ArQule, Inc.
ARQULE INC (Form: 10-Q, Received: 05/08/2009 09:31:14)

Table of Contents

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

FORM 10-Q

 

Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

 

For the Quarter Ended March 31, 2009

 

Commission File No. 000-21429

 

ArQule, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

 

04-3221586

(State of Incorporation)

 

(I.R.S. Employer Identification Number)

 

19 Presidential Way, Woburn, Massachusetts 01801

(Address of Principal Executive Offices)

 

(781) 994-0300

(Registrant’s Telephone Number, including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).       Yes  o   No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer  x

 

 

 

Non-accelerated filer o

 

Smaller reporting company  o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o   No  x

 

Number of shares outstanding of the registrant’s Common Stock as of May 1, 2009:

 

Common Stock, par value $.01           44,657,547 shares outstanding

 

 

 



Table of Contents

 

ARQULE, INC.

 

QUARTER ENDED MARCH 31, 2009

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

Item 1. — Unaudited Condensed Consolidated Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets (Unaudited) March 31, 2009 and December 31, 2008

3

 

 

 

 

Condensed Consolidated Statements of Operations (Unaudited) three months ended March 31, 2009 and 2008

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) three months ended March 31, 2009 and 2008

5

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

 

 

Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

15

 

 

 

Item 3. — Quantitative and Qualitative Disclosures about Market Risk

 

23

 

 

 

Item 4. — Controls and Procedures

 

23

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

Item 1. —Legal Proceedings

 

24

 

 

 

Item 1A. — Risk Factors

 

24

 

 

 

Item 2. —Unregistered Sales of Equity Securities and Use Of Proceeds

 

24

 

 

 

Item 3. — Defaults Upon Senior Securities

 

24

 

 

 

Item 4. — Submission of Matters to a Vote of Security Holders

 

24

 

 

 

Item 6. — Exhibits

 

24

 

 

 

SIGNATURES

 

25

 



Table of Contents

 

ARQULE, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

 

 

 

March 31,
2009

 

December 31,
2008

 

 

 

(IN THOUSANDS,
EXCEPT SHARE AND
PER SHARE DATA)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

98,356

 

$

141,890

 

Marketable securities-short term

 

30,543

 

 

Prepaid expenses and other current assets

 

1,078

 

772

 

Total current assets

 

129,977

 

142,662

 

Marketable securities-long term

 

63,472

 

64,219

 

Property and equipment, net

 

5,224

 

5,620

 

Other assets

 

1,677

 

1,711

 

Total assets

 

$

200,350

 

$

214,212

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

12,327

 

$

14,260

 

Note payable

 

47,750

 

47,750

 

Current portion of deferred revenue

 

21,019

 

20,420

 

Current portion of deferred gain on sale leaseback

 

552

 

552

 

Total current liabilities

 

81,648

 

82,982

 

Restructuring accrual, net of current portion

 

 

78

 

Deferred revenue, net of current portion

 

81,249

 

84,693

 

Deferred gain on sale leaseback, net of current portion

 

2,853

 

2,992

 

Total liabilities

 

165,750

 

170,745

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.01 par value; 1,000,000 shares authorized; no shares issued or outstanding

 

 

 

Common stock, $0.01 par value; 100,000,000 shares authorized; 44,557,477 and 44,153,237 shares issued and outstanding at March 31, 2009 and December 31, 2008, respectively

 

446

 

442

 

Additional paid-in capital

 

376,540

 

375,478

 

Accumulated other comprehensive loss

 

(25

)

 

Accumulated deficit

 

(342,361

)

(332,453

)

Total stockholders’ equity

 

34,600

 

43,467

 

Total liabilities and stockholders’ equity

 

$

200,350

 

$

214,212

 

 

The accompanying notes are an integral part of these interim unaudited financial statements.

 

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ARQULE, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

 

 

THREE MONTHS ENDED
MARCH 31,

 

 

 

2009

 

2008

 

 

 

(IN THOUSANDS,
EXCEPT PER
SHARE DATA)

 

Revenue:

 

 

 

 

 

Research and development revenue

 

$

5,420

 

$

3,527

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

Research and development

 

11,334

 

13,452

 

General and administrative

 

3,660

 

5,634

 

 

 

14,994

 

19,086

 

 

 

 

 

 

 

Loss from operations

 

(9,574

)

(15,559

)

 

 

 

 

 

 

Interest income

 

361

 

1,645

 

Interest expense

 

(166

)

 

Other income (expense)

 

(529

)

 

Net loss

 

$

(9,908

)

$

(13,914

)

 

 

 

 

 

 

Basic and diluted net loss per share:

 

 

 

 

 

Net loss per share

 

$

(0.23

)

$

(0.32

)

 

 

 

 

 

 

Weighted average basic and diluted common shares outstanding

 

44,029

 

43,771

 

 

The accompanying notes are an integral part of these interim unaudited financial statements.

 

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ARQULE, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

 

 

THREE MONTHS ENDED
March 31,

 

 

 

2009

 

2008

 

 

 

(IN THOUSANDS)

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(9,908

)

$

(13,914

)

 

 

 

 

 

 

Adjustments to reconcile loss to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

432

 

370

 

Amortization of premium/discount on marketable securities

 

16

 

20

 

Amortization of deferred gain on sale leaseback

 

(139

)

(138

)

Non-cash stock compensation

 

1,066

 

2,903

 

Impairment on auction rate securities

 

76

 

 

Impairment on auction rate securities put option

 

453

 

 

Loss on disposal of property and equipment

 

 

21

 

Changes in operating assets and liabilities:

 

 

 

 

 

Prepaid expenses and other current assets

 

(306

)

(564

)

Other assets

 

34

 

49

 

Accounts payable and accrued expenses

 

(1,933

)

444

 

Restructuring accrual, net of current portion

 

(78

)

(163

)

Deferred revenue

 

(2,845

)

1,472

 

Net cash used in operating activities

 

(13,132

)

(9,500

)

Cash flows from investing activities:

 

 

 

 

 

Purchases of marketable securities

 

(30,366

)

(8,857

)

Proceeds from sale or maturity of marketable securities

 

 

66,353

 

Additions to property and equipment

 

(36

)

(2,433

)

Proceeds from disposal of property and equipment

 

 

87

 

Net cash provided by (used in) investing activities

 

(30,402

)

55,150

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common stock

 

 

44

 

Net cash provided by financing activities

 

 

44

 

Net increase (decrease) in cash and cash equivalents

 

(43,534

)

45,694

 

Cash and cash equivalents, beginning of period

 

141,890

 

10,835

 

Cash and cash equivalents, end of period

 

$

98,356

 

$

56,529

 

 

The accompanying notes are an integral part of these interim unaudited financial statements.

 

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ARQULE, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

 

1.  NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

We are a clinical-stage biotechnology company organized as a Delaware corporation in 1993 and engaged in the research and development of innovative cancer therapeutics directed toward molecular targets that we believe play critical roles in the development of human cancers. Our mission is to discover and develop novel products that target multiple tumor types, act selectively against cancer cells and are well tolerated by patients.

 

Our lead product is ARQ 197, an orally administered inhibitor of the c-Met receptor tyrosine kinase. ARQ 197 is currently being evaluated as monotherapy and in combination therapy in a Phase 2 clinical development program. We have licensed commercial rights to ARQ 197 for human cancer indications to Daiichi Sankyo Co., Ltd. (“Daiichi Sankyo”) in the U.S., Europe, South America and the rest of the world, excluding Japan and certain other Asian countries, where we have licensed commercial rights to Kyowa Hakko Kirin Co. Ltd. (“Kyowa Hakko Kirin”).

 

Our product pipeline offers the potential for multiple therapeutic candidates based on diverse biological targets, mechanisms of action and chemistry. The most advanced of these programs is focused on the development of inhibitors of the Eg5 kinesin motor protein, which include ARQ 621, in Phase 1 clinical development.

 

Our drug discovery efforts are focused primarily on the ArQule Kinase Inhibitor Platform (“AKIP™”), which we are leveraging to generate a new class of compounds designed to inhibit a variety of kinases potently, selectively and without competing with adenosine triphosphate (“ATP”), an energy source for cells. We have maintained the know-how associated with our combinatorial chemistry expertise, developed and validated in the course of our previous chemistry services collaborations with companies in the pharmaceutical and biotechnology industries, and combined it with our biology expertise.

 

We have prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to these rules and regulations.  These condensed consolidated financial statements should be read in conjunction with our audited financial statements and footnotes related thereto for the year ended December 31, 2008 included in our annual report on Form 10-K filed with the SEC on March 6, 2009.

 

The unaudited condensed consolidated financial statements include, in our opinion, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly our financial position as of March 31, 2009, and the results of our operations and cash flows for the three months ended March 31, 2009 and March 31, 2008. The results of operations for such interim periods are not necessarily indicative of the results to be achieved for the full year.

 

2. COLLABORATIONS AND ALLIANCES

 

Daiichi Sankyo Co., Ltd. Kinase Inhibitor Discovery Agreement

 

On November 7, 2008, we entered into a research collaboration, exclusive license and co-commercialization agreement with Daiichi Sankyo under which we will apply our proprietary technology and know-how from our AKIP™ platform for the discovery of therapeutic compounds that selectively inhibit certain kinases. The agreement defines two such kinase targets, and Daiichi Sankyo will have an option to license compounds directed to these targets following the completion of certain pre-clinical studies.

 

The agreement provides for a $15 million upfront payment, which we received in November 2008, research support payments for the first two years of the collaboration, licensing fees for compounds discovered as a result of this research, milestone payments related to clinical development, regulatory review and sales, and royalty payments on net sales of compounds from the collaboration. We retain the option to co-commercialize licensed products developed under this agreement in the U.S.

 

The duration and termination of the agreement is tied to future events. Unless earlier terminated due to breach, insolvency or upon 90 days notice by Daiichi, the agreement terminates on the later of (i) the expiration of the research collaboration period, or (ii) various periods specified in the agreement for development and commercialization of products. If Daiichi has commercialized a

 

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licensed product or products, the agreement will continue in force until such time as all royalty terms for all licensed products have ended. The royalty term, on a country-by country basis for a product, ends as of the later of (i) the expiration of the last valid claim under a patent covering the manufacture, use, or sale of a licensed product or (ii) a certain number of years from the date of the commercial sale of the licensed product in such country.

 

Revenue for this agreement is recognized using the contingency-adjusted performance model with an estimated performance period through November 2012. For the quarter ended March 31, 2009, $1.4 million was recognized as revenue. At March 31, 2009, $18.8 million remains in deferred revenue.

 

Daiichi Sankyo Co., Ltd. ARQ 197 Agreement

 

On December 18, 2008, we entered into a license, co-development and co-commercialization agreement with Daiichi Sankyo to conduct research, clinical trials and commercialization of ARQ 197 in human cancer indications in the U.S., Europe, South America and the rest of the world, excluding Japan, China (including Hong Kong), South Korea and Taiwan, where Kyowa Hakko Kirin has exclusive rights for development and commercialization.

 

The agreement provides for a $60 million cash upfront licensing payment from Daiichi Sankyo to us, which we received in December 2008, and an additional $560 million in potential development and sales milestone payments. We and Daiichi Sankyo will share equally the costs of Phase 2 and Phase 3 clinical studies, with our share of Phase 3 costs payable solely from milestone and royalty payments by Daiichi Sankyo. Upon commercialization, we will receive tiered, double-digit royalties from Daiichi Sankyo on net sales of ARQ 197 commensurate with the magnitude of the transaction. We retain the option to participate in the commercialization of ARQ 197 in the U.S.

 

The duration and termination of the agreement is tied to future events. Unless earlier terminated due to breach, insolvency or upon 90 days notice if prior to phase 3 clinical trials or 180 days notice if on or after the beginning of phase 3 clinical trials by Daiichi, the agreement shall continue until the later of (i) such time as Daiichi is no longer developing at least one licensed product or (ii) if Daiichi has commercialized a licensed product or products, such time as all royalty terms for all licensed products have ended. The royalty term, on a country-by country basis for a product, ends as of the later of (i) the expiration of the last valid claim under a patent covering the manufacture, use, or sale of a licensed product or (ii) a certain number of years from the date of the commercial sale of the licensed product in such country.

 

Revenue for this agreement is recognized using the contingency-adjusted performance model with an estimated development period through December 2013. For the quarter ended March 31, 2009, $3.0 million was recognized as revenue. At March 31, 2009, $56.5 million remains in deferred revenue.

 

Kyowa Hakko Kirin Co., Ltd. Licensing Agreement

 

On April 27, 2007, we entered into an exclusive license agreement with Kyowa Hakko Kirin to develop and commercialize ARQ 197, a small molecule, selective inhibitor of the c-Met receptor tyrosine kinase, in Japan and parts of Asia. A $3 million portion of an upfront licensing fee was received by the Company under this agreement in the first quarter of 2007 and an additional $27 million in upfront licensing fees was received on May 7, 2007. The agreement includes $123 million in upfront and potential development milestone payments from Kyowa Hakko Kirin to ArQule, including the $30 million cash upfront licensing payments. In February 2008, we received a $3 million milestone payment from Kyowa Hakko Kirin. Upon commercialization, ArQule will receive tiered royalties in the mid-teen to low-twenty percent range from Kyowa Hakko Kirin on net sales of ARQ 197. Kyowa Hakko Kirin will be responsible for all clinical development costs and commercialization of the compound in certain Asian countries, consisting of Japan, China (including Hong Kong), South Korea and Taiwan.

 

In addition to the upfront and possible regulatory milestone payments totaling $123 million, the Company will be eligible for future milestone payments based on the achievement of certain levels of net sales. The Company will recognize the payments, if any, as revenue in accordance with its revenue recognition policies. As of March 31, 2009, the Company has not recognized any revenue from these sales milestone payments, and there can be no assurance that it will do so in the future.

 

The duration and termination of the agreement is tied to future events. Unless earlier terminated due to breach, insolvency or upon 90 days notice by Kyowa Hakko Kirin, the agreement terminates on the date that the last royalty term expires in all countries in the territory. The royalty term ends as of the later of (i) the expiration of the last pending patent application or expiration of the patent in the country covering the manufacture, use, or sale of a licensed product or (ii) a certain number of years from the date of the commercial launch in such country of such license product.

 

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Revenue for this agreement is recognized using the contingency-adjusted performance model with an estimated development period through April 2016. For the quarter ended March 31, 2009, $1.0 million was recognized as revenue. At March 31, 2009, $27.0 million remains in deferred revenue.

 

3.  MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS

 

We account for our marketable securities in accordance with SFAS No. 115. We generally classify our marketable securities as available-for-sale at the time of purchase and re-evaluate such designation as of each consolidated balance sheet date. Our marketable securities are classified as cash equivalents if the original maturity, from the date of purchase, is ninety days or less and as short-term investments if the original maturity, from the date of purchase, is in excess of ninety days since we generally intend to convert them into cash as necessary to meet our liquidity requirements.

 

Our marketable securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity, net of tax. Realized gains or losses on the sale of marketable securities are determined using the specific-identification method. We evaluate our investments periodically for possible other-than-temporary impairment by reviewing factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and our ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of market value as well as other factors relevant to the specific securities being evaluated such as agency credit ratings and the probability of collecting amounts due based on the contractual terms of the security. We record an impairment charge to the extent that the carrying value of our available-for-sale securities exceeds the estimated fair value of the securities and the decline in value is determined to be other-than-temporary. Certain of our marketable securities are classified as trading securities and any changes in the fair value of those securities are recorded as other income (expense) in the statement of operations.

 

We invest our available cash primarily in money market mutual funds, and U.S. federal and state agency backed certificates, including auction rate securities, that have strong credit ratings. Auction rate securities are structured with short-term interest reset dates of generally less than 90 days, but with contractual maturities that can be well in excess of ten years. At the end of each reset period, which occurs every seven to twenty-eight days, investors can sell or continue to hold the securities at par value. If any of our auction rate securities were to fail an auction, due to sell orders exceeding buy orders, the funds associated with a failed auction would not be accessible until a successful auction occurred, a buyer was found outside the auction process, the underlying securities matured or a settlement with the underwriter is reached.

 

Beginning in the first quarter of 2008 and throughout 2008, certain auction rate securities failed auction due to sell orders exceeding buy orders. On November 3, 2008, the Company accepted an offer (“the Offering”) by UBS AG (“UBS”) of certain rights (“Put Option”) to cause UBS to purchase auction rate securities owned by the Company. The repurchase rights were offered in connection with UBS’s obligations under settlement agreements with the U.S. Securities and Exchange Commission and other federal and state regulatory authorities. The offering, the settlement agreements, and the respective rights and obligations of the parties, including a release by the Company of UBS and its employees and agents from all claims except claims for consequential damages relating to UBS’s marketing and sale of auction rate securities, are described in a prospectus issued by UBS dated October 7, 2008.

 

As a result of accepting the Offering, the Company received a Put Option from UBS to repurchase the securities at par value at any time during the period from June 30, 2010 through July 2, 2012, if the Company’s auction rate securities have not previously been sold by the Company or by UBS on its behalf. The Company has accounted for the Put Option as a freestanding financial instrument and elected to record the value under the fair value option of SFAS No. 159.  Pursuant to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities , the Company has classified its auction rate securities as trading securities reflecting the Company’s intent to exercise the Put Option during the period June 30, 2010 to July 2, 2012. The decrease in value of our Put Option and auction rate securities totaling $0.5 million in the three months ended March 31, 2009 was recorded as a loss in other income (expense) in the statement of operations.

 

ArQule’s marketable securities long term portfolio as of December 31, 2008 and March 31, 2009 consisted of $65.3 million (at cost) invested in auction rate securities all of which were associated with auctions that failed subsequent to February 12, 2008.

 

On July 8, 2008, we entered into a collateralized, revolving credit line agreement for up to $47.5 million with UBS Bank USA (the “Facility”). In July 2008, we drew down $46.1 million under the Facility.  In accordance with the Offering by UBS, the Facility remains payable on demand; however, if UBS Bank USA should exercise its right to demand repayment of any portion of the Company’s indebtedness prior to the date the Company can exercise its repurchase rights (other than for reasons specified in the prospectus), UBS and certain of its affiliates will arrange for alternative financing on terms and conditions substantially the same as those contained in the Facility. If alternative financing cannot be established, then UBS or one of its affiliates will purchase the Company’s pledged auction rate securities at par.

 

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The following is a summary of the fair value of available-for-sale marketable securities we held at March 31, 2009. The Company had no available-for-sale marketable securities at December 31, 2008.

