Notice Date, either party may initiate mediation upon written notice to the other party, whereupon both parties shall be obligated to engage in a mediation proceeding under the then current Center for Public Resources ("CPR") Model Procedure for Mediation of Business Disputes, except that specific provisions of this Section shall override inconsistent provisions of the CPR Model Procedure. The mediator will be selected from the CPR Panels of Neutrals. If the parties cannot agree upon the selection of a mediator within ***** after the Notice Date, then upon the request of either party, the CPR shall appoint the mediator. The parties shall attempt to resolve the dispute through mediation until one of the following occurs: (i) the parties reach a written settlement; (ii) the mediator notifies the parties in writing that they have reached an impasse; (iii) the parties agree in writing that they have reached an impasse; or (iv) the parties have not reached a settlement within ***** after the Notice Date. 10.2.3 TRIAL WITHOUT JURY. If the parties fail to resolve the dispute through mediation, or if neither party elects to initiate mediation, each party shall have the right to pursue any other remedies legally available to resolve the dispute; provided, however, that the parties expressly waive any right to a jury trial in any legal proceeding under this Section. 10.3 PRESERVATION OF RIGHTS PENDING RESOLUTION. 10.3.1 PERFORMANCE TO CONTINUE. Each party shall continue to perform its obligations under this Agreement pending final resolution of any dispute arising out of or relating to this Agreement; provided, however, that a party may suspend performance of its obligations during any period in which the other party fails or refuses to perform its obligations. 10.3.2 PROVISIONAL REMEDIES. Although the procedures specified in this Article are the sole and exclusive procedures for the resolution of disputes arising out of or relating to this Agreement, either party may seek a preliminary injunction or other provisional equitable relief if, in its reasonable judgment, such action is necessary to avoid irreparable harm to itself or to preserve its rights under this Agreement. 10.3.3 STATUTE OF LIMITATIONS. The parties agree that all applicable statutes of limitation and time-based defenses (such as estoppel and laches) shall be tolled while the ***** Confidential Treatment has been requested for the marked portion. 23 24 procedures set forth in Subsections 10.2.1. and 10.2.2. are pending. The parties shall take any actions necessary to effectuate this result. 11. MISCELLANEOUS. 11.1 PUBLICITY. No press release, advertising, promotional sales literature, or other promotional oral or written statements to the public in connection with or alluding to work performed under this Agreement or the relationship between the parties created by it, having or containing any reference to ArQule or ACADIA, shall be made by either party without the prior written approval of the other party, except for restatements of previously-approved statements and disclosures required by applicable law or regulation. 11.2 RELATIONSHIP OF PARTIES. For the purposes of this Agreement, each party is an independent contractor and not an agent or employee of the other party. Neither party shall have authority to make any statements, representations, or commitments of any kind, or to take any action which shall be binding on the other party, except as may be explicitly provided for herein or authorized in writing. In particular, (i) neither party shall represent to creditors or vendors that such party has any authority to obligate or bind the other party, and shall affirmatively correct any misconception to that effect and (ii) neither party shall use the name of the other party in connection with such transactions without the prior written consent of the other party, which consent may be withheld in its sole discretion. 11.3 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument. 11.4 HEADINGS. All headings in this Agreement are for convenience only and shall not affect the meaning of any provision hereof. 11.5 BINDING EFFECT. This Agreement shall inure to the benefit of and be binding upon the parties and their respective lawful successors and assigns. 11.6 ASSIGNMENT. This Agreement may not be assigned by either party without the prior written consent of the other party, except that either of the parties may assign this Agreement to a successor in connection with the merger, consolidation, or sale of all or substantially all of its assets or that portion of its business pertaining to the subject matter of this Agreement; provided, however, that in the event of such a transaction, no intellectual property rights of any Affiliate or third party that is an acquiring party shall be included in the technology subject to this Agreement. 