<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________.
Commission file number 0-22170
EPOCH PHARMACEUTICALS, INC.
(exact name of small business issuer as specified in its charter)
Delaware 91-1311592
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
12277 134th Ct. N.E., Ste. 110, Redmond, WA 98052
(Address of principal executive offices)
(425) 821-7535
(Issuer's telephone number)
1725 220th St. S.E., No. 104, Bothell, WA 98021
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 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
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
Class Outstanding at November 4, 1998
---------------------------- -------------------------------
Common Stock, $.01 par value 14,824,227
Page 1 of 14 Pages
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EPOCH PHARMACEUTICALS, INC.
INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of December 31, 1997
and September 30, 1998 (unaudited)....................................... 3
Statements of Operations (unaudited) for the three
months and nine months ended September 30, 1997 and 1998................. 4
Statements of Cash Flows (unaudited) for the nine months ended
September 30, 1997 and 1998.............................................. 5
Condensed Notes to Financial Statements (unaudited)...................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 8
PART II. OTHER INFORMATION
Item 5. Other Information........................................................ 13
Item 6. Exhibits and Reports on Form 8-K......................................... 13
NOTE: Items 1-4 are omitted as they are not applicable.
SIGNATURE ........................................................................... 14
</TABLE>
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EPOCH PHARMACEUTICALS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 1,485,483 $ 1,421,580
Receivables ........................................................ 63,287 21,761
Prepaid expenses ................................................... 38,801 94,377
------------ ------------
Total current assets ........................................... 1,587,571 1,537,718
Equipment and leasehold improvements, net .............................. 160,011 181,951
Other assets ........................................................... 65,064 103,260
------------ ------------
Total assets ................................................... $ 1,812,646 $ 1,822,929
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ................................................... $ 236,970 $ 160,526
Accrued liabilities ................................................ 226,549 904,638
------------ ------------
Total current liabilities ...................................... 463,519 1,065,164
------------ ------------
Note payable ........................................................... -- 3,000,000
Stockholders' equity (deficit):
Preferred stock, par value $.01; authorized 10,000,000
shares; no shares issued and outstanding ....................... -- --
Common stock, par value $.01; authorized
50,000,000 shares; issued and outstanding
14,814,793 shares at December 31, 1997
and 14,824,227 shares at September 30, 1998 .................... 148,148 148,242
Additional paid-in capital ......................................... 52,930,787 54,470,107
Deferred financing expense ......................................... -- (1,115,329)
Accumulated deficit ................................................ (51,729,808) (55,745,255)
------------ ------------
Total stockholders' equity (deficit) ........................... 1,349,127 (2,242,235)
------------ ------------
Total liabilities and stockholders' equity (deficit) ........... $ 1,812,646 $ 1,822,929
============ ============
</TABLE>
See accompanying notes to financial statements.
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EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTH ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Research contract revenue ..................... $ 43,983 $ 41,787 $ 133,694 $ 126,159
Operating expenses:
Research and development ...................... 661,589 712,053 1,942,165 2,114,240
General and administrative .................... 363,086 913,246 1,176,755 1,667,266
------------ ------------ ------------ ------------
Total operating expenses .................. 1,024,675 1,625,299 3,118,920 3,781,506
------------ ------------ ------------ ------------
Operating loss ............................ (980,692) (1,583,512) (2,985,226) (3,655,347)
Other income (expense):
Interest income ............................... 35,198 26,732 132,374 92,820
Interest and financing expense ................ (1,433) (260,696) (3,026) (566,210)
Other income .................................. 20,720 200 92,228 23,290
------------ ------------ ------------ ------------
Loss from continuing operations ........... (926,207) (1,817,276) (2,763,650) (4,105,447)
Discontinued operations -- gain on disposal
of Diagnostics Division ..................... 30,000 30,000 100,000 90,000
------------ ------------ ------------ ------------
Net loss .................................. $ (896,207) $ (1,787,276) $ (2,663,650) $ (4,015,447)
============ ============ ============ ============
Loss per share from continuing
operations - basic and diluted .............. $ (0.06) $ (0.12) $ (0.19) $ (0.28)
Income per share from discontinued
operations - basic and diluted .............. -- -- 0.01 0.01
------------ ------------ ------------ ------------
Loss per share - basic and diluted ............ $ (0.06) $ (0.12) $ (0.18) $ (0.27)
============ ============ ============ ============
Weighted average number of common shares
outstanding - basic and diluted ............. 14,751,820 14,821,968 14,742,936 14,817,185
</TABLE>
See accompanying notes to financial statements.
