<PAGE> 1
This filing is made pursuant
to Rule 424(b)(1) under
the Securities Act of
1933 in connection with
Registration No. 333-88909
PROSPECTUS
EPOCH PHARMACEUTICALS, INC.
Shares of Common Stock
The stockholders listed in this prospectus under the section entitled
"Selling Stockholders" may offer and sell a total of 10,408,916 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 include 1,524,348 shares issuable upon
the exercise of warrants.
------------------
Our common stock is currently traded on The Nasdaq National Market under
the symbol "EBIO".
------------------
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE THE
SECTION TITLED "RISK FACTORS" BEGINNING ON PAGE 2 OF THIS PROSPECTUS.
------------------
Neither The Securities and Exchange Commission 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.
------------------
The date of this prospectus is August 2, 2000.
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
Prospectus Summary................................................................................ 1
Risk Factors...................................................................................... 2
Summary Financial Information..................................................................... 5
Price Range of Common Stock....................................................................... 6
Capitalization.................................................................................... 7
Dividend Policy................................................................................... 7
Selected Financial Data........................................................................... 8
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................................... 9
Business.......................................................................................... 15
Management........................................................................................ 22
Certain Relationships and Related Transactions.................................................... 26
Principal Stockholders............................................................................ 27
Description of Capital Stock...................................................................... 29
Selling Stockholders.............................................................................. 32
Plan of Distribution.............................................................................. 34
Legal Matters..................................................................................... 34
Experts........................................................................................... 34
Index to Financial Statements..................................................................... F
</TABLE>
<PAGE> 3
PROSPECTUS SUMMARY
This summary highlights information, including the financial statements and
related notes, contained elsewhere in this prospectus, and may exclude
information that you should consider before investing in the common stock
offered in this prospectus. You should read the entire prospectus carefully.
The number of shares outstanding as of June 30, 2000, is 24,859,619. This
number does not include 1,693,250 shares reserved for issuance upon the exercise
of outstanding stock options, or 1,524,348 shares reserved for issuance upon the
exercise of outstanding warrants.
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.
We would receive the proceeds from the exercise of any warrants, which we would
use to fund our research and development activities and for general corporate
purposes.
BUSINESS OF EPOCH PHARMACEUTICALS, INC.
Epoch Pharmaceuticals, Inc. develops and intends to commercialize unique,
proprietary technologies to enhance the study of genes in plants, animals and
humans. Our technology is based on our expertise in DNA chemistry, which allows
us to design, synthesize and modify oligonucleotides, or synthetic strands of
DNA, that more selectively bind to and interact with their target genes, or the
gene of interest. Our technology has broad application potential in the
developing fields of molecular diagnostics and the study of genes, including the
detection of infectious diseases, inheritable diseases through prenatal testing,
screening populations to identify landmarks on the gene which correlate with
disease risk or drug response, as well as any other genetic analysis based on
DNA sequence determination.
In January 1999, we licensed some of our gene analysis technology to the PE
Biosystems Division of The PE Corporation. As part of the license agreement, PE
Biosystems will purchase our proprietary chemical compounds, and we will receive
a royalty on all products that PE Biosystems 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.
1
<PAGE> 4
RISK FACTORS
Investing in the common stock 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 offered by
the selling stockholders.
We have never been profitable and anticipate future losses
We have never been profitable. Since our formation in 1985, we have
generated limited revenues. As of March 31, 2000, we had an accumulated deficit
of approximately $63 million. We expect to incur additional losses as we expand
our research and development efforts. We will need additional funds to continue
our research and development activities.
There is a risk that our technology may not be effective or might not work
The science and technology of synthetic DNA-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. We face the risk that any or all of our proposed products could
prove to be ineffective or unsafe, or be an inferior product to products
marketed by others because our products are based on new and unproven innovative
technologies. We cannot predict whether our research and development activities
will result in any commercially viable products. If we do not have commercially
viable products, we will not be able to generate funds internally to support
operations.
There is a risk that we do not own exclusive rights to our technology and our
competition may have access to our technology which may prevent us from selling
our products
We attempt to protect our proprietary technology by relying on several
methods including United States patents. We also have international patent
applications that correspond to many of the U.S. patents and patent
applications. The issued patents and pending patent applications cover
inventions relating to the components of our core technologies. The expiration
dates of these patents range from January 2010 to June 2015. We make no
guarantee that any issued patents will provide us with significant proprietary
protection, that pending patents will be issued, or that products incorporating
the technology from our issued patents or pending applications will be free from
challenges by competitors. Further, third parties may hold proprietary rights,
which precede our claims and, therefore, could prohibit us from marketing the
proposed products.
Some of our technology might infringe on the rights of others, which may prevent
us from selling our products
There is a great deal of litigation regarding patents and other
intellectual property rights in the biomedical industry. We were defendants in
one action of this kind which we settled prior to 1997. Although patent and
intellectual property disputes in the biomedical area are sometimes settled
through licensing or similar arrangements, this kind of solution can be
expensive, if a license can be obtained at all. 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 business.
2
<PAGE> 5
We face numerous competitors and changing technologies which could make our
products obsolete
Many companies do research and development and market products designed to
diagnose conditions based on a number of technologies and are developing
additional products using gene-based technologies. 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. Even if we successfully introduce
our products or proposed products, our technologies could be replaced by new
technologies or our products or proposed products might be obsolete or
non-competitive.
The loss of key personnel could adversely affect operations by impairing our
research and our efforts to commercialize and license our products
Our performance is greatly dependent upon our key management including our
CEO, Dr. Gerber, and technical personnel and consultants. Our future success
will depend in part upon our ability to retain these people 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 these
highly qualified personnel or hire additional qualified personnel. We currently
maintain no key man life insurance on any of our management or technical
personnel.
The value of our common stock could change significantly in a very short time
The market price of our common stock may fluctuate significantly. For
example, in the first quarter of 2000, our stock traded as high as $25.00 and as
low as $2.87. The rapid price changes Epoch has experienced recently, and
throughout our history, place your investment in our common stock at risk of
total loss over a short period of time. 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.
The price of our common stock could decrease because more shares will be fully
tradable
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 June 28, 2000, 24,859,619 shares of our common stock were
outstanding; 1,524,348 shares of our common stock were issuable upon exercise of
outstanding warrants at exercise prices ranging from $0.50 to $2.50 per share;
and an additional 1,693,250 shares of our common stock were issuable upon
exercise of outstanding options at exercise prices ranging from $0.30 to $14.63
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 these securities without restriction. If these holders sell a large
number of shares of our common stock in the public market, these 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 the options or warrants are exercised, the
exercise will have a dilutive effect on the other stockholders.
3
<PAGE> 6
You must rely only on the information presented in this document
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.
YEAR 2000 COMPLIANCE
We completed remediation programs to deal with year 2000 issues in December
1999. The cost of correcting potential problems was approximately $42,000. Our
systems have functioned normally in 2000 and there have been no interruptions of
service from suppliers or vendors.
FORWARD LOOKING STATEMENTS
Some of the information included in this prospectus contains
forward-looking statements. These statements can be identified by the use of
forward-looking terms like "may," "will," "expect," "anticipates," "estimate,"
"continue," or other similar words. These statements discuss future
expectations, projections or results of operations or of financial condition or
state other "forward-looking" information. When considering these
forward-looking statements, you should keep in mind the risk factors and other
cautionary statements we make. These risk factors could cause our actual results
to differ materially from those contained in any forward-looking statement. If
any of the above risks actually occur, our business could be harmed and the
trading price of our common stock could decline.
4
<PAGE> 7
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table sets forth selected summary financial information for
the years ended December 31, 1997, 1998, and 1999, as well as for the three
months ended March 31, 1999 and 2000.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ ---------------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue $ 188 $ 160 $ 181 $ 95 $ 98
Loss from continuing operations (3,735) (5,213) (4,770) (1,096) (1,226)
Net loss (3,605) (5,103) (4,700) (1,056) (1,226)
Net loss per common share - basic
and diluted $ (0.24) $ (0.34) $ (0.30) $ (0.07) $ (0.06)
============= ============= ============= ============= =============
Weighted average common shares
outstanding - basic and diluted 14,755,462 14,818,960 15,607,934 14,830,435 21,518,898
DECEMBER 31, MARCH 31,
------------------------------------------------ -------------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ------------- -------------
BALANCE SHEET DATA:
Working capital (deficit) $ 1,124 $ (429) $ 1,052 $ (2,381) $ 17,542
Total assets 1,813 970 2,266 2,142 19,571
Stockholders' equity (deficit) $ 1,349 $ (3,201) $ 175 $ (4,070) $ 17,334
</TABLE>
5
<PAGE> 8
PRICE RANGE OF COMMON STOCK
On May 10, 2000, our common stock began trading on The Nasdaq National
Market under the symbol "EBIO." The information for trades on The Nasdaq
National Market are based on the sales price of our common stock. Prior to May
10, 2000, our common stock traded on the OTC Bulletin Board under the symbol
"EPPH." Information on the high and low bid prices for the common stock while on
the OTC Bulletin Board reflect inter-dealer prices, without retail mark-up, mark
down or commission and may not represent actual transactions:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000 HIGH LOW
--------- --------
<S> <C> <C>
Second quarter $11.19 $4.31
First quarter 25.00 2.88
FISCAL YEAR ENDED DECEMBER 31, 1999 HIGH LOW
--------- --------
Fourth quarter $3.25 $1.19
Third quarter 2.93 1.75
Second quarter 3.56 2.00
First quarter 2.75 0.52
FISCAL YEAR ENDED DECEMBER 31, 1998 HIGH LOW
--------- --------
Fourth quarter $0.72 $0.48
Third quarter 0.76 0.57
Second quarter 0.93 0.70
First quarter 0.94 0.56
FISCAL YEAR ENDED DECEMBER 31, 1997 HIGH LOW
--------- --------
Fourth quarter $0.84 $0.47
Third quarter 0.75 0.25
Second quarter 0.72 0.39
First quarter 1.03 0.59
</TABLE>
On June 28, 2000, the last reported sale price for the common stock on The
Nasdaq National Market was $9.00 per share. As of June 28, 2000, there were
approximately 2,968 stockholders of record of our common stock.
6
<PAGE> 9
CAPITALIZATION
The following table sets forth the capitalization of Epoch as of March 31,
2000. The number of shares issued and outstanding does not include 2,020,590
shares of common stock issuable upon the exercise of outstanding warrants at
exercise prices ranging from $0.50 to $2.50, and 1,646,166 shares of common
stock issuable upon the exercise of outstanding options at exercise prices
ranging from $0.30 to $17.44 per share. A discussion of our options can be found
on page 31 and our warrants are discussed starting on page 30.