 

March 31, 2009

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Security type

 

 

 

 

 

 

 

 

 

U.S. Federal Treasury and U.S. government agencies securities

 

$

28,173

 

$

6

 

$

(34

)

$

28,145

 

Corporate debt securities (FDIC backed)

 

2,395

 

3

 

 

2,398

 

Total marketable securities

 

$

30,568

 

$

9

 

$

(34

)

$

30,543

 

 

The following is a summary of the fair value of trading securities we held at March 31, 2009 and December 31, 2008:

 

March 31, 2009

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Security type

 

 

 

 

 

 

 

 

 

Auction rate securities

 

$

65,329

 

$

 

$

(8,088

)

$

57,241

 

Auction rate put option

 

 

6,231

 

 

6,231

 

Total marketable securities long-term

 

$

65,329

 

$

6,231

 

$

(8,088

)

$

63,472

 

 

December 31, 2008

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Security type

 

 

 

 

 

 

 

 

 

Auction rate securities

 

$

65,547

 

$

 

$

(8,012

)

$

57,535

 

Auction rate put option

 

 

6,684

 

 

6,684

 

Total marketable securities long-term

 

$

65,547

 

$

6,684

 

$

(8,012

)

$

64,219

 

 

The underlying collateral of our auction rate securities consists primarily of student loans, the majority of which are supported by the federal government as part of the Federal Family Education Loan Program (FFELP). The credit ratings for all of our auction rate securities were AAA when originally purchased. At March 31, 2009, $53.0 million at par value were rated AAA $1.2 million at par value were rated AA and $11.1 million at par value were rated A.

 

The Company’s marketable securities long-term at March 31, 2009 and December 31, 2008 are classified as trading securities and accordingly any future gains and losses will be recorded as other income (expense) in the statement of operations.

 

Effective January 1, 2009, we implemented Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements , or SFAS 157, for our nonfinancial assets and liabilities that are remeasured at fair value on a non-recurring basis. The adoption of SFAS 157 for our nonfinancial assets and liabilities that are remeasured at fair value on a non-recurring basis did not impact our financial position or results of operations; however, could have an impact in future periods. In addition, we may have additional disclosure requirements in the event we complete an acquisition or incur impairment of our assets in future periods.

 

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The following tables present information about our assets that are measured at fair value on a recurring basis for the periods presented and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability:

 

 

 

March 31,
2009

 

Quoted Prices in
Active Markets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Cash equivalents

 

$

95,783

 

$

95,783

 

$

 

$

 

Marketable securities

 

30,543

 

30,543

 

 

 

Marketable securities—long term

 

63,472

 

 

 

63,472

 

Total

 

$

189,798

 

$

126,326

 

$

 

$

63,472

 

 

 

 

December 31,
2008

 

Quoted Prices in
Active Markets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Cash equivalents

 

$

139,370

 

$

139,370

 

$

 

$

 

Marketable securities—long term

 

64,219

 

 

 

64,219

 

Total

 

$

203,589

 

$

139,370

 

$

 

$

64,219

 

 

Our marketable securities-long term consist of auction rate securities and the related Put Option. Due to the lack of market quotes relating to our auction rate securities, the fair value measurements for our auction rate securities have been estimated using an income approach model (discounted cash flow analysis), which is exclusively based on Level 3 inputs. The model considers factors that reflect assumptions market participants would use in pricing including among others, the collateralization underlying the investments, the creditworthiness of the counterparty, the expected future cash flows, liquidity premiums, the probability of successful auctions in the future, and interest rates. The assumptions used are subject to volatility and may change as the underlying sources of these assumptions and markets conditions change.

 

Due to the lack of market quotes relating to our Put Option, the fair value measurements for our Put Option have been estimated using a valuation approach commonly used for forward contracts in which one party agrees to sell a financial instrument (generating cash flows) to another party at a particular time for a predetermined price, which is exclusively based on Level 3 inputs. In this approach the present value of all expected future cash flows is subtracted from the current fair value of the security, and the resulting value is calculated as a future value at an interest rate reflective of counterparty risk. The assumptions used are subject to volatility and may change as the underlying sources of these assumptions and markets conditions change.

 

The following tables roll forward the fair value of our auction rate securities, whose fair value is determined by Level 3 inputs for the periods presented:

 

 

 

Amount
($ in millions)

 

Balance at December 31, 2008

 

$

64.2

 

Impairment of auction rate securities and put option

 

(0.5

)

Settlements

 

(0.2

)

Balance at March 31, 2009

 

$

63.5

 

 

 

 

Amount
($ in millions)

 

 

 

 

 

Balance at December 31, 2007

 

$

92.9

 

Total unrealized losses included in other comprehensive income

 

(3.7

)

Settlements

 

(26.2

)

Balance at March 31, 2008

 

$

63.0

 

 

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4.  COMPREHENSIVE LOSS

 

Comprehensive loss is comprised of net loss and other comprehensive loss.  Other comprehensive loss includes unrealized losses on our available-for-sale securities that are excluded from net loss.  Total comprehensive loss for the three months ended March 31, 2009 and March 31, 2008 was as follows:

 

 

 

Three Months Ended
March 31,

 

 

 

2009

 

2008

 

Net loss

 

$

(9,908

)

$

(13,914

)

Unrealized loss on marketable securities

 

(25

)

(3,700

)

Comprehensive loss

 

$

(9,933

)

$

(17,614

)

 

5.  ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses include the following at March 31, 2009 and December 31, 2008:

 

 

 

March 31,
2009

 

December 31,
2008

 

Accounts payable

 

$

314

 

$

495

 

Accrued payroll

 

1,399

 

2,671

 

Accrued outsourced pre-clinical and clinical fees

 

7,754

 

8,669

 

Accrued professional fees

 

1,065

 

1,037

 

Accrued restructuring-current portion

 

575

 

660

 

Other accrued expenses

 

1,220

 

728

 

 

 

$

12,327

 

$

14,260

 

 

6.  RESTRUCTURING CHARGES

 

In 2002, we recorded a restructuring charge associated with abandoning our facility in Redwood City, California, which was comprised of the difference between the remaining lease obligation, which runs through 2010, and our estimate of potential future sublease income.  The accrual balance was adjusted in 2003 to reflect a change in estimate due to continued deterioration in the local real estate market.  The accrual balance was adjusted again in 2004 as a result of us entering into a sublease for the facility.  The remaining facility-related restructuring accrual is primarily comprised of the difference between our lease obligation for this facility, which will be paid out through 2010, and the amount of sublease payments we will receive under our sublease agreement.

 

 

Activities against the restructuring accrual in the three months ended March 31, 2009 and March 31, 2008 were as follows:

 

 

 

Balance as of
December 31, 2008

 

2009
Provisions

 

2009
Payments

 

Balance as of
March 31, 2009

 

Facility-related

 

$

738

 

$

 

$

(163

)

$

575

 

 

 

 

Balance as of
December 31, 2007

 

2008
Provisions

 

2008
Payments

 

Balance as of
March 31, 2008

 

Facility-related

 

$

1,366

 

$

 

$

(155

)

$

1,211

 

 

7.  NET LOSS PER SHARE

 

Net loss per share is computed using the weighted average number of common shares outstanding. Basic and diluted net loss per share amounts are equivalent for the periods presented as the inclusion of potential common shares in the number of shares used for the diluted computation would be anti-dilutive to loss per share. Potential common shares, the shares that would be issued upon the exercise of outstanding stock options, were 5,606,711 and 5,212,279 for the three months ended March 31, 2009 and 2008, respectively.

 

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8.  STOCK-BASED COMPENSATION AND STOCK PLANS

 

Effective January 1, 2006, we adopted the provisions of SFAS No.123(R), “Share-Based Payment”  (“SFAS 123 (R)”), which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS 123(R), stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employees’ requisite service period (generally the vesting period of the equity grant).

 

We estimate the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, expected option term, expected volatility of our stock over the option’s expected term, risk-free interest rate over the option’s expected term, and the expected annual dividend yield. We believe that the valuation technique and approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of our stock options granted in the three months ended March 31, 2009 and March 31, 2008.

 

The following table presents stock-based compensation expense included in our Condensed Consolidated Statements of Operations:

 

 

 

Three Months Ended
March  31,

 

 

 

2009

 

2008

 

Research and development

 

$

401

 

$

437

 

General and administrative

 

665

 

2,466

 

Total stock-based compensation expense

 

$

1,066

 

$

2,903

 

 

In the three months ended March 31, 2009 and March 31, 2008, no stock-based compensation expense was capitalized and there were no recognized tax benefits associated with the stock-based compensation expense.  Stock-based compensation expense of $2,237, included in general and administrative in the first quarter of 2008, resulted from amendments to the former CEO’s employment agreement in October 2007 and January 2008.

 

 

Option activity under our stock plans for the three months ended March 31, 2009 was as follows:

 

Stock Options

 

Number of
Shares

 

Weighted Average
Exercise Price

 

Outstanding as of December 31, 2008

 

5,600,583

 

$

5.99

 

Granted

 

41,000

 

3.56

 

Exercised

 

 

 

Cancelled

 

(34,872

)

7.08

 

 

 

 

 

 

 

Outstanding as of March 31, 2009

 

5,606,711

 

$

5.96

 

 

 

 

 

 

 

Exercisable as of March 31, 2009

 

3,503,158

 

$

6.61

 

 

The aggregate intrinsic value of options outstanding at March 31, 2009 was $594, of which $180 related to exercisable options. The weighted average fair value of options granted in the three months ended March 31, 2009 and 2008 was $2.00 and $2.83 per share, respectively. The intrinsic value of options exercised in the three months ended March 31, 2009 and 2008 was zero.

 

The total compensation cost not yet recognized as of March 31, 2009 related to non-vested option awards was $4.5 million, which will be recognized over a weighted-average period of 2.7 years. During the three months ended March 31, 2009, there were 3,100 shares forfeited with a weighted average grant date fair value of $3.42 per share. The weighted average remaining contractual life for options exercisable at March 31, 2009 was 4.6 years.

 

In January 2009 and 2008, we granted 412,200 and 103,316 shares, respectively, of restricted stock to employees, vesting annually over a four year period. Through March 31, 2009, 21,783 shares were forfeited, and 83,627 shares have vested.  The shares of restricted stock were issued at no cost to the recipients. The fair value of the restricted stock at the time of grant in January 2009 and 2008 was $3.54 and $4.75 respectively, per share, and is being expensed ratably over the vesting period. We recognized share-based compensation expense related to restricted stock of $207,406 and $23,271 for the quarter ended March 31, 2009 and 2008, respectively.

 

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9.  RECENT ACCOUNTING PRONOUNCEMENTS

 

Effective January 1, 2009, we implemented SFAS No. 157, Fair Value Measurements , or SFAS 157, for our nonfinancial assets and liabilities that are remeasured at fair value on a non-recurring basis. The adoption of SFAS 157 for our nonfinancial assets and liabilities that are remeasured at fair value on a non-recurring basis did not impact our financial position or results of operations; however, could have an impact in future periods. In addition, we may have additional disclosure requirements in the event we complete an acquisition or incur impairment of our assets in future periods.

 

On December 12, 2007, Emerging Issues Task Force (“EITF”) 07-01, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property , or EITF 07-01, was issued. EITF- 07-01 prescribes the accounting for collaborations. It requires certain transactions between collaborators to be recorded in the income statement on either a gross or net basis within expenses when certain characteristics exist in the collaboration relationship. EITF 07-01 is effective for all of our collaborations existing after January 1, 2009. The adoption of this standard did not have a material impact on our financial statements or results of operations.

 

On December 4, 2007, SFAS No. 141(R), Business Combinations , or SFAS 141(R), was issued. This Standard will require an acquiring company to measure all assets acquired and liabilities assumed, including contingent considerations and all contractual contingencies, at fair value as of the acquisition date. In addition, an acquiring company is required to capitalize IPR&D and either amortize it over the life of the product, or write it off if the project is abandoned or impaired. The Standard is effective for transactions occurring on or after January 1, 2009. There was no significant impact to the Company’s Consolidated Financial Statements from the adoption of SFAS 141(R).

 

Recently Issued Accounting Standards

 

In April 2009, the Financial Accounting Standards Board (“FASB”) issued the following new accounting standards:

 

 

 

i.

 

FASB Staff Position FAS 157-4, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed, or FSP FAS 157-4. FSP FAS 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS 157. FSP FAS 157-4 provides additional authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed, is applicable to all assets and liabilities (i.e. financial and nonfinancial) and will require enhanced disclosures.

 

 

 

ii.

 

FASB Staff Position FAS 115-2, FAS 124-2, and EITF 99-20-2, Recognition and Presentation of Other-Than-Temporary Impairments , or FSP FAS 115-2, FAS 124-2, and EITF 99-20-2. FSP FAS 115-2, FAS 124-2, and EITF 99-20-2 provides additional guidance to provide greater clarity about the credit and noncredit component of an other-than-temporary impairment event and to more effectively communicate when an other-than-temporary impairment event has occurred. This FSP applies to debt securities.

 

 

 

iii.

 

FASB Staff Position FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments , or FSP FAS 107-1 and APB 28-1. FSP FAS 107-1 and APB 28-1, amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments , to require disclosures about fair value of financial instruments in interim as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting , to require those disclosures in all interim financial statements

 

 

 

 

These standards are effective for periods ending after June 15, 2009. We are evaluating the impact that these standards will have on our financial statements.

 

10.  INCOME TAXES

 

As of December 31, 2008, we had federal net operating losses (“NOL”), state NOL, and research and development credit carryforwards of approximately $203,285, $138,319 and $18,250 respectively, which can be used to offset future federal and state income tax liabilities and expire at various dates through 2028. Federal net capital loss carryforwards of approximately $5,000 can be used to offset future federal capital gains and expire in 2010. Approximately $17,450 of our federal NOL and $1,508 of our state NOL were generated from excess tax deductions from share-based awards, the tax benefit of which will be credited to additional paid-in-capital when the deductions reduce current taxes payable.

 

We adopted the provisions of FASB Interpretation No. 48 (“FIN 48”) Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“SFAS 109”) on January 1, 2007. As a result of the implementation of FIN 48, we recorded no adjustment for unrecognized income tax benefits. At the adoption date of January 1, 2007, at December 31, 2008, and March 31, 2009 we had no unrecognized tax benefits. We do not expect that the total amount of unrecognized tax benefits will

 

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significantly increase in the next twelve months. We recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2008 and March 31, 2009, we had no accrued interest or penalties related to uncertain tax positions. The tax years 2005 through 2008 remain open to examination by the major taxing jurisdictions to which we are subject, which is primarily the U.S. Prior tax years remain open to the extent of net operating loss and tax credit carryforwards.

 

Utilization of NOL and R&D credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. Since the Company’s formation, the Company has raised capital through the issuance of capital stock on several occasions which, combined with the purchasing shareholders’ subsequent disposition of those shares, may have resulted in a change of control, as defined by Section 382, or could result in a change of control in the future upon subsequent disposition. The Company has not currently completed a study to assess whether a change of control has occurred or whether there have been multiple changes of control since the Company’s formation due to the significant complexity and cost associated with such study and that there could be additional changes in control in the future. If we have experienced a change of control at any time since Company formation, utilization of our NOL or R&D credit carryforwards would be subject to an annual limitation under Section 382. Any limitation may result in expiration of a portion of the NOL or R&D credit carryforwards before utilization. Further, until a study is completed and any limitation known, no amounts are being presented as an uncertain tax position under FIN 48.

 

11.  NOTE PAYABLE

 

On July 8, 2008, we entered into a collateralized, revolving credit line agreement for up to $47.5 million with UBS Bank USA (the “Facility”). The Facility is secured by a first priority lien and security interest in the auction rate securities held by us in an account with UBS Financial Services Inc., an affiliate of UBS Bank USA. The credit line is uncommitted and any outstanding balance, including interest, is payable upon demand. Variable rate advances under the Facility currently bear interest at LIBOR plus 100 basis points and interest is payable monthly. The Facility replaced the $15 million standard margin loan agreement with UBS Financial Services Inc. that we entered into on May 8, 2008. The funds are available for research and development efforts, including clinical trials, and for general corporate purposes, including working capital. In July 2008, we drew down $46.1 million under the Facility and that amount is reported as note payable.

 

On November 3, 2008, the Company accepted an offer (“the Offering”) by UBS of certain rights to cause UBS to purchase auction rate securities owned by the Company. The repurchase rights were offered in connection with UBS’s obligations under settlement agreements with the U.S. Securities and Exchange Commission and other federal and state regulatory authorities. The offering, the settlement agreements, and the respective rights and obligations of the parties, including a release by the Company of UBS and its employees and agents from all claims except claims for consequential damages relating to UBS’s marketing and sale of auction rate securities, are described in a prospectus issued by UBS dated October 7, 2008.

 

In accordance with the offering by UBS, the Facility will be treated as a “no net cost loan” as defined in the prospectus. As such, the Facility will remain payable on demand; however, if UBS Bank USA should exercise its right to demand repayment of any portion of the Company’s indebtedness prior to the date the Company can exercise its repurchase rights (other than for reasons specified in the prospectus), UBS and certain of its affiliates will arrange for alternative financing on terms and conditions substantially the same as those contained in the Facility. If alternative financing cannot be established, then UBS or one of its affiliates will purchase the Company’s pledged auction rate securities at par.

 

In October 2008, we entered into a margin loan agreement with another financial institution collateralized by $2.9 million of our auction rate securities and borrowed $1.7 million which is the maximum amount allowed under this facility. Interest expense was $166 for the three months ended March 31, 2009. There was no interest expense for the three months ended March 31, 2008.

 

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Table of Contents

 

ITEM 2.  MANAGEMENT ’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW

 

We are a clinical-stage biotechnology company organized as a Delaware corporation in 1993 and engaged in the research and development of innovative cancer therapeutics directed toward molecular targets that we believe play critical roles in the development of human cancers. Our mission is to discover and develop novel products that target multiple tumor types, act selectively against cancer cells and are well tolerated by patients. We believe our clinical stage products represent potential best-in-class or first-in-class small molecule candidates with differentiated mechanisms of action.

 

Our products and research programs are based on our understanding of biological processes that lead to the proliferation and metastasis of cancer cells, combined with our ability to generate product candidates possessing certain pre-selected, drug-like properties and designed to act with specificity against cancer cells. We believe that these qualities, when present from the earliest stages of product development, increase the likelihood of producing safe, effective and marketable drugs. We believe that our combined expertise in cancer biology and chemistry differentiates us from many companies at a similar stage of development.

 

Our lead product is ARQ 197, an orally administered inhibitor of the c-Met receptor tyrosine kinase. ARQ 197 is currently being evaluated as monotherapy and in combination therapy in a Phase 2 clinical development program that includes trials in Microphthalmia Transcription Factor (“MiT”)-associated tumors, non-small cell lung cancer (“NSCLC”), pancreatic adenocarcinoma and hepatocellular carcinoma (“HCC”). We have licensed commercial rights to ARQ 197 for human cancer indications to Daiichi Sankyo Co., Ltd. (“Daiichi Sankyo”) in the U.S., Europe, South America and the rest of the world, excluding Japan and certain other Asian countries, where we have licensed commercial rights to Kyowa Hakko Kirin Co., Ltd. (“Kyowa Hakko Kirin”). Our separate agreements with these partners provide for possible future milestone payments, royalties on product sales, and development funding, in addition to payments that we have already received.

 

Our product pipeline offers the potential for multiple therapeutic candidates based on diverse biological targets, mechanisms of action and chemistry. The most advanced of these programs is focused on the development of inhibitors of the Eg5 kinesin motor protein, which include ARQ 621, in Phase 1 clinical development.  We have completed certain Phase 2 proof-of-principle trials with ARQ 501, a first-generation, intravenously administered novel activator of the cell’s DNA damage response mechanism mediated by the E2F-1 transcription factor, and we have filed an IND for ARQ 761, a second-generation molecule from our E2F-1 program. We are in pre-clinical development with an inhibitor of the BRAF kinase.

