<PAGE> 1
As filed with the Securities and Exchange Commission on August 26, 1999
Registration No. 333-21353
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 4
TO
FORM SB-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
EPOCH PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 2834 91-1311592
- ------------------------------- ----------------------- ----------------------
(STATE OR OTHER JURISDICTION OF PRIMARY STANDARD (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) INDUSTRIAL CODE NUMBER) IDENTIFICATION NUMBER)
12277 134th Court NE, Suite 110, Redmond, Washington 98052
(425) 821-7535
- --------------------------------------------------------------------------------
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
12277 134th Court NE, Suite 110, Redmond, Washington 98052
(425) 821-7535
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL PLACE OF BUSINESS)
Fred Craves, Ph.D., Chief Executive Officer
12277 134th Court NE, Suite 110, Redmond, Washington 98052
(425) 821-7535
- --------------------------------------------------------------------------------
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
C. CRAIG CARLSON, ESQ.
LAWRENCE B. COHN, ESQ.
STRADLING YOCCA CARLSON & RAUTH
660 NEWPORT CENTER DRIVE, SUITE 1600
NEWPORT BEACH, CALIFORNIA 92660
(949) 725-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933 (the "Securities Act"),
please check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box: [X]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================================
TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AMOUNT PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TO BE REGISTERED TO BE REGISTERED (1) AGGREGATE OFFERING PRICE (2) OFFERING PRICE REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value: $.01 per share 1,268,258 shares $.86 $1,000,702 $331*
=================================================================================================================================
</TABLE>
(1) The Company originally registered for resale by security holders 10,428,365
shares of Common Stock under Registration No. 333-12601 on Form SB-2.
Pursuant to Rule 429, the Prospectus included as part of this Post Effective
Amendment No. 1 to Form SB-2 Registration Statement also relates to the
resale of such previously registered shares. The Registrant has previously
paid a registration fee of $3,465.47 with respect to such shares.
(2) The offering price is estimated solely for the purpose of calculating the
registration fee in accordance with Rule 457(C), using the average of the
high and low bid price for the Common Stock on the OTC Bulletin Board or
February 3, 1996, which was approximately $.86 per share.
* Previously paid
================================================================================
<PAGE> 2
PROSPECTUS
EPOCH PHARMACEUTICALS, INC.
(formerly "MicroProbe Corporation")
4,891,001 Shares of Common Stock
(Par Value $0.01 Per Share)
The stockholders listed in this Prospectus under the section entitled
"Selling Stockholders" may offer and sell a total of 4,891,001 shares of Common
Stock, which they own or have the right to acquire from time to time. The shares
of Common Stock included in this offering consist of 4,891,001 shares of Common
Stock issuable upon exercise of warrants.
------------------
The Selling Stockholders may sell the shares of Common Stock described in
this Prospectus in public or private transactions, on or off the OTC Bulletin
Board, at prevailing market prices, or at privately negotiated prices. The
Selling Stockholders may sell shares directly to purchasers or through brokers
or dealers. Brokers or dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Stockholders. We will not
receive any proceeds from the Selling Stockholders' sale of the shares of Common
Stock. However, some of the Common Stock which may be sold under this prospectus
will require the Selling Stockholder to first exercise warrants. Epoch would
receive the proceeds from the exercise of any warrants and the proceeds would be
used to fund the ongoing operations of the Company. Also, we have agreed to pay
the expenses associated with the registration and sale of the Common Stock
offered by the Selling Stockholders. More information is provided in the section
titled "Plan of Distribution."
------------------
Our Common Stock is currently traded on the OTC Bulletin Board under the
symbol "EPPH."
------------------
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 4 OF THIS PROSPECTUS.
------------------
Neither The Securities and Exchange Commission ("SEC") nor any state
securities commission has approved or disapproved of these securities, or
determined if this Prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
------------------
In this prospectus, the "Company," the "Registrant," "Epoch," "we," "us"
and "our" refer to Epoch Pharmaceuticals, Inc.
------------------
The date of this Prospectus is _____________, 1999.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-Looking and Cautionary Statements....................................i
Prospectus Summary..........................................................ii
The Offering.................................................................2
Summary Financial Information................................................3
Risk Factors.................................................................4
Use Of Proceeds..............................................................9
Price Range of Common Stock.................................................10
Capitalization..............................................................11
Dividend Policy.............................................................11
Selected Financial Data.....................................................12
Management's Discussion and Analysis of Financial Condition
and Results of Operations..............................................13
Business....................................................................19
Management..................................................................25
Certain Transactions........................................................27
Security Ownership of Certain Beneficial Owners and Management..............29
Description of Capital Stock................................................31
Selling Stockholders........................................................34
Plan of Distribution........................................................36
Legal Matters...............................................................36
Experts.....................................................................36
Index to Financial Statements................................................F
</TABLE>
We have not authorized any dealer, salesperson or other person to give any
information or represent anything not contained in this Prospectus. You must not
rely on any unauthorized information. This Prospectus does not offer to sell or
buy any shares in any jurisdiction where it is unlawful. The information in this
Prospectus is current as of ______, 1999.
<PAGE> 4
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
This Prospectus contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934 (the "Exchange Act") and such
forward-looking statements are subject to the safe harbors created thereby. For
this purpose, any statements contained in this Form SB-2 except for historical
information may be deemed to be forward-looking statements. Without limiting the
generality of the foregoing, words such as "may," "will," "expect," "believe,"
"anticipate," "intend," "could," "estimate" or "continue" or the negative or
other variations thereof or comparable terminology are intended to identify
forward-looking statements. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances are forward-looking statements.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties, as well as on
certain assumptions. For example, any statements regarding future cash flow,
financing activities, and research and development programs are forward-looking
statements and there can be no assurance that the Company will generate positive
cash flow in the future or that the Company will be able to obtain financing on
satisfactory terms, if at all. Additional risks and uncertainties include
possible delays in the completion of products, the possible lack of market
acceptance of products released by the Company, failure of our products to be
and remain accepted within their respective markets, material adverse changes in
competitive conditions within our markets, failure to retain key research and
development personnel, failure of the Company to accurately anticipate market
demand, and material adverse changes in the Company's operations or business.
Additional factors that may affect future operating results are discussed in
more detail under the Section entitled "Risk Factors." Assumptions relating to
the foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions, and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although we believe that the assumptions
underlying the forward-looking statements are reasonable, the business and
operations of the Company are subject to substantial risks that increase the
uncertainty inherent in the forward-looking statements, and the inclusion of
such information 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.
In addition, risks, uncertainties and assumptions change as events or
circumstances change.
In light of such significant uncertainties, you should carefully read
the factors set forth in the section entitled "Risk Factors" and any other
cautionary statements made in this Prospectus and understand that those factors
and statements are applicable to all related forward-looking statements wherever
they appear in this Prospectus.
i
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information, including the Financial Statements
and related Notes, contained elsewhere in this Prospectus. This summary is
incomplete and may exclude certain information that you should consider before
investing in the Common Stock offered in this Prospectus. You should read the
entire Prospectus carefully.
BUSINESS OF EPOCH PHARMACEUTICALS, INC.
Epoch Pharmaceuticals, Inc. ("Epoch" or the "Company") is a biomedical
company utilizing nucleoside and nucleotide chemistry to develop molecular tools
for genetic analysis. Utilizing unique and proprietary technology in the
rational design, synthesis and chemical modification of oligonucleotides, the
Company has positioned itself to provide products and techniques for high
throughput genetic sequence analysis that are in increasing demand in the
rapidly expanding field of genetic pharmacology.
Previously, our therapeutic research and development program focused on
the modification of gene expression by altering cellular genomic DNA using
oligonucleotide targeting technology combined with chemical reactivity. Our
technology is based on expertise in designing and synthesizing oligonucleotides
bearing modifications that selectively bind to and interact with the target
genes.
Recently, we discovered that the compounds and techniques that were
being developed for our gene modification program can be adapted to several gene
sequencing analysis systems currently in use or being developed by others. We
believe 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.
In January 1999, we licensed certain of our enabling genetic analysis
technology to the PE Biosystems Division of The Perkin-Elmer Corporation.
Perkin-Elmer will use the technology in applications related to its proprietary
technology in the areas of biomedical research and certain non-clinical applied
fields. As part of the license agreement, Perkin-Elmer will purchase our
proprietary chemical intermediates. In addition to up-front license fees and
pre-payments for future purchases, we will receive a royalty on all products
that Perkin-Elmer sells which incorporate our technology.
We incorporated in Delaware on August 14, 1985, under the name
MicroProbe Corporation. We changed our name to Epoch Pharmaceuticals, Inc. in
December 1995. Our principal office is located at 12277 134th Court NE, Suite
110, Redmond, Washington 98052 and our telephone number is (425) 821-7535.
ii
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered................................... Up to 4,891,001 shares, including up to 4,891,001 shares
issuable upon exercise of warrants, to be sold by the
Selling Stockholders.
Common Stock Outstanding Prior to this Offering (1).... 14,932,095 shares
Common Stock to be Outstanding After Completion of this
Offering (1).......................................... 14,932,095 shares
Selling Stockholders .................................. See the section entitled "Selling Stockholders,"
included in this Prospectus.
Risk Factors........................................... Investment in these securities is uncertain and risky.
See "Risk Factors."
Use of Proceeds........................................ We will not receive any proceeds from the sale of the
Common Stock being sold in this offering. Some of the
Common Stock, however, will be received by the Selling
Stockholders only when they exercise warrants. For any
warrants exercised, the Company will receive proceeds
which will be used to fund our research and development
activities and for general corporate purposes.
Dividend Policy ....................................... We do not anticipate paying cash dividends in the
foreseeable future as earnings will be invested in the
growth of our business. See "Dividend Policy."
OTC Bulletin Board Symbol Common Stock................. EPPH
</TABLE>
- ---------------------------
(1) Based upon the number of outstanding shares at August 12, 1999. Does
not include (i) 1,362,218 shares reserved for issuance upon exercise of
outstanding stock options, and (ii) 7,798,875 shares reserved for
issuance upon exercise of outstanding warrants.
-2-
<PAGE> 7
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table sets forth selected Summary Financial Information
for the years ended December 31, 1996, 1997, and 1998, as well as for the six
months ended June 30, 1998 and 1999.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue $ 37 $ 188 $ 160 $ 84 $ 153
Loss from continuing operations (3,326) (3,735) (5,213) (2,288) (2,231)
Net loss (3,452) (3,605) (5,103) (2,228) (2,161)
Net loss per common share -
basic and diluted (0.32) (0.24) (0.34) (0.15) (0.15)
Weighted average common shares
outstanding - basic and diluted 10,854,993 14,755,462 14,818,960 14,814,793 14,851,762
BALANCE SHEET DATA:
Working capital (deficit) $ 4,577 $ 1,124 $ (429) $ 2,047 $ (3,381)
Total assets 5,318 1,813 970 2,960 1,326
Stockholders' equity (deficit) 4,876 1,349 (3,201) (652) (4,951)
</TABLE>
-3-
<PAGE> 8
RISK FACTORS
Investing in the Common Stock being offered by the Selling Stockholders
is very risky. You should be able to bear a complete loss of your investment.
You should carefully consider the following factors and other information in
this Prospectus before deciding to invest in shares of our Common Stock being
offered by the Selling Stockholders.
HISTORY OF OPERATING LOSSES; ANTICIPATED FUTURE LOSSES.
Since our formation in 1985, we have generated limited revenues from
the sale of diagnostic products and from research and development grants. In
1995, we sold substantially all of the then existing diagnostic assets that were
used to generate these product revenues. As of June 30, 1999, the Company had an
accumulated deficit of approximately $59 million and negative working capital of
$3,381,000. We expect to incur additional losses as we expand our research and
development efforts. We make no guarantee that we will ever become profitable.
We will need additional funds to continue our research and development
activities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
NEED FOR SUBSTANTIAL ADDITIONAL FUNDS.
Historically, we have spent, and will continue to spend, more money
than we can generate in order to complete the research and development in
nucleoside and nucleotide chemistry to develop tools for genetic analysis. Based
on our currently planned programs, we believe that our current financial
resources should support our capital and operating needs into the third quarter
of 1999. We will require additional funds to continue our operations beyond that
time. We plan to seek additional funds through public or private sales of our
securities, including equity securities and through collaborative or other
arrangements with corporate partners. However, we may be unable to obtain, from
these or other sources, adequate funds when needed or on terms acceptable to us.
If we fail to obtain sufficient funds, we may need to delay, scale back or
terminate some or all of our research and development programs or license third
parties, if possible, to commercialize our products or technologies that we
would otherwise seek to develop ourselves.
DEPENDENCE UPON NEW AND UNPROVEN TECHNOLOGY.
The science and technology of oligonucleotide-based products is rapidly
evolving. Our proposed products are in the discovery or early development stage.
The proposed products will require significant further research, development,
and testing and are subject to the risks of failure inherent in the development
of products based on innovative technologies. We also face the risk that any or
all of our proposed products could prove to be ineffective or unsafe, be
unmarketable because third parties hold proprietary rights which prohibit us
from marketing the proposed products, or be an inferior product to products
marketed by others. Accordingly, we cannot predict whether our research and
development activities will result in any commercially viable products.
DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING AND MARKETING.
We believe that raw materials and other components are available in
sufficient quantities to meet production requirements. Our current plan for
operations is to produce chemical reagent products and small quantities of
oligonucleotide products in our Redmond facility. Our longer term plan for
operations is to enter into collaborative arrangements with other companies to
manufacture our products. To date, we have not entered into any collaborative
manufacturing arrangements for any of our proposed products
-4-
<PAGE> 9
and there can be no assurance that we will be able to enter into any such
arrangements on favorable terms or at all.
We have no recent experience in marketing products and anticipate that
we will seek to enter into collaborative arrangements with pharmaceutical
companies to market our products. We entered into a license agreement for
certain of our enabling genetic analysis technology with the PE Biosystems
division of Perkin Elmer Corporation in January 1999. There can be no assurance
that Perkin-Elmer can successfully introduce our proposed products or that we
will be able to enter into any additional collaborative arrangements on
favorable terms or at all.
RELIANCE ON PATENT AND PROPRIETARY TECHNOLOGY; RISK OF PATENT INFRINGEMENT.
We attempt to protect our proprietary technology by relying on several
methods. As of August 12, 1999, we had thirteen issued U.S. patents and two U.S.
patent applications with Notices of Allowance and seven additional U.S. patent
applications in process. We also have international patent applications that
correspond to many of the U.S. patents and patent applications. The issued
patents and pending patent applications cover inventions relating to the
components of our core technologies. The expiration dates of these patents range
from January 2010 to June 2015. We make no guarantee that any issued patents
will provide us with significant proprietary protection, that pending patents
will be issued, or that products incorporating the technology from our issued
patents or pending applications will be free from challenges by competitors.
The biomedical industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. We were defendants in
one such action which has been settled. Although patent and intellectual
property disputes in the biomedical area have often been settled through
licensing or similar arrangements, costs associated with such arrangements may
be substantial. Further, we make no guarantee that we will obtain necessary
licenses on satisfactory terms or at all. Accordingly, an adverse determination
in a judicial or administrative proceeding or our failure to obtain necessary
licenses could prevent us from manufacturing and selling our products. This
would substantially hurt our operating results, financial condition and
ultimately our business.
COMPETITION AND CHANGING TECHNOLOGY
Many companies do research and development and market products designed
to diagnose infectious diseases based on a number of technologies and are
developing additional DNA probe-based products. Many of these companies have
substantially greater capital resources, larger research and development and
marketing staffs and facilities and greater experience in developing products
than we have. Furthermore, our specific field in which we operate is subject to
significant and rapid technological change. Accordingly, even if we successfully
introduce our products or proposed products, we risk that our technologies will
be replaced by new technologies or that our products or proposed products will
be obsolete or non-competitive.
LACK OF FULL-TIME EXECUTIVE OFFICERS
Fred Craves currently serves as our Chairman and Chief Executive
Officer and Sanford S. Zweifach currently serves as our President and Chief
Financial Officer. Both serve on a part-time basis. Although they devote a
substantial portion of their time to our business, they also devote substantial
portions of their time to their positions with other entities.
-5-
<PAGE> 10
DEPENDENCE ON KEY PERSONNEL
We are dependent upon our key management and technical personnel and
consultants, and our future success will depend in part upon our ability to
retain these persons and to recruit additional qualified personnel. We must
compete with other companies, universities, research entities and other
organizations in order to attract and retain highly qualified personnel.
Although we have entered into agreements with our key executive officers, we
make no guarantee that we will retain such highly qualified personnel or hire
additional qualified personnel. We currently maintain no key man life insurance
on any of our management or technical personnel.