<TABLE>
<S> <C>
Stockholders' equity:
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;
24,314,511 shares issued and outstanding...................... 243,145
Additional paid-in capital ....................................... 79,949,843
Deferred compensation expense .................................... (99,886)
Accumulated deficit .............................................. (62,759,165)
------------
Total stockholders' equity ................................. 17,333,937
------------
Total capitalization ............................................. $ 17,333,937
------------
</TABLE>
DIVIDEND POLICY
We have not paid cash dividends in the past and do not intend to pay cash
dividends in the foreseeable future.
7
<PAGE> 10
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 as of
December 31, 1999 and for each of the years in the two year period ended
December 31, 1999 and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus. The
selected financial data for the years ended December 31, 1997, 1998, and 1999
have been derived from our audited financial statements. The selected financial
data for the three months ended March 31, 1999 and 2000 are derived from
unaudited financial statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------------- -----------------------------
1997 1998 1999 1999 2000
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Product sales and license fees ..... $ -- $ -- $ -- $ -- $ 98
Research contract revenue .......... 188 160 109 95 --
------------- ------------ ------------ ------------ ------------
Total revenue ...................... 188 160 181 95 98
Operating expenses:
Research and development ....... 2,682 2,759 2,546 644 734
General and administrative ..... 1,514 2,015 1,414 335 717
------------- ------------ ------------ ------------ ------------
Total operating expenses ........... 4,196 4,774 3,960 979 1,451
------------- ------------ ------------ ------------ ------------
Operating loss ..................... (4,008) (4,614) (3,779) (884) (1,353)
------------- ------------ ------------ ------------ ------------
Loss from continuing operations .... (3,735) (5,213) (4,770) (1,096) (1,226)
============= ============ ============ ============ ============
Net loss ........................... $ (3,605) $ (5,103) $ (4,700) $ (1,056) $ (1,226)
============= ============ ============ ============ ============
Loss from continuing operations per
common share - basic and diluted $ (0.25) $ (0.35) $ (0.31) $ (0.07) $ (0.06)
Net loss per common share - basic
and diluted .................... $ (0.24) $ (0.34) $ (0.30) $ (0.07) $ (0.06)
Weighted average shares outstanding
- basic and diluted ............ 14,755,462 14,818,960 15,607,934 14,830,435 21,518,898
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------------------------- -----------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents .......... $ 1,485 $ 658 $ 1,772 $ 1,724 $ 18,348
Working capital (deficit) .......... 1,124 (429) 1,052 (2,381) 17,542
Total assets ....................... 1,813 970 2,266 2,142 19,571
Accumulated deficit ................ (51,730) (56,833) (61,533) (57,889) (62,759)
Total stockholders' equity (deficit) $ 1,349 $ (3,201) $ 175 $ (4,070) $ 17,334
</TABLE>
8
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of our
operations 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. Our actual
results may differ materially from those anticipated in the forward-looking
statement as a result of factors including, but not limited to, those set forth
in "Risk Factors" and elsewhere in this prospectus.
In January 1999, Epoch and PE Biosystems entered into a License and Supply
Agreement pursuant to which we licensed some of our technology to PE Biosystems
for use in TaqMan(R) 5'-nuclease real-time PCR assays, or tests. Under the terms
of the agreement, PE Biosystems' made payments to us of initial fees for
licensed technology and proprietary know how, and will make ongoing payments for
purchases of chemical compounds as well as royalties on sales of product which
use the licensed technology.
In July 1999, we licensed our proprietary software, which speeds the design
of chemical tools used in the study of genes, to PE Biosystems. This agreement
increased the scope of the licensing agreement entered into in January 1999 with
PE Biosystems to include software that allows for the efficient custom design of
Taqman(R) probes, which are chemical compounds which seek out, or "probe" for a
specific location on a gene, by the end user. The software is incorporated into
PE Biosystems' Primer Express(TM) software which is sold with its 7700 Sequence
Detection System. In addition to license fees, we will receive a royalty on all
products that PE Biosystems sells which incorporate the software.
In November 1999, PE Biosystems converted $1,000,000 of prepayments made by
it pursuant to the License and Supply Agreement into 400,000 shares of our
common stock. In order to secure any unused portion of the purchased product
prepayments (up to $450,000), we continued to grant to PE Biosystems a security
interest in the patents related to the technology under the terms of a security
agreement. The security interest automatically terminates when any unused
portion of the purchased product prepayments is $50,000 or less. Although no
security interest was granted with respect to the royalty prepayments, if the
royalty payments do not become due under the agreement, we will also be required
to refund any unused prepayments to PE Biosystems.
Under the terms of the agreement, if PE Biosystems terminates the agreement
upon 60 days written notice to us, or if we terminate the agreement following a
material breach by PE Biosystems, PE Biosystems will release its security
interest in the patents and forfeit any unused portion of the prepayments.
However, if we and PE Biosystems mutually agree to terminate the agreement, or
if PE Biosystems terminates the agreement as a result of a material breach by
us, then we must reimburse PE Biosystems the difference between the unused
portion of the purchased product prepayments and $50,000.
Through June 2000, we received $2,552,000 under the agreements, $1,000,000
of which was converted to equity in November 1999. A portion of the receipts
represent prepayments to be credited against future product purchases and
royalty payments.
9
<PAGE> 12
We expect to incur substantial operating losses for the next year as we
continue research and development spending in applying our synthetic DNA-based
technology to the expanding areas of the study of genes, or genomics, and
molecular diagnostics.
RESULTS OF OPERATIONS
The following discussion of results of operations reflects Epoch's
diagnostics division as discontinued operations.
Three Months ended March 31, 1999 and 2000
Product Sales. Product sales represent the sale of specialty probes to end
users. The first shipment of these probes was in December 1999.
License Fees. License fees reflect the amortization of initial payments for
the transfer of technology and know how. These amounts are amortized over the
life of the contract beginning in the fourth quarter of 1999.
Research Contract Revenue. Research contract revenue reflects revenue from
U.S. government grants and contracts, and subcontracts. The company does not
have any active grants at this time.
Research and Development. The increase in research and development expenses
of $89,000 over the comparable 1999 quarter is primarily the result of Epoch's
subcontracting support work on research and development to an outside firm in
2000. These expenses totaled $58,000 in the first quarter. The short-term
contract was concluded in May 2000. Additional variations in research and
development expense are the result of normal business fluctuations.
General and Administrative. General and administrative expenses increased
$382,000 in the quarter ended March 31, 2000 compared to the respective prior
year period. The increase in 2000 is primarily the result of:
- $150,000 in expenses incurred in connection with a warrant call and
private placement completed during the quarter.
- An increase of $65,000 in expenditures associated with the filing of
patents over the prior period. In the first quarter of 2000, we
incurred $81,000 in fees toward filing patents on new technologies, as
compared to $16,000 in the same period of 1999. We believe that these
patents, if issued, will improve our proprietary position. There can
be no assurance that our patent applications will result in further
issued patents or that such issued patents will offer protection
against competitors with similar technology. Additionally, there can
be no assurance that any manufacture, use or sale of our technology or
products will not infringe on patents or proprietary rights of others,
and we may be unable to obtain licenses or other rights to these other
technologies that may be required for commercialization of the
proposed products.
- An increase over 1999 of $62,000 in compensation related to
additional executive personnel.
10
<PAGE> 13
- A rent increase of $22,000.
- Increased travel expense of $21,000.
Further variances in general and administrative expenses between the
comparable quarters are the result of normal business fluctuations.
Interest Income. Interest income in 2000 increased over the comparable
prior year period due to higher cash balances available for investment.
Interest and Financing Expense. Interest and financing expense in 1999
represents the costs associated with the $3,000,000 note payable to a related
party, which was repaid in 1999.
Gain on Disposal. The gain on disposal of discontinued operations
represents only that portion of the gain for which cash payments were received
during the reporting periods.
Years Ended December 31, 1998 and 1999
License Fees. License fees reflect the amortization of initial payments for
technology and know how transfers. These amounts are amortized over the life of
the contract.
Research Contract Revenue. Research contract revenue reflects revenue from
U.S. government grants and contracts and subcontracts.
Research and Development. Research and development expenses decreased by
$214,000 in 1999. This decrease was the result of a reduction in staffing in
1999 from 1998 levels, as well as normal business fluctuations. The reduction in
staffing was the result of normal attrition, but due to low financial resources
during 1999 the positions were not replaced. With new funding received in the
first quarter of 2000, we replaced one of these positions and are actively
recruiting for another.
General and Administrative. General and administrative expenses decreased
$600,000 in 1999 from the prior year. The decrease was primarily the result of
the expenses incurred in 1998 relative to the abandonment of a proposed
facility, which resulted in the recognition of $472,000 in costs during 1998.
Also included in 1998 was $88,000 in expenses associated with the move to a new
building in Redmond, Washington.
General legal expense was $55,000 less in 1999 than in 1998. This decrease
was the result of fewer business transactions requiring legal counsel. An
additional decrease in expenditures resulted from a reduction of filings of
patents on new technologies. During 1998, we expended $212,000 for patent
filings on new technologies, as compared to $150,000 in 1999. We are presently
working on several new patents and this expense is expected to increase in 2000.
Additional variations in general and administrative expenses are the result
of normal business fluctuations.
Interest Income. Interest income in 1999 is less than 1998 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 primarily as a result of including
the amortization of $818,000 of deferred financing
11
<PAGE> 14
expense in 1999 as compared to $516,000 in 1998. Deferred financing expense in
1999, in addition to the normal amortization, included the charge off of all
remaining unamortized amounts when the loan was converted to equity in November
1999.
Other Income. Other income in 1998 represents payments received from a
sub-lease and administrative support agreement. This agreement was terminated in
April 1998 and, consequently, there is no income from this source after April
1998.
Gain on Disposal. The gain on disposal of discontinued operations
represents only that portion of the gain for which cash payments were received
during the reporting periods.
Years Ended December 31, 1997 and 1998
Research Contract Revenue. Research contract revenue reflects revenue from
U.S. government grants and contracts and subcontracts.
Research and Development. Research and development expenses increased in
total by $77,000 for 1998 over the prior year. This increase is the result of a
modest increase in research activity as well as normal business fluctuations.
General and Administrative. General and administrative expenses increased
$501,000 in 1998 over the prior year. The increase was primarily the result of
the expenses incurred in the abandonment of a proposed facility which resulted
in the recognition of $472,000 in costs during 1998. Also included in 1998 is
$88,000 in expenses associated with the move to a new building.
Our general legal expense was $84,000 more in 1998 than in 1997. This
increase was the result of an increase in business transactions requiring legal
counsel.
Offsetting some of the increase in general and administrative expenses in
1998, is a decrease in expenditures for the filing of patents on new
technologies. During 1997, we 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 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, we disposed of the remaining assets of our discontinued
diagnostics division receiving a $1,100,000 note. Collections on the note have
been sporadic and, due to uncertainties regarding ultimate collectibility, we
have not recognized the receivable and recognize only that portion of the gain
for
12
<PAGE> 15
which cash payments are received. At December 31, 1998, the unrecognized
balance on the note and the unrecognized gain was $973,000.
