<PAGE> 1
As filed with the Securities and Exchange Commission on May 1, 2000
Registration No. 333-88909
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
EPOCH PHARMACEUTICALS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 2834 91-1311592
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
12277 134th Court NE, Suite 110, Redmond, Washington 98052
(425) 821-7535
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
12277 134th Court NE, Suite 110, Redmond, Washington 98052
(425) 821-7535
(ADDRESS OF PRINCIPAL PLACE OF BUSINESS)
Fred Craves, Ph.D., Chief Executive Officer
12277 134th Court NE, Suite 110, Redmond, Washington 98052
(425) 821-7535
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
C. CRAIG CARLSON, ESQ.
LAWRENCE B. COHN, ESQ.
STRADLING YOCCA CARLSON & RAUTH
660 NEWPORT CENTER DRIVE, SUITE 1600
NEWPORT BEACH, CALIFORNIA 92660
(949) 725-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box: [X]
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=========================================================================================================
CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES AMOUNT TO BE AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) OFFERING PRICE(2) PRICE FEE(3)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, par value: $.01
per share 7,039,560 shares $7.50 $52,796,700 $13,939
=========================================================================================================
</TABLE>
(1) We originally registered for resale by security holders 10,428,365 shares of
common stock under Registration No. 333-12601 on Form SB-2 and 1,268,258
shares of common stock under Registration No. 333-21353 on Form SB-2.
Pursuant to Rule 429, the prospectus included as part of this Registration
Statement also relates to the resale of these previously registered shares.
Epoch has previously paid registration fees of $3,796.47 with respect to
these shares.
(2) The offering price is estimated solely for the purpose of calculating the
registration fee in accordance with Rule 457(C), using the average of the
high and low bid price for the common stock on the OTC Bulletin, on April
27, 2000, which was approximately $7.50 per share.
(3) We previously paid registration fees of $1,660.52 for the registration of
3,472,738 shares when this registration statement was first filed on October
13, 1999. Fees totalling $12,278 are being paid at the time of the filing
of this amendment.
<PAGE> 2
TABLE OF CONTENTS
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PAGE
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Prospectus Summary...........................................................................1
The Offering.................................................................................2
Risk Factors.................................................................................3
Summary Financial Information................................................................6
Use Of Proceeds..............................................................................7
Price Range of Common Stock..................................................................8
Capitalization...............................................................................9
Dividend Policy..............................................................................9
Selected Financial Data.....................................................................10
Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................................................11
Business....................................................................................15
Management..................................................................................23
Certain Relationships and Related Transactions..............................................27
Principal Stockholders......................................................................28
Description of Capital Stock................................................................30
Selling Stockholders........................................................................33
Plan of Distribution........................................................................35
Legal Matters...............................................................................35
Experts.....................................................................................35
Index to Financial Statements................................................................F
</TABLE>
We have not authorized any dealer, salesperson or other person to give
any information or represent anything not contained in this prospectus. You must
not rely on any unauthorized information. This prospectus does not offer to sell
or buy any shares in any jurisdiction where it is unlawful. The information in
this prospectus is current as of April 17, 2000.
<PAGE> 3
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 10,057,316 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.
------------------
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.
------------------
Our common stock is currently traded on the OTC Bulletin Board under the
symbol "EPPH". We have applied for listing on the Nasdaq National Market but
that application is still pending.
------------------
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE THE
SECTION TITLED "RISK FACTORS" BEGINNING ON PAGE 4 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.
------------------
In this prospectus, the "company," the "registrant," "Epoch," "we," "us"
and "our" refer to Epoch Pharmaceuticals, Inc.
------------------
The date of this prospectus is May __, 2000.
<PAGE> 4
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.
BUSINESS OF EPOCH PHARMACEUTICALS, INC.
Epoch Pharmaceuticals, Inc. develops and intends to commercialize
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 (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 (synthetic DNA
strands) that more selectively bind to and interact with their target genes.
Using our DNA technology, Epoch is developing molecular tools and reagents for
improved genetic sequence analysis.
Previously, we discovered that the compounds and techniques we were
developing for our therapeutic program in gene modification could be adapted to
several genetic 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, including the detection of infectious
diseases, inheritable diseases through prenatal testing, screening populations
to identify genetic markers that correlate with disease risk or drug response,
as well as any other genetic analysis based on DNA sequence determination.
