<PAGE> 1
As filed with the Securities and Exchange Commission on __________ ___, 1999
Registration No. 333-21353
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
EPOCH PHARMACEUTICALS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 2834 91-1311592
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER OF
INCORPORATION OR ORGANIZATION) INDUSTRIAL CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
12277 134th Court NE, Suite 110, Redmond, Washington 98052
(425) 821-7535
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
12277 134th Court NE, Suite 110, Redmond, Washington 98052
(425) 821-7535
(ADDRESS OF PRINCIPAL PLACE OF BUSINESS)
Fred Craves, Ph.D., Chief Executive Officer
12277 134th Court NE, Suite 110, Redmond, Washington 98052
(425) 821-7535
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
C. CRAIG CARLSON, ESQ.
LAWRENCE B. COHN, ESQ.
STRADLING YOCCA CARLSON & RAUTH
660 NEWPORT CENTER DRIVE, SUITE 1600
NEWPORT BEACH, CALIFORNIA 92660
(949) 725-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933 (the "Securities Act"),
please check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box: [X]
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CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES AMOUNT TO BE AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED (1) OFFERING PRICE (2) PRICE FEE
=====================================================================================================================
<S> <C> <C> <C> <C>
Common Stock, par value: $.01 per share 1,268,258 shares $.86 $1,000,702 $331*
=====================================================================================================================
</TABLE>
(1) The Company originally registered for resale by security holders 10,428,365
shares of Common Stock under Registration No. 333-12601 on Form SB-2.
Pursuant to Rule 429, the Prospectus included as part of this Post
Effective Amendment No. 1 to Form SB-2 Registration Statement also relates
to the resale of such previously registered shares. The Registrant has
previously paid a registration fee of $3,465.47 with respect to such
shares.
(2) The offering price is estimated solely for the purpose of calculating the
registration fee in accordance with Rule 457(C), using the average of the
high and low bid price for the Common Stock on the OTC Bulletin Board or
February 3, 1997, which was approximately $.86 per share.
* Previously paid
<PAGE> 2
TABLE OF CONTENTS
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PAGE
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<S> <C>
Forward-Looking and Cautionary Statements.................................... 2
Prospectus Summary........................................................... 3
Risk Factors................................................................. 4
Use Of Proceeds.............................................................. 9
Price Range of Common Stock.................................................. 10
Capitalization............................................................... 11
Dividend Policy.............................................................. 11
Selected Financial Data...................................................... 12
Management's Discussion and Analysis of Financial Condition
And Results of Operations................................................ 13
Business..................................................................... 17
Management................................................................... 23
Certain Transactions......................................................... 25
Security Ownership of Certain Beneficial Owners And Management............... 27
Description Of Capital Stock................................................. 29
Selling Stockholders......................................................... 32
Plan of Distribution......................................................... 34
Legal Matters................................................................ 34
Experts...................................................................... 34
Index to Financial Statements................................................F-
</TABLE>
We have not authorized any dealer, salesperson or other person to give
any information or represent anything not contained in this Prospectus. You must
not rely on any unauthorized information. This Prospectus does not offer to sell
or buy any shares in any jurisdiction where it is unlawful. The information in
this Prospectus is current as of ______, 1999.
<PAGE> 3
PROSPECTUS
EPOCH PHARMACEUTICALS, INC.
(formerly "MicroProbe Corporation")
4,891,001 Shares of Common Stock
(Par Value $0.01 Per Share)
The stockholders listed in this Prospectus under the section entitled
"Selling Stockholders" may offer and sell a total of 4,891,001 shares of Common
Stock, which they own or have the right to acquire from time to time. The shares
of Common Stock included in this offering consist of 4,891,001 shares of Common
Stock issuable upon exercise of warrants.
------------------
The Selling Stockholders may sell the shares of Common Stock described
in this Prospectus in public or private transactions, on or off the OTC Bulletin
Board, at prevailing market prices, or at privately negotiated prices. The
Selling Stockholders may sell shares directly to purchasers or through brokers
or dealers. Brokers or dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Stockholders. We will not
receive any proceeds from the Selling Stockholders' sale of the shares of Common
Stock. However, some of the Common Stock which may be sold under this prospectus
will require the Selling Stockholder to first exercise warrants. Epoch would
receive the proceeds from the exercise of any warrants and the proceeds would be
used to fund the ongoing operations of the Company. Also, we have agreed to pay
the expenses associated with the registration and sale of the Common Stock
offered by the Selling Stockholders. More information is provided in the section
titled "Plan of Distribution."
------------------
Our Common Stock is currently traded on the OTC Bulletin Board under the
symbol "EPPH."
------------------
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 4 OF THIS PROSPECTUS.
------------------
Neither The Securities and Exchange Commission ("SEC") nor any state
securities commission has approved or disapproved of these securities, or
determined if this Prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
------------------
In this prospectus, the "Company," the "Registrant," "Epoch," "we," "us"
and "our" refer to Epoch Pharmaceuticals, Inc.
------------------
The date of this Prospectus is ___________, 1999.
<PAGE> 4
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
This Prospectus contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934 (the "Exchange Act") and such
forward-looking statements are subject to the safe harbors created thereby. For
this purpose, any statements contained in this Form SB-2 except for historical
information may be deemed to be forward-looking statements. Without limiting the
generality of the foregoing, words such as "may," "will," "expect," "believe,"
"anticipate," "intend," "could," "estimate" or "continue" or the negative or
other variations thereof or comparable terminology are intended to identify
forward-looking statements. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances are forward-looking statements.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties, as well as on
certain assumptions. For example, any statements regarding future cash flow,
financing activities, and research and development programs are forward-looking
statements and there can be no assurance that the Company will generate positive
cash flow in the future or that the Company will be able to obtain financing on
satisfactory terms, if at all. Additional risks and uncertainties include
possible delays in the completion of products, the possible lack of market
acceptance of products released by the Company, failure of our products to be
and remain accepted within their respective markets, material adverse changes in
competitive conditions within our markets, failure to retain key research and
development personnel, failure of the Company to accurately anticipate market
demand, and material adverse changes in the Company's operations or business.
Additional factors that may affect future operating results are discussed in
more detail under the Section entitled "Risk Factors." Assumptions relating to
the foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions, and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although we believe that the assumptions
underlying the forward-looking statements are reasonable, the business and
operations of the Company are subject to substantial risks that increase the
uncertainty inherent in the forward-looking statements, and the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.
In addition, risks, uncertainties and assumptions change as events or
circumstances change.
In light of such significant uncertainties, you should carefully read
the factors set forth in the section entitled "Risk Factors" and any other
cautionary statements made in this Prospectus and understand that those factors
and statements are applicable to all related forward-looking statements wherever
they appear in this Prospectus.
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information, including the Financial Statements
and related Notes, contained elsewhere in this Prospectus. This summary is
incomplete and may exclude certain information that you should consider before
investing in the Common Stock offered in this Prospectus. You should read the
entire Prospectus carefully.
BUSINESS OF EPOCH PHARMACEUTICALS, INC.
Epoch Pharmaceuticals, Inc. ("Epoch" or the "Company") is a biomedical
company utilizing nucleoside and nucleotide chemistry to develop molecular tools
for genetic analysis. Utilizing unique and proprietary technology in the
rational design, synthesis and chemical modification of oligonucleotides, the
Company has positioned itself to provide products and techniques for high
throughput genetic sequence analysis that are in increasing demand in the
rapidly expanding field of genetic pharmacology.
Previously, our therapeutic research and development program focused on
the modification of gene expression by altering cellular genomic DNA using
oligonucleotide targeting technology combined with chemical reactivity. Our
technology is based on expertise in designing and synthesizing oligonucleotides
bearing modifications that selectively bind to and interact with the target
genes.
Recently, we discovered that the compounds and techniques that were
being developed for our gene modification program can be adapted to several gene
sequencing analysis systems currently in use or being developed by others. We
believe this technology has broad application potential in the developing fields
of molecular diagnostics and genomics, including the detection of infectious
diseases, inheritable diseases through prenatal testing, screening populations
to identify genetic markers that correlate with disease risk or drug response,
as well as any other genetic analysis based on DNA sequence determination.
In January 1999, we licensed certain of our enabling genetic analysis
technology to the PE Biosystems Division of The Perkin-Elmer Corporation.
Perkin-Elmer will use the technology in applications related to its proprietary
technology in the areas of biomedical research and certain non-clinical applied
fields. As part of the license agreement, Perkin-Elmer will purchase our
proprietary chemical intermediates. In addition to up-front license fees and
pre-payments for future purchases, we will receive a royalty on all products
that Perkin-Elmer sells which incorporate our technology.
We incorporated in Delaware on August 14, 1985, under the name
MicroProbe Corporation. We changed our name to Epoch Pharmaceuticals, Inc. in
December 1995. Our principal office is located at 12277 134th Court NE, Suite
110, Redmond, Washington 98052 and our telephone number is (425) 821-7535.
<PAGE> 6
THE OFFERING
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<S> <C>
Common Stock Offered......................... Up to 4,891,001 shares, including up to
4,891,001 shares issuable upon exercise of
warrants, to be sold by the Selling
Stockholders.
Common Stock Outstanding Prior to
this Offering (1)............................ 14,824,227 shares
Common Stock to be Outstanding After
Completion of this Offering (1).............. 14,824,227 shares
Selling Stockholders ........................ See the section entitled "Selling
Stockholders," included in this Prospectus.
Risk Factors................................. Investment in these securities is uncertain
and risky. See "Risk Factors."
Use of Proceeds.............................. We will not receive any proceeds from the
sale of the Common Stock being sold in this
offering. Some of the Common Stock, however,
will be received by the Selling Stockholders
only when they exercise warrants. For any
warrants exercised, the Company will receive
proceeds which will be used to fund our
research and development activities and for
general corporate purposes.