PLAN OF OPERATIONS; LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000 we had operating cash and cash equivalents of $18,348,000
and stockholder's equity of $17,334,000. We received an additional $1,233,000 in
cash from the exercise of warrants in April 2000.
In February 2000 we received $10 million of private equity financing from
the sale of 1,428,577 shares of common stock at $7.00 per share. The $7.00 per
share price was determined based upon the 20 day trailing average of the closing
price of the stock.
In February 2000, Epoch exercised the redemption provision on outstanding
warrants, which were issued in a private placement in 1996 and a warrant
exchange in 1997, representing 3,801,812 shares of common stock. Warrants to
purchase approximately 3,305,570 shares of common stock were exercised in the
first quarter generating $8,264,000 in cash. An additional 493,192 warrants were
exercised in April generating $1,233,000 in cash which will be reflected in
second quarter results. There were no warrants exercised in May 2000.
In addition to the warrant call, the exercise of other miscellaneous
warrants generated $54,000 in the first quarter.
Management estimates that the March 31, 2000 cash balance, coupled with the
additional $1,233,000 received in April 2000 from the exercise of additional
warrants will be sufficient to operate through 2001.
Utilizing our current cash balances coupled with anticipated revenues from
our licensing agreements, we plan to further develop and verify applicability of
our compounds and techniques in the developing fields of molecular diagnostics
and genomics, or the study of genes, and to determine how our technology may be
exploited.
We are focused on the development of our products with the goal of entering
into additional corporate partnering arrangements to further commercialize our
technology. Our working capital requirements may vary depending upon numerous
factors including commercialization of our products, the progress of our
research and development, competitive and technological advances, relocation
expenses and other factors. We anticipate operating this quarter with
approximately 28 employees.
Cash increased by $16,575,810 during the first quarter of 2000 primarily as
a result of the net of $10,000,000 received from the private placement and
$8,318,000 from the exercise of warrants offset by normal expenditures on
operations and the acquisition of $98,000 of capital equipment. The comparable
period of the prior year had a cash increase of $1,066,000, the net result of
$2,300,000 received from the PE Biosystems license agreement offset by normal
operating expenditures and the acquisition of $52,000 of equipment used in
research and development.
Variances in receivables, accounts payable and other accrued liabilities in
the first quarters of 2000 and 1999 are the result of normal business
fluctuations.
Cash increased by $1,114,000 from December 31, 1998 to December 31, 1999.
The increase was primarily the result of $4,211,000 received from the sale of
stock and the exercising of warrants and
13
<PAGE> 16
options to purchase common stock, and $1,552,000 received from PE Biosystems
under the license and supply agreement. These receipts were offset by the
payment of $431,000 in accrued interest to Bay City, the purchase of $241,000 of
capital equipment, and normal expenditures on operations. In the prior year cash
decreased $827,000 due to normal expenditures on operations offset by the
proceeds of the $3,000,000 loan from Bay City Capital which was repaid in
November 1999.
Prior to September 1998, we had been in negotiations for a lease on
approximately 21,000 square feet in the general vicinity of our then current
facility in Bothell, Washington. A design build team had been selected and was
working on plans for the new space. In September 1998, the project was canceled.
Costs for architectural fees and long lead equipment items incurred prior to
cancellation of the project were 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 1998. These accrued obligations were
satisfied in 1999.
Further variances in accounts payable and other accrued liabilities in 1999
and 1998 are the result of normal business fluctuations.
Cash decreased by $827,000 from December 31, 1997 to December 31, 1998 due
to normal expenditures on our operations, offset by the proceeds of a $3,000,000
loan received from Bay City Capital which was originally 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 our operations.
14
<PAGE> 17
BUSINESS
EPOCH PHARMACEUTICALS
Epoch Pharmaceuticals, Inc. is developing and commercializing unique,
proprietary technologies to enhance the study of genes. Epoch scientists are
applying their expertise in nucleic acid chemistry to develop products that
improve current methods of studying the genetic sequence, or genomes, of humans,
animals and plants. Our technology is based on our expertise in DNA chemistry,
which allows us to design, synthesize and modify oligonucleotides, or synthetic
DNA strands, that more selectively bind to and interact with the gene being
studied, which is called the target gene. Using our DNA technology, Epoch is
developing molecular tools and chemical compounds for improved genetic sequence
analysis.
Previously, we discovered that we could adapt chemical compounds and
techniques we were developing for our therapeutic gene modification program to
several gene sequencing analysis systems currently in use or being developed by
others. Our technology has broad application potential in the developing fields
of molecular diagnostics and genomics, or the study of genes, including the
detection of infectious diseases, inheritable diseases through prenatal testing,
screening populations to identify markers in genes that correlate with disease
risk or drug response, as well as any other genetic analysis based on DNA
sequence determination.
Our technologies are compatible with many of the genetic analysis systems
currently in use or that are in development. Just as microprocessors are found
in essentially all electronic appliances, our chemistries and technologies have
the potential to be incorporated in all genetic analysis systems.
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 or DNA and ribonucleic
acid, or 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.
[GRAPHIC]
Figure 1. Segment of Double-Stranded DNA Showing the Base Pair Relationship
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 that 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 the following 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 paired segments
15
<PAGE> 18
are matched correctly. 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,
or 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, or tRNA, transports the necessary building block amino acids to
ribosomes, which are complex intracellular structures where protein synthesis
occurs through the "translation" of the mRNA message. Ribosomal RNA, or 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.
Synthetic DNA strands 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, RNA or the proteins they
produce. Our expertise in the chemistry, design and synthesis of synthetic DNA
strands forms the basis of our research and development activities on compounds
and techniques for gene sequencing analysis.
OVERVIEW
Genetic analysis has become the most important laboratory tool in the life
sciences. The massive effort to sequence the human genome is paralleled by
projects to sequence the genomes of infectious organisms, research animals,
including yeast, fruit flies, worms and rats, and important food crops and
animals. It is estimated that over $3 billion was spent worldwide in 1999 on
industrial and academic research to understand human gene function. This
research effort is revolutionizing the pharmaceutical and diagnostic industries,
as well as the fields of crop science, animal breeding and veterinary medicine.
In the area of human health, genetic analysis promises to identify the mutations
that cause hereditary diseases, to elucidate the genetic events that lead to
cancer and determine the relative malignancy of tumors, and to identify our
individual risk for developing chronic illnesses like heart disease and
arthritis.
This future promise of genetic analysis and a rapid surge in research
activity has created a demand for new technologies and systems to accelerate the
pace and accuracy of genetic research. Techniques to study gene expression
levels and detect differences in gene sequences are rapidly evolving. As the
amount of data being generated grows, the demand for simple, accurate, high
throughput formats is increasing. New technologies are generating great
interest, such as primer extension, which is a DNA analysis system being
developed by Orchid Biocomputer, and the Invader(TM) test which eliminates the
need for PCR, being developed by Third Wave Technologies.
We have developed chemical compounds that broadly facilitate genetic
analysis. Our chemistries include minor groove binders, modified nucleotides,
novel fluorescent molecules and non-fluorescent quenchers, and a unique
chemistry to attach synthetic DNA strands to solid surfaces. These chemical
compounds enhance methods to measure gene expression and to detect missing
nucleotides, a condition called single nucleotide polymorphisms, or SNPs. They
are compatible with multiple technologies, including PCR and alternative nucleic
acid amplification technologies. Our technologies have multiple formats,
including high throughput systems and microtiter plate formats, and they can be
used in solution-based or solid phase reactions, including microarrays.
We are seeking partners and collaborators who are interested in improving
the speed, accuracy, and simplicity of their tests and applications by using our
proprietary nucleic acid-related chemistries. We have a strategic partnership
with PE Biosystems, where our technology is being incorporated into
16
<PAGE> 19
PE's TaqMan 5'-nuclease real-time PCR assays, or tests. Other partners are being
sought to commercialize products for genetic analysis that incorporate our
technologies.
GENETIC ANALYSIS OVERVIEW
As of June 2000, the Human Genome Project and Celera announced that they
had sequenced the entire human genome of over 3 billion base pairs. At the same
time, Incyte Pharmaceuticals and Human Genome Sciences have identified partial
sequences for the majority of human genes.
Sequencing the human genome has been likened to the discovery of the
elements and their arrangement in the periodic table: it only reveals the
underlying structure and order of the system. When the human genome has been
completely sequenced, we will know how many genes our chromosomes contain and
where the genes are located on the chromosomes. However, that information will
generate many more questions than it will answer. Searching for the answers to
those questions will result in a rapid growth in the field of genetic analysis,
with a parallel growth in technologies and products that facilitate that effort.
Among the most important issues that genetic research will address in the
next few decades are:
- How does our genetic diversity - the differences in the sequence of
the four bases that make up our DNA - affect our response to drugs,
and contribute to our susceptibility to chronic diseases, including
cancer and cardiovascular disease?
- How do differences in the expression of genes in our various tissues
affect development and contribute to health and illness?
SNP detection
Our genetic material is made up of nucleotide bases that are formed into
chains that comprise the DNA of our chromosomes. The sequence of the four
nucleotides (A,G,T,C) determines our genetic makeup. Differences in this
sequence, in large part, determine the uniqueness of each individual. Sites in
the sequence which differ due to inheritance are called allelic polymorphisms.
One type of polymorphism is due to a single change in the genetic DNA sequence
so that one nucleotide is substituted. These single base polymorphisms, or SNPs,
are stable, inherited and occur frequently enough along our DNA so that they can
be used to generate a "map" of sequence differences. This map can be used to
localize traits, such as, hypertension, diabetes or, sensitivity to therapeutic
drugs by identifying SNPs that occur at a higher frequency in individuals with
the trait than those without the trait. Knowing where the SNPs associated with
the trait occur, one can look for nearby genes responsible for the trait, thus
leading to a genetic understanding of the trait and directing efforts for
treatment. Some SNPs have been shown to cause disease, or associate with risk
for disease or adverse drug response. Presumably, a high proportion of
genetically controlled disease will be caused by or associated with SNPs.
Research on SNPs has proceeded in two phases, (1) discovery by comparing DNA
sequences of different individuals and (2) analysis by studying populations with
or without a given trait. The second phase requires testing thousands of SNPs in
hundreds of individuals and requires accurate, high through put testing methods
using systems like those developed at Epoch.
Gene expression
17
<PAGE> 20
How gene expression affects development and contributes to health and
illness is being addressed by comparing the level of expression of genes in
different tissues, in healthy versus diseased tissues, and at different times
during development. This approach has been accelerated by the development of DNA
microarrays, or biochips, which contain hundreds or thousands of sites on their
surface to which messenger RNAs expressed by different genes will bind, allowing
their relative levels to be tested and measured.