LACK OF LISTING ON AN EXCHANGE OR ON THE NASDAQ SYSTEM; RESTRICTIONS ON OUR
STOCK
Our Common Stock is neither listed on any exchange nor on the Nasdaq
System. Our Common Stock is reported on the OTC Bulletin Board. Because our
shares are not listed on the Nasdaq System, they are subject to the regulations
regarding trading in "penny stocks" which are those securities trading for less
than $5.00 per share. The following is a list of the restrictions on the sale of
penny stocks.
1. Prior to the sale of penny stock by a broker-dealer to a new
purchaser, the broker-dealer must determine whether the
purchaser is suitable to invest in penny stocks. To make that
determination, a broker-dealer must obtain, from a prospective
investor, information regarding the purchaser's financial
condition and investment experience and objectives.
Subsequently, the broker-dealer must deliver to the purchaser
a written statement setting forth the basis of the suitability
finding.
2. A broker-dealer must obtain from the purchaser a written
agreement to purchase the securities. This agreement must be
obtained for every purchase until the purchaser becomes an
"established customer."
3. The Exchange Act requires that prior to effecting any
transaction in any penny stock, a broker-dealer must provide
the purchaser with a "risk disclosure document" that contains,
among other things, a description of the penny stock market
and how it functions and the risks associated with such
investment. These disclosure rules are applicable to both
purchases and sales by investors.
4. A dealer that sells penny stock must send to the purchaser,
within ten days after the end of each calendar month, a
written account statement including prescribed information
relating to the security.
As a result of our securities not being listed on an exchange or the
Nasdaq System and the rules regarding penny stock transactions, your ability to
convert shares of our Common Stock into cash or to sell to a third party may be
very limited. We make no guarantee that our current market-makers will continue
to make a market in our securities, or that any market for our securities will
continue.
NO DIVIDENDS PAID AND NONE ANTICIPATED
We have never paid dividends on our Common Stock and do not plan to in
the foreseeable future, as any earnings will be invested in the further
expansion of our business.
VOLATILITY OF STOCK PRICE
The market price of our Common Stock may fluctuate significantly. We
are in the biotechnology industry and the market price of securities of
biotechnology companies have fluctuated
-6-
<PAGE> 11
significantly and these fluctuations have often been unrelated to the companies'
operating performance. Announcements by us or our competitors concerning
technological innovations, new products, proposed governmental regulations or
actions, developments or disputes relating to patents or proprietary rights, and
other factors that affect the market generally could significantly impact our
business and the market price of our securities. Sales of our securities by
existing security holders could also significantly impact the market price of
our securities.
SHARES ELIGIBLE FOR FUTURE SALE; DILUTION.
Sales of substantial numbers of shares of our Common Stock in the
public market could substantially reduce the prevailing market price of our
Common Stock. As of August 12, 1999, 14,932,095 shares of our Common Stock were
outstanding, 7,798,875 shares of our Common Stock were issuable upon exercise of
outstanding warrants at exercise prices ranging from $0.30 to $9.21 per share,
and an additional 1,362,218 shares of our Common Stock were issuable upon
exercise of outstanding options at exercise prices ranging from $0.30 to $5.88
per share. Of the outstanding shares of Common Stock and shares issuable upon
exercise of warrants and options, substantially all are freely tradable by the
holders of such securities without restriction. If these holders sell a large
number of shares of our Common Stock in the public market, such sales could
substantially reduce the prevailing market price of our Common Stock. To the
extent the trading price of our Common Stock exceeds the exercise price of
options or warrants at the time such options or warrants are exercised, such
exercise will have a dilutive effect on the other stockholders.
IMPACT OF YEAR 2000
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. We have assessed the impact of such "Year 2000" issues on our products,
our internal IT and non-IT systems, as well as on our suppliers and service
providers. We have determined that our business systems are not Year 2000 ready.
We have developed a plan to replace these systems in a timely fashion at a cost
of approximately $30,000 by December 1999. We are also discussing with our
significant suppliers and service providers their plans to investigate, identify
and fix their Year 2000 issues. We believe that most of our significant
suppliers and service providers will cooperate in resolving any Year 2000
problems. However, we are also dependent on certain utility companies,
telecommunication service companies and other service providers that are outside
our control. Therefore, it may be difficult for us to obtain assurances of Year
2000 readiness from such third parties. We believe that we will have identified
all of our material Year 2000 issues. However, given the pervasiveness of Year
2000 issues and the complex interrelationships among Year 2000 issues both
internal and external to us, we cannot guarantee that we will be able to
identify and accurately evaluate all such issues.
If any supplier or service provider fails to appropriately address
their Year 2000 issues, our business, financial condition and operating results
could be significantly hurt. For example, if a supplier or service provider
experiences a Year 2000 problem which results in or contributes to delays or
interruptions in delivering products or services to us, our business, financial
condition and operating results could be significantly hurt. Finally, general
economic disruption resulting from Year 2000 issues could also significantly
hurt us.
In preparation for the Year 2000, we are developing contingency plans
in case we fail to complete our remediation programs in a timely manner and in
the event that any third party who provides goods or services essential to our
business fails to appropriately address their Year 2000 issues. We expect to
finalize these contingency plans during the third quarter of 1999. Even if we
complete
-7-
<PAGE> 12
these plans on time and put them in place, we cannot guarantee 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 significantly hurt
our business, financial condition and operating results.
-8-
<PAGE> 13
USE OF PROCEEDS
The Company will not receive any proceeds from the Selling
Stockholders' sales of their Common Stock. However, certain of the Selling
Stockholders hold warrants exercisable for Common Stock. The Company will
receive the proceeds when those Selling Stockholders exercise their warrants and
we will use those proceeds for research and development and general corporate
purposes; however, the amount of such exercises and the corresponding proceeds
cannot be predicted.
-9-
<PAGE> 14
PRICE RANGE OF COMMON STOCK
Our Common Stock trades on the OTC Bulletin Board under the symbol
"EPPH." The following table presents quarterly information on the high and low
bid prices on the OTC Bulletin Board, which reflects inter-dealer prices,
without retail mark-up, mark down or commission and may not represent actual
transactions:
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
FISCAL QUARTER ENDED JUNE 30, 1999 $3.56 $2.00
FISCAL QUARTER ENDED MARCH 31, 1999 2.75 .52
FISCAL YEAR ENDED DECEMBER 31, 1998 HIGH LOW
----- -----
Fourth Quarter $0.72 $0.48
Third Quarter 0.76 0.57
Second Quarter 0.93 0.70
First Quarter 0.94 0.56
FISCAL YEAR ENDED DECEMBER 31, 1997 HIGH LOW
----- -----
Fourth Quarter $0.84 $0.47
Third Quarter 0.75 0.25
Second Quarter 0.72 0.39
First Quarter 1.03 0.59
FISCAL YEAR ENDED DECEMBER 31, 1996 HIGH LOW
----- -----
Fourth Quarter $1.56 $0.63
Third Quarter 1.56 0.95
Second Quarter 2.03 1.50
First Quarter 1.04 0.50
</TABLE>
On August 12, 1999, the last reported sale price for the Common Stock
on the OTC Bulletin Board was $2.00 per share. As of August 12, 1999, there were
approximately 160 stockholders of record of the Company's Common Stock. The
Company has not paid any dividends on its Common Stock since its inception and
does not anticipate paying any dividends upon its Common Stock in the
foreseeable future. The Company will use any earnings generated in the
foreseeable future for the further expansion of the business.
-10-
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of Epoch as of June
30, 1999:
<TABLE>
<S> <C>
Stockholders' deficit:
Preferred stock, par value $.01; 10,000,000 shares authorized;
no shares issued and outstanding ............................ $ --
Common Stock, par value $.01; 50,000,000 shares authorized;
14,835,214 shares issued and outstanding (1) ................ 148,956
Additional paid-in capital ................................... 54,513,829
Deferred compensation expense ................................ (135,850)
Deferred financing expense ................................... (484,452)
Accumulated deficit .......................................... (58,993,328)
------------
Total stockholders' deficit .................................. (4,950,845)
------------
Total capitalization (deficit) ............................... $ (4,950,845)
============
</TABLE>
- ------------------
(1) Excludes 7,798,875 shares of Common Stock issuable upon exercise of
outstanding warrants at exercise prices ranging from $0.30 to $9.21, and
1,398,624 shares of Common Stock issuable upon exercise of outstanding
options at exercise prices ranging from $0.30 to $5.88 per share. See
"Management--Stock Option Plan" and "Description of Capital Stock."
DIVIDEND POLICY
We have not paid cash dividends in the past and do not intend to pay
cash dividends in the foreseeable future.
-11-
<PAGE> 16
SELECTED FINANCIAL DATA
(in thousands, except share and per share data)
You should read the following selected financial and operating data in
conjunction with the accompanying financial statements and related notes thereto
included elsewhere in this Prospectus and "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The selected financial data
set forth below as of and for the years ended December 31, 1996, 1997 and 1998
have been derived from our audited financial statements. The report of our
Independent Auditors, dated February 10, 1999, contains an explanatory paragraph
that states that we have suffered recurring losses from operations and have a
net capital deficiency which raises substantial doubt about our ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty. The selected
data for the six months ended June 30, 1998 and 1999 are derived from unaudited
financial statements and include all adjustments, consisting only of normal
recurring adjustments that we consider necessary for a fair presentation of the
financial position and operating results for these periods.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Research contract revenue ........... $ 37 $ 188 $ 160 $ 84 $ 153
Operating expenses:
Research and development ......... 2,149 2,682 2,759 1,402 1,298
General and administrative ....... 1,256 1,514 2,015 754 654
------------ ------------ ------------ ------------ ------------
Total operating expenses ............ 3,405 4,196 4,774 2,156 1,952
------------ ------------ ------------ ------------ ------------
Operating loss ...................... (3,368) (4,008) (4,614) (2,072) (1,799)
------------ ------------ ------------ ------------ ------------
Loss from continuing operations ..... (3,326) (3,735) (5,213) (2,288) (2,231)
============ ============ ============ ============ ============
Net loss ............................ $ (3,452) $ (3,605) $ (5,103) $ (2,228) $ (2,161)
============ ============ ============ ============ ============
Loss from continuing operations per
common share - basic and diluted.. $ (0.31) $ (0.25) $ (0.35) $ (0.15) $ (0.15)
Net loss per common share - basic
and diluted ...................... $ (0.32) $ (0.24) $ (0.34) $ (0.15) $ (0.15)
Weighted average shares
outstanding - basic and diluted .. 10,854,993 14,755,462 14,818,960 14,814,793 14,851,762
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ........... $ 4,890 $ 1,485 $ 658 $ 2,558 $ 805
Working capital (deficit) ........... 4,577 1,124 (429) 2,047 (3,381)
Total assets ........................ 5,318 1,813 970 2,960 1,326
Accumulated deficit ................. (48,125) (51,730) (56,833) (53,958) (58,993)
Total stockholders' equity (deficit) 4,876 1,349 (3,201) (652) (4,951)
</TABLE>
-12-
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operation of the Company should be read in conjunction with the Financial
Statements and related Notes included elsewhere in this Prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in the forward-looking statement as a result of certain factors,
including, but not limited to, those set forth in "Risk Factors" and elsewhere
in this Prospectus.
In January 1999, the Company and Perkin-Elmer entered into a License
and Supply Agreement pursuant to which the Company licensed certain of its
enabling genetic analysis technology to Perkin-Elmer. Under the terms of the
agreement, Perkin-Elmer is making payments to the Company consisting of initial
fees for licensed technology and proprietary know how, and ongoing payments for
chemical intermediate purchases as well as royalties on sales of product which
uses the licensed technology.
Through February 1999, the Company received $2,300,000 under the
agreement, a portion of which represents prepayments to be credited against
future product purchases and royalty payments. There have been no further
receipts through May 1999.
The Company expects to incur substantial operating losses for the next
year as the Company continues research and development spending in applying its
oligonucleotide-based technology to the expanding areas of genomics and
molecular diagnostics.
RESULTS OF OPERATIONS
The following discussion of results of operations reflects the
Company's diagnostics division as discontinued operations.
Six Months Ended June 30, 1998 and 1999
Research Contract Revenue. Research contract revenue reflects revenue
from U.S. government grants and contracts, and subcontracts.
Research and Development. The decrease in research and development
expenses of $104,000 for the six months ended June 30, 1999, in relation to the
comparable 1998 period, is primarily the result of reduced rent and building
expenses in 1999, as the new facility is smaller than the previous facility.
Additional variations in research and development expense are the result of
normal business fluctuations.
General and Administrative. General and administrative expenses
decreased $100,000 in the six month period ended June 30, 1999 compared to the
respective prior year period. This decrease in expenditures is primarily the
result of a decrease in expenditures for the filing of patents on new
technologies. During the first six months of 1998, the Company expended $115,000
for patent filings on new technologies, as compared to $47,000 in the comparable
period of the current year. We believe that these patents, if issued, will
improve the Company's proprietary position with regard to its genetic analysis
technologies. However, 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
-13-
<PAGE> 18
required for commercialization of the Company's proposed products. Further
variances in the results for the six month periods ended June 30, 1998 and 1999
are the result of normal business fluctuations.
Interest Income. Interest income in the 1999 periods is less than the
1998 comparable periods due to lower cash balances available for investment.
Interest and Financing Expense. Interest and financing expense
represents the costs associated with the $3,000,000 note payable to a related
party which was funded at the end of February 1998. The increase in the six
month period of 1999 results from six months of expense in 1999 versus four
months in 1998.
Other Income. Other income in 1998 represents payments received from a
sublease and administrative support agreement. As of April 1998, this agreement
was terminated and, consequently, there is no further income from this source
beyond April 1998.
Gain on Disposal. The gain on disposal of discontinued operations
represents only that portion of the gain for which cash payments were received
during the reporting periods.
Years Ended December 31, 1997 and 1998
Research Contract Revenue. Research contract revenue reflects revenue
from U.S. government grants and contracts and subcontracts.
Research and Development. Research and development expenses increased
in total by $77,000 for 1998 over the prior year. This increase is the result of
a modest increase in research activity as well as normal business fluctuations.
General and Administrative. General and administrative expenses
increased $501,000 in 1998 over the prior year. The increase was primarily the
result of the expenses incurred in the abandonment of a proposed facility which
resulted in the recognition of $472,000 in costs during 1998. Also included in
1998 is $88,000 in expenses associated with the move to a new building.
The Company's general legal expense was $84,000 more in 1998 than in
1997. This increase was the result of an increase in business transactions
requiring legal counsel.
Offsetting some of the increase in general and administrative expenses
in 1998, is a decrease in expenditures for the filing of patents on new
technologies. During 1997, the Company expended $263,000 for patent filings on
new technologies, as compared to $212,000 in 1998.
Additional variations in general and administrative expenses are the
result of normal business fluctuations.
Interest Income. Interest income in 1998 is less than 1997 due to lower
cash balances available for investment.
Interest and Financing Expense. Interest and financing expense in the
current year increased over the prior year due to the increase in notes payable
of $3,000,000, as well as including the amortization of $516,000 of deferred
financing expense incurred in 1998.
-14-
<PAGE> 19
Other Income. Other income in 1997 includes $116,000 received from
Saigene Corporation ("Saigene") as payment for administrative support functions
as well as for rented laboratory and office space. Saigene relocated to separate
facilities in April 1998, after which this income ceased.
In 1996, the Company disposed of the remaining assets of its
discontinued diagnostics division receiving a $1,100,000 note. Collections on
the note have been sporadic and, due to uncertainties regarding ultimate
collectibility, the Company has not recognized the receivable and recognizes
only that portion of the gain for which cash payments are received. At December
31, 1998, the unrecognized balance on the note and the unrecognized gain was
$973,000.
Years Ended December 31, 1996 and 1997.
Research Contract Revenue. Research contract revenue is comprised of
revenue from U.S. government grants and contracts and subcontracts.
Research and Development. Research and development expense increased
approximately $534,000 for the year ended December 31, 1997 compared to the
prior year. This increase is the result of increased research funded with
proceeds from the 1996 private placement.
General and Administrative. General and administrative expense
increased $257,000 in 1997 over the prior year. General and administrative
expense in 1997 included $263,000 in fees for filing patents on new
technologies, compared to $87,000 in 1996. We believe that these patents, if
issued, will improve our proprietary position with regard to our targeted gene
mutagenesis technologies. We make no guarantee that our patent applications will
result in further issued patents or that such issued patents will offer
protection against competitors with similar technology. Additionally, we make no
guarantee that the manufacture, use or sale of our technology or products will
be free from any infringements on patents or proprietary rights belonging to
others. Further, we may be unable to obtain licenses or other rights to other
technologies that we may need to commercialize our proposed products.