Dividend Policy ............................. We do not anticipate paying cash dividends in
the foreseeable future as earnings will be
invested in the growth of our business. See
"Dividend Policy."
OTC Bulletin Board Symbol Common Stock....... EPPH
</TABLE>
- ----------
(1) Based upon the number of outstanding shares at December 31, 1998. Does
not include (i) 1,135,986 shares reserved for issuance upon exercise of
outstanding stock options, and (ii) 7,798,875 shares reserved for
issuance upon exercise of outstanding warrants.
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<PAGE> 7
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table sets forth selected Summary Financial Information for 1996,
1997, and 1998.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenue $ 37 $ 188 $ 160
Loss from continuing operations (3,326) (3,735) (5,213)
Net loss (3,452) (3,605) (5,103)
Net loss per common share - basic and diluted (0.32) (0.24) (0.34)
Weighted average common shares
outstanding - basic and diluted 10,854,993 14,755,462 14,818,960
BALANCE SHEET DATA:
Working capital (deficit) $ 4,577 $ 1,124 $ (429)
Total assets 5,318 1,813 970
Stockholders' equity (deficit) 4,876 1,349 (3,201)
</TABLE>
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<PAGE> 8
RISK FACTORS
Investing in the Common Stock being offered by the Selling Stockholders
is very risky. You should be able to bear a complete loss of your investment.
You should carefully consider the following factors and other information in
this Prospectus before deciding to invest in shares of our Common Stock being
offered by the Selling Stockholders.
HISTORY OF OPERATING LOSSES; ANTICIPATED FUTURE LOSSES.
Since our formation in 1985, we have generated limited revenues from the
sale of diagnostic products and from research and development grants. In 1995,
we sold substantially all of the then existing diagnostic assets that were used
to generate these revenues. As of December 31, 1998, the Company had a
cumulative deficit of approximately $56.8 million and negative working capital
of $429,000. We expect to incur additional losses as we expand our research and
development efforts. We make no guarantee that we will ever become profitable.
We will need additional funds to continue our research and development
activities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
NEED FOR SUBSTANTIAL ADDITIONAL FUNDS.
Historically, we have spent, and will continue to spend, more money than
we can generate in order to complete the research and development in nucleoside
and nucleotide chemistry to develop tools for genetic analysis. Based on our
currently planned programs, we believe that our current financial resources
should support our capital and operating needs into the third quarter of 1999.
We will require additional funds to continue our operations beyond that time. We
plan to seek additional funds through public or private sales of our securities,
including equity securities and through collaborative or other arrangements with
corporate partners. However, we may be unable to obtain, from these or other
sources, adequate funds when needed or on terms acceptable to us. If we fail to
obtain sufficient funds, we may need to delay, scale back or terminate some or
all of our research and development programs or license third parties to
commercialize our products or technologies that we would otherwise seek to
develop ourselves.
DEPENDENCE UPON NEW AND UNPROVEN TECHNOLOGY.
The science and technology of oligonucleotide-based products is rapidly
evolving. Our proposed products are in the discovery or early development stage.
The proposed products will require significant further research, development,
and testing and are subject to the risks of failure inherent in the development
of products based on innovative technologies. We also face the risk that any or
all of our proposed products could prove to be ineffective or unsafe, be
unmarketable because third parties hold proprietary rights which prohibit us
from marketing the proposed products, or be an inferior product to products
marketed by others. Accordingly, we cannot predict whether our research and
development activities will result in any commercially viable products.
DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING AND MARKETING.
We believe that raw materials and other components are available in
sufficient quantities to meet production requirements. Our current plan for
operations is to produce chemical reagent products and small quantities of
oligonucleotide products in our Redmond facility. Our longer term plan for
operations is to enter into collaborative arrangements with other companies to
manufacture our products. To date,
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<PAGE> 9
we have not entered into any collaborative manufacturing arrangements for any of
our proposed products and there can be no assurance that we will be able to
enter into any such arrangements on favorable terms or at all.
We have no recent experience in marketing products and anticipate that
we will seek to enter into collaborative arrangements with pharmaceutical
companies to market our products. We entered into a license agreement for
certain of our enabling genetic analysis technology with the PE Biosystems
division of Perkin Elmer Corporation in January 1999. There can be no assurance
that Perkin-Elmer can successfully introduce our proposed products or that we
will be able to enter into any additional collaborative arrangements on
favorable terms or at all.
RELIANCE ON PATENT AND PROPRIETARY TECHNOLOGY; RISK OF PATENT INFRINGEMENT.
We attempt to protect our proprietary technology by relying on several
methods. As of February 8, 1999, we 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. We also have international patent applications that
correspond to many of the U.S. patents and patent applications. The issued
patents and pending patent applications cover inventions relating to the
components of our core technologies. The expiration dates of these patents range
from January 2010 to August 2014. We make no guarantee that any issued patents
will provide us with significant proprietary protection, that pending patents
will be issued, or that products incorporating the technology from our issued
patents or pending applications will be free from challenges by competitors.
The biomedical industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. We were defendants in
one such action which has been settled. Although patent and intellectual
property disputes in the biomedical area have often been settled through
licensing or similar arrangements, costs associated with such arrangements may
be substantial. Further, we make no guarantee that we will obtain necessary
licenses on satisfactory terms or at all. Accordingly, an adverse determination
in a judicial or administrative proceeding or our failure to obtain necessary
licenses could prevent us from manufacturing and selling our products. This
would substantially hurt our operating results, financial condition and
ultimately our business.
COMPETITION AND CHANGING TECHNOLOGY
Many companies do research and development and market products designed
to diagnose infectious diseases based on a number of technologies and are
developing additional DNA probe-based products. Many of these companies have
substantially greater capital resources, larger research and development and
marketing staffs and facilities and greater experience in developing products
than we have. Furthermore, our specific field in which we operate is subject to
significant and rapid technological change. Accordingly, even if we successfully
introduce our products or proposed products, we risk that our technologies will
be replaced by new technologies or that our products or proposed products will
be obsolete or non-competitive.
LACK OF FULL-TIME EXECUTIVE OFFICERS
Fred Craves currently serves as our Chairman and Chief Executive Officer
and Sanford S. Zweifach currently serves as our President and Chief Financial
Officer. Both serve on a part-time basis. Although they devote a substantial
portion of their time to our business, they also devote substantial portions of
their time to their positions with other entities.
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<PAGE> 10
DEPENDENCE ON KEY PERSONNEL
We are dependent upon our key management and technical personnel and
consultants, and our future success will depend in part upon our ability to
retain these persons and to recruit additional qualified personnel. We must
compete with other companies, universities, research entities and other
organizations in order to attract and retain highly qualified personnel.
Although we have entered into agreements with our key executive officers, we
make no guarantee that we will retain such highly qualified personnel or hire
additional qualified personnel. We currently maintain no key man life insurance
on any of our management or technical personnel.
LACK OF LISTING ON AN EXCHANGE OR ON THE NASDAQ SYSTEM; RESTRICTIONS ON OUR
STOCK
Our Common Stock is neither listed on any exchange nor on the Nasdaq
System. Our Common Stock is reported on the OTC Bulletin Board. Because our
shares are not listed on the Nasdaq System, they are subject to the regulations
regarding trading in "penny stocks" which are those securities trading for less
than $5.00 per share. The following is a list of the restrictions on the sale of
penny stocks.
1. Prior to the sale of penny stock by a broker-dealer to a new
purchaser, the broker-dealer must determine whether the purchaser
is suitable to invest in penny stocks. To make that
determination, a broker-dealer must obtain, from a prospective
investor, information regarding the purchaser's financial
condition and investment experience and objectives. Subsequently,
the broker-dealer must deliver to the purchaser a written
statement setting forth the basis of the suitability finding.
2. A broker-dealer must obtain from the purchaser a written
agreement to purchase the securities. This agreement must be
obtained for every purchase until the purchaser becomes an
"established customer."
3. The Exchange Act requires that prior to effecting any transaction
in any penny stock, a broker-dealer must provide the purchaser
with a "risk disclosure document" that contains, among other
things, a description of the penny stock market and how it
functions and the risks associated with such investment. These
disclosure rules are applicable to both purchases and sales by
investors.
4. A dealer that sells penny stock must send to the purchaser,
within ten days after the end of each calendar month, a written
account statement including prescribed information relating to
the security.
As a result of our securities not being listed on an exchange or the
Nasdaq System and the rules regarding penny stock transactions, your ability to
convert shares of our Common Stock into cash or to sell to a third party may be
very limited. We make no guarantee that our current market-makers will continue
to make a market in our securities, or that any market for our securities will
continue.
NO DIVIDENDS PAID AND NONE ANTICIPATED
We have never paid dividends on our Common Stock and do not plan to in
the foreseeable future, as any earnings will be invested in the further
expansion of our business.
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<PAGE> 11
VOLATILITY OF STOCK PRICE
The market price of our Common Stock may fluctuate significantly. We are
in the biotechnology industry and the market price of securities of
biotechnology companies have fluctuated significantly and these fluctuations
have often been unrelated to the companies' operating performance. Announcements
by us or our competitors concerning technological innovations, new products,
proposed governmental regulations or actions, developments or disputes relating
to patents or proprietary rights, and other factors that affect the market
generally could significantly impact our business and the market price of our
securities. Sales of our securities by existing security holders could also
significantly impact the market price of our securities.
SHARES ELIGIBLE FOR FUTURE SALE; DILUTION.