11.7 NOTICES. All notices, requests, demands and other communications required or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed to have been duly given upon the date of receipt if delivered by hand, recognized national overnight courier, confirmed facsimile transmission, or registered or certified mail, return receipt requested, postage prepaid, to the following addresses or facsimile numbers: ***** Confidential Treatment has been requested for the marked portion. 24 25 If to ACADIA: ACADIA Pharmaceuticals 3911 Sorrento Valley Blvd. San Diego, CA 92121-1402 Attn: Chief Executive Officer Tel: (858) 320-8614 Fax: (858) 455-1751 with a copy (which shall not constitute notice) to: Pillsbury Madison & Sutro LLP 101 West Broadway, Suite 1800 San Diego, CA 92101-8219 Attn: John M. Dunn Tel: (858) 509-4015 Fax: (858) 236-1995 If to ArQule: ArQule, Inc. 19 Presidential Way Woburn, MA 01801 Attn: President Tel: (781) 994-0300 Fax: (781) 503-0009 with a copy (which shall not constitute notice) to: ArQule, Inc. 19 Presidential Way Woburn, MA 01801 Attn: Legal Department Tel: (781) 994-0300 Fax: (781) 994-0676 Either party may change its designated address and facsimile number by notice to the other party in the manner provided in this Section. 11.8 AMENDMENT AND WAIVER. This Agreement may be amended, supplemented, or otherwise modified at any time, but only by means of a written instrument signed by both parties. Any waiver of any rights or failure to act in a specific instance shall relate only to such instance and shall not be construed as an agreement to waive any rights or fail to act in any other instance, whether or not similar. 11.9 GOVERNING LAW. This Agreement and the legal relations among the parties shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts irrespective of any conflict of laws principles. 25 26 11.10 SEVERABILITY. In the event that any provision of this Agreement shall, for any reason, be held to be invalid or unenforceable in any respect, such invalidity or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid or unenforceable provision had not been included herein. 11.11 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes any and all prior or contemporaneous oral and prior written agreements and understandings including, without limitation, the MTA. IN WITNESS WHEREOF, the undersigned have duly executed and delivered this Agreement as a sealed instrument effective as of the date first above written. ACADIA PHARMACEUTICALS, INC. By: /s/ Uli Hacksell, Ph.D. ---------------------------------------- Uli Hacksell, Ph.D. Chief Executive Officer ARQULE, INC. By: /s/ Stephen A. Hill, M.D. ---------------------------------------- Stephen A. Hill , M.D. President and Chief Executive Officer 26 27 EXHIBIT A ***** ***** Confidential Treatment has been requested for the marked portion. EX-11.1 6 b38132arex11-1.txt STATEMENT RE COMPUTATION OF PER SHARE NET INCOME 1 11.1 ARQULE, INC. STATEMENT RE COMPUTATION OF UNAUDITED NET INCOME (LOSS) PER SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------ 1998 1999 2000 ------- -------- ------- (UNAUDITED) Net income (loss)........................................... $(6,462) $(17,433) $ 3,855 ------- -------- ------- Weighted average shares outstanding: Common stock.............................................. 12,031 12,606 13,911 Weighted average common shares outstanding.................. 12,031 12,606 13,911 ======= ======== ======= Basic net income (loss) per share........................... $ (0.54) $ (1.38) $ 0.28 ======= ======== =======
YEAR ENDED DECEMBER 31, ------------------------------ 1998 1999 2000 ------- -------- ------- (UNAUDITED) Net income (loss)........................................... $(6,462) $(17,433) $ 3,855 ------- -------- ------- Weighted average shares outstanding: Common stock.............................................. 12,031 12,606 13,911 Common stock equivalents.................................. -- -- 1,297 Weighted average common shares and equivalents outstanding............................................... 12,031 12,606 15,208 ======= ======== ======= Diluted net income (loss) per share......................... $ (0.54) $ (1.38) $ 0.25 ======= ======== =======
II-1 EX-21.1 7 b38132arex21-1.txt SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 ARQULE, INC. SUBSIDIARIES OF THE COMPANY ArQule Catalytics, Inc., a Delaware corporation (dissolved on March 1, 2001). Camitro Corporation, a California corporation. Camitro UK, Ltd., a company organized under the laws of the United Kingdom (Camitro UK, Ltd. is a subsidiary of Camitro Corporation). EX-23.1 8 b38132arex23-1.