Offsetting the increase in patent fees, our general legal expense was
$82,000 less in 1997 than in 1996. This reduction was the result of normal
fluctuations in business transactions requiring legal counsel. Expenses in 1997
were further reduced by $21,000 compared to 1996 as deferred compensation from
stock options become fully amortized during the year. We had no deferred
compensation to be amortized as of December 31, 1997. Further contributing to
the variance, in July 1996 the In Re Blech Securities Litigation suit was
dismissed. Accordingly, $250,000 of estimated costs which had been accrued for
this matter was reversed resulting in an expense reduction for the year ended
December 31, 1996. Additional variations in general and administrative expenses
resulted from normal business fluctuations.
Interest Income and Expense. Interest income in the year ended December
31, 1997 decreased compared to the prior year due to lower investable funds
during 1997. Interest expense in 1997 decreased from 1996 as proceeds from the
1996 private placement were used to pay off debt. Additionally, 1996 included
amortization of $122,000 of discount on notes payable due to repricing of
warrants associated with a bridge financing which was completed in 1995.
Other Income. Other income in 1997 included $116,000 received from
Saigene as payment for administrative support functions as well as for rented
laboratory and office space. As previously mentioned, in April 1998, Saigene
moved to new facilities and we stopped providing administrative support
functions.
-15-
<PAGE> 20
Income (Loss) from Discontinued Operations. The income (loss) from
discontinued operations relates to the operations and disposal of the assets of
our diagnostics division. We sold the majority of our then existing diagnostic
assets to Becton Dickinson in November 1995.
Gain on Disposal of Diagnostics Division. The gain on disposal of
diagnostics division represents only that portion of the gain for which cash
payments were received, which totaled $67,000 in 1996 and $130,000 in 1997.
PLAN OF OPERATIONS; LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had cash and cash equivalents of
$805,000, which resulted primarily from $2,300,000 received in January and
February of 1999 under a license and supply agreement with Perkin-Elmer less
normal expenditures for operations.
In January 1999, the Company and Perkin-Elmer entered into a License
and Supply Agreement pursuant to which the Company licensed certain of its
enabling genetic analysis technology to Perkin-Elmer. Under the terms of the
agreement, Perkin-Elmer is making payments to the Company consisting of initial
fees for licensed technology and proprietary know how, and ongoing payments for
chemical intermediate purchases as well as royalties on sales of product which
uses the licensed technology. The agreement also requires Perkin-Elmer to
purchase annual minimum amounts of proprietary chemical intermediates from the
Company.
In order to secure any unused portion of the purchased product
prepayments, the Company granted to Perkin-Elmer a security interest in the
Company's patents related to its enabling genetic technology (the "Patents")
under the terms of a Security Agreement (the "Security Agreement"). The security
interest automatically terminates when any unused portion of the purchased
product prepayments is $50,000 or less. Although no security interest was
granted with respect to the royalty prepayments, if such royalty payments do not
become due under the agreement, the Company will also be required to refund any
unused prepayments to Perkin-Elmer.
Under the terms of the agreement, if Perkin-Elmer terminates the
agreement upon 60 days written notice to the Company, or if the Company
terminates the agreement following a material breach by Perkin-Elmer,
Perkin-Elmer will release its security interest in the Patents and forefit any
unused portion of the prepayments. However, if the Company and Perkin-Elmer
mutually agree to terminate the agreement, or if Perkin-Elmer terminates the
agreement as a result of a material breach by the Company, the Company must
reimburse Perkin-Elmer the difference between the unused portion of the
purchased product prepayments and $50,000.
Through February 1999, the Company received $2,300,000 under the
agreement, a portion of which represents prepayments to be credited against
future product purchases and royalty payments. There have been no further
receipts through July 1999.
Management estimates that its existing cash balance as of June 30, 1999
of $805,000, which includes the Perkin-Elmer receipts, provides sufficient
working capital to operate into the third quarter 1999.
Using the proceeds of the Perkin-Elmer licensing agreement and any
future financing, the Company plans to further develop and verify applicability
of its compounds and techniques in the developing fields of molecular
diagnostics and genomics and to determine how its technology may be exploited.
-16-
<PAGE> 21
The Company is focused on the development of its products with the goal
of entering into corporate partnering arrangements to further commercialize the
technology. Our primary future needs for capital are for continued research and
development, repayment of the note payable due in February 2000 and relocation
expenses anticipated to be incurred in a move to new facilities, if our Company
is unable to negotiate a new lease at its existing facility. The Company's
working capital requirements may vary depending upon numerous factors including
the progress of our research and development, competitive and technological
advances, possible relocation expenses and other factors. We anticipate
operating with approximately 25 employees.
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 other 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. If additional funds are not available, the
Company will be required to delay, reduce, or eliminate expenditures for certain
or all of its programs or products.
Cash increased by $147,000 during the first half of 1999 as a result of
the net of $2,300,000 received from Perkin-Elmer offset by normal expenditures
on the Company's operations, the acquisition of $212,000 of equipment used in
research and development, and payment of $287,000 on the canceled building
facility project discussed below. The comparable period of the prior year had a
cash increase of $1,072,000, the net result of proceeds from a $3,000,000 note
payable offset by normal operating expenditures on the Company's operations.
Cash decreased by $827,000 from December 31, 1997 to December 31, 1998
due to normal expenditures on the Company's operations, offset by the proceeds
of a $3,000,000 loan received from Bay City Capital which is due in February
2000. The comparable period of the prior year, December 31, 1996 to December 31,
1997, had a cash decrease of $3,405,000 due to normal expenditures on the
Company's operations.
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 in favor of an already existing space. Costs for architectural fees and
long lead equipment items incurred prior to cancellation of the project are
estimated at $472,000, which were included in general and administrative
expenses in the year ended 1998. Cash payments of $287,000 were distributed
during the first half of 1999 and $104,000 remained in accrued liabilities at
June 30, 1999. The remaining liability is expected to be resolved by the end of
third quarter of 1999.
Receivables are $64,000 higher at the end of June 1999 than in the
prior year primarily as a result of increased revenues from grant work.
Variances in accounts payable and other accrued liabilities in 1999 and
1998 are the result of normal business fluctuations.
The note payable to related party is due in February 2000, at which
time the balance will need to be repaid or refinanced.
The Company will require additional funds to continue its operations
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
-17-
<PAGE> 22
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 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.
-18-
<PAGE> 23
BUSINESS
OVERVIEW
Epoch is a biomedical company utilizing nucleoside and nucleotide
chemistry to develop molecular tools for genetic analysis. Utilizing unique and
proprietary technology in the rational design, synthesis and chemical
modification of oligonucleotides, the Company has positioned itself to provide
products and techniques for high throughput genetic sequence analysis that are
in increasing demand in the rapidly expanding field of genetic pharmacology.
Previously, Epoch's therapeutic research and development program had
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 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.
BACKGROUND
Nucleic acids are found in all living organisms and are the sole
carriers of the genetic code that specifies an organism's makeup. There are two
types of closely related nucleic acids, deoxyribonucleic acid (DNA) and
ribonucleic acid (RNA). DNA carries the permanent genetic information for
construction of all proteins in higher living organisms, while RNA carries a
temporary copy of this information to direct protein synthesis. Proteins perform
most of the normal physiological functions of living organisms, and aberrant
production or activity of proteins may cause numerous diseases.
DNA is comprised of two linear strands that are formed in a double
helix. Each strand is a sequential array of four nucleotide bases: adenine (A),
guanine (G), thymine (T) and cytosine (C), which are linked together in DNA by a
sugar and phosphate backbone. Every gene contains unique sequences of these
bases and it is these unique sequences which constitute the genetic information
or code which guides all cellular processes. The two chains, or strands,
normally comprising DNA are held together by chemical attractions between
opposing paired bases according to certain rules: A always pairs with T, G
always pairs with C. Figure 1 is a schematic diagram of double-stranded DNA
showing this highly specific interaction between the bases in the two strands.
This process of base pairing, called hybridization, can occur between DNA
strands of any size, as long as the segments hybridizing are complementary.
-19-
<PAGE> 24
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
FIGURE 1. SEGMENT OF DOUBLE-STRANDED DNA SHOWING THE BASE PAIR RELATIONSHIP
- --------------------------------------------------------------------------------
Hybridization can also occur between a DNA strand and a complementary
RNA strand or two complementary RNA strands. RNA occurs in several forms in
cells, and each of these forms has a different function. Messenger RNA (mRNA) is
copied, or transcribed, from the DNA comprising a gene and carries the genetic
code which is translated into the proteins synthesized by the cell. Transfer RNA
(tRNA) transports the necessary building block amino acids to ribosomes, complex
intracellular structures where protein synthesis occurs through the
"translation" of the mRNA message. Ribosomal RNA (rRNA) functions to bring mRNA
and tRNA together so protein synthesis can occur. The process of transcription
and translation which results in protein synthesis is called gene expression.
Oligonucleotides are well suited for development as pharmaceuticals and
diagnostic probes because they can be designed to bind selectively to, and
inhibit or inactivate specific sequences in, DNA and RNA or the proteins they
produce. The Company's expertise in the chemistry, design and synthesis of
oligonucleotides forms the basis of the Company's research and development
activities on compounds and techniques for gene sequencing analysis.
DIAGNOSTIC RESEARCH AND DEVELOPMENT
A probe molecule is designed to be complimentary to a unique sequence
of bases in the DNA or RNA of the target cell or organism. This probing is
usually done with short pieces of DNA (oligonucleotides) of known sequence.
However, short oligonucleotides (10 to 18 nucleotides) do not form (as a group)
very stable duplexes and longer oligonucleotides can form stable duplexes that
are not perfect complements (i.e., that have mismatches) leading to errors in
sequence determination. The ability to overcome these issues is the key to the
Company's technology.
Certain naturally occurring antibiotics have a shape which allows them
to "fold" into the "minor groove" of the DNA helix. The Company has found that
it can direct the binding of these "minor groove binders" ("MGB") to a specific
site on DNA by coupling it to a short DNA molecule (an oligonucleotide) such
that when the oligonucleotide reacted with its complement, the MGB folded into
the minor groove of the duplex formed by the oligonucleotide and its complement.
The MGB-oligonucleotide duplex could not be disassociated at temperatures that
would normally separate the two strands. When the MGB was coupled to
oligonucleotides as short as seven nucleotides, the duplex formed with its
complement was stable at temperatures 15 degrees to 30 degreesC higher than the
non-MGB oligonucleotide. However, the duplex was stabilized to this extent only
if a perfect duplex (i.e., with no mismatches) was formed. This finding enabled
the Company to develop MGB-oligonucleotides into DNA sequence probes that the
Company believes offer the best solutions yet found for the following
situations:
o Single base mismatch discrimination at high temperatures with
short oligonucleotides;
o Enhancement and sequence-independent equalization of
oligonucleotide hybrid stability concurrently; and
o Mismatch "hiding" with longer oligonucleotide conjugates.
The Company believes that the ability of oligonucleotides to precisely
bind to matching DNA sequences will have broad use in the developing fields of
molecular diagnostics and genomics. The Company believes that the technology
offers immediate advantages to any PCR-based assay where sensitive detection of
mutations is required. The Company anticipates that the technology can be used
to
-20-
<PAGE> 25
genotype and quantitate HIV-I viruses that are resistant to reverse
transcriptase or protease inhibitors. Similarly, it can be used to identify and
type other infectious organisms. The Company also believes that the mismatch
sensitivity offered by its technology is ideal for the detection of inheritable
diseases by prenatal genotyping.
Epoch's technology has potential applications to the emerging area of
genetic testing. The correlation of genetic make-up with phenotypic (physically
evident) response is a developing field. Genetic markers, which are changes in
DNA sequence, can be linked either directly (e.g., sickle cell trait and cystic
fibrosis) or indirectly (e.g., Alzheimer's disease, Type II diabetes) to disease
traits. Some of these genetic markers with single nucleotide changes, Single
Nucleotide Polymorphisms (SNPs), have recently been identified. However, several
hundred thousand more of these sites exist throughout the human genome. True
SNPs are stable genetic markers, likely established thousands of years ago. As
these are characterized, they are being linked to genetic traits. Thus, one can,
by identifying one or more SNPs in an individual's DNA, correlate the SNP with
physical or metabolic traits. This will allow the prediction of, for instance,
the individual's propensity to a given disease or responsiveness to a given
drug. This field is rapidly growing and depends upon screening populations to
correlate known physical traits with sets (one or more) of SNPs. In practice,
potential SNPs will be discovered as differences in gene sequences among a few
individuals. However, in order to definitively identify these differences as
true allelic polymorphisms, and to link them to relevant characteristics
(disease propensity, drug response, etc.), large populations must be screened
for the sequence differences. Current sequencing methods are too slow and costly
to be effective for this effort. The Company believes that it will be able to
deliver this technology and analytical tools on a cost-effective basis, thus
making the Company's technology the method of choice in SNP screening.
Other sorts of mutations of a similar nature are known to occur in
precancerous or cancer cells. These mutations in specific genes which regulate
cell growth can be associated with characteristics of different cancers and will
be used in diagnosis and prognosis in cancer therapy. The Company believes that
its technology can be used in these test systems as well.
SALES AND MARKETING
The Company has no recent experience in marketing products and
anticipates that it will seek to enter into collaborative arrangements with
pharmaceutical companies to market its therapeutic and diagnostic products. The
Company entered into a license agreement for certain of its enabling genetic
analysis technology with the PE Biosystems division of Perkin Elmer Corporation
("Perkin-Elmer") in January 1999. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." There can be no assurance that
the Company will be able to enter into any additional collaborative arrangements
on favorable terms or at all.
MANUFACTURING AND SUPPLY
The Company believes that raw materials and other components are
available in sufficient quantities to meet production requirements. The
Company's current plan for operations is to produce chemical reagent products
and small quantities of oligonucleotide products in it's Redmond facility. The
Company's longer term plan for operations is to enter into collaborative
arrangements with other companies to manufacture its oligonucleotide products.
To date, the Company has not entered into any collaborative arrangements for any
of its proposed products and there can be no assurance that the Company will be
able to enter into any such arrangements on favorable terms or at all.
-21-
<PAGE> 26
RESEARCH AND DEVELOPMENT
The Company conducts the majority of its research and development
activities through its own staff and facilities. The Company has assembled a
scientific staff with a variety of complementary skills in a broad range of
advanced research technologies. As of March 31, 1999, the Company had 21
employees engaged in research and development, including 12 with Ph.D.'s. These
21 employees were engaged in research and development related to technology
applications. The Company's in-house research and development efforts are
focused primarily on the development of DNA probes, probe labeling and detection
techniques and reagent chemistries.
In addition to its in-house research programs, the Company collaborates
with academic and research institutions to support research in areas of interest
to the Company. In October 1996, The National Institute of Arthritis and
Musculoskeletal and Skin Disease, of the National Institutes of Health, awarded
a four-year contract to Virginia Mason Research Center ("VMRC"), and the Company
as subcontractor, to develop and test a compound designed to inactivate a gene
which causes rheumatoid arthritis. The federal research award is for $1.2
million of which Epoch will receive $584,000 over the four year period. Epoch
earned $41,000 and $32,000 of these funds in the first quarters of 1998 and
1999, respectively, as well as, $159,000 and $160,000 of these funds in 1997 and
1998, respectively, and as of March 31,1999, there was $196,000 remaining on
this contract. Such compounds are expected to search the DNA structure to locate
and attach to the affected gene. Researchers then hope to turn off the genetic
element which causes the patient's immune system to attack cells in patients'
joints, resulting in rheumatoid arthritis.
Research and development expenses totaled approximately $2,682,000 for
the year ended December 31, 1997, $2,759,000 for the year ended December 31,
1998 and $1,298,000 for the six months ended June 30, 1999.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company attempts to protect its proprietary technology by relying
on several methods. As of August 12, 1999, the Company had thirteen issued U.S.
patents and two U.S. patent applications with Notices of Allowance and seven
additional U.S. patent applications in process. There are international patent
applications corresponding to many of the U.S. patents and patent applications.
The issued patents and pending patent applications cover inventions relating to
the components of Epoch's core therapeutics and diagnostics technology. The
expiration dates of these patents range from January 2010 to June 2015.
The patent position of biomedical companies, including Epoch, is
uncertain and may involve complex legal and factual issues. Consequently, the
Company does not know whether any of its patent applications will result in the
issuance of any further patents, or whether issued patents will provide
significant proprietary protection or will not be circumvented or invalidated.