Sales of substantial numbers of shares of our Common Stock in the public
market could substantially reduce the prevailing market price of our Common
Stock. As of December 31, 1998, 14,824,227 shares of our Common Stock were
outstanding, 7,798,875 shares of our Common Stock were issuable upon exercise of
outstanding warrants at exercise prices ranging from $0.30 to $9.21 per share,
and an additional 1,135,986 shares of our Common Stock were issuable upon
exercise of outstanding options at exercise prices ranging from $0.30 to $5.88
per share. Of the outstanding shares of Common Stock and shares issuable upon
exercise of warrants and options, substantially all are freely tradable by the
holders of such securities without restriction. If these holders sell a large
number of shares of our Common Stock in the public market, such sales could
substantially reduce the prevailing market price of our Common Stock. To the
extent the trading price of our Common Stock exceeds the exercise price of
options or warrants at the time such options or warrants are exercised, such
exercise will have a dilutive effect on the other stockholders.
IMPACT OF YEAR 2000
Many existing information technology (IT) systems, such as computer
systems and software products, as well as non-IT systems that include embedded
technology, were not designed to correctly process dates after December 31,
1999. We have assessed the impact of such "Year 2000" issues on our products,
our internal IT and non-IT systems, as well as on our suppliers and service
providers. We have determined that our business systems are not Year 2000 ready.
We have developed a plan to replace these systems in a timely fashion at a cost
of approximately $30,000. We are also discussing with our significant suppliers
and service providers their plans to investigate, identify and fix their Year
2000 issues. We believe that most of our significant suppliers and service
providers will cooperate in resolving any Year 2000 problems. However, we are
also dependent on certain utility companies, telecommunication service companies
and other service providers that are outside our control. Therefore, it may be
difficult for us to obtain assurances of Year 2000 readiness from such third
parties. We believe that we will have identified all of our material Year 2000
issues. However, given the pervasiveness of Year 2000 issues and the complex
interrelationships among Year 2000 issues both internal and external to us, we
cannot guarantee that we will be able to identify and accurately evaluate all
such issues.
If any supplier or service provider fails to appropriately address their
Year 2000 issues, our business, financial condition and operating results could
be significantly hurt. For example, if a supplier or service provider
experiences a Year 2000 problem which results in or contributes to delays or
interruptions in delivering products or services to us, our business, financial
condition and operating
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<PAGE> 12
results could be significantly hurt. Finally, general economic disruption
resulting from Year 2000 issues could also significantly hurt us.
In preparation for the Year 2000, we are developing contingency plans in
case we fail to complete our remediation programs in a timely manner and in the
event that any third party who provides goods or services essential to our
business fails to appropriately address their Year 2000 issues. We expect to
finish developing these contingency plans by mid-1999. Even if we complete these
plans on time and put them in place, we cannot guarantee that such plans will be
sufficient to address any third party failures or that unresolved or undetected
internal and external Year 2000 issues will not significantly hurt our business,
financial condition and operating results.
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<PAGE> 13
USE OF PROCEEDS
The Company will not receive any proceeds from the Selling Stockholders'
sales of their Common Stock. However, certain of the Selling Stockholders hold
warrants exercisable for Common Stock. The Company will receive the proceeds
when those Selling Stockholders exercise their warrants and we will use those
proceeds for research and development and general corporate purposes; however,
the amount of such exercises and the corresponding proceeds cannot be predicted.
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<PAGE> 14
PRICE RANGE OF COMMON STOCK
Our Common Stock trades on the OTC Bulletin Board under the symbol
"EPPH." The following table presents quarterly information on the high and low
bid prices on the OTC Bulletin Board, which reflects inter-dealer prices,
without retail mark-up, mark down or commission and may not represent actual
transactions:
<TABLE>
<CAPTION>
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
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1996 HIGH LOW
------ -----
<S> <C> <C>
Fourth Quarter $1.56 $0.63
Third Quarter 1.56 0.95
Second Quarter 2.03 1.50
First Quarter 1.04 0.50
</TABLE>
On April 19, 1999, the last reported sale price for the Common Stock on
the OTC Bulletin Board was $3.44 per share. 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 anticipate paying any dividends upon its Common Stock in the
foreseeable future. The Company will use any earnings generated in the
foreseeable future for the further expansion of the business.
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<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of Epoch as of
December 31, 1998:
<TABLE>
<S> <C>
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 (1) ................. 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)
------------
Total capitalization ............................................. $ (201,489)
============
</TABLE>
(1) Excludes 7,798,875 shares of Common Stock issuable upon exercise of
outstanding warrants at exercise prices ranging from $0.30 to $9.21, and
1,135,986 shares of Common Stock issuable upon exercise of outstanding
options at exercise prices ranging from $0.30 to $5.88 per share. See
"Management--Stock Option Plan" and "Description of Capital Stock."
DIVIDEND POLICY
We have not paid cash dividends in the past and do not intend to pay
cash dividends in the foreseeable future.
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<PAGE> 16
SELECTED FINANCIAL DATA
(in thousands, except share and per share data)
You should read the following selected financial and operating data in
conjunction with the accompanying financial statements and related notes thereto
included elsewhere in this Prospectus and "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The selected financial data
set forth below as of and for the years ended December 31, 1996, 1997 and 1998
have been derived from our audited financial statements. The report of our
Independent Public Accountants dated February 10, 1999 contains an explanatory
paragraph that states that we have suffered recurring losses from operations and
have a net capital deficiency which raises substantial doubt about our ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty. Certain
balances have been restated to reflect the sale of our diagnostic division as
discontinued operations.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Statement of Operations Data:
Research contract revenue ........................ $ 37 $ 188 $ 160
Operating expenses:
Research and development ......................... 2,149 2,682 2,759
General and administrative ....................... 1,256 1,514 2,015
Total operating expenses ......................... 3,405 4,196 4,774
------------ ------------ ------------
Operating loss ................................... (3,368) (4,008) (4,614)
------------ ------------ ------------
Net loss from continuing operations .............. (3,326) (3,735) (5,213)
============ ============ ============
Net loss ......................................... $ (3,452) $ (3,605) $ (5,103)
============ ============ ============
Net loss from continuing operations per
common share - basic and diluted ................. $ (0.31) $ (0.25) $ (0.35)
Net loss per common share - basic and diluted .... $ (0.32) $ (0.24) $ (0.34)
Weighted average shares outstanding -
basic and diluted ................................ 10,854,993 14,755,462 14,818,960
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ........................ $ 4,890 $ 1,485 $ 658
Working capital (deficit) ........................ 4,577 1,124 (429)
Total assets ..................................... 5,318 1,813 970
Accumulated deficit .............................. (48,125) (51,730) (56,833)
Total stockholders' equity (deficit) ............. 4,876 1,349 (3,201)
</TABLE>
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<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operation of the Company should be read in conjunction with the Financial
Statements and related Notes included elsewhere in this Prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in the forward-looking statement as a result of certain factors,
including, but not limited to, those set forth in "Risk Factors" and elsewhere
in this Prospectus.
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 and cash of $658,000.
In January 1999, the Company entered into a License and Supply
Agreement with 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.
Management estimates that its existing cash balance, including the
Perkin-Elmer receipts, provides sufficient working capital to operate until the
third quarter 1999.
The Company expects to incur substantial operating losses for the next
year as the Company continues research and development spending in applying its
oligonucleotide-based technology to the expanding areas of genomics and
molecular diagnostics.
RESULTS OF OPERATIONS
The following discussion of results of operations reflects the Company's
diagnostics division as discontinued operations.
Years Ended December 31, 1997 and 1998
Research Contract Revenue. Research contract revenue reflects revenue
from U.S. government grants and contracts and subcontracts.
Research and Development. Research and development expenses increased in
total by $77,000 for 1998 over the prior year. This increase is the result of a
modest increase in research activity as well as normal business fluctuations.
General and Administrative. General and administrative expenses
increased $501,000 in 1998 over the prior year. The increase was primarily the
result of the expenses incurred in the abandonment of a proposed facility which
resulted in the recognition of $472,000 in costs during 1998. Also included in
1998 is $88,000 in expenses associated with the move to a new building.
The Company's general legal expense was $84,000 more in 1998 than in
1997. This increase was the result of an increase in business transactions
requiring legal counsel.
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<PAGE> 18
Offsetting some of the increase in general and administrative expenses
in 1998, is a decrease in expenditures for the filing of patents on new
technologies. During 1997, the Company expended $263,000 for patent filings on
new technologies, as compared to $212,000 in 1998.
Additional variations in general and administrative expenses are the
result of normal business fluctuations.
Interest Income. Interest income in 1998 is less than 1997 due to lower
cash balances available for investment.
Interest and Financing Expense. Interest and financing expense in the
current year increased over the prior year due to the increase in notes payable
of $3,000,000, as well as including the amortization of $516,000 of deferred
financing expense incurred in 1998.
Other Income. Other income in 1997 includes $116,000 received from
Saigene Corporation ("Saigene") as payment for administrative support functions
as well as for rented laboratory and office space. Saigene relocated to separate
facilities in April 1998, after which this income ceased.
In 1996, the Company disposed of the remaining assets of its
discontinued diagnostics division receiving a $1,100,000 note. Collections on
the note have been sporadic and, due to uncertainties regarding ultimate
collectibility, the Company has not recognized the receivable and recognizes
only that portion of the gain for which cash payments are received. At December
31, 1998, the unrecognized balance on the note and the unrecognized gain was
$973,000.
Years Ended December 31, 1996 and 1997.
Research Contract Revenue. Research contract revenue is comprised of
revenue from U.S. government grants and contracts and subcontracts.
Research and Development. Research and development expense increased
approximately $534,000 for the year ended December 31, 1997 compared to the
prior year. This increase is the result of increased research funded with
proceeds from the 1996 private placement.
General and Administrative. General and administrative expense increased
$257,000 in 1997 over the prior year. General and administrative expense in 1997
included $263,000 in fees for filing patents on new technologies, compared to
$87,000 in 1996. We believe that these patents, if issued, will improve our
proprietary position with regard to our targeted gene mutagenesis technologies.