Our technologies are compatible with many methods and formats used to
perform genetic analysis.
In January 1999, we licensed some of our enabling genetic analysis
technology to the PE Biosystems Division of The PE Corporation. PE Biosystems
will use the technology in applications related to its proprietary TaqMan(R)
5'-nuclease real-time PCR technology in the areas of biomedical research and in
some non-clinical applied fields. As part of the license agreement, PE
Biosystems will purchase our proprietary chemical intermediates. In addition to
up-front license fees and pre-payments for future purchases, we will receive a
royalty on all products that 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> 5
THE OFFERING
The number of shares outstanding prior to and after completion of this
offering is based upon the number of outstanding shares at April 13, 2000, but
does not include 1,646,166 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.
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Common stock offered......................... Up to 10,057,316 shares, including up to
1,524,348 shares issuable upon the exercise
of warrants, which the selling stockholders
may sell.
Common stock outstanding prior to
this offering............................. 24,807,703 shares
Common stock to be outstanding after
completion of this offering............... 24,807,703 shares
Use of proceeds.............................. We will not receive any proceeds from the
sale of the common stock being sold in this
offering. Some of the selling stockholders
will not receive shares of common stock until
they exercise warrants. We will receive
proceeds from the exercise of these warrants,
which we will use to fund our research and
development activities and for general
corporate purposes.
OTC Bulletin Board common stock symbol....... EPPH
</TABLE>
2
<PAGE> 6
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. At the end of 1999, we had an accumulated deficit of
approximately $62 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.
Our technology is new and unproven
The science and technology of oligonucleotide-based products is rapidly
evolving. Our proposed products are in the discovery or early development stage.
The proposed products will require significant further research, development,
and testing and are subject to the risks of failure inherent in the development
of products based on innovative technologies. We also face the risk that any or
all of our proposed products could prove to be ineffective or unsafe, be
unmarketable because third parties hold proprietary rights which prohibit us
from marketing the proposed products, or be an inferior product to products
marketed by others. We cannot predict whether our research and development
activities will result in any commercially viable products.
There is a risk that our patents will not protect our technology
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.
Some of our technology might infringe on the rights of others
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.
3
<PAGE> 7
We face numerous competitors and changing technologies
Many companies do research and development and market products designed
to diagnose infectious diseases based on a number of technologies and are
developing additional DNA probe-based products. Many of these companies have
substantially greater capital resources, larger research and development and
marketing staffs and facilities and greater experience in developing products
than we have. Furthermore, our specific field in which we operate is subject to
significant and rapid technological change. 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
Our performance is greatly dependent upon our key management 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.
We are not listed on the Nasdaq and our stock is subject to restrictions
Our common stock is neither listed on any exchange nor on the Nasdaq
National Market, although we did apply for listing on the Nasdaq National Market
in March of 2000. Our common stock is reported on the OTC Bulletin Board.
Because our shares are not listed on the Nasdaq National Market, they are
subject to the regulations regarding trading in "penny stocks" which are those
securities trading for less than $5.00 per share.
Because our securities are not listed on an exchange or the Nasdaq
National Market and the rules regarding penny stock transactions, you may not be
able to easily convert shares of our common stock into cash or to sell to a
third party. We make no guarantee that our current market-makers will continue
to make a market in our securities, or that any market for our securities will
continue or that we will be listed on Nasdaq.
Our stock price has been highly volatile
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. Sales of our securities by
existing security holders could also significantly impact the market price of
our securities.
4
<PAGE> 8
You may incur substantial dilution
Sales of substantial numbers of shares of our common stock in the public
market could substantially reduce the prevailing market price of our common
stock. As of December 31, 1999, 19,382,410 shares of our common stock were
outstanding; 5,434,910 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 1,635,370 shares of our common stock were issuable upon
exercise of outstanding options at exercise prices ranging from $0.30 to $5.88
per share. We issued a redemption notice on 3,801,812 of the outstanding
warrants in February 2000. See "Liquidity and Capital Resources." 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.
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.