Epoch cannot be certain that it was the first creator of inventions covered by
pending patent applications or that it was the first to file patent applications
for such inventions, largely because patent applications in the U.S. are
maintained in secrecy until patents issue, and because publications of
discoveries in the scientific or patent literature tend to lag behind actual
discoveries by several months. Moreover, the Company may have to participate in
interference proceedings declared by the U.S. Patent and Trademark Office to
determine the priority of inventions, which could result in substantial costs to
the Company. 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
-22-
<PAGE> 27
to these other technologies that may be required for commercialization of the
Company's proposed products.
The Company requires its employees, consultants and advisors to execute
confidentiality agreements upon the commencement of an employment or consulting
relationship with the Company. Each agreement provides that all confidential
information developed or made known to the individual during the course of the
relationship will be kept confidential and not disclosed to third parties except
in specified circumstances. In the case of employees, the agreements provide
that all inventions conceived by an individual shall be the exclusive property
of the Company, other than inventions unrelated to the Company's business and
developed entirely on the employee's own time. There can be no assurance,
however, that these agreements will provide meaningful protection or adequate
remedies for misappropriation of the Company's trade secrets in the event of
unauthorized use or disclosure of such information.
COMPETITION
Diagnostic Products
Competition in the development and marketing of infectious disease
diagnostics using a variety of technologies is intense. There are many
pharmaceutical, diagnostic and biotechnology companies, public and private
universities and research organizations engaged in the research and development
of diagnostic products. Most of these organizations have financial,
manufacturing, marketing and human resources greater than those of the Company.
EMPLOYEES
As of June 30, 1999, the Company had 25 full-time employees, of which
21 employees were devoted to research and development activities, and 4 were
devoted to general and administrative activities. The Company believes it has
been successful in attracting skilled employees with experience in the
biomedical industry, although there can be no assurance that it will continue to
do so in the future. None of the employees is covered by a collective bargaining
agreement, and management considers relations with its employees to be good.
PROPERTIES
The Company's principal administrative office and research laboratories
are located in Redmond, Washington, where the Company sub-leases and occupies
approximately 13,000 square feet. The Company's current building lease will
expire in October 1999. The Company has entered into discussions with the
current landlord over extending the term of the lease into the year 2000. There
can be no assurance that the Company will be able to negotiate terms favorable
to the Company, in which case the Company would be required to relocate to new
facilities. There can be no assurance that the Company would be able to relocate
to new facilities on terms favorable to the Company, to manage the relocation
successfully or that the relocation would not disrupt the Company's operations.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
-23-
<PAGE> 28
WHERE YOU CAN FIND MORE INFORMATION.
We are a "small business issuer" under the Securities Act. We are also
required by the Exchange Act to file annual, quarterly and special reports,
proxy statements and other information with the SEC. Our SEC filings are
available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file with the SEC
at its public reference facilities at 450 Fifth Street, N.W., Washington, D.C.
20549; 7 World Trade Center, Suite 1300, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You
may also obtain copies of the documents at prescribed rates by writing to the
Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference facilities.
We originally registered for resale by the Selling Stockholders
10,428,365 shares of Common Stock under Registration No. 333-12601 and 1,268,258
shares of Common Stock under Registration No. 333-21353. Pursuant to Rule 429 of
the Securities Act, this Prospectus relates to the resale of shares of Common
Stock covered by both Registration Statements. The Registration Statements
contain more information than this Prospectus does about us and our securities.
We excluded certain parts which were not required by the SEC. To obtain further
information about us, please refer to the Registration Statements and their
exhibits, which you can inspect without charge by visiting the SEC's public
reference facilities listed in the prior paragraph. You can obtain copies of all
or any part of the Registration Statement and its exhibits by writing to the
SEC's Public Reference Section at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 after payment of the fees prescribed by the SEC. Statements contained
in this Prospectus regarding the contents of any contract or any other document
are not necessarily complete, and as such, you may want to review the complete
contract or document filed as an exhibit to the Registration Statement.
-24-
<PAGE> 29
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Fred Craves, Ph.D. 53 Chairman of the Board of Directors and
Chief Executive Officer
Richard L. Dunning 53 Director
Kenneth L. Melmon, M.D. 65 Director
Sanford S. Zweifach 43 President, Chief Financial Officer,
Secretary and Director
</TABLE>
Dr. Craves joined the Company as Chairman of the Board of Directors in
July 1993 and became Chief Executive Officer in April 1994. Since January 1997
Dr. Craves has been a principal of the consulting firm of The Craves Group. From
January 1994 until January 1997, Dr. Craves was a principal of the consulting
firm, Burrill & Craves. From January 1991 to May 1993, he was President and
Chief Executive Officer of Berlex Biosciences, a division of Schering A.G., and
Vice President of Berlex Laboratories, Inc., the U.S. subsidiary of Schering
A.G. From 1981 to 1982, Dr. Craves was Chief Executive Officer and, from 1982 to
June 1990, was Chairman, Chief Executive Officer and President of Codon, a
biotechnology company. Following Codon's acquisition by Schering A.G., Dr.
Craves was President and Chief Executive Officer of Codon from June 1990 to
December 1990. From 1981 to 1983, Dr. Craves was also a co-founder and director
of Creative Biomolecules. From 1979 to 1981, he was a sales and marketing
representative for Millipore Corporation. Dr. Craves received his Ph.D. in
Pharmacology and Experimental Toxicology from the University of California, San
Francisco. Dr. Craves is also Chairman of the Board of Directors of NeoRx
Corporation and a director of InCyte Pharmaceuticals, Inc.
Mr. Dunning has been a Director of the Company since October 1996.
Since April 1996, Mr. Dunning has served as the President, Chief Executive
Officer, and as a Director of VIMRx Pharmaceuticals, Inc. From 1991 to 1996, Mr.
Dunning served as Executive Vice President and Chief Financial Officer of the
Dupont Merck Pharmaceutical Company. Mr. Dunning currently serves as a director
of several other companies, including Innovir laboratories, Inc. and Endorex
Corp.
Dr. Melmon has been a Director of the Company since November 1991. Dr.
Melmon is Professor of Medicine at Stanford University School of Medicine, where
he joined the faculty in 1978. He was previously on the faculty at the
University of California, San Francisco, specializing in clinical pharmacology.
He is a member of the Institute of Medicine-National Academy of Sciences, and a
past president of the American Federation for Clinical Research and the American
Association of Clinical Investigation. He holds an M.D. from the University of
California Medical Center. He is also on the Board of Directors of Lysis.
Mr. Zweifach joined the Company in January 1995 as President and Chief
Financial Officer. From July 1994 to September 1994, and since September 1996,
Mr. Zweifach also served as a director of the Company. Since July 1997, Mr.
Zweifach has served as the Chief Financial Officer of Bay City Capital and,
since January 1995, Mr. Zweifach has served as a Managing Director of The
Olmsted Group, L.L.C., a merchant banking firm. Mr. Zweifach was a Managing
Director of D. Blech & Co. from 1991 to September 1994, and prior to 1991, he
was a Vice President of J.S. Frelinghuysen & Co.,
-25-
<PAGE> 30
Inc., a risk capital and merchant banking firm. He is a Certified Public
Accountant and holds an M.S. in Human Physiology from the University of
California, Davis.
Dr. Craves and Mr. Zweifach are also employed by other entities and,
although they devote a substantial portion of their time to the Company, they
also devote a portion of their time to their positions at the other entities.
Both Dr. Craves and Mr. Zweifach have been engaged by the Company pursuant to
Consulting Agreements.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning
compensation paid or accrued by the Company for services rendered during the
years ended December 31, 1996, 1997 and 1998, to the Company's Chief Executive
Officer, and the Company's other executive officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
----------------------------------------------------- ------------
Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary ($) (4) Bonus ($) Compensation ($) Options (#) Compensation
- --------------------------- ---- -------------- --------- ---------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Fred Craves (1) 1998 $100,000 $ -- $ -- -- $ --
Chief Executive Officer 1997 100,000 -- -- -- --
1996 125,000 -- -- -- --
Sanford S. Zweifach 1998 135,000 -- -- -- --
President and 1997 140,625 -- -- -- --
Chief Financial Officer 1996 135,000 -- -- -- --
Rich B. Meyer, Jr. (2) 1998 119,083 -- -- -- 43,307
Vice President, Research 1997 145,008 2,789 -- 14,900 --
and Development 1996 140,016 -- -- -- --
Robert Wydro (3) 1998 140,016 2,693 -- -- --
Vice President, Research 1997 140,016 2,693 -- 5,000 --
Management 1996 52,506 -- -- 100,000 --
</TABLE>
- -------------------------
(1) Includes $25,000 payment earned in 1993, paid in 1996.
(2) Dr. Meyer resigned from the Company in October 1998. Upon his separation
from the Company, Dr. Meyer received accrued vacation pay of $43,307.
(3) Dr. Wydro resigned from the Company in January 1999.
(4) Includes amounts deferred during 1996 and 1997 under the Company's 401(k)
employee savings and retirement plan. To date, the Company has not made
any matching contributions under that plan.
OPTION MATTERS
There were no grants of stock options to the Company's executive
officers named in the Summary Compensation Table during the year ended December
31, 1998 or the six months ended June 30, 1999. Additionally, none of the
Company's executive officers named in the Summary Compensation Table exercised
options or warrants during the year ended December 31, 1998.
Dr. Wydro, who resigned from the Company in January 1999, exercised
55,000 options in April of 1999.
-26-
<PAGE> 31
CONSULTING AGREEMENTS
In July 1993, the Company entered into a one-year consulting agreement
with Dr. Craves under which he received monthly payments of $8,333. The Company
and Dr. Craves have extended the consulting agreement for successive one year
periods and, concurrently with the loan to the Company in the amount of
$3,000,000 from Bay City Capital the Company extended the agreement through
February 24, 2000.
In January 1995, the Company entered into a consulting agreement with
Mr. Zweifach under which he received monthly payments of $11,250. Concurrently
with the Bay City loan, the Company extended the term of the agreement through
February 24, 2000.
Dr. Melmon also serves as a consultant to the Company and as a member
of the Company's Scientific Advisory Board and receives compensation in those
capacities.
DIRECTORS' COMPENSATION
The Company pays all non-employee directors a fee of $1,000 for each
Board of Directors meeting attended in person. In July 1993, the Company adopted
a Non-Employee Directors Option Plan (the "Directors Plan") pursuant to which
the Company granted each non-employee director (except Dr. Craves) a
fully-vested 10-year option to purchase 10,000 shares of Common Stock at an
exercise price of $4.00 per share. In addition, upon each anniversary of the
inception of the Directors Plan each non-employee director will receive
fully-vested 10-year options to purchase 5,000 shares of Common Stock at the
then current fair market value. Non-employee directors who subsequently join the
Board of Directors will receive, upon each anniversary of joining the Board of
Directors, fully-vested 10-year options to purchase 5,000 shares of Common Stock
at the then current fair market value.
CERTAIN TRANSACTIONS
BAY CITY CAPITAL BRIDGE LOAN.
In February 1998, Bay City Fund I, LLP, an affiliate of Bay City
Capital LLC, (collectively, "Bay City"), 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, Bay City 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 Bay City's agreement
to purchase excess shares, if any, in a rights offering, Bay City received a
fully vested five year warrant to purchase 2,000,000 shares of Epoch's Common
Stock at a price of $0.90 per share. Bay City 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 Chief Executive Officer of Epoch. Sanford S. Zweifach, Epoch's President and
Chief Financial Officer, is also the Managing Director and Chief Financial
Officer of Bay City.
See "Consulting Agreements" for a description of certain arrangements
and transactions with executive officer and directors.
In April 1998, the Company issued five year warrants to purchase
300,000 shares of Common Stock to Joel Hedgpeth, a consultant, at $0.75 per
share. The warrants vest at the rate of 2.083% per month over four years.
-27-
<PAGE> 32
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Our by-laws allow us to indemnify our directors and officers to the
fullest extent permitted by law. Insofar as indemnification for liabilities
under the Securities Act may be available to our directors, officers or
controlling persons pursuant to our Certificate of Incorporation, as amended,
our by-laws and the Delaware General Corporation Law ("DGCL"), we have been
informed that, in the SEC's opinion, such indemnification violates public policy
as expressed in the Securities Act and is therefore unenforceable.
Section 102(b)(7) of the DGCL provides that a certificate of
incorporation may include a provision which eliminates or limits the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to the company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
relating to prohibited dividends or distributions or the repurchase or
redemption of stock or (iv) for any transaction from which the director derives
an improper personal benefit. Our Certificate of Incorporation includes such a
provision. As a result of this provision, we and our stockholders may be unable
to obtain monetary damages from a director for breach of his or her duty of
care.
-28-
<PAGE> 33
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 1998 certain
information about the beneficial ownership of Epoch's Common Stock by (i) each
stockholder known by us to be the beneficial owner of more than 5% of Epoch's
Common Stock, (ii) each director, (iii) each of the executive officers named in
the Summary Compensation Table, and (iv) all executive officers and directors as
a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF
NAME AND ADDRESS BENEFICIALLY OWNED (1) OUTSTANDING SHARES
- ---------------- ---------------------- ------------------
<S> <C> <C>
Grace Brothers Ltd. 5,013,193 33.8%
1560 Sherman Avenue
Evanston, Illinois 60201
Fred Craves, Ph.D.(2) 2,863,241 16.3%
Bay City Capital, LLC(3) 2,000,000 11.9%
750 Battery Street, Suite 600
San Francisco, CA 94111
Richard L. Dunning(4) 467,143 3.1%
VIMRx Pharmaceuticals, Inc. 457,143 3.1%
2751 Centerville Road, Suite 210
Little Falls II
Wilmington, Delaware 19808
Sanford S. Zweifach(5) 400,000 2.6%
The Olmsted Group, LLC(6) 345,000 2.3%
81 Main Street
White Planes, NY 10601
Rich B. Meyer, Jr., Ph.D.(7) 170,229 1.1%
Robert M. Wydro, Ph.D.(8) 130,000 *
Kenneth L. Melmon, M.D.(9) 80,999 *
All executive officers and directors as a group
(5 persons)(10) 1,309,469 8.1%
</TABLE>
- -----------------------------------
* Less than one percent
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in this table have
sole voting and investment power with respect to all shares of Common
Stock.
(2) Includes 2,585,741 shares subject to warrants and options exercisable
within 60 days, including warrants to purchase 250,000 shares which are
held by Burrill & Craves, of which Fred Craves is a general partner and
2,000,000 shares subject to Warrants exercisable within 60 days which are
held by Bay City Capital, LLC. See footnote (3). Fred Craves disclaims
beneficial ownership of such warrants and the shares underlying such
warrants except to the extent of his pecuniary interest in Burrill &
Craves and Bay City Capital, LLC.
-29-
<PAGE> 34
(3) Includes 2,000,000 shares subject to warrants exercisable within 60 days.
Represents 2,000,000 shares held by Bay City Capital Fund I, L.P. Bay City
Capital, LLC, the general partner of Bay City Capital Fund I, L.P., is a
merchant banking partnership formed by The Craves Group and The Pritzker
Family business interest. Fred Craves, Ph.D., the chairman and chief
executive officer of the Company, is the majority owner and controlling
person of The Craves Group. By virtue of their status as members of Bay
City Capital, LLC, each of The Craves Group and The Pritzer Family may be
deemed the beneficial owner of all of the shares held of record by Bay
City Fund I, L.P. (the "Bay City Shares"). By virtue of his status as the
majority owner and controlling person of The Craves Group, Fred Craves may
also be deemed a beneficial owner of the Bay City Shares. Each of The
Craves Group, The Pritzker Family and Fred Craves disclaims beneficial
ownership of any Bay City Shares except the extent, if any, of such
persons actual pecuniary interest therein.
(4) Includes 10,000 shares subject to warrants and options exercisable within
60 days and 457,143 shares of common stock which are held by VIMRx
Pharmaceuticals Inc., of which Richard L. Dunning is the President and
CEO. Richard L. Dunning disclaims beneficial ownership of such shares of
common stock except to the extent of his pecuniary interest in VIMRx
Pharmaceuticals, Inc.
(5) Includes 400,000 shares subject to warrants and options exercisable within
60 days, including warrants to purchase 345,000 shares which are held by
The Olmstead Group L.L.C., of which Sanford Zweifach was a managing
partner. (See footnote 6.) Sanford Zweifach disclaims beneficial ownership
of such warrants and the shares underlying such warrants except to the
extent of his pecuniary interest in The Olmstead Group L.L.C.
(6) Includes 345,000 shares subject to warrants exercisable within 60 days.