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EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1997 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss .......................................... $(2,663,650) $(4,015,447)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ..................... 146,089 44,023
Amortization of deferred financing expense ........ -- 419,224
Changes in operating assets and liabilities:
Receivables, prepaid expenses, and other assets ... 20,874 (52,246)
Accounts payable and accrued liabilities .......... 38,321 601,645
----------- -----------
Net cash used in operating activities ............. (2,458,366) (3,002,801)
----------- -----------
Cash used in investing activities:
Acquisition of equipment and leasehold improvements (19,275) (65,963)
Issuance of notes receivable ...................... (43,148)
----------- -----------
Net cash used in investing activities ............. (62,423) (65,963)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable ....................... -- 3,000,000
Principal payments on notes payable ............... (8,264) --
Exercise of stock options ......................... 19,891 4,861
----------- -----------
Net cash provided by financing activities ......... 11,627 3,004,861
----------- -----------
Net increase (decrease) in cash and cash equivalents .. (2,509,162) (63,903)
Cash and cash equivalents at beginning of period ...... 4,890,358 1,485,483
----------- -----------
Cash and cash equivalents at end of period ............ $ 2,381,196 $ 1,421,580
=========== ===========
Supplemental disclosure of cash flow information - cash
payments made during the period for interest ........ $ 3,026 $ --
=========== ===========
</TABLE>
See accompanying notes to financial statements.
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EPOCH PHARMACEUTICALS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE (1) BASIS OF PRESENTATION
Epoch Pharmaceuticals, Inc. ("Epoch" or the "Company") (formerly MicroProbe
Corporation) is a biomedical company focused on the development of
oligonucleotides (short chains of nucleotides which are the building blocks of
DNA and RNA) as new biologically useful compounds. Utilizing unique and
proprietary technology in the rational design, synthesis and chemical
modification of oligonucleotides, the Company has been developing a gene-therapy
approach to inactivate or reverse mutate disease associated genes.
Epoch's therapeutic research and development program has focused on the
modification of gene expression by altering cellular genomic DNA using
oligonucleotide targeting technology combined with chemical reactivity. The
Company's technology is based on its expertise in designing and synthesizing
oligonucleotides bearing modifications that selectively bind to and interact
with the target genes.
Epoch has recently discovered that the compounds and techniques that were being
developed for its gene modification therapeutic program can be adapted to
several gene sequencing analysis systems currently in use or being developed by
others. The Company believes that this technology has broad application
potential in the developing fields of molecular diagnostics and genomics,
including the detection of infectious diseases, inheritable diseases through
prenatal testing, screening populations to identify genetic markers that
correlate with disease risk or drug response, as well as any other genetic
analysis based on DNA sequence determination.
The unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB. Accordingly, they do not include all of
the information and footnotes required to be presented for complete financial
statements. The accompanying financial statements include all adjustments
(consisting only of normal recurring accruals) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. Certain 1997 balances have been reclassified to conform with
the 1998 presentation.
The financial statements and related disclosures have been prepared with the
presumption that users of the interim financial information have read or have
access to the audited financial statements for the preceding fiscal year.
Accordingly, these financial statements should be read in conjunction with the
audited financial statements and the related notes thereto included in the
Company's Annual Report on Form 10-KSB as filed with the Securities and Exchange
Commission on April 14, 1998.
NOTE (2) LOSS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 128, Earnings Per Share. This statement establishes standards for computing
and presenting earnings per share (EPS), replacing the presentation of primary
EPS with a presentation of Basic EPS. For
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entities with complex capital structures, the statement requires the dual
presentation of both Basic EPS and diluted EPS on the face of the statement of
operations. Under this new statement, Basic EPS is computed based on weighted
average shares outstanding and excludes any potential dilution. Diluted EPS
reflects potential dilution from the exercise or conversion of securities into
common stock or from other contracts to issue common stock and is similar to the
previously required fully diluted EPS. Basic EPS and diluted EPS have been
restated for the three and nine months ended September 30, 1997. The capital
structure of the Company includes stock options and stock warrants. At September
30, 1998, there were 1,107,016 options outstanding to purchase the common stock
of the Company with exercise prices ranging from $0.30 to $10.00. Also
outstanding at September 30, 1998 were 7,498,875 warrants to purchase the common
stock of the Company with exercise prices ranging from $0.30 to $9.21 per share.