5
<PAGE> 9
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table sets forth selected summary financial information
for 1997, 1998, and 1999.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
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1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue $ 188 $ 160 $ 181
Loss from continuing operations (3,735) (5,213) (4,770)
Net loss (3,605) (5,103) (4,700)
Net loss per common share -
basic and diluted $ (0.24) $ (0.34) $ (0.30)
Weighted average common shares
outstanding - basic and diluted 14,755,462 14,818,960 15,607,934
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) $ 1,124 $ (429) $ 1,052
Total assets 1,813 970 2,266
Stockholders' equity (deficit) $ 1,349 $ (3,201) $ 175
</TABLE>
6
<PAGE> 10
USE OF PROCEEDS
We will not receive any proceeds from the selling stockholders' sales of
their common stock. However, some of the selling stockholders hold warrants
exercisable for common stock. We will receive the proceeds when those selling
stockholders exercise their warrants and we will use those proceeds for research
and development and general corporate purposes; however, we cannot predict the
amount of the exercises and the corresponding proceeds.
7
<PAGE> 11
PRICE RANGE OF COMMON STOCK
Our common stock trades on the OTC Bulletin Board under the symbol
"EPPH." The following table presents quarterly information on the high and low
bid prices on the OTC Bulletin Board, which reflects inter-dealer prices,
without retail mark-up, mark down or commission and may not represent actual
transactions:
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<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1999 HIGH LOW
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Fourth quarter $ 3.25 $ 1.19
Third quarter 2.93 1.75
Second quarter 3.56 2.00
First quarter 2.75 .52
FISCAL YEAR ENDED DECEMBER 31, 1998 HIGH LOW
-------- --------
Fourth quarter $ 0.72 $ 0.48
Third quarter 0.76 0.57
Second quarter 0.93 0.70
First quarter 0.94 0.56
FISCAL YEAR ENDED DECEMBER 31, 1997 HIGH LOW
-------- --------
Fourth quarter $ 0.84 $ 0.47
Third quarter 0.75 0.25
Second quarter 0.72 0.39
First quarter 1.03 0.59
FISCAL YEAR ENDED DECEMBER 31, 1996 HIGH LOW
-------- --------
Fourth quarter $ 1.56 $ 0.63
Third quarter 1.56 0.95
Second quarter 2.03 1.50
First quarter 1.04 0.50
</TABLE>
On April 13, 2000, the last reported sale price for the common stock on
the OTC Bulletin Board was $8.00 per share. As of April 13, 2000, there were
approximately 2,229 stockholders of record of our common stock.
8
<PAGE> 12
CAPITALIZATION
The following table sets forth the capitalization of Epoch as of
December 31, 1999. The number of shares issued and outstanding does not include
5,434,910 shares of common stock issuable upon the exercise of outstanding
warrants at exercise prices ranging from $0.50 to $2.50, and 1,635,370 shares of
common stock issuable upon the exercise of outstanding options at exercise
prices ranging from $0.30 to $5.88 per share. A discussion of our options can be
found on page 31 and our warrants are discussed starting on page 30.
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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;
19,382,410 shares issued and outstanding ..................... 193,824
Additional paid-in capital ....................................... 61,625,990
Deferred compensation expense .................................... (111,874)
Accumulated deficit .............................................. (61,532,771)
------------
Total stockholders' equity ................................... 175,169
------------
Total capitalization ............................................. $ 175,169
============
</TABLE>
DIVIDEND POLICY
We have not paid cash dividends in the past and do not intend to pay
cash dividends in the foreseeable future.