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in this Registration Statement on Form S-3 (No. 333-54796) of our report dated January 11, 2001, except as to Footnote 14, which is as of March 14, 2001 relating to the financial statements, which appears in ArQule, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2000. We also consent to the references to us under the headings "Experts" in such Registration Statement. PricewaterhouseCoopers LLP Boston, Massachusetts March 22, 2001 EX-99.1 9 b38132arex99-1.txt IMPORTANT FACTORS REGARDING FORWARD LOOKING STMTS 1 EXHIBIT 99.1 ARQULE, INC. IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS MARCH 2001 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 and Exchange Act of 1934 and Section 27A of the Securities Act of 1933, as enacted by the Private Securities Litigation Reform Act of 1995. We wish 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, we wish to advise readers that the factors listed below, as well as other factors not currently identified by management, could affect our financial or other performance and could cause the 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. We will not undertake and specifically decline 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, we are hereby filing cautionary statements identifying important factors that could cause our actual results to differ materially from those projected in our forward-looking statements made by us or on our behalf. Although we were profitable in fiscal year 2000, we may not be able to sustain profitability. From our inception in 1993 to December 31, 2000, we have incurred cumulative net losses of approximately $30.7 million. The costs of our research activities and enhancements to our technology principally have resulted in these losses. 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. 1 2 To date, except for during 1997 and 2000, 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. OUR STRATEGY OF USING OUR TECHNOLOGIES TO ASSIST IN THE DEVELOPMENT OF NEW DRUGS AND OTHER PRODUCTS MAY NOT BE COMMERCIALLY SUCCESSFUL. Our approach to compound discovery has not yet yielded a commercially successful drug. Our strategy is to use our technologies 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. In addition, we have recently reoriented our business and technology strategies to offer comprehensive compound discovery, in addition to chemical compound products and services. Our potential customers may not accept our new strategy. 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 crafting viable chemical compounds, known as combinatorial chemistry, and comprehensive compound discovery as effective tools 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. Furthermore, Camitro has not launched any of its products and, therefore, the market may not accept any of its products. If the market does not accept these products, or does so at a lower than expected rate, we may not be able to attract new customers to support such products. The specialized nature and high price of our services limit our potential customer base. These potential customers may decide to try to use our approach themselves without our assistance, or they may try other methods. Because we offer specialized assistance in the development of drugs, our potential customer base consists of a limited number of pharmaceutical and biotechnology companies and research institutions. These companies have historically identified lead compounds and capitalized upon the most promising leads 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. WE DEPEND ON COLLABORATION ARRANGEMENTS WITH THIRD PARTIES FOR OUR REVENUE AND OUR COLLABORATIONS MAY NOT BE SUCCESSFUL OR WE MAY NOT REALIZE MUCH OF THE POTENTIAL REVENUE FROM OUR COLLABORATIONS. We will only realize much of the potential revenue under these collaborations if we meet compound delivery goals, 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 and biotechnology 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 developed using our products. We may not achieve these milestones and our partners may not develop commercial drugs or other products on which we will receive royalties. 2 3 Our ability to realize potential revenue from milestones and royalties from our collaborations depends, in large part, on the efforts of our partners, over which we have little control. Much of the revenue from milestones and royalties that we may receive under these collaborations will depend upon our partners' ability to successfully develop, introduce, market and sell new drugs they develop using our products. Our products will result in commercialized drugs 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 maintain existing collaborations and enter into new ones, either of which may not be possible to do. To be successful, we must expand the number of our collaborations both by maintaining existing collaborations, as well as continuing to enter into agreements with new partners to use our technology to develop potential drugs. We may not be able to maintain our existing collaborations or establish new collaborations with commercially acceptable terms. WE MAY NOT SUCCESSFULLY INTEGRATE CERTAIN ASPECTS OF CAMITRO OPERATIONS, THE INTEGRATION OF THE BUSINESSES MAY BE COSTLY, AND WE MAY ULTIMATELY NOT CAPITALIZE ON CAMITRO'S TECHNOLOGY AND KNOW-HOW. On January 29, 2001, we acquired Camitro Corporation, a California corporation, through a wholly owned subsidiary of ours. We have to integrate certain aspects of Camitro's operations into our pre-existing operations. The integration will require significant efforts from each company, including coordinating research and development efforts. Camitro personnel may leave because of the merger. Camitro collaborators, customers, distributors, or suppliers may terminate their arrangements with Camitro or demand new arrangements. Integrating our operations may distract management's attention from the day-to-day business of the combined company. If ArQule is unable to successfully integrate certain aspects of the operations of the two companies or if this integration process costs more than expected, ArQule's future results will be negatively impacted. 