 

Our drug discovery efforts are focused primarily on the ArQule Kinase Inhibitor Platform (“AKIP™”), which we employ to generate a new class of compounds designed to inhibit a variety of kinases potently, selectively and without competing with adenosine triphosphate (“ATP”), an energy source for cells. We are currently assessing the potential of multiple kinases in oncology and other therapeutic areas as targets for this drug discovery platform, and we are seeking to generate and validate compounds that inhibit these kinase targets. We have signed a drug discovery agreement with Daiichi Sankyo that utilizes the capabilities of the AKIP platform to discover compounds that inhibit two such kinase targets in the field of oncology.

 

All of our drug discovery efforts, including our kinase platform, are supported by the expertise we have derived from our heritage as a combinatorial chemistry company. This expertise, which has been validated through collaborations with Pfizer Inc. , Wyeth, Solvay and other corporate partners, is married to innovative biology to create a discovery engine marked by speed, efficiency and flexibility.

 

We have incurred a cumulative net loss of $342 million from inception through March 31, 2009. We expect research and development costs to increase in 2009, due to clinical testing of our lead product candidates. Although we had generated positive cash flow from operations for six consecutive years from 2000-2005, these cash flows were attributable to our discontinued chemistry services operations. We recorded a net loss for all but one of those years. We recorded a net loss for 2006, 2007 and 2008, and expect a net loss for 2009.

 

Our revenue consists primarily of development funding from our alliances with Daiichi Sankyo and Kyowa Hakko Kirin. Revenue and expenses fluctuate from quarter to quarter based upon a number of factors, notably: the timing and extent of our cancer related research and development activities together with the length and outcome of our clinical trials. On December 17, 2008, Roche notified the Company of its intention not to exercise its option to license the E2F program. Roche’s rights to develop and commercialize potential drugs under the agreement terminated as of December 31, 2008. As a result, the Company will not receive any further payments under this agreement.

 

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Table of Contents

 

On December 18, 2008, we entered into a license, co-development and co-commercialization agreement with Daiichi Sankyo to conduct research, clinical trials and commercialization of ARQ 197 in human cancer indications in the U.S., Europe, South America and the rest of the world, excluding Japan, China (including Hong Kong), South Korea and Taiwan, where Kyowa Hakko Kirin has exclusive rights for development and commercialization. The agreement provides for a $60 million cash upfront licensing payment from Daiichi Sankyo to us, which we received in December 2008, and an additional $560 million in potential development and sales milestone payments. We and Daiichi Sankyo will share equally the costs of Phase 2 and Phase 3 clinical studies, with our share of Phase 3 costs payable solely from milestone and royalty payments by Daiichi Sankyo. Upon commercialization, we will receive tiered, double-digit royalties from Daiichi Sankyo on net sales of ARQ 197 commensurate with the magnitude of the transaction. We retain the option to participate in the commercialization of ARQ 197 in the U.S. Revenue for this agreement is recognized using the contingency-adjusted performance model with an estimated development period through December 2013.

 

On November 7, 2008, we entered into a research collaboration, exclusive license and co-commercialization agreement with Daiichi Sankyo under which we will apply our proprietary technology and know-how from our AKIP™ platform for the discovery of therapeutic compounds that selectively inhibit certain kinases. The agreement defines two such kinase targets, and Daiichi Sankyo will have an option to license compounds directed to these targets following the completion of certain pre-clinical studies. The agreement provides for a $15 million upfront payment, which we received in November 2008, research support payments for the first two years of the collaboration, licensing fees for compounds discovered as a result of this research, milestone payments related to clinical development, regulatory review and sales, and royalty payments on net sales of compounds from the collaboration. We retain the option to co-commercialize licensed products developed under this agreement in the U.S. Revenue for this agreement is recognized using the contingency-adjusted performance model with an estimated performance period through November 2012.

 

On April 27, 2007, we entered into an exclusive license agreement with Kyowa Hakko Kirin to develop and commercialize ARQ 197, a small molecule, selective inhibitor of the c-Met receptor tyrosine kinase, in Japan and parts of Asia. A $3 million portion of an upfront licensing fee was received by the Company under this agreement in the first quarter of 2007, and an additional $27 million in upfront licensing fees was received on May 7, 2007. The agreement includes $123 million in upfront and potential development milestone payments from Kyowa Hakko Kirin to ArQule, including the $30 million cash upfront licensing payments. In February 2008, we received a $3 million milestone payment from Kyowa Hakko Kirin. Upon commercialization, ArQule will receive tiered royalties in the mid-teen to low-twenty percent range from Kyowa Hakko Kirin on net sales of ARQ 197. Kyowa Hakko Kirin will be responsible for all clinical development costs and commercialization of the compound in certain Asian countries, consisting of Japan, China (including Hong Kong), South Korea and Taiwan. In addition to the upfront and possible regulatory milestone payments totaling $123 million, the Company will be eligible for future milestone payments based on the achievement of certain levels of net sales. The Company will recognize the payments, if any, as revenue in accordance with its revenue recognition policies. As of December 31, 2008, the Company has not recognized any revenue from these sales milestone payments, and there can be no assurance that it will do so in the future. Revenue for this agreement is recognized using the contingency-adjusted performance model with an estimated development period through April 2016.

 

LIQUIDITY AND CAPITAL RESOURCES

 

 

 

March 31,

 

December 31,

 

Increase (decrease)

 

 

 

2009

 

2008

 

$

 

%

 

 

 

(in millions)

 

Cash, cash equivalents and marketable securities-short term

 

$

128.9

 

$

141.9

 

$

(13.0

)

(9

)%

Marketable securities- long term

 

63.5

 

64.2

 

(0.7

)

(1

)%

Notes payable

 

47.8

 

47.8

 

 

 

Working capital

 

48.3

 

59.7

 

(11.4

)

(19

)%

 

 

 

Q1 2009

 

Q1 2008

 

Increase (decrease)

 

 

 

(in millions)

 

Cash flow from:

 

 

 

 

 

 

 

Operating activities

 

$

(13.1

)

$

(9.5

)

$

(3.6

)

Investing activities

 

(30.4

)

55.2

 

(85.6

)

Financing activities

 

 

 

 

 

Cash flow from operating activities.   Our uses of cash for operating activities have primarily consisted of salaries and wages for our employees, facility and facility-related costs for our offices and laboratories, fees paid in connection with preclinical and clinical studies, laboratory supplies and materials, and professional fees. The sources of our cash flow from operating activities have consisted primarily of payments from our collaborators for services performed or upfront payments for future services.  For the three

 

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months ended March 31, 2009, our net use of cash was primarily driven by the difference between cash receipts from our collaborators and payments for operating expenses, which resulted in a net cash outflow of $13.1 million.

 

Cash flow from investing activities.   Our net cash used by investing activities of $30.4 million in the three months ended March 31, 2009 was predominantly comprised of net purchases of marketable securities. The composition and mix of cash, cash equivalents and marketable securities may change frequently as a result of the Company’s constant evaluation of conditions in financial markets, the maturity of specific investments, and our near term liquidity needs.

 

Our cash equivalents and marketable securities include US Treasury bill funds, money market funds, commercial paper fully guaranteed by the FDIC under the Temporary Liquidity Guarantee Program (TLGP) and US federal and state agency backed certificates, including auction rate securities that have investment grade ratings.

 

Our cash equivalents and our portfolio of marketable securities are subject to market risk due to changes in interest rates. Fixed rate interest securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates.

 

Auction rate securities are structured with short-term interest reset dates of generally less than 90 days, but with contractual maturities that can be well in excess of ten years. At the end of each reset period, which occurs every seven to twenty-eight days, investors can sell or continue to hold the securities at par value. If any of our auction rate securities were to fail an auction, due to sell orders exceeding buy orders, the funds associated with a failed auction would not be accessible until a successful auction occurred, a buyer was found outside the auction process, the underlying securities matured or a settlement with the underwriter is reached.

 

Beginning in the first quarter of 2008 and throughout 2008, certain auction rate securities failed auction due to sell orders exceeding buy orders. On November 3, 2008, the Company accepted an offer (the “Offering”) by UBS AG (“UBS”) of certain rights (“Put Option”) to cause UBS to purchase auction rate securities owned by the Company. The repurchase rights were offered in connection with UBS’s obligations under settlement agreements with the U.S. Securities and Exchange Commission and other federal and state regulatory authorities. The Offering, the settlement agreements, and the respective rights and obligations of the parties, including a release by the Company of UBS and its employees and agents from all claims except claims for consequential damages relating to UBS’s marketing and sale of auction rate securities, are described in a prospectus issued by UBS dated October 7, 2008.

 

As a result of accepting the Offering, the Company received a Put Option from UBS to repurchase the securities at par value at any time during the period from June 30, 2010 through July 2, 2012, if the Company’s auction rate securities have not previously been sold by the Company or by UBS on its behalf. The Company has accounted for the Put Option as a freestanding financial instrument and elected to record the value under the fair value option of SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.   Pursuant to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities , the Company has classified its auction rate securities as trading securities reflecting the Company’s intent to exercise the Put Option during the period June 30, 2010 to July 2, 2012. The decrease in value of our Put Option and auction rate securities totaling $0.5 million in the three months ended March 31, 2009 was recorded as a loss in other income (expense) in the statement of operations.

 

ArQule’s marketable securities portfolio as of December 31, 2008 and March 31, 2009 was $65.3 million (at cost) invested in auction rate securities all of which were associated with auctions that failed subsequent to February 12, 2008.

 

On July 8, 2008, we entered into a collateralized, revolving credit line agreement for up to $47.5 million with UBS Bank USA (the “Facility”). The Facility is secured by a first priority lien and security interest in the auction rate securities held by us in an account with UBS Financial Services Inc., an affiliate of UBS Bank USA. The credit line is uncommitted and any outstanding balance, including interest, is payable upon demand. Variable rate advances under the Facility currently bear interest at LIBOR plus 100 basis points and interest will be payable monthly. The Facility replaced the $15 million standard margin loan agreement with UBS Financial Services Inc. that we entered into on May 8, 2008. In July 2008, we drew down $46.1 million under the Facility. The funds will be available for research and development efforts, including clinical trials, and for general corporate purposes, including working capital.

 

In accordance with the Offering by UBS, the $46.1 million borrowed under the Facility remains payable on demand; however, if UBS Bank USA should exercise its right to demand repayment of any portion of the Company’s indebtedness prior to the date the Company can exercise its repurchase rights (other than for reasons specified in the prospectus), UBS and certain of its affiliates will arrange for alternative financing on terms and conditions substantially the same as those contained in the Facility. If alternative financing cannot be established, then UBS or one of its affiliates will purchase the Company’s pledged auction rate securities at par.

 

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In light of the above arrangement with our auction rate securities and the financial impact of our two agreements with Daiichi Sankyo, including a cumulative $75 million in cash and upfront payments received in the quarter ended December 31, 2008 and certain anticipated milestone and cost-sharing provisions, we expect that our available cash and cash equivalents, including cash received under our auction rate security credit line agreement (as described above), together with cash from operations and investment income, will be sufficient to finance our working capital and capital requirements through at least the end of 2011.

 

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 additional corporate collaborations and the terms of such collaborations, results of research and development, unanticipated required capital expenditures, competitive and technological advances, acquisitions and other factors. We cannot guarantee that we will be able to develop any of our drug candidates into a commercial product. It is likely we will need to raise additional capital or incur indebtedness to continue to fund our operations in the future. Our ability to raise additional funds will depend on financial, economic and market conditions and due to global capital and credit market conditions or for other reasons, we may be unable to raise capital when needed, or on terms favorable to us. If necessary funds are not available, we may have to delay, reduce the scope of, or eliminate some of our development programs, potentially delaying the time to market for any of our product candidates.

 

Our contractual obligations were comprised of the following as of March 31, 2009 (in thousands):

 

 

 

Payment due by period

 

Contractual Obligations

 

Total

 

Less than
1 year

 

1 - 3 years

 

3 - 5 years

 

More than
5 years

 

Notes payable

 

$

47,750

 

$

47,750

 

$

 

$

 

$

 

Operating lease obligations

 

20,886

 

3,855

 

7,024

 

6,549

 

3,458

 

Purchase obligations

 

7,975

 

7,975

 

 

 

 

Total

 

$

76,611

 

$

59,580

 

$

7,024

 

$

6,549

 

$

3,458

 

 

Included in the total minimum payments for operating leases is approximately $550 related to abandoned real estate in California, net of contractual sublease income. This net amount has been accrued as a liability as a part of the Company’s restructuring charge in 2002 and subsequently adjusted in 2003 and 2004. Purchase obligations are comprised primarily of outsourced preclinical and clinical trial expenses and payments to license certain intellectual property to support the Company’s research efforts. Interest on notes payable is variable and is excluded from the table above. Notes payable of $46.1 million currently bear interest at a rate not to exceed our weighted average auction rate security coupon rate and $1.7 million currently bear interest at LIBOR plus 125 basis points.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

A “critical accounting policy” is one which is both important to the portrayal of the Company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. For additional information, please see the discussion of our significant accounting policies in Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K filed with the SEC on March 6, 2009.

 

Research and Development Revenue

 

The Company’s revenue recognition policies are in accordance with the SEC’s Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements , as amended by SEC Staff Accounting Bulletin No. 104, Revenue Recognition , and for revenue arrangements entered into after June 30, 2003, Emerging Issues Task Force (“EITF”) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF 00-21”).

 

Research and development revenue is generated primarily through collaborative research and development agreements. The terms of the agreements may include nonrefundable upfront payments, funding for research and development, milestone payments and royalties on any product sales derived from collaborations.

 

Research and development payments from our collaborators are recognized as research and development revenue using the contingency adjusted performance model. Under this model, when payments are earned, revenue is immediately recognized on a pro-rata basis in the period we achieve the milestone based on the time elapsed from inception of the agreement to the time the milestone is earned over the estimated duration of the development period under the agreement. Thereafter, the remaining portion of the milestone payment is recognized on a straight-line basis over the remaining estimated development period under the agreement. This

 

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estimated development period may ultimately be shorter or longer depending upon the outcome of the development work, resulting in accelerated or deferred recognition of the development revenue. Royalty payments will be recognized as revenue when earned. The costs associated with satisfying research and development contracts are included in research and development expense as incurred.

 

RESULTS OF OPERATIONS

 

The following are the results of operations for the three months ended March 31, 2009 and 2008:

 

Revenue

 

 

 

 

 

 

 

Increase (decrease)

 

 

 

2009

 

2008

 

$

 

%

 

 

 

(in millions)

 

 

 

 

 

For the three months ended March 31:

 

 

 

 

 

 

 

 

 

Research and development revenue

 

$

5.4

 

$

3.5

 

$

1.9

 

54

%

 

Research and development revenue in the three months ended March 31, 2009 is comprised of revenue from the Daiichi Sankyo development and research collaborations agreements entered into in 2008 and the Kyowa Hakko exclusive license agreement. The increase in the three month period is primarily due to revenue from Daiichi Sankyo. Revenue of $1.6 million was recognized in the comparable period of the prior year from the Roche alliance agreement that was terminated in December 2008.

 

 

Research and development

 

 

 

 

 

 

 

Increase (decrease)

 

 

 

2009

 

2008

 

$

 

%

 

 

 

(in millions)

 

 

 

 

 

For the three months ended March 31:

 

 

 

 

 

 

 

 

 

Research and development

 

$

11.3

 

$

13.5

 

$

(2.2

)

(16

)%

 

Overview

 

Our research and development expense consists primarily of salaries and related expenses for personnel, costs of contract manufacturing services, costs of facilities and equipment, fees paid to professional service providers in conjunction with our clinical trials, fees paid to research organizations in conjunction with pre-clinical animal studies, costs of materials used in research and development, consulting, license, and sponsored research fees paid to third parties and depreciation of associated laboratory equipment. We expect our research and development expense to increase as we continue to develop our portfolio of oncology programs.

 

We have not accumulated and tracked our internal historical research and development costs or our personnel and personnel-related costs on a program-by-program basis. Our employee and infrastructure resources are allocated across several projects, and many of our costs are directed to broadly applicable research endeavors. As a result, we cannot state the costs incurred for each of our oncology programs on a program-by-program basis. The expenses incurred by us to third parties for pre-clinical and clinical trials in the current quarter and since inception of our lead clinical stage program were as follows (in millions):

 

Oncology program

 

Current status

 

Three Months Ended
March 31, 2009

 

Program-to-date

 

c-Met program—ARQ 197

 

Phase 2

 

$

4.5

 

$

38.7

 

 

Our future research and development expenses in support of our current and future oncology programs will be subject to numerous uncertainties in timing and cost to completion. We test potential products in numerous pre-clinical studies for safety, toxicology, and efficacy. We may conduct multiple clinical trials for each product. As we obtain results from trials, we may elect to discontinue or delay clinical trials for certain products in order to focus our resources on more promising products. Completion of, clinical trials may take several years or more, but the length of time generally varies substantially according to the type, complexity novelty, and intended use of a product. It is not unusual for the pre-clinical and clinical development of these types of products to each take nine years or more, and for total development costs to exceed $500 million for each product.

 

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We estimate that clinical trials of the type generally needed to secure new drug approval are typically completed over the following timelines:

 

Clinical Phase

 

Estimated Completion Period

 

Phase 1

 

1-2 years

 

Phase 2

 

2-3 years

 

Phase 3

 

2-4 years

 

 

The duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others, the following:

 

·   the number of clinical sites included in the trials;

 

·   the length of time required to enroll suitable patients;

 

·        the number of patients that ultimately participate in the trials;

 

·        the duration of patient follow-up to ensure the absence of long-term product-related adverse events; and

 

·        the efficacy and safety profile of the product.

 

An element of our business strategy is to pursue the research and development of a broad pipeline of products. This is intended to allow us to diversify the risks associated with our research and development expenditures. As a result, we believe our future capital requirements and future financial success are not substantially dependent on any one product. To the extent we are unable to build and maintain a broad pipeline of products, our dependence on the success of one or a few products increases.

 

Our strategy includes entering into alliance arrangements with third parties to participate in the development and commercialization of our products, such as our collaboration agreements with Daiichi and Kyowa Hakko Kirin. In the event that third parties have control over the clinical trial process for a product, the estimated completion date would be under control of that third party rather than under our control. We cannot forecast with any degree of certainty whether our products will be subject to future collaborative arrangements or how such arrangements would affect our development plans or capital requirements.

 

As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our oncology programs or when and to what extent we will receive cash inflows from the commercialization and sale of a product. Our inability to complete our oncology programs in a timely manner or our failure to enter into appropriate collaborative agreements could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time-to-time in order to continue with our product development strategy. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business.

 

Research and development expense in the first quarter of 2009 decreased by $2.2 million. The decrease is primarily due to a $1.6 million decrease in clinical and preclinical costs related to ARQ 501 and ARQ 621, and a decrease of $0.4 million labor and related costs. At March 31, 2009 and 2008 we had 78 employees dedicated to our research and development program.