9
<PAGE> 13
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 included elsewhere in this prospectus and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
selected financial data set forth below have been derived from our audited
financial statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Research contract revenue ............. $ 188 $ 160 $ 109
Total revenue ......................... 188 160 181
Operating expenses:
Research and development ............ 2,682 2,759 2,546
General and administrative .......... 1,514 2,015 1,414
Total operating expenses .............. 4,196 4,774 3,960
Operating loss ........................ (4,008) (4,614) (3,779)
Loss from continuing operations ....... (3,735) (5,213) (4,770)
Net loss .............................. $ (3,605) $ (5,103) $ (4,700)
Loss from continuing operations
per common share - basic and ........ $ (0.25) $ (0.35) $ (0.31)
diluted
Net loss per common share -
basic and diluted ................... $ (0.24) $ (0.34) $ (0.30)
Weighted average shares
outstanding - basic and diluted ..... 14,755,462 14,818,960 15,607,934
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ............. $ 1,485 $ 658 $ 1,772
Working capital (deficit) ............. 1,124 (429) 1,052
Total assets .......................... 1,813 970 2,266
Accumulated deficit ................... (51,730) (56,833) (61,533)
Total stockholders' equity (deficit) .. $ 1,349 $ (3,201) $ 175
</TABLE>
10
<PAGE> 14
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 enabling genetic
analysis technology to PE Biosystems for use in TaqMan(R) 5'-nuclease real-time
PCR assays. 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 chemical intermediate purchases as well as royalties on
sales of product which use the licensed technology.
In July 1999, we licensed our proprietary probe design software 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 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 enabling genetic 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 December 1999, 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.
We expect to incur substantial operating losses for the next year as we
continue research and development spending in applying our oligonucleotide-based
technology to the expanding areas of genomics and molecular diagnostics.
11
<PAGE> 15
RESULTS OF OPERATIONS
The following discussion of results of operations reflects Epoch's
diagnostics division as discontinued operations.
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 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.
12
<PAGE> 16
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 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
Using the proceeds of the February 2000 financing, the warrant
redemption, and the PE Biosystems licensing agreement discussed on page 11, we
plan to further develop and verify applicability of our compounds and techniques
in the developing fields of molecular diagnostics and genomics and to further
commercialize these technologies.
We are focused on the development and commercialization of our products
with the goal of entering into corporate partnering arrangements to further
commercialize the technology. Our primary future needs for capital are for
continued research and development, as well as relocation expenses
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<PAGE> 17
anticipated to be incurred in a move to new facilities. Our working capital
requirements may vary depending upon numerous factors including the progress of
our research and development, competitive and technological advances, relocation
expenses and other factors. We currently operate with approximately 25
employees, and expect modest hiring activity.
We have experienced recurring losses from operations and had a total
stockholders' equity of approximately $175,000 at December 31, 1999.
At December 31, 1999, we had cash and cash equivalents of approximately
$1,772,000. In February 2000, we received $10,000,000 through the sale of common
stock in a private placement. We also received $9,500,000 from the exercise of
warrants through April 17, 2000. Under the licensing and supply agreement with
PE Biosystems, we will receive an ongoing royalty stream based on licensee sales
and earn revenues from the sale of chemical intermediates to PE Biosystems. We
estimate these cash resources provide sufficient working capital to operate
through 2002.
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 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.
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<PAGE> 18
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 (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 (synthetic DNA
strands) that more selectively bind to and interact with their target genes.
Using our DNA technology, Epoch is developing molecular tools and reagents for
improved genetic sequence analysis.
Previously, we discovered that we could adapt 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, including the detection of infectious diseases,
inheritable diseases through prenatal testing, screening populations to identify
genetic markers that correlate with disease risk or drug response, as well as
any other genetic analysis based on DNA sequence determination.
Our technologies are compatible with many methods and formats used to
perform genetic analysis.
Epoch was incorporated in Delaware in 1985 as MicroProbe Corporation and
we changed our name in 1995 to Epoch Pharmaceuticals, Inc.
BACKGROUND
Nucleic acids are found in all living organisms and are the sole
carriers of the genetic code that specifies an organism's makeup. There are two
types of closely related nucleic acids, deoxyribonucleic acid (DNA) and
ribonucleic acid (RNA). DNA carries the permanent genetic information for
construction of all proteins in higher living organisms, while RNA carries a
temporary copy of this information to direct protein synthesis. Proteins perform
most of the normal physiological functions of living organisms, and aberrant
production or activity of proteins may cause numerous diseases.
[GRAPH]
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 segments hybridizing are complementary.