Sanford Zweifach, President and Chief Financial Officer of the Company,
was a managing partner of The Olmstead Group L.L.C. Mr. Zweifach disclaims
beneficial ownership of such warrants and the shares underlying such
warrants except to the extent of his pecuniary interest in The Olmstead
Group, L.L.C.
(7) Includes 145,229 shares subject to warrants exercisable within 60 days.
Dr. Meyer resigned from the Company in October 1998.
(8) Includes 81,457 shares subject to options and warrants exercisable within
60 days. Dr. Wydro resigned from the Company in January 1999. Dr. Wydro
exercised 55,000 options in April of 1999.
(9) Includes 80,999 shares subject to warrants and options exercisable within
60 days.
(10) Includes directors' and executive officers' shares listed above, including
1,309,469 shares subject to warrants and options exercisable within 60
days. Excludes 2,000,000 warrants and the shares underlying such warrants
held by Bay City Capital LLC. Excludes 457,143 shares of common stock held
by VIMRx Pharmaceuticals, Inc. Excludes 345,000 warrants and the shares
underlying such warrants held by the Olmstead Group, LLC.
-30-
<PAGE> 35
DESCRIPTION OF CAPITAL STOCK
GENERAL
Epoch's authorized capital stock consists of 50,000,000 shares of
Common Stock, $.01 par value per share, and 10,000,000 shares of Preferred
Stock, $.01 par value per share, with such rights as our Board may determine. As
of August 12, 1999, there were 14,932,095 shares of Common Stock outstanding
held of record by approximately 160 stockholders, 1,301,812 Exchange Warrants
(as defined below), held of record by approximately 45 Exchange Warrant holders,
6,496,963 Other Warrants, held of record by approximately 69 Other Warrant
holders, and 1,362,218 options to purchase Common Stock. There are no shares of
Preferred Stock outstanding.
COMMON STOCK
The holders of outstanding shares of Common Stock are entitled to
receive dividends out of legally available assets at such times and in such
amounts as our Board of Directors may, from time to time, determine. Each
stockholder is entitled to one vote for each share of Common Stock held and
there is no cumulative voting in the election of directors. The Common Stock is
not entitled to preemptive rights and is not subject to redemption or
conversion. Upon our liquidation, dissolution or winding-up, our assets legally
available for distribution to stockholders are distributable ratably among the
holders of the Common Stock after payment of other claims of creditors. All
outstanding shares of Common Stock are, and the shares of Common Stock to be
issued pursuant to this offering will be, validly issued, fully paid and
nonassessable.
PREFERRED STOCK
Our Board of Directors has the authority to issue up to 10,000,000
shares of Preferred Stock, $0.01 par value, and to fix the rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any future vote or action by our stockholders. The rights of the holders of the
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock could have the effect of making it more difficult
for a third party to acquire a majority of our outstanding voting stock, thereby
delaying, deferring or preventing a change in our company's control.
Furthermore, such Preferred Stock may have other rights, including economic
rights senior to the Common Stock, and, as a result, the issuance of Preferred
Stock could significantly hurt the market value of our Common Stock. We have no
present plans to issue shares of Preferred Stock.
EXCHANGE WARRANTS
In June 1996, we offered to exchange for every two Redeemable Common
Stock Purchase Warrants, which were issued in conjunction with our initial
public offering in September 1993 at $6.50 per share (the "Public Warrants"),
one new warrant to purchase one share of our Common Stock until June 20, 2001
exercisable at $2.50 per share (the "Exchange Warrants").
In June 1997, the exchange of warrants was completed, with 2,603,825
Public Warrants being exchanged for 1,301,912 of the Exchange Warrants. As of
August 12, 1999, 1,301,812 Exchange Warrants remained outstanding. The following
discussion of the material terms and provisions of the Exchange Warrants is
qualified in its entirety by reference to the detailed provisions of the
Exchange Warrant Agreement, (the "Exchange Warrant Agreement") between the
Company and American Stock Transfer & Trust Company, a copy of which has been
filed as an exhibit to the Registration Statement of
-31-
<PAGE> 36
which this Prospectus is part. Any outstanding and unexercised Public Warrants
expired on September 29, 1998.
Each Exchange Warrant entitles the holder to purchase at any time until
June 20, 2001 one share of our Common Stock at an exercise price of $2.50 per
share. The exercise price of the Exchange Warrants and the number of shares of
Common Stock underlying the Exchange Warrants are subject to adjustment for
stock splits, stock dividends and similar events. The Exchange Warrants do not
contain anti-dilution provisions relating to issuances or sales of Common Stock
at prices below the exercise price or the then prevailing market price of the
Common Stock. The Exchange Warrants may be exercised in whole or in part.
We may redeem the Exchange Warrants, in whole but not in part, at our
option at any time after eighteen months from the date the Exchange Warrants
were issued upon not less than 30 days' nor more than 60 days' notice, at a
price of $.05 per warrant, providing the market price of our Common Stock has
been at least $3.75 for 20 consecutive business days ending within 15 days of
the date of the notice of redemption. For purposes of redemption of the Exchange
Warrants, the market price of a share of Common Stock on any date would be the
last sale price (or highest reported bid price if the stock is not traded on a
national securities exchange or the Nasdaq National Market) on such date. In the
event we exercise our right to redeem the Exchange Warrants, such Exchange
Warrants would be exercisable until the close of business on the date fixed for
redemption in such notice. If any Exchange Warrant called for redemption is not
exercised by such time, it would cease to be exercisable and the holder thereof
would be entitled only to the redemption price.
For a holder to exercise the Exchange Warrants, we must have a current
registration statement in effect with the SEC and we must be qualified with or
approved by various state securities agencies with respect to the shares or
other securities underlying the Exchange Warrants, or we must have an opinion
from our counsel stating that there is an exemption from registration or
qualification. As long as the Exchange Warrants remain outstanding and
exercisable, we are required to maintain an effective registration statement
with respect to the shares issuable on exercise of the Exchange Warrants.
However, we make no guarantee that such registration statement can be kept
current. If a registration statement covering such shares of Common Stock is not
kept current for any reason, or if the shares underlying the Exchange Warrants,
are not registered in the state in which a holder resides, the Exchange Warrants
will not be exercisable and their value will be impaired.
OTHER WARRANTS
As of August 12, 1999, there were other warrants outstanding to
purchase an aggregate of 6,496,963 shares of Common Stock at exercise prices
ranging from $.30 to $9.21 per share.
COMMON STOCK OPTIONS
The Company has a 1991 and a 1993 Incentive Stock Option Plan,
Nonqualified Stock Option and Restricted Stock Purchase Plan pursuant to which
1,436,470 shares and 500,000 shares of common stock, respectively, have been
reserved for grants. Under the plans, incentive stock options must have an
exercise price at least equal to the fair market value of the common stock on
the date of grant. Nonqualified stock options and rights to purchase restricted
stock must have an exercise price at least equal to 85% of the fair market value
of the common stock on the date of grant. The options are issued with a ten year
term and vest over a period of four years. At August 12, 1999, 39,967 shares and
191,632 shares, respectively, remained available for grant under these plans. At
August 12, 1999, there were 1,362,218 outstanding options to purchase common
stock under these plans.
-32-
<PAGE> 37
The Company also has a Non-Employee Directors Option Plan (the
"Directors Plan") under which the Company granted each non-employee director, a
fully-vested 10-year option to purchase 10,000 shares of common stock at the
inception of the plan in 1993. Upon each anniversary of the inception of the
Directors Plan, each non-employee director receives fully-vested 10-year options
to purchase 5,000 shares of common stock at the then current fair market value.
Non-employee directors who subsequently join the Board of Directors will
receive, upon each anniversary of joining the Board of Directors, fully-vested
10-year options to purchase 5,000 shares of common stock at the then current
fair market value.
TRANSFER AGENT, REGISTRAR AND WARRANT AGENT
The stock transfer agent, registrar and warrant agent for our Common
Stock and Warrants is American Stock Transfer & Trust Company, 40 Wall Street,
New York, New York 10005.
-33-
<PAGE> 38
SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
SHARES OWNED BEFORE AMOUNT AND
OFFERING (INCLUDING SHARES OFFERED PERCENTAGE OF SHARES
SHARES ISSUABLE UPON PURSUANT TO THIS BENEFICIALLY OWNED
SELLING STOCKHOLDER EXERCISE OF WARRANTS) PROSPECTUS(1) AFTER OFFERING
- ---------------------------------------------- --------------------- ---------------- --------------------
<S> <C> <C> <C>
& Capital Partners, L.P. ..................... 375,000 125,000 250,000 (1.7%)
Laurie & Harold Alexander .................... 12,500 12,500 0
Armore Perpetuo, Inc. ........................ 50,000 50,000 0
Michael Arnouse .............................. 150,000 50,000 100,000*
Jeffrey Baron ................................ 26,500 26,500 0
Arnolda Barros ............................... 50,000 50,000 0
Edgar E. Barton, Jr .......................... 37,500 12,500 25,000*
Batterson, Johnson & Wang Limited Partners ... 258,145 58,145 200,000 (1.3%)
Lamon Lynn Bennett ........................... 300,000 100,000 200,000 (1.3%)
Biotechnology Investment Group L.L.C.......... 250,000 250,000 0
David Blech .................................. 109,355 109,355 0
The Edward Blech Trust ....................... 350,000 350,000 0
Francis F. Bodkin, Jr ........................ 3,500 3,500
Burrill & Craves ............................. 250,000 250,000 0
Frederick Chassman ........................... 27,500 27,500 0
James F. Clark ............................... 25,000 25,000 0
James L. Comazzi ............................. 12,500 12,500 0
Concept Mining, Inc. ......................... 50,000 50,000 0
Cooley, Goward ............................... 25,000 25,000 0
John S. & Carol A. Dahne ..................... 37,500 12,500 25,000*
Theodore H. Friedman ......................... 25,000 25,000 0
Frontier Charitable Remainder,
Nicolas Madonia (Trustee) .................. 140,000 140,000 0
Corinna Furnazi .............................. 37,500 12,500 25,000*
Thomas L. Garell ............................. 37,500 12,500 25,000*
John G. Garell ............................... 12,500 12,500 0
The Gerbsman Family Trust, DTD
12-4-90, Steven R. or Marlene Gerbsman,
Trustees ................................... 37,500 12,500 25,000*
Joseph Giamanco .............................. 50,000 50,000 0
Grace Brothers Ltd.(3) ....................... 5,013,193 2,000,000 3,013,193 (17.8%)
John P. Green, Jr ............................ 25,000 25,000 0
Helen Gurman ................................. 25,000 25,000 0
Jason C. Hackett ............................. 12,500 12,500 0
Jerry Heymann ................................ 25,000 25,000 0
Billy B. & Lorraine S. Huff .................. 37,500 12,500 25,000*
Eli David Jacobson ........................... 17,500 17,500 0
Karfunkel Family Foundation .................. 150,000 50,000 100,000*
Gerald Korman ................................ 37,500 12,500 25,000*
Paula Kramer ................................. 37,500 12,500 25,000*
The Low Family Trust, U/T/A 3-21-82
Thomas B. Low, Trustee ..................... 37,500 37,500 0
Allan R. Lyons ............................... 12,500 12,500 0
Joseph D. McKeown ............................ 37,500 12,500 25,000*
Kenneth L. Melmon(2) ......................... 80,999 1,001 79,998*
Eric Miller .................................. 12,500 12,500 0
</TABLE>
-34-
<PAGE> 39
<TABLE>
<S> <C> <C> <C>
Tolof O. Nasby ............................... 5,000 5,000 0
The Olmsted Group, L.L.C.(4) ................. 345,000 115,000 230,000 (1.5%)
The Ridge Land Company ....................... 50,000 50,000 0
David Mark Rozen ............................. 237,500 112,500 125,000*
Frank J. Schultheis .......................... 25,000 25,000 0
Smith Barney, New York ....................... 12,500 12,500 0
Glenn S. Stanley ............................. 12,500 12,500 0
Joseph L. Stanley ............................ 12,500 12,500 0
Stuart G. Stanley ............................ 12,500 12,500 0
Michael Steifman ............................. 12,500 12,500 0
Richard B. Stone ............................. 25,000 25,000 0
Richard Sullivan ............................. 12,500 12,500 0
Robert N. Swetnick ........................... 25,000 25,000 0
United Equities Commodities Company .......... 250,000 250,000 0
Susan Jane Walker ............................ 112,500 37,500 75,000*
Raymond Zabel, Jr ............................ 12,500 12,500 0
Larry Zalk ................................... 25,000 25,000 0
--------- --------- ---------
TOTAL ........................................ 9,489,192 4,891,001 4,598,191
========= ========= =========
</TABLE>
- -------------------
* Less than one percent
(1) Includes up to 4,891,001shares issuable upon exercise of warrants.
(2) See "Management" and "Security Ownership of Certain Beneficial Owners and
Management."
(3) See "Security Ownership of Certain Beneficial Owners and Management."
(4) Sanford Zweifach, Epoch's President and Chief Financial Officer and one of
Epoch's directors, is an employee of the Olmsted Group, L.L.C.
-35-
<PAGE> 40
PLAN OF DISTRIBUTION
Each Selling Stockholder has informed us that he, she or it may sell
Common Stock from time to time in transactions on the OTC Bulletin Board, in
negotiated transactions, or otherwise, or by a combination of these methods, at
fixed prices which may be changed, at market prices at the time of sale, at
prices related to market prices or at negotiated prices. The Selling
Stockholders may effect these transactions by selling the Common Stock to or
through broker-dealers, who may receive compensation in the form of discounts,
concessions or commissions from the Selling Stockholders or the purchasers of
the Common Stock for whom the broker-dealer may act as an agent or to whom they
may sell the Common Stock as a principal, or both. The compensation to a
particular broker-dealer may be in excess of customary commissions.
The Selling Stockholders and broker-dealers who act in connection with
the sale of the Common Stock may be considered "underwriters" within the meaning
of the Securities Act, and any commissions received by such broker-dealers and
profits on any resale of the Common Stock as a principal may be considered
underwriting discounts and commissions under the Securities Act.
We have agreed to bear the expenses in connection with the registration
and sale of the Common Stock offered by the Selling Stockholders (other than
selling commissions and the fees and expenses of counsel or other advisors to
the Selling Stockholders) which we estimate to be $27,331.
LEGAL MATTERS
The validity of the Common Stock offered in this Prospectus will be
passed upon for us by Stradling Yocca Carlson & Rauth, a Professional
Corporation, Newport Beach, California.
EXPERTS
The financial statements of Epoch Pharmaceuticals, Inc. as of December
31, 1998 and for each of the years in the two-year period ended December 31,
1998 have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent auditors, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and auditing.
The report of KPMG LLP dated February 10, 1999 contains an explanatory
paragraph that states that we have suffered recurring losses from operations and
have a net capital deficiency which raises substantial doubt about our ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
-36-
<PAGE> 41
EPOCH PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Independent Auditors' Report....................................................... F-1
Balance Sheet as of December 31, 1998 and June 30, 1999 (unaudited)................ F-2
Statements of Operations for the years ended
December 31, 1997 and 1998 and for the six months ended
June 30, 1998 and 1999 (unaudited)............................................ F-3
Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1997 and 1998 and for the six months
ended June 30, 1999 (unaudited)............................................... F-4
Statements of Cash Flows for the years ended
December 31, 1997 and 1998 and for the six months ended
June 30, 1998 and 1999 (unaudited)............................................ F-5
Notes to Financial Statements...................................................... F-6
</TABLE>
<PAGE> 42
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Epoch Pharmaceuticals, Inc.
