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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-22170
-----------------------------------------------
EPOCH PHARMACEUTICALS, INC.
(Name of Small Business Issuer in its charter)
<TABLE>
<S> <C>
Delaware 91-1311592
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
12277 134th Court N.E., Suite 110 98052
(Address of principal executive offices) (Zip Code)
</TABLE>
(425) 821-7535
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Common Stock Purchase Warrants
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports); and (2) has been subject to such filing requirements for the past 90
days. YES |X| NO
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB |X|
Issuer's revenues for its most recent fiscal year were $159,917
As of March 29, 1999, the aggregate market value of the voting stock
held by non-affiliates, computed by reference to the price at which the stock
was sold on such date, was approximately $30,115,484
14,835,214 shares of Common Stock were outstanding at March 29, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
None
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INTRODUCTORY NOTE
This Annual Report on Form 10-KSB contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and the Registrant intends
that such forward-looking statements be subject to the safe harbors created
thereby. These forward-looking statements include, without limitation, (i) the
development of the Registrant's technology, and (ii) the need for, and
availability of, additional financing.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. These
forward-looking statements are based on assumptions that the Registrant will be
able to obtain sufficient financing to continue operations, that the
Registrant's technology will continue to be developed, and will not be replaced
by new technology, that Registrant will retain key technical and management
personnel, and that there will be no material adverse change in the Registrant's
operations or business. Assumptions relating to the foregoing involve judgments
with respect to, among other things, future technology, 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 Registrant. Although the Registrant believes that the assumptions underlying
the forward-looking statements are reasonable, any of the assumptions could
prove inaccurate and, therefore, there can be no assurance that the results
contemplated in forward-looking statements will be realized. In addition, the
business and operations of the Registrant are subject to substantial risks which
increase the uncertainty inherent in such forward-looking statements. In light
of the significant uncertainties inherent in the forward-looking information
included herein, the inclusion of such information should not be regarded as a
representation by the Registrant or any other person that the objectives or
plans of the Registrant will be achieved.
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PART I
ITEM 1. BUSINESS
THE COMPANY
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, 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
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base pairing, called hybridization, can occur between DNA strands of any size,
as long as the segments hybridizing are complementary.
[GRAPHIC]
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:
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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 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.
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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 or
Plan of Operation." 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.
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 December 31, 1998, 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 $159,000 and $160,000 of these funds in 1997 and 1998, respectively, and
as of December 31, 1998, there was $228,000 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 amounted to $2,682,000 and $2,759,000
in 1997 and 1998, respectively.
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PATENTS AND PROPRIETARY TECHNOLOGY
The Company attempts to protect its proprietary technology by relying
on several methods. As of February 8, 1999, the Company had eleven issued U.S.
patents and two U.S. patent applications with Notices of Allowance and ten
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 August 2014.
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 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
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development of diagnostic products. Most of these organizations have financial,
manufacturing, marketing and human resources greater than those of the Company.
EMPLOYEES
As of December 31, 1998, 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.
ITEM 2. 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.
ITEM 3: LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the OTC Bulletin Board. 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>
FISCAL YEAR ENDED DECEMBER 31, 1998 High Low
--------- ---------
<S> <C> <C>
Fourth Quarter $ 0.72 $ 0.48
Third Quarter 0.76 0.57
Second Quarter 0.93 0.70
First Quarter 0.94 0.56
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1997 High Low
--------- ---------
<S> <C> <C>
Fourth Quarter $ 0.84 $ 0.47
Third Quarter 0.75 0.25
Second Quarter 0.72 0.39
First Quarter 1.03 0.59
</TABLE>
As of December 31, 1998, there were approximately 174 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 contemplate or anticipate
paying any dividends upon its Common Stock in the foreseeable future. It is
currently anticipated that earnings, if any, will be used to finance the
development and expansion of the Company's business.
The following is a summary of transactions by the Company during the
fiscal year ended December 31, 1998 involving sales of the Company's 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 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 $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 $32,000.
2. 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 ("BCC 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
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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 has recorded additional paid-in capital and deferred
financing expense of $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 $516,000.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Since its inception in 1985, the Company has devoted its principal
efforts toward research and development. The Company has an accumulated deficit
of $57 million as of December 31, 1998. 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, as well as for
therapeutic applications.
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. Additionally, Perkin-Elmer will purchase Epoch's proprietary
chemical intermediates. Through February 1999, Epoch received $2,300,000 under
the agreement.
RESULTS OF OPERATIONS
The following discussion of results of operations reflects the
Company's diagnostics division as discontinued operations.
Years Ended December 31, 1997 and 1998
Research contract revenue reflects revenue from U.S. government grants
and contracts and subcontracts.
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 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
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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 in 1998 is less than 1997 due to lower cash balances
available for investment.
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced recurring losses from operations and has a
total stockholders' deficit of $3,201,000 at December 31, 1998.
At December 31, 1998, the Company had cash and cash equivalents of
$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
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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 decreased by $827,000 from December 31, 1997 to December 31, 1998
due to normal expenditures on the Company's operations, offset by the receipt of
the $3,000,000 loan received from Bay City Capital which is due in 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. 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 1998. Of these expenses,
$391,000 remained in accrued liabilities at year end.
Further variances in accounts payable and other accrued liabilities in
1998 and 1997 are the result of normal business fluctuations.
PLAN OF OPERATIONS
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.
The Company is focused on the development of its products with the goal
of entering into corporate partnering arrangements to further commercialize the
technology. The Company's primary future needs for capital are for continued
research and development, as well as relocation expenses anticipated to be
incurred in a move to new facilities, if the 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 the Company's
research and development, competitive and technological advances, relocation
expenses and other factors. The Company anticipates operating with approximately
25 employees.
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 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
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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.
YEAR 2000 COMPLIANCE
Many existing information technology ("IT") systems, such as computer
systems and software products, as well as non-IT systems that include embedded
technology, were not designed to correctly process dates after December 31,
1999. The Company has assessed the impact of such "Year 2000" issues on its
internal IT and non-IT systems, as well as on its suppliers and service
providers. The Company has evaluated its IT systems and has determined that the
Company's business systems are not Year 2000 compliant. The Company has
developed a plan to replace these systems in a timely fashion at a cost of
approximately $30,000. The Company has also initiated discussions with its
significant suppliers and service providers regarding their plans to
investigate, identify and remediate their Year 2000 issues. Although the Company
anticipates cooperation in these efforts from most of the Company's significant
suppliers and service providers, the Company is also dependent on certain
utility companies, telecommunication service companies and other service
providers that are outside the Company's control. Therefore, it may be difficult
for the Company to obtain assurances of Year 2000 readiness from such third
parties. Although the Company believes that it will have identified all of the
Company's material Year 2000 issues in the course of its assessments, given the
pervasiveness of Year 2000 issues and the complex interrelationships among Year
2000 issues both internal and external to the Company, there can be no assurance
that the Company will be able to identify and accurately evaluate all such
issues.
If any suppliers or service providers fail to appropriately address
their Year 2000 issues, such failure could have a material adverse effect on the
Company's business, financial condition and results of operations. For example,
if Year 2000 problems are experienced by any of the Company's significant
suppliers or service providers and result in or contribute to delays or
interruptions in the delivery of products or services to the Company, such
delays or interruptions could have a material adverse effect on the Company's
business, financial condition and results of operations. Finally, disruption in
the economy generally resulting from Year 2000 issues could also materially
adversely affect the Company.
The Company's activities with respect to the Year 2000 preparation will
include the development of contingency plans in the event the Company has not
completed all of its remediation programs in a timely manner and in the event
that any third parties who provide goods or services essential to the Company's
business, fail to appropriately address their Year 2000 issues. The Company
expects to conclude the development of these contingency plans by mid 1999. Even
if these plans are completed on time and put in place, there can be no assurance
that such plans will be sufficient to address any third party failures or that
unresolved or undetected internal and external Year 2000 issues will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
12
<PAGE> 14
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company required by this item begin on
Page F-1 of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
13
<PAGE> 15
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company 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. 64 Director
Sanford S. Zweifach 43 President, Chief Financial Officer, 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
14
<PAGE> 16
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 LLysis.
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., 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.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Based upon its review of the copies of reporting forms furnished to the
Company, the Company believes that all filing requirements under Section 16(a)
of the Securities Exchange Act of 1934 applicable to its directors, officers and
any persons holding ten percent or more of the Company's Common Stock with
respect to the Company's fiscal year ended December 31, 1998, were satisfied.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning
compensation paid or accrued by the Company for services rendered during the
fiscal years ended December 31, 1998 and 1997, to the Company's Chief Executive
Officer, and the Company's two other most highly compensated executive officers:
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
---------------------------------------------------- Securities
Name and Other Annual Underlying
Principal Position Year Salary($)(3) Bonus($) Compensation($) Options(#) All Other
------------------ ---- ------------ -------- --------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Fred Craves 1998 $100,000 $ -- $ -- -- $ --
Chief Executive Officer 1997 100,000 -- -- -- --
Sanford S. Zweifach 1998 135,000 -- -- -- --
President and 1997 140,625 -- -- -- --
Chief Financial Officer
Rich B. Meyer, Jr. (1) 1998 119,083 -- -- -- 43,307
Vice President, Research 1997 145,008 2,789 -- 14,900 --
and Development
Robert Wydro (2) 1998 140,016 2,693 -- -- --
Vice President, Research 1997 140,016 2,693 -- 5,000 --
Management
</TABLE>
15
<PAGE> 17
(1) Dr. Meyer left the Company in October 1998. Upon his separation from the
Company, Dr. Meyer received accrued vacation pay of $43,307.
(2) Dr. Wydro left the Company in January 1999.
(3) 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
None of the Company's executive officers exercised options or
warrants during the fiscal year ended December 31, 1998.
CONSULTING AGREEMENTS
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, in conjunction with the BBC Fund
I, 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.
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.
16
<PAGE> 18
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.
ITEM 11. 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>
17
<PAGE> 19
* 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, Inc.
(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.
18
<PAGE> 20
(6) Includes 345,000 shares subject to warrants exercisable within 60 days.
Sanford Zweifach, President and CFO 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 left the Company in October 1998.
(8) Includes 81,457 shares subject to options and warrants exercisable within 60
days. Dr. Wydro left the Company in January 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.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 ("BCC 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.
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.
19
<PAGE> 21
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-KSB:
(a) Exhibits:
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.
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).
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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).
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.
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).
</TABLE>
21
<PAGE> 23
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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).
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).
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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).
10.20 Sublease between the Registrant as Tenant and Bion Diagnostic Sciences, Inc. for premises
located in Redmond, Washington, dated September 25, 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).
23.1 Consent of KPMG LLP.
25.0 Power of Attorney (included on the signature page).
27.0 Financial Data Schedules.
</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.
(b) Reports on Form 8-K:
None
23
<PAGE> 25
EPOCH PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Independent Auditors' Report...................................................... F-1
Balance Sheet as of December 31, 1998............................................. F-2
Statements of Operations for the years ended
December 31, 1997 and 1998................................................... F-3
Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1997 and 1998................................................... F-4
Statements of Cash Flows for the years ended
December 31, 1997 and 1998................................................... F-5
Notes to Financial Statements..................................................... F-6
</TABLE>
<PAGE> 26
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> 27
EPOCH PHARMACEUTICALS, INC.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
<S> <C>
Current assets:
Cash and cash equivalents ......................................... $ 658,363
Receivables ....................................................... 38,303
Prepaid expenses .................................................. 45,769
------------
Total current assets .......................................... 742,435
Equipment, net ......................................................... 173,831
Other assets ........................................................... 53,937
------------
Total assets .................................................. $ 970,203
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable .................................................. $ 215,813
Accrued interest on note payable to related party ................. 208,804
Accrued expenses for canceled relocation .......................... 391,042
Other accrued liabilities ......................................... 356,033
------------
Total current liabilities ..................................... 1,171,692
------------
Note payable to related party .......................................... 3,000,000
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;
14,824,227 shares issued and outstanding ...................... 148,242
Additional paid-in capital ........................................ 54,460,706
Deferred compensation expense ..................................... (159,826)
Deferred financing expense ........................................ (817,794)
Accumulated deficit ............................................... (56,832,817)
------------
Total stockholders' deficit ................................... (3,201,489)
------------
Commitments, contingency and subsequent event
Total liabilities and stockholders' deficit ............................ $ 970,203
============
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 28
EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Research contract revenue ..................... $ 187,737 $ 159,917
------------ ------------
Operating expenses:
Research and development ................. 2,682,269 2,759,476
General and administrative ............... 1,513,955 2,014,571
------------ ------------
Total operating expenses ............. 4,196,224 4,774,047
------------ ------------
Operating loss ....................... (4,008,487) (4,614,130)
Other income (expense):
Interest income .......................... 157,215 104,985
Interest and financing expense ........... (3,835) (727,156)
Other income ............................. 120,300 23,292
------------ ------------
Loss from continuing operations ...... (3,734,807) (5,213,009)
Discontinued operations -
gain on disposal of Diagnostics Division . 130,000 110,000
------------ ------------
Net loss ............................. $ (3,604,807) $ (5,103,009)
============ ============
Loss per share from continuing operations -
basic and diluted ........................ $ (0.25) $ (0.35)
Income per share from discontinued operations -
basic and diluted ........................ 0.01 0.01
------------ ------------
Net loss per share - basic and diluted $ (0.24) $ (0.34)
============ ============
Weighted average number of common
shares outstanding -
basic and diluted .................... 14,755,462 14,818,960
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 29
EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock
----------------------------- Additional
Shares Amount Paid-In Capital
---------- ----------- ---------------
<S> <C> <C> <C>
Balance at December 31, 1996 14,723,856 $ 147,239 52,892,549
Exercise of stock options 90,937 909 38,238
Amortization of deferred compensation
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
Issuance of warrants to a consultant 191,791
Amortization of deferred compensation
Amortization of deferred financing expense
Net loss
----------- ----------- ----------
Balance at December 31, 1998 14,824,227 $ 148,242 54,460,706
=========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Deferred Total
Deferred Financing Accumulated Stockholders
Compensation Expense Deficit Equity (Deficit)
------------ --------- ----------- ----------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 (39,029) -- (48,125,001) 4,875,758
Exercise of stock options 39,147
Amortization of deferred compensation 39,029 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 (1,333,361) --
Issuance of warrants to a consultant (191,791) --
Amortization of deferred compensation 31,965 31,965
Amortization of deferred financing expense 515,567 515,567
Net loss (5,103,009) (5,103,009)
-------- ---------- ----------- ----------
Balance at December 31, 1998 (159,826) (817,794) (56,832,817) (3,201,489)
======== ========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 30
EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ..................................................... $(3,604,807) $(5,103,009)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................................ 196,339 61,264
Amortization of deferred financing expense ................... -- 515,567
Amortization of deferred compensation expense ................ -- 31,965
Changes in operating assets and liabilities:
Receivable, prepaid expenses, and other assets ............. (17,271) 29,143
Accounts payable ........................................... 36,733 (21,158)
Accrued interest on note payable to related party .......... -- 208,804
Accrued expenses for canceled relocation ................... -- 391,042
Other accrued liabilities .................................. 35,023 129,485
----------- -----------
Net cash used in operating activities ........................ (3,353,983) (3,756,897)
----------- -----------
Cash used in investing activities -
acquisition of equipment ..................................... (78,851) (75,084)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable .................................. -- 3,000,000
Principal payments on notes payable .......................... (11,188) --
Exercise of stock options .................................... 39,147 4,861
----------- -----------
Net cash provided by financing activities .................... 27,959 3,004,861
----------- -----------
Net decrease in cash and cash equivalents ......................... (3,404,875) (827,120)
Cash and cash equivalents at beginning of year .................... 4,890,358 1,485,483
----------- -----------
Cash and cash equivalents at end of year .......................... $ 1,485,483 $ 658,363
=========== ===========
Supplemental disclosure of non-cash financing activities - warrants
issued in debt financing ..................................... $ -- $ 1,333,361
=========== ===========
Supplemental disclosure of cash flow information - cash
payments made during the year for interest ................... $ 3,836 $ 2,785
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 31
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.