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<PAGE> 19
Hybridization can also occur between a DNA strand and a complementary
RNA strand or two complementary RNA strands. RNA occurs in several forms in
cells, and each of these forms has a different function. Messenger RNA (mRNA) is
copied, or transcribed, from the DNA comprising a gene and carries the genetic
code which is translated into the proteins synthesized by the cell. Transfer RNA
(tRNA) transports the necessary building block amino acids to ribosomes, complex
intracellular structures where protein synthesis occurs through the
"translation" of the mRNA message. Ribosomal RNA (rRNA) functions to bring mRNA
and tRNA together so protein synthesis can occur. The process of transcription
and translation, which results in protein synthesis, is called gene expression.
Oligonucleotides are well suited for development as pharmaceuticals and
diagnostic probes because they can be designed to bind selectively to, and
inhibit or inactivate specific sequences in DNA, RNA or the proteins they
produce. Our expertise in the chemistry, design and synthesis of
oligonucleotides 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 formats like the TaqMan(R) assay,
developed by PE Biosystems, based on the polymerase chain reaction (PCR) method
and DNA microarrays are being widely adopted. New technologies like primer
extension being developed by Orchid Biocomputer, and the InvaderTM assay being
developed by Third Wave Technologies, are generating great interest.
We have developed reagents 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 oligonucleotides to solid surfaces. These reagents enhance methods to
measure gene expression and to detect single nucleotide polymorphisms (SNPs).
They are compatible with multiple technologies, including PCR and alternative
nucleic acid amplification technologies; with 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 assays 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
PE's TaqMan 5'-nuclease real-time PCR assays. Other partners are being sought to
commercialize products for genetic analysis that incorporate our technologies.
GENETIC ANALYSIS OVERVIEW
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As of early 2000, the Human Genome Project has sequenced over 1/3 of the
entire human genome, about one billion bases, and all of chromosome 22. The
NIH-sponsored project is expected to be complete by 2003, although Celera has
predicted that they will finish by mid-2000. 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 or missing. 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 (e.g. hypertension, diabetes,
sensitivity to therapeutic drugs, etc) 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 many SNPs (thousands) in hundreds of individuals and requires accurate,
high through put testing methods using systems like those developed at Epoch.
Gene expression
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
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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 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 ASSAYS
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. 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 of complimentarity is exploited in the design of
hybridization assays, 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 duplex remains stable at an elevated
temperature. If they are not, the strands separate, or dissociate. The assay is
designed to detect the presence of the bound, or hybridized, nucleic acid
target.
One of the greatest challenges facing scientists in developing
hybridization assays 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 assay, 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 assays simpler to design, and
detection of the hybridized product easier. 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.
DIAGNOSTIC RESEARCH AND DEVELOPMENT
A probe molecule is designed to be complimentary to a unique sequence of
bases in the DNA or RNA of the target cell or organism. This probing is usually
done with short pieces of DNA (oligonucleotides) of known sequence. However,
short oligonucleotides (10 to 18 nucleotides) do not form very stable duplexes,
and longer oligonucleotides can form stable duplexes that are not perfect
complements (i.e., that have mismatches) leading to errors in sequence
determination. The ability to overcome these issues is the key to 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" (MGBs) to a specific target site by coupling
it to a short oligonucleotide (a probe). Experiments have shown that after the
probe binds to its complement, the MGB folds into the minor groove of the duplex
formed by the oligonucleotide and its complement, and the MGB-oligonucleotide
duplex could not be separated at temperatures that would normally separate the
two strands. When the MGB was coupled to
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oligonucleotides as short as seven nucleotides, the duplex formed with its
complement was stable at temperatures 15 degrees to 30 degreesC higher than
non-MGB oligonucleotides. However, the duplex was stabilized to this extent only
if a perfectly complementary duplex (i.e., with no mismatches) was formed. This
finding enabled us to develop MGB-oligonucleotides 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
oligonucleotides;
- Sequence-independent leveling of oligonucleotide hybrid stability;
- Sequence specific inhibition of PCR.
We believe that the ability of oligonucleotides to precisely bind to
matching DNA sequences will have broad use in the developing fields of molecular
diagnostics and genomics. 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.