We make no guarantee that our patent applications will result in further issued
patents or that such issued patents will offer protection against competitors
with similar technology. Additionally, we make no guarantee that the
manufacture, use or sale of our technology or products will be free from any
infringements on patents or proprietary rights belonging to others. Further, we
may be unable to obtain licenses or other rights to other technologies that we
may need to commercialize our proposed products.
Offsetting the increase in patent fees, our general legal expense was
$82,000 less in 1997 than in 1996. This reduction was the result of normal
fluctuations in business transactions requiring legal counsel. Expenses in 1997
were further reduced by $21,000 compared to 1996 as deferred compensation from
stock options become fully amortized during the year. We had no deferred
compensation to be amortized as of December 31, 1997. Further contributing to
the variance, in July 1996 the In Re Blech Securities Litigation suit was
dismissed. Accordingly, $250,000 of estimated costs which had been accrued for
this matter was reversed resulting in an expense reduction for the year ended
December 31,
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<PAGE> 19
1996. Additional variations in general and administrative expenses resulted from
normal business fluctuations.
Interest Income and Expense. Interest income in the year ended December
31, 1997 decreased compared to the prior year due to lower investable funds
during 1997. Interest expense in 1997 decreased from 1996 as proceeds from the
1996 private placement were used to pay off debt. Additionally, 1996 included
amortization of $122,000 of discount on notes payable due to repricing of
warrants associated with a bridge financing which was completed in 1995.
Other Income. Other income in 1997 included $116,000 received from
Saigene as payment for administrative support functions as well as for rented
laboratory and office space. As previously mentioned, in April 1998, Saigene
moved to new facilities and we stopped providing administrative support
functions.
Income (Loss) from Discontinued Operations. The income (loss) from
discontinued operations relates to the operations and disposal of the assets of
our diagnostics division. We sold the majority of our then existing diagnostic
assets to Becton Dickinson in November 1995.
Gain on Disposal of Diagnostics Division. The gain on disposal of
diagnostics division represents only that portion of the gain for which cash
payments were received, which totaled $67,000 in 1996 and $130,000 in 1997.
PLAN OF OPERATIONS; LIQUIDITY AND CAPITAL RESOURCES
At 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 with Perkin-Elmer. Under the
agreement, 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.
Cash decreased by $827,000 from December 31, 1997 to December 31, 1998
due to normal expenditures on the Company's operations, offset by the proceeds
of a $3,000,000 loan received from Bay City Capital which is due in February
2000. The comparable period of the prior year, December 31, 1996 to December 31,
1997, had a cash decrease of $3,405,000 due to normal expenditures on the
Company's operations.
Prior to September 1998, the Company had been in negotiations for a
lease on approximately 21,000 square feet in the general vicinity of its then
current facility in Bothell, Washington. A design build team had been selected
and was working on plans for the new space. In September 1998, the project was
canceled. Costs for architectural fees and long lead equipment items incurred
prior to
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<PAGE> 20
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.
Cash decreased by $3,405,000 as of December 31, 1997 compared to
December 31, 1996. This was primarily due to normal operating expenditures. The
comparable period of the prior year, December 31, 1995 to December 31, 1996, had
a cash increase of $1,151,000 due to the net cash generated by the sale of
shares and warrants offset by normal operating expenditures.
The changes in accounts payable and accrued liabilities as of December
31, 1997 compared to December 31, 1996 resulted from normal business
fluctuations.
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 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.
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<PAGE> 21
BUSINESS
OVERVIEW
Epoch is a biomedical company utilizing nucleoside and nucleotide
chemistry to develop molecular tools for genetic analysis. Utilizing unique and
proprietary technology in the rational design, synthesis and chemical
modification of oligonucleotides, the Company has positioned itself to provide
products and techniques for high throughput genetic sequence analysis that are
in increasing demand in the rapidly expanding field of genetic pharmacology.
Previously, Epoch's therapeutic research and development program had
focused on the modification of gene expression by altering cellular genomic DNA
using oligonucleotide targeting technology combined with chemical reactivity.
The Company's technology is based on its expertise in designing and synthesizing
oligonucleotides bearing modifications that selectively bind to and interact
with the target genes.
Epoch recently discovered that the compounds and techniques that were
being developed for its gene modification therapeutic program can be adapted to
several gene sequencing analysis systems currently in use or being developed by
others. The Company believes that this technology has broad application
potential in the developing fields of molecular diagnostics and genomics,
including the detection of infectious diseases, inheritable diseases through
prenatal testing, screening populations to identify genetic markers that
correlate with disease risk or drug response, as well as any other genetic
analysis based on DNA sequence determination.
BACKGROUND
Nucleic acids are found in all living organisms and are the sole
carriers of the genetic code that specifies an organism's makeup. There are two
types of closely related nucleic acids, deoxyribonucleic acid (DNA) and
ribonucleic acid (RNA). DNA carries the permanent genetic information for
construction of all proteins in higher living organisms, while RNA carries a
temporary copy of this information to direct protein synthesis. Proteins perform
most of the normal physiological functions of living organisms, and aberrant
production or activity of proteins may cause numerous diseases.
DNA is comprised of two linear strands that are formed in a double
helix. Each strand is a sequential array of four nucleotide bases: adenine (A),
guanine (G), thymine (T) and cytosine (C), which are linked together in DNA by a
sugar and phosphate backbone. Every gene contains unique sequences of these
bases and it is these unique sequences which constitute the genetic information
or code which guides all cellular processes. The two chains, or strands,
normally comprising DNA are held together by chemical attractions between
opposing paired bases according to certain rules: A always pairs with T, G
always pairs with C. Figure 1 is a schematic diagram of double-stranded DNA
showing this highly specific interaction between the bases in the two strands.
This process of base pairing, called hybridization, can occur between DNA
strands of any size, as long as the segments hybridizing are complementary.
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<PAGE> 22
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.
FIGURE 1. SEGMENT OF DOUBLE-STRANDED DNA SHOWING THE BASE PAIR RELATIONSHIP
[GRAPHIC]
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(degree) to 30(degree)C 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:
- Single base mismatch discrimination at high temperatures with short
oligonucleotides;
- Enhancement and sequence-independent equalization of oligonucleotide
hybrid stability concurrently; and
- 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
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<PAGE> 23
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.
SALES AND MARKETING
The Company has no recent experience in marketing products and
anticipates that it will seek to enter into collaborative arrangements with
pharmaceutical companies to market its therapeutic and diagnostic products. The
Company entered into a license agreement for certain of its enabling genetic
analysis technology with the PE Biosystems division of Perkin Elmer Corporation
("Perkin-Elmer") in January 1999. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." There can be no assurance that
the Company will be able to enter into any additional collaborative arrangements
on favorable terms or at all.
MANUFACTURING AND SUPPLY
The Company believes that raw materials and other components are
available in sufficient quantities to meet production requirements. The
Company's current plan for operations is to produce chemical reagent products
and small quantities of oligonucleotide products in it's Redmond facility. The
Company's longer term plan for operations is to enter into collaborative
arrangements with other companies to manufacture its oligonucleotide products.
To date, the Company has not entered into any
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<PAGE> 24
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.
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
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<PAGE> 25
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 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.
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.
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<PAGE> 26
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
WHERE YOU CAN FIND MORE INFORMATION.
We are a "small business issuer" under the Securities Act. We are also
required by the Exchange Act to file annual, quarterly and special reports,
proxy statements and other information with the SEC. Our SEC filings are
available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file with the SEC
at its public reference facilities at 450 Fifth Street, N.W., Washington, D.C.
20549; 7 World Trade Center, Suite 1300, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You
may also obtain copies of the documents at prescribed rates by writing to the
Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference facilities.
We originally registered for resale by the Selling Stockholders
10,428,365 shares of Common Stock under Registration No. 333-12601 and 1,268,258
shares of Common Stock under Registration No. 333-21353. Pursuant to Rule 429 of
the Securities Act, this Prospectus relates to the resale of shares of Common
Stock covered by both Registration Statements. The Registration Statements
contain more information than this Prospectus does about us and our securities.
We excluded certain parts which were not required by the SEC. To obtain further
information about us, please refer to the Registration Statements and their
exhibits, which you can inspect without charge by visiting the SEC's public
reference facilities listed in the prior paragraph. You can obtain copies of all
or any part of the Registration Statement and its exhibits by writing to the
SEC's Public Reference Section at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 after payment of the fees prescribed by the SEC. Statements contained
in this Prospectus regarding the contents of any contract or any other document
are not necessarily complete, and as such, you may want to review the complete
contract or document filed as an exhibit to the Registration Statement.
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<PAGE> 27
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are as follows:
<TABLE>
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,
Secretary and Director
</TABLE>
Dr. Craves joined the Company as Chairman of the Board of Directors in
July 1993 and became Chief Executive Officer in April 1994. Since January 1997
Dr. Craves has been a principal of the consulting firm of The Craves Group. From
January 1994 until January 1997, Dr. Craves was a principal of the consulting
firm, Burrill & Craves. From January 1991 to May 1993, he was President and
Chief Executive Officer of Berlex Biosciences, a division of Schering A.G., and
Vice President of Berlex Laboratories, Inc., the U.S. subsidiary of Schering
A.G. From 1981 to 1982, Dr. Craves was Chief Executive Officer and, from 1982 to
June 1990, was Chairman, Chief Executive Officer and President of Codon, a
biotechnology company. Following Codon's acquisition by Schering A.G., Dr.