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.
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
F-6
<PAGE> 32
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. 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.
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.
F-7
<PAGE> 33
(2) EQUIPMENT
Equipment consists of the following:
<TABLE>
<S> <C>
Machinery and equipment........... $ 1,373,876
Furniture and fixtures............ 214,301
-----------
$ 1,588,177
Less accumulated depreciation..... (1,414,346)
-----------
Equipment, net.................... $ 173,831
===========
</TABLE>
(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> 34
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
--------------------------------------------------- -------------------------------
RANGE OF NUMBER WEIGHTED-AVERAGE WEIGHTED NUMBER WEIGHTED-
EXERCISE OUTSTANDING AT REMAINING YEARS AVERAGE EXERCISABLE AT AVERAGE
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.
F-9
<PAGE> 35
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 "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.
F-10
<PAGE> 36
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-11
<PAGE> 37
(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-12
<PAGE> 38
(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-13
<PAGE> 39
(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. Additionally, Perkin-Elmer will purchase Epoch's proprietary
chemical intermediates. Through February 1999, Epoch received $2,300,000 under
the agreement.
(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-14
<PAGE> 40
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes Fred Craves
and/or Sanford Zweifach, as attorney-in-fact, to sign in his behalf and in each
capacity stated below, and to file, all amendments and/or supplements to this
Annual Report on Form 10-KSB.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: April 13, 1999 EPOCH PHARMACEUTICALS, INC.
(Registrant)
By: /s/ Sanford S. Zweifach
---------------------------------------
Sanford S. Zweifach
President/Chief Financial Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons of the registrant 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
- --------------------------------- Chief Executive Officer April 13, 1999
Fred Craves
/s/ Sanford S. Zweifach President/Chief Financial Officer (Chief
- --------------------------------- Accounting Officer), and Director April 13, 1999
Sanford S. Zweifach
/s/ Richard Dunning Director
- ---------------------------------
Richard Dunning April 13, 1999
/s/ Kenneth L. Melmon Director
- ---------------------------------
Kenneth L. Melmon, M.D. April 13, 1999
</TABLE>
F-15
<PAGE> 41
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.
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).
</TABLE>
<PAGE> 42
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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).
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.
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).
</TABLE>
<PAGE> 43
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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).
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).
</TABLE>
<PAGE> 44
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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).
10.20 Sublease between the Registrant as Tenant and Bion Diagnostic Sciences, Inc. for premises
located in Redmond, Washington, dated September 25, 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).
23.1 Consent of KPMG LLP.
25.0 Power of Attorney (included on the signature page).
27.0 Financial Data Schedules.
</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 10.10
-----------------------------------------------------
WARRANT AGREEMENT
BETWEEN
EPOCH PHARMACEUTICALS, INC.
AND
AMERICAN STOCK TRANSFER & TRUST COMPANY
DATED AS OF APRIL 29, 1997
----------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
ARTICLE I
DISTRIBUTION OF WARRANT CERTIFICATES
1.1 Appointment of Warrant Agent.................................................1
1.2 Form of Warrant Certificates.................................................1
1.3 Execution of Warrant Certificates............................................2
1.4 Issuance and Distribution of Warrant Certificates............................2
ARTICLE II
WARRANT EXERCISE PRICE AND EXERCISE OF WARRANTS
2.1 Exercise Price...............................................................2
2.2 Registration of Common Stock and Exercisability of Exchange Warrants.........2
2.3 Procedure for Exercise of Exchange Warrants..................................3
2.4 Issuance of Warrant Shares...................................................3
2.5 Certificates for Unexercised Exchange Warrants...............................3
2.6 Reservation of Shares........................................................4
2.7 Disposition of Proceeds......................................................4
ARTICLE III
CALL OF WARRANTS
3.1 Call Price and Trigger Price.................................................4
3.2 Payment of Call Price........................................................4
ARTICLE IV
ADJUSTMENTS AND NOTICE PROVISIONS
4.1 Adjustment of Exercise Price.................................................4
4.2 Current Market Price.........................................................5
4.3 No Adjustments to Exercise Price.............................................5
4.4 Deferral of Adjustments to Exercise Price....................................5
4.5 Adjustment to Number of Shares...............................................6
4.6 Reorganizations..............................................................6
4.7 Reclassifications............................................................7
4.8 Adjustment of Call Trigger Price.............................................7
4.9 Verification of Computations.................................................7
4.10 Notice of Certain Actions....................................................7
4.11 Notice of Call...............................................................8
4.12 Notice of Adjustments........................................................8
4.13 Warrant Certificate Amendments...............................................8
4.14 Fractional Shares............................................................8
ARTICLE V
OTHER PROVISIONS RELATING TO RIGHTS OF
REGISTERED HOLDERS OF WARRANT CERTIFICATES
5.1 Rights of Warrant Holders....................................................9
5.2 Lost, Stolen, Mutilated or Destroyed Warrant Certificates....................9
</TABLE>
i
<PAGE> 3
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
ARTICLE VI
SPLIT UP, COMBINATION, EXCHANGE, TRANSFER
AND CANCELLATION OF WARRANT CERTIFICATES
6.1 Split Up, Combination, Exchange and Transfer of Warrant Certificates.........9
6.2 Cancellation of Warrant Certificates........................................10
6.3 Agreement of Warrant Certificate Holders....................................10
ARTICLE VII
PROVISIONS CONCERNING THE WARRANT
AGENT AND OTHER MATTERS
7.1 Payment of Taxes and Charges................................................11
7.2 Resignation or Removal of Warrant Agent.....................................11
7.3 Notice of Appointment.......................................................11
7.4 Merger of Warrant Agent.....................................................12
7.5 Company Responsibilities....................................................12
7.6 Certification for the Benefit of Warrant Agent..............................12
7.7 Books and Records...........................................................12
7.8 Liability of Warrant Agent..................................................12
7.9 Use of Attorneys, Agents and Employees......................................13
7.10 Indemnification.............................................................13
7.11 Acceptance of Agency........................................................13
7.12 Changes to Agreement........................................................13
7.13 Assignment..................................................................13
7.14 Successor to Company........................................................13
7.15 Notices.....................................................................14
7.16 Defects in Notice...........................................................14
7.17 Governing Law...............................................................14
7.18 Standing....................................................................14
7.19 Headings....................................................................14
7.20 Counterparts................................................................15
7.21 Conflict of Interest........................................................15
7.22 Availability of the Agreement...............................................15
</TABLE>
ii
<PAGE> 4
WARRANT AGREEMENT
WARRANT AGREEMENT dated as of April 29, 1997, between EPOCH
PHARMACEUTICALS, INC., a Delaware corporation (the "Company"), and AMERICAN
STOCK TRANSFER & TRUST COMPANY, a corporation organized under the banking laws
of the State of New York (the "Warrant Agent").
W I T N E S S E T H:
WHEREAS, the Company has made a private placement (the "Offering") of
Redeemable Common Stock Purchase Warrants (the "Exchange Warrants") to exchange
for every two Redeemable Common Stock Purchase Warrants of the Company, which
were issued by the Company in its initial public offering on September 29, 1993
(the "Public Warrants"), one new Exchange Warrant to purchase one share of the
Company's Common Stock; and
WHEREAS, the Company proposes to issue certificates evidencing the
Exchange Warrants (such Warrant certificates issued pursuant to this Agreement
being hereinafter called the "Warrant Certificates"); and
WHEREAS, the Company desires the Warrant Agent, and the Warrant Agent
agrees, to act on behalf of the Company in connection with the issuance,
transfer, exchange, replacement, redemption and surrender of the Warrant
Certificates; and
WHEREAS, the Company and the Warrant Agent desire to set forth in this
Warrant Agreement, among other things, the form and provisions of the Warrant
Certificates and the terms and conditions under which they may be issued,
transferred, exchanged, replaced, redeemed and surrendered in connection with
the exercise and redemption of the Warrants;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, the parties hereto agree as follows:
ARTICLE I
DISTRIBUTION OF WARRANT CERTIFICATES
1.1 Appointment of Warrant Agent. The Company hereby appoints the
Warrant Agent to act on behalf of the Company in accordance with the
instructions hereinafter set forth in this Agreement, and the Warrant Agent
hereby accepts such appointment.
1.2 Form of Warrant Certificates. The Warrant Certificates for the
Exchange Warrants shall be issued in registered form only and, together with the
purchase and assignment forms to be printed on the reverse thereof, shall be
substantially in the form of Exhibit A and Exhibit B attached hereto,
respectively, and, in addition, may have such letters, numbers or other marks of
identification or designation and such legends, summaries or endorsements
stamped, printed, lithographed or engraved thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this Agreement or
as, in any particular case, may be required, in the opinion of counsel
<PAGE> 5
for the Company, to comply with any law or with any rule or regulation of any
regulatory authority or agency or to conform to customary usage.
1.3 Execution of Warrant Certificates. The Warrant Certificates shall
be executed on behalf of the Company by its Chairman of the Board, Chief
Executive Officer or President or any Vice President, and by its Chief Financial
Officer or Treasurer or any Assistant Treasurer, or Secretary or any Assistant
Secretary, either manually or by facsimile signature printed thereon. The
Warrant Certificate shall be manually countersigned and dated the date of
countersignature by the Warrant Agent and shall not be valid for any purpose
unless so countersigned and dated. In case any authorized officer of the Company
who shall have signed any of the Warrant Certificates shall cease to be such
officer of the Company either before or after delivery thereof by the Company to
the Warrant Agent, the signature of such person on such Warrant Certificates,
nevertheless, shall be valid and such Warrant Certificates may be countersigned
by the Warrant Agent and issued and delivered to those persons entitled to
receive the Exchange Warrants represented thereby with the same force and effect
as though the person who signed such Warrant Certificates had not ceased to be
such officer of the Company.
1.4 Issuance and Distribution of Warrant Certificates. Upon completion
of the Offering, the Company shall deliver to the Warrant Agent an adequate
supply of Warrant Certificates for the Exchange Warrants executed on behalf of
the Company as described in Section 1.3 hereof. Upon receipt of an order from
the Company, the Warrant Agent shall within three business days complete and
countersign Warrant Certificates representing the total number of Exchange
Warrants to be issued hereunder and shall deliver such Warrant Certificates
pursuant to written instructions of the Company.
ARTICLE II
WARRANT EXERCISE PRICE AND EXERCISE OF WARRANTS
2.1 Exercise Price. Each Warrant Certificate for the Exchange Warrants
shall, when signed by the Chairman, Chief Executive Officer or President or any
Vice President, and by the Chief Financial Officer or Treasurer or any Assistant
Treasurer, or Secretary or any Assistant Secretary, of the Company and
countersigned by the Warrant Agent, entitle the registered holder thereof,
subject to the provisions of Article III hereof, to purchase from the Company
one share of Common Stock for each Warrant evidenced thereby, at the purchase
Price of $2.50 per share (the "Initial Exercise Price"), or such adjusted number
of shares at such adjusted purchase price as may be established from time to
time pursuant to the provisions of Article IV hereof, payable in full at the
time of exercise of the Exchange Warrant. Except as the context otherwise
requires, the term "Exercise Price" as used in this Agreement shall mean the
purchase price of one share of Common Stock upon the exercise of an Exchange
Warrant, reflecting all appropriate adjustments made in accordance with the
provisions of Article IV hereof and Section 7.12 hereof.
2.2 Registration of Common Stock and Exercisability of Exchange
Warrants. Each Exchange Warrant may be exercised at any time until 5:00 P.M.,
New York City time, on June 20, 2001. The term "Exercise Deadline" as used in
this Agreement shall mean the latest time and date at which the Exchange
Warrants may be exercised. The Company shall use its best efforts to maintain
the registration or qualification in effect of the Warrant Shares and to keep
available for delivery
-2-
<PAGE> 6
upon the exercise of the Exchange Warrants a prospectus that meets the
requirements of Section 10 of the Securities Act, until the earlier of the date
by which all the Exchange Warrants are exercised or the Exercise Deadline;
provided, however, that the Company shall have no obligation to maintain the
effectiveness of such registration or qualification or to keep available a
prospectus, as aforesaid, in the event that, by amendment to the Securities Act
or otherwise, such registration or qualification or the delivery of such
prospectus is not required at the time said Common Stock is to be issued; and
provided further, that in the event, by amendment to the Securities Act or
otherwise, some other or different requirement shall be imposed by act of the
Congress of the United States which shall relate to the issuance of Common Stock
upon exercise of the Exchange Warrants, the company shall use its best efforts
to comply with such requirements.
2.3 Procedure for Exercise of Exchange Warrants. During the period
specified in and subject to the provisions of Section 2.2 hereof, the Exchange
Warrants may be exercised by surrendering the Warrant Certificates representing
such Exchange Warrants to the Warrant Agent at its principal office (the
"Principal Office"), which is presently located at 40 Wall Street, New York, New
York 10005, with the election to purchase form set forth on the Warrant
Certificate duly completed and executed, with signatures guaranteed by a member
firm of a national securities exchange, a commercial bank or trust company
located in the United States, a member of the National Association of Securities
Dealers, Inc. ("NASD") or other eligible guarantor institution which is a
participant in a signature guarantee program (as such terms are defined in Reg.
240. 17Ad-15 under the Securities Exchange Act of 1934, as amended) acceptable
to the Warrant Agent ("Signatures Guaranteed"), accompanied by payment in full
of the Exercise Price as provided in Section 2.1 in effect at the time of such
exercise, together with such taxes as are specified in Section 7.1 hereof, for
each share of Common Stock with respect to which such Exchange Warrants are
being exercised. Such Exercise Price and taxes shall be paid in full by
certified check or money order, payable in United States currency, to the
Warrant Agent for the account of the Company. The date on which the Exchange
Warrants are exercised in accordance with this Section 2.3 is sometimes referred
to herein as the Date of Exercise of such Exchange Warrants.
2.4 Issuance of Warrant Shares. As soon as practicable after the Date
of Exercise of any Exchange Warrants, the Company shall issue, or cause the
transfer agent for the Common Stock, if any, to issue a certificate or
certificates for the number of full shares of Common Stock to which such holder
is entitled, registered in accordance with the instructions set forth in the
election to purchase. All Warrant Shares shall be validly authorized and issued,
fully paid and nonassessable and free from all taxes, liens and charges created
by the Company in respect of the issue thereof, and shall be previously unissued
shares. Each person in whose name any such certificate for Warrant Shares is
issued shall for all purposes be deemed to have become the holder of record of
the Warrant Shares represented thereby on the Date of Exercise of the Exchange
Warrants resulting in the issuance of such shares, irrespective of the date of
issuance or delivery of such certificate for the Warrant Shares.
2.5 Certificates for Unexercised Exchange Warrants. In the event that
less than all of the Exchange Warrants represented by a Warrant Certificate are
exercised, the Warrant Agent shall execute and mail, by first-class mail, within
30 days of the Date of Exercise, to the registered holder of such Warrant
Certificate, or such other person as shall be designated in the election to
purchase, a new Warrant Certificate representing the number of full Exchange
Warrants not exercised. In no event shall a fraction of an Exchange Warrant be
exercised, and the Warrant Agent shall distribute
-3-
<PAGE> 7
no Warrant Certificates representing fractions of Exchange Warrants under this
or any other section of this Agreement. Final fractions of shares shall be
treated as provided in Section 4.14.