Epoch's technology also has potential applications to the emerging area
of genetic testing. The correlation of an individual's genetic sequence with
their physical characteristic is a developing field. Genetic markers, which are
variations in the sequence of DNA at specific locations, can be linked either
directly (e.g., sickle cell trait and cystic fibrosis) or indirectly (e.g.,
Alzheimer's disease, type II diabetes) to disease traits. Genetic markers known
as single nucleotide polymorphisms (SNPs), have been identified. An estimated
hundred thousand or more of these sites exist throughout the human genome. True
SNPs are stable genetic markers, likely established thousands of years ago. The
linking or mapping of genetic markers will allow the prediction of, for
instance, the individual's propensity to a given disease or responsiveness to a
given drug. However, in order to definitively link SNPs to relevant
characteristics (disease propensity, drug response, diagnosis and prognosis in
cancer therapy, etc.), large populations must be screened. Current sequencing
methods are too slow and costly to be effective for this effort. We believe that
we will be able to deliver improved analytical tools on a cost-effective basis,
thus making our technology the method of choice in SNP screening.
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 enabling
genetic analysis 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 and small quantities of
oligonucleotide products in our Redmond, Washington facility. The longer-term
plan for operations is to enter into collaborative arrangements with other
companies to manufacture our oligonucleotide 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.
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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 December 31, 1999, we had 19 employees engaged in research
and development, including 10 with Ph.D.'s. These 19 employees were engaged in
research and development related to technology applications. Our in-house
research and development efforts are focused primarily on the development of DNA
probes, probe labeling and detection techniques and reagent chemistries.
In addition to 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
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Competition in the development and marketing of diagnostics and
genomics, including the detection of infectious 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 the research and development of diagnostic products.
Most of these organizations have financial, manufacturing, marketing and human
resources greater than ours.
EMPLOYEES
As of December 31, 1999, we had 24 full-time employees, of which 19 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 should begin 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.
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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. 53 Chief Executive Officer and Director
Herbert L. Heynecker, Ph.D. 56 Director
Kenneth L. Melmon, M.D. 65 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 Francisco
Medical Center after attending Dartmouth College. Dr. Gerber is also on the
board of directors of Sangamo BioSciences, Inc.
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Dr. Heynecker 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. Heynecker 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. Heynecker served as Chairman of the board of ProtoGene Laboratories, Inc.
which he co-founded. Dr. Heynecker was also a founder and Chief Executive
Officer of GlycoGen, Inc., which later merged with Cytel Corporation. Dr.
Heynecker 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. Heynecker 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.
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:
23
<PAGE> 27
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Awards Compensation
--------------------------------------------- ------------
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.
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Number of Securities % of Total Options Exercise Expiration
NAME Underlying Options Granted to Employees Price Date
Granted in Fiscal Year (%/Share)
- -------------------------------------------------------------------------------------------------
<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 evenly over 12 months and have an exercise price of
$1.87.
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 $3.25 per share.
24
<PAGE> 28
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Number of Value of
securities underlying unexercised in-the-
unexercised options/ money options/
Shares SARs at FY-end(#) SARs at FY-end($)
acquired on Value Exercisable/ Exercisable/
Name 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> 29
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> 30
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of December 31, 1999 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, NUMBER OF SHARES PERCENTAGE OF
NAME AND ADDRESS SUBJECT TO WARRANTS BENEFICIALLY OUTSTANDING
OR OPTIONS OWNED SHARES
------------------- ---------------- -------------
<S> <C> <C> <C>
Grace Brothers Ltd. 5,332,693 27.5%
1560 Sherman Avenue
Evanston, Illinois 60201
Fred Craves, Ph.D.(1) 700,000 3,868,241 19.3%
Bay City Capital, LLC(2) 2,880,000 14.9%
750 Battery Street, Suite 600
San Francisco, CA 94111
Richard L. Dunning(3) 15,000 472,143 2.4%
Nexell Therapeutics, Inc. 457,143 2.4%
9 Parker
Irvine CA 92618
Sanford S. Zweifach(4) 101,250 126,250 *
William G. Gerber, M.D. 100,000 100,000 *
Kenneth L. Melmon, M.D. 85,999 85,999 *
Herbert L. Heynecker, Ph.D. 602 *
All executive officers and directors
as a group (6 persons)(5) 1,002,249 1,316,092 6.5%
</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 and chief
executive officer 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 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.
27
<PAGE> 31
(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> 32
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
December 31, 1999, there