Craves was President and Chief Executive Officer of Codon from June 1990 to
December 1990. From 1981 to 1983, Dr. Craves was also a co-founder and director
of Creative Biomolecules. From 1979 to 1981, he was a sales and marketing
representative for Millipore Corporation. Dr. Craves received his Ph.D. in
Pharmacology and Experimental Toxicology from the University of California, San
Francisco. Dr. Craves is also Chairman of the Board of Directors of NeoRx
Corporation and a director of InCyte Pharmaceuticals, Inc.
Mr. Dunning has been a Director of the Company since October 1996. Since
April 1996, Mr. Dunning has served as the President, Chief Executive Officer,
and as a Director of VIMRx Pharmaceuticals, Inc. From 1991 to 1996, Mr. Dunning
served as Executive Vice President and Chief Financial Officer of the Dupont
Merck Pharmaceutical Company. Mr. Dunning currently serves as a director of
several other companies, including Innovir laboratories, Inc. and Endorex Corp.
Dr. Melmon has been a Director of the Company since November 1991. Dr.
Melmon is Professor of Medicine at Stanford University School of Medicine, where
he joined the faculty in 1978. He was previously on the faculty at the
University of California, San Francisco, specializing in clinical pharmacology.
He is a member of the Institute of Medicine-National Academy of Sciences, and a
past president of the American Federation for Clinical Research and the American
Association of Clinical Investigation. He holds an M.D. from the University of
California Medical Center. He is also on the Board of Directors of Lysis.
Mr. Zweifach joined the Company in January 1995 as President and Chief
Financial Officer. From July 1994 to September 1994, and since September 1996,
Mr. Zweifach also served as a director of the Company. Since July 1997, Mr.
Zweifach has served as the Chief Financial Officer of Bay City Capital and,
since January 1995, Mr. Zweifach has served as a Managing Director of The
Olmsted Group, L.L.C., a merchant banking firm. Mr. Zweifach was a Managing
Director of D. Blech & Co.
-23-
<PAGE> 28
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.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning
compensation paid or accrued by the Company for services rendered during the
years ended December 31, 1996, 1997 and 1998, to the Company's Chief Executive
Officer, and the Company's other executive officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
-------------------------------------------------------------- -------------
Securities
Name and Salary Other Annual Underlying All Other
Principal Position Year ($) (4) Bonus ($) Compensation ($) Options (#) Compensation
- ------------------------------ -------- -------- -------- ------------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Fred Craves (1) 1998 $100,000 $ -- $ -- -- $ --
Chief Executive Officer 1997 100,000 -- -- -- --
1996 125,000 -- -- -- --
Sanford S. Zweifach 1998 135,000 -- -- -- --
President and 1997 140,625 -- -- -- --
Chief Financial Officer 1996 135,000 -- -- --
Rich B. Meyer, Jr. (2) 1998 119,083 -- -- -- 43,307
Vice President, Research 1997 145,008 2,789 -- 14,900
and Development 1996 140,016 -- -- -- --
Robert Wydro (3) 1998 140,016 2,693 -- -- --
Vice President, Research 1997 140,016 2,693 -- 5,000
Management 1996 52,506 -- -- 100,000 --
</TABLE>
- ----------
(1) Includes $25,000 payment earned in 1993, paid in 1996.
(2) Dr. Meyer resigned from the Company in October 1998. Upon his separation
from the Company, Dr. Meyer received accrued vacation pay of $43,307.
(3) Dr. Wydro resigned from the Company in January 1999.
(4) Includes amounts deferred during 1996 and 1997 under the Company's
401(k) employee savings and retirement plan. To date, the Company has
not made any matching contributions under that plan.
OPTION MATTERS
There were no grants of stock options to the Company's executive
officers named in the Summary Compensation Table during the year ended December
31, 1998. Additionally, none of the Company's executive officers named in the
Summary Compensation Table exercised options or warrants during the year ended
December 31, 1998.
-24-
<PAGE> 29
CONSULTING AGREEMENTS
In July 1993, the Company entered into a one-year consulting agreement
with Dr. Craves under which he received monthly payments of $8,333. The Company
and Dr. Craves have extended the consulting agreement for successive one year
periods and, concurrently with the loan to the Company in the amount of
$3,000,000 from Bay City Capital the Company extended the agreement through
February 24, 2000.
In January 1995, the Company entered into a consulting agreement with
Mr. Zweifach under which he received monthly payments of $11,250. Concurrently
with the Bay City loan, the Company extended the term of the agreement through
February 24, 2000.
Dr. Melmon also serves as a consultant to the Company and as a member of
the Company's Scientific Advisory Board and receives compensation in those
capacities.
DIRECTORS' COMPENSATION
The Company pays all non-employee directors a fee of $1,000 for each
Board of Directors meeting attended in person. In July 1993, the Company adopted
a Non-Employee Directors Option Plan (the "Directors Plan") pursuant to which
the Company granted each non-employee director (except Dr. Craves) a
fully-vested 10-year option to purchase 10,000 shares of Common Stock at an
exercise price of $4.00 per share. In addition, upon each anniversary of the
inception of the Directors Plan each non-employee director will receive
fully-vested 10-year options to purchase 5,000 shares of Common Stock at the
then current fair market value. Non-employee directors who subsequently join the
Board of Directors will receive, upon each anniversary of joining the Board of
Directors, fully-vested 10-year options to purchase 5,000 shares of Common Stock
at the then current fair market value.
CERTAIN TRANSACTIONS
BAY CITY CAPITAL BRIDGE LOAN.
In February 1998, Bay City Fund I, LLP, an affiliate of Bay City Capital
LLC, (collectively, "Bay City"), San Francisco, California, loaned $3,000,000 to
the Company as a bridge to the earlier of a public rights offering, other
financing, or February 25, 2000. The loan is accruing interest at 8% per annum.
In the event of a rights offering, Bay City has agreed, subject to certain
conditions, to convert the loan into equity to the extent that the current
stockholders do not subscribe for their proportionate share of the offering. In
partial consideration for the bridge loan and Bay City's agreement to purchase
excess shares, if any, in a rights offering, Bay City received a fully vested
five year warrant to purchase 2,000,000 shares of Epoch's Common Stock at a
price of $0.90 per share. Bay City is a merchant banking partnership that was
formed by The Craves Group and The Pritzker Family business interests. The
founding partner of The Craves Group, Fred Craves, Ph.D., is the Chairman and
Chief Executive Officer of Epoch. Sanford S. Zweifach, Epoch's President and
Chief Financial Officer, is also the Managing Director and Chief Financial
Officer of Bay City.
See "Consulting Agreements" for a description of certain arrangements
and transactions with executive officer and directors.
-25-
<PAGE> 30
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.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Our by-laws allow us to indemnify our directors and officers to the
fullest extent permitted by law. Insofar as indemnification for liabilities
under the Securities Act may be available to our directors, officers or
controlling persons pursuant to our Certificate of Incorporation, as amended,
our by-laws and the Delaware General Corporation Law ("DGCL"), we have been
informed that, in the SEC's opinion, such indemnification violates public policy
as expressed in the Securities Act and is therefore unenforceable.
Section 102(b)(7) of the DGCL provides that a certificate of
incorporation may include a provision which eliminates or limits the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to the company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
relating to prohibited dividends or distributions or the repurchase or
redemption of stock or (iv) for any transaction from which the director derives
an improper personal benefit. Our Certificate of Incorporation includes such a
provision. As a result of this provision, we and our stockholders may be unable
to obtain monetary damages from a director for breach of his or her duty of
care.
-26-
<PAGE> 31
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 1998 certain
information about the beneficial ownership of Epoch's Common Stock by (i) each
stockholder known by us to be the beneficial owner of more than 5% of Epoch's
Common Stock, (ii) each director, (iii) each of the executive officers named in
the Summary Compensation Table, and (iv) all executive officers and directors as
a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF
NAME AND ADDRESS BENEFICIALLY OWNED (1) OUTSTANDING SHARES
- ----------------------------------------- ---------------------- ------------------
<S> <C> <C>
Grace Brothers Ltd. 5,013,193 33.8%
1560 Sherman Avenue
Evanston, Illinois 60201
Fred Craves, Ph.D.(2) 2,863,241 16.3%
Bay City Capital, LLC (3) 2,000,000 11.9%
750 Battery Street, Suite 600
San Francisco, CA 94111
Richard L. Dunning(4) 467,143 3.1%
VIMRx Pharmaceuticals, Inc. 457,143 3.1%
2751 Centerville Road, Suite 210
Little Falls II
Wilmington, Delaware 19808
Sanford S. Zweifach(5) 400,000 2.6%
The Olmsted Group, LLC(6) 345,000 2.3%
81 Main Street
White Planes, NY 10601
Rich B. Meyer, Jr., Ph.D.(7) 170,229 1.1%
Robert M. Wydro, Ph.D.(8) 130,000 *
Kenneth L. Melmon, M.D.(9) 80,999 *
All executive officers and directors as a group
(5 persons)(10) 1,309,469 8.1%
</TABLE>
* Less than one percent
- ----------
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in this table have
sole voting and investment power with respect to all shares of Common
Stock.
(2) Includes 2,585,741 shares subject to warrants and options exercisable
within 60 days, including warrants to purchase 250,000 shares which are
held by Burrill & Craves, of which Fred Craves is a general partner and
2,000,000 shares subject to Warrants exercisable within 60 days which
are held by Bay City Capital, LLC. See footnote (3). Fred Craves
disclaims
-27-
<PAGE> 32
beneficial ownership of such warrants and the shares underlying such
warrants except to the extent of his pecuniary interest in Burrill &
Craves and Bay City Capital, LLC.
(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
Pritzker Family may be deemed the beneficial owner of all of the shares
held of record by Bay City Fund I, L.P. (the "Bay City Shares"). By
virtue of his status as the majority owner and controlling person of The
Craves Group, Fred Craves may also be deemed a beneficial owner of the
Bay City Shares. Each of The Craves Group, The Pritzker Family and Fred
Craves disclaims beneficial ownership of any Bay City Shares except the
extent, if any, of such persons actual pecuniary interest therein.