2.6 Reservation of Shares. The Company shall at all times reserve and
keep available for issuance upon the exercise of Exchange Warrants a number of
its authorized but unissued shares of Common Stock that will be sufficient to
permit the exercise in full of all outstanding Exchange Warrants.
2.7 Disposition of Proceeds. The Warrant Agent shall account at least
monthly (or more frequently upon the request of the Company, provided that in no
event shall the Warrant Agent be required to account more frequently than
weekly) to the Company with respect to Exchange Warrants exercised and
concurrently deliver to the Company all funds.
ARTICLE III
CALL OF WARRANTS
3.1 Call Price and Trigger Price. The Company may, at its option, upon
30 days' notice, call for redemption all or any portion of the then outstanding
Warrants at a call price of $.05 per warrant (such price is hereinafter referred
to as the "Call Price"), at any time after the last sale price of the Company's
Common Stock, as determined pursuant to Section 4.2, has been at least 150% of
the then effective Exercise Price of the Warrants, as adjusted pursuant to
Section 4.8 (the "Call Trigger Price") but not giving effect to any decrease of
such Exercise Price as permitted by Section 7.12 hereof, for 20 consecutive
business days ending within 15 days of the date of the notice of such call shall
have been given to the Warrant Agent by the Company pursuant to Section 4.11,
and provided further that the Company has complied and continues to be in
compliance with the provisions of Section 2.2 hereof. In the event the Company
exercises its right to redeem the Warrants, such Warrants will be exercisable
until the close of business on the date fixed for redemption in such notice. If
any Warrant called for redemption is not exercised by such time, such Warrant
shall cease to be exercisable and the holder thereof shall be entitled only to
the redemption price.
3.2 Payment of Call Price. On or prior to the opening of business on
the Call Date (as defined in Section 4.11), the Company will deposit with the
Warrant Agent funds in form satisfactory to the Warrant Agent sufficient to
purchase all the Exchange Warrants which are to be called. Payment of the Call
Price will be made by the Warrant Agent upon presentation and surrender of the
Warrant Certificates representing such Exchange Warrants to the Warrant Agent at
its Principal Office.
ARTICLE IV
ADJUSTMENTS AND NOTICE PROVISIONS
4.1 Adjustment of Exercise Price. Subject to the provisions of this
Article IV, the Exercise Price in effect from time to time shall be subject to
adjustment, as follows:
(a) In case the Company shall at any time after the date
hereof (i) declare a dividend on the outstanding Common Stock payable in shares
of its capital stock, (ii) subdivide the
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<PAGE> 8
outstanding Common Stock, (iii) combine the outstanding Common Stock into a
smaller number of shares, or (iv) issue any shares of its capital stock by
reclassification of the Common Stock (including any such reclassification in
connection with a consolidation or merger in which the Company is the continuing
corporation), then, in each case, the Exercise Price in effect, and the number
of shares of Common Stock issuable upon exercise of the Exchange Warrants
outstanding, at the time of the record date for such dividend or of the
effective date of such subdivision, combination or reclassification, shall be
proportionately adjusted so that the holders of the Exchange Warrants after such
time shall be entitled to receive the aggregate number and kind of shares which,
if such Exchange Warrants had been exercised immediately prior to such time,
such holders would have owned upon such exercise and been entitled to receive by
virtue of such dividend, subdivision, combination or reclassification. Such
adjustment shall be made successively whenever any event listed above shall
occur.
(b) In case the Company shall distribute to all holders of
Common Stock (including any such distribution made to the shareholders of the
Company in connection with a consolidation or merger in which the Company is the
continuing corporation) evidences of its indebtedness, cash or assets (other
than distributions and dividends payable in shares of Common Stock), or rights,
options or warrants to subscribe for or purchase Common Stock, or securities
convertible into or exchangeable for shares of Common Stock, then, in each case,
the Exercise Price shall be adjusted by multiplying the Exercise Price in effect
immediately prior to the record date for the determination of shareholders
entitled to receive such distribution by a fraction, the numerator of which
shall be the Current Market Price (as determined pursuant to Section 4.2 hereof)
per share of Common Stock on such record date, less the fair market value (as
determined in good faith by the board of directors of the Company, whose
determination shall be conclusive absent manifest error) of the portion of the
evidences of indebtedness or assets so to be distributed, or of such rights,
options, or warrants or convertible or exchangeable securities, or the amount of
such cash, applicable to one share, and the denominator of which shall be such
Current Market Price per share of Common Stock. Such adjustment shall become
effective at the close of business on such record date.
4.2 Current Market Price. For the purpose of any computation under
Section 3.1 and this Article IV, the Current Market Price per share of Common
Stock on any date shall be deemed to be the average of the daily closing prices
for the 20 consecutive trading days immediately preceding the date in question.
For the purpose of any computation hereunder or under Section 3.1, the closing
price for each day shall be the last reported sales price regular way or, in
case no such reported sale takes place on such day, the closing bid price
regular way, in either case on the principal national securities exchange
(including, for purposes hereof, the NASDAQ National Market System) on which the
Common Stock is listed or admitted to trading or, if the Common Stock is not
listed or admitted to trading on any national securities exchange, the highest
reported bid price for the Common Stock as furnished by the NASD through NASDAQ
or a similar organization if NASDAQ is no longer reporting such information. If
on any such date the Common Stock is not listed or admitted to trading on any
national securities exchange and is not quoted by NASDAQ or any similar
organization, the fair value of a share of Common Stock on such date as
determined in good faith by the board of directors of the Company, whose
determination shall be conclusive absent manifest error, shall be used.
4.3 No Adjustments to Exercise Price. No adjustment in the Exercise
Price shall be required if such adjustment is less than $.05; provided, however,
that any adjustments which by
-5-
<PAGE> 9
reason of this Article IV are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under this
Article IV shall be made to the nearest cent or to the nearest one hundredth of
a share, as the case may be.
4.4 Deferral of Adjustments to Exercise Price. In any case in which
this Article IV shall require that an adjustment in the Exercise Price be made
effective as of a record date for a specified event, the Company may elect to
defer, until the occurrence of such event, issuing to the holders of the
Exchange Warrants, if any holder has exercised an Exchange Warrant after such
record date, the shares of Common Stock, if any, issuable upon such exercise
over and above the shares of Common Stock, if any, issuable upon such exercise
on the basis of the Exercise Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to such exercising holder a due bill or
other appropriate instrument evidencing such holder's right to receive such
additional shares upon the occurrence of the event requiring such adjustment.
4.5 Adjustment to Number of Shares. Upon each adjustment of the
Exercise Price as a result of the calculations made in Section 4.1(b) hereof,
the Exchange Warrants shall thereafter evidence the right to purchase, at the
adjusted Exercise Price, that number of shares (calculated to the nearest
hundredth) obtained by dividing (A) the product obtained by multiplying the
number of shares purchasable upon exercise of the Exchange Warrants prior to
adjustment of the number of shares by the Exercise Price in effect prior to
adjustment of the Exercise Price by (B) the Exercise Price in effect after such
adjustment of the Exercise Price.
4.6 Reorganizations. In case of any capital reorganization, other than
in the cases referred to in Section 4.1 hereof, or the consolidation or merger
of the Company with or into another corporation (other than a merger or
consolidation in which the Company is the continuing corporation and which does
not result in any reclassification of the outstanding shares of Common Stock or
the conversion of such outstanding shares of Common Stock into shares of other
stock or other securities or property), or in the case of any sale, lease or
conveyance to another corporation of the property and assets of any nature of
the Company as an entirety or substantially as an entirety (such actions being
hereinafter collectively referred to as "Reorganizations"), there shall
thereafter be deliverable upon exercise of any Exchange Warrant (in lieu of the
number of shares of Common Stock theretofore deliverable) the number of shares
of stock or other securities or property to which a holder of the number of
shares of Common Stock which would otherwise have been deliverable upon the
exercise of such Exchange Warrant would have been entitled upon such
Reorganization if such Exchange Warrant had been exercised in full immediately
prior to such Reorganization. In case of any Reorganization, appropriate
adjustment, as determined in good faith by the Board of Directors of the
Company, shall be made in the application of the provisions herein set forth
with respect to the rights and interests of Warrant holders so that the
provisions set forth herein shall thereafter be applicable, as nearly as
possible, in relation to any shares or other property thereafter deliverable
upon exercise of Exchange Warrants. Any such adjustment shall be made by and set
forth in a supplemental agreement between the Company, or any successor thereto,
and the Warrant Agent and shall for all purposes hereof conclusively be deemed
to be an appropriate adjustment. The Company shall not effect any such
Reorganization unless upon or prior to the consummation thereof the successor
corporation, or if the Company shall be the surviving corporation in any such
Reorganization and is not the issuer of the shares of stock or other securities
or property to be delivered to holders of shares of the Common Stock outstanding
at the effective time thereof, then such issuer, shall assume by written
instrument the obligation to deliver to the registered holder of
-6-
<PAGE> 10
any Warrant Certificate such shares of stock, securities, cash or other property
as such holder shall be entitled to purchase in accordance with the foregoing
provisions. In the event of sale, lease or conveyance or other transfer of all
or substantially all of the assets of the Company as part of a plan for
liquidation of the Company, all rights to exercise any Exchange Warrant shall
terminate 30 days after the Company gives written notice to each registered
holder of a Warrant Certificate that such sale or conveyance or other transfer
has been consummated.
4.7 Reclassifications. In case of any reclassification or change of the
shares of Common Stock issuable upon exercise of the Exchange Warrants (other
than a change in par value or from no par value to a specified par value, or as
a result of a subdivision or combination, but including any change in the shares
into two or more classes or series of shares), or in case of any consolidation
or merger of another corporation into the Company in which the Company is the
continuing corporation and in which there is a reclassification or change
(including a change to the right to receive cash or other property) of the
shares of Common Stock (other than a change in par value, or from no par value
to a specified par value, or as a result of a subdivision or combination, but
including any change in the shares into two or more classes or series of
shares), the holders of the Exchange Warrants shall have the right thereafter to
receive upon exercise of the Exchange Warrants solely the kind and amount of
shares of stock and other securities, property, cash, or any combination thereof
receivable upon such reclassification, change, consolidation or merger by a
holder of the number of shares of Common Stock for which the Exchange Warrants
might have been exercised immediately prior to such reclassification, change,
consolidation or merger. Thereafter, appropriate provision shall be made for
adjustments which shall be as nearly equivalent as practicable to the
adjustments in Article IV. The above provisions of this Section 4.7 shall
similarly apply to successive reclassifications and changes of shares of Common
Stock.
4.8 Adjustment of Call Trigger Price. Upon each adjustment of the
Exercise Price of the Exchange Warrants pursuant to Article IV hereof, the Call
Trigger Price shall be adjusted by multiplying such price as in effect prior to
such adjustment by a fraction, the numerator of which shall be the Exercise
Price subsequent to adjustment and the denominator of which shall be the
Exercise Price prior to such adjustment. All calculations under this Section 4.8
shall be made to the nearest cent.
4.9 Verification of Computations. Whenever the exercise price is
adjusted as provided in this Article IV, the Company will promptly obtain a
certificate of its Chief Financial Officer setting forth the exercise price as
so adjusted and a brief statement of the facts accounting for such adjustment,
and will make available a brief summary thereof to the holders of the Warrant
Certificates, at their addresses listed on the register maintained for that
purpose by the Warrant Agent (which summary may be included in any notice of
adjustment required by Section 4.12 hereof).
4.10 Notice of Certain Actions. In case at any time the Company shall
propose:
(a) to pay any dividend or make any distribution on shares of
Common Stock in shares of Common Stock or make any other distribution
(other than regularly scheduled cash dividends which are not in a
greater amount per share than the most recent such cash dividend) to
all holders of Common Stock; or
-7-
<PAGE> 11
(b) to issue any rights, warrants or other securities to all
holders of Common Stock entitling them to purchase any additional
shares of Common Stock or any other rights, warrants or other
securities; or
(c) to effect any consolidation, merger, sale, lease, or
conveyance of property, described in Section 4.6, or any
reclassification or change of outstanding shares of Common Stock,
described in Section 4.7; or
(d) to effect any liquidation, dissolution or winding-up of
the Company; or
(e) to take any other action which would cause an adjustment
to the Exercise Price;
then, in each such case, the Company shall cause notice of such proposed action
to be mailed to the Warrant Agent. Such notice shall specify the date on which
the books of the Company shall close, or a record shall be taken, for
determining holders of Common Stock entitled to receive such stock dividend or
other distribution or such rights or warrants, or the date on which such
reclassification, change, consolidation, merger, sale, lease, other disposition,
liquidation, dissolution, winding up or exchange or other action shall take
place or commence, as the case may be, and the date as of which it is expected
that holders of record of Common Stock shall be entitled to receive securities
or other property deliverable upon such action, if any such date has been fixed.
The Company shall cause copies of such notice to be mailed to each registered
holder of a Warrant Certificate. Such notice shall be mailed, in the case of any
action covered by Subsection 4.10(a) or 4.10(b) above, at least 15 days prior to
the record date for determining holders of the Common Stock for purposes of
receiving such payment or offer; in the case of any action covered by Subsection
4.10(c) or 4.10(d) above, at least 15 days prior to the earlier of the date upon
which such action is to take place or any record date to determine holders of
Common Stock entitled to receive such securities or other property; and in the
case of any action covered by Subsection 4.10(e) above, no more than 15 days
after such action.
4.11 Notice of Call. Notice of any call for redemption shall be given
to the Warrant Agent by the Company upon not less than 30 days nor more than 60
days prior to the date established for such call (the "Call Date") and the
Company shall cause the Warrant Agent to mail such notice to all registered
holders of Warrant Certificates to be called promptly after the Company shall
have given such notice to the Warrant Agent. Each such notice of call will
specify the Call Date and the Call Price. The notice will state that payment of
the Call Price will be made by the Warrant Agent upon presentation and surrender
of the Warrant Certificates representing such Exchange Warrants to the Warrant
Agent at its Principal Office, and will also state that the right to exercise
the Exchange Warrants will terminate at 5:00 P.M., New York City time, on the
business day immediately preceding the Call Date. The Company will also make
prompt public announcement of such redemption by news release and by notice to
the NASD or any national securities exchange on which the Warrants are listed
for trading.
4.12 Notice of Adjustments. Whenever any adjustment is made pursuant to
this Article IV, the Company shall cause written notice of such adjustment to be
sent by registered mail, postage prepaid to the Warrant Agent within 15 days
thereafter, such notice to include in reasonable detail (i) the events
precipitating the adjustment, (ii) the computation of any adjustments, and (iii)
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<PAGE> 12
the Exercise Price, the number of shares or the securities or other property
purchasable upon exercise of each Exchange Warrant and the Call Trigger Price
after giving effect to such adjustment. The Company shall cause the Warrant
Agent, within 15 days after receipt of such notice from the Company, to mail a
similar notice to be mailed to each registered holder of a Warrant Certificate.
4.13 Warrant Certificate Amendments. Irrespective of any adjustments
pursuant to this Article IV, Warrant Certificates theretofore or thereafter
issued need not be amended or replaced but certificates thereafter issued shall
bear an appropriate legend or other notice of any adjustments.
4.14 Fractional Shares. The Company shall not be required upon the
exercise of any Exchange Warrant to issue fractional shares of Common Stock
which may result from adjustments in accordance with this Article IV to the
Exercise Price or number of shares of Common Stock purchasable under each
Exchange Warrant. If more than one Exchange Warrant is exercised at one time by
the same registered holder, the number of full shares of Common Stock which
shall be deliverable shall be computed based on the number of shares deliverable
in exchange for the aggregate number of Exchange Warrants exercised. With
respect to any final fraction of a share called for upon the exercise of any
Exchange Warrant or Exchange Warrants, the Company shall pay a cash adjustment
in respect of such final fraction in an amount equal to the same fraction of the
Current Market Price of a share of Common Stock calculated in accordance with
Section 4.2.