Today, genetic analysis is primarily a research activity carried out in
thousands of academic, industrial, and government laboratories. Within a few
years, these analyses will be used not only in research, but also in doctors'
offices and clinics, on farms and ranches, at food-processing plants, in
factories, at crime scenes, and on the battlefield. Simple, inexpensive DNA
tests have a future in almost every aspect of everyday life.
HYBRIDIZATION TESTS
Essentially all of the technologies and products useful for genetic
analysis rely on the binding of two single strands of nucleic acid to form a
double-stranded duplex in a process known as hybridization. The four bases, or
nucleotides, that make up the two strands bind to each other selectively - A to
T, and C to G. The bond between the strands is most stable if the sequence of
the bases on the two strands is perfectly complementary. For example, an A on
one strand is positioned across from and binds to a T on the other strand.
This property is exploited in the design of hybridization tests, which use
a synthetic DNA strand, or probe, to bind to a target DNA strand that is being
detected. If the sequences of the two strands are perfectly complementary, the
combination remains stable at an elevated temperature. If they are not, the
strands separate, or dissociate. The test is designed to detect the presence of
the bound, or hybridized, nucleic acid target.
One of the greatest challenges facing scientists in developing
hybridization tests is that the sequence of the target DNA can complicate the
design and hybridization temperature of the probe. The process of choosing the
optimum region on the target strand to which to design the probe to can be
time-consuming and tedious. In multiplex formats, where multiple targets are
being probed in the same test, designing probes that hybridize to their target
at similar temperatures can further complicate the problem.
Our technologies facilitate genetic analysis by making the process of
hybridization more efficient, hybridization tests simpler to design, and
detection of the hybridized product easier.
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. Probing is usually done
with short pieces of DNA, or synthetic DNA strands, of known sequence. However,
short synthetic DNA strands do not form very stable duplexes, and longer
synthetic DNA strands can form stable duplexes that have mismatches leading to
errors in the sequence. The ability to overcome these problems is the key to our
technology.
Some naturally occurring antibiotics have a shape that allows them to
"fold" into the "minor groove" of the DNA helix. We have found that we can
direct these "minor groove binders" or MGBs, to
18
<PAGE> 21
a specific target site by coupling it to a short synthetic DNA strand.
Experiments have shown that after the probe binds to its complement, the MGB
folds into the minor groove of the duplex formed by the synthetic DNA strand and
its complement, and the MGB- synthetic DNA strand duplex could not be separated
at temperatures that would normally separate the two strands. When the MGB was
coupled to synthetic DNA strands as short as seven nucleotides, the duplex
formed with its complement was stable at temperatures 15(degrees) to
30(degrees)C higher than non-MGB synthetic DNA strands. However, the duplex was
stabilized to this extent only if a duplex with no mismatches was formed. This
finding enabled us to develop MGB- synthetic DNA strands into DNA sequence
probes that we believe offer the best solutions yet found for the following
situations:
- Single base mismatch discrimination at high temperatures with short
synthetic DNA strands;
- Sequence-independent leveling of synthetic DNA strand hybrid
stability;
- Sequence specific inhibition of PCR.
We believe that the ability of synthetic DNA strands to precisely bind to
matching DNA sequences will have broad use in the developing fields of molecular
diagnostics and the study of genes. Applications that could benefit from
improved hybridization sensitivity include:
- Sensitive detection of mutations by PCR or hybridization;
- Identifying infectious organisms including genotyping and
quantitating HIV viruses resistant to reverse transcriptase or
protease inhibitors; and
- Diagnosing and determining the prognosis of cancers and their
therapies.
SALES AND MARKETING
We have no recent experience in marketing products and anticipate that we
will seek to enter into collaborative arrangements with companies to market our
products. We entered into a license agreement for some of our technology with
the PE Biosystems division of PE Corporation in January 1999. There is no
guarantee that we will be able to enter into any additional collaborative
arrangements on favorable terms or at all.
MANUFACTURING AND SUPPLY
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, or compounds, and small
quantities of synthetic DNA products in our Redmond, Washington facility. The
longer-term plan for operations is to enter into collaborative arrangements with
other companies to manufacture our synthetic DNA products. To date, we have not
entered into any collaborative arrangements for any proposed products and there
can be no assurance that we will be able to enter into any arrangements of this
kind on favorable terms if at all.
RESEARCH AND DEVELOPMENT
We conduct the majority of our research and development activities through
our own staff and facilities. We have assembled a scientific staff with a
variety of complementary skills in a broad range of advanced research
technologies. As of March 31, 2000, we had 20 employees engaged in research and
development, including 12 with Ph.D.'s. These 20 employees were engaged in
research and development related to technology applications. Our in-house
research and development efforts are
19
<PAGE> 22
focused primarily on the development of DNA probes, probe labeling and detection
techniques and development of chemical compounds.
In addition to our in-house research programs, we collaborate with academic
and research institutions to support research in areas of interest to us.
Research and development expenses totaled approximately $2,759,000 for 1998
and $2,546,000 for 1999.
PATENTS AND PROPRIETARY TECHNOLOGY
Our core technologies are covered by seven issued patents, two applications
with notices of allowance from the US Patent Office, and we have filed eight
additional patent applications. To our knowledge, there are no competing patents
on our technology. The expiration dates of these patents range from January 2010
to June 2015.
The patent position of biomedical companies, including our own, is
uncertain and may involve complex legal and factual issues. Consequently, we do
not know whether any of our 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. We cannot be
certain that we were the first creator of inventions covered by pending patent
applications or that we were the first to file patent applications for these
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, we 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. We cannot provide assurance
that our patent applications will result in further issued patents or that our
issued patents will offer protection against competitors with similar
technology. Additionally, we cannot provide assurance that any manufacture, use
or sale of our technology or products will not infringe on patents or
proprietary rights of others, and we may be unable to obtain licenses or other
rights to these other technologies that may be required for the
commercialization of our proposed products.
We require our employees, consultants and advisors to execute
confidentiality agreements upon the commencement of an employment or consulting
relationship with us. 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 our exclusive property, other
than inventions unrelated to our business and developed entirely on the
employee's own time. We cannot provide assurance, however, that these agreements
will provide meaningful protection or adequate remedies for misappropriation of
trade secrets in the event of unauthorized use or disclosure of this
information.
COMPETITION
Competition in the development and marketing of diagnostics and genomics,
including the detection of diseases using a variety of technologies is intense.
There are many pharmaceutical, diagnostic and biotechnology companies, public
and private universities and research organizations engaged in similar research
and commercialization. Most of these organizations have financial,
manufacturing, marketing and human resources greater than ours.
20
<PAGE> 23
EMPLOYEES
As of March 31, 2000, we had 25 full-time employees, of which 20 were
devoted to research and development activities, and 5 were devoted to general
and administrative activities. We believe we have been successful in attracting
skilled employees with experience in the biomedical industry, but we cannot
provide assurance that we will continue to do so in the future. None of our
employees is covered by a collective bargaining agreement. Management considers
relations with its employees to be good.
PROPERTIES
Our principal administrative office and research laboratories are located
in Redmond, Washington, where we sub-lease and occupy approximately 13,000
square feet. The current lease term will expire in April 2000, after which the
lease will continue on a month-to-month basis with a 120 day notification of
termination by either party.
In February 2000 we entered into a 12-year non-cancelable lease for a
25,000 square foot facility in Bothell, Washington. We anticipate completing
tenant improvements on approximately 19,000 square feet of this space with the
remaining 6,000 reserved for future growth. Tenant improvements began in June
2000 and we intend to occupy the new facility late in 2000.
We cannot provide assurance that we will be able to relocate to the new
facilities, to manage the relocation successfully or that the relocation will
not significantly disrupt our operations.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
21
<PAGE> 24
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Fred Craves, Ph.D 54 Chairman of the Board of Directors
Richard L. Dunning 54 Director
William G. Gerber, M.D 54 Chief Executive Officer and Director
Herbert L. Heynecker, Ph.D 56 Director
Kenneth L. Melmon, M.D 66 Director
Riccardo Pigliucci 53 Director
Sanford S. Zweifach 44 President, Chief Financial Officer, Secretary and Director
</TABLE>
Dr. Craves joined Epoch as Chairman of the board of directors in July 1993
and became Chief Executive Officer in April 1994. In September 1999, Dr. Craves
turned over the duties of Chief Executive Officer to Dr. Gerber, who joined
Epoch in September 1999. Dr. Craves will continue as the Chairman of the board
of directors. Since January 1997, Dr. Craves has been Chairman of Bay City
Capital, a merchant bank specializing in life sciences. 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, EOS and Medarex, Inc.
Mr. Dunning has been a Director of Epoch since October 1996. Since April
1996, Mr. Dunning has served as the President and Chief Executive Officer of
Nexell Pharmaceuticals, Inc., and was elected to the board of directors of
Nexell in May 1999. From 1991 to 1996, Mr. Dunning served as Executive Vice
President and Chief Financial Officer of the Dupont Merck Pharmaceutical
Company. Mr. Dunning also serves as a director of Endorex Corp.
Dr. Gerber has served as Chief Executive Officer of Epoch Pharmaceuticals,
Inc. since September 1999. From April 1998 until July 1999, Dr. Gerber served as
President and Chief Executive Officer of diaDexus LLC, a joint venture
established by Incyte Pharmaceuticals and SmithKline Beecham to apply genomic
information and technologies to the discovery of novel diagnostic products. Dr.
Gerber served as Vice President and Chief Operating Officer of Onyx
Pharmaceuticals, a biotechnology firm involved in the discovery of novel cancer
therapeutics from June 1995 until April 1998; as President of Chiron Diagnostics
from December 1991 until June 1995. Previously, he was Senior Vice President and
General Manager of the PCR Division with Cetus Corporation. Dr. Gerber also has
medical practice and managerial experience in emergency medicine and founded an
urgent care center management company. He served on and was President of the
board of Medical Quality Assurance, State of California. He received his M.D.
and B.S. from the University of California, San
22
<PAGE> 25
Francisco Medical Center after attending Dartmouth College. Dr. Gerber is also
on the board of directors of Sangamo BioSciences, Inc.
Dr. Heyneker is the Chief Technology Officer and a founder of EOS
Biotechnology, Inc., a company focused on drug target discovery, where he has
been since its inception in 1997. Prior to joining EOS, Dr. Heyneker was
involved with Array Technologies, Inc., a company devoted to the development of
oligonucleotide and cDNA arrays, which he co-founded in 1996. From 1994 to 1996,
Dr. Heyneker served as Chairman of the board of ProtoGene Laboratories, Inc.
which he co-founded. Dr. Heyneker was also a founder and Chief Executive Officer
of GlycoGen, Inc., which later merged with Cytel Corporation. Dr. Heyneker
became the first Vice President of Research of Genecor International, Inc., a
joint venture between Genetech and Corning, after joining Genetech as a senior
scientist in 1978. He is a Director of IntroGene, B.V., Chairman of the
scientific advisory board of Pharming, B.V., and as advisor for Genencor and
Energy Biosystems Corp. Dr. Heyneker received his undergraduate degree and Ph.D.
from the University of Leiden, The Netherlands.