The assumed conversion and exercise of these securities have been excluded from
Diluted EPS as their effect is anti-dilutive.
NOTE (3) NOTE PAYABLE
In February 1998, Bay City Capital Fund I LP ("BCC Fund I"), San Francisco,
California, loaned $3,000,000 to the Company as a bridge to the earlier of a
public rights offering, other financing, or February 25, 2000. The loan is
accruing interest at 8% per annum. In the event of a rights offering, BCC Fund I
has agreed, subject to certain conditions, to convert the loan into equity to
the extent that the current stockholders do not subscribe for their
proportionate share of the offering. In partial consideration for the bridge
loan and BCC Fund I's agreement to purchase excess shares, if any, in a rights
offering, BCC Fund I received a warrant to purchase 2,000,000 shares of Epoch's
Common Stock at a price of $0.90 per share. Bay City Capital LLC, which manages
BCC Fund I, is a merchant banking partnership that was formed by The Craves
Group and The Pritzker Family business interests. The founding partner of The
Craves Group, Fred Craves, Ph.D., is the Chairman and CEO of Epoch. Sanford S.
Zweifach, Epoch's President and Chief Financial Officer, is also the Chief
Financial Officer of Bay City Capital LLC.
The Company has recorded additional paid-in capital and deferred financing
expense of approximately $1,535,000 in connection with the issuance of these
warrants to purchase 2,000,000 shares of Epoch's Common Stock. This deferred
financing expense is being amortized over the two year term of the note.
Deferred financing expense recognized in the three and nine month periods ended
September 30, 1998 was $197,000 and $419,000, respectively.
NOTE (4) FACILITIES
In October 1998, the Company moved its operations to a 13,000 square foot
sub-leased facility in Redmond, Washington. The monthly lease expense on this
new space is approximately $14,300, and the sub-lease expires at the end of
October 1999.
Moving expenses incurred and accrued in the third quarter totaled $77,000. The
move is still being finalized and additional expenses are anticipated in the
fourth quarter. Leasehold improvements on the new space are estimated to be
approximately $50,000, which will be incurred in the fourth quarter of 1998.
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Prior to September 1998, the Company had been in negotiations for a lease on
approximately 21,000 square feet in the general vicinity of its then current
facility in Bothell, Washington. A design build team had been selected and was
working on plans for the new space. In September 1998, the project was canceled.
Costs for architectural fees and long lead equipment items incurred prior to
cancellation of the project are estimated at $472,000, which has been expensed
and included in general and administrative expenses in the third quarter of
1998.
NOTE (5) ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Standards (SFAS) No. 130, Reporting Comprehensive Income. This
statement establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
The purpose of reporting comprehensive income is to report a measure of all
changes in equity of an enterprise that result from recognized transactions and
other economic events of the period other than transactions with owners in their
capacity as owners. SFAS 130 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods. Other than
net losses, the Company did not have any items of comprehensive income or loss
during the nine months ended September 30, 1998 or 1997. As a result, a separate
statement of comprehensive income is not included with the financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS; PLAN OF OPERATIONS
At September 30, 1998, the Company had cash and cash equivalents of $1,421,580
which provides sufficient liquidity to operate until January 1999, based on the
Company's current plan of operation, exclusive of the cost associated with the
canceled facility. To date the expenses on the canceled facility total $472,000,
of which approximately $81,000 has been paid. The Company's continuing
operations are research and development, and will not generate working capital
in the near term to fund future operations.
In October 1998, the Company moved its operations to a 13,000 square foot
sub-leased facility in Redmond, Washington. The monthly lease expense on this
new space is approximately $14,300 per month, and the sub-lease expires at the
end of October 1999.
Moving expenses incurred and accrued in the third quarter total $77,000. The
move is still being finalized and additional expenses are anticipated in the
fourth quarter. Leasehold improvements on the new space are estimated to be
approximately $50,000, which will be incurred in the fourth quarter of 1998.
The lease on the new space will expire at the end of October, 1999, at which
time the Company will be required to negotiate a new lease or relocate to
another facility. There are no assurances that a new lease can be negotiated for
the Redmond facility on terms acceptable to the Company, if at all, and there
are currently no negotiations in process on this, or any other space. The
Company plans to address the upcoming facility needs in early 1999.
In October 1998, Rich B. Meyer, Vice President, Research and Development, and
Chief Science Officer, resigned to pursue other interests. Dr. Meyer's duties
have been assumed by senior staff leaders.