3 4 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 utilize compounds as potential drugs. Many of these competitors have greater financial and human resources and more experience in research and development than we have. They include: - biotechnology, pharmaceutical, combinatorial chemistry and other companies; - academic and scientific institutions; - governmental agencies; and - public and private research organizations. Historically, pharmaceutical companies have maintained close control over their research activities, including the synthesis, screening and optimization of potential drugs. Many of these companies, which represent a significant potential market for our products and services, have developed or are developing internal compound discovery processes 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 which includes Stephen A. Hill, David C. Hastings, Phillipe Bey and Harold E. Selick. The loss of one or more of these members of our staff could have a material adverse effect on our business. We have employment agreements with Stephen Hill, Phillipe Bey and Harold E. Selick. We do not maintain keyperson 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 on a sustainable basis 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 collaborations 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, it may dilute your proportionate ownership in ArQule. 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. WE WILL NOT BE ABLE TO SUCCESSFULLY GROW OUR BUSINESS IF WE ARE UNABLE TO EXPAND AND INTEGRATE OUR TECHNOLOGIES. Our success depends on the integration and expansion of various chemistry based, drug discovery technologies. In order for us to achieve our goal of reducing the current industry average for identifying IND candidates by half, we will have to integrate and acquire complimentary technologies. We also must successfully structure and manage multiple collaborative relationships. If we do not, we could lose significant amounts of revenues. Further, we may not succeed in managing and meeting the staffing requirements of additional collaborative relationships. 4 5 OUR PATENTS AND OTHER PROPRIETARY RIGHTS MAY FAIL TO PROTECT OUR TECHNOLOGIES AND THIS FAILURE COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS. Our success will depend on our ability to obtain and protect patents on our technology and to protect our trade secrets. We may not receive any additional patents, and the claims of our patents may not offer significant protection of our technology. Third parties may challenge, narrow, invalidate or circumvent our patents. 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. Neither the U.S. Patent and Trademark Office, nor the courts have set forth a consistent policy 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. These agreements, however, may not 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 to defend, 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's 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. Any of these occurrences will result in lost revenues and profits for us. OUR COMMON STOCK MAY HAVE A VOLATILE PUBLIC TRADING PRICE AND LOW TRADING VOLUME. The market price of our common stock has been highly volatile and the market for our common stock has experienced significant price and volume fluctuations, some of which are unrelated to our operating performance. For example, from January 2, 2001 to March 12, 2001, the per share price of our common stock has fluctuated from $31.25 to $14.00 per share with an average daily trading volume over such period of approximately 338,400 shares. Many factors can have a significant adverse effect on our common stock's market price, including: - announcements by us or our competitors of technological innovations or new commercial products; 5 6 - developments concerning our proprietary rights, including patent and litigation matters; - publicity regarding actual or potential results relating to our or our collaborators' products or compounds under development; - an unexpected termination of one of our collaborations; - announcements of business acquisitions and other business ventures; - regulatory developments in the United States and other countries; - general market conditions; and - quarterly fluctuations in our revenues and other financial results. 6 -----END PRIVACY-ENHANCED MESSAGE-----