 

General and administrative

 

 

 

 

 

 

 

Increase (decrease)

 

 

 

2009

 

2008

 

$

 

%

 

 

 

(in millions)

 

 

 

 

 

For the three months ended March 31:

 

 

 

 

 

 

 

 

 

General and administrative

 

$

3.7

 

$

5.6

 

$

(1.9

)

(35

)%

 

General and administrative expense decreased in the first quarter of 2009 principally due to stock-based compensation expense incurred in the first quarter of 2008 resulting from senior management transitions that did not recur in the first quarter of 2009. General and administrative headcount was 30 at March 31, 2009, compared to 34 at March 31, 2008.

 

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Interest income , interest expense and other income (expense)

 

 

 

 

 

 

 

Increase (decrease)

 

 

 

2009

 

2008

 

$

 

%

 

 

 

(in millions)

 

 

 

 

 

For the three months ended March 31:

 

 

 

 

 

 

 

 

 

Interest income

 

$

0.4

 

$

1.6

 

$

(1.2

)

(78

)%

Interest expense

 

(0.2

)

 

0.2

 

 

Other income (expense)

 

(0.5

 

0.5

 

 

 

Interest income is comprised primarily of interest income derived from our portfolio of cash, cash equivalents and investments. Interest income decreased in 2009 due to lower interest rates earned on our portfolio. Interest expense in 2009 was incurred on our notes payable. Other income (expense) in the three months ended March 31, 2009 includes a $0.5 million  loss from recording our auction rate securities and Put Option at fair value.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

Effective January 1, 2009, we implemented Statement of Financial Accounting Standards No. 157, Fair Value Measurements , or SFAS 157, for our nonfinancial assets and liabilities that are remeasured at fair value on a non-recurring basis. The adoption of SFAS 157 for our nonfinancial assets and liabilities that are remeasured at fair value on a non-recurring basis did not impact our financial position or results of operations; however, could have an impact in future periods. In addition, we may have additional disclosure requirements in the event we complete an acquisition or incur impairment of our assets in future periods.

 

On December 12, 2007, EITF 07-01, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property , or EITF 07-01, was issued. EITF- 07-01 prescribes the accounting for collaborations. It requires certain transactions between collaborators to be recorded in the income statement on either a gross or net basis within expenses when certain characteristics exist in the collaboration relationship. EITF 07-01 is effective for all of our collaborations existing after January 1, 2009. The adoption of this standard did not have a material impact on our financial statements or results of operations.

 

On December 4, 2007, SFAS No. 141(R), Business Combinations , or SFAS 141(R), was issued. This Standard will require an acquiring company to measure all assets acquired and liabilities assumed, including contingent considerations and all contractual contingencies, at fair value as of the acquisition date. In addition, an acquiring company is required to capitalize IPR&D and either amortize it over the life of the product, or write it off if the project is abandoned or impaired. The Standard is effective for transactions occurring on or after January 1, 2009. There was no significant impact to the Company’s Consolidated Financial Statements from the adoption of SFAS 141(R).

 

Recently Issued Accounting Standards

 

In April 2009, the FASB issued the following new accounting standards:

 

i.                   FASB Staff Position FAS 157-4, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed, or FSP FAS 157-4.  FSP FAS 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS 157. FSP FAS 157-4 provides additional authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed, is applicable to all assets and liabilities (i.e. financial and nonfinancial) and will require enhanced disclosures.

 

ii.                FASB Staff Position FAS 115-2, FAS 124-2, and EITF 99-20-2, Recognition and Presentation of Other-Than-Temporary Impairments , or FSP FAS 115-2, FAS 124-2, and EITF 99-20-2.  FSP FAS 115-2, FAS 124-2, and EITF 99-20-2 provides additional guidance to provide greater clarity about the credit and noncredit component of an other-than-temporary impairment event and to more effectively communicate when an other-than-temporary impairment event has occurred. This FSP applies to debt securities.

 

iii.             FASB Staff Position FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments , or FSP FAS 107-1 and APB 28-1.  FSP FAS 107-1 and APB 28-1, amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments , to require disclosures about fair value of financial instruments in interim as well as in

 

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annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting , to require those disclosures in all interim financial statements

 

These standards are effective for periods ending after June 15, 2009. We are evaluating the impact that these standards will have on our financial statements.

 

FORWARD LOOKING STATEMENTS

 

In addition to historical information, this report contains forward-looking statements. You can identify these forward-looking statements by their use of words such as “anticipate,” “assume,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “project,” “target,” “will” and other words and terms of similar meaning. You also can identify them by the fact that they do not relate strictly to historical or current facts.  All statements which address operating performance, events or developments that the Company expects or anticipates will occur in the future, such as projections about its future results of operations, its financial condition, research, development and commercialization of its products and anticipated trends in its business are forward-looking statements.

 

In this report we make forward-looking statements regarding our drug development pipeline and our clinical trials involving ARQ 197. Additional forward-looking statements relate to our agreements with Kyowa Hakko Kirin and Daiichi Sankyo, including potential future milestones and royalty payments that could result from the future development of ARQ 197.

 

Drug development involves a high degree of risk. Only a small number of research and development programs result in the commercialization of a product.  For example, pre-clinical efforts associated with our product pipeline may fail or prove disappointing because our technology platform did not produce candidates with the desired characteristics. Animal xenograft pre-clinical studies may be unpredictive of human response.  Positive information about early stage clinical trial results will not ensure that later stage or larger scale clinical trials will be successful.

 

Furthermore, our drugs may not demonstrate promising therapeutic effects; in addition, they may not demonstrate appropriate safety profiles in ongoing or later stage or larger scale clinical trials as a result of known or as yet unidentified side effects. The results achieved in later stage trials may not be sufficient to meet applicable regulatory standards. Problems or delays may arise during clinical trials or in the course of developing, testing or manufacturing our drugs that could lead us or our partner to discontinue development.

 

Even if later stage clinical trials are successful, the risk exists that unexpected concerns may arise from analysis of data or from additional data or that obstacles may arise or issues be identified in connection with review of clinical data with regulatory authorities or that regulatory authorities may disagree with the Company’s view of the data or require additional data or information or additional studies. Also, the planned timing of initiation of clinical trials and the duration and conclusion of such trials for our drugs are subject to the ability of the company to enroll patients, enter into agreements with clinical trial sites and investigators, and other technical hurdles and issues that may not be resolved.

 

We also make forward-looking statements regarding the adequacy of our financial resources.  Our capital resources may not be adequate because our cash requirements may vary materially from those now planned depending upon the results of our drug discovery and development strategies, the outcomes of our clinical trials, our ability to enter into additional corporate collaborations in the future and the terms of such collaborations, results of research and development, the need for currently unanticipated capital expenditures, competitive and technological advances, acquisitions, financial market conditions, our ability to liquidate our investments in auction rate securities and other factors.  Additionally, our corporate collaborators may terminate their agreements with us, thereby eliminating that source of funding, because we may fail to satisfy the prescribed terms of the collaborations or for other reasons.  Finally, we can not assure that UBS will have adequate financial resources to fulfill its repurchase obligations to us.

 

We cannot guarantee that we will be able to develop any of our drug candidates into a commercial product generating revenues.  If we experience increased losses, we may have to seek additional financing from public and 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.

 

The factors, risks and uncertainties referred to above and others are more fully described under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed with the SEC on March 6, 2009, as updated from time to time in our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.  The forward-looking statements contained herein represent the judgment of the Company as of the date of this report.  We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by law.

 

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We own financial instruments that are sensitive to market risk as part of our investment portfolio. We have implemented policies regarding the amount and credit ratings of investments. Our investment portfolio is used to preserve our capital until it is used to fund operations, including our research and development activities. Our investments are evaluated quarterly to determine the fair value of the portfolio.

 

Our cash and marketable securities include US Treasury bill funds, money market funds, and U.S. federal and state agency backed certificates, including auction rate securities that have strong credit ratings.

 

Our cash equivalents and our portfolio of marketable securities are subject to market risk due to changes in interest rates. Fixed rate interest securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates.

 

Auction rate securities are securities that are structured with short-term interest reset dates of generally less than 90 days, but with contractual maturities that can be well in excess of ten years. At the end of each reset period, which occurs every seven to twenty-eight days, investors can sell or continue to hold the securities at par value. If any of our auction rate securities were to fail an auction, due to sell orders exceeding buy orders, the funds associated with a failed auction would not be accessible until a successful auction occurred, a buyer was found outside the auction process, the underlying securities matured or a settlement with the underwriter is reached.

 

Beginning in the first quarter of 2008 and throughout 2008, certain auction rate securities failed auction due to sell orders exceeding buy orders. On November 3, 2008, the Company accepted an offer (the “Offering”) by UBS AG (“UBS”) of certain rights (“Put Option”) to cause UBS to purchase auction rate securities owned by the Company. The repurchase rights were offered in connection with UBS’s obligations under settlement agreements with the U.S. Securities and Exchange Commission and other federal and state regulatory authorities. The offering, the settlement agreements, and the respective rights and obligations of the parties, including a release by the Company of UBS and its employees and agents from all claims except claims for consequential damages relating to UBS’s marketing and sale of auction rate securities, are described in a prospectus issued by UBS dated October 7, 2008.

 

As a result of accepting the Offering, the Company received a Put Option from UBS to repurchase the securities at par value at any time during the period from June 30, 2010 through July 2, 2012, if the Company’s auction rate securities have not previously been sold by the Company or by UBS on its behalf. The Company has accounted for the Put Option as a freestanding financial instrument and elected to record the value under the fair value option of SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities .  Pursuant to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities , the Company has classified its auction rate securities as trading securities reflecting the Company’s intent to exercise the Put Option during the period June 30, 2010 to July 2, 2012. The decrease in value of our Put Option and auction rate securities totaling $0.5 million in the three months ended March 31, 2009 was recorded as a loss in other income (expense) in the statement of operations.

 

ArQule’s marketable securities portfolio as of December 31, 2008 and March 31, 2009 was $65.3 million (at cost) invested in auction rate securities all of which were associated with auctions that failed subsequent to February 12, 2008.

 

On July 8, 2008, we entered into a collateralized, revolving credit line agreement for up to $47.5 million with UBS Bank USA (the “Facility”). In July 2008, we drew down $46.1 million under the Facility.  In accordance with the offering by UBS, the Facility remains payable on demand; however, if UBS Bank USA should exercise its right to demand repayment of any portion of the Company’s indebtedness prior to the date the Company can exercise its repurchase rights (other than for reasons specified in the prospectus), UBS and certain of its affiliates will arrange for alternative financing on terms and conditions substantially the same as those contained in the Facility. If alternative financing cannot be established, then UBS or one of its affiliates will purchase the Company’s pledged auction rate securities at par.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Our management, with the participation of our Chief Executive Officer (Principal Executive Officer) and President and Chief Operating Officer (Principal Financial Officer), evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2009. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that

 

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information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and financial officer, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2009, our Chief Executive Officer (Principal Executive Officer) and President and Chief Operating Officer (Principal Financial Officer) concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

There have been no changes in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1 . — LEGAL PROCEEDINGS.   None.

 

ITEM 1A . — RISK FACTORS.   For information regarding factors that could affect the Company’s results of operations, financial condition and liquidity, see the risk factors discussion provided under “Risk Factors” in Item 1A of ArQule’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on March 6, 2009, as updated from time to time in our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.  See also, “Forward-Looking Statements” included in this Quarterly Report on Form 10-Q.

 

ITEM 2 . - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS .   None

 

ITEM 3 . — DEFAULTS UPON SENIOR SECURITIES.   None.

 

ITEM 4. — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.

 

ITEM 6 . EXHIBITS

 

EXHIBIT
NO.

 

DESCRIPTION

 

 

 

10.1 *

 

Employment Agreement, dated as of June 17, 2008, by and between ArQule, Inc. and Brian Schwartz filed herewith.

10.2 *

 

Employment Agreement, dated as of November 21, 2008, by and between ArQule, Inc. and Thomas Chan filed herewith.

31.1

 

Rule 13a-14(a) Certificate of Chief Executive Officer, filed herewith.

31.2

 

Rule 13a-14(a) Certificate of Principal Financial Officer, filed herewith.

32

 

Rule 13a-14(b) Certificate of Chief Executive Officer and Chief Financial Officer, filed herewith.

 


*                                          Indicates a management contract or compensatory plan.

 

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Table of Contents

 

ARQULE, INC.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

ArQule, Inc.

 

 

 

 

Date: May 8, 2009

/s/ PETER S. LAWRENCE

 

Peter S. Lawrence
President and Chief Operating Officer
(Principal Financial Officer)

 

 

 

/s/ ROBERT J. WEISKOPF

 

Robert J. Weiskopf
Vice President of Finance,
Corporate Controller and Treasurer
(Principal Accounting Officer)

 

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Exhibit 10.1

 

EMPLOYMENT AGREEMENT

 

This Employment Agreement (the “Agreement”) dated as of June 17, 2008 (the “Execution Date”) is made by and between ArQule, Inc., a Delaware corporation (the “Company”) with its principal offices at 19 Presidential Way, Woburn, Massachusetts  01801, and Brian Schwartz (“Executive”) whose current principal residential address is 18 October Hill Road, Woodbridge, Connecticut 06525.

 

WHEREAS, the Company desires to employ Executive as its Chief Medical Officer and Vice President and to enter into an agreement embodying the terms of such employment; and

 

WHEREAS, Executive desires to accept such employment and enter into such an agreement;

 

NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the Company and Executive (collectively, the “Parties”) hereby agree as follows:

 

1.                                        Term of Employment .  The Company hereby agrees to employ Executive, and Executive hereby accepts such employment with the Company, upon the terms and subject to the conditions set forth in this Agreement.  Executive’s employment shall commence on July 14, 2008 (the “Effective Date”) and shall continue until terminated in accordance with the provisions of Section 5 of this Agreement (the “Employment Term”).

 

2.                                        Title; Duties .  During the Employment Term, Executive shall serve as the Chief Medical Officer and Vice President of the Company.  Executive hereby agrees to undertake the duties and responsibilities inherent in such position and such other duties and responsibilities consistent with such position as the President or Chief Executive Officer of the Company shall from time to time reasonably assign to Executive.

 

3.                                        No Conflict .  During the Employment Term, Executive shall devote substantially all of Executive’s business time and efforts to the performance of Executive’s duties hereunder and shall not, directly or indirectly, engage in any other business, profession or occupation for compensation or otherwise which would conflict with the rendition of such duties.  Notwithstanding the foregoing, Executive may engage in other activities, such as activities involving charitable, educational, religious, trade association, civic and similar types of organizations, speaking engagements and membership on the Board of Directors or equivalent of other organizations (“Outside Activities”), provided that Executive shall obtain the President’s written consent before engaging in any such Outside Activities, and provided further that Executive’s participation in such Outside Activities shall not be in violation of any of Executive’s obligations to the Company, including but not limited to those set forth in the Company’s Code of Conduct.  Executive represents and warrants that Exhibit A attached hereto states all Outside Activities which Executive is participating in as of the Effective Date, and to which the Company hereby consents.

 



 

4.                                        Compensation and Benefits .

 

4.1                                  Base Salary .  During the Employment Term, the Company shall pay Executive for Executive’s services hereunder a base salary at the initial annual rate of $325,000, payable in substantially equal installments in accordance with the Company’s usual payment practices and subject to annual review and adjustment by the Company in its sole discretion.  Such amount (as it may be adjusted upward or downward from time to time in accordance with this Section 4.1) shall be referred to herein as the “Base Salary.”

 

4.2                                  Bonus Compensation .  For each calendar year during the Employment Term, Executive shall be eligible to receive a discretionary annual cash bonus, the target amount of which shall be thirty-five (35) percent of Executive’s Base Salary.  The award of an annual cash bonus, if any, shall be in the Company’s sole discretion and shall be based on Company and individual performance.  For calendar year 2008, the annual cash bonus award, if any, shall be prorated based on the portion of the year actually worked by Executive.  The annual cash bonus typically is paid during the first quarter of the following calendar year, and, except as otherwise expressly provided herein, Executive must be actively employed with the Company as of the payment date in order to receive the discretionary annual cash bonus, if any.  Executive shall also be eligible to participate in any and all other bonus plans and packages that are made available to the Company’s executives, on a basis consistent with Executive’s position and then-current Base Salary and in accordance with the policies and practices of the Company and the Company’s Board of Directors.

 

4.3                                  Stock Option Grant .  As further compensation for Executive’s services hereunder, the Company shall grant to Executive, on the Effective Date, a stock option (the “Execution Stock Option”) to purchase 200,000 shares of the Company’s Common Stock, $0.01 par value per share (the “Common Stock”), pursuant to the Company’s Amended and Restated 1994 Equity Incentive Plan (the “Plan”) and in accordance with the terms, and subject to a vesting schedule pursuant to which twenty-five percent of the shares shall vest annually commencing on the first anniversary of the Effective Date, and other conditions, set forth in substantially the form of Option Certificate attached hereto as Exhibit B.  The method of determining the exercise price of the Execution Stock Option is set forth in the attached Exhibit C.  In its sole discretion, the Company may grant to Executive from time to time other stock options to purchase additional shares of Common Stock, also pursuant to the Plan and such other terms and conditions set forth at the time of such grant (the Execution Stock Option and such other stock options, collectively, the “Stock Options”) and may also grant stock awards.  The Execution Stock Option is intended to be an “incentive stock option” to the extent permissible under Section 422 of the Internal Revenue Code of 1986 (the “Code”), including the $100,000 limitation of Code Section 422(d).]

 

4.4                                  Executive Benefits .  During the Employment Term, Executive shall be eligible to participate in all employee benefit plans and perquisite plans and policies

 

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(including fringe benefits, 401(k) plan participation, life, health dental, accident and short and long term disability insurance) which the Company may, in its sole and absolute discretion, make available to its similarly-situated employees, whether such benefits are now in effect or hereafter adopted, subject to the terms and conditions of each such plan or policy.  The Company may alter, modify, add to or delete its employee benefit plans and its perquisite plans and policies at any time as it, in its sole judgment, determines to be appropriate, without recourse by Executive.

 

4.5                                  Paid Time Off .  Executive shall be entitled to four weeks (20 working days) of paid time off (“PTO”) per annum during the Employment Term, which will accrue pursuant to the Company’s policies and practices and is to be taken at such time or times as shall be mutually convenient for the Company and Executive; provided, however, that the Company may elect to increase the annual time to which Executive shall be entitled to PTO.  Unused PTO shall be allocated pursuant to the Company’s policies and practices.

 

4.6                                  Business Expenses and Perquisites .  Upon delivery of adequate documentation of expenses incurred in accordance with the policies and practices of the Company, Executive shall be entitled to reimbursement by the Company for reasonable travel, entertainment and other business expenses incurred by Executive in the performance of Executive’s duties hereunder in accordance with such policies as the Company may from time to time have in effect.