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Since inception, the Company has financed its operations primarily through the
sale of its equity securities. In addition, the Company received $8,510,000 from
the sale of its diagnostics division. To continue operations, the Company will
be required to sell additional equity securities, borrow additional funds, or
obtain additional financing through licensing, joint venture, or other
collaborative arrangements. The Company is pursuing such financing arrangements
but has no commitments for such financing and there can be no assurance that
such financing will be available on satisfactory terms, if at all.
This Quarterly Report on Form 10-QSB contains certain forward-looking statements
that are based on current expectations. In light of the important factors that
can materially affect results, including those set forth below and elsewhere in
this Quarterly Report on Form 10-QSB, the inclusion of forward-looking
information herein should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.
The Company may encounter competitive, technological, financial and business
challenges making it more difficult than expected to continue to develop
therapeutic technologies and products; the market may not accept the Company's
therapeutic products; the Company may be unable to retain existing key
management personnel; and there may be other material adverse changes in the
Company's operations or business. Certain important factors affecting the
forward-looking statements made herein include, but are not limited to (i) the
successful development of viable therapeutic technologies and products, (ii)
accurately forecasting capital expenditures, and (iii) obtaining new sources of
external financing. Assumptions relating to budgeting, product development and
other management decisions are subjective in many respects and thus susceptible
to interpretations and periodic revisions based on actual experience and
business developments, the impact of which may cause the Company to alter its
operating, capital expenditure or other budgets, which may in turn affect the
Company's financial position and results of operations.
Future operating results may be impacted by a number of factors that could cause
actual results to differ materially from those stated herein, which reflect
management's current expectations. These factors include industry specific
factors, the Company's ability to maintain access to external financing sources
and its financial liquidity, the Company's ability to timely develop and produce
commercially viable therapeutic products and the Company's ability to manage
expense levels.
RESULTS OF OPERATIONS
The following discussion of results of operations reflects the Company's
diagnostics division as discontinued operations for the three and nine months
ended September 30, 1997 and 1998.
Research contract revenue reflects revenue from U.S. government grants and
contracts and subcontracts.
Research and development expenses for the three and nine month periods ended
September 30, 1998 increased $50,000 and $172,000, respectively, over the same
periods in the prior year as a result of increased research activity. This level
of expenditures for research and development is anticipated throughout the
remainder of 1998.
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General and administrative expenses increased $550,000 and $491,000 in the three
and nine month periods ended September 30, 1998 compared to the respective prior
year periods. These increases were primarily the result of the expenses incurred
in the abandonment of a proposed facility which resulted in the recognition of
$472,000 in expenses for the three and nine month periods ended September 30,
1998. Also included in the three and nine month periods is $77,000 in expenses
associated with the move to a new building.
Offsetting some of the increase in general and administrative expenses in the
nine month period ended September 30, 1998, is a decrease in expenditures for
the filing of patents on new technologies. During the first nine months of 1997
the Company expended $214,000 for patent filings on new technologies, as
compared to $145,000 in the comparable period of 1998. The Company believes that
these patents, if issued, will improve the Company's proprietary position with
regard to its targeted gene mutagenesis technologies. There can be no assurance
that the Company's patent applications will result in further issued patents or
that such issued patents will offer protection against competitors with similar
technology. Additionally, there can be no assurance that any manufacture, use or
sale of the Company's technology or products will not infringe on patents or
proprietary rights of others, and the Company may be unable to obtain licenses
or other rights to these other technologies that may be required for
commercialization of the Company's proposed products. Further variances in
general and administrative expenses for the three and nine month periods ended
September 30, 1998 are the result of normal business fluctuations.
Interest income in the three and nine month periods ended September 30, 1998 is
less than 1997 comparable periods due to lower cash balances available for
investment.
Interest and financing expense in the current periods increased over the
respective periods in the prior year due to the increase in notes payable of
$3,000,000, as well as including $197,000 and $419,000, respectively, of
amortized financing expense incurred during the three and nine month periods
ended September 30, 1998.
Other income primarily represents payments received from Saigene Corporation
("Saigene") for administrative support functions as well as for rented
laboratory and office space. As of April 1998, Saigene had secured and relocated
to separate facilities. As such, there is no further income for administrative
support functions beyond April 1998.