(4) Includes 10,000 shares subject to warrants and options exercisable
within 60 days and 457,143 shares of common stock which are held by
VIMRx Pharmaceuticals Inc., of which Richard L. Dunning is the President
and CEO. Richard L. Dunning disclaims beneficial ownership of such
shares of common stock except to the extent of his pecuniary interest in
VIMRx Pharmaceuticals, Inc.
(5) Includes 400,000 shares subject to warrants and options exercisable
within 60 days, including warrants to purchase 345,000 shares which are
held by The Olmstead Group L.L.C., of which Sanford Zweifach was a
managing partner. (See footnote 6.) Sanford Zweifach disclaims
beneficial ownership of such warrants and the shares underlying such
warrants except to the extent of his pecuniary interest in The Olmstead
Group L.L.C.
(6) Includes 345,000 shares subject to warrants exercisable within 60 days.
Sanford Zweifach, President and Chief Financial Officer of the Company,
was a managing partner of The Olmstead Group L.L.C. Mr. Zweifach
disclaims beneficial ownership of such warrants and the shares
underlying such warrants except to the extent of his pecuniary interest
in The Olmstead Group, L.L.C.
(7) Includes 145,229 shares subject to warrants exercisable within 60 days.
Dr. Meyer resigned from the Company in October 1998.
(8) Includes 81,457 shares subject to options and warrants exercisable
within 60 days. Dr. Wydro resigned from the Company in January 1999.
(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.
-28-
<PAGE> 33
DESCRIPTION OF CAPITAL STOCK
GENERAL
Epoch's authorized capital stock consists of 50,000,000 shares of Common
Stock, $.01 par value per share, and 10,000,000 shares of Preferred Stock, $.01
par value per share, with such rights as our Board may determine. As of December
31, 1998, there were 14,824,227 shares of Common Stock outstanding held of
record by approximately 174 stockholders, 1,301,912 Exchange Warrants (as
defined below), held of record by 46 Exchange Warrant holders, 6,496,963 Other
Warrants, held of record by approximately 69 Other Warrant holders, and
1,135,986 options to purchase Common Stock. There are no shares of Preferred
Stock outstanding.
COMMON STOCK
The holders of outstanding shares of Common Stock are entitled to
receive dividends out of legally available assets at such times and in such
amounts as our Board of Directors may, from time to time, determine. Each
stockholder is entitled to one vote for each share of Common Stock held and
there is no cumulative voting in the election of directors. The Common Stock is
not entitled to preemptive rights and is not subject to redemption or
conversion. Upon our liquidation, dissolution or winding-up, our assets legally
available for distribution to stockholders are distributable ratably among the
holders of the Common Stock after payment of other claims of creditors. All
outstanding shares of Common Stock are, and the shares of Common Stock to be
issued pursuant to this offering will be, validly issued, fully paid and
nonassessable.
PREFERRED STOCK
Our Board of Directors has the authority to issue up to 10,000,000
shares of Preferred Stock, $0.01 par value, and to fix the rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any future vote or action by our stockholders. The rights of the holders of the
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock could have the effect of making it more difficult
for a third party to acquire a majority of our outstanding voting stock, thereby
delaying, deferring or preventing a change in our company's control.
Furthermore, such Preferred Stock may have other rights, including economic
rights senior to the Common Stock, and, as a result, the issuance of Preferred
Stock could significantly hurt the market value of our Common Stock. We have no
present plans to issue shares of Preferred Stock.
EXCHANGE WARRANTS
In June 1996, we offered to exchange for every two Redeemable Common
Stock Purchase Warrants, which were issued in conjunction with our initial
public offering in September 1993 at $6.50 per share (the "Public Warrants"),
one new warrant to purchase one share of our Common Stock until June 20, 2001
exercisable at $2.50 per share (the "Exchange Warrants").
In June 1997, the exchange of warrants was completed, with 2,603,825
Public Warrants being exchanged for 1,301,912 of the Exchange Warrants. The
following discussion of the material terms and provisions of the Exchange
Warrants is qualified in its entirety by reference to the detailed provisions of
the Exchange Warrant Agreement, (the "Exchange Warrant Agreement") between the
Company and American Stock Transfer & Trust Company, a copy of which has been
filed as an exhibit to the
-29-
<PAGE> 34
Registration Statement of which this Prospectus is part. Any outstanding and
unexercised Public Warrants expired on September 29, 1998.
Each Exchange Warrant entitles the holder to purchase at any time until
June 20, 2001 one share of our Common Stock at an exercise price of $2.50 per
share. The exercise price of the Exchange Warrants and the number of shares of
Common Stock underlying the Exchange Warrants are subject to adjustment for
stock splits, stock dividends and similar events. The Exchange Warrants do not
contain anti-dilution provisions relating to issuances or sales of Common Stock
at prices below the exercise price or the then prevailing market price of the
Common Stock. The Exchange Warrants may be exercised in whole or in part.
We may redeem the Exchange Warrants, in whole but not in part, at our
option at any time after eighteen months from the date the Exchange Warrants
were issued upon not less than 30 days' nor more than 60 days' notice, at a
price of $.05 per warrant, providing the market price of our Common Stock has
been at least $3.75 for 20 consecutive business days ending within 15 days of
the date of the notice of redemption. For purposes of redemption of the Exchange
Warrants, the market price of a share of Common Stock on any date would be the
last sale price (or highest reported bid price if the stock is not traded on a
national securities exchange or the Nasdaq National Market) on such date. In the
event we exercise our right to redeem the Exchange Warrants, such Exchange
Warrants would be exercisable until the close of business on the date fixed for
redemption in such notice. If any Exchange Warrant called for redemption is not
exercised by such time, it would cease to be exercisable and the holder thereof
would be entitled only to the redemption price.
For a holder to exercise the Exchange Warrants, we must have a current
registration statement in effect with the SEC and we must be qualified with or
approved by various state securities agencies with respect to the shares or
other securities underlying the Exchange Warrants, or we must have an opinion
from our counsel stating that there is an exemption from registration or
qualification. As long as the Exchange Warrants remain outstanding and
exercisable, we are required to maintain an effective registration statement
with respect to the shares issuable on exercise of the Exchange Warrants.
However, we make no guarantee that such registration statement can be kept
current. If a registration statement covering such shares of Common Stock is not
kept current for any reason, or if the shares underlying the Exchange Warrants,
are not registered in the state in which a holder resides, the Exchange Warrants
will not be exercisable and their value will be impaired.
OTHER WARRANTS
As of December 31, 1998, there were other warrants outstanding to
purchase an aggregate of 6,496,963 shares of Common Stock at exercise prices
ranging from $.30 to $9.21 per share.
COMMON STOCK OPTIONS
The Company has a 1991 and a 1993 Incentive Stock Option Plan,
Nonqualified Stock Option and Restricted Stock Purchase Plan pursuant to which
1,436,470 shares and 500,000 shares of common stock, respectively, have been
reserved for grants. Under the plans, incentive stock options must have an
exercise price at least equal to the fair market value of the common stock on
the date of grant. Nonqualified stock options and rights to purchase restricted
stock must have an exercise price at least equal to 85% of the fair market value
of the common stock on the date of grant. The options are issued with a ten year
term and vest over a period of four years. At December 31, 1998, 373,976 shares
and
-30-
<PAGE> 35
191,632 shares, respectively, remained available for grant under these plans. At
December 31, 1998, there were 1,135,986 outstanding options to purchase common
stock 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.
REGISTRATION RIGHTS
We are obligated to keep the Registration Statement, of which this
Prospectus is a part, effective until the earlier of June 21, 1999, or the date
on which all shares may be sold without volume limitations under Rule 144. We
are also obligated to maintain the effectiveness of our Registration Statement
covering the 1,301,912 shares of Common Stock issuable upon exercise of the
Exchange Warrants until June 20, 2001, the period of their exercisability.
TRANSFER AGENT, REGISTRAR AND WARRANT AGENT
The stock transfer agent, registrar and warrant agent for our Common
Stock and Warrants is American Stock Transfer & Trust Company, 40 Wall Street,
New York, New York 10005.