We have audited the accompanying balance sheet of Epoch
Pharmaceuticals, Inc. as of December 31, 1998, and the related statements of
operations, stockholders' equity (deficit), and cash flows for each of the years
in the two-year period ended December 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects the financial position of Epoch
Pharmaceuticals, Inc. as of December 31, 1998, and the results of its operations
and its cash flows for each of the years in the two-year period ended December
31, 1998 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 11 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 11. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
KPMG LLP
Seattle, Washington
February 10, 1999
F-1
<PAGE> 43
EPOCH PHARMACEUTICALS, INC.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................... $ 658,363 $ 805,473
Receivables ........................................ 38,303 102,627
Prepaid expenses ................................... 45,769 37,184
------------ ------------
Total current assets ............................ 742,435 945,284
Equipment, net ......................................... 173,831 340,494
Other assets ........................................... 53,937 39,903
------------ ------------
Total assets .................................... $ 970,203 $ 1,325,681
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ................................... $ 215,813 $ 191,275
Accrued interest on note payable to related party .. 208,804 338,213
Accrued expenses for canceled relocation ........... 391,042 103,645
Other accrued liabilities .......................... 356,033 343,393
Deferred revenue - current portion ................. -- 350,000
Note payable to related party ...................... -- 3,000,000
------------ ------------
Total current liabilities ....................... 1,171,692 4,326,526
Note payable to related party .......................... 3,000,000 --
Deferred revenue ....................................... -- 1,950,000
Stockholders' deficit:
Preferred stock, par value $.01; 10,000,000 shares
authorized; no shares issued and outstanding .... -- --
Common stock, par value $.01; 50,000,000 shares
authorized; issued and outstanding: 14,824,227 at
December 31, 1998 and 14,895,589 at June 30, 1999
(unaudited) ..................................... 148,242 148,956
Additional paid-in capital ......................... 54,460,706 54,513,829
Deferred compensation expense ...................... (159,826) (135,850)
Deferred financing expense ......................... (817,794) (484,452)
Accumulated deficit ................................ (56,832,817) (58,993,328)
------------ ------------
Total stockholders' deficit ..................... (3,201,489) (4,950,845)
------------ ------------
Commitments, contingency and subsequent event
Total liabilities and stockholders' deficit ............ $ 970,203 $ 1,325,681
============ ============
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 44
EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1997 1998 1998 1999
------------ ------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Research contract revenue ........ $ 187,737 $ 159,917 $ 84,372 $ 152,617
Operating expenses:
Research and development ...... 2,682,269 2,759,476 1,402,187 1,297,816
General and administrative .... 1,513,955 2,014,571 754,022 653,635
------------ ------------ ------------ ------------
Total operating expenses .... 4,196,224 4,774,047 2,156,209 1,951,451
------------ ------------ ------------ ------------
Operating loss .............. (4,008,487) (4,614,130) (2,071,837) (1,798,834)
Other income (expense):
Interest income ............... 157,215 104,985 66,087 31,927
Interest and financing expense (3,835) (727,156) (305,514) (463,604)
Other income .................. 120,300 23,292 23,091 --
------------ ------------ ------------ ------------
Loss from continuing operations (3,734,807) (5,213,009) (2,288,173) (2,230,511)
Discontinued operations - gain
on disposal of Diagnostics
Division ...................... 130,000 110,000 60,000 70,000
------------ ------------ ------------ ------------
Net loss .................... $ (3,604,807) $ (5,103,009) $ (2,228,173) $ (2,160,511)
============ ============ ============ ============
Loss per share from continuing
operations - basic and diluted $ (0.25) $ (0.35) $ (0.15) $ (0.15)
Income per share from
discontinued operations -
basic and diluted ............. 0.01 0.01 -- --
------------ ------------ ------------ ------------
Net loss per share - basic
and diluted ............... $ (0.24) $ (0.34) $ (0.15) $ (0.15)
============ ============ ============ ============
Weighted average number of
common shares outstanding -
basic and diluted ............. 14,755,462 14,818,960 14,814,793 14,851,762
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 45
EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock Deferred
-------------------------- Additional Deferred Financing
Shares Amount Paid-In Capital Compensation Expense
----------- ----------- --------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 ............. 14,723,856 $ 147,239 52,892,549 (39,029) --
Exercise of stock options ................ 90,937 909 38,238
Amortization of deferred compensation .... 39,029
Net loss .................................
----------- ----------- ---------- -------- --------
Balance at December 31, 1997 ............. 14,814,793 148,148 52,930,787 -- --
Exercise of stock options ................ 9,434 94 4,767
Warrants issued in debt financing ........ 1,333,361 (1,333,361)
Issuance of warrants to a consultant ..... 191,791 (191,791)
Amortization of deferred compensation .... 31,965
Amortization of deferred financing expense 515,567
Net loss .................................
----------- ----------- ---------- -------- --------
Balance at December 31, 1998 ............. 14,824,227 148,242 54,460,706 (159,826) (817,794)
Exercise of stock options (unaudited) .... 71,362 714 53,123
Amortization of deferred compensation
(unaudited) ........................... 23,976
Amortization of deferred financing expense
(unaudited) ........................... 333,342
Net loss (unaudited) .....................
----------- ----------- ---------- -------- --------
Balance at June 30, 1999 (unaudited) ..... 14,895,589 $ 148,956 54,513,829 (135,850) (484,452)
=========== =========== ========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Total
Accumulated Stockholders
Deficit Equity (Deficit)
----------- ---------------
<S> <C> <C>
Balance at December 31, 1996 ............. (48,125,001) 4,875,758
Exercise of stock options ................ 39,147
Amortization of deferred compensation .... 39,029
Net loss ................................. (3,604,807) (3,604,807)
----------- ----------
Balance at December 31, 1997 ............. (51,729,808) 1,349,127
Exercise of stock options ................ 4,861
Warrants issued in debt financing ........ --
Issuance of warrants to a consultant ..... --
Amortization of deferred compensation .... 31,965
Amortization of deferred financing expense 515,567
Net loss ................................. (5,103,009) (5,103,009)
----------- ----------
Balance at December 31, 1998 ............. (56,832,817) (3,201,489)
Exercise of stock options (unaudited) .... 53,837
Amortization of deferred compensation
(unaudited) ........................... 23,976
Amortization of deferred financing expense
(unaudited) ........................... 333,342
Net loss (unaudited) ..................... (2,160,511) (2,160,511)
----------- ----------
Balance at June 30, 1999 (unaudited) ..... (58,993,328) (4,950,845)
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 46
EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------- --------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss ............................................ $(3,604,807) $(5,103,009) $(2,228,173) $(2,160,511)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization ..................... 196,339 61,264 28,017 44,984
Amortization of deferred financing expense ........ -- 515,567 222,400 333,342
Amortization of deferred compensation expense ..... -- 31,965 -- 23,976
Changes in operating assets and liabilities:
Receivables ..................................... (4,545) 24,984 1,315 (64,324)
Prepaid expenses, and other assets .............. (12,726) 4,159 (30,873) 22,619
Accounts payable ................................ 36,733 (21,158) 20,234 (24,538)
Accrued interest on note payable to related party -- 208,804 82,377 129,409
Accrued expenses for canceled relocation ........ -- 391,042 -- (287,397)
Deferred revenue ................................ -- -- -- 2,300,000
Other accrued liabilities ....................... 35,023 129,485 45,881 (12,640)
----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities (3,353,983) (3,756,897) (1,858,822) 304,920
----------- ----------- ----------- -----------
Cash used in investing activities -
acquisition of equipment ............................ (78,851) (75,084) (73,957) (211,647)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from notes payable ......................... -- 3,000,000 3,000,000 --
Principal payments on notes payable ................. (11,188) -- -- --
Exercise of stock options ........................... 39,147 4,861 4,861 53,837
----------- ----------- ----------- -----------
Net cash provided by financing activities ........... 27,959 3,004,861 3,004,861 53,837
----------- ----------- ----------- -----------
Net decrease in cash and cash equivalents .............. (3,404,875) (827,120) 1,072,082 147,110
Cash and cash equivalents at beginning of period ....... 4,890,358 1,485,483 1,485,483 658,363
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period ............. $ 1,485,483 $ 658,363 $ 2,557,565 $ 805,473
=========== =========== =========== ===========
Supplemental disclosure of non-cash financing
activities - warrants issued in debt financing ...... $ -- $ 1,333,361 $ 1,333,361 $ --
=========== =========== =========== ===========
Supplemental disclosure of cash flow information -
cash payments made during the period for interest ... $ 3,836 $ 2,785 $ 737 $ 852
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 47
EPOCH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Epoch Pharmaceuticals, Inc. ("Epoch" or "the Company") was organized to
develop, manufacture and market therapeutic and diagnostic products utilizing
oligonucleotide technology. The Company's activities are focused on the
development of therapeutic technologies and products.
Basis of Presentation
The unaudited interim 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 1998 balances have been reclassified to conform with the 1999
presentation.
Discontinued Operations
In 1995, the Company sold its then existing diagnostics division and in
1996 sold its remaining diagnostic technologies (see note 6). Accordingly,
amounts related to the diagnostics division have been reported as discontinued
operations.
Equipment
Equipment is stated at cost. Depreciation and amortization are provided
on the straight-line method over the assets' estimated useful lives, generally
three to five years.
Impairment of Long-Lived Assets
For long-lived assets including equipment, the Company evaluates the
carrying value of the assets by comparing the estimated future cash flows
generated from the use of the assets and their eventual disposition with the
assets' reported net book value. The carrying value of assets are evaluated for
impairment when events or changes in circumstances occur which may indicate the
carrying amount of the asset may not be recoverable.
Revenue Recognition
Research contract revenue is recognized as research and development
activities are performed under the terms of related agreements.
F-6
<PAGE> 48
Deferred revenue represents unrecognized license and technology fees,
prepaid royalties, and prepayments for product purchases related to a license
and supply agreement. License fees, technology fees, and prepayments for product
purchases will be recognized based upon minimum sales of products sold to the
licensee by the Company as specified over the term of the agreement. Prepaid
royalties will be recognized based upon sales of the licensed product by the
licensee as specified in the agreement.
As a general policy, revenues are not recognized if amounts received
are refundable or the Company has related future performance obligations.
Income Taxes
Deferred income taxes are provided based on the estimated future tax
effects of temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on the deferred
tax assets and liabilities of a change in tax rates is recognized in the period
that includes the enactment date. A valuation allowance is recorded for deferred
tax assets when it is more likely than not that such deferred tax assets will
not be realized.
Stock-Based Compensation
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations in measuring compensation costs for its
stock option plans. The Company discloses proforma net income (loss) and net
income (loss) per share as if compensation cost had been determined consistent
with Statement of Financial Accounting Standard (FAS) No. 123, Accounting for
Stock-Based Compensation.
Net Loss Per Share
Basic earnings (loss) per share (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. The capital
structure of the Company includes stock options and stock warrants. At December
31, 1997 and 1998, there were outstanding options to purchase 1,123,516 and
1,135,986 shares of common stock and outstanding warrants to purchase 6,705,771
and 7,798,875 shares of common stock, respectively. At June 30, 1998 and 1999,
there were outstanding options to purchase 1,107,016 and 1,398,624 shares of
common stock and outstanding warrants to purchase 8,470,016 and 7,798,875 shares
of common stock, respectively. The assumed conversion and exercise of these
securities has been excluded from diluted EPS as their effect would be
anti-dilutive.
Financial Instruments
The Company has financial instruments consisting of cash and
cash equivalents, receivables, accounts payable and a note payable to related
party. The fair value of these financial instruments approximates their carrying
amount based on their short term nature and current market indicators.
F-7
<PAGE> 49
Cash Equivalents
All highly liquid investments with a maturity of three months or less
at date of purchase are considered to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) EQUIPMENT
Equipment at December 31, 1998 consists of the following:
Machinery and equipment.............. $ 1,373,876
Furniture and fixtures............... 214,301
-----------
$ 1,588,177
Less accumulated depreciation........ (1,414,346)
------------
Equipment, net....................... $ 173,831
===========
(3) RETIREMENT SAVINGS PLAN
The Company has a profit sharing plan, which is qualified under Section
401(k) of the United States Internal Revenue Code. The plan allows eligible
employees to contribute up to 20% of their salary. The Company, at its
discretion, makes matching contributions to the plan. No matching contributions
were made to the plan in 1997 or 1998.
(4) EQUITY
Options to Purchase Common Stock
The Company has a 1991 and a 1993 Incentive Stock Option Plan,
Nonqualified Stock Option and Restricted Stock Purchase Plan pursuant to which
1,436,470 shares and 500,000 shares of common stock, respectively, have been
reserved for grants. Under the plans, incentive stock options must have an
exercise price at least equal to the fair market value of the common stock on
the date of grant. Nonqualified stock options and rights to purchase restricted
stock must have an exercise price at least equal to 85% of the fair market value
of the common stock on the date of grant. The options are issued with a ten year
term and vest over a period of four years. At December 31, 1998, 373,976 shares
and 191,632 shares, respectively, remained available for grant under these
plans.
The Company also has a Non-Employee Directors Option Plan (the
"Directors Plan") under which the Company granted each non-employee director, a
fully-vested 10-year option to purchase 10,000 shares of common stock at the
inception of the plan in 1993. Upon each anniversary of the inception of the
Directors Plan, each non-employee director receives fully-vested 10-year options
to purchase 5,000 shares of common stock at the then current fair market value.
Non-employee directors who subsequently join the Board of Directors will
receive, upon each anniversary of joining the Board of Directors, fully-vested
10-year options to purchase 5,000 shares of common stock at the then current
fair market value.
F-8
<PAGE> 50
A summary of the Company's three stock option plans follows.
<TABLE>
<CAPTION>
1997 1998
---------------------------- -----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year ....... 1,307,758 $1.84 1,123,516 $1.72
Granted ................................ 271,999 0.77 29,000 0.70
Exercised .............................. (90,937) 0.69 (9,434) 0.52
Forfeited .............................. (365,304) 1.76 (7,096) 0.63
---------- ----- ---------- -----
Outstanding at end of year ............. 1,123,516 $1.72 1,135,986 $1.71
========== ===== ========== =====
Options exercisable at year end ........ 636,052 $1.80 786,413 $1.56
Weighted - average fair value of options
granted during the year $0.77 $0.70
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------- --------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING AT REMAINING YEARS WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
EXERCISE PRICES 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE 12/31/98 EXERCISE PRICE
- --------------- -------------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.30 - 0.50 234,735 5.3 $0.44 209,067 $0.43
0.53 - 0.78 478,251 7.4 0.62 327,971 0.62
0.87 - 1.13 58,000 7.6 1.00 34,375 1.02
3.87 - 4.50 345,000 5.0 3.97 195,000 4.04
5.87 - 5.88 20,000 4.7 5.88 20,000 5.88
--------- ----- ----- ------- -----
$0.30 - 5.88 1,135,986 6.2 $1.71 786,413 $1.56
========= ===== ===== ======= =====
</TABLE>
Warrants to Purchase Common Stock
As part of a debt financing in February 1998, the company issued a
fully vested five year warrant to purchase 2,000,000 shares of the Company's
common stock at $.90 per share (see note 8).
In April 1998, the Company issued five-year warrants to purchase
300,000 shares of Common Stock to a consultant at $0.75 per share. The warrants
vest at the rate of 2.083% per month over four years. The Company recorded
additional paid-in capital and deferred compensation expense of approximately
$192,000 in connection with the issuance of this warrant. This deferred
compensation expense is being amortized over the four year vesting period of the
warrant. Deferred compensation expense recognized in 1998 was approximately
$32,000.
In June 1996, the Company announced that it intended to exchange for
every two Redeemable Common Stock Purchase Warrants, which were issued in
conjunction with the Company's public offering in September 1993 at $6.50 per
share (the "Public Warrants"), one new warrant to purchase one share of the
Company's Common Stock until June 20, 2001, that is exercisable at $2.50 per
share (the
F-9
<PAGE> 51
"Exchange Warrants"). In June 1997 this exchange of warrants was completed, with
2,603,825 of the Public Warrants being exchanged for 1,301,912 of the Exchange
Warrants. Each Exchange Warrant is redeemable by the Company at any time after
eighteen months from the date that they were issued at $0.05 per warrant,
provided that the closing trading price per share of Common Stock is at least
$3.75 for twenty consecutive trading days.
A summary of the Company's outstanding warrants follows.
<TABLE>
<CAPTION>
1997 1998
-------------------------------- -----------------------------
EXERCISE EXERCISE
SHARES PRICE RANGE SHARES PRICE RANGE
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 8,743,762 $0.30-10.40 6,705,771 $0.30-10.40
Granted 1,351,912 0.75- 2.50 2,300,000 0.75- 0.90
Exercised -- -- -- -- -- --
Expired (3,389,903) 2.00- 6.50 (1,206,896) 3.00-10.40
---------- ----------- ---------- -----------
Outstanding at end of year 6,705,771 0.30-10.40 7,798,875 0.30- 9.21
========== =========== ========== ===========
Warrants exercisable at year end 6,666,186 $0.30-10.40 7,521,780 $0.30- 9.21
Weighted - average value of
exercisable warrants $2.29 $1.65
</TABLE>
The outstanding warrants are fully vested at December 31, 1998 with the
exception of 277,095 warrants issued to a consultant which vest at a rate of
2.083% per month. All outstanding warrants will be fully vested in 2002. The
warrants have expiration dates that range to 2003.