ARTICLE V
OTHER PROVISIONS RELATING TO
RIGHTS OF REGISTERED HOLDERS
OF WARRANT CERTIFICATES
5.1 Rights of Warrant Holders. No Warrant Certificate shall entitle the
registered holder thereof to any of the rights of a shareholder of the Company,
including, without limitation, the right to vote, to receive dividends and other
distributions, or to receive any notice of, or to attend, meetings of
shareholders or any other proceedings of the Company.
5.2 Lost, Stolen, Mutilated or Destroyed Warrant Certificates. If any
Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company
shall direct the Warrant Agent to execute and deliver, in exchange and
substitution for and upon cancellation of a mutilated Warrant Certificate, or in
lieu of or in substitution for a lost, stolen or destroyed Warrant Certificate,
a new Warrant Certificate for the number of Exchange Warrants represented by the
Warrant Certificate so mutilated, lost, stolen or destroyed but only upon
receipt of evidence of such loss, theft or destruction of such Warrant
Certificate, and of the ownership thereof, and indemnity, if requested, all
satisfactory to the Company and the Warrant Agent. Applicants for such
substitute Warrant Certificates shall also comply with such other reasonable
regulations and pay such other reasonable charges incidental thereto as the
Company or Warrant Agent may prescribe. Any such new Warrant Certificate shall
constitute an original contractual obligation of the Company, whether or not the
allegedly lost, stolen, mutilated or destroyed Warrant Certificate shall be at
any time enforceable by anyone.
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<PAGE> 13
ARTICLE VI
SPLIT UP, COMBINATION, EXCHANGE, TRANSFER
AND CANCELLATION OF WARRANT CERTIFICATES
6.1 Split Up, Combination, Exchange and Transfer of Warrant
Certificates. Prior to the Exercise Deadline, Warrant Certificates, subject to
the provisions of Section 6.2, may be split up, combined or exchanged for other
Warrant Certificates representing a like aggregate number of Exchange Warrants
or may be transferred in whole or in part. Any holder desiring to split up,
combine or exchange a Warrant Certificate or Warrant Certificates shall make
such request in writing delivered to the Warrant Agent at its Principal Office
and shall surrender the Warrant Certificate or Warrant Certificates so to be
split up, combined or exchanged at said office. Subject to any applicable laws,
rules or regulations restricting transferability, any restriction on
transferability that may appear on a Warrant Certificate in accordance with the
terms hereof, or any "stop-transfer" instructions the Company may give to the
Warrant Agent to implement any such restrictions (which instructions the Company
is expressly authorized to give), transfer of outstanding Warrant Certificates
may be effected by the Warrant Agent from time to time upon the books of the
Company to be maintained by the Warrant Agent for that purpose, upon a surrender
of the Warrant Certificate to the Warrant Agent at its Principal Office, with
the assignment form set forth in the Warrant Certificate duly executed and with
Signatures Guaranteed. Upon any such surrender for split up, combination,
exchange or transfer, the Warrant Agent shall execute and deliver to the person
entitled thereto a Warrant Certificate or Warrant Certificates, as the case may
be, as so requested. The Warrant Agent may require the holder to pay a sum
sufficient to cover any tax or governmental charge that may be imposed in
connection with any split up, combination, exchange or transfer of Warrant
Certificates prior to the issuance of any new Warrant Certificate.
6.2 Cancellation of Warrant Certificates. Any Warrant Certificate
surrendered upon the exercise of Exchange Warrants or for split up, combination,
exchange or transfer, or purchased or otherwise acquired by the Company, shall
be cancelled and shall not be reissued by the Company; and, except as provided
(i) in Section 2.5, in case of the exercise of less than all of the Exchange
Warrants evidenced by a Warrant Certificate, or (ii) in Section 6.1, in case of
a split up, combination, exchange or transfer of the Exchange Warrants evidenced
by a Warrant Certificate, no Warrant Certificate shall be issued hereunder in
lieu of such cancelled Warrant Certificate. Any Warrant Certificate so cancelled
shall be destroyed by the Warrant Agent unless otherwise directed by the
Company.
6.3 Agreement of Warrant Certificate Holders. Every holder of a Warrant
Certificate by accepting the same consents and agrees with the Company and the
Warrant Agent and with every other holder of a Warrant Certificate that:
(a) transfer of the Warrant Certificates shall be registered
on the books of the Company maintained for that purpose by the Warrant Agent
only if surrendered at the Principal Office of the Warrant Agent, duly endorsed
or accompanied by a proper instrument of transfer, with Signatures Guaranteed;
and
(b) prior to due presentment for registration of transfer, the
Company and the Warrant Agent may deem and treat the person in whose name the
Warrant Certificate is registered as
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<PAGE> 14
the absolute owner thereof and of the Exchange Warrants evidenced thereby
(notwithstanding any notations of ownership or writing on the Warrant
Certificates made by anyone other than the Company or the Warrant Agent) for all
purposes whatsoever, and neither the Company nor the Warrant Agent shall be
affected by any notice to the contrary.
ARTICLE VII
PROVISIONS CONCERNING THE WARRANT AGENT
AND OTHER MATTERS
7.1 Payment of Taxes and Charges. The Company will from time to time
promptly pay to the Warrant Agent, or make provisions satisfactory to the
Warrant Agent for the payment of, all taxes and charges that may be imposed by
the United States or any state upon the Company or the Warrant Agent in
connection with the issuance or delivery of shares of Common Stock upon the
exercise of any Exchange Warrants, but any transfer taxes in connection with the
issuance of Warrant Certificates or certificates for shares of Common Stock in
any name other than that of the registered holder of the Warrant Certificate
surrendered shall be paid by such registered holder; and, in such case, the
Company shall not be required to issue or deliver any Warrant Certificate or
certificate for shares of Common Stock until such taxes shall have been paid or
it has been established to the Company's satisfaction that no tax is due.
7.2 Resignation or Removal of Warrant Agent. The Warrant Agent may
resign its duties and be discharged from all further duties and liabilities
hereunder after giving 30 days' notice in writing to the Company, except that
such shorter notice may be given as the Company shall, in writing, accept as
sufficient. Upon comparable notice to the Warrant Agent, the Company may remove
the Warrant Agent; provided, however, that in such event the Company shall
appoint a new Warrant Agent, as hereinafter provided, and the removal of the
Warrant Agent shall not be effective until a new Warrant Agent has been
appointed and has accepted such appointment. If the office of Warrant Agent
becomes vacant by resignation or incapacity to act or otherwise, the Company
shall appoint in writing a new Warrant Agent. If the Company shall fail to make
such appointment within a period of 30 days after it has been notified in
writing of such resignation or incapacity by the resigning or incapacitated
Warrant Agent or by the registered holder of any Warrant Certificate, then the
registered holder of any Warrant Certificate may apply to any court of competent
jurisdiction for the appointment of a new Warrant Agent. Any successor Warrant
Agent, whether appointed by the Company or any such court, shall be a registered
transfer agent, bank or trust company in good standing and incorporated under
the United States banking laws or under the laws of any State within the United
States, having its principal office within the United States. Any new Warrant
Agent appointed hereunder shall execute, acknowledge and deliver to the former
Warrant Agent last in office and to the Company, an instrument accepting such
appointment under substantially the same terms and conditions as are contained
herein and thereupon such new Warrant Agent, without any further act or deed,
shall become vested with the rights, powers, duties and responsibilities of the
Warrant Agent and the former Warrant Agent shall cease to be the Warrant Agent;
but if for any reason it becomes necessary or expedient to have the former
Warrant Agent execute and deliver any further assurance, conveyance, act or
deed, the same shall be done at the expense of the Company and shall be legally
and validly executed and delivered by the former Warrant Agent.
-11-
<PAGE> 15
7.3 Notice of Appointment. Not later than the effective date of the
appointment of a new Warrant Agent, the Company shall cause notice thereof to be
mailed to the former Warrant Agent and the transfer agent, if any, for the
Common Stock and shall forthwith cause a copy of such notice to be mailed to
each registered holder of a Warrant Certificate. Failure to mail such notice, or
any defect contained therein, shall not affect the legality or validity of the
appointment of the successor Warrant Agent.
7.4 Merger of Warrant Agent. Any company into which the Warrant Agent
may be merged or with which it may be consolidated, or any company resulting
from any merger or consolidation to which the Warrant Agent shall be a party,
shall be the successor Warrant Agent under this Agreement without further act,
provided that such company would be eligible for appointment as a successor
Warrant Agent under the provisions of Section 7.2 hereof. Any such successor
Warrant Agent may adopt the prior countersignature of any predecessor Warrant
Agent and distribute Warrant Certificates countersigned but not distributed by
such predecessor Warrant Agent, or may countersign the Warrant Certificates in
its own name.
7.5 Company Responsibilities. The Company agrees that it shall (i) pay
the Warrant Agent reasonable remuneration for its services as Warrant Agent
hereunder and will reimburse the Warrant Agent upon demand for all expenses,
advances and expenditures that the Warrant Agent may reasonably incur in the
execution of its duties hereunder (including fees and expenses of its counsel);
(ii) provide the Warrant Agent, upon request, with sufficient funds to pay any
cash due pursuant to Section 4.14 upon exercise of the Exchange Warrants; and
(iii) perform, execute, acknowledge and deliver or cause to be performed,
executed, acknowledged and delivered all further and other acts, instruments and
assurances as may reasonably be required by the Warrant Agent for the carrying
out or performing by the Warrant Agent of the provisions of this Agreement.
7.6 Certification for the Benefit of Warrant Agent. Whenever in the
performance of its duties under this Agreement the Warrant Agent shall deem it
necessary or desirable that any matter be proved or established or that any
instructions with respect to the performance of its duties hereunder be given by
the Company prior to taking or suffering any action hereunder, such matter
(unless other evidence in respect thereof be herein specifically prescribed) may
be deemed to be conclusively proved and established, or such instructions may be
given, by a certificate or instrument signed by the Chairman, the Chief
Executive Officer, the President, a Vice President, the Secretary or the
Treasurer of the Company and delivered to the Warrant Agent. Such certificate or
instrument may be relied upon by the Warrant Agent for any action taken or
suffered in good faith by it under the provisions of this Agreement; but in its
discretion the Warrant Agent may in lieu thereof accept other evidence of such
matter or may require such further or additional evidence as it may deem
reasonable.
7.7 Books and Records. The Warrant Agent shall maintain the Company's
books and records for registration and registration of transfer of the Warrant
Certificates issued hereunder. Such books and records shall show the names and
addresses of the respective holders of the Warrant Certificates, the number of
Exchange Warrants evidenced on its face by each Warrant Certificate and the date
of each Warrant Certificate.
7.8 Liability of Warrant Agent. The Warrant Agent shall be liable
hereunder for its own negligence or willful misconduct. The Warrant Agent shall
act hereunder solely as an agent for the
-12-
<PAGE> 16
Company and its duties shall be determined solely by the provisions hereof. The
Warrant Agent shall not be liable for or by reason of any of the statements of
fact or recitals contained in this Agreement or in the Warrant Certificates
(except its counter-signature thereof) or be required to verify the same, but
all such statements and recitals are and shall be deemed to have been made by
the Company only. The Warrant Agent will not incur any liability or
responsibility to the Company or to any holder of any Warrant Certificate for
any action taken, or any failure to take action, in reliance on any notice,
resolution, waiver, consent, order, certificate or other paper, document or
instrument reasonably believed by the Warrant Agent to be genuine and to have
been signed, sent or presented by the proper party or parties. The Warrant Agent
shall not be under any responsibility in respect of the validity of this
Agreement or the execution and delivery hereof by the Company or in respect of
the validity or execution of any Warrant Certificate (except its
counter-signature thereof); nor shall it be responsible for any breach by the
Company of any covenant or condition contained in this Agreement or in any
Warrant Certificate; nor shall it be responsible for the making of any
adjustment required under the provisions of Article IV hereof or responsible for
the manner, method or amount of any such adjustment or the facts that would
require any such adjustment; nor shall it by any act hereunder be deemed to make
any representation or warranty as to the authorization or reservation of any
shares of Common Stock or other securities to be issues pursuant to this
Agreement or any Warrant Certificate or as to whether any shares of Common Stock
or other securities will, when issued, be validly authorized and issued and
fully paid and nonassessable.
7.9 Use of Attorneys, Agents and Employees. The Warrant Agent may
execute and exercise any of the rights or powers hereby vested in it or perform
any duty hereunder either itself or by or through its attorneys, agents or
employees.
7.10 Indemnification. The Company agrees to indemnify the Warrant Agent
and save it harmless against any and all losses, expenses or liabilities,
including judgments, costs and counsel fees arising out of or in connection with
its agency under this Agreement, except as a result of the negligence or willful
misconduct of the Warrant Agent.
7.11 Acceptance of Agency. The Warrant Agent hereby accepts the agency
established by this Agreement and agrees to perform the same upon the terms and
conditions herein set forth.
7.12 Changes to Agreement. The Warrant Agent may, without the consent
or concurrence of any registered holder of a Warrant Certificate, by
supplemental agreement or otherwise, join with the Company in making any changes
or corrections in this Agreement that they shall have been advised by counsel
(i) are required to cure any ambiguity or to correct any defective or
inconsistent provision or clerical omission or mistake or manifest error herein
contained, (ii) add to the covenants and agreements of the Company or the
Warrant Agent in this Agreement such further covenants and agreements thereafter
to be observed, or (iii) result in the surrender or modification of any right or
power reserved to or conferred upon the Company or the Warrant Agent in this
Agreement, including, without limitation, the reduction of the Exercise Price
(except for purposes of Article III hereof), but which changes or corrections do
not or will not adversely affect, alter or change the rights, privileges or
immunities of the registered holders of Warrant Certificates.
7.13 Assignment. All the covenants and provisions of this Agreement by
or for the benefit of the Company or the Warrant Agent shall bind and inure to
the benefit of their respective successors and assigns.
-13-
<PAGE> 17
7.14 Successor to Company. The Company will not merge or consolidate
with or into any other corporation or sell or otherwise transfer its property,
assets and business substantially as an entirety to a successor corporation,
unless the corporation resulting from such merger, consolidation, sale or
transfer (if not the Company) shall expressly assume, by supplemental agreement
satisfactory in form and substance to the Warrant Agent and delivered to the
Warrant Agent, the due and punctual performance and observance of each and every
covenant and condition of this Agreement to be performed and observed by the
Company.
7.15 Notices. Any notice or demand required by this Agreement to be
given or made by the Warrant Agent or by the registered holder of any Warrant
Certificate to or on the Company shall be sufficiently given or made if sent by
first-class or registered mail, postage prepaid, addressed (until another
address is filed in writing with the Warrant Agent by the Company) as follows:
Epoch Pharmaceuticals, Inc.
1725 220th Street, S.E., No. 104
Bothell, Washington 98021
Attention: Chief Financial Officer
Any notice or demand required by this Agreement to be given or made by the
registered holder of any Warrant Certificate or by the Company to or on the
Warrant Agent shall be sufficiently given or made if sent by first-class or
registered mail, postage prepaid, addressed (until another address is filed in
writing with the Company by the Warrant Agent), as follows:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Attention: George Karfunkel
Any notice or demand required by this Agreement to be given or made by the
Company or the Warrant Agent to or on the registered holder of any Warrant
Certificate shall be sufficiently given or made, whether or not such holder
receives the notice, if sent by first-class or registered mail, postage prepaid,
addressed to such registered holder at his last address as shown on the books of
the Company maintained by the Warrant Agent. Otherwise such notice or demand
shall be deemed given when received by the party entitled thereto.