-31-
<PAGE> 36
SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
SHARES OWNED AMOUNT AND
BEFORE OFFERING PERCENTAGE OF
(INCLUDING SHARES
SHARES ISSUABLE SHARES OFFERED BENEFICIALLY
UPON EXERCISE OF PURSUANT TO THIS OWNED AFTER
SELLING STOCKHOLDER WARRANTS) PROSPECTUS(1) OFFERING
- ----------------------------------- ---------------- ---------------- ---------------
<S> <C> <C> <C>
& Capital Partners, L.P............ 375,000 125,000 250,000 (1.7%)
Laurie & Harold Alexander.......... 12,500 12,500 0
Armore Perpetuo, Inc............... 50,000 50,000 0
Michael Arnouse.................... 150,000 50,000 100,000*
Jeffrey Baron...................... 26,500 26,500 0
Arnolda Barros..................... 50,000 50,000 0
Edgar E. Barton, Jr................ 37,500 12,500 25,000*
Batterson, Johnson & Wang Limited
Partners......................... 258,145 58,145 200,000 (1.3%)
Lamon Lynn Bennett................. 300,000 100,000 200,000 (1.3%)
Biotechnology Investment Group
L.L.C. .......................... 250,000 250,000 0
David Blech........................ 109,355 109,355 0
The Edward Blech Trust ............ 350,000 350,000 0
Francis F. Bodkin, Jr.............. 3,500 3,500
Burrill & Craves................... 250,000 250,000 0
Frederick Chassman................. 27,500 27,500 0
James F. Clark..................... 25,000 25,000 0
James L. Comazzi................... 12,500 12,500 0
Concept Mining, Inc................ 50,000 50,000 0
Cooley, Goward..................... 25,000 25,000 0
John S. & Carol A. Dahne........... 37,500 12,500 25,000*
Theodore H. Friedman............... 25,000 25,000 0
Frontier Charitable Remainder,
Nicolas Madonia (Trustee)........ 140,000 140,000 0
Corinna Furnazi.................... 37,500 12,500 25,000*
Thomas L. Garell................... 37,500 12,500 25,000*
John G. Garell..................... 12,500 12,500 0
The Gerbsman Family Trust, DTD
12-4-90, Steven R. or Marlene
Gerbsman, Trustees............... 37,500 12,500 25,000*
Joseph Giamanco.................... 50,000 50,000 0
Grace Brothers Ltd.(3)............. 5,013,193 2,000,000 3,013,193(18.0%)
John P. Green, Jr.................. 25,000 25,000 0
Helen Gurman....................... 25,000 25,000 0
Jason C. Hackett................... 12,500 12,500 0
Jerry Heymann...................... 25,000 25,000 0
Billy B. & Lorraine S. Huff........ 37,500 12,500 25,000*
Eli David Jacobson................. 17,500 17,500 0
Karfunkel Family Foundation........ 150,000 50,000 100,000*
Gerald Korman...................... 37,500 12,500 25,000*
Paula Kramer....................... 37,500 12,500 25,000*
The Low Family Trust, U/T/A 3-21-82
Thomas B. Low, Trustee........... 37,500 37,500 0
Allan R. Lyons..................... 12,500 12,500 0
</TABLE>
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<PAGE> 37
<TABLE>
<S> <C> <C> <C>
Joseph D. McKeown.................. 37,500 12,500 25,000*
Kenneth L. Melmon(2)............... 80,999 1,001 79,998*
Eric Miller........................ 12,500 12,500 0
Tolof O. Nasby..................... 5,000 5,000 0
The Olmsted Group, L.L.C.(4)....... 345,000 115,000 230,000 (1.5%)
The Ridge Land Company............. 50,000 50,000 0*
David Mark Rozen................... 237,500 112,500 125,000*
Frank J. Schultheis................ 25,000 25,000 0
Smith Barney, New York............. 12,500 12,500 0
Glenn S. Stanley................... 12,500 12,500 0
Joseph L. Stanley.................. 12,500 12,500 0
Stuart G. Stanley.................. 12,500 12,500 0
Michael Steifman................... 12,500 12,500 0
Richard B. Stone................... 25,000 25,000 0
Richard Sullivan................... 12,500 12,500 0
Robert N. Swetnick................. 25,000 25,000 0
United Equities Commodities Company 250,000 250,000 0
Susan Jane Walker.................. 112,500 37,500 75,000*
Raymond Zabel, Jr.................. 12,500 12,500 0
Larry Zalk......................... 25,000 25,000 0
--------- --------- ---------
TOTAL.............................. 9,489,192 4,891,001 4,598,191
</TABLE>
- ----------
* Less than one percent
(1) Includes up to 4,891,001 shares issuable upon exercise of warrants.
(2) See "Management" and "Security Ownership of Certain Beneficial Owners
and Management."
(3) See "Security Ownership of Certain Beneficial Owners and Management."
(4) Sanford Zweifach, Epoch's President and Chief Financial Officer and one
of Epoch's directors, is an employee of the Olmsted Group, L.L.C.
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<PAGE> 38
PLAN OF DISTRIBUTION
Each Selling Stockholder has informed us that he, she or it may sell
Common Stock from time to time in transactions on the OTC Bulletin Board, in
negotiated transactions, or otherwise, or by a combination of these methods, at
fixed prices which may be changed, at market prices at the time of sale, at
prices related to market prices or at negotiated prices. The Selling
Stockholders may effect these transactions by selling the Common Stock to or
through broker-dealers, who may receive compensation in the form of discounts,
concessions or commissions from the Selling Stockholders or the purchasers of
the Common Stock for whom the broker-dealer may act as an agent or to whom they
may sell the Common Stock as a principal, or both. The compensation to a
particular broker-dealer may be in excess of customary commissions.
The Selling Stockholders and broker-dealers who act in connection with
the sale of the Common Stock may be considered "underwriters" within the meaning
of the Securities Act, and any commissions received by such broker-dealers and
profits on any resale of the Common Stock as a principal may be considered
underwriting discounts and commissions under the Securities Act.
We have agreed to bear the expenses in connection with the registration
and sale of the Common Stock offered by the Selling Stockholders (other than
selling commissions and the fees and expenses of counsel or other advisors to
the Selling Stockholders) which we estimate to be $18,331.
LEGAL MATTERS
The validity of the Common Stock offered in this Prospectus will be
passed upon for us by Stradling Yocca Carlson & Rauth, a Professional
Corporation, Newport Beach, California.
EXPERTS
Our financial statements as of December 31, 1998 and for each of the
years in the two-year period ended December 31, 1998 have been included in this
Prospectus and in the registration statement in reliance upon the report of KPMG
LLP, independent certified public accounts, appearing elsewhere in this
Prospectus, and upon the authority of KPMG LLP as experts in accounting and
auditing.
The report of KPMG LLP dated February 10, 1999 contains an explanatory
paragraph that states that we have suffered recurring losses from operations and
have a net capital deficiency which raises substantial doubt about our ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
-34-
<PAGE> 39
EPOCH PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
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> 40
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> 41
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> 42
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> 43
EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Total
Additional Deferred Stockholders
Common Stock Paid-In Deferred Financing Accumulated Equity
Shares Amount Capital Compensation Expense Deficit (Deficit)
----------- ----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 14,723,856 $ 147,239 52,892,549 (39,029) -- (48,125,001) 4,875,758
Exercise of stock options 90,937 909 38,238 39,147
Amortization of deferred compensation 39,029 39,029
Net loss (3,604,807) (3,604,807)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 14,814,793 148,148 52,930,787 -- -- (51,729,808) 1,349,127
Exercise of stock options 9,434 94 4,767 4,861
Warrants issued in debt financing 1,333,361 (1,333,361) --
Issuance of warrants to a consultant 191,791 (191,791) --
Amortization of deferred compensation 31,965 31,965
Amortization of deferred financing 515,567 515,567
expense
Net loss (5,103,009) (5,103,009)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 14,824,227 $ 148,242 54,460,706 (159,826) (817,794) (56,832,817) (3,201,489)
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 44
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> 45
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 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.
F-6
<PAGE> 46
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> 47
(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> 48
A summary of the Company's three stock option plans follows.
<TABLE>
<CAPTION>
1997 1998
----------------------------- -----------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES 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 REMAINING YEARS AVERAGE EXERCISABLE AVERAGE
PRICES AT 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE AT 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> 49
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> 50
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.
(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.
F-11
<PAGE> 51
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.
(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.
F-12
<PAGE> 52
(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.
(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-13
<PAGE> 53
- --------------------------------------------------------------------------------
4,891,001 SHARES
EPOCH PHARMACEUTICALS, INC.
COMMON STOCK
PROSPECTUS
_____, 1999
- --------------------------------------------------------------------------------
<PAGE> 54
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's by-laws provide for indemnification of its directors and
officers to the fullest extent permitted by law. Insofar as indemnification for
liabilities under the Securities Act may be permitted to our directors or
officers or controlling persons of the Company pursuant to our Certificate of
Incorporation, as amended, the by-laws and the DGCL, we have been informed that,
in the SEC's opinion, such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
Section 102(b)(7) of the DGCL provides that a certificate of
incorporation may include a provision which eliminates or limits the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability
(i) for any breach of the director's duty of loyalty to the company
or its stockholders,
(ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the DGCL, relating to prohibited dividends
or distributions or the repurchase or redemption of stock, or
(iv) for any transaction from which the director derives an improper
personal benefit.
Our Certificate of Incorporation includes such a provision. As a result
of this provision, our company and its stockholders may be unable to obtain
monetary damages from a director for breach of his or her duty of care.
ITEM 25. OTHER EXPENSES OF ISSUANCES AND DISTRIBUTION
The following sets forth the costs and expenses, all of which shall be
borne by our company, in connection with the offering of the Common Stock
pursuant to this Registration Statement:
<TABLE>
<S> <C>
SEC registration $ 331
Legal fees and expenses 10,000
Accounting fees and expenses 8,000
Miscellaneous --
-------
TOTAL $18,331
=======
</TABLE>
- ----------
* Estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of our transactions during the past three
years preceding the date hereof involving sales of our securities that were not
registered under the Securities Act:
II-1
<PAGE> 55
1. In April 1998, the Company issued five year warrants to purchase
300,000 shares of Common Stock to Joel Hedgpeth, a consultant, at $0.75 per
share.
2. In February 1998, we issued a warrant to Bay City to purchase
2,000,000 shares of our Common Stock at an exercise price of $.90 per share in
connection with a $3,000,000 bridge financing loan from Bay City.
3. On October 1, 1996, we issued 457,143 shares of Common Stock at $1.75
per share and warrants to purchase an additional 900,000 shares of Common Stock,
450,000 of which were at an exercise price of $2.00, and 450,000 or which are at
an exercise price of $3.00 to VIMRx. The warrants were not exercised and have
expired.
4. On June 26, 1996, we issued 5,000,000 shares of Common Stock and
warrants to purchase 2,500,000 of Common Stock at an exercise price of $2.50 to
institutional and accredited individual investors, for an aggregate purchase
price of $5 million. In connection therewith, pursuant to an agreement with our
financial advisor, David Blech, we issued to Mr. Blech five year warrants to
purchase 500,000 shares of Common Stock at $1.00 per share.
5. On January 16, 1996 we issued five year warrants to purchase 250,000
shares of Common Stock to Burrill & Craves, a consulting firm of which Dr.