Stock Based Compensation
Had compensation cost for stock options and warrants issued to
employees been determined consistent with FAS No. 123, the Company's net loss
and loss per share would have been increased to the pro forma amounts below:
<TABLE>
<CAPTION>
1997 1998
------------ -----------
<S> <C> <C> <C>
Loss from continuing operations As reported $(3,734,807) $(5,213,009)
Pro forma $(3,815,518) $(5,443,207)
Loss per share from continuing operations As reported $ (0.25) $ (0.35)
Pro forma $ (0.26) $ (0.37)
Net loss As reported $(3,604,807) $(5,103,009)
Pro forma $(3,785,518) $(5,333,207)
Net loss per share - basic and diluted As reported $ (0.24) $ (0.34)
Pro forma $ (0.25) $ (0.36)
</TABLE>
The fair value of each stock option and warrant grant is estimated on
the date of grant using the Black Scholes option-pricing model with the
following weighted average assumptions used for grants in 1997 and 1998:
dividend yield of 0.0% for both years; expected volatility of 123% in 1997 and
1998; risk free interest rates of 7.0% in 1997 and 5.33% in 1998; and expected
lives of 7.3 years in 1997 and 10 years in 1998.
F-10
<PAGE> 52
(5) INCOME TAXES
There was no income tax benefit attributable to net losses for 1997 and
1998. The difference between taxes computed by applying the U.S. Federal
corporate tax rate of 34% and the actual income tax provision in 1997 and 1998
is primarily the result of limitations on utilizing net operating losses.
The tax effects of temporary differences and carryforwards that give
rise to significant portions of the deferred tax assets at December 31, 1998 are
presented below:
<TABLE>
<S> <C>
Net operating loss carryforwards ............ $ 6,769,000
Research and development credit carryforwards 1,779,000
Capitalized research and development ........ 2,174,000
Bad debt write-off .......................... 1,117,000
Other ....................................... 519,000
------------
Total gross deferred tax assets ............. 12,358,000
Less deferred tax asset valuation allowance . (12,358,000)
------------
Net deferred tax assets ..................... $ --
============
</TABLE>
The net change in the valuation allowance for 1997 and 1998 was an
increase of approximately $2,431,000 and $1,903,000 respectively, due primarily
to the inability to utilize net operating losses and research and development
credits.
At December 31, 1998, the Company had net operating loss carryforwards
for income tax purposes of approximately $19,908,000 and unused research and
development tax credits of approximately $1,779,000 available to offset future
taxable income and income taxes, respectively, expiring through 2018. The
Company's net operating loss and credit carryforwards have been reduced to
reflect the limitations pursuant to the Tax Reform Act of 1986, due to
cumulative changes in stock ownership in excess of 50%.
(6) DISCONTINUED OPERATIONS
In 1996, the Company disposed of the remaining assets of its
discontinued diagnostics division receiving a $1,100,000 note. Collections on
the note have been sporadic and, due to uncertainties regarding ultimate
collectibility, the Company has not recognized the receivable and recognizes
only that portion of the gain for which cash payments are received. At December
31, 1998, the unrecognized balance on the note and the unrecognized gain was
$973,000.
F-11
<PAGE> 53
(7) RESEARCH GRANTS AND CONTRACTS
At December 31, 1998, the Company, as a subcontractor to Virginia Mason
Research Center, had one active research contract. Under this agreement, the
Company conducts research and is reimbursed for its direct costs plus an amount
to cover indirect administrative costs. Epoch earned approximately $159,000 and
$160,000 of these funds in 1997 and 1998, respectively, and as of December 31,
1998, there was approximately $228,000 remaining on this contract.
In December 1998, the Company was awarded an additional research grant
from the National Institutes of Health. Under this new grant, the Company will
receive $93,000 during 1999 as research is conducted.
(8) NOTE PAYABLE
In February 1998, Bay City Capital LLC, ("Bay City Capital"), San
Francisco, California, loaned $3,000,000 to the Company from Bay City Capital
Fund I LP ("BBC Fund I") 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 fully vested five year warrant to purchase 2,000,000 shares of
Epoch's Common Stock at a price of $0.90 per share. Bay City Capital, 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 Managing
Director and Chief Financial Officer of Bay City Capital.
The Company recorded additional paid-in capital and deferred financing
expense of approximately $1,333,000 in connection with the issuance of this
warrant. This deferred financing expense is being amortized over the two year
term of the note. Deferred financing expense recognized in 1998 was
approximately $516,000.
(9) COMMITMENTS
In July 1993, the Company entered into a one-year consulting agreement
with Dr. Craves under which he received monthly payments of $8,333. The Company
and Dr. Craves have extended the consulting agreement for successive one year
periods and, in conjunction with the BCC Fund I loan, the agreement has been
extended through February 24, 2000.
In January 1995, the Company entered into a consulting agreement with
Mr. Zweifach under which he received monthly payments of $11,250. In conjunction
with the BCC Fund I loan, the Company has extended the term of the contract to
run through February 24, 2000.
During 1997 and 1998, rent expense on operating leases was
approximately $337,000 and 283,000, respectively.
F-12
<PAGE> 54
(10) SUBSEQUENT EVENT
In January 1999 the Company entered into a License and Supply Agreement
with The Perkin-Elmer Corporation ("Perkin-Elmer"). Under the terms of the
agreement, Epoch licensed certain of its enabling genetic analysis technology to
Perkin-Elmer, and Perkin-Elmer will purchase Epoch's proprietary chemical
intermediates. In June 1999, the agreement was amended to include proprietary
software. Through February 1999, Epoch received $2,300,000 under the agreement.
There have been no further cash receipts through July 1999.
(11) LIQUIDITY
The Company has experienced recurring losses from operations and has a
total stockholders' deficit of approximately $3,201,000 at December 31, 1998.
At December 31, 1998, the Company had cash and cash equivalents of
approximately $658,000. In January and February 1999, the Company received a
total of $2,300,000 under a license and supply agreement. Under the licensing
and supply agreement with Perkin-Elmer, the Company will receive an ongoing
royalty stream based on licensee sales and earn revenues from the sale of
chemical intermediates to Perkin-Elmer. Management estimates that its existing
cash balance provides sufficient working capital to operate until the third
quarter 1999.
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 other 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. If additional funds are not available, the
Company will be required to delay, reduce, or eliminate expenditures for certain
or all of its programs or products.
F-13
<PAGE> 55
- --------------------------------------------------------------------------------
4,891,001 SHARES
EPOCH PHARMACEUTICALS, INC.
COMMON STOCK
PROSPECTUS
_____, 1999
- --------------------------------------------------------------------------------
<PAGE> 56
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's by-laws provide for indemnification of its directors and
officers to the fullest extent permitted by law. Insofar as indemnification for
liabilities under the Securities Act may be permitted to our directors or
officers or controlling persons of the Company pursuant to our Certificate of
Incorporation, as amended, the by-laws and the DGCL, we have been informed that,
in the SEC's opinion, such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
Section 102(b)(7) of the DGCL provides that a certificate of
incorporation may include a provision which eliminates or limits the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability
(i) for any breach of the director's duty of loyalty to the
company or its stockholders,
(ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the DGCL, relating to prohibited
dividends or distributions or the repurchase or redemption of
stock, or
(iv) for any transaction from which the director derives an
improper personal benefit.
Our Certificate of Incorporation includes such a provision. As a result
of this provision, our company and its stockholders may be unable to obtain
monetary damages from a director for breach of his or her duty of care.
ITEM 25. OTHER EXPENSES OF ISSUANCES AND DISTRIBUTION
The following sets forth the costs and expenses, all of which shall be
borne by our company, in connection with the offering of the Common Stock
pursuant to this Registration Statement:
<TABLE>
<S> <C>
SEC registration $ 331
Legal fees and expenses* 15,000
Accounting fees and expenses* 12,000
Miscellaneous --
-------
TOTAL $27,331
=======
</TABLE>
- ----------
* Estimated.
II-1
<PAGE> 57
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of our transactions during the past three
years preceding the date hereof involving sales of our securities that were not
registered under the Securities Act:
1. In April 1998, the Company issued five year warrants to purchase
300,000 shares of Common Stock to Joel Hedgpeth, a consultant, at $0.75 per
share.
2. In February 1998, we issued a warrant to Bay City to purchase
2,000,000 shares of our Common Stock at an exercise price of $.90 per share in
connection with a $3,000,000 bridge financing loan from Bay City.
3. On October 1, 1996, we issued 457,143 shares of Common Stock at
$1.75 per share and warrants to purchase an additional 900,000 shares of Common
Stock, 450,000 of which were at an exercise price of $2.00, and 450,000 or which
are at an exercise price of $3.00 to VIMRx. The warrants were not exercised and
have expired.
4. On June 26, 1996, we issued 5,000,000 shares of Common Stock and
warrants to purchase 2,500,000 of Common Stock at an exercise price of $2.50 to
institutional and accredited individual investors, for an aggregate purchase
price of $5 million. In connection therewith, pursuant to an agreement with our
financial advisor, David Blech, we issued to Mr. Blech five year warrants to
purchase 500,000 shares of Common Stock at $1.00 per share.
5. On January 16, 1996 we issued five year warrants to purchase 250,000
shares of Common Stock to Burrill & Craves, a consulting firm of which Dr.
Craves was a principal, and 345,000 shares of Common Stock to the Olmsted Group,
L.L.C., a merchant banking firm of which Mr. Zweifach is a principal, at an
exercise price of $0.50 per share, in consideration for the services performed
by Burrill & Craves and The Olmsted Group, L.L.C., respectively, in connection
with the sale of our diagnostics assets to Becton Dickinson and Company and
other corporate matters. The warrants are fully vested as of January 1, 1999.
Exemption from the registration provisions of the Securities Act for
the transactions described above is claimed under Section 4(2) of the Securities
Act, among others, on the basis that such transactions did not involve any
public offering and the purchasers were sophisticated with access to the kind of
information registration would provide.
In June 1997, we offered to exchange for every two Redeemable Common
Stock Purchase Warrants, which were issued in conjunction with our public
offering in September 1993 at $6.50 per share (the "Public Warrants"), one new
warrant to purchase one share of our Common Stock until June 20, 2001, that is
exercisable at $2.50 per share (the "Exchange Warrants"). 2,603,825 of the
Public Warrants were exchanged for 1,301,912 of the Exchange Warrants. We can
redeem each Exchange Warrant at any time after eighteen months from the date
that they were issued at $0.05 per warrant, provided that the closing trading
price per share of Common Stock is at least $3.75 for twenty consecutive trading
days. Exemption from the registration provisions of the Securities Act for this
transaction is claimed under Section 3(a) of the Securities Act.
II-2
<PAGE> 58
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT LIST
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1998).
3.2* Bylaws of the Registrant, as currently in effect.
5.0 Opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Counsel to the
Registrant (incorporated by reference to the same numbered exhibit to the Company's
Registration Statement on Form SB-2, No. 333-21353, filed February 7, 1997).
10.1* MicroProbe Corporation Incentive Stock Option, Nonqualified Stock Option And Restricted
Stock Purchase Plan--1991, as amended.
10.2* Form of Indemnification Agreement entered into with officers and directors of the
Registrant.
10.3 Letter Agreement between the Registrant and Fred Craves, dated August 3, 1993 (incorporated
by reference to Exhibit 10.12 of the Registrant's Registration Statement on Form SB-2,
Registration No. 33-66742, effective on September 29, 1993).
10.4 Form of Common Stock Warrant issued December 31, 1991 (incorporated by reference to
Exhibit 10.22 of the Registrant's Registration Statement on Form SB-2, Registration
No. 33-66742, effective on September 29, 1993).
10.5 Second Amended and Restated Investment Agreement, dated April 28, 1992 among the Registrant
and certain investors (incorporated by reference to Exhibit 10.25 of the Registrant's
Registration Statement on Form SB-2, Registration No. 33-66742, effective on September 29,
1993).
10.6 Common Stock and Warrant Purchase Agreement, dated April 28, 1992 as amended June 30, 1992
and July 31, 1992 (with form of warrant) among the Registrant and certain investors
(incorporated by reference to Exhibit 10.26 of the Registrant's Registration Statement on
Form SB-2, Registration No. 33-66742, effective on September 29, 1993).
10.7 Form of Registration Agreement, dated February 12, 1993 among the Registrant and certain
investors (incorporated by reference to Exhibit 10.30 of the Registrant's Registration
Statement on Form SB-2, Registration No. 33-66742, effective on September 29, 1993).
</TABLE>
II-3
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.8 MicroProbe Corporation Incentive Stock Option, Nonqualified Stock Option and Restricted
Stock Purchase Plan--1993 (incorporated by reference to Exhibit 10.39 of the Registrant's
Registration Statement on Form SB-2, Registration No. 33-66742, effective on September 29,
1993).
10.9 MicroProbe Corporation Non-Employee Directors Stock Option Plan (incorporated by reference
to Exhibit 10.40 of the Registrant's Registration Statement on Form SB-2, Registration
No. 33-66742, effective on September 29, 1993).
10.10* Warrant Agreement between the Registrant and American Stock Transfer & Trust Company dated
April 29, 1997, (incorporated by reference to Exhibit 10.10 of the Registrant's Annual
Report on 10-KSB for the year ended December 31, 1998).
10.11 Purchase Agreement dated as of November 30, 1993, by and among the Registrant, Animal
Biotechnology Cambridge Limited, and Herbert Stradler (without exhibits) (incorporated by
reference to Exhibit 10.47 of the Registrant's Registration Statement on Form SB-2,
Registration No. 33-76446, effective on July 7, 1994).
10.11.1 Amendment dated April 1, 1994 to Put Agreement (incorporated by reference to Exhibit
10.48.1 of the Registrant's Annual Report on Form 10-KSB for the year ended December 31,
1993).
10.11.2 Amendment dated April 27, 1994 to Put Agreement (incorporated by reference to the
Registrant's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1994).
10.11.3 Amendment dated May 26, 1994 to Put Agreement (incorporated by reference to Exhibit 10.48.3
of the Registrant's Registration Statement on Form SB-2, Registration No. 33-76446,
effective on July 7, 1994).
10.11.4 Amendment dated June 30, 1994 to Put Agreement (incorporated by reference to Exhibit
10.48.4 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30,
1994).
10.11.5 Amendment dated July 27, 1994 to Put Agreement (incorporated by reference to Exhibit
10.48.5 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30,
1994).
10.11.6 Amendment dated August 15, 1994 to Put Agreement (incorporated by reference to Exhibit
10.48.6 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September
30, 1994).
10.11.7 Amendment dated August 30, 1994 to Put Agreement (incorporated by reference to Exhibit
10.48.7 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September
30, 1994).
</TABLE>
II-4
<PAGE> 60
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.11.8 Amendment dated September 14, 1994 to Put Agreement (incorporated by reference to Exhibit
10.48.8 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September
30, 1994).
10.11.9 Exercise Notice dated September 27, 1994 to Put Agreement (incorporated by reference to
Exhibit 10.48.9 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1994).
10.12 Put Agreement relating to Ribonetics GmbH dated as of December 1, 1993 between the
Registrant and David Blech, as amended December 3, 1993 and February 18, 1994 (incorporated
by reference to Exhibit 10.48 of the Registrant's Annual Report on Form 10-KSB for the year
ended December 31, 1993).
10.13 Registration Rights Agreement dated October 12, 1994 (incorporated by reference to Exhibit
10.57 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September
30, 1994).
10.14 Consulting Agreement between the Registrant and Sanford S. Zweifach, dated January 18, 1995
(incorporated by reference to Exhibit 10.59 of the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1995).
10.15 Asset Purchase Agreement between the Registrant and Becton, Dickinson and Company, dated as
of September 29, 1995 (incorporated by reference to the form of such Asset Purchase
Agreement filed with the Registrant's Definitive Proxy Materials for its Special Meeting of
Stockholders held November 27, 1995).
10.16 Consulting Agreement with David Blech dated March 29, 1996 (incorporated by reference to
Exhibit 10.65 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1996).
10.17 Form of Subscription Agreement with Private Placement Investors (incorporated by reference
to Exhibit 4.1 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1996).
10.18 Warrant Agreement between the Registrant and American Stock Transfer and Trust Company
dated June 21, 1996, with form of Warrant (incorporated by reference to Exhibit 4.2 of the
Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1996).
10.19 Bridge Financing Agreement dated as of February 25, 1998, with form of note and warrant,
between the Registrant and Bay City Capital, LLC (incorporated by reference to
Exhibit 10.69 of the Registrant's Annual Report on Form 10-KSB for the year ended
December 31, 1997).
</TABLE>
II-5
<PAGE> 61
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.20* Sublease between the Registrant as Tenant and Bion Diagnostic Sciences, Inc. for premises
located in Redmond, Washington, dated September 25, 1998 (incorporated by reference to
Exhibit 10.20 of Registrant's Annual Report on 10-KSB for the year ended December 31, 1998).