7.16 Defects in Notice. Failure to file any certificate or notice or to
mail any notice, or any defect in any certificate or notice pursuant to this
Agreement, shall not affect in any way the rights of any registered holder of a
Warrant Certificate or the legality or validity of any adjustment made pursuant
to Article IV hereof, or any transaction giving rise to any such adjustment, or
the legality or validity of any action taken or to be taken by the Company.
7.17 Governing Law. The laws of the State of New York shall govern this
Warrant Agreement and the Warrant Certificates.
7.18 Standing. Nothing in this Agreement expressed and nothing that may
be implied from any of the provisions hereof is intended, or shall be construed,
to confer upon, or give to, any person or corporation other than the Company,
the Warrant Agent, and the registered holders of the
-14-
<PAGE> 18
Warrant Certificates any right, remedy or claim under or by reason of this
Agreement or of any covenant, condition, stipulation, promise or agreement
contained herein; and all covenants, conditions, stipulations, promises and
agreements contained in this Agreement shall be for the sole and exclusive
benefit of the Company and the Warrant Agent and their respective successors and
assigns, and the registered holders of the Warrant Certificates.
7.19 Headings. The descriptive headings of the articles and sections of
this Agreement are inserted for convenience only and shall not control or affect
the meaning or construction of any of the provisions hereof.
7.20 Counterparts. This Agreement may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original; but
such counterparts shall together constitute but one and the same instrument.
7.21 Conflict of Interest. The Warrant Agent and any shareholder,
director, officer or employee of the Warrant Agent may buy, sell or deal in any
of the Warrant Certificates or other securities of the Company or become
pecuniarily interested in any transaction in which the Company may be
interested, or contract with or lend money to the Company or otherwise act as
fully and freely as though the Warrant Agent were not Warrant Agent under this
Agreement. Nothing herein shall preclude the Warrant Agent from acting in any
other capacity for the Company, including, without limitation, as trustee under
any indenture or as transfer agent for the Common Stock or any other securities
of the Company, or for any other legal entity.
7.22 Availability of the Agreement. The Warrant Agent shall keep copies
of this Agreement available for inspection by holders of Exchange Warrants
during normal business hours at its Principal Office. Copies of this Agreement
may be obtained upon written request addressed to:
Epoch Pharmaceuticals, Inc.
1725 220th Street, S.E., No. 104
Bothell, Washington 98021
Attention: Chief Financial Officer
-15-
<PAGE> 19
IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties hereto as of the day and year first above written.
EPOCH PHARMACEUTICALS, INC.
By: /s/ Sanford Zweifach
-----------------------------------
Name: Sanford Zweifach
Title: President and Chief
Financial Officer
AMERICAN STOCK TRANSFER & TRUST COMPANY
By: /s/ Herbert J. Lemmer
-----------------------------------
Name: Herbert J. Lemmer
Title: Vice President
-16-
<PAGE> 1
SUBLEASE
This Sublease is by and between BION DIAGNOSTIC SCIENCES, INC. ("Sublandlord")
AND EPOCH PHARMACEUTICALS, INC. ("Subtenant"). Sublandlord, as Tenant, entered
into a lease with ZETRON, INC., a Washington Corporation as Landlord, dated the
15th of July,1998, leasing certain space on the main floor, 12277 134th Court
N.E., Redmond, WA 98052 ("Building"), to which lease reference is hereby made as
if the same were herein set forth at length, which lease is hereinafter referred
to as the "Prime Lease".
WHEREAS, the parties hereto have agreed that Sublandlord shall sublet
approximately 13,000 net rentable square feet of such space to Subtenant.
NOW, THEREFORE, in consideration of the mutual promises contained herein
and all other good and valuable consideration, the parties hereto agree as
follows:
1. Premises. Sublandlord hereby subleases to Subtenant approximately 13,000
net rentable square feet on the main floor of the Building - Suite 100 (the
"Premises") as shown on Exhibit A attached hereto and made part of this
sublease.
2. Term. Sublandlord shall sublease the Premises for a term (the "Sublease
Term") commencing on October 1, 1998 and expiring on October 31, 1999, unless
sooner terminated in accordance with this Sublease.
3. Minimum Rent. Subtenant shall pay to Sublandlord as minimum rent for the
Premises in equal monthly installments of fourteen thousand three hundred and
No/100 Dollars ($14,300.00), in advance, on the first day of each month of the
term hereof. Minimum rent for any period during the term hereof which is for
less than one (1) month shall be a pro-rata portion of the monthly installment
amount, plus any Additional Rent provided in Paragraph 7 of this Sublease.
Minimum rent and Additional Rent provided hereunder shall be payable without
notice or demand and without deduction, offset, or abatement, in lawful money of
the United States of America to Sublandlord at the address stated in Paragraph
14 of this Sublease or to such other persons or at such other places as
Sublandlord may designate in writing.
4. Utilities and Services. Subtenant shall be responsible for and shall
promptly pay when due the pro-rata share of charges for telephone and other
utilities, which are separately metered, to the Premises. In no event shall the
Sublandlord be liable for the interruption of the supply of any utilities to the
Premises.
5. Use. The Premises shall be used for general office and biomedical
laboratory purposes and for no other purpose.
6. Assignment. Subtenant shall not assign this Sublease nor sublet the
Premises in whole or in part; and shall not permit Subtenant's interest in this
Sublease to be vested in any third party by operation of law or otherwise,
without written consent from Sublandlord which shall not be unreasonably
withheld.
7. Additional Rent. Subtenant shall be responsible for and shall promptly
pay when due the pro-rata share of Operating Costs and Real Property Taxes as
defined in Section 18 of the Master Lease. Additional Rent shall include
pass-through for increases in Operating Expenses and Real Estate Taxes.
<PAGE> 2
Sublease Agreement
Page 2
8. Prime Lease. This Sublease is subject and subordinate to the Prime
Lease. Except as may be inconsistent with the terms hereof, all the terms,
covenants and conditions in the Prime Lease contained shall be applicable to
this Sublease with the same force and effect as if Sublandlord were the landlord
under the Prime Lease and Subtenant were the tenant thereunder; and in case of
any breach hereof by Subtenant, Sublandlord shall have all the rights against
Subtenant as would be available to the landlord against the tenant under the
Prime Lease if such breach were by the tenant thereunder. A copy of the Prime
Lease is marked Exhibit B and attached hereto and made a part of this Sublease.
9. Limitation. Notwithstanding anything herein contained, the only services
or rights to which Subtenant is entitled hereunder are those to which
Sublandlord is entitled under the Prime Lease and for all such services and
rights Subtenant will look to the landlord under the Prime Lease.
10. Indemnification. Subtenant shall neither do nor permit anything to be
done which would cause the Prime Lease to be terminated or forfeited by reason
of any right of termination or forfeiture reserved or vested in the Sublandlord
under the Prime Lease, and Subtenant shall indemnify and hold Sublandlord
harmless from and against all claims of any kind whatsoever by reason of any
breach or default on the part of Subtenant by reason of which the Prime Lease
may be terminated or forfeited.
11. Security Deposit. Subtenant shall, upon its execution and delivery of
this Sublease to the Sublandlord, deposit with Sublandlord the sum of twenty one
thousand four hundred fifty dollars ($21,450.00) as a Security Deposit for the
faithful performance and observance by Subtenant of all the terms, provisions
and conditions of this Sublease.
12. Tenant Improvements. Subtenant agrees to accept the Premises in "as-is"
condition. Provided that Subtenant restores the premises to the original
condition, Sublandlord agrees that Subtenant may install two (2) fume hoods in
the laboratory portion of the premises. Subtenant to be responsible for any
damage caused by installation, operation and removal of said fume hoods.
13. Representation. Subtenant represents that it has read and is familiar
with the terms of the Prime Lease and agrees to be bound by all of the terms and
conditions contained therein.
14. Entire Agreement. All prior understandings and agreements between the
parties are merged within this Sublease, which alone fully and completely sets
forth the understanding of the parties; and this Sublease may not be changed or
terminated orally or in any manner other than by an agreement in writing and
signed by the party against whom enforcement of the charge or termination is
sought.
15. Prepaid Rent. Subtenant upon execution and delivery of this Sublease
shall prepay the first two-(2) months of rent.
16. Furniture. Subtenant shall pay in addition to Minimum Rent and
Additional Rent one thousand five hundred and No/100 Dollars ($1500.00) in
advance on the first day of each month for the use of furniture in the Premises.
<PAGE> 3
Sublease Agreement
Page 3
17. Notices. Any notice or demand which either party may or must give to
the other hereunder shall be in writing and delivered personally or sent by
registered mail addressed, if to Sublandlord, as follows:
Mr. Paul Hulker
BDS, Inc.
12277 134th Court N.E. - Suite 101
Redmond, Wa 98052
and if to Subtenant, as follows:
Ms. Cathy Elkey
Epoch Pharmaceuticals
12277 134th Court N.E. - Suite 100
Redmond, Wa 98052
Either party may, by notice in writing, direct the future notices or demands be
sent to a different address.
18. Successors and Assigns. The covenants and agreements herein
contained shall bind and inure to the benefit of the Sublandlord, the Subtenant,
and their respective executors, administrators, successors and assigns.
19. Exhibits and Attachments which are a part of this Sublease.
Exhibit A Floor plan showing the Premises
Exhibit B Copy of Prime Lease
DATED THIS 25TH DAY OF SEPTEMBER, 1998.
SUBLANDLORD:
By: /s/Paul Hulker
-------------------------
Its: General Manager
-------------------------
SUBTENANT:
By: /s/ Rich B. Meyer
-------------------------
Its: V.P. of R&D
-------------------------
<PAGE> 4
Sublease Agreement
Page 4
SUBLANDLORD ACKNOWLEDGMENT
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
THIS IS TO CERTIFY that on this 29th day of September____, 1998, before me, the
undersigned, a notary public in and for the state of Washington, duly
commissioned and sworn, personally appeared Paul Hulker, to me known to be the
General Manager of BDS, Inc., the corporation that executed the within and
foregoing instrument, and acknowledged the said instrument to be the free and
voluntary act and deed of said corporation for the uses and purposes therein
mentioned, and on oath stated that she were authorized to execute said
instrument.
WITNESS my hand and official seal the day and year in this certificate
first above written.
Signature /s/ Teresa L. Lowe
-------------------------------------------
Printed Name Teresa L. Lowe
----------------------------------------
Notary public in and for the State of Washington
residing at Snohomish County
-----------------------------------------
My appointment expires 10/9/99
------------------------------
SUBTENANT ACKNOWLEDGMENT
STATE OF WASHINGTON )
) ss.
COUNTYOF KING )
THIS IS TO CERTIFY that on this 25th day of September, 1998, before me, the
undersigned, a notary public in and for the state of Washington, duly
commissioned and sworn, personally appeared to me known to be the Vice President
of R&D, of Epoch Pharmaceuticals the corporation that executed the within and
foregoing instrument, and acknowledged the said instrument to be the free and
voluntary act and deed of corporation for the uses and purposes therein
mentioned, and on oath stated that they were authorized to execute said
instrument.
WITNESS my hand and official seal the day and year in this certificate
first above written.
Signature /s/ Teresa L. Lowe
-------------------------------------------
Printed Name Teresa L. Lowe
----------------------------------------
Notary public in and for the State of Washington
residing at Snohomish County
-----------------------------------------
My appointment expires 10/9/99
------------------------------
<PAGE> 5
Sublease Agreement
Page 5
BION DIAGNOSTICS BUILDING
SUBLEASE BETWEEN BION DIAGNOSTIC SCIENCES, INC. (TENANT)
AND
EPOCH PHARMACEUTICALS, INC. (SUBTENANT)
CONSENT BY LESSOR
The undersigned, the Prime Landlord, joins in the execution of this
Sublease solely to evidence its consent to the subletting of the
Premises described herein, as such consent is required pursuant to the
Prime Lease. However, by this consent Prime Landlord does not approve or
disapprove this Sublease, and neither the execution of this Sublease nor
anything done pursuant to the provisions thereof shall be deemed or
construed to modify the Prime Lease. It is understood that Bion
Diagnostic Sciences, Inc. remains liable for its obligations under the
Lease. This consent shall not be deemed to increase the obligations or
liabilities of the Prime Landlord, or to reduce the Prime Landlord's
rights and remedies under the Prime Lease. This consent shall not be
deemed a consent to any other or further subletting.
LANDLORD: Zetron, Inc.
a Washington Corporation
By: /s/ Daniel R. Garretson
----------------------------
Its Vice President
----------------------------
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Sublease Agreement
Page 6
LANDLORD ACKNOWLEDGMENT
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
THIS IS TO CERTIFY that on this 30th day of September, 1998, before me, the
undersigned, a notary public in and for the state of Washington, duly
commissioned and sworn, personally appeared Daniel R. Garretson to me known to
be the V.P. of Zetron, Inc, a corporation, to be known to be the Washington
Corporation that executed the within and foregoing instrument, and acknowledged
the said instrument to be the free and voluntary act and deed of said
corporation and partnerships for the uses and purposes therein mentioned, and on
oath stated that said individual was authorized to execute said instrument.
WITNESS my hand and official seal this 30th day of September, 1998.
Signature /s/ Brent T. Dippie
-------------------------------------------
Printed Name Brent T. Dippie
----------------------------------------
Notary public in and for the State of Washington,
residing at Kirkland, WA
-----------------------------------------
My appointment expires 1/29/00
------------------------------
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Sublease Agreement
Page 7
EXHIBIT A
Floor Plan showing Sublease Premises
<PAGE> 8
Sublease Agreement
Page 8
EXHIBIT B
Copy of Prime Lease
<PAGE> 1
EXHIBIT 10.21
LICENSE AND SUPPLY AGREEMENT
This License and Supply agreement ("Agreement") dated as of the 11th day of
January, 1999 ("Effective Date") 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").
ARTICLE I. BACKGROUND OF THE AGREEMENT
1.01 Epoch represents that it has rights under certain patents pertaining to
oligonucleotides having a minor-groove binding moiety covalently
attached thereto ("MGB Oligonucleotide"), and methods for making and
using such MGB Oligonucleotides.
1.02 Perkin-Elmer wishes to acquire exclusive and non-exclusive licenses,
depending on fields of use, under such patents.
1.03 Epoch represents that it has certain know-how relating to the synthesis
of MGB Oligonucleotides, and the design of sequence-specific probes
comprising such oligonucleotides.
1.04 Perkin-Elmer wishes to have Epoch supply (i) MGB Oligonucleotides and
intermediate compounds useful for making MGB Oligonucleotides, and (ii)
information with respect to chemical synthesis and purification
know-how relating to the production of MGB Oligonucleotides using such
intermediate compounds.
ARTICLE II. DEFINITIONS
2.01 "AFFILIATES" means any corporation, firm, partnership or other entity,
whether de jure or de facto, which directly or indirectly owns, is
owned by or is under common ownership with a Party to this Agreement,
as the case may be, to the extent of at least fifty percent of the
equity (or such lesser percentage which is the maximum allowed to be
owned by a foreign corporation in a particular jurisdiction) having the
power to vote on or direct the affairs of the entity.
2.02 "NET SALES" means (1) with respect to sales by a Party, or an Affiliate
of a Party, to non-affiliated third party purchasers, the actual amount
of gross sales of Licensed Product(s) to a third party, less: trade,
cash and quantity discounts granted at the time invoiced, if any,
actually allowed, amounts refunded for faulty
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or defective product, returns, rejections, freight, insurance and other
transportation costs (except income taxes), tariffs, duties and similar
governmental charges paid, to the extent included in gross sales price,
(2) with respect to sales by a Party made to any Affiliate or to any
person, firm or corporation enjoying a special course of dealing with a
Party, the Net Sales will be determined based on the first resale in a
bona fide arms-length transaction of Licensed Product(s) by such
Affiliate, person, firm or corporation to third parties, and (3) with
respect to Licensed Product(s) which are used by a Party, or an
Affiliate of a Party, to supply services or information to a third
party for commercial purposes, or are otherwise disposed of, the Net
Sales will be determined as if such Licensed Product(s) had been sold
at the average Net Sales for such Licensed Product(s) during the past
one hundred and twenty days prior to the supply of such services or
information.