 

4.7                                  Relocation Expenses .  Upon delivery of adequate documentation of expenses incurred in relocation of Executive’s primary residence to Massachusetts, the Company shall reimburse Executive, in an amount not to exceed $75,000, for reasonable expenses incurred by Executive in the course of such relocation, subject to the ArQule Relocation Policy Guidelines.  The Company’s decision on which relocation expenses are reimbursable under this paragraph shall be conclusive.  Executive shall not be entitled to reimbursement under this paragraph if he does not submit a request and provide documentation for such reimbursement within two years of the Effective Date of this Agreement.  The reimbursement provided under this paragraph shall not apply to more than one relocation by Executive.  In the event that Executive resigns his employment with the Company or is terminated for Cause within one year of receiving any reimbursement as provided under this paragraph, Executive shall be required to repay to the Company any and all reimbursement amounts received pursuant to this paragraph.

 

4.8                                  Deductions and Withholdings .  Notwithstanding any other provision of this Agreement, any payments or benefits hereunder shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions, as the Company reasonably determines it should withhold pursuant to any applicable law or regulation.

 

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4.9                                  Annual Review .  Executive shall receive an annual review of his performance by the President of the Company.

 

5.                                        Termination .

 

5.1                                  Without Cause by the Company . The Company may terminate Executive’s employment hereunder at any time without Cause (as defined in Section 5.2) upon not less than fourteen (14) days prior written notice from the Company to Executive.  The effective date of Executive’s termination shall be referred to herein as the “Termination Date.”  If Executive’s employment is terminated by the Company pursuant to this Section 5.1, all compensation and benefits provided to Executive by the Company pursuant to this Agreement or otherwise shall cease as of the Termination Date, except that the Company shall pay Executive all Base Salary owed to Executive for work performed prior to the Termination Date, plus the cash value of any accrued but unused PTO, as of the Termination Date.

 

5.1.1                         The Severance Package .  In the event the Company terminates Executive’s employment without Cause, and provided that Executive first executes a general release in a form and of a scope reasonably acceptable to the Company within sixty (60) days of the Termination Date, the Company shall provide, following the effective date of such general release, the following severance benefits to Executive (the “Severance Package”):

 

(a)                                   A payment (the “Severance Payment”) in the following amount:

 

(i)                                      An amount equal to Executive’s Base Salary through the end of the twelve (12) month period commencing on the Termination Date; plus

 

(ii)                                   An amount equal to the average annual discretionary cash bonus, if any, awarded by the Company to Executive with respect to the two years preceding the year in which the Termination Date occurs, provided that, for purposes of this paragraph only, Executive shall be deemed to have received his thirty-five percent of Base Salary bonus target for any year within such two-year period in which Executive was not paid a bonus solely because Executive was not employed by the Company, and provided further that for purposes of this sub-paragraph only, the annual discretionary cash bonus, if any, awarded by the Company shall not be pro-rated.   Attached at Exhibit D is a series of examples of the manner in which this portion of the Severance Payment shall be calculated.

 

(b)                                  Payment of the costs associated with continuing the benefits which Executive is entitled to receive pursuant to Section 4.4 of this Agreement at the level in effect as of the Termination Date

 

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(subject to any employee contribution requirements applicable to Executive on the Termination Date) through the twelve (12) month period commencing on the Termination Date, to the extent such benefits may continue beyond the Termination Date (for example, among other things, Executive’s coverage under the Company’s life and disability insurance policies will terminate as of the Termination Date).

 

(c)                                   The Severance Payment shall be paid to Executive in substantially equal installments, according to the Company’s regular payroll schedule, over the twelve (12) month period beginning on the first regular payroll date following the effective date of the general release executed by Executive as provided above, subject to Section 5.8 below.

 

5.1.2                         Deemed Termination .  For purposes of this Section 5.1, a “termination without Cause” by the Company shall be deemed to have occurred where Executive has complied with the “Deemed Termination Process” (hereinafter defined) following the occurrence of any of the following events (a “Deemed Termination Condition”) without the Executive’s prior written consent:

 

(a)                                   A diminution of Executive’s Base Salary below $325,000 on an annualized basis (other than in connection with a Company-wide decrease in salary affecting all or substantially all senior management employees of the Company);

 

(b)                                  A diminution in Executive’s authority, duties or responsibilities without Cause;

 

(c)                                   A material change in the geographic location of Executive’s place of employment (for purposes of this paragraph, a “material change” shall be deemed to occur only if the Company relocates Executive’s place of employment by a distance of more then fifty (50) miles, excluding any relocation to the Company’s existing offices in Woburn, MA); or

 

(d)                                  The Company materially breaches any of its obligations to Executive pursuant to this Agreement.

 

“Deemed Termination Process” shall mean that (i) the Executive reasonably determines in good faith that a Deemed Termination Condition has occurred; (ii) the Executive provides written notice to the Company of the occurrence of the Deemed Termination Condition within 45 days of the initial occurrence of such condition; (iii) the Executive cooperates in good faith with the Company’s efforts, for a period not less than 30 days following such notice (the “Cure Period”), to remedy the Deemed

 

5



 

Termination Condition; (iv) notwithstanding such efforts, the Deemed Termination Condition continues to exist; and (v) the Executive provides the Company with a Notice of Termination, which establishes a Termination Date within 30 days after the end of the Cure Period.  If the Company cures the Deemed Termination Condition during the Cure Period, a “termination without Cause” shall be deemed not to have occurred.

 

5.2                                  For Cause by the Company .  Notwithstanding any other provision of this Agreement, Executive’s employment hereunder may be terminated by the Company at any time for Cause.  For purposes of this Agreement, “Cause” shall mean: (i) Executive’s failure to follow the reasonable instructions of the President or Chief Executive Officer or otherwise perform Executive’s duties hereunder (other than as a result of a Disability (as defined in Section 5.3)) for thirty (30) days after a written demand for performance is delivered to Executive on behalf of the Company, which demand specifically identifies the manner in which the Company alleges that Executive has not substantially followed such instructions or otherwise performed Executive’s duties; (ii) material violation by Executive of the Company’s Code of Conduct; (iii) Executive’s willful misconduct that is materially injurious to the Company (whether from a monetary perspective or otherwise); (iv) Executive’s willful commission of an act constituting fraud with respect to the Company; (v) conviction of Executive for a felony under the laws of the United States or any state thereof; or (vi) Executive’s material breach of Executive’s obligations under Sections 7 or 8 hereof.

 

If Executive’s employment is terminated by the Company for Cause, all compensation and benefits provided to Executive by the Company pursuant to this Agreement or otherwise shall cease as of the Termination Date, except that the Company shall pay Executive all Base Salary owed to Executive for work performed prior to the Termination Date, plus the cash value of any accrued but unused PTO, as of the Termination Date.

 

5.3                                  Disability .  Subject to the requirements of the Americans with Disabilities Act, Massachusetts General Laws Chapter 151B and any other applicable laws, Executive’s employment hereunder may be terminated by the Company at any time in the event of the Disability of Executive.  For purposes of this Agreement, “Disability” shall mean the inability of Executive to perform the essential functions of Executive’s position, with or without reasonable accommodation, due to physical or mental disablement which continues for a period of four (4) consecutive months during the Employment Term, as determined by an independent qualified physician mutually acceptable to the Company and Executive (or Executive’s personal representative) or, if the Company and Executive (or such representative) are unable to agree on an independent qualified physician, as determined by a panel of three physicians, one designated by the Company, one designated by Executive (or such representative) and one designated by the two physicians so designated.  If Executive’s employment is terminated by the Company for Disability, all compensation and benefits provided

 

6



 

to Executive by the Company pursuant to this Agreement or otherwise shall cease as of the Termination Date, except that (a) the Company shall pay Executive all Base Salary owed to Executive for work performed prior to the Termination Date, plus the cash value of any accrued but unused PTO, as of the Termination Date; and (b) provided that Executive first executes a general release in a form and of a scope reasonably acceptable to the Company within sixty (60) days of the Termination Date, Executive shall be entitled to the Severance Package, except that the portion of the Severance Payment based on Executive’s Base Salary paid as a part of the Severance Package shall be reduced by the amount of Base Salary, salary continuation (short-term disability), and cash disability benefits (long-term disability) paid to Executive for the corresponding period under the Company’s employee benefit plans as then in effect.

 

5.4                                  Death .  Executive’s employment hereunder shall automatically terminate in the event of Executive’s death.  If Executive’s employment is terminated by the death of Executive, all compensation and benefits provided to Executive by the Company pursuant to this Agreement or otherwise shall cease as of the Termination Date, except that (a) the Company shall pay to Executive’s estate or legal representative all Base Salary owed to Executive for work performed prior to the Termination Date, plus the cash value of any accrued but unused PTO, as of the Termination Date; and (b) provided that Executive’s estate first executes a general release in a form and of a scope reasonably acceptable to the Company within ninety (90) days of the Termination Date, Executive shall be entitled to the Severance Package.

 

5.5                                  Termination by Executive .  Executive’s employment hereunder may be terminated by Executive at any time upon not less than thirty (30) days prior written notice from Executive to the Board.  Executive agrees that such notice period is reasonable and necessary in light of the duties assumed by Executive pursuant to this Agreement and fair in light of the consideration Executive is receiving pursuant to this Agreement.  If Executive terminates Executive’s employment with the Company pursuant to this Section 5.5, all compensation and benefits provided to Executive by the Company pursuant to this Agreement or otherwise shall cease as of the Termination Date, except that the Company shall pay Executive all amounts owed to Executive for work performed prior to the Termination Date, plus the cash value of any accrued but unused PTO as of the Termination Date.

 

5.6                                  Notice of Termination .  Any purported termination of employment by the Company or by Executive shall be communicated by written Notice of Termination to the other Party in accordance with Section 11 hereof.  For purposes of this Agreement, a “Notice of Termination” shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated.

 

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5.7                                  Survival .  The provisions of Sections 7, 8 and 9 shall survive the termination of this Agreement.

 

5.8                                  Section 409A of the Code .  It is the intention of the parties to this Agreement that, to the extent possible, no payment or entitlement pursuant to this Agreement will give rise to any adverse tax consequences to Executive under Section 409A of the Internal Revenue Code (“Code”) and Department of Treasury regulations and other interpretive guidance issued thereunder, including that issued after the date hereof (collectively, “Section 409A”).  The Agreement shall be interpreted to that end and consistent with that objective.  Notwithstanding any other provision herein, if Executive is a “specified employee” as defined in, and pursuant to, Treas. Reg. Section 1.409A-1(i) on the Termination Date, no payment of compensation under this Agreement shall be made to Executive during the period lasting six (6) months from the Termination Date.  If any payment to Executive is delayed pursuant to the foregoing sentence, such payment instead shall be made in a lump sum payment on the first business day following the expiration of the six-month period referred to in the prior sentence, and, as of the first business day following the expiration of such six-month period, all such payments shall resume in accordance with the schedule for such payments.

 

Each payment under this Agreement shall be designated as a “separate payment” within the meaning of Section 409A of the Code.  To the extent any reimbursement or in-kind benefit due to Executive under this Agreement constitutes “deferred compensation” under Section 409A of the Code, any such reimbursement or in-kind benefit shall be paid to Executive in a manner consistent with Treas. Reg. Section 1.409A-3(i)(1)(iv).

 

6.                                        Accelerated Vesting in Change of Control .  In the event that both (i) a Change of Control occurs and (ii) the Company terminates Executive’s employment without Cause (or is deemed to terminate Executive’s employment without Cause) within the period commencing three months prior to the latest possible date of a Change of Control and ending one year after the latest possible date of a Change of Control, any Stock Option held by Executive shall become immediately exercisable as to all option shares without regard to the vesting schedule set forth on the applicable Option Certificate, and any shares of Restricted Stock previously granted shall immediately be free and clear of any restrictions.  For purposes of this Agreement, any one of the following events shall be considered a “Change of Control” of the Company:

 

(a)                                   Acquisition by any “person” (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934) of any amount of the Company’s Common Stock so that such person holds or controls fifty percent (50%) or more of the Company’s Common Stock;

 

(b)                                  Merger or consolidation of the Company with or into any other entity in which the holders of the Company’s outstanding shares of capital stock immediately before such merger or consolidation do not, immediately after such merger or

 

8



 

consolidation, retain capital stock representing a majority of the voting power of the surviving entity of such merger or consolidation;

 

(c)                                   Sale of all or substantially all of the assets of the Company to a third party;

 

(d)                                  Within any twenty-four (24) month period, the election by the stockholders of the Company of twenty percent (20%) or more of the directors of the Company other than pursuant to nomination by the Board, or its designated committee; or

 

(e)                                   Execution of a legally binding, definitive agreement approved by the Board of Directors providing for any of the events set forth in (a), (b), (c) or (d) above.

 

7.                                        Confidentiality .

 

7.1                                  Definitions .  As used herein, the term “Confidential Information” shall mean any and all ideas, inventions, information, know-how, compounds, materials and other items (whether patentable or not) that are confidential or proprietary to the Company (or to its affiliates, collaborators, consultants, suppliers, or customers) whether disclosed in written, oral, tangible or other form and whether or not labeled or otherwise identified as confidential or proprietary.  Confidential Information shall include, without limitation, the following to the extent proprietary to the Company (or to its affiliates, collaborators, consultants, suppliers or customers) and not publicly available:

 

(a)                                   inventions, trade secrets, discoveries and computer programs, and any improvements or modifications thereto;

 

(b)                                  engineering, research, development and design projects, data, designs, drawings and specifications;

 

(c)                                   manufacturing, development and other technical processes, applications, methods, apparatus and equipment;

 

(d)                                  business information such as lists of approved components and sources, price lists, product costs, production schedules, business plans, sales information, profit and loss information, and customer and collaborator lists;

 

(e)                                   any and all reagents, substances, chemical compounds, subcellular constituents, cells or cell lines, organisms and progeny, and mutants, as well as any and all derivatives or replications derived from or relating to such materials; and

 

(f)                                     any and all information, materials and other items supplied by third parties to the Company (or generated by the Company for third parties) under an obligation of confidentiality.

 

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7.2                                  Non-Disclosure .  Executive shall not at any time (whether during or after Executive’s employment with the Company) disclose or use any Confidential Information for Executive’s own benefit or purposes or the benefit or purposes of any other person, firm, partnership, joint venture, association, corporation or other organization, entity or enterprise (a “Person”) other than the Company.

 

7.3                                  Exceptions .  Notwithstanding any other provision in the Agreement, Confidential Information shall not include any information or material which:

 

(g)                                  is or becomes generally available to the public other than as a result of disclosure thereof by Executive;

 

(h)                                  is lawfully received by Executive on a non-confidential basis from a third party that is not itself under an obligation of confidentiality or non-disclosure to the Company with respect to such information;

 

(i)                                      can be shown by Executive to have been independently developed by Executive;

 

(j)                                      Executive establishes by competent proof was in Executive’s possession at the time of disclosure by the Company and was not acquired, directly or indirectly from the Company; or

 

(k)                                   is required to be publicly disclosed by law or by regulation; provided, however, that in such event Executive shall provide the Company with prompt advance notice of such disclosure so that the Company has the opportunity if it so desires to seek a protective order or other appropriate remedy.

 

7.4                                  Return of Company Property .  Executive agrees that upon termination of Executive’s employment hereunder, Executive shall return immediately to the Company any proprietary materials, any materials containing Confidential Information and any other Company property then in Executive’s possession or under Executive’s control, including, without limitation all notes, drawings, lists, memoranda, magnetic disks or tapes, or other recording media containing such Confidential Information, whether alone or together with non-confidential information, all documents, reports, files, memoranda, records, software, credit cards, door and file keys, telephones, PDAs, computers, computer access codes, disks and instructional manuals, or any other physical property that Executive received, prepared, or helped prepare in connection with Executive’s employment under this Agreement.  Upon termination, Executive shall not retain any copies, duplicates, reproductions, or excerpts of Confidential Information, nor shall Executive show or give any of the above to any third party.  Executive further agrees that Executive shall not retain or use for Executive’s account at any time any trade name, trademark, service mark, logo or other proprietary business designation used or owned in connection with the business of the Company.

 

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7.5            Other Agreements .  Executive represents and warrants that Executive is not bound by any agreement or any other previous or existing business relationship which conflicts with or prevents the full performance of Executive’s duties and obligations to the Company (including Executive’s duties and obligations under this or any other agreement with the Company).  If Executive is prevented from performing his duties under this Agreement for any period of time by order of a court of competent jurisdiction as a result of the exercise of any legal or equitable remedy available to ZIOPHARM Oncology, Inc. (“ZIOPHARM”) under that certain Invention, Non-Disclosure and Non-Competition Agreement dated June 1, 2006 between Executive and ZIOPHARM, then as of the date of such court order the Company may exercise its right to terminate Executive’s employment for Cause pursuant to Section 5.2 of this Agreement.  Executive understands that the Company does not desire to acquire from Executive any trade secrets, know-how, or confidential or proprietary business information that Executive may have acquired from others.  Therefore, Executive agrees that during the Employment Term and thereafter, Executive shall not, through, for or on behalf of the Company, improperly use or disclose any confidential or proprietary information or trade secrets of any former or concurrent employer, or any other person or entity with whom Executive has an agreement or to whom Executive owes a duty to keep such information in confidence, and Executive further agrees that any such improper use or disclosure of any such confidential or proprietary information or trade secrets shall be a material breach of this Agreement.

 

8.              Non-Competition; Non-Solicitation .

 

8.1            Non-Competition .  During Executive’s employment with the Company or any of its affiliates and for a period of one (1) year after the termination or cessation of such employment for any reason, Executive shall not directly or indirectly, alone or through any other organization or entity, including without limitation becoming an employee, investor (except as provided below), officer, agent, partner, member or director of any such organization or entity, engage or prepare to engage in any Competitive Activity.  For purposes of this Agreement, the term “Competitive Activity” means any area of business that the Company or any of its affiliates worldwide (which affiliates shall not include any entity that purchases the Company or otherwise acquires all or substantially all of the Company’s assets and any of such purchasing or acquiring entity’s affiliates) conducted or actively planned to conduct at any time during Executive’s employment, including but not limited to oncological drug development and kinase platform drug development.  Notwithstanding the foregoing, Executive shall not be deemed to be engaged directly or indirectly in any Competitive Activity if Executive participates in any such business solely as a passive investor in up to one percent (1%) of the equity securities of a company or partnership.  For purposes of this Section, Executive shall be deemed to be engaging in Competitive Activity as of the date that Executive accepts employment or consulting engagement with any other person or entity, regardless of when Executive actually begins providing services under such employment or consulting engagement, but only if Executive is preparing to engage in Competitive Activity during such period.  Nothing in this Section shall

 

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be construed to affect in any way Executive’s confidentiality obligations as set forth in Section 7 of this Agreement.  Nothing in this Section shall be construed to prohibit Executive from seeking permission from the Company to engage in any activity which may otherwise fall within the definition of Competitive Activity as set forth in this Section, provided that a grant of permission from the Company, if any, must be in writing.

 

8.2                                  Non-Solicitation .  During Executive’s employment with the Company or any of its affiliates and for a period of one (1) year after the termination or cessation of such employment for any reason thereafter, Executive will not directly or indirectly: (a) 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 the Company or its affiliates with whom the Company or its affiliates has or is actively negotiating a written agreement as of the Termination Date; (b) recruit, solicit or hire any person who is, or within the six (6) month period preceding the Termination Date was, an officer, director or employee of the Company or any of its affiliates or was a scientific consultant with an exclusive arrangement with the Company or any of its affiliates; or (c) induce or attempt to induce any officer, director, employee consultant, agent or representative of the Company or any of its affiliates to discontinue his or her relationship with the Company or any of its affiliates or to commence an employment or other business relationship with another entity.