10.21* License Agreement between the Registrant and Perkin-Elmer Corporation dated January 11,
1999 (portions of this Exhibit are omitted and were filed separately with the Secretary of
the SEC pursuant to the Registrant's application requesting confidential treatment under
Rule 406 of the Securities Act) (incorporated by reference to Exhibit 10.21 of Registrant's
Annual Report on Form 10-KSB for the year ended December 31, 1998).
10.21.1 First Amendment to the License and Supply Agreement between the Registrant and Perkin-Elmer
Corporation dated January 11, 1999. (Portions of this Exhibit are omitted and were filed
separately with the Secretary of the SEC pursuant to the Registrant's application
requesting confidential treatment under Rule 406 of the Securities Act.)
23.2 Consent of Stradling Yocca Carlson & Rauth, a Professional Corporation (included in the
Opinion filed as Exhibit 5.0).
23.1 Consent of KPMG LLP.
25.0 Power of Attorney (included on the signature page).
27.0 Financial Data Schedules (incorporated by reference to Exhibit 27 of Registrant's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1999).
</TABLE>
- -------------
* Incorporated by reference to the same numbered exhibit of the Registrant's
Registration Statement on Form SB-2, No. 33-66742, effective on September 29,
1993.
II-6
<PAGE> 62
ITEM 28. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section
10(a)(3) of the Securities Act.
(ii) Reflect in the prospectus any facts or event,
which, individually or together, represent a fundamental change in the
information in the registration statement.
(iii) Include any additional or changed information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be deemed the
initial bona fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
(e) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-7
<PAGE> 63
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Redmond, State of
Washington, on the 26th day of August 1999.
EPOCH PHARMACEUTICALS, INC.
By: /s/ Sanford S. Zweifach
-------------------------------------
Sanford S. Zweifach
President and Chief Financial Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of Epoch Pharmaceuticals,
Inc. do hereby constitute and appoint Fred Craves and Sanford S. Zweifach, or
either of them, as our true and lawful attorneys and agents, to do any and all
acts and things in our name and behalf in our capacities as directors and
officers and to execute any and all instruments for us and in our names in the
capacities indicated below, which said attorneys and agents, or either of them,
may deem necessary or advisable to enable said corporation to comply with the
Securities Act, as amended, and any rules, regulations and requirements of the
SEC in connection with this Registration Statement, including specifically, but
without limitation, power and authority to sign for us or any of us in our names
and in the capacities indicated below, any and all amendments (including
post-effective amendments) hereto or any related registration statement that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act, as
amended; and we do hereby ratify and confirm all that the said attorneys and
agents, or either of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Fred Craves Chairman of the Board of Directors and August 26, 1999
- --------------------------- Chief Executive Officer
Fred Craves, Ph.D.
/s/ Sanford S. Zweifach President and Chief Financial Officer August 26, 1999
- --------------------------- (Chief Accounting Officer)
Sanford S. Zweifach
/s/ Richard Dunning Director August 26, 1999
- ---------------------------
Richard Dunning
/s/ Kenneth L. Melmon Director August 26, 1999
- ---------------------------
Kenneth L. Melmon, M.D.
/s/ Sanford S. Zweifach
- ---------------------------
*Sanford S. Zweifach
As Attorney-in-Fact
</TABLE>
II-8
<PAGE> 64
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1998).
3.2* Bylaws of the Registrant, as currently in effect.
5.0 Opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Counsel to the
Registrant (incorporated by reference to the same numbered exhibit to the Company's
Registration Statement on Form SB-2, No. 333-21353, filed February 7, 1997).
10.1* MicroProbe Corporation Incentive Stock Option, Nonqualified Stock Option And Restricted
Stock Purchase Plan--1991, as amended.
10.2* Form of Indemnification Agreement entered into with officers and directors of the
Registrant.
10.3 Letter Agreement between the Registrant and Fred Craves, dated August 3, 1993 (incorporated
by reference to Exhibit 10.12 of the Registrant's Registration Statement on Form SB-2,
Registration No. 33-66742, effective on September 29, 1993).
10.4 Form of Common Stock Warrant issued December 31, 1991 (incorporated by reference to
Exhibit 10.22 of the Registrant's Registration Statement on Form SB-2, Registration
No. 33-66742, effective on September 29, 1993).
10.5 Second Amended and Restated Investment Agreement, dated April 28, 1992 among the Registrant
and certain investors (incorporated by reference to Exhibit 10.25 of the Registrant's
Registration Statement on Form SB-2, Registration No. 33-66742, effective on September 29,
1993).
10.6 Common Stock and Warrant Purchase Agreement, dated April 28, 1992 as amended June 30, 1992
and July 31, 1992 (with form of warrant) among the Registrant and certain investors
(incorporated by reference to Exhibit 10.26 of the Registrant's Registration Statement on
Form SB-2, Registration No. 33-66742, effective on September 29, 1993).
10.7 Form of Registration Agreement, dated February 12, 1993 among the Registrant and certain
investors (incorporated by reference to Exhibit 10.30 of the Registrant's Registration
Statement on Form SB-2, Registration No. 33-66742, effective on September 29, 1993).
</TABLE>
<PAGE> 65
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.8 MicroProbe Corporation Incentive Stock Option, Nonqualified Stock Option and Restricted
Stock Purchase Plan--1993 (incorporated by reference to Exhibit 10.39 of the Registrant's
Registration Statement on Form SB-2, Registration No. 33-66742, effective on September 29,
1993).
10.9 MicroProbe Corporation Non-Employee Directors Stock Option Plan (incorporated by reference
to Exhibit 10.40 of the Registrant's Registration Statement on Form SB-2, Registration
No. 33-66742, effective on September 29, 1993).
10.10* Warrant Agreement between the Registrant and American Stock Transfer & Trust Company dated
April 29, 1997, (incorporated by reference to Exhibit 10.10 of the Registrant's Annual
Report on 10-KSB for the year ended December 31, 1998).
10.11 Purchase Agreement dated as of November 30, 1993, by and among the Registrant, Animal
Biotechnology Cambridge Limited, and Herbert Stradler (without exhibits) (incorporated by
reference to Exhibit 10.47 of the Registrant's Registration Statement on Form SB-2,
Registration No. 33-76446, effective on July 7, 1994).
10.11.1 Amendment dated April 1, 1994 to Put Agreement (incorporated by reference to Exhibit
10.48.1 of the Registrant's Annual Report on Form 10-KSB for the year ended December 31,
1993).
10.11.2 Amendment dated April 27, 1994 to Put Agreement (incorporated by reference to the
Registrant's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1994).
10.11.3 Amendment dated May 26, 1994 to Put Agreement (incorporated by reference to Exhibit 10.48.3
of the Registrant's Registration Statement on Form SB-2, Registration No. 33-76446,
effective on July 7, 1994).
10.11.4 Amendment dated June 30, 1994 to Put Agreement (incorporated by reference to Exhibit
10.48.4 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30,
1994).
10.11.5 Amendment dated July 27, 1994 to Put Agreement (incorporated by reference to Exhibit
10.48.5 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30,
1994).
10.11.6 Amendment dated August 15, 1994 to Put Agreement (incorporated by reference to Exhibit
10.48.6 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September
30, 1994).
10.11.7 Amendment dated August 30, 1994 to Put Agreement (incorporated by reference to Exhibit
10.48.7 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September
30, 1994).
</TABLE>
<PAGE> 66
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.11.8 Amendment dated September 14, 1994 to Put Agreement (incorporated by reference to Exhibit
10.48.8 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September
30, 1994).
10.11.9 Exercise Notice dated September 27, 1994 to Put Agreement (incorporated by reference to
Exhibit 10.48.9 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1994).
10.12 Put Agreement relating to Ribonetics GmbH dated as of December 1, 1993 between the
Registrant and David Blech, as amended December 3, 1993 and February 18, 1994 (incorporated
by reference to Exhibit 10.48 of the Registrant's Annual Report on Form 10-KSB for the year
ended December 31, 1993).
10.13 Registration Rights Agreement dated October 12, 1994 (incorporated by reference to Exhibit
10.57 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September
30, 1994).
10.14 Consulting Agreement between the Registrant and Sanford S. Zweifach, dated January 18, 1995
(incorporated by reference to Exhibit 10.59 of the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1995).
10.15 Asset Purchase Agreement between the Registrant and Becton, Dickinson and Company, dated as
of September 29, 1995 (incorporated by reference to the form of such Asset Purchase
Agreement filed with the Registrant's Definitive Proxy Materials for its Special Meeting of
Stockholders held November 27, 1995).
10.16 Consulting Agreement with David Blech dated March 29, 1996 (incorporated by reference to
Exhibit 10.65 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1996).
10.17 Form of Subscription Agreement with Private Placement Investors (incorporated by reference
to Exhibit 4.1 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1996).
10.18 Warrant Agreement between the Registrant and American Stock Transfer and Trust Company
dated June 21, 1996, with form of Warrant (incorporated by reference to Exhibit 4.2 of the
Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1996).
10.19 Bridge Financing Agreement dated as of February 25, 1998, with form of note and warrant,
between the Registrant and Bay City Capital, LLC (incorporated by reference to
Exhibit 10.69 of the Registrant's Annual Report on Form 10-KSB for the year ended
December 31, 1997).
</TABLE>
<PAGE> 67
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.20* Sublease between the Registrant as Tenant and Bion Diagnostic Sciences, Inc. for premises
located in Redmond, Washington, dated September 25, 1998 (incorporated by reference to
Exhibit 10.20 of Registrant's Annual Report on 10-KSB for the year ended December 31, 1998).
10.21* License Agreement between the Registrant and Perkin-Elmer Corporation dated January 11,
1999 (portions of this Exhibit are omitted and were filed separately with the Secretary of
the SEC pursuant to the Registrant's application requesting confidential treatment under
Rule 406 of the Securities Act) (incorporated by reference to Exhibit 10.21 of Registrant's
Annual Report on Form 10-KSB for the year ended December 31, 1998).
10.21.1 First Amendment to the License and Supply Agreement between the Registrant and Perkin-Elmer
Corporation dated January 11, 1999. (Portions of this Exhibit are omitted and were filed
separately with the Secretary of the SEC pursuant to the Registrant's application
requesting confidential treatment under Rule 406 of the Securities Act.)
23.2 Consent of Stradling Yocca Carlson & Rauth, a Professional Corporation (included in the
Opinion filed as Exhibit 5.0).
23.1 Consent of KPMG LLP.
25.0 Power of Attorney (included on the signature page).
27.0 Financial Data Schedules (incorporated by reference to Exhibit 27 of Registrant's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1999).
</TABLE>
- -------------
* Incorporated by reference to the same numbered exhibit of the Registrant's
Registration Statement on Form SB-2, No. 33-66742, effective on September 29,
1993.
<PAGE> 1
EXHIBIT 10.21.1
CONFIDENTIAL PORTIONS HAVE BEEN OMITTED
BASED UPON A REQUEST FOR CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934 AND
HAVE BEEN SEPARATELY FILED WITH THE COMMISSION
FIRST AMENDMENT TO THE LICENSE AND SUPPLY AGREEMENT
BETWEEN EPOCH AND PERKIN-ELMER HAVING AN EFFECTIVE DATE
OF JANUARY 5, 1999
This First Amendment to the License and Supply Agreement ("First Amendment")
dated as of the 30th day of June, 1999 ("Effective Date of First Amendment") is
between EPOCH PHARMACEUTICALS, INC., 12277 134th Court NE, Suite 100, Redmond,
WA ("Epoch") and THE PERKIN-ELMER CORPORATION, having its PE Biosystems Division
at 850 Lincoln Centre Drive, Foster City, CA 94404 ("Perkin-Elmer").
WHEREAS, Epoch and Perkin-Elmer have entered into a License and Supply Agreement
having an Effective Date of January 5, 1999 ("License and Supply Agreement").
WHEREAS, both Epoch and Perkin-Elmer desire to amend the License and Supply
Agreement so as to provide for the transfer of certain know-how relating to the
prediction of the melting temperature of MGB Oligonucleotides from Epoch to
Perkin-Elmer for the purpose of incorporating such know how into certain
Perkin-Elmer software products. e.g., Perkin-Elmer's Primer Express software
product.
NOW THEREFORE, in consideration of the mutual covenants and promises contained
in this First Amendment, the Parties agree as follows:
1. Unless otherwise defined herein, capitalized terms will have the
meaning ascribed to them in the License and Supply Agreement.
2. DELETE existing Section 2.21 (Licensed Know-How) of the License and
Supply Agreement and REPLACE with the following amended Section 2.21:
2.21 "Licensed Know-How" means trade secrets, technical
information, experimental data, software and other knowledge
now existing and controlled by Epoch relating to (1) the
chemical synthesis and purification of MGB Oligonucleotide
using MGB Intermediate, and (2) algorithms and related
software for determining the melting temperature of MGB
Oligonucleotide, as described in Section 5.04 and Exhibit C,
to the extent that such technical information, experimental
data, software and other knowledge is not publicly available.
-1-
<PAGE> 2
3. ADD the following to the end of existing Section 3.04 (Restrictions) of
the License and Supply Agreement:
Licensed Products comprising Licensed Know-How in the form of
software embodying algorithms for determining the melting
temperature of MGB Oligonucleotide, as described in Section
5.04 and Exhibit C, will only be sold or marketed pursuant to
a limited-use non-exclusive license agreement consistent with
Perkin-Elmer's normal practice for the sale and marketing of
like software products.
4. ADD the following to the table of existing Section 4.02 (Royalties) of
the License and Supply Agreement:
software [*]
5. ADD the following to existing Section 4.03 (Payment for Know-How) of
the License and Supply Agreement:
Perkin-Elmer will pay to Epoch, as additional consideration
for the transfer of and license under Licensed Know-How, [*]
per month for the period between June 15, 1999 and the first
New Product Release of a Licensed Product provided that Epoch
makes available at least source code embodying algorithms for
determining the melting temperature of MGB Oligonucleotide as
described in Subsection 3 of amended Exhibit C within ten (10)
days of the Effective Date of First Amendment; where as used
herein, the term "New Product Release" means that point in a
Perkin-Elmer product development program at which a product is
released for unrestricted manufacture and sale to customers
under PE Biosystems ISO 9001 Product Development Procedures.
In the event that the period between June 15, 1999 and the
first New Product Release includes a fractional month,
payments due for that fractional month will be determined on a
pro rata basis. As yet additional consideration for the
transfer of and license under Licensed Know-How, Perkin-Elmer
will give to Epoch an ABI PRISM(TM) Model 7700 Sequence
Detection System instrument (p/n 7700-01-200/208) [*]. The
instrument provided hereunder will include all installation
services and warranties typically provided to customers in
connection with the purchase of such instrument. However,
Perkin-Elmer will not provide an optional service contract
covering the instrument. All reagents will be purchased by
Epoch using conventional retail distribution channels.
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH COMMISSION.
-2-
<PAGE> 3
6. DELETE existing Section 5.04 (Transfer of Know-How) of the License and
Supply Agreement and REPLACE with the following amended Section 5.04:
5.04 Epoch will transfer Licensed Know-How to Perkin-Elmer to the
extent necessary for Perkin-Elmer to make full use of MGB
Intermediates and MGB Oligonucleotides. Such Licensed Know-How
will include, but not be limited to, that information
specified in Exhibit C. All Licensed Know-How is considered
Confidential Information and will only be used by Perkin-Elmer
in connection with the exploitation of the license rights
granted in Article III. All Licensed Know-How will remain
owned by Epoch.
7. ADD the following to Exhibit C (Licensed Know-How) of the License and
Supply Agreement:
3. Algorithms, object code, source code and any other embodiments
of methods or processes useful for predicting the melting
temperature of MGB Oligonucleotides, whether patented,
copyrighted or not.
IN WITNESS WHEREOF, the Parties, through their authorized officers, have
executed this First Amendment as of the Effective Date of First Amendment.
EPOCH PHARMACEUTICALS, INC. THE PERKIN-ELMER CORPORATION,
THROUGH ITS PE BIOSYSTEMS DIVISION
By: /s/ Sanford S. Zweifach By: /s/ Elaine Heron
--------------------------------- ---------------------------------
Name: Sanford S. Zweifach Name: Elaine Heron
------------------------------- -------------------------------
Title: President Title: Vice President
------------------------------ The Perkin-Elmer Corporation
Date: July 1, 1999 ------------------------------
------------------------------- Date: June 30, 1999
-------------------------------
-3-
<PAGE> 1
CONSENT OF KPMG LLP
Exhibit 23.1
The Board of Directors
Epoch Pharmaceuticals, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
Our report dated February 10, 1999 contains an explanatory paragraph that states
the Company has suffered recurring losses from operations and has a net capital
deficiency which raises substantial doubt about its ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of that uncertainty.
KPMG LLP
Seattle, Washington
August 26, 1999