Dr. Melmon has been a Director of Epoch 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 Vysis.
Mr. Pigliucci became a director of Epoch in February 2000. Mr. Pigliucci is
Chairman and Chief Executive Officer of Discovery Partners International, a San
Diego, CA-based corporation providing platforms, services, and information to
augment the internal drug discovery efforts of pharmaceutical and
biopharmaceutical companies. Before joining Discovery Partners, Mr. Pigliucci
was Chief Executive Officer of Life Sciences International PLC from 1996 to
1997, a global supplier of scientific equipment and consumables to research,
clinical and industrial markets based in London, England. Prior to that, during
a 23-year career at the Perkin-Elmer Corporation, he held numerous management
positions including President and Chief Operating Officer. Mr. Pigliucci
received his degree in Chemistry in Milan, Italy and is a graduate of the
Management Program of Northeastern University, Boston, Massachusetts. Mr.
Pigliucci is director of Biosphere Medical and Dionex Corporation and a trustee
of The Worcester Foundation for Biomedical Research.
Mr. Zweifach joined Epoch 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 Epoch. Mr. Zweifach has served as the
Chief Financial Officer since 1997, and as the Managing Director since January
of 1999 of Bay City Capital. Mr. Zweifach previously served as a Managing
Director of The Olmsted Group, L.L.C., a merchant-banking firm since January
1995. Mr. Zweifach was a Managing Director of D. Blech & Co. from 1991 to
September 1994, and prior to 1991, he was a Vice President of J.S. Frelinghuysen
& Co., Inc., a risk capital and merchant banking firm. He is a Certified Public
Accountant and holds an M.S. in Human Physiology from the University of
California, Davis.
Dr. Craves and Mr. Zweifach are also employed by other entities and,
although they devote a substantial portion of their time to Epoch, 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 Epoch pursuant to Consulting
Agreements.
23
<PAGE> 26
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning compensation
paid or accrued by us for services rendered during 1997, 1998 and 1999, to our
Chief Executive Officer, and our other executive officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------------------------------------- ------------
Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary ($) Bonus ($) Compensation ($) Options (#) Compensation
------------------ ---- ---------- --------- ---------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Fred Craves 1999 $100,000 $ -- $ -- -- $ --
Chairman of the Board 1998 100,000 -- -- -- --
of Directors 1997 100,000 -- -- --
William G. Gerber
Chief Executive Officer 1999 78,688 -- -- 100,000 --
Sanford S. Zweifach 1999 135,000 -- -- -- --
President and 1998 135,000 -- -- -- --
Chief Financial Officer 1997 140,625 -- -- -- --
</TABLE>
OPTION MATTERS
The following table sets forth the options granted to those persons
listed in the summary compensation table above. Options granted have a term of
10 years, and are subject to earlier termination in some situations related to
termination of employment.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
------------------------------------------------------------------------------------------------
Number of Securities % of Total Options Exercise
Underlying Options Granted to Employees Price Expiration
NAME Granted in Fiscal Year (%/Share) Date
---- -------------------- -------------------- ---------- -----------
<S> <C> <C> <C> <C>
William G. Gerber 100,000 14.3% $1.87 9/8/2009
</TABLE>
Dr. Gerber was granted options to purchase 100,000 shares of common stock
in September 1999 when he accepted the position of Chief Executive Officer. The
shares vest monthly over 12 months and have an exercise price of $1.87.
Dr. Gerber was granted options to purchase 100,000 shares of common stock
in May 2000. The shares vest monthly over 24 months and have an exercise price
of $7.25.
The following table includes the number of shares covered by both
exercisable and unexercisable stock options as of December 31, 1999. Also
reported are the values for "in the money" options which represent the positive
spread between the exercise prices of any of the existing stock options and the
fiscal year end price of our common stock at $3.25 per share.
24
<PAGE> 27
<TABLE>
<CAPTION>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
--------------------------------------------------------------------------------------------------------------
Number of Value of
securities underlying unexercised in-the-
unexercised options/ money options/
SARs at FY-end (#) SARs at FY-end ($)
Shares acquired Value Exercisable/ Exercisable/
Name on exercise (#) realized ($) Unexercisable Unexercisable
---- ---------------- ------------ --------------------- ------------------
<S> <C> <C> <C> <C>
Fred Craves 160,741 $ 246,482 616,666 / 0 458,332 / 0
William G. Gerber -- -- 33,333 / 66,667 43,666 / 87,334
Sanford S. Zweifach -- -- 101,250 / 0 278,438 / 0
</TABLE>
Dr. Craves exercised 160,741 warrants in December 1999 at a total price of
$75,000.
CONSULTING AGREEMENTS
In July 1993, Epoch entered into a one-year consulting agreement with Dr.
Craves. The agreement has been extended for successive one year periods and the
agreement is currently in effect through February 28, 2001 at a rate of $7,500
per month.
In January 1995, Epoch entered into a consulting agreement with Mr.
Zweifach. The agreement has been extended for successive one year periods and
the agreement is currently in effect through February 28, 2001 at a rate of
$7,500 per month.
Dr. Melmon also serves as a consultant to Epoch and as a member of our
Scientific Advisory Board and receives compensation in those capacities.
DIRECTORS' COMPENSATION
Epoch pays all non-employee directors a fee of $1,000 for each board of
directors meeting attended in person. In July 1993, we adopted a Non-Employee
Directors Option Plan pursuant to which each non-employee director (except Dr.
Craves) was granted 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
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 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.
25
<PAGE> 28
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BAY CITY CAPITAL BRIDGE LOAN
In November 1999, Epoch concluded $7 million of private equity financing.
Bay City Capital LLC, San Francisco, California, participated in the financing
by paying $1 million in cash and converting their $3 million note to equity.
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 of Epoch. Sanford S. Zweifach, Epoch's President and Chief Financial
Officer, is also a Managing Director and Chief Financial Officer of Bay City
Capital.
26
<PAGE> 29
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of June 30, 2000 about the
beneficial ownership of Epoch's common stock by each stockholder known by us to
be the beneficial owner of more than 5% of Epoch's common stock, as well as each
director, each of the executive officers named in the summary compensation
table, and all executive officers and directors as a group. 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.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED,
SUBJECT TO WARRANTS OR
OPTIONS
EXERCISABLE WITHIN 60 NUMBER OF SHARES PERCENTAGE OF
NAME AND ADDRESS DAYS OF JUNE 30, 2000 BENEFICIALLY OWNED OUTSTANDING SHARES
---------------- --------------------- ------------------ ------------------
<S> <C> <C> <C>
Grace Brothers Ltd. -- 5,249,693 21.1%
1560 Sherman Avenue
Evanston, Illinois 60201
Fred Craves, Ph.D.(1) 700,000 3,868,241 15.1%
Bay City Capital, LLC(2) -- 2,880,000 11.6%
750 Battery Street, Suite 600
San Francisco, CA 94111
Richard L. Dunning(3) 15,000 472,143 1.9%
Nexell Therapeutics, Inc. -- 457,143 1.8%
9 Parker
Irvine CA 92618
Sanford S. Zweifach(4) 101,250 126,250 *
William G. Gerber, M.D. 104,168 104,168 *
Kenneth L. Melmon, M.D. 85,999 85,999 *
Herbert L. Heyneker, Ph.D. -- 602 *
All executive officers and 1,006,417 1,320,260 5.1%
directors as a group
(6 persons)(5)
</TABLE>
* Less than one percent
------------------
(1) Includes warrants to purchase 83,334 shares which are held by Burrill &
Craves, of which Fred Craves is a general partner. Also includes 2,880,000
shares which are held by Bay City Capital, LLC. See footnote (2). Fred
Craves disclaims beneficial ownership of the Bay City Capital shares except
to the extent of his pecuniary interest in Bay City Capital, LLC.
(2) Represents 2,880,000 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 of Epoch, is the
majority owner and controlling person of The Craves Group. By virtue of
their status as members of Bay City Capital, LLC, each of The Craves Group
and The Pritzer Family may be
27
<PAGE> 30
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 to the extent, if any, of their actual pecuniary
interest in those shares.
(3) Includes 457,143 shares of common stock which are held by Nexell
Therapeutics, Inc., of which Richard L. Dunning is the Chairman and CEO.
Richard L. Dunning disclaims beneficial ownership of these shares of common
stock except to the extent of his pecuniary interest in Nexell Therapeutics,
Inc.
(4) Includes 15,000 warrants with a strike price of $.50 were exercised on
January 18, 2000.
(5) Includes directors' and executive officers' shares listed above. Excludes
2,880,000 warrants and the shares underlying these warrants held by Bay City
Capital LLC. Excludes 457,143 shares of common stock held by Nexell
Therapeutics, Inc.
28
<PAGE> 31
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 those rights as our board may determine. As of June
30, 2000, there were 24,859,619 shares of common stock outstanding held of
record by approximately 2,968 stockholders, 1,524,348 warrants, held of record
by approximately 11 warrant holders, and 1,693,250 options to purchase common
stock. There are no shares of preferred stock outstanding.
COMMON STOCK
The holders of outstanding shares of our common stock are entitled to
receive dividends out of legally available assets when and in the amount that
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 non-assessable.
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, thus
delaying, deferring or preventing a change in our company's control.
Furthermore, the 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 1997, an exchange of warrants was completed, with 2,603,825 public
warrants being exchanged for 1,301,912 of the exchange warrants. As of June 30,
2000, 1,250 exchange warrants remained outstanding. The following discussion of
the material terms and provisions of the exchange warrants is qualified in its
entirety by reference to the detailed provisions of the exchange warrant
agreement between us and American Stock Transfer & Trust Company, a copy of
which has been filed as an exhibit to the registration statement of which this
prospectus is part. Any outstanding and unexercised public warrants expired on
September 29, 1998.
Each exchange warrant entitled 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
29
<PAGE> 32
adjustment for stock splits, stock dividends and similar events. The exchange
warrants did 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.
In February 2000, we exercised the redemption provision on these warrants
which was that we could 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 that date.
As of April 17, 2000, 1,298,762 of these warrants had been exercised which
generated $3,246,905 in cash. Those 3,050 exchange warrants which were not
exercised are no longer exercisable and anyone still holding an exchange warrant
is now only entitled to the redemption price. In June 2000, 1,800 of the expired
exchange warrants were redeemed for $0.05 per warrant, or $90 total.