Craves was a principal, and 345,000 shares of Common Stock to the Olmsted Group,
L.L.C., a merchant banking firm of which Mr. Zweifach is a principal, at an
exercise price of $0.50 per share, in consideration for the services performed
by Burrill & Craves and The Olmsted Group, L.L.C., respectively, in connection
with the sale of our diagnostics assets to Becton Dickinson and Company and
other corporate matters. The warrants are fully vested as of January 1, 1999.
Exemption from the registration provisions of the Securities Act for the
transactions described above is claimed under Section 4(2) of the Securities
Act, among others, on the basis that such transactions did not involve any
public offering and the purchasers were sophisticated with access to the kind of
information registration would provide.
In June 1997, we offered to exchange for every two Redeemable Common
Stock Purchase Warrants, which were issued in conjunction with our public
offering in September 1993 at $6.50 per share (the "Public Warrants"), one new
warrant to purchase one share of our Common Stock until June 20, 2001, that is
exercisable at $2.50 per share (the "Exchange Warrants"). 2,603,825 of the
Public Warrants were exchanged for 1,301,912 of the Exchange Warrants. We can
redeem each Exchange Warrant at any time after eighteen months from the date
that they were issued at $0.05 per warrant, provided that the closing trading
price per share of Common Stock is at least $3.75 for twenty consecutive trading
days. Exemption from the registration provisions of the Securities Act for this
transaction is claimed under Section 3(a) of the Securities Act.
II-2
<PAGE> 56
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT LIST
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------------------------------------------------------------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation (incorporated
by reference to Exhibit 3 of the Registrant's Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1998).
3.2* Bylaws of the Registrant, as currently in effect.
5.0 Opinion of Stradling Yocca Carlson & Rauth, a Professional
Corporation, Counsel to the Registrant (incorporated by
reference to the same numbered exhibit to the Company's
Registration Statement on Form SB-2, No. 333-21353, filed
February 7, 1997).
10.1* MicroProbe Corporation Incentive Stock Option, Nonqualified
Stock Option And Restricted Stock Purchase Plan--1991, as
amended.
10.2* Form of Indemnification Agreement entered into with officers and
directors of the Registrant.
10.3 Letter Agreement between the Registrant and Fred Craves, dated
August 3, 1993 (incorporated by reference to Exhibit 10.12 of
the Registrant's Registration Statement on Form SB-2,
Registration No. 33-66742, effective on September 29, 1993).
10.4 Form of Common Stock Warrant issued December 31, 1991
(incorporated by reference to Exhibit 10.22 of the Registrant's
Registration Statement on Form SB-2, Registration No. 33-66742,
effective on September 29, 1993).
10.5 Second Amended and Restated Investment Agreement, dated April
28, 1992 among the Registrant and certain investors
(incorporated by reference to Exhibit 10.25 of the Registrant's
Registration Statement on Form SB-2, Registration No. 33-66742,
effective on September 29, 1993).
10.6 Common Stock and Warrant Purchase Agreement, dated April 28,
1992 as amended June 30, 1992 and July 31, 1992 (with form of
warrant) among the Registrant and certain investors
(incorporated by reference to Exhibit 10.26 of the Registrant's
Registration Statement on Form SB-2, Registration No. 33-66742,
effective on September 29, 1993).
10.7 Form of Registration Agreement, dated February 12, 1993 among
the Registrant and certain investors (incorporated by reference
to Exhibit 10.30 of the Registrant's Registration Statement on
Form SB-2, Registration No. 33-66742, effective on September 29,
1993).
</TABLE>
II-3
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------------------------------------------------------------------
<S> <C>
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).
10.11.6 Amendment dated August 15, 1994 to Put Agreement (incorporated
by reference to Exhibit 10.48.6 of the Registrant's Quarterly
Report on Form 10-QSB for the quarter ended September 30, 1994).
10.11.7 Amendment dated August 30, 1994 to Put Agreement (incorporated
by reference to Exhibit 10.48.7 of the Registrant's Quarterly
Report on Form 10-QSB for the quarter ended September 30, 1994).
</TABLE>
II_4
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------------------------------------------------------------------
<S> <C>
10.11.8 Amendment dated September 14, 1994 to Put Agreement
(incorporated by reference to Exhibit 10.48.8 of the
Registrant's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1994).
10.11.9 Exercise Notice dated September 27, 1994 to Put Agreement
(incorporated by reference to Exhibit 10.48.9 of the
Registrant's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1994).
10.12 Put Agreement relating to Ribonetics GmbH dated as of December
1, 1993 between the Registrant and David Blech, as amended
December 3, 1993 and February 18, 1994 (incorporated by
reference to Exhibit 10.48 of the Registrant's Annual Report on
Form 10-KSB for the year ended December 31, 1993).
10.13 Registration Rights Agreement dated October 12, 1994
(incorporated by reference to Exhibit 10.57 of the Registrant's
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1994).
10.14 Consulting Agreement between the Registrant and Sanford S.
Zweifach, dated January 18, 1995 (incorporated by reference to
Exhibit 10.59 of the Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1995).
10.15 Asset Purchase Agreement between the Registrant and Becton,
Dickinson and Company, dated as of September 29, 1995
(incorporated by reference to the form of such Asset Purchase
Agreement filed with the Registrant's Definitive Proxy Materials
for its Special Meeting of Stockholders held November 27, 1995).
10.16 Consulting Agreement with David Blech dated March 29, 1996
(incorporated by reference to Exhibit 10.65 of the Registrant's
Quarterly Report on Form 10-QSB for the quarter ended June 30,
1996).
10.17 Form of Subscription Agreement with Private Placement Investors
(incorporated by reference to Exhibit 4.1 of the Registrant's
Quarterly Report on Form 10-QSB for the quarter ended June 30,
1996).
10.18 Warrant Agreement between the Registrant and American Stock
Transfer and Trust Company dated June 21, 1996, with form of
Warrant (incorporated by reference to Exhibit 4.2 of the
Registrant's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1996).
10.19 Bridge Financing Agreement dated as of February 25, 1998, with
form of note and warrant, between the Registrant and Bay City
Capital, LLC (incorporated by reference to Exhibit 10.69 of the
Registrant's Annual Report on Form 10-KSB for the year ended
December 31, 1997).
</TABLE>
II-5
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------------------------------------------------------------------
<S> <C>
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).
23.2 Consent of Stradling Yocca Carlson & Rauth, a Professional
Corporation (included in the Opinion filed as Exhibit 5.0).
23.1 Consent of KPMG LLP.
25.0 Power of Attorney (included on the signature page).
27.0 Financial Data Schedules.
</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.
ITEM 28. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of
the Securities Act.
(ii) Reflect in the prospectus any facts or event, which,
individually or together, represent a fundamental change in the
information in the registration statement.
(iii) Include any additional or changed information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be deemed the
initial bona fide offering.
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
(e) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing
II-6
<PAGE> 60
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-7
<PAGE> 61
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Redmond, State of
Washington, on the 7th day of May, 1999.
EPOCH PHARMACEUTICALS, INC.
By: /s/ SANFORD S. ZWEIFACH
------------------------------------
Sanford S. Zweifach
President and Chief Financial Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of Epoch Pharmaceuticals,
Inc. do hereby constitute and appoint Fred Craves and Sanford S. Zweifach, or
either of them, as our true and lawful attorneys and agents, to do any and all
acts and things in our name and behalf in our capacities as directors and
officers and to execute any and all instruments for us and in our names in the
capacities indicated below, which said attorneys and agents, or either of them,
may deem necessary or advisable to enable said corporation to comply with the
Securities Act, as amended, and any rules, regulations and requirements of the
SEC in connection with this Registration Statement, including specifically, but
without limitation, power and authority to sign for us or any of us in our names
and in the capacities indicated below, any and all amendments (including
post-effective amendments) hereto or any related registration statement that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act, as
amended; and we do hereby ratify and confirm all that the said attorneys and
agents, or either of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman of the Board of Directors May 7, 1999
- ----------------------------- and Chief Executive Officer
Fred Craves, Ph.D.
/s/ SANFORD ZWEIFACH President and Chief Financial May 7, 1999
- ----------------------------- Officer (Chief Accounting Officer)
Sanford Zweifach
</TABLE>
II-8
<PAGE> 62
<TABLE>
<S> <C> <C>
* Director May 7, 1999
- -----------------------------
Richard Dunning
* Director May 7, 1999
- -----------------------------
Kenneth L. Melmon, M.D.
/s/ SANFORD ZWEIFACH
- -----------------------------
*Sanford Zweifach
Attorney-in-Fact
</TABLE>
II-9
<PAGE> 63
EXHIBIT INDEX
<TABLE>
<S> <C>
10.10 Warrant Agreement between the Registrant and American Stock
Transfer & Trust Company dated April 29, 1997.
10.20 Sublease between the Registrant as Tenant and Bion Diagnostic
Sciences, Inc. for premises located in Redmond, Washington,
dated September 25, 1998.
23.1 Consent of KPMG LLP.
27.0 Financial Data Schedules.
</TABLE>
<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
----
<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
----
<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
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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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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
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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
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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
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(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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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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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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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.
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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
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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
----------------------------
<PAGE> 6
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
------------------------------
<PAGE> 7
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
CONSENT OF KPMG LLP
Exhibit 23.1
The Board of Directors
Epoch Pharmaceuticals, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
Our report dated February 10, 1999 contains an explanatory paragraph that states
the Company has suffered recurring losses from operations and has a net capital
deficiency which raises substantial doubt about its ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of that uncertainty.
/s/ KPMG LLP
Seattle, Washington
May 7, 1999
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<S> <C>
<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
<NET-INCOME> (5,103,009)
<EPS-PRIMARY> (0.34)
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</TABLE>