The income from discontinued operations relates to the disposal of the assets of
the Company's then existing diagnostics division. The Company sold the majority
of the diagnostic assets of the Company to Becton Dickinson in November 1995. In
November 1996, the Company entered into an agreement with Saigene, whereby Epoch
transferred its remaining diagnostic technologies, including SBIR grants, to
Saigene for $1,100,000. The $1,100,000 is in the form of an 8% note receivable
with terms of $50,000 down and $10,000 per month. The note is secured by the
assets and technologies transferred to Saigene in the agreement. The balance of
the note originally was due March 31, 1997, or upon Saigene completing financing
arrangements, whichever occurred first. On June 20, 1997, the note was amended
to payments of $10,000 per month up to the closing of an anticipated private
placement which is currently in process by Saigene and increasing to $20,000 per
month after completion of the anticipated private placement. If the private
placement raises $1,500,000 or more, then Epoch is to receive a payment on the
note of $500,000. Additionally, Epoch now holds a 12% equity position, acquired
as compensation for the note extensions, in Saigene. The note must be repaid in
full upon completion of any additional financing in excess of $1,000,000 or on
June 20, 1999, whichever occurs first.
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The gain on disposal of diagnostic division represents only that portion of the
gain for which cash payments were received during the three and nine months
ended September 30, 1997 and 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had cash and cash equivalents of $1,421,580
which provides sufficient liquidity to operate until January 1999, based on the
Company's current plan of operation, exclusive of the cost associated with the
canceled facility. The Company's continuing operations are research and
development, and will not generate working capital in the near term to fund
future operations.
Cash decreased by $64,000 from December 31, 1997 to September 30, 1998 primarily
as a result of $3,000,000 of loan proceeds offset by $3,003,000 of cash used in
operations and $66,000 used to acquire equipment. In February 1998, Bay City
Capital Fund I LP ("BCC Fund I"), San Francisco, California, loaned $3,000,000
to the Company as a bridge to the earlier of a public rights offering, other
financing, or February 25, 2000. The loan is accruing interest at 8% per annum.
In the event of a rights offering, BCC Fund I has agreed, subject to certain
conditions, to convert the loan into equity to the extent that the current
stockholders do not subscribe for their proportionate share of the offering. In
partial consideration for the bridge loan and BCC Fund I's agreement to purchase
excess shares, if any, in a rights offering, BCC Fund I received a warrant to
purchase 2,000,000 shares of Epoch's Common Stock at a price of $0.90 per share.
Bay City Capital LLC, which manages BCC Fund I, is a merchant banking
partnership that was formed by The Craves Group and The Pritzker Family business
interests. The founding partner of The Craves Group, Fred Craves, Ph.D., is the
Chairman and CEO of Epoch. Sanford S. Zweifach, Epoch's President and Chief
Financial Officer, is also the Chief Financial Officer of Bay City Capital LLC.
The Company's accounts payable and accrued liabilities balances increased by
$602,000 from December 31, 1997 to September 30, 1998. This increase is caused,
primarily, by the incurrence of liabilities and the resultant accounts payable
associated with the canceled facility project as well as normal business
fluctuations.
The Company is focused on the development of its products with the goal of
entering into corporate partnering arrangements to further commercialize the
technology. The Company's primary future needs for capital are for continued
research and development, as well as relocation expenses anticipated to be
incurred in a move to new facilities in 1999. The Company's working capital
requirements may vary depending upon numerous factors including the progress of
the Company's research and development, competitive and technological advances
and other factors.
The Company will require additional funds to continue its operations in the near
term and, over the longer term, will require substantial additional funds to
maintain and expand its research and development activities and to ultimately
commercialize, with or without the assistance of corporate partners, any of its
proposed products. The Company will seek collaborative or other arrangements
with larger pharmaceutical companies, under which such companies would provide
additional capital to the Company in exchange for exclusive or non-exclusive
license or other rights to certain of the technologies and products the Company
is developing. However, the competition for such
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arrangements with major pharmaceutical companies is intense, with a large number
of biopharmaceutical companies attempting to satisfy their funding requirements
through such arrangements. There can be no assurance that an agreement or
agreements will arise from these discussions in a timely manner, or at all, or
that revenues that may be generated thereby will offset operating expenses
sufficiently to reduce the Company's short- or long-term funding requirements.
If additional funding is not obtained, the Company will have to curtail
operations.