PRIVATE PLACEMENT WARRANTS
In June 1996, we completed a private placement of units, each unit
consisting of one share of our common stock and one warrant to purchase 0.5
shares of our common stock. We sold a total of 5 million units, for an aggregate
purchase price of $5 million to institutional and accredited individual
investors. The term of the warrants was five years, and they were exercisable at
$2.50 per share (or $1.25 per 0.5 shares). Each warrant was redeemable by us at
any time after eighteen months from the date issued at $0.05 per warrant,
provided that the closing trading price per share of common stock had been at
least $3.75 for twenty (20) consecutive trading days.
In February 2000, we exercised the redemption provision on these warrants
and as of April 17, 2000, all of the warrants had been exercised which generated
$6,250,000 in cash.
OTHER WARRANTS
As of June 30, 2000, there were other warrants outstanding to purchase an
aggregate of 1,524,348 shares of common stock at exercise prices ranging from
$.50 to $2.50 per share.
COMMON STOCK OPTIONS
Epoch has Incentive Stock Option Plans, a Nonqualified Stock Option Plan
and a Restricted Stock Purchase Plan pursuant to which 1,936,470 shares of
common stock 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
generally issued with a ten year term and vest over a period of four years. At
June 30, 2000, the shares granted under these plans exceeded the number reserved
for grants by 200,127 shares, therefore those grants in excess of the authorized
amount are subject to shareholder approval at the next annual meeting.
Epoch also has a Non-Employee Directors Option Plan under which each
non-employee director was granted a fully-vested 10-year option to purchase
10,000 shares of common stock at the inception of
30
<PAGE> 33
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 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 current fair market value.
TRANSFER AGENT, REGISTRAR AND WARRANT AGENT
The stock transfer agent, registrar and warrant agent for our common stock
and warrants is American Stock Transfer & Trust Company, 40 Wall Street, New
York, New York 10005.
31
<PAGE> 34
SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
SHARES OWNED
BEFORE OFFERING AMOUNT AND
(INCLUDING PERCENTAGE OF
SHARES ISSUABLE SHARES OFFERED SHARES
UPON EXERCISE OF PURSUANT TO THIS BENEFICIALLY OWNED
SELLING STOCKHOLDER WARRANTS) PROSPECTUS(1) AFTER OFFERING
------------------- ---------------- ---------------- ------------------
<S> <C> <C> <C>
American Masters Fund, "Hilspen
Series"............................. 53,200 53,200 0
Amerindo Investment Advisors, Inc. ... 285,715 285,715 0
The Alfred J. Anzalone Family Ltd.
Partnership......................... 40,000 40,000 0
Michael Arnouse....................... 30,000 30,000 0
Batterson, Johnson & Wang Limited
Partners............................ 258,145 258,145 0
Bay City Capital...................... 2,880,000 2,880,000 0
Lamon Lynn Bennett.................... 73,000 73,000 0
David Blech........................... 500,000 500,000 0
Burrill & Craves (2).................. 83,334 83,334 0
James F. Clark........................ 25,000 25,000 0
James L. Comazzi...................... 10,500 10,500 0
Concept Mining, Inc................... 44,000 44,000 0
Cooley, Godward....................... 25,000 25,000 0
John S. Dehne & Carol A. Dehne........ 37,500 12,500 25,000*
Donaldson, Lufkin, Jenrette
Securities Corporation.............. 13,000 13,000 0
Fred B. Craves (2).................... 454,907 327,407 127,500*
Frontier Charitable Remainder, Nicolas
Madonia (Trustee)................... 140,000 140,000 0
Corinna Funari........................ 12,500 12,500 0
The Gerbsman Family Trust, DTD
12-4-90, Steven R. or Marlene
Gerbsman, Trustees.................. 36,000 11,000 25,000*
Carl S. Goldfischer, M.D.............. 8,743 7,143 1,600*
Goldman Sachs Performance Partners
(Offshore), L.P. ................... 19,700 19,700 0
Goldman Sachs Performance Partners, 27,800 27,800 0
L.P.
Grace Brothers Ltd.(3)................ 5,249,693 2,200,000 3,049,693 (12.3%)
John P. Green, Jr..................... 25,000 25,000 0
Gsam Oracle Investments, Inc. FAO
Mark Callow Gam Fund Management
Limited............................. 47,143 47,143 0
Helen Gurman.......................... 25,000 25,000 0
Jason C. Hackett...................... 7,500 7,500 0
Seth Harrison......................... 7,143 7,143 0
Joel Hedgpeth......................... 350,000 350,000 0
Louisa Heyward........................ 37,500 12,500 25,000*
Hilspen Capital Partners.............. 40,200 40,200 0
Hilspen Capital Partners II........... 159,800 159,800 0
Hilspen Capital Partners I, L.P....... 19,200 19,200 0
Hilspen Capital Partners II, L.P...... 165,815 165,815 0
Billy B. & Lorraine S. Huff........... 37,500 12,500 25,000*
Gerald Korman......................... 8,500 8,500 0
Paula Kramer.......................... 12,500 12,500 0
</TABLE>
32
<PAGE> 35
<TABLE>
<CAPTION>
SHARES OWNED
BEFORE OFFERING AMOUNT AND
(INCLUDING PERCENTAGE OF
SHARES ISSUABLE SHARES OFFERED SHARES
UPON EXERCISE OF PURSUANT TO THIS BENEFICIALLY OWNED
SELLING STOCKHOLDER WARRANTS) PROSPECTUS(1) AFTER OFFERING
------------------- ---------------- ---------------- ------------------
<S> <C> <C> <C>
Lone Cypress, Ltd.................. 234,000 234,000 0
Lone Sequoia, L.P.................. 18,857 18,857 0
Lone Balsam, L.P................... 22,572 22,572 0
Lone Spruce, L.P................... 10,286 10,286 0
Louisiana State University......... 50,000 50,000 0
The Low Family Trust, U/T/A 3-21-82
Thomas B. Low, Trustee........... 42,100 37,500 4,600*
Joseph D. McKeown.................. 37,500 12,500 25,000*
Kenneth L. Melmon(2)............... 80,999 55,999 25,000*
Merlin Biomed International........ 71,429 71,429 0
Eric Miller........................ 12,500 12,500 0
MMC/GATX........................... 100 100 0
Narragansett I, L.P................ 52,143 52,143 0
Narragansett Offshore, Ltd......... 19,286 19,286 0
Tolof O. Nasby..................... 5,000 5,000 0
The Olmsted Group, L.L.C.(4)....... 145,700 122,500 23,200*
Oracle Partners, L.P............... 179,715 179,715 0
Oracle Institutional Partners, L.P. 49,714 49,714 0
Oracle Offshore Limited............ 9,143 9,143 0
Roy C. Page........................ 38,955 26,999 11,956*
PE Corporation..................... 800,000 800,000 0
Pensco Pension Services f/b/o
Lawrence A. Mitchell IRA......... 109,858 42,858 67,000*
Pharmawealth....................... 71,429 71,429 0
Richard Pops....................... 7,143 7,143 0
The Ridge Land Company............. 44,000 44,000 0
David Mark Rozen................... 250,000 62,500 187,500*
Bruce D. Schlerling TTEE
the estate of David Blech Debtor. 109,355 109,355 0
Stuart G. Stanley.................. 15,000 12,500 2,500*
Michael Steifman................... 12,500 12,500 0
Robert N. Swetnick................. 5,000 5,000 0
Ursula Vollenweider................ 7,143 7,143 0
Susan Jane Walker.................. 18,500 7,500 11,000*
Robert M. Wydro.................... 55,000 50,000 5,000*
Raymond Zabel, Jr.................. 12,500 12,500 0
Marlee Zweifach.................... 101,250 101,250 0
Sanford S. Zweifach(2)............. 126,250 101,250 25,000*
TOTAL.............................. 14,075,465 10,408,916 3,666,549
</TABLE>
---------------------
* Less than one percent
(1) Includes up to 1,524,348 shares issuable upon the exercise of warrants.
(2) See "Management" and "Principal Stockholders."
(3) See "Principal Stockholders."
(4) Sanford Zweifach, Epoch's President and Chief Financial Officer and one of
Epoch's directors, was an employee of the Olmsted Group, L.L.C.
33
<PAGE> 36
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 Nasdaq National Market, 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 or their successors in interest 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 or their successors in interest 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 the broker-dealers and profits on any resale of the common stock as
a principal may be considered underwriting discounts and commissions under the
Securities Act.
We have agreed to bear the expenses in connection with the registration and
sale of the common stock offered by the selling stockholders (other than selling
commissions and the fees and expenses of counsel or other advisors to the
selling stockholders) which we estimate to be $27,128.
LEGAL MATTERS
The validity of the common stock offered in this prospectus will be passed
upon for us by Stradling Yocca Carlson & Rauth, a Professional Corporation,
Newport Beach, California.
EXPERTS
The financial statements of Epoch Pharmaceuticals, Inc. as of December 31,
1999 and for each of the years in the two-year period ended December 31, 1999
have been included in this prospectus and in the registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
included elsewhere in this prospectus, and upon the authority of said firm as
experts in accounting and auditing.
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-
34
<PAGE> 37
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 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.
You should rely only on the information contained in this prospectus or any
supplement. We have not authorized anyone else to provide you with different
information. You should not assume that the information in this prospectus or
any supplement or in the documents incorporated by reference is accurate on any
date other than the date on the front of those documents.
35
<PAGE> 38
EPOCH PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
ITEM 1. FINANCIAL STATEMENTS NUMBER
<S> <C>
Independent Auditors' Report....................................... F-1
Balance Sheet as of December 31, 1999 and
March 31, 2000 (unaudited)..................................... F-2
Statements of Operations for the years ended
December 31, 1998 and 1999 and for the three months
ended March 31, 1999 and 2000 (unaudited)...................... F-3
Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1998 and 1999 and for the three months
ended March 31, 2000 (unaudited)............................... F-4
Statements of Cash Flows for the years ended
December 31, 1998 and 1999 and for the three months
ended March 31, 1999 and 2000 (unaudited)...................... F-5
Notes to Financial Statements...................................... F-6
</TABLE>
F
<PAGE> 39
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, 1999, 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, 1999. 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, 1999, and the results of its operations and its cash flows for
each of the years in the two-year period ended December 31, 1999 in conformity
with generally accepted accounting principles.