 

9.                                        Injunctive Relief and Other Remedies .  Executive acknowledges and agrees that the Company’s remedies at law for a breach or threatened breach of any of the provisions of Sections 7 and 8 would be inadequate and, in recognition of this fact, Executive agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to obtain equitable relief in the form of specific performance, temporary restraining orders, temporary or permanent injunctions or any other equitable remedy which may then be available.  In addition, in the event that Executive breaches any provision of Sections 7 or 8 of this Agreement, the applicable time periods set forth in such Sections, shall be extended for a period of time equal to the period of time during which Executive was in breach of the Agreement, up to a maximum of twelve (12) months, and if the Company is required to seek relief from such breach in any judicial proceedings, then such time limitations shall extend for a period of time equal to the pendency of any such proceedings, including all appeals, up to a maximum of twenty-four months.  In connection with the restrictions in Sections 7 and 8, Executive represents that his economic means are such that those provisions will not prevent him from providing for himself and his family on a basis satisfactory to Executive.  Further, in addition to any other remedies available to the Company, in the event Executive breaches any of the provisions of this Agreement, including but not limited to Sections 7 or 8, Executive agrees that any post-termination payments and benefits, if any, flowing to Executive from the Company, including but not limited to the Severance Package, shall be subject to termination, reduction, disgorgement or cancellation.

 

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10.            Notices .  Any notice hereunder by either Party to the other shall be given in writing by personal delivery, telex, facsimile, overnight courier or certified mail, return receipt requested, addressed, if to the Company, to the attention of the President at the Company’s executive offices or to such other address as the Company may designate in writing at any time or from time to time to Executive, and if to Executive, to Executive’s most recent address on file with the Company.  Notice shall be deemed given, if by personal delivery or by overnight courier, on the date of such delivery or, if by telex or facsimile, on the business day following receipt of answer back or facsimile information or, if by certified mail, on the date shown on the applicable return receipt.

 

11.            Assignment .  This Agreement may not be assigned by either Party without the prior written consent of the other Party, provided, however, that the Company may assign this Agreement without Executive’s consent in the event of a merger, acquisition, or transfer of all or substantially all of the assets of the Company with or to a third party (a “Merger”).  In the event of a Merger, the Company shall require in writing any successor Person to assume and agree to perform this Agreement; failure to so assume and agree shall constitute a Deemed Termination Condition for purposes of Section 5.1.2(d).

 

12.            Entire Agreement .  This Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof and there have been no oral or other agreements of any kind whatsoever as a condition precedent or inducement to the signing of this Agreement or otherwise concerning this Agreement or the subject matter hereof.

 

13.            Expenses .  The Parties shall each pay their own respective expenses incident to the enforcement or interpretation of, or dispute resolution with respect to, this Agreement, including all fees and expenses of their counsel for all activities of such counsel undertaken pursuant to this Agreement.

 

14.            Waivers and Further Agreements .  Any waiver of any terms or conditions of this Agreement shall not operate as a waiver of any other breach of such terms or conditions or any other term or condition, nor shall any failure to enforce any provision hereof operate as a waiver of such provision or of any other provision hereof; provided, however, that no such written waiver, unless it, by its own terms, explicitly provides to the contrary, shall be construed to effect a continuing waiver of the provision being waived and no such waiver in any instance shall constitute a waiver in any other instance or for any other purpose or impair the right of the Party against whom such waiver is claimed in all other instances or for all other purposes to require full compliance with such provision.  Each of the Parties agrees to execute all such further instruments and documents and to take all such further action as the other Party may reasonably require in order to effectuate the terms and purposes of this Agreement.

 

15.            Amendments .  This Agreement may not be amended, nor shall any waiver, change, modification, consent or discharge be effected except by an instrument in writing executed by both Parties.

 

16.            Severability .  If any provision of this Agreement shall be held or deemed to be, or shall in fact be, invalid, inoperative or unenforceable as applied to any particular case in any

 

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jurisdiction or jurisdictions, or in all jurisdictions or in all cases, because of the conflict of any provision with any constitution or statute or rule of public policy or for any other reason, such circumstance shall not have the effect of rendering the provision or provisions in question invalid, inoperative or unenforceable in any other jurisdiction or in any other case or circumstance or of rendering any other provision or provisions herein contained invalid, inoperative or unenforceable to the extent that such other provisions are not themselves actually in conflict with such constitution, statute or rule of public policy, but this Agreement shall be reformed and construed in any such jurisdiction or case as if such invalid, inoperative or unenforceable provision had never been contained herein and such provision reformed so that it would be valid, operative and enforceable to the maximum extent permitted in such jurisdiction or in such case.

 

17.            Counterparts .  This Agreement maybe executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

 

18.            Section Headings .  The headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement.

 

19.            Governing Law and Forum .  This Agreement shall in all events and for all purposes be governed by, and construed in accordance with, the laws of the Commonwealth of Massachusetts without regard to any choice of law principle that would dictate the application of the laws of another jurisdiction.  Any action, suit or other legal proceeding which may be commenced to resolve any matter arising under or relating to any provision of this Agreement shall be commenced only in a court of the Commonwealth of Massachusetts (or, if appropriate, a federal court located within Massachusetts), and the parties hereby consent to the jurisdiction of such court with respect to any action, suit or proceeding commenced in such court.

 

IN WITNESS WHEREOF, the Parties have executed or caused to be executed this Agreement as of the Execution Date.

 

 

ARQULE, INC.

 

EXECUTIVE

By:

/s/ Paolo Pucci

 

By:

/s/ Brian Schwartz

Name: Paolo Pucci

 

Name: Brian Schwartz

Title: Chief Executive Officer

 

 

 

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EXHIBIT A

 

Outside Activities

 

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EXHIBIT B

 

ARQULE, INC. AMENDED AND RESTATED 1994 EQUITY INCENTIVE PLAN

Stock Option Terms And Conditions

 

THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES WHICH HAVE BEEN ISSUED UNDER THE 1994 EQUITY INCENTIVE PLAN AND REGISTERED UNDER THE SECURITIES ACT OF 1933.

 

1.                                        Plan Incorporated by Reference .  This Option is issued pursuant to the terms of the Plan and may be amended as provided in the Plan.  Capitalized terms used and not otherwise defined in this certificate have the meanings given to them in the Plan.  This certificate does not set forth all of the terms and conditions of the Plan, which are incorporated herein by reference.  The Committee administers the Plan and its determinations regarding the operation of the Plan are final and binding.  Copies of the Plan may be obtained upon written request without charge from the Company.  This Option is intended to be an “incentive stock option” to the extent permissible under Section 422 of the Internal Revenue Code of 1986 (the “Code”), including the $100,000 limitation of Code Section 422(d).

 

2.                                        Option Price .  The price to be paid for each share of Common Stock issued upon exercise of the whole or any part of this Option is the Option Price set forth on the face of this certificate.

 

3.                                        Vesting Schedule .  This Option may be exercised at any time and from time to time over the number of shares and in accordance with the vesting schedule set forth on the face of this certificate, but only for the purchase of whole shares, provided that if Option Holder’s employment is terminated by the Company pursuant to Section 5.1 (including 5.1.2), 5.3 or 5.4 of the Employment Agreement between the Company and Option Holder dated April 15, 2008  (“Employment Agreement”), then this Option may be exercised at any time and from time to time over the number of shares and in accordance with the vesting schedule set forth in the applicable Section of the Employment Agreement and subject to the terms and conditions of such applicable Section of the Employment Agreement.  Notwithstanding the foregoing, this Option may not be exercised as to any shares after the Expiration Date.

 

4.                                        Method of Exercise .  To exercise this Option, the Option Holder shall deliver written notice of exercise to the Company specifying the number of shares with respect to which the Option is being exercised accompanied by payment of the Option Price for such shares in cash, by certified check or in such other form, including shares of Common Stock of the Company valued at their Fair Market Value on the date of delivery, as the Committee may approve.  Promptly following such a notice, the Company will deliver to the Option Holder a certificate representing the number of shares with respect to which the Option is being exercised.

 

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5.                                        Rights as a Stockholder or Employee .  The Option Holder shall not have any rights in respect of shares as to which the Option shall not have been exercised and payment made as provided above.  The Option Holder shall not have any rights to continued employment by the Company or any group company by virtue of the grant of this Option.

 

6.                                        Recapitalization, Mergers, Etc .  As provided in the Plan, in the event of a corporate transaction affecting the Company’s outstanding Common Stock, the Committee shall equitably adjust the number and kind of shares subject to this Option and the exercise price hereunder or make provision for a cash payment.  If such transaction involves a consolidation or merger of the Company with another entity, the sale or exchange of all or substantially all of the assets of the Company or a reorganization or liquidation of the Company, then in lieu of the foregoing, the Committee may upon written notice to the Option Holder provide that this Option shall terminate on a date not less than 20 days after the date of such notice unless theretofore exercised.  In connection with such notice, the Committee may in its discretion accelerate or waive any deferred exercise period.

 

7.                                        Option Not Transferable .  This Option is not transferable by the Option Holder other than upon the death of the Option Holder, in accordance with the Plan.

 

8.                                        Exercise of Option After Termination of Employment   Except as expressly set forth in this Paragraph 9 of this Agreement, if the Option Holder’s employment with (a) the Company, (b) a corporation (or parent or subsidiary corporation of such corporation) issuing or assuming a stock option in a transaction to which section 424(a) of the Code applies, is terminated for any reason, the Option Holder may exercise the rights which were available to the Option Holder at the time of such termination only within three months from the date of termination.  Upon the death of the Option Holder, his or her Designated Beneficiary shall have the right, at any time within twelve months after the date of death, to exercise in whole or in part any rights that were available to the Option Holder at the time of death.  It is understood and agreed, however, that any part of the Option intended to be an “incentive stock option” that is not exercised within three months following the date of termination will lose incentive stock option qualification and automatically convert to a Nonstatutory Stock Option for the remainder of the applicable exercise period.  Notwithstanding the foregoing, no rights under this Option may be exercised after the Expiration Date.

 

9.                                        Exercise of Option Upon Retirement .  Upon Retirement, as defined below, any unvested shares set forth on the face of this certificate shall vest, and this Option may be exercised in whole or part until the earlier of up to two years from the date of Retirement or the Expiration Date.  “Retirement” as to any Option Holder shall mean such person’s leaving the employment of the Company or an Affiliate after reaching age 55 with ten (10) years of full-time continuous service with the Company; provided, that the sum of the Option Holder’s age plus the number of years of continuous service equals or exceed seventy (70).

 

10.                                  Compliance with Securities Laws .  It shall be a condition to the Option Holder’s right to purchase shares of Common Stock hereunder that the Company may, in its discretion,

 

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require (a) that the shares of Common Stock reserved for issue upon the exercise of this Option shall have been duly listed, upon official notice of issuance, upon any national securities exchange or automated quotation system on which the Company’s Common Stock may then be listed or quoted, (b) that either (i) a registration statement under the Securities Act of 1933 with respect to the shares shall be in effect, or (ii) in the opinion of counsel for the Company, the proposed purchase shall be exempt from registration under that Act and the Option Holder shall have made such undertakings and agreements with the Company as the Company may reasonably require, and (c) that such other steps, if any, as counsel for the Company shall consider necessary to comply with any law applicable to the issue of such shares by the Company shall have been taken by the Company or the Option Holder, or both.  The certificates representing the shares purchased under this Option may contain such legends as counsel for the Company shall consider necessary to comply with any applicable law.

 

11.            Payment of Taxes .  To the extent applicable: The Option Holder shall pay to the Company, or make provision satisfactory to the Company for payment of, any taxes required by law to be withheld with respect to the exercise of this Option.  The Committee may, in its discretion, require any other Income taxes imposed on the sale of the shares to be paid by the Option Holder.  In the Committee’s discretion, such tax obligations may be paid by entering into some other arrangements to ensure that such amount is available to them or it (whether by authorizing the sale of some or all of the shares and payment to the Company or the member of the Group (as the case may be) of the requisite amount of the proceeds of sale or otherwise). The Company and any group company may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the Option Holder.

 

12.            Transfer of Personal Data.   By acknowledging and accepting this award, you understand that, in order to perform its requirements under the Plan, the Company may transfer and process personal data and/or sensitive personal data about you.  Such data may include but is not limited to personal and financial data about you and sale of shares purchased under the Plan from time to time.  You also hereby give explicit consent to the Company to transfer and process any such personal data and/or sensitive data outside the country in which you work or are employed including countries which may be outside the European Economic Area where there may be no legislation in relation to an individual’s rights concerning personal data.  This may also apply to other companies in the Company group, third party advisers and administrators or regulatory authorities.

 

13.            Special Tax Consequences.  The Option Holder acknowledges that, to the extent the aggregate Fair Market Value of stock with respect to which “incentive stock options” (within the meaning of Section 422 of the Code, but without regard to Section 422(d) of the Code), including this Option, are exercisable for the first time by the Option Holder during any calendar year (under the Plan and all other incentive stock option plans of the Company, any Subsidiary and any parent corporation thereof (within the meaning of Section 422 of the Code)) exceeds $100,000, such options shall be treated as Nonstatutory Options to the extent required by Section 422 of the Code.  The Option Holder further acknowledges that the rule set forth in the preceding sentence shall be applied by taking

 

18



 

options into account in the order in which they were granted.  For purposes of these rules, the Fair Market Value of stock shall be determined as of the time the Option with respect to such stock is granted.

 

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EXHIBIT C

 

Determination of Option Price

 

The exercise price of the Execution Stock Option is the Fair Market Value of ArQule’s Common Stock (as defined below) as of the Effective Date as defined in Section 1 of the Employment Agreement between the Company and Executive.

 

The Fair Market Value of ArQule’s Common Stock shall be the closing price of the Common Stock as reported by the NASDAQ National Market on the trading day of the commencement of Executive’s employment with the Company.

 

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EXHIBIT D

 

Calculation of the Severance Payment

 

Pursuant to Section 5.1.1(a)(ii), the portion of Executive’s Severance Payment based on annual discretionary cash bonuses (“Bonus Severance”) awarded to Executive, if any, would be calculated in the following manner (in all examples, Executive’s Base Salary is assumed to be an annual rate of $325,000):

 

Example #1 — Executive terminated in 2008.

 

Bonus Severance = $113,750 (average of 35% deemed amount for two-year lookback period where Executive did not work for the Company).

 

Example #2 — Executive awarded a 30% bonus for 2008, terminated during 2009.

 

Bonus Severance = $105,625 (average of 30% Year 1 award ($97,500) and 35% deemed amount ($113,750) for the year during the two-year lookback period where Executive did not work for the Company).

 

Example #3 — Executive awarded a 30% bonus for 2008, a 0% bonus for 2009, terminated during 2010.

 

Bonus Severance = $48,750 (average of year 1 and year 2 bonuses actually awarded).

 

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Exhibit 10.2

 

EMPLOYMENT AGREEMENT

 

This Employment Agreement (the “Agreement”) dated as of November 21, 2008 (the “Execution Date”) is made by and between ArQule, Inc., a Delaware corporation (the “Company”) with its principal offices at 19 Presidential Way, Woburn, Massachusetts  01801, and Thomas Chan (“Executive”) whose current principal residential address is 7 Stoney Brook Road, Hopkinton, MA  01748.

 

WHEREAS, the Company desires to employ Executive as its Chief Scientific Officer (CSO) and to enter into an agreement embodying the terms of such employment; and

 

WHEREAS, Executive desires to accept such employment and enter into such an agreement;

 

NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the Company and Executive (collectively, the “Parties”) hereby agree as follows:

 

1.              Term of Employment .  The Company hereby agrees to employ Executive, and Executive hereby accepts such employment with the Company, upon the terms and subject to the conditions set forth in this Agreement.  The Agreement shall continue until November 17, 2012 unless earlier terminated in accordance with the provisions of Section 5 of this Agreement (the “Employment Term”).

 

2.              Title; Duties .  During the Employment Term, Executive shall serve as the CSO of the Company, reporting directly to its Chief Executive Officer (CEO).  Executive hereby agrees to undertake the duties and responsibilities inherent in such position and such other duties and responsibilities consistent with such position as CEO shall from time to time reasonably assign to Executive.

 

3.              No Conflict .  During the Employment Term, Executive shall devote substantially all of Executive’s business time and efforts to the performance of Executive’s duties hereunder and shall not, directly or indirectly, engage in any other business, profession or occupation for compensation or otherwise which would conflict with the rendition of such duties.  Notwithstanding the foregoing, Executive may engage in other activities, such as activities involving charitable, educational, religious, trade association, civic and similar types of organizations, speaking engagements and membership on the Board of Directors or equivalent of other organizations (“Outside Activities”), provided that Executive shall obtain CEO’s written consent before engaging in any such Outside Activities and provided further that Executive’s participation in such Outside Activities shall not be in violation of any of Executive’s obligations to the Company, including but not limited to those set forth in the Company’s Code of Conduct.  Executive represents and warrants that Exhibit A attached hereto states all Outside Activities which Executive is participating in as of the Effective Date, and to which the Company hereby consents.

 



 

4.              Compensation and Benefits .

 

4.1.           Base Salary .  During the Employment Term, the Company shall pay Executive for Executive’s services hereunder a base salary at the initial annual rate of $309,000.00, payable in substantially equal installments in accordance with the Company’s usual payment practices and subject to annual review and adjustment upward or downward by the Company in its sole discretion; provided, however, that an adjustment downward shall only occur in connection with a percentage decrease in salary affecting all or substantially all senior management employees of the Company.  Such amount (as adjusted from time to time in accordance with this Section 4.1) shall be referred to herein as the “Base Salary.”

 

4.2.           Bonus Compensation .  For each calendar year during the Employment Term, Executive shall be eligible to receive a discretionary annual cash bonus, the target amount of which shall be 30 percent of Executive’s Base Salary.  The award of an annual cash bonus, if any, shall be in the Company’s sole discretion and shall be based on Company and individual performance.  The annual cash bonus typically is paid during the first quarter of the following calendar year, and, except as otherwise expressly provided herein, Executive must be actively employed with the Company as of the payment date in order to receive the discretionary annual cash bonus, if any.  Executive shall also be eligible to participate in any and all other bonus plans and packages that are made available to the Company’s executives, on a basis consistent with Executive’s position and then-current Base Salary and in accordance with the policies and practices of the Company and the Company’s Board of Directors.

 

4.3.           Stock Option Grant .  As further compensation for Executive’s services hereunder, the Company shall grant to Executive on the Effective Date a stock option (the “Execution Stock Option”) to purchase 100,000 shares of the Company’s Common Stock, $0.01 par value per share (the “Common Stock”), pursuant to the Company’s Amended and Restated 1994 Equity Incentive Plan (the “Plan”) subject to a vesting schedule pursuant to which rights to twenty-five percent of the shares shall vest annually on the next four anniversaries of the Effective Date and the terms and other conditions set forth in substantially the form of Option Certificate attached hereto as Exhibit B.  The method of determining the exercise price of the Execution Stock Option is set forth in the attached Exhibit C.  In its sole discretion, the Company may grant to Executive from time to time other stock options to purchase additional shares of Common Stock, also pursuant to the Plan and such other terms and conditions set forth at the time of such grant (the Execution Stock Option and such other stock options, collectively, the “Stock Options”) and may also grant stock awards.  The Execution Stock Option is intended to be an “incentive stock option” to the extent permissible under Section 422 of the Internal Revenue Code of 1986 (the “Code”), including the $100,000 limitation of Code Section 422(d).