2.03 "LICENSE YEAR" means the twelve month period beginning on the first day
of January, April, July or October next following the Effective Date,
and each twelve month period thereafter, except that the first License
Year will include the period from the Effective Date to the first day
of the twelve month period.
2.04 "PARTY" means Epoch or Perkin-Elmer and, when used in the plural, will
mean Epoch and Perkin-Elmer.
2.05 "LICENSED PATENT" means U.S. Patent No. 5,801,155 titled Covalently
Linked Oligonucleotide Minor Groove Binder Conjugates, issued September
1, 1998, including any Related Patent.
2.06 "RELATED PATENT" means any patent or patent application owned, held, or
otherwise controlled, in whole or in part by Epoch that (1) discloses
and/or claims substantially the same subject matter as a Licensed
Patent, (2) discloses and/or claims improvements to inventions
disclosed or claimed in a Licensed Patent and requires rights under the
Licensed Patent to exploit such improvements, (3) claims priority to, a
Licensed Patent, including but not limited to continuation applications
and patents, continuation-in-part applications and patents, divisional
applications and patents, reexamination applications and patents,
reissue applications and patents, and continuing prosecution
applications and patents, (4) is a parent of U.S. Patent No. 5,801,155,
and/or (5) any foreign equivalents of a Licensed Patent or any patent
or patent application in (1), (2), (3) or (4) above.
2.07 "LICENSED PRODUCT" means any product for use in the Exclusive Licensed
Field or the Non-Exclusive Licensed Field (i) which, but for the
license granted hereunder, manufacture, use or sale thereof would
infringe at least one Valid
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Claim of a Licensed Patent, or (ii) which otherwise uses, incorporates
or was developed or manufactured using Licensed Know-How.
2.08 "MGB OLIGONUCLEOTIDE" means Licensed Product comprising an
oligonucleotide having a minor-groove binding moiety covalently
attached thereto, and, at Perkin-Elmer's option, further comprising
[*]. A Purified MGB Oligonucleotide means an MGB Oligonucleotide that
is at least [*] pure based on the HPLC assay specified in Exhibit B.
2.09 "MGB INTERMEDIATE" means Licensed Product consisting of intermediates
useful for the synthesis of an MGB Oligonucleotide, including but not
limited to [*] . The identity of a MGB Intermediate will be confirmed
based on an assay specified in Exhibit B.
2.10 "PURCHASED PRODUCT" means MGB Intermediate or MGB Oligonucleotide
purchased from Epoch by Perkin-Elmer.
2.11 "PROBE UNIT" means that amount of MGB Intermediate required to make [*]
of a single Purified MGB Oligonucleotide, or [*] of a single Purified
MGB Oligonucleotide, as defined in Exhibit B.
2.12 "KITS" means products containing MGB Oligonucleotides packaged with
other materials and reagents, such other reagents including but not
limited to enzymes, reaction buffers and nucleotide triphosphates. Also
included within the definition of Kits are microfluidic devices
containing or packaged with MGB Oligonucleotides.
2.13 "BARE PROBE" means a MGB Oligonucleotide provided alone.
2.14 "VALID CLAIM" means a claim of a Licensed Patent (or pending
application included in the Related Patents) which has not been held
permanently invalid or otherwise unenforceable by a court of competent
jurisdiction, unappealable or unappealed within the time allowed for
appeal, or has not otherwise finally been held unpatentable by an
appropriate administrative agency, unappealable or unappealed within
the time allowed for appeal.
2.15 "EXCLUSIVE LICENSED FIELD" means the 5'-Nuclease Assay Field.
2.16 "REAL-TIME NUCLEIC ACID AMPLIFICATION MONITORING FIELD" means the
monitoring of a polymerase chain reaction by detecting a change in a
magnitude of a detectable signal as a function of reaction cycle
practiced outside of the HIVD Field only.
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH COMMISSION.
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2.17 "5'-NUCLEASE ASSAY FIELD" means the detection of a nucleic acid
sequence based on the cleavage of a nucleic acid probe that is
hybridized to the nucleic acid sequence by a 5' to 3' nuclease activity
of a polymerase enzyme, as generally described in U.S. Patent No.
5,487,972, practiced outside of the HIVD Field only.
2.18 "NON-EXCLUSIVE LICENSED FIELD" means (1) use of MGB Oligonucleotides as
ligation probes in an oligonucleotide ligation assay, generally as
described in U.S. Patent No. 4,883,750; (2) use of MGB Oligonucleotides
in an assay employing a [*]; (3) use of MGB Oligonucleotides as primers
in a primer extension reaction, including but limited to a PCR reaction
or a DNA sequencing reaction, and (4) use of MGB Oligonucleotides in
the Real-Time Nucleic Acid Monitoring Field, to the extent that (1),
(2), (3) and (4) are practiced outside of the Exclusive Licensed Field
and practiced outside of the HIVD Field.
2.19 "PERKIN-ELMER DNA SYNTHESIS AND PURIFICATION PATENTS" means U.S. Patent
Nos. 4,997,927 (GBF), 4,458,066, 5,132,418, 5,153,319, 4,973,679
(Caruthers Process), and 4,415,732, 4,668,777, 4,500,707 (Caruthers
Reagents), including any Related Patent.
2.20 "HUMAN IN VITRO DIAGNOSTICS FIELD" ("HIVD Field") means products and
processes for the measurement of attributes, characteristics, diseases,
traits or other conditions of a human being for the medical management
of that human being.
2.21 "LICENSED KNOW-HOW" means trade secrets, technical information,
experimental data, software and other knowledge now existing and
controlled by Epoch with respect to chemical synthesis and purification
relating to the production of MGB Oligonucleotide using MGB
Intermediate, as described in Section 5.04 and Exhibit C, to the extent
that such information, data, software and knowledge is not publicly
available.
2.22 "CONFIDENTIAL INFORMATION" means information received by one Party
(Receiving Party) from the other Party (Disclosing Party) (1) that the
Receiving Party has a reasonable basis to believe is confidential to
the Disclosing Party, or is treated by the disclosing Party as
confidential, (2) is identified at the time of disclosure as
"CONFIDENTIAL" and, (3) in the case of disclosures in non-written form,
is identified in writing within thirty (30) days as confidential.
Notwithstanding the above, Confidential Information will not include
any information which:
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH COMMISSION.
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(1) can be demonstrated to have been in the public domain as of
the Effective Date or comes into the public domain during the
term of this Agreement through no act of the recipient; or
(2) can be demonstrated to have been independently known to the
recipient prior to the receipt thereof, or made available to
the recipient as a matter of lawful right by a third party; or
(3) can be demonstrated to have been rightfully received by the
recipient from a third party who did not require the recipient
to hold it in confidence or limit its use and who did not
acquire it, directly or indirectly, from the other Party to
this Agreement under a continuing obligation of
confidentiality; or
(4) will be required for disclosure to any governmental regulatory
agencies pursuant to approval for use, provided the Disclosing
Party is given reasonable notice of such proposed disclosure
and, if requested by the Disclosing Party, the Receiving Party
uses reasonable efforts to maintain the confidentiality of
such information in such governmental submission; or
(5) is independently conceived, invented or acquired by
researchers of the recipient who have not been personally
exposed to the information provided to the recipient
hereunder; or
(6) is published by a governmental agency as part of the normal
patent filing and prosecution process.
ARTICLE III. LICENSE GRANT
3.01 Exclusive License. Epoch hereby grants to Perkin-Elmer a world-wide
exclusive license under Licensed Patents and Licensed Know-How to make,
use, offer to sell, sell and import Licensed Products in the Exclusive
Licensed Field.
3.02 Non-Exclusive License. Epoch hereby grants to Perkin-Elmer a world-wide
non-exclusive license under Licensed Patents and Licensed Know-How to
make, use, offer to sell, sell and import Licensed Products in the
Non-Exclusive Licensed Field.
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3.03 Sublicenses. Perkin-Elmer will have no right to sublicense its license
rights granted hereunder.
3.04 Restrictions. Perkin-Elmer will not knowingly sell, market, make or
have made, Licensed Products for use outside the Exclusive Licensed
Field or the Non-Exclusive Licensed Field. In the event that
Perkin-Elmer does inadvertently sell, market, make or have made,
Licensed Products for use outside the Exclusive Licensed Field or the
Non-Exclusive Licensed Field, Perkin-Elmer will within thirty (30) days
of learning of such activity cease such activity. Epoch will not
knowingly sell, market, make or have made MGB Intermediate and/or MGB
Oligonucleotide to third parties in the Exclusive Licensed Field. In
the event that Epoch does inadvertently sell, market, make or have made
MGB Intermediate and/or MGB Oligonucleotide to third parties in the
Exclusive Licensed Field, Epoch will within thirty (30) days of
learning of such activity cease such activity.
3.05 Patent Prosecution. To the extent commercially practicable, Epoch will
file and diligently prosecute patent applications with respect to the
Licensed Patent in at least the United States, Germany, France,
Switzerland, United Kingdom, Sweden, Italy, Japan, Australia and
Canada.
ARTICLE IV. LICENSE FEE; ROYALTIES; PAYMENT FOR KNOW-HOW
4.01 License Fees. Perkin-Elmer will, as a license fee, pay to Epoch, within
ten (10) business days after the Effective Date, [*] Dollars [*], [*]
of which will be creditable against future royalties called for under
Section 4.02. Perkin-Elmer will use credits against future royalties at
a rate not to exceed [*] Dollars [*] per License Year. In addition,
upon the first commercial sale of a Licensed Product for each of the
four uses listed in the definition of "Non-Exclusive Licensed Field,"
Perkin-Elmer will pay to Epoch, within ten (10) business days of each
such first commercial sale, an additional license fee of [*] Dollars
[*].
4.02 Royalties. Perkin-Elmer will pay to Epoch royalties on the Net Sales of
Licensed Products sold or otherwise disposed of under the license
granted under Sections 3.01 and 3.02 of this Agreement as follows:
Bare Probes covered by a Valid Claim [*]%
Kits covered by a Valid Claim [*]%
Bare Probes not covered by a Valid Claim [*]%
Kits not covered by a Valid Claim [*]%
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No royalties will be owed under this Section 4.02 (1) for the sale by
Perkin-Elmer of any Bare Probes purchased by Perkin-Elmer from Epoch,
and (2) for the sale by Perkin-Elmer of any Bare Probes or Kits not
covered by a Valid Claim in the event that (i) the Licensed Know-How
becomes publicly available, (ii) Perkin-Elmer is placed at a commercial
disadvantage as a result of such know-how becoming publicly available,
and (iii) such know-how was not made publicly available by
Perkin-Elmer.
4.03 Payment for Know-How. Perkin-Elmer will pay to Epoch, as additional
consideration for the transfer of and license under Licensed Know-How,
within ten (10) business days after the Effective Date, [*] Dollars
[*].
4.04 Payment Dates and Statements. Within forty-five (45) days of the end of
each calendar quarter in which Net Sales occur, Perkin-Elmer will
calculate the royalty amount owed to Epoch under this Section 4 and
will remit such amount to Epoch. Such payment will be accompanied by a
statement showing the calculation of the amount owed for Licensed
Products, including the Net Sales of Licensed Products for that quarter
(including the gross invoiced sales and permissible deductions
therefrom), and the exchange rate (as determined pursuant to Section
4.06) used to directly convert any royalty amounts into U.S. Dollars.
4.05 Late Payments. Any payment owed to Epoch under this Agreement that is
not paid on or before the date such payment is due will bear interest,
to the extent permitted by applicable law, at twelve percent (12%) per
annum, calculated on the number of days such payment is delinquent.
4.06 Currency of Payments. All payments under this Agreement will be made
U.S. Dollars by wire transfer to such bank account as Epoch may
designate from time to time. Any payments due hereunder on Net Sales
outside of the United States will be payable in U.S. Dollars at the
average of the rate of exchange of the currency of the country in which
the Net Sales are made as reported in the New York edition of The Wall
Street Journal, for the last three (3) business days of the quarter for
which the royalties are payable.
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH COMMISSION.
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4.07 Other Taxes. Perkin-Elmer will pay all sales, use, transfer or similar
taxes, whether foreign, federal (United States), state or local,
however designated, that are levied or imposed by reason of the sale or
transfer of Licensed Products contemplated hereby, and any penalties,
interest and collection or withholding costs associated with any of the
foregoing items.
4.08 Records, Review. Perkin-Elmer will keep accurate records of all
operations affecting payments hereunder, and will permit Epoch or its
duly authorized agent to inspect all such records and to make copies of
or extracts from such records during regular business hours throughout
the term of this Agreement and for a reasonable period of not less than
three (3) years thereafter, provided that the frequency of such
inspections is no more than once per License Year. If the review
results in a determination of an underpayment of royalties to Epoch,
such underpayment will be promptly remitted to Epoch with interest as
provided in Section 4.05. If such inspection determines that Net Sales
were more than 105% of the Net Sales reported by Perkin-Elmer for the
period under review, Perkin-Elmer will pay all of the reasonable costs
of such review.
ARTICLE V. SUPPLY
5.01 Purchases. Subject to the terms and conditions of this Agreement, Epoch
will sell Purchased Product to Perkin-Elmer, and Perkin-Elmer will
purchase such Purchased Product from Epoch. Perkin-Elmer will not
purchase any Licensed Product from any third-party.
5.02 Specifications. Purchased Product will meet the product specifications
set forth in Exhibit B. The Parties will reasonably agree on any
changes to such specifications, and any such changes will be in
writing. Any third party manufacturing Purchased Product for Epoch must
be licensed under Perkin-Elmer DNA Synthesis and Purification Patents.
5.03 Price. Epoch will charge Perkin-Elmer and Perkin-Elmer will pay Epoch
[*] Dollars [*] per Probe Unit of MGB Intermediate and [*] Dollars [*]
per Probe Unit of MGB Oligonucleotide. At the end of the second License
Year, the Parties will negotiate in good faith to determine a
reasonable volume discount schedule with respect to purchases of both
MGB Intermediate and MGB Oligonucleotide.
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH COMMISSION.
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5.04 Transfer of Know-How. Within three (3) months of the Effective Date of
this Agreement, Epoch will transfer Licensed Know-How to Perkin-Elmer
to the extent necessary for Perkin-Elmer to make full use of such MGB
Intermediates for the synthesis of MGB Oligonucleotides. Such Licensed
Know-How will include, but not be limited to, that information
specified in Exhibit C. To effect such transfer, during a period
beginning on the Effective date and ending three (3) months thereafter,
Epoch will make available to Perkin-Elmer at least one qualified
full-time-equivalent employee. In addition, Epoch will transfer
Licensed Know-How relating to the optimal sequence for an MGB
Oligonucleotide probe directed against a particular target sequence.
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 above. All Licensed Know-How will
remain owned by Epoch. To the extent Licensed Know-How comprises
software, the license rights granted in Article III include only the
right to use and execute such software (in machine-readable object form
only, excluding any source code) and Perkin-Elmer agrees not to modify,
reverse engineer, reverse assemble, decompile or otherwise attempt to
derive source code from such software.