KPMG LLP
Seattle, Washington
March 14, 2000
F-1
<PAGE> 40
EPOCH PHARMACEUTICALS, INC.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
December 31, March 31, 2000
1999 (unaudited)
----------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 1,772,274 $ 18,348,084
Receivables......................................... 20,073 105,145
Prepaid expenses.................................... 34,188 23,334
-------------- --------------
Total current assets............................ 1,826,535 18,476,563
Equipment, net.......................................... 399,705 462,612
Restricted cash......................................... -- 595,700
Other assets............................................ 39,344 36,162
-------------- --------------
Total assets.................................... $ 2,265,584 $ 19,571,037
============== ==============
Current liabilities:
Accounts payable..................................... $ 102,884 $ 153,372
Accrued vacations.................................... 119,014 144,389
Other accrued liabilities............................ 274,646 358,654
Deferred revenue..................................... 277,742 277,742
-------------- --------------
Total current liabilities........................ 774,286 934,157
Deferred revenue......................................... 1,316,129 1,302,943
Stockholders' equity:
Preferred stock, par value $.01;
10,000,000 shares authorized;
no shares issued and outstanding: .............. -- --
Common stock, par value $.01;
50,000,000 shares authorized;
issued and outstanding:
19,382,410 at December 31, 1999 and
24,314,511 at March 31, 2000..................... 193,824 243,145
Additional paid-in capital........................... 61,625,990 79,949,843
Deferred compensation expense........................ (111,874) (99,886)
Accumulated deficit.................................. (61,532,771) (62,759,165)
-------------- --------------
Total stockholders' equity....................... 175,169 17,333,937
-------------- --------------
Commitments and subsequent events
Total liabilities and stockholders' equity .............. $ 2,265,584 $ 19,571,037
============== ==============
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 41
EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- -------------------------------
1998 1999 1999 2000
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue:
Product sales ................................ $ $ $ $ 85,200
License fees ................................. -- 71,942 -- 13,186
Research contract revenue .................... 159,917 109,152 95,092 --
------------ ------------ ------------ ------------
Total revenue .............................. 159,917 181,094 95,092 98,386
Operating expenses:
Research and development ..................... 2,759,476 2,545,583 644,601 733,740
General and administrative ................... 2,014,571 1,414,587 334,865 717,230
------------ ------------ ------------ ------------
Total operating expenses ................... 4,774,047 3,960,170 979,466 1,450,970
------------ ------------ ------------ ------------
Operating loss ............................. (4,614,130) (3,779,076) (884,374) (1,352,584)
Other income (expense):
Interest income ............................ 104,985 52,069 18,553 126,345
Interest and financing expense ............. (727,156) (1,042,947) (230,563) (155)
Other income ............................... 23,292 -- -- --
------------ ------------ ------------ ------------
Loss from continuing operations ......... (5,213,009) (4,769,954) (1,096,384) (1,226,394)
Discontinued operations -
gain on disposal of diagnostics
division ..................................... 110,000 70,000 40,000 --
------------ ------------ ------------ ------------
Net loss ................................... $ (5,103,009) $ (4,699,954) $ 1,056,384 $ (1,226,394)
============ ============ ============ ============
Loss per share from continuing
operations - basic and diluted ............... $ (0.35) $ (0.31) $ (0.07) $ (0.06)
Income per share from discontinued
operations - basic and diluted ............... $ 0.01 $ 0.01 $ -- $ --
------------ ------------ ------------ ------------
Net loss per share - basic and diluted ..... $ (0.34) $ (0.30) $ (0.07) $ (0.06)
============ ============ ============ ============
Weighted average number of common
shares outstanding - basic and diluted ....... 14,818,960 15,607,934 14,830,435 21,518,898
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 42
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, 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)
Exercise of stock options 117,342 1,174 74,442 75,616
Exercise of warrants 2,360,841 23,608 1,911,642 1,935,250
Private placement of stock 1,600,000 16,000 3,984,000 4,000,000
Exchange of debt for equity 480,000 4,800 1,195,200 1,200,000
Amortization of deferred compensation 47,952 47,952
Amortization of deferred financing 817,794 817,794
expense
Net loss (4,699,954) (4,699,954)
---------- ---------- ---------- --------- ----------- ----------- ----------
Balance at December 31, 1999 19,382,410 193,824 61,625,990 (111,874) -- (61,532,771) 175,169
========== ========== ========== ========= =========== =========== ==========
Exercise of stock options (unaudited) 89,204 892 53,941 54,833
Exercise of warrants (unaudited) 3,414,320 34,143 8,284,159 8,318,302
Private placement of stock (unaudited) 1,428,577 14,286 9,985,753 10,000,039
Amortization of deferred compensation
(unaudited) 11,988 11,988
Net loss (unaudited) (1,226,394) (1,226,394)
---------- ----------- ---------- --------- ----------- ----------- ----------
Balance at March 31, 2000 (unaudited) 24,314,511 $ 243,145 79,949,843 (99,886) -- (62,759,165) 17,333,937
========== =========== ========== ========= =========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 43
EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------- -----------------------------
1998 1999 1999 2000
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................. $ (5,103,009) $ (4,699,954) $ (1,056,384) $ (1,226,394)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............................ 61,264 110,200 18,873 35,325
Amortization of deferred financing expense ............... 515,567 817,794 166,671 --
Amortization of deferred compensation expense ............ 31,965 47,954 11,988 11,988
Changes in operating assets and liabilities:
Receivables ............................................ 24,984 18,230 (69,785) (85,072)
Prepaid expenses and other assets ...................... 4,159 26,174 (2,455) 14,036
Accounts payable ....................................... (21,158) (112,929) (84,499) 50,488
Accrued interest on note payable to related party ...... 208,804 (208,804) 63,703 --
Accrued expenses for canceled relocation ............... 391,042 (391,042) (287,397) --
Accrued vacation and other accrued liabilities ......... 129,485 37,627 47,751 109,383
Deferred revenue ....................................... -- 1,498,871 2,300,000 (13,186)
------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities ...... (3,756,897) (2,855,881) 1,108,466 (1,103,432)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Restricted cash security deposit on new facilities ....... -- -- -- (595,700)
Acquisition of equipment ................................. (75,084) (241,074) (52,128) (98,232)
------------ ------------ ------------ ------------
Net cash used in investing activities .................... (75,084) (241,074) (52,128) (693,932)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from notes payable .............................. 3,000,000 -- -- --
Proceeds from sale of common stock ....................... -- 4,000,000 -- 10,000,039
Proceeds from exercise of warrants ....................... -- 135,250 -- 8,318,302
Proceeds from exercise of stock options .................. 4,861 75,616 9,506 54,833
------------ ------------ ------------ ------------
Net cash provided by financing activities ................ 3,004,861 4,210,866 9,506 18,373,174
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ....... (827,120) 1,113,911 1,065,844 16,575,810
Cash and cash equivalents at beginning of period ........... 1,485,483 658,363 658,363 1,772,274
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period ................. $ 658,363 $ 1,772,274 $ 1,724,207 $ 18,348,084
============ ============ ============ ============
Supplemental disclosure of non-cash
financing items:
Debts extinguished through the issuance of
common stock and the exercise of warrants .............. $ -- $ 3,000,000 $ -- $ --
Equipment received pursuant to a license
and supply agreement ................................... $ -- $ 95,000 $ -- $ --
Warrants issued in debt financing ........................ $ 1,333,361 $ -- $ -- $ --
============ ============ ============ ============
Supplemental disclosure of cash flow information -
cash payments made during the period for interest ........ $ 2,785 $ 433,956 $ 189 $ 155
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 44
EPOCH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Epoch Pharmaceuticals, Inc. ("Epoch" or "the Company") is a developer of
proprietary products with commercial applications in the fields of genomics and
molecular diagnostics. Our activities are focused on the further development and
commercialization of its technologies.
Basis of Presentation
The unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB. Accordingly, they do not include all of
the information and footnotes required to be presented for complete financial
statements. The accompanying unaudited financial statements include all
adjustments (consisting only of normal recurring accruals) which are, in the
opinion of management, necessary for a fair presentation of the results for the
interim periods presented. Certain quarterly balances have been reclassified to
conform with the year end presentation.
Discontinued Operations
In 1995, we sold our then existing diagnostics division and in 1996 we sold
the remaining diagnostic technologies (see note 7). Accordingly, amounts related
to the diagnostics division have been reported as discontinued operations.
Equipment
Equipment is stated at cost. Depreciation is 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, we evaluate 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
License fees are recognized over the term of the agreement to which the
license fees correspond.
Research contract revenue is recognized as research and development
activities are performed under the terms of related agreements.
F-6
<PAGE> 45
Deferred revenue represents unrecognized license and technology fees,
prepaid royalties, and prepayments for product purchases related to a license
and supply agreement. License fees, technology fees, and prepayments for product
purchases and royalties are recognized over the term of the agreement.
As a general policy, revenues are not recognized if amounts received are
refundable or if there are related future performance obligations.
Income Taxes
Deferred income taxes are provided based on the estimated future tax
effects of carryforwards and 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 carryforwards and temporary differences are expected to be recovered or
settled. The effect on the deferred tax assets and liabilities of a change in
tax rates is recognized in the period that includes the enactment date. A
valuation allowance is recorded for deferred tax assets when it is more likely
than not that such deferred tax assets will not be realized.
Stock-Based Compensation
Epoch applies APB Opinion No. 25, Accounting for Stock Issued to Employees
and related interpretations in measuring compensation costs for its employee
stock option plans. We disclose 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 loss per share is computed based on weighted average shares
outstanding during the reporting period and excludes any potential dilution.
Diluted loss per share reflects potential dilution from the exercise or
conversion of securities into common stock or from other contracts to issue
common stock. Our capital structure includes common stock options and common
stock warrants. At March 31, 2000, there were 1,646,166 options outstanding to
purchase the common stock of Epoch with exercise prices ranging from $0.30 to
$17.44. Also outstanding at March 31, 2000 were 2,020,590 warrants to purchase
the common stock of Epoch with exercise prices ranging from $0.50 to $2.50 per
share. At March 31, 1999, there were 1,458,999 options outstanding to purchase
the common stock of Epoch with exercise prices ranging from $0.30 to $5.88. Also
outstanding at March 31, 1999 were 7,498,875 warrants to purchase the common
stock of Epoch with exercise prices ranging from $0.30 to $9.21 per share. The
assumed conversion and exercise of these securities have been excluded from the
calculation of diluted loss per share for both periods as their effect is
anti-dilutive.
Cash Equivalents
All highly liquid investments with a maturity of three months or less at
the date of purchase are considered to be cash equivalents. Cash equivalents
total $1,757,698 and consist of money market accounts and treasury bills.
Restricted Cash
F-7
<PAGE> 46
Restricted cash represents long-term certificates of deposit pledged under
a security agreement in lieu of a cash deposit on our new facility.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) FINANCIAL INSTRUMENTS
Epoch has financial instruments consisting of cash and cash equivalents,
receivables, and accounts payable. The fair value of these financial instruments
approximates their carrying amount based on their short term nature.