 

4.4.           Executive Benefits .  During the Employment Term, Executive shall be eligible to participate in all employee benefit plans and perquisite plans and policies

 

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(including fringe benefits, 401(k) plan participation. life, health dental, accident and short and long term disability insurance) which the Company may, in its sole and absolute discretion, make available to its similarly-situated employees, whether such benefits are now in effect or hereafter adopted, subject to the terms and conditions of each such plan or policy.  The Company may alter, modify, add to or delete its employee benefit plans and its perquisite plans and policies at any time as it, in its sole judgment, determines to be appropriate, without recourse by Executive.

 

4.5.           Paid Time Off .  Executive shall be entitled to four weeks (20 working days) of paid time off (“PTO”) per annum during the Employment Term, which will accrue pursuant to the Company’s policies and practices and is to be taken at such time or times as shall be mutually convenient for the Company and Executive; provided, however, that the Company may elect to increase the annual time to which Executive shall be entitled to PTO.  Unused PTO shall be allocated pursuant to the Company’s policies and practices.

 

4.6.           Business Expenses and Perquisites .  Upon delivery of adequate documentation of expenses incurred in accordance with the policies and practices of the Company, Executive shall be entitled to reimbursement by the Company for reasonable travel, entertainment and other business expenses incurred by Executive in the performance of Executive’s duties hereunder in accordance with such policies as the Company may from time to time have in effect.

 

4.7.           Deductions and Withholdings .  Notwithstanding any other provision of this Agreement, any payments or benefits hereunder shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions, as the Company reasonably determines it should withhold pursuant to any applicable law or regulation.

 

4.8.           Annual Review.   Executive shall receive an annual review of his performance by CEO of the Company.

 

5.              Termination .

 

5.1.           Without Cause by the Company . The Company may terminate Executive’s employment hereunder at any time without Cause (as defined in Section 5.2) upon not fewer than fourteen (14) days prior written notice from the Company to Executive.  The effective date of Executive’s termination shall be referred to herein as the “Termination Date.”  If Executive’s employment is terminated by the Company pursuant to this Section 5.1, all compensation and benefits provided to Executive by the Company pursuant to this Agreement or otherwise shall cease as of the Termination Date, except that the Company shall pay Executive all Base Salary owed to Executive for work performed prior to the Termination Date, plus the cash value of any accrued but unused PTO, as of the Termination Date.

 

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For purposes of clarity, a termination of Executive’s employment by reason of the expiration of the Employment Term as set forth in Section 1 shall not be considered a termination without Cause.

 

5.1.1.        The Severance Package .  In the event the Company terminates Executive’s employment without Cause, and provided that Executive first executes a general release in a form and of a scope reasonably acceptable to the Company within sixty (60) days of the Termination Date, the Company shall provide the following severance benefits to Executive (the “Severance Package”):

 

(a)            A payment (the “Severance Payment”) in the following amount:

 

(i)             An amount equal to Executive’s Base Salary through the end of the twelve - month period commencing on the Termination Date; plus

 

(ii)            An amount equal to the average annual discretionary bonus, if any, paid by the Company to Executive with respect to the two years preceding the year in which the Termination Date occurs.  Bonus amounts paid to Executive by the Company prior to the Effective Date shall be included in the calculation set forth in the preceding sentence.   Attached at Exhibit D is a series of examples of the manner in which this portion of the Severance Payment shall be calculated.

 

(b)            Payment of the costs associated with continuing the benefits which Executive is entitled to receive pursuant to Section 4.4 of this Agreement at the level in effect as of the Termination Date (subject to any employee contribution requirements applicable to Executive on the Termination Date) through the twelve-month period commencing on the Termination Date, to the extent such benefits may continue beyond the Termination Date (for example, among other things, Executive’s coverage under the Company’s life and disability insurance policies will terminate as of the Termination Date).

 

(c)            The Severance Payment shall be paid to Executive in substantially equal installments, according to the Company’s regular payroll schedule over a twelve-month period, beginning on the first regular payroll date following the effective date of the general release executed by Executive as provided above, subject to Section 5.8 below.

 

5.1.2.        Deemed Termination .  For purposes of this Section 5.1, a “termination without Cause” by the Company shall be deemed to have occurred where

 

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Executive has complied with the “Deemed Termination Process” (hereinafter defined) following the occurrence of any of the following events (a “Deemed Termination Condition”) without the Executive’s prior written consent:

 

(a)            A diminution of Executive’s Base Salary below $309,000 on an annualized basis (other than in connection with a Company-wide decrease in salary affecting all or substantially all senior management employees of the Company);

 

(b)            A diminution in Executive’s authority, duties, responsibilities without Cause;

 

(c)            A material change in the geographic location of Executive’s place of employment (for purposes of this paragraph, a “material change” shall be deemed to occur only if the Company relocates Executive’s place of employment by a distance of more then fifty (50) miles, excluding any relocation to the Company’s existing offices in Woburn, MA); or

 

(d)            The Company materially breaches any of its obligations to Executive pursuant to this Agreement.

 

“Deemed Termination Process” shall mean that (i) the Executive reasonably determines in good faith that a Deemed Termination Condition has occurred; (ii) the Executive provides written notice to the Company of the occurrence of the Deemed Termination Condition within 45 days of the initial occurrence of such condition; (iii) the Executive cooperates in good faith with the Company’s efforts, for a period not fewer than 30 days following such notice (the “Cure Period”), to remedy the Deemed Termination Condition; (iv) notwithstanding such efforts, the Deemed Termination Condition continues to exist; and (v) the Executive provides the Company with a Notice of Termination, which establishes a Termination Date within 30 days after the end of the Cure Period.  If the Company cures the Deemed Termination Condition during the Cure Period, a “termination without Cause” shall be deemed not to have occurred.

 

5.2.           For Cause by the Company .  Notwithstanding any other provision of this Agreement, Executive’s employment hereunder may be terminated by the Company at any time for Cause.  For purposes of this Agreement, “Cause” shall mean: (i) Executive’s failure to follow the reasonable instructions of CEO or otherwise perform Executive’s duties hereunder for thirty (30) days after a written demand for performance is delivered to Executive on behalf of the Company, which demand specifically identifies the manner in which the Company alleges that Executive has not substantially followed such instructions or otherwise performed Executive’s duties; (ii) material violation by Executive of the

 

5



 

Company’s Code of Conduct; (iii) Executive’s willful misconduct that is materially injurious to the Company (whether from a monetary perspective or otherwise); (iv) Executive’s willful commission of an act constituting fraud with respect to the Company; (v) conviction of Executive for a felony under the laws of the United States or any state thereof; or (vi) Executive’s material breach of Executive’s obligations under Sections 7 or 8 hereof.

 

If Executive’s employment is terminated by the Company for Cause, all compensation and benefits provided to Executive by the Company pursuant to this Agreement or otherwise shall cease as of the Termination Date, except that the Company shall pay Executive all Base Salary owed to Executive for work performed prior to the Termination Date, plus the cash value of any accrued but unused PTO, as of the Termination Date.

 

5.3.           Termination by Executive .  Executive’s employment hereunder may be terminated by Executive at any time upon not fewer than 30 days prior written notice from Executive to the Board.  Executive agrees that such notice period is reasonable and necessary in light of the duties assumed by Executive pursuant to this Agreement and fair in light of the consideration Executive is receiving pursuant to this Agreement.  If Executive terminates Executive’s employment with the Company pursuant to this Section 5.3, all compensation and benefits provided to Executive by the Company pursuant to this Agreement or otherwise shall cease as of the Termination Date, except that the Company shall pay Executive all amounts owed to Executive for work performed prior to the Termination Date, plus the cash value of any accrued but unused PTO as of the Termination Date.

 

5.4.           Disability .  Subject to the requirements of the Americans with Disabilities Act, Massachusetts General Laws Chapter 151B and any other applicable laws, Executive’s employment hereunder may be terminated by the Company at any time in the event of the Disability of Executive.  For purposes of this Agreement, “Disability” shall mean the inability of Executive to perform the essential functions of Executive’s position, with or without reasonable accommodation, due to physical or mental disablement which continues for a period of four (4) consecutive months during the Employment Term, as determined by an independent qualified physician mutually acceptable to the Company and Executive (or Executive’s personal representative) or, if the Company and Executive (or such representative) are unable to agree on an independent qualified physician, as determined by a panel of three physicians, one designated by the Company, one designated by Executive (or such representative) and one designated by the two physicians so designated.  If Executive’s employment is terminated by the Company for Disability, all compensation and benefits provided to Executive by the Company pursuant to this Agreement or otherwise shall cease as of the Termination Date, except that (a) the Company shall pay Executive all Base Salary owed to Executive for work performed prior to the Termination Date, plus the cash value of any accrued but unused PTO, as of the Termination Date; (b) in the event the Company terminates Executive by reason of Disability after a

 

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calendar year has been completed but before the discretionary annual cash bonus, if any, relating to that calendar year as provided in Section 4.2 above has been paid, the Company shall pay Executive such discretionary annual cash bonus amount, if awarded; and (c) provided that Executive first executes a general release in a form and of a scope reasonably acceptable to the Company within sixty (60) days of the Termination Date, Executive shall be entitled to the Severance Package, except that the portion of the Severance Payment based on Executive’s Base Salary paid as a part of the Severance Package shall be reduced by the amount of Base Salary, salary continuation (short-term disability), and cash disability benefits (long-term disability) paid to Executive for the corresponding period under the Company’s employee benefit plans as then in effect.

 

5.5.           Death .  Executive’s employment hereunder shall automatically terminate in the event of Executive’s death.  If Executive’s employment is terminated by the death of Executive, all compensation and benefits provided to Executive by the Company pursuant to this Agreement or otherwise shall cease as of the Termination Date, except that (a) the Company shall pay to Executive’s estate or legal representative all Base Salary owed to Executive for work performed prior to the Termination Date, plus the cash value of any accrued but unused PTO, as of the Termination Date; (b) in the event the Company terminates Executive by reason of Death after a calendar year has been completed but before the discretionary annual cash bonus, if any, relating to that calendar year as provided in Section 4.2 above has been paid, the Company shall pay Executive such discretionary annual cash bonus amount, if awarded; and (c) provided that Executive’s estate first executes a general release in a form and of a scope reasonably acceptable to the Company within ninety (90) days of the Termination Date, Executive shall be entitled to the Severance Package.

 

5.6.           Notice of Termination .  Any purported termination of employment by the Company or by Executive shall be communicated by written Notice of Termination to the other Party in accordance with Section 11 hereof.  For purposes of this Agreement, a “Notice of Termination” shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated.

 

5.7.           Survival .  The provisions of Sections 7, 8 and 9 shall survive the termination of this Agreement.

 

5.6            Section 409A of the Code .  It is the intention of the parties to this Agreement that, to the extent possible, no payment or entitlement pursuant to this Agreement will give rise to any adverse tax consequences to Executive under Section 409A of the Internal Revenue Code (“Code”) and Department of Treasury regulations and other interpretive guidance issued thereunder, including that issued after the date hereof (collectively, “Section 409A”).  The Agreement shall be interpreted to that end and consistent with that objective.  Notwithstanding any other provision herein, if Executive is a “specified employee” as defined in, and pursuant to,

 

7



 

Treas. Reg. Section 1.409A-1(i) on the Termination Date, no payment of compensation under this Agreement shall be made to Executive during the period lasting six (6) months from the Termination Date.  If any payment to Executive is delayed pursuant to the foregoing sentence, such payment instead shall be made in a lump sum payment on the first business day following the expiration of the six-month period referred to in the prior sentence, and, as of the first business day following the expiration of such six-month period, all such payments shall resume in accordance with the schedule for such payments.

 

Each payment under this Agreement shall be designated as a “separate payment” within the meaning of Section 409A of the Code.  To the extent any reimbursement or in-kind benefit due to Executive under this Agreement constitutes “deferred compensation” under Section 409A of the Code, any such reimbursement or in-kind benefit shall be paid to Executive in a manner consistent with Treas. Reg. Section 1.409A-3(i)(1)(iv).

 

6.              Accelerated Vesting in Change of Control .  In the event that both (i) a Change of Control occurs and (ii) the Company terminates Executive’s employment without Cause (or is deemed to terminate Executive’s employment without Cause) within the period commencing three months prior to the latest possible date of a Change of Control and ending one year after the latest possible date of a Change of Control, any Stock Option held by Executive shall become immediately exercisable as to all option shares without regard to the vesting schedule set forth on the applicable Option Certificate, and any shares of Restricted Stock previously granted shall immediately be free and clear of any restrictions.  For purposes of this Agreement, any one of the following events shall be considered a “Change of Control” of the Company:

 

(a)            Acquisition by any “person” (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934) of any amount of the Company’s Common Stock so that such person holds or controls fifty percent (50%) or more of the Company’s Common Stock;

 

(b)            Merger or consolidation of the Company with or into any other entity in which the holders of the Company’s outstanding shares of capital stock immediately before such merger or consolidation do not, immediately after such merger or consolidation, retain capital stock representing a majority of the voting power of the surviving entity of such merger or consolidation;

 

(c)            Sale of all or substantially all of the assets of the Company to a third party;

 

(d)            Within any twenty-four (24) month period, the election by the stockholders of the Company of twenty percent (20%) or more of the directors of the Company other than pursuant to nomination by the Board, or its designated committee; or

 

(e)            Execution of a legally binding, definitive agreement approved by the Board of Directors providing for any of the events set forth in (a), (b), (c) or (d) above.

 

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7.              Confidentiality .

 

7.1.           Definitions .  As used herein, the term “Confidential Information” shall mean any and all ideas, inventions, information, know-how, compounds, materials and other items (whether patentable or not) that are confidential or proprietary to the Company (or to its affiliates, collaborators, consultants, suppliers, or customers) whether disclosed in written, oral, tangible or other form and whether or not labeled or otherwise identified as confidential or proprietary.  Confidential Information shall include, without limitation, the following to the extent proprietary to the Company (or to its affiliates, collaborators, consultants, suppliers or customers) and not publicly available:

 

(a)            inventions, trade secrets, discoveries and computer programs, and any improvements or modifications thereto;

 

(b)            engineering, research, development and design projects, data, designs, drawings and specifications;

 

(c)            manufacturing, development and other technical processes, applications, methods, apparatus and equipment;

 

(d)            business information such as lists of approved components and sources, price lists, product costs, production schedules, business plans, sales information, profit and loss information, and customer and collaborator lists;

 

(e)            any and all reagents, substances, chemical compounds, subcellular constituents, cells or cell lines, organisms and progeny, and mutants, as well as any and all derivatives or replications derived from or relating to such materials; and

 

(f)             any and all information, materials and other items supplied by third parties to the Company (or generated by the Company for third parties) under an obligation of confidentiality.

 

7.2.           Non-Disclosure .  Executive shall not at any time (whether during or after Executive’s employment with the Company) disclose or use any Confidential Information for Executive’s own benefit or purposes or the benefit or purposes of any other person, firm, partnership, joint venture, association, corporation or other organization, entity or enterprise (a “Person”) other than the Company.

 

7.3.           Exceptions .  Notwithstanding any other provision in the Agreement, Confidential Information shall not include any information or material which:

 

(a)            is or becomes generally available to the public other than as a result of disclosure thereof by Executive;

 

9



 

(b)            is lawfully received by Executive on a non-confidential basis from a third party that is not itself under an obligation of confidentiality or non-disclosure to the Company with respect to such information;

 

(c)            can be shown by Executive to have been independently developed by Executive;

 

(d)            Executive establishes by competent proof was in Executive’s possession at the time of disclosure by the Company and was not acquired, directly or indirectly from the Company; or

 

(e)            is required to be publicly disclosed by law or by regulation; provided, however, that in such event Executive shall provide the Company with prompt advance notice of such disclosure so that the Company has the opportunity if it so desires to seek a protective order or other appropriate remedy.

 

7.4.           Return of Company Property .  Executive agrees that upon termination of Executive’s employment hereunder, Executive shall return immediately to the Company any proprietary materials, any materials containing Confidential Information and any other Company property then in Executive’s possession or under Executive’s control, including, without limitation all notes, drawings, lists, memoranda, magnetic disks or tapes, or other recording media containing such Confidential Information, whether alone or together with non-confidential information, all documents, reports, files, memoranda, records, software, credit cards, door and file keys, telephones, PDAs, computers, computer access codes, disks and instructional manuals, or any other physical property that Executive received, prepared, or helped prepare in connection with Executive’s employment under this Agreement.  Upon termination, Executive shall not retain any copies, duplicates, reproductions, or excerpts of Confidential Information, nor shall Executive show or give any of the above to any third party.  Executive further agrees that Executive shall not retain or use for Executive’s account at any time any trade name, trademark, service mark, logo or other proprietary business designation used or owned in connection with the business of the Company.

 

8.              Non-Competition; Non-Solicitation .

 

8.1            Non-Competition .  During Executive’s employment with the Company or any of its affiliates and for a period of one year after the termination or cessation of such employment for any reason, Executive shall not directly or indirectly, alone or through any other organization or entity, including without limitation becoming an employee, investor (except as provided below), officer, agent, partner, member or director of any such organization or entity, engage or prepare to engage in any Competitive Activity.  For purposes of this Agreement, the term “Competitive Activity” means any area of business that the Company or any of its affiliates worldwide (which affiliates shall not include any entity that purchases the Company or otherwise acquires all or substantially all of the Company’s assets

 

10



 

and any of such purchasing or acquiring entity’s affiliates) conducted or actively planned to conduct at any time during Executive’s employment, including but not limited to oncological drug development and kinase platform drug development.  Notwithstanding the foregoing, Executive shall not be deemed to be engaged directly or indirectly in any Competitive Activity if Executive participates in any such business solely as a passive investor in up to one percent (1%) of the equity securities of a company or partnership.  For purposes of this Section, Executive shall be deemed to be engaging in Competitive Activity as of the date that Executive accepts employment or consulting engagement with any other person or entity, regardless of when Executive actually begins providing services under such employment or consulting engagement, but only if Executive is preparing to engage in Competitive Activity during such period.  Nothing in this Section shall be construed to affect in any way Executive’s confidentiality obligations as set forth in Section 7 of this Agreement.  Nothing in this Section shall be construed to prohibit Executive from seeking permission from the Company to engage in any activity which may otherwise fall within the definition of Competitive Activity as set forth in this Section, provided that a grant of permission from the Company, if any, must be in writing.