5.05 Purchase Orders. Perkin-Elmer will purchase Purchased Product from
Epoch by issuing a written purchase order identifying Purchased Product
to be purchased, the quantity, price, shipping instructions, delivery
dates, and any other special information. To the extent the terms of
any such purchase order differ from or conflict with the terms of this
Agreement, the terms of this Agreement will govern. Within thirty (30)
days of the date hereof and prior to the end of each calendar month
thereafter, Perkin-Elmer will submit a six-month rolling forecast of
estimated Purchased Product requirements. The forecast for the first
two (2) months will constitute a binding purchase order and the balance
of such Perkin-Elmer's forecast will be non-binding.
5.06 Modifications. Perkin-Elmer may modify, defer or cancel a purchase
order not later than two (2) months prior to the scheduled shipment of
Purchased Product.
5.07 Shipment. Shipment will be made freight prepaid, F.O.B. Epoch's
facility, to the address set forth on Perkin-Elmer's purchase order.
Epoch will invoice Perkin-Elmer on a separate line for all shipping
charges ("pre-pay and add"). Title and risk of loss will pass from
Epoch to Perkin-Elmer upon delivery to carrier at the F.O.B. point.
5.08 Invoicing; Payment. Epoch will submit an invoice to Perkin-Elmer with
each shipment of Purchased Products. Each invoice will be due and
payable net forty five (45) days from the date of shipment.
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5.09 Inspection, Rejection. Perkin-Elmer will inspect all Purchased Product
received for defects and for conformance with the purchase order.
Perkin-Elmer may reject any Purchased Product that is defective or that
fails to conform to the purchase order. Any such rejection must be made
within ten days (10) of receipt of the Purchased Product by
Perkin-Elmer. To reject a Purchased Product, Perkin-Elmer will notify
Epoch of its rejection and will promptly return the rejected Purchased
Product to Epoch. Epoch will immediately replace the Purchased Product
with conforming goods.
5.10 Pre-Payments. Concurrent with execution of this Agreement, in addition
to the License Fees paid under 4.01, Perkin-Elmer will pay Epoch [*] as
a pre-payment towards future purchases of MGB Oligonucleotides and MGB
Intermediates. In addition, on or before February 1, 1999, Perkin-Elmer
will pay Epoch [*] as an additional pre-payment towards future
purchases of MGB Oligonucleotides and MGB Intermediates. Perkin-Elmer
will credit purchases of MGB Intermediates and MGB Oligonucleotides
against these pre-payments at a rate not to exceed [*] per License
Year.
5.11 Security Interest. In order to secure any unused portion of the
pre-payments made under Section 5.10 (up to [*]), Epoch will grant to
Perkin-Elmer a security interest in the Licensed Patent pursuant to the
Security Agreement attached as Exhibit A. Epoch may, at any time,
return all or a portion of the unused prepayments. In the event the
unused balance of the prepayments is Fifty Thousand Dollars ($50,000)
or less, the security interest will terminate.
5.12 Annual Minimum Purchase. Perkin-Elmer will, during each License Year,
purchase at least [*] worth of MGB Oligonucleotides and/or MGB
Intermediates from Epoch. In the event that Perkin-Elmer has not, by
the end of such License Year, purchased such minimum amount, it will
promptly, within thirty (30) days of the end of such License Year,
purchase an amount of MGB Oligonucleotides and/or MGB Intermediates
necessary to meet such annual minimum amount. Such additional amounts
will not be counted towards the annual minimum amount in the License
Year in which they were purchased.
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH COMMISSION.
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5.13 Covenant Not To Sue. Perkin-Elmer hereby covenants not to sue Epoch
under Perkin-Elmer DNA Synthesis and Purification Patents for
infringement based upon the manufacture of MGB Oligonucleotides for
Perkin-Elmer. This covenant does not extend to the manufacture of MGB
Oligonucleotides for any party other than Perkin-Elmer. No other rights
are hereby granted or intended to be granted to Epoch either expressly,
impliedly or by estoppel under Perkin-Elmer DNA Synthesis and
Purification Patents or any other patents not specifically identified
in this Agreement.
ARTICLE VI. REPRESENTATIONS AND WARRANTIES
6.01 Product Warranty. Epoch warrants to Perkin-Elmer that, upon delivery of
any Purchased Product to Perkin-Elmer, such Purchased Product will be
free from defects in material, workmanship, design and title, and will
substantially meet the specifications attached hereto as Exhibit B (or
any mutually agreed upon replacements).
6.02 Documentation Warranty. Epoch further warrants that the Purchased
Product, and all literature, packaging, inserts, accompanying
materials, and any other documentation supplied by Epoch in connection
with the Purchased Product will not contain any misrepresentation as to
the nature or performance of the Purchased Product.
6.03 Remedies. If any Purchased Product fails to meet the foregoing
warranties, in addition to satisfying any other remedies Perkin-Elmer
may have, Epoch will replace such deficient Purchased Product in the
most timely manner possible at its own expense or Epoch will refund to
Perkin-Elmer all costs associated with the purchase and shipping of
that Purchased Product.
6.04 Disclaimer. EXCEPT FOR THE EXPRESS WARRANTY AGAINST DEFECTS IN DESIGN,
MATERIALS, TITLE AND WORKMANSHIP CONTAINED HEREIN, EPOCH MAKES NO
WARRANTY OF ANY KIND WHATSOEVER, EXPRESS OR IMPLIED, AND ALL WARRANTIES
OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE ARE HEREBY
DISCLAIMED BY EPOCH. Without limitation of the foregoing, Epoch
expressly disclaims any liability whatsoever for any damages incurred,
directly or indirectly, in connection with the Licensed Products and/or
the Purchased Products, including without limitation, loss of profits
and special, incidental or consequential damages.
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6.05 Representations and Warranties. Each Party represents, warrants and
covenants to the other Party that:
(1) it has the corporate power and authority and legal right to
enter into this Agreement and to perform its obligations
hereunder;
(2) the execution and delivery of this Agreement and the
performance of the transactions contemplated thereby have been
duly authorized by all necessary corporate action of such
Party;
(3) the execution and delivery of this Agreement and the
performance by such Party of any of its obligations under this
Agreement do not and will not (a) conflict with, or constitute
a breach or violation of, any other contractual obligation to
which it is a party, any judgment of any court or governmental
body applicable to such Party or its properties or, to such
Party's knowledge, any statute, decree, order, rule or
regulation of any court or governmental agency or body
applicable to such Party or its properties, and (b) with
respect to the execution and delivery of the Agreement,
require any consent or approval of any governmental authority
or other person;
(4) each Party will to the best of its knowledge without
undertaking a special investigation, disclose to the other
Party any material adverse proceedings, claims or actions that
arise, which would materially interfere with that Party's
performance of its obligations under this Agreement; and
(5) each Party's employees have executed or will execute
agreements whereby all right, title and interest in any
technology and invention(s) will be assigned to their
respective employers.
ARTICLE VII. INDEMNITY
7.01 Indemnification of Epoch. Perkin-Elmer will defend, indemnify and hold
Epoch harmless against any judgment, damage, liability, loss, cost or
other expense, including legal fees ("Liability"), resulting from any
third party claims made or proceedings brought against Epoch to the
extent that such Liability arises from Perkin-Elmer's use, marketing ,
distribution or sale of Licensed Product and/or Purchased Product,
except to the extent such claims or proceedings result (1) from Epoch's
negligence or willful act or omission in the manufacture, storage, or
delivery of Licensed Product and/or Purchased Product, (2) from Epoch's
breach of any warranty set forth in Article VI, or (3) infringement of
a patent owned or controlled by a third party, only to the extent such
infringement arises from the
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inclusion in the Licensed Product of inventions claimed in a Licensed
Patent or the use of the Licensed Know-How.
7.02 Indemnification of Perkin-Elmer. Epoch will defend, indemnify and hold
Perkin-Elmer harmless against any Liability resulting from any third
party claims made or proceedings brought against Perkin-Elmer to the
extent that such Liability arises (1) from Epoch's negligence or
willful act or omission in the manufacture, storage, or delivery of
Licensed Product and/or Purchased Product or (2) from Epoch's breach of
any warranty set forth in Article VI.
7.03 Indemnification Procedures. This agreement of indemnity is conditioned
upon the indemnified Party's obligation to: (1) advise the indemnifying
Party of any claim or lawsuit, in writing, within ten (10) days after
the indemnified Party has received notice of said claim or lawsuit, or,
within such a time frame as not to materially prejudice the rights of
the indemnifying Party, and (2) assist the indemnifying Party and its
representatives in the investigation and defense of any lawsuit and/or
claim for which indemnification is provided. This agreement of
indemnity will not be valid as to any settlement of a claim or lawsuit
or offer of settlement or compromise without the prior written approval
of the indemnifying Party.
ARTICLE VIII. TERM AND TERMINATION
8.01 Term. Unless terminated earlier as provided herein, this Agreement will
commence on the Effective Date and will remain in full force until the
expiration of the last to expire Licensed Patent.
8.02 Termination. This Agreement may be terminated as follows:
(1) by mutual written agreement of the Parties, effective as of
the time specified in such written agreement; or
(2) by either Party, (a) in the event the other Party will file in
any court or agency pursuant to any statute or regulation of
any state or country, a petition in bankruptcy or insolvency
or for reorganization or for an arrangement or for the
appointment of a receiver or trustee of the Party or of its
assets, or if the other Party proposes a written agreement of
composition or extension of its debts, or if the other Party
will be served with an involuntary petition against it, filed
in any insolvency proceeding, and such petition will not be
dismissed within sixty days after the filing thereof, or if
the other Party will propose or be a Party to any dissolution
or liquidation, or if the other Party will make an assignment
for the benefit
13
<PAGE> 14
of creditors, or (b) upon any material breach of this
Agreement by the other Party, provided that the Party alleging
such breach must first give the other Party written notice
thereof, which notice must state the nature of the breach in
reasonable detail and the Party receiving such notice must
have failed to cure such alleged breach within sixty (60) days
after receipt of such notice.
(3) Perkin-Elmer may terminate this Agreement at any time upon
sixty (60) days advance written notice to Epoch. In the event
that Perkin-Elmer terminates the Agreement pursuant to this
Section 8.02(3), Perkin-Elmer (1) will release its security
interest in the Licensed Patent granted in Section 5.11 and
Exhibit A, (2) will forfeit any unused portion of the
pre-payments paid to Epoch under Section 5.10, (3) will pay
for any orders placed under Article V prior to termination,
and (4) return all tangible embodiments of the Licensed
Know-How to Epoch.
8.03 Survival. Upon any termination of this Agreement, neither Party will be
relieved of any obligations incurred prior to such termination.
Notwithstanding any termination of this Agreement, the obligations of
the Parties under Articles IV, VI, VII, VIII, and X, as well as under
any licenses which are maintained in effect and any other provisions
which by their nature are intended to survive any such termination,
will survive and continue to be enforceable.
ARTICLE IX. INFRINGEMENT LITIGATION
9.01 Notification. Each Party will notify the other Party in writing of any
suspected infringement(s) of Licensed Patents in the Exclusive Licensed
Field or the Non-Exclusive Licensed Field and will inform the other
Party of any evidence of such infringement(s).
9.02 Infringement in Exclusive Licensed Field. Perkin-Elmer will have the
first right to institute suit for infringement(s) in the Exclusive
Licensed Field. Epoch agrees to join as a party plaintiff in any such
lawsuit initiated by Perkin-Elmer, if requested by Perkin-Elmer, with
all costs, attorneys' fees, and expenses to be paid by Perkin-Elmer.
However, if Perkin-Elmer does not institute suit for infringement(s)
within ninety (90) days of receipt of written notice from Epoch of
Epoch's desire to bring suit for infringement in its own name and on
its own behalf, then Epoch may, at its own expense, bring suit or take
any other appropriate action.
14
<PAGE> 15
9.03 Infringement Outside Exclusive Licensed Field. Epoch will have the sole
right, but not the obligation, to institute suit for infringement and
to recover damages outside of the Exclusive Licensed Field.
9.04 Recovery. Perkin-Elmer will be entitled to any recovery of damages
resulting from a lawsuit brought by it pursuant to Section 9.02. Epoch
will be entitled to recovery of damages resulting from any lawsuit
brought by Epoch pursuant to Section 9.03.
9.05 Settlement. Neither Party may settle with an infringer without the
prior written approval of the other Party if such settlement would
affect the rights of the other Party under the Licensed Patents.
ARTICLE X. GENERAL PROVISIONS
10.01 Force Majeure. If the performance of any part of this Agreement by
either Party, or of any obligation under this Agreement, is prevented,
restricted, interfered with or delayed by reason of any cause beyond
the reasonable control of the Party liable to perform, unless
conclusive evidence to the contrary is provided, the Party so affected
will, upon giving written notice to the other Party, be excused from
such performance to the extent of such prevention, restriction,
interference or delay, provided that the affected Party will use its
reasonable best efforts to avoid or remove such causes of
non-performance and will continue performance with the utmost dispatch
whenever such causes are removed. When such circumstances arise, the
Parties will discuss what, if any, modification of the terms of this
Agreement may be required in order to arrive at an equitable solution.
10.02 Governing Law. This Agreement will be deemed to have been made in the
State of California and its form, execution, validity, construction and
effect will be determined in accordance with the laws of the State of
California.
10.03 Informal Dispute Resolution. In an effort to resolve informally and
amicably any claim, controversy, or dispute arising out of or related
to the interpretation, performance, or breach of this Agreement (a
"Dispute") without resorting to litigation, each party will notify the
other party to the Dispute in writing of any Dispute hereunder that
requires resolution. Such notice will set forth the nature of the
Dispute, the amount involved, if any, and the remedy sought. Each party
will promptly designate an executive-level employee to investigate,
discuss and seek to settle the matter between them. If the two
designated representatives are unable to settle the matter within
thirty (30) days after such notification, the matter will be submitted
to Epoch's Chief Executive Officer and Perkin-Elmer's President of the
PE Biosystems Division for consideration. If settlement cannot be
reached
15
<PAGE> 16
through their efforts within an additional thirty (30) days (or such
longer time period as they will agree upon in writing), each party will
have the right to take such action as it deems appropriate. The statute
of limitations of the State of California applicable to the
commencement of a lawsuit will be tolled as of initial written
notification of a dispute to the other party as set forth above for
sixty (60) days (or such longer time as the parties agree in writing)
if all interim deadlines have been complied with by the notifying
party.
10.04 Attorneys' Fees. Except as otherwise provided herein, each party will
bear its own legal fees incurred in connection with the transactions
contemplated hereby, provided, however, that if any party to this
Agreement seeks to enforce its rights under this Agreement by legal
proceedings or otherwise, subject to Section 10.03, the non-prevailing
party will pay all costs and expenses incurred by the prevailing party,
including, without limitation, all reasonable attorneys' fees.
10.05 Separability. In the event any portion of this Agreement will be held
illegal, void or ineffective, the remaining portions hereof will be
interpreted to maintain the intent of the Parties. If any of the terms
or provisions of this Agreement are in conflict with any applicable
statute or rule of law, then such terms or provisions will be deemed
inoperative to the extent that they may conflict therewith and will be
deemed to be modified to conform with such statute or rule of law.
10.06 Entire Agreement. This Agreement constitutes the sole agreement between
the Parties relating to the subject matter hereof and supersede all
previous writings and understandings. Confidential disclosures made
pursuant to previously executed Confidentiality Agreements between
Epoch and Perkin-Elmer will remain subject to the terms of those
Confidentiality Agreements. No terms or provisions of this Agreement
will be varied or modified by any prior or subsequent statement,
conduct or act of either of the Parties, except that the Parties may
amend this Agreement by written instruments specifically referring to
and executed in the same manner as this Agreement.