(3) EQUIPMENT
Equipment at December 31, 1999, consists of the following:
<TABLE>
<S> <C>
Machinery and equipment........................... $ 1,709,950
Furniture and fixtures............................ 214,301
-------------
$ 1,924,251
Less accumulated depreciation..................... (1,524,546)
-------------
Equipment, net.................................... $ 399,705
=============
</TABLE>
(4) RETIREMENT SAVINGS PLAN
Epoch 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 1998 or 1999.
(5) EQUITY
Options to Purchase Common Stock
Epoch has Incentive Stock Option Plans, a Nonqualified Stock Option Plan
and a Restricted Stock Purchase Plan pursuant to which 1,936,470 shares of
common stock 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
generally issued with a ten year term and vest over a period of four years. At
December 31, 1999, the shares granted under these plans exceeded the number
reserved for grants by 51,127 shares, therefore those grants in excess of the
authorized amount are subject to shareholder approval at the next annual
meeting.
F-8
<PAGE> 47
Epoch also has a Non-Employee Directors Option Plan (the "Directors Plan")
under which each non-employee director was granted 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 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 current fair market value.
A summary of the stock option plans follows.
<TABLE>
<CAPTION>
1998 1999
----------------------------- -----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,248,516 $2.00 1,242,316 $2.11
Granted 29,000 0.70 697,513 1.74
Exercised (9,434) 0.52 (117,342) 0.64
Forfeited (25,766) 0.65 (187,117) 0.73
---------- ----- --------- -----
Outstanding at end of year 1,242,316 $2.11 1,635,370 $2.14
========== ===== ========= =====
Options exercisable at year end 911,413 $1.96 957,299 $2.48
</TABLE>
The following table summarizes information about stock options at December
31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ---------------------------
RANGE OF NUMBER WEIGHTED-AVERAGE WEIGHTED NUMBER WEIGHTED-
EXERCISE OUTSTANDING REMAINING YEARS AVERAGE EXERCISABLE AVERAGE
PRICES AT 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/99 EXERCISE PRICE
---------------- ------------ ---------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
0.30 - 0.50 79,758 5.1 $0.35 71,215 $0.34
0.53 - 0.78 348,724 6.4 0.61 322,334 0.61
0.87 - 1.31 256,388 9.2 1.26 43,750 1.08
1.87 - 2.31 460,500 9.3 1.92 30,000 1.99
3.87 - 4.50 470,000 4.1 4.11 470,000 4.11
5.87 - 5.88 20,000 3.8 5.88 20,000 5.88
--------- --- ----- ------- -----
0.30 - 5.88 1,635,370 6.9 $2.14 957,299 $2.48
========= === ===== ======= =====
</TABLE>
Warrants to Purchase Common Stock
As part of a debt financing in February 1998, Epoch issued a fully vested
five year warrant to purchase 2,000,000 shares of common stock at $.90 per share
(see note 9). This warrant was exercised in November 1999.
In June 1996, Epoch announced that it intended to exchange for every two
Redeemable Common Stock Purchase Warrants, which were issued in conjunction with
Epoch's public offering in September 1993 at $6.50 per share (the "Public
Warrants"), one new warrant to purchase one share of common stock until June 20,
2001, that is exercisable at $2.50 per share (the "Exchange Warrants"). In June
1997
F-9
<PAGE> 48
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 us 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. These
warrants were called in February 2000. See note 11.
In June 1996, Epoch completed a private placement of units, each unit
consisting of one share of common stock and one warrant to purchase 0.5 shares
of common stock. We sold a total of 5 million units, for an aggregate purchase
price of $5 million to institutional and accredited individual investors. The
term of the warrants is five years, and they are exercisable at $2.50 per share
( or $1.25 per 0.5 shares). Each warrant is redeemable 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 (20) consecutive trading days. These warrants were called in
February 2000. See note 11.
A summary of our outstanding warrants follows.
<TABLE>
<CAPTION>
1998 1999
------------------------------ -------------------------------
EXERCISE EXERCISE
SHARES PRICE RANGE SHARES PRICE RANGE
---------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 6,705,771 $0.30 - 10.40 7,798,875 $0.30 - 9.21
Granted 2,300,000 0.75 - 0.90 -- --
Exercised -- -- -- (2,360,841) 0.30 - 2.50
Expired (1,206,896) 3.00 - 10.40 (3,124) 9.21
---------- ------------- ----------- ------------
Outstanding at end of year 7,798,875 0.30 - 9.21 5,434,910 0.50 - 2.50
========== ============= =========== ============
Warrants exercisable at year end 7,521,780 $ 0.30 - 2.50 5,330,044 0.50 - 2.50
Weighted average exercise
price of exercisable warrants $ 1.65 $ 1.99
</TABLE>
The outstanding warrants are fully vested at December 31, 1999 with the
exception of 104,866 warrants issued to a consultant which are vesting at a rate
of 6,597 warrant shares per month. All outstanding warrants will be fully vested
in 2002. The warrants have expiration dates that range to 2003.
F-10
<PAGE> 49
Stock Based Compensation
Had compensation cost for stock options and warrants issued to employees
been determined consistent with FAS No. 123, Epoch's net loss and loss per share
would have been increased to the pro forma amounts shown in the table below.
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C> <C>
Loss from continuing operations As reported $(5,213,009) $(4,769,954)
Pro forma $(5,443,207) $(5,320,568)
Loss per share from continuing operations As reported $ (0.35) $ (0.31)
Pro forma $ (0.37) $ (0.34)
Net loss As reported $(5,103,009) $(4,699,954)
Pro forma $(5,333,207) $(5,250,568)
Net loss per share - basic and diluted As reported $ (0.34) $ (0.30)
Pro forma $ (0.36) $ (0.34)
</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 and the weighted
average assumptions listed below.
<TABLE>
<CAPTION>
1998 1999
------------- -----------
<S> <C> <C>
Dividend yield 0.0% 0.0%
Expected volatility 123% 108%
Risk free interest rate 5.33% 5.59%
Expected life 10 years 10 years
</TABLE>
(6) INCOME TAXES
There was no income tax benefit attributable to net losses for 1998 and
1999. The difference between taxes computed by applying the U.S. Federal
corporate tax rate of 34% and the actual income tax provision in 1998 and 1999
is primarily the result of limitations on utilizing net operating losses.
F-11
<PAGE> 50
The tax effects of temporary differences and carryforwards that give rise
to significant portions of the deferred tax assets at December 31, 1999 are
presented below:
<TABLE>
<S> <C>
Net operating loss carryforwards............................ $ 15,898,739
Research and development credit carryforwards............... 1,858,506
Capitalized research and development........................ 2,672,212
Bad debt write-off ......................................... 1,117,270
Other ...................................................... 453,790
------------
Total gross deferred tax assets............................. 20,000,517
Less deferred tax asset valuation allowance................. (20,000,517)
------------
Net deferred tax assets..................................... $ --
============
</TABLE>
The net change in the valuation allowance for 1998 and 1999 was an increase
of approximately $1,903,000 and $1,675,298 respectively, due primarily to the
inability to utilize net operating losses and research and development credits.
At December 31, 1999, Epoch had net operating loss carryforwards for income
tax purposes of approximately $46,761,000 and unused research and development
tax credits of approximately $1,859,000 available to offset future taxable
income and income taxes, respectively, expiring through 2019. Epoch's ability to
utilize net operating loss and credit carryforwards is limited pursuant to the
Tax Reform Act of 1986, due to cumulative changes in stock ownership in excess
of 50%.
(7) DISCONTINUED OPERATIONS
In 1996, Epoch 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, Epoch
has not recognized the receivable and recognizes only that portion of the gain
for which cash payments are received. At December 31, 1999, the unrecognized
balance on the note and the unrecognized gain was $979,000.
(8) RESEARCH GRANTS AND CONTRACTS
Epoch earned approximately $160,000 and $109,000 of these funds in 1998 and
1999, respectively. At December 31, 1999, we did not have any active research
contracts.
(9) NOTE PAYABLE
In February 1998, Bay City Capital LLC, ("Bay City Capital"), San
Francisco, California, loaned $3,000,000 to Epoch from Bay City Capital Fund I
LP ("BCC Fund I") as a bridge to the earlier of a public rights offering, other
financing, or February 25, 2000. The loan accrued interest at 8% per annum. 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.
In November 1999 Bay City Capital converted $1.2 million of this $3.0
million loan into 480,000 shares of Epoch's common stock at $2.50 per share and
Bay City Capital applied the remaining $1.8 million of its $3.0 million loan to
the purchase of 2 million shares of Epoch's common stock at
F-12
<PAGE> 51
$0.90 per share pursuant to the warrant. Accrued interest on the note in the
amount of $431,000 was paid in conjunction with the repayment.
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 of Epoch. Sanford S. Zweifach, Epoch's President and Chief Financial
Officer, is also a Managing Director and Chief Financial Officer of Bay City
Capital.
Epoch recorded additional paid-in capital and deferred financing expense of
approximately $1,333,000 in connection with the issuance of this warrant in
1998. This deferred financing expense was being amortized over the two year term
of the note. Deferred financing expense recognized in 1998 was approximately
$516,000. Deferred financing expense in 1999 was $818,000. All unamortized
deferred financing expenses were expensed in November 1999 when the Note was
converted to equity.
(10) LEASES
During 1999 we leased our facility in Redmond, Washington under a short
term operating lease which expires in April 2000 but continues thereafter on a
monthly basis with a four month notification of termination by the landlord or
Epoch.
In February of 2000, we entered into a 12 year non-cancelable operating
lease for 25,000 square feet in Bothell, Washington, which we intend to occupy
in November of 2000. Future minimum payments under non-cancelable operating
leases, including the new lease in Bothell, are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
2000 $ 327,578
2001 584,056
2002 604,501
2003 625,655
2004 647,553
Thereafter 6,066,590
------------
$ 8,855,933
============
</TABLE>
Rental expense is recognized on the straight-line basis over the term of
the leases. Rent expense on operating leases was $283,000 in 1998 and $224,000
in 1999.
(11) SUBSEQUENT EVENTS
In February 2000, Epoch completed a private equity financing in which the
Company issued 1,428,577 shares of common stock in return for $10 million.
In February 2000, Epoch exercised the redemption provision on outstanding
warrants at December 31, 1999, which were issued in a private placement in 1996
and a warrant exchange in 1997, representing 3,801,812 shares of common stock.
As a result of the exercise of warrants, Epoch anticipates receiving $9.5
million in additional capital by March 31, the redemption date. As of March 14,
2000, $6.5 million of these funds had been received.
In March 2000, Epoch applied for listing on The Nasdaq Stock Market(R). The
Nasdaq Stock Market informed Epoch the application would take approximately six
to eight weeks to process.
F-13
<PAGE> 52
10,408,916 SHARES
EPOCH PHARMACEUTICALS, INC.
COMMON STOCK
PROSPECTUS
August 2, 2000