YEAR 2000 COMPLIANCE
Many existing information technology (IT) systems, such as computer systems and
software products, as well as non-IT systems that include embedded technology,
were not designed to correctly process dates after December 31, 1999. The
Company has assessed the impact of such "Year 2000" issues on its products, its
internal IT and non-IT systems, as well as on its suppliers and service
providers. The Company has evaluated its IT systems and has determined that the
Company's business systems are not Year 2000 compliant. The Company has
developed a plan to replace these systems in a timely fashion at a cost of
approximately $30,000. The Company has also initiated discussions with its
significant suppliers and service providers regarding their plans to
investigate, identify and remediate their Year 2000 issues. Although the Company
anticipates cooperation in these efforts from most of the Company's significant
suppliers and service providers, the Company is also dependent on certain
utility companies, telecommunication service companies and other service
providers that are outside the Company's control. Therefore, it may be difficult
for the Company to obtain assurances of Year 2000 readiness from such third
parties. Although the Company believes that it will have identified all of the
Company's material Year 2000 issues in the course of its assessments, given the
pervasiveness of Year 2000 issues and the complex interrelationships among Year
2000 issues both internal and external to the Company, there can be no assurance
that the Company will be able to identify and accurately evaluate all such
issues.
If any suppliers or service providers fail to appropriately address their Year
2000 issues, such failure could have a material adverse effect on the Company's
business, financial condition and results of operations. For example, if Year
2000 problems are experienced by any of the Company's significant suppliers or
service providers and result in or contribute to delays or interruptions in the
delivery of products or services to the Company, such delays or interruptions
could have a material adverse effect on the Company's business, financial
condition and results of operations. Finally, disruption in the economy
generally resulting from Year 2000 issues could also materially adversely affect
the Company.
The Company's activities with respect to the Year 2000 preparation will include
the development of contingency plans in the event the Company has not completed
all of its remediation programs in a timely manner and in the event that any
third parties who provide goods or services essential to the Company's business,
fail to appropriately address their Year 2000 issues. The Company expects to
conclude the development of these contingency plans by mid 1999. Even if these
plans are completed on time and put in place, there can be no assurance that
such plans will be sufficient to address any third party failures or that
unresolved or undetected internal and external Year 2000 issues will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
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PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Any stockholder desiring to submit a proposal for action at the 1999 Annual
Meeting of Stockholders and presentation in the Company's proxy statement with
respect to such meeting should arrange for such proposal to be delivered to the
Company's offices, Attn: Secretary, Epoch Pharmaceuticals, Inc., 12277 134th
Court NE, #110, Redmond, Washington 98052, no later than December 15, 1999 in
order to be considered for inclusion in the Company's proxy statement relating
to the meeting. Matters pertaining to such proposals, including the number and
length thereof, eligibility of persons entitled to have such proposals included
and other aspects are regulated by the Securities Exchange Act of 1934, Rules
and Regulations of the Securities and Exchange Commission and other laws and
regulations to which interested persons should refer.
In May 21, 1998, the Securities and Exchange Commission adopted an amendment to
Rule 14a-4, as promulgated under the Securities and Exchange Act of 1934, as
amended. The amendment to Rule 14a-4(c)(1) governs the Company's use of its
discretionary proxy voting authority with respect to a stockholder proposal
which is not addressed in the Company's proxy statement. The new amendment
provides that if a proponent of a proposal fails to notify the Company at least
45 days prior to the month and day of mailing of the prior year's proxy
statement, then the Company will be allowed to use its discretionary voting
authority when the proposal is raised at the meeting, without any discussion of
the matter in the proxy statement.
With respect to the Company's 1999 Annual Meeting of Stockholders, if the
Company is not provided notice of a stockholder proposal, which the stockholder
has not previously sought to include in the Company's proxy statement, by
February 28, 1999, the Company will be allowed to use its voting authority as
outlined.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
27.1 Financial Data Schedule
13
<PAGE> 14
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EPOCH PHARMACEUTICALS, INC.
Date: November 13, 1998 By: /s/ SANFORD S. ZWEIFACH
------------------------
Sanford S. Zweifach
President/Chief Financial Officer
14
<PAGE> 15
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,421,580
<SECURITIES> 0
<RECEIVABLES> 21,761
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,537,718
<PP&E> 181,951
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,822,929
<CURRENT-LIABILITIES> 1,065,164
<BONDS> 0
0
0
<COMMON> 148,242
<OTHER-SE> (2,390,477)
<TOTAL-LIABILITY-AND-EQUITY> 1,822,929
<SALES> 0
<TOTAL-REVENUES> 126,159
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,781,506
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 566,210
<INCOME-PRETAX> (4,015,447)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,105,447)
<DISCONTINUED> 90,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,015,447)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