 

8.2            Non-Solicitation .  During Executive’s employment with the Company or any of its affiliates and for a period of one year after the termination or cessation of such employment for any reason thereafter, Executive will not directly or indirectly: (a) 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 the Company or its affiliates with whom the Company or its affiliates has or is actively negotiating a written agreement as of the Termination Date; (b) recruit, solicit or hire any person who is, or within the six (6) month period preceding the Termination Date was, an officer, director or employee of the Company or any of its affiliates or was a scientific consultant with an exclusive arrangement with the Company or any of its affiliates; or (c) induce or attempt to induce any officer, director, employee consultant, agent or representative of the Company or any of its affiliates to discontinue his or her relationship with the Company or any of its affiliates or to commence an employment or other business relationship with another entity.

 

9.              Other Agreements .  Executive hereby represents to the Company that Executive is not bound by any agreement or any other previous or existing business relationship which conflicts with or prevents the full performance of Executive’s duties and obligations to the Company (including Executive’s duties and obligations under this or any other agreement with the Company).  Executive understands that the Company does not desire to acquire from Executive any trade secrets or confidential business information Executive may have acquired from others.  Therefore, Executive agrees that during the Employment Term and thereafter, Executive will not improperly use or disclose any proprietary information or trade secrets of any former or concurrent employer, or any other person or entity with whom Executive has an agreement or to whom Executive owes a duty to keep such information in confidence.

 

11



 

10.                                  Injunctive Relief .  Executive acknowledges and agrees that the Company’s remedies at law for a breach or threatened breach of any of the provisions of Sections 7 and 8 would be inadequate and, in recognition of this fact, Executive agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to obtain equitable relief in the form of specific performance, temporary restraining orders, temporary or permanent injunctions or any other equitable remedy which may then be available.  In addition, in the event that Executive breaches any provision of Sections 7 or 8 of this Agreement, the applicable time periods set forth in such Sections, shall be extended for a period of time equal to the period of time during which Executive was in breach of the Agreement, up to a maximum of twelve months, and if the Company is required to seek relief from such breach in any judicial proceedings, then such time limitations shall extend for a period of time equal to the pendency of any such proceedings, including all appeals, up to a maximum of twenty-four months.  In connection with the restrictions in Sections 7 and 8, Executive represents that his economic means are such that those provisions will not prevent him from providing for himself and his family on a basis satisfactory to Executive. .  Further, in addition to any other remedies available to the Company, in the event Executive breaches any of the provisions of this Agreement, including but not limited to Sections 7 or 8, Executive agrees that any post-termination payments and benefits flowing to Executive from the Company, including but not limited to the Severance Package, shall be subject to disgorgement by the Employee and/or may be terminated, reduced, or cancelled by the Company.

 

11.                                  Notices .  Any notice hereunder by either Party to the other shall be given in writing by personal delivery, telex, facsimile, overnight courier or certified mail, return receipt requested, addressed, if to the Company, to the attention of CEO at the Company’s executive offices or to such other address as the Company may designate in writing at any time or from time to time to Executive, and if to Executive, to Executive’s most recent address on file with the Company.  Notice shall be deemed given, if by personal delivery or by overnight courier, on the date of such delivery or, if by telex or facsimile, on the business day following receipt of answer back or facsimile information or, if by certified mail, on the date shown on the applicable return receipt.

 

12.                                  Assignment .  This Agreement may not be assigned by either Party without the prior written consent of the other Party, provided, however, that the Company may assign this Agreement without Executive’s consent in the event of a merger, acquisition, or transfer of all or substantially all of the assets of the Company with or to a third party (a “Merger”).  In the event of a Merger, the Company shall require in writing any successor Person to assume and agree to perform this Agreement; failure to so assume and agree shall constitute a Deemed Termination Condition for purposes of Section 5.1.2(d).

 

13.                                  Entire Agreement .  This Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof and there have been no oral or other agreements of any kind whatsoever as a condition precedent or inducement to the signing of this Agreement or otherwise concerning this Agreement or the subject matter hereof.

 

12



 

14.                                  Expenses .  The Parties shall each pay their own respective expenses incident to the enforcement or interpretation of, or dispute resolution with respect to, this Agreement, including all fees and expenses of their counsel for all activities of such counsel undertaken pursuant to this Agreement.

 

15.                                  Waivers and Further Agreements .  Any waiver of any terms or conditions of this Agreement shall not operate as a waiver of any other breach of such terms or conditions or any other term or condition, nor shall any failure to enforce any provision hereof operate as a waiver of such provision or of any other provision hereof; provided, however, that no such written waiver, unless it, by its own terms, explicitly provides to the contrary, shall be construed to effect a continuing waiver of the provision being waived and no such waiver in any instance shall constitute a waiver in any other instance or for any other purpose or impair the right of the Party against whom such waiver is claimed in all other instances or for all other purposes to require full compliance with such provision.  Each of the Parties agrees to execute all such further instruments and documents and to take all such further action as the other Party may reasonably require in order to effectuate the terms and purposes of this Agreement.

 

16.                                  Amendments .  This Agreement may not be amended, nor shall any waiver, change, modification, consent or discharge be effected except by an instrument in writing executed by both Parties.

 

17.                                  Severability .  If any provision of this Agreement shall be held or deemed to be, or shall in fact be, invalid, inoperative or unenforceable as applied to any particular case in any jurisdiction or jurisdictions, or in all jurisdictions or in all cases, because of the conflict of any provision with any constitution or statute or rule of public policy or for any other reason, such circumstance shall not have the effect of rendering the provision or provisions in question invalid, inoperative or unenforceable in any other jurisdiction or in any other case or circumstance or of rendering any other provision or provisions herein contained invalid, inoperative or unenforceable to the extent that such other provisions are not themselves actually in conflict with such constitution, statute or rule of public policy, but this Agreement shall be reformed and construed in any such jurisdiction or case as if such invalid, inoperative or unenforceable provision had never been contained herein and such provision reformed so that it would be valid, operative and enforceable to the maximum extent permitted in such jurisdiction or in such case.

 

18.                                  Counterparts .  This Agreement maybe executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

 

19.                                  Section Headings .  The headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement.

 

20.                                  Governing Law and Forum .  This Agreement shall in all events and for all purposes be governed by, and construed in accordance with, the laws of the Commonwealth of Massachusetts without regard to any choice of law principle that would dictate the application of the laws of another jurisdiction.  Any action, suit or other legal proceeding which may be commenced to resolve any matter arising under or relating to any provision of this Agreement shall be commenced only in a court of the Commonwealth of Massachusetts (or, if appropriate, a federal court located within Massachusetts), and the parties hereby consent to the jurisdiction of such court with respect to any action, suit or proceeding commenced in such court.

 



 

IN WITNESS WHEREOF, the Parties have executed or caused to be executed this Agreement as of the Execution Date.

 

 

ARQULE, INC.

EXECUTIVE

By:

/s/ Paolo Pucci

 

By:

/s/ Thomas C. Chan

Name: Paolo Pucci

Name: Thomas C. Chan

Title: Chief Executive Officer

 

 



 

EXHIBIT A

 

Outside Activities

 

1.                                        National Institutes of Health-National Cancer Institute:  Chair and Study Section member

 

2.                                        Department of Defense — U.S. Army Prostate and Breast Cancer Scientific Advisory Panels:  Chair and Panel member

 

3.                                        Hope Funds for Cancer Research:  Study Section member

 

4.                                        University of Massachusetts:  Scientific Advisory Board member

 

5.                                        Longy School of Cambridge:  Board of Trustee member

 

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EXHIBIT B

 

ARQULE, INC. AMENDED AND RESTATED 1994 EQUITY INCENTIVE PLAN

Stock Option Terms And Conditions

 

THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES WHICH HAVE BEEN ISSUED UNDER THE 1994 EQUITY INCENTIVE PLAN AND REGISTERED UNDER THE SECURITIES ACT OF 1933.

 

1.                                        Plan Incorporated by Reference .  This Option is issued pursuant to the terms of the Plan and may be amended as provided in the Plan.  Capitalized terms used and not otherwise defined in this certificate have the meanings given to them in the Plan.  This certificate does not set forth all of the terms and conditions of the Plan, which are incorporated herein by reference.  The Committee administers the Plan and its determinations regarding the operation of the Plan are final and binding.  Copies of the Plan may be obtained upon written request without charge from the Company.  This Option is intended to be an “incentive stock option” to the extent permissible under Section 422 of the Internal Revenue Code of 1986 (the “Code”), including the $100,000 limitation of Code Section 422(d).

 

2.                                        Option Price .  The price to be paid for each share of Common Stock issued upon exercise of the whole or any part of this Option is the Option Price set forth on the face of this certificate.

 

3.                                        Vesting Schedule .  This Option may be exercised at any time and from time to time over the number of shares and in accordance with the vesting schedule set forth on the face of this certificate, but only for the purchase of whole shares, provided that if Option Holder’s employment is terminated by the Company pursuant to Section 5.1 (including 5.1.2),  5.4 or 5.5 of the Employment Agreement between the Company and Option Holder dated April 15, 2008  (“Employment Agreement”),  then this Option may be exercised at any time and from time to time over the number of shares and in accordance with the vesting schedule set forth in the applicable Section of the Employment Agreement and subject to the terms and conditions of such applicable Section of the Employment Agreement.  Notwithstanding the foregoing, this Option may not be exercised as to any shares after the Expiration Date.

 

4.                                        Method of Exercise .  To exercise this Option, the Option holder shall deliver written notice of exercise to the Company specifying the number of shares with respect to which the Option is being exercised accompanied by payment of the Option Price for such shares in cash, by certified check or in such other form, including shares of Common Stock of the Company valued at their Fair Market Value on the date of delivery, as the Committee may approve.  Promptly following such a notice, the Company will deliver to the Option holder a certificate representing the number of shares with respect to which the Option is being exercised.

 

5.                                        Rights as a Stockholder or Employee .  The Option Holder shall not have any rights in respect of shares as to which the Option shall not have been exercised and payment made

 

16



 

as provided above.  The Option Holder shall not have any rights to continued employment by the Company or any group company by virtue of the grant of this Option.

 

6.                                        Recapitalization, Mergers, Etc .  As provided in the Plan, in the event of a corporate transaction affecting the Company’s outstanding Common Stock, the Committee shall equitably adjust the number and kind of shares subject to this Option and the exercise price hereunder or make provision for a cash payment.  If such transaction involves a consolidation or merger of the Company with another entity, the sale or exchange of all or substantially all of the assets of the Company or a reorganization or liquidation of the Company, then in lieu of the foregoing, the Committee may upon written notice to the Option Holder provide that this Option shall terminate on a date not less than 20 days after the date of such notice unless theretofore exercised.  In connection with such notice, the Committee may in its discretion accelerate or waive any deferred exercise period.

 

7.                                        Option Not Transferable .  This Option is not transferable by the Option Holder other than upon the death of the Option Holder, in accordance with the Plan.

 

8.                                        Exercise of Option After Termination of Employment   Except as expressly set forth in this Paragraph 9 of this Agreement, if the Option Holder’s employment with (a) the Company, (b) a corporation (or parent or subsidiary corporation of such corporation) issuing or assuming a stock option in a transaction to which section 424(a) of the Code applies, is terminated for any reason, the Option Holder may exercise the rights which were available to the Option Holder at the time of such termination only within three months from the date of termination.  Upon the death of the Option Holder, his or her Designated Beneficiary shall have the right, at any time within twelve months after the date of death, to exercise in whole or in part any rights that were available to the Option Holder at the time of death.  It is understood and agreed,  however,  that any part of the Option intended to be an “incentive stock option” that is not exercised within three months following the date of termination will lose incentive stock option qualification and automatically convert to a Nonstatutory Stock Option for the remainder of the applicable exercise period.  Notwithstanding the foregoing, no rights under this Option may be exercised after the Expiration Date.

 

9.                                        Exercise of Option Upon Retirement .  Upon Retirement, as defined below, any unvested shares set forth on the face of this certificate shall vest, and this Option may be exercised in whole or part until the earlier of up to two years from the date of Retirement or the Expiration Date.  “Retirement” as to any Option Holder shall mean such person’s leaving the employment of the Company or an Affiliate after reaching age 55 with ten (10) years of full-time continuous service with the Company; provided, that the sum of the Option Holder’s age plus the number of years of continuous service equals or exceed seventy (70).

 

10.                                  Compliance with Securities Laws .  It shall be a condition to the Option Holder’s right to purchase shares of Common Stock hereunder that the Company may, in its discretion, require (a) that the shares of Common Stock reserved for issue upon the exercise of this Option shall have been duly listed, upon official notice of issuance, upon any national securities exchange or automated quotation system on which the Company’s Common Stock may then be listed or quoted, (b) that either (i) a registration statement under the

 

17



 

Securities Act of 1933 with respect to the shares shall be in effect, or (ii) in the opinion of counsel for the Company, the proposed purchase shall be exempt from registration under that Act and the Option Holder shall have made such undertakings and agreements with the Company as the Company may reasonably require, and (c) that such other steps, if any, as counsel for the Company shall consider necessary to comply with any law applicable to the issue of such shares by the Company shall have been taken by the Company or the Option Holder, or both.  The certificates representing the shares purchased under this Option may contain such legends as counsel for the Company shall consider necessary to comply with any applicable law.

 

11.                                  Payment of Taxes .  To the extent applicable: The Option Holder shall pay to the Company, or make provision satisfactory to the Company for payment of, any taxes required by law to be withheld with respect to the exercise of this Option.  The Committee may, in its discretion, require any other Income taxes imposed on the sale of the shares to be paid by the Option Holder.  In the Committee’s discretion, such tax obligations may be paid by entering into some other arrangements to ensure that such amount is available to them or it (whether by authorizing the sale of some or all of the shares and payment to the Company or the member of the Group (as the case may be) of the requisite amount of the proceeds of sale or otherwise). The Company and any group company may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the Option Holder.

 

12.                                  Transfer of Personal Data.   By acknowledging and accepting this award, you understand that, in order to perform its requirements under the Plan, the Company may transfer and process personal data and/or sensitive personal data about you.  Such data may include but is not limited to personal and financial data about you and sale of shares purchased under the Plan from time to time.  You also hereby give explicit consent to the Company to transfer and process any such personal data and/or sensitive data outside the country in which you work or are employed including countries which may be outside the European Economic Area where there may be no legislation in relation to an individual’s rights concerning personal data.  This may also apply to other companies in the Company group, third party advisers and administrators or regulatory authorities.

 

13.                                  Special Tax Consequences.  The Option Holder acknowledges that, to the extent the aggregate Fair Market Value of stock with respect to which “incentive stock options” (within the meaning of Section 422 of the Code, but without regard to Section 422(d) of the Code), including this Option, are exercisable for the first time by the Option Holder during any calendar year (under the Plan and all other incentive stock option plans of the Company, any Subsidiary and any parent corporation thereof (within the meaning of Section 422 of the Code)) exceeds $100,000, such options shall be treated as Nonstatutory Options to the extent required by Section 422 of the Code.  The Option Holder further acknowledges that the rule set forth in the preceding sentence shall be applied by taking options into account in the order in which they were granted.  For purposes of these rules, the Fair Market Value of stock shall be determined as of the time the Option with respect to such stock is granted.

 

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EXHIBIT C

 

Determination of Option Price

 

The exercise price of the Execution Stock Option is the Fair Market Value of ArQule’s Common Stock (as defined below) as of the Effective Date as defined in Section 1 of the Employment Agreement between the Company and Executive.

 

The Fair Market Value of ArQule’s Common Stock shall be the closing price of the Common Stock as reported by the NASDAQ National Market on the trading day of the commencement of Executive’s employment with the Company as its Chief Scientific Officer.

 

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EXHIBIT D

 

Calculation of the Severance Payment

 

Pursuant to Section 5.1.1(a)(ii), the portion of Executive’s Severance Payment based on bonuses (“Bonus Severance”) awarded to Executive, if any, would be calculated in the following manner:

 

These calculations are for illustrative purposes only and the following assumptions are utilized knowing that going forward exact numbers will change the calculation of the bonus payments:

 

2008 Salary:

 

$

286,000

 

2008 Bonus Target:

 

25

%

2009 Salary:

 

$

325,000

 

2009 Bonus Target:

 

30

%

 

Example #1:  Executive terminated in 2009

 

Bonus Severance = $68,750 (average of 25% for 2008 and 24% for 2007).

 

Example #2:  Executive awarded a 25% bonus for 2008 and 30% for 2009, terminated during 2010

 

Bonus Severance = $84,500 (average of 2008 and 2009)

 

Example #3:  Executive awarded a 25% bonus for 2008, 0% bonus for 2009, terminated during 2010

 

Bonus Severance = $35,750 (average of year 1 and year 2 bonuses actually awarded)

 

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Exhibit 31.1

 

CERTIFICATE OF THE CHIEF EXECUTIVE OFFICER

 

I, Paolo Pucci, certify that:

 

1.                I have reviewed this quarterly report on Form 10-Q of ArQule, Inc.;

 

2.                Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.                Based on my knowledge, the financial statements, and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.                The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)               Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)              Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)               Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

 

d)              Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.                The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)               All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)              Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:  May 8, 2009

 

 

/s/ PAOLO PUCCI

 

Paolo Pucci

 

Chief Executive Officer

 

(Principal Executive Officer)

 


Exhibit 31.2

 

CERTIFICATE OF THE PRINCIPAL FINANCIAL OFFICER

 

I, Peter S. Lawrence, certify that:

 

1.                I have reviewed this quarterly report on Form 10-Q of ArQule, Inc.;

 

2.                Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.                Based on my knowledge, the financial statements, and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.                The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)               Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)              Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)               Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

 

d)              Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.                The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)               All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)              Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:  May 8, 2009

 

 

/s/ PETER S. LAWRENCE

 

Peter S. Lawrence

 

President and Chief Operating Officer

 

(Principal Financial Officer)

 


 

Exhibit 32

 

ARQULE, INC.

 

CERTIFICATE OF THE CHIEF EXECUTIVE OFFICER AND

PRINCIPAL FINANCIAL OFFICER

 

The undersigned, Paolo Pucci Chief Executive Officer (Principal Executive Officer) of ArQule, Inc. (the “Company”) and Peter S. Lawrence, President and Chief Operating Officer (Principal Financial Officer), of the Company, both duly elected and currently serving, hereby certify that, to the best of his or her knowledge:

 

1.                the quarterly report on Form 10-Q for the period ending March 31, 2009, filed on behalf of the Company pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”) and containing the financial statements of the Company, fully complies with the requirements of section 13(a) of the Exchange Act; and

 

2.                the information contained in such quarterly report fairly presents, in all material respects, the financial condition and results of operations of the Company for the dates and periods covered by such quarterly report.

 

This certification accompanies the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2009, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (the “2002 Act”) and shall not be deemed filed by the Company for purposes of Section 18 of the Exchange Act.

 

This certification is being made for the exclusive purpose of compliance by the Principal Executive Officer and Principal Financial Officer of the Company with the requirements of Section 906 of the 2002 Act, and may not be disclosed, distributed or used by any person for any reason other than as specifically required by law.

 

IN WITNESS WHEREOF, the undersigned have executed this Certificate as of the 8th day of May 2009.

 

 

/s/ PAOLO PUCCI

 

Name:

Paolo Pucci

Title:

Chief Executive Officer

 

(Principal Executive Officer)

 

 

/s/ PETER S. LAWRENCE

 

Name:

Peter S. Lawrence

Title:

President and Chief Operating Officer

 

(Principal Financial Officer)