10.07 Assignment. This Agreement and the licenses herein granted will be
binding upon and inure to the benefit of the successors in interest of
the respective Parties. Neither Party will have the power to assign
this Agreement nor any interest hereunder without the written consent
of the other, such consent not to be unreasonably withheld, provided,
however, that Perkin-Elmer or Epoch may assign this Agreement or any of
its rights or obligations hereunder to any Affiliate or to any third
party with which it may merge or consolidate, or to which it may
transfer all or substantially all of its assets or business to which
this Agreement relates, without obtaining the consent of the other
Party, subject to the other Party assuming all liabilities and
obligations under the Agreement.
16
<PAGE> 17
10.08 Bankruptcy. All rights and licenses granted under this Agreement by
Epoch to Perkin-Elmer will be considered for purposes of Section 365(n)
of the Bankruptcy Code, licenses of rights to "intellectual property"
as defined under Section 101(56) of the Bankruptcy Code. The parties
agree that Perkin-Elmer, as a licensee of such rights under this
Agreement, will retain and may fully exercise all of its rights and
elections under the Bankruptcy Code. In the event that Epoch seeks or
is involuntarily placed under the protection of the Bankruptcy Code,
and the trustee in bankruptcy rejects this Agreement, Perkin-Elmer
hereby elects, pursuant to Section 365(n), to retain all rights granted
to it under this Agreement to the extent permitted by the law.
10.09 Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart will be deemed an original
instrument, but all such counterparts together will constitute but one
agreement.
10.10 Notices. Any notice required or permitted under this Agreement will be
sent by air mail, postage pre-paid, to the following addresses of the
Parties:
If to Epoch: If to Perkin-Elmer:
Epoch Pharmaceuticals, Inc. The Perkin-Elmer Corp.
12277 134th Court NE PE Biosystems Division
Suite 100 850 Lincoln Centre Drive
Redmond, WA 98052 Foster City, CA 94404
Attn.: President Attn.: Legal Department
17
<PAGE> 18
IN WITNESS WHEREOF, the Parties, through their authorized officers, have
executed this Agreement as of the date first written above.
EPOCH PHARMACEUTICALS, INC. THE PERKIN-ELMER CORPORATION, THROUGH ITS
PE BIOSYSTEMS DIVISION
By: By:
/s/ Sanford S. Zweifach /s/
- ----------------------------------- -----------------------------------------
Name: Name:
Sanford S. Zweifach
- ----------------------------------- -----------------------------------------
Title: President Title:
- ----------------------------------- -----------------------------------------
Date: Date:
January 11, 1999 January 11, 1999
- ----------------------------------- -----------------------------------------
18
<PAGE> 19
EXHIBIT A
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (the "Security Agreement") is made and entered
into this 11th day of January, 1999 by and between EPOCH PHARMACEUTICALS, INC.,
a Delaware corporation (the "Debtor"), and THE PERKIN-ELMER CORPORATION, a New
York corporation (the "Secured Party").
R E C I T A L S
1. Pursuant to that certain License and Supply Agreement by and
between the Company and the Secured Party of even date herewith (the "License
and Supply Agreement"), Debtor will receive [*] from Secured Party as
pre-payment for certain goods (the "Pre-Payment").
2. As an inducement to Secured Party to provided the Pre-Payment,
Debtor has agreed to grant a security interest as set forth herein.
A G R E E M E N T
1. Security Interest. Pursuant to the Uniform Commercial Code,
Debtor hereby grants to Secured Party a security interest in the property of
Debtor (the "Collateral") described at Paragraph 2 below to secure the
Pre-Payment, as described at Paragraph 3 below.
2. Collateral. The Collateral of Debtor is described as follows:
US Patent No. 5,801,155 titled Covalently Linked Oligonucleotide Minor Groove
Binder Conjugates, issued September 1, 1998 (the "Licensed Patent"), including
any Related Patent. "Related Patent" means any patent or patent application
owned, held, or otherwise controlled, in whole or in part by Epoch that (1)
discloses and/or claims substantially the same subject matter as a Licensed
Patent, (2) discloses and/or claims improvements to inventions disclosed or
claimed in a Licensed Patent and requires rights under the Licensed Patent to
exploit such improvements, (3) claims priority to, a Licensed Patent, including
but not limited to continuation applications and patents, continuation-in-part
applications and patents, divisional applications and patents, reexamination
applications and patents, reissue applications and patents, and continuing
prosecution applications and patents, (4) is a parent of U.S. Patent No.
5,801,155, and/or (5) any foreign equivalents of a Licensed Patent or any patent
or patent application in (1), (2), (3) or (4) above.
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH COMMISSION.
A-1
<PAGE> 20
3. Obligations Secured. The obligations ("Obligations") secured
by this Security Agreement will be any repayment of any unused portion of the
Pre-Payment corresponding to goods not received by Secured Party in accordance
with the terms of the License and Supply Agreement, in excess of Fifty Thousand
Dollars ($50,000).
4. Collateral Encumbrances; Covenants of Debtor.
(a) Debtor owns the Collateral free and clear of any lien
except for the lien created by this Security Agreement, and no effective
financing statement or other instrument similar in effect, which covers all or
any part of the Collateral, exists or is on file in any recording office.
(b) As to the Collateral, Debtor covenants with Secured
Party as follows:
(i) Except as otherwise created by this Security
Agreement, Debtor will keep the Collateral free of all levies, liens,
encumbrances and other security interests of any nature whatsoever.
(ii) Debtor will comply with all laws, statutes
and regulations pertaining to the Collateral.
(iii) Debtor will pay when due all taxes,
licenses, charges and other impositions on or for the Collateral.
(iv) Debtor, at its own expense, (1) will
execute, file and record such assignments, statements, notices and agreements
including without limitation Form UCC-1, if applicable, and assignments,
statements, notices and agreements to be filed with government patent offices,
and (2) take such action and obtain such certificates and documents, in
accordance with all applicable laws, statutes, and regulations (whether state,
federal or local), as necessary to perfect, evidence and continue Secured
Party's security interest in the Collateral, including, without limitation,
assignments for security in the U.S. Patent and Trademark Office and
corresponding foreign patent offices. This subparagraph (iv) is subject to
specific performance and injunctive relief for the benefit of Secured Party in
the event of a failure by Debtor to duly comply with a reasonable request for
such compliance.
(v) Debtor will deliver to Collateral Agent all
instruments and other items of Collateral for which possession is required for
perfection.
(vi) Except as otherwise created by this Security
Agreement, Debtor will not create, permit or suffer to exist, and will defend
the Collateral against and take such other action as is necessary to remove, any
lien or encumbrance on the Collateral and will defend the right, title and
interest of Secured Party in and to the
A-2
<PAGE> 21
Collateral and in and to the proceeds thereof against the claims and demands of
all persons whomsoever.
5. Default. In the event of any termination of the License and
Supply Agreement (other than a termination by Debtor under Section 8.02(2)(b)
thereof due to a breach thereof by Secured Party), Debtor will within fifteen
(15) days of such termination reimburse Secured Party the difference between the
then unused portion of the Pre-Payment and Fifty Thousand Dollars ($50,000).
Upon such reimbursement, Secured Party will release its security interest in the
Collateral. In the event Debtor does not so reimburse Secured Party, Secured
Party may declare an event of default.
6. Remedies. Upon the occurrence of an event of default pursuant
to Section 5 hereof, the Secured Party may exercise any rights or remedies that
it may have as a secured party under applicable law.
7. Termination.
(a) This Security Agreement and the security interest
granted to Secured Party by Debtor hereunder will terminate at such time as the
unused portion of the Pre-Payment corresponding to goods not received by Secured
Party in accordance with the terms of the License and Supply Agreement is Fifty
Thousand Dollars ($50,000) or less.
(b) If applicable, and promptly upon termination of this
Security Agreement, the Secured Party agrees to execute and file with the
Washington Secretary of State a termination statement on Form UCC-2 and a
collateral assignment for filing in the Patent and Trademark Office terminating
Secured Party's security interest in the Collateral at the expense of the
Debtor. This subparagraph (b) is subject to specific performance and injunctive
relief for the benefit of Debtor in the event of a failure by the Secured Party
to duly comply with a reasonable request for such compliance.
8. Cumulative Rights. The rights, powers and remedies of Secured
Party under this Security Agreement will be in addition to all rights, powers
and remedies given to Secured Party by virtue of any statute or rule of law, or
any other agreement between Debtor and Secured Party or otherwise, all of which
rights, powers and remedies will be cumulative and may be exercised successively
or concurrently without impairing Secured Party's security interest in the
Collateral.
9. Waiver. Any forbearance or failure or delay by Secured Party
in exercising any right, power or remedy will not preclude the further exercise
thereof, and every right, power or remedy of Secured Party will continue in full
force and effect until such right, power or remedy is specifically waived in a
writing executed by Secured
A-3
<PAGE> 22
Party. Debtor waives any right to require Secured Party to proceed against any
person or to exhaust any of the Collateral or to pursue any remedy in Secured
Party's power.
10. Binding Upon Successors. All rights of Secured Party under
this Security Agreement will inure to the benefit of their successors and
assigns, and all obligations of Debtor will bind its successors and assigns.
11. Entire Agreement; Severability. This Security Agreement, along
with the associated License and Supply Agreement, contains the entire agreement
between Secured Party, and Debtor with respect to the subject matter hereof. If
any of the provisions of this Security Agreement will be held invalid or
unenforceable, this Security Agreement will be construed as if not containing
those provisions and the rights and obligations of the parties hereto will be
construed and enforced accordingly.
12. Choice of Law. This Security Agreement will be construed in
accordance with and governed by the internal laws of the State of Washington,
and where applicable and except as otherwise defined herein, terms used herein
will have the meanings given them in the Washington Uniform Commercial Code.
13. Place of Business; Trade Name; Collateral Location; Records.
Debtor represents that its chief place of business is 12277 134th Court, NE,
#110, Redmond, WA 98052 and that Epoch Pharmaceuticals, Inc., is the only trade
name or style used by Debtor and that Debtor's records concerning the Collateral
are kept at 12277 134th Court, NE, #110, Redmond, WA 98052.
14. Notice. Any written notice, consent or other communication
provided for in this Security Agreement will be deemed given if delivered by
hand, by courier against receipt, by certified or registered mail, return
receipt requested, or by overnight delivery service providing evidence of
receipt, at the following addresses, or to such other address with respect to
any party as such party will notify the other in writing:
Secured Party: The Perkin-Elmer Corp.
PE Biosystems Division
850 Lincoln Centre Drive
Foster City, CA 94404
Attn.: Legal Department
Debtor: Epoch Pharmaceuticals, Inc.
12277 134th Court NE
Suite 100
Redmond, WA 98052
Attn.: President
A-4
<PAGE> 23
15. Attorneys' Fees. In the event of any controversy, claim or
dispute between or among the Debtor and the Secured Party arising out of or
relating to this Security Agreement, or the breach hereof, the prevailing party
will be entitled to recover from the losing party reasonable attorneys' fees,
expenses and costs.
A-5
<PAGE> 24
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first written above.
DEBTOR: SECURED PARTY:
EPOCH PHARMACEUTICALS, INC. THE PERKIN-ELMER CORPORATION, THROUGH ITS
PE BIOSYSTEMS DIVISION
By: By:
/s/ Sanford S. Zweifach /s/
- ----------------------------------- -----------------------------------------
Name: Name:
Sanford S. Zweifach
- ----------------------------------- -----------------------------------------
Title: Title:
President
- ----------------------------------- -----------------------------------------
Date: Date:
January 11, 1999 January 11, 1999
- ----------------------------------- -----------------------------------------
A-6
<PAGE> 25
EXHIBIT B
SPECIFICATIONS FOR PURCHASED PRODUCT
I. HPLC ASSAY OF MGB OLIGONUCLEOTIDE
1. Equipment
a. Perkin-Elmer UV/Vis Detector or equivalent
b. [*] Ion Exchange Column [*]
c. [*] Rheodyne sample loop (Alltech Associates Inc. or
equivalent)
2. Reagents
a. [*] or equivalent
b. Water, Milli-Q or HPLC grade
c. Standard Buffer Salt is pH [*] Fisher P/N [*] or equivalent
d. [*] Filtration Membrane, [*] (Alltech Associates Inc. or
equivalent)
3. [*]
4. [*]
5. [*]
II. PURITY OF MGB OLIGONUCLEOTIDE
The purity of a MGB Oligonucleotide will be determined based on an area
percent of a product peak based on the above-described HPLC Method. A
Purified MGB Oligonucleotide will have a purity of at least [*].
However, the value of the required purity of a MGB Oligonucleotide may
be amended pursuant to Section 10.06 of the Agreement.
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH COMMISSION.
B-1
<PAGE> 26
III. YIELD OF MGB OLIGONUCLEOTIDE
The yield of a MGB Oligonucleotide will be determined based on a
relative area of a product peak as compared to an appropriate internal
standard based on the above-described HPLC Method, where the HPLC
analysis is performed immediately following synthesis of the MGB
Oligonucleotide. A Purified MGB Oligonucleotide will have a yield of at
least [*].
IV. IDENTITY OF MGB INTERMEDIATE
The parties will define a mutually acceptable assay for confirming the
identity of MGB Intermediate supplied to Perkin-Elmer by Epoch.
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH COMMISSION.
B-2
<PAGE> 27
EXHIBIT C
LICENSED KNOW-HOW
The Licensed Know-How transferred from Epoch to Perkin-Elmer will include at
least the following information.
1. Chemical structures of all reagents and probes provided to Perkin-Elmer
by Epoch to the extent necessary for Perkin-Elmer to make full use of
such reagents and probes for the synthesis and/or use of MGB
Intermediates and MGB Oligonucleotides.
2. Details of Epoch's manufacturing and QC methods to extent necessary for
Perkin-Elmer to manufacture MGB Oligonucleotides in conformance with
the specifications set forth in Exhibit B, including at least the
following:
a) detailed description of all DNA synthesis, purification,
formulation and analytical instrumentation, including vendors;
b) detailed DNA synthesis cycles;
c) cleavage conditions;
d) deprotection conditions;
e) purification methods, including HPLC, OPC and other protocols;
f) analytical methods, including HPLC and other protocols;
g) formulation and quantitation methods;
h) [*];
i) [*];
j) stability data of MGB reagents in DNA synthesis reagents and
under cleavage/deprotection conditions;
k) long term stability data of MGB probes;
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH COMMISSION.
C-1
<PAGE> 28
l) data correlating analytical specs (HPLC, etc.) to performance
of probes in relevant applications;
m) method used for validating probe manufacturing process;
n) method used for monitoring probe manufacturing process; and
o) extinction coefficients (at [*] nm) for MGB reagents.
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH COMMISSION.
C-2
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Epoch Pharmaceuticals, Inc.:
We consent to incorporation by reference in the registration statement (No.
33-66742) on Form S-3 of Epoch Pharmaceuticals, Inc. of our report dated
February 10, 1999, relating to the 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, which report appears in the December 31, 1998 annual
report on form 10-KSB of Epoch Pharmaceuticals, Inc.
Our report dated February 10, 1999 contains an explanatory paragraph which
states that the Company has suffered reoccurring 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
April 14, 1999
<TABLE> <S> <C>
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 658,363
<SECURITIES> 0
<RECEIVABLES> 38,303
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 742,435
<PP&E> 173,831
<DEPRECIATION> 0
<TOTAL-ASSETS> 970,203
<CURRENT-LIABILITIES> 1,171,692
<BONDS> 0
0
0
<COMMON> 148,242
<OTHER-SE> (3,349,731)
<TOTAL-LIABILITY-AND-EQUITY> 970,203
<SALES> 0
<TOTAL-REVENUES> 159,917
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,774,047
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 727,156
<INCOME-PRETAX> (5,103,009)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,213,009)
<DISCONTINUED> 110,000
<EXTRAORDINARY> 0
<CHANGES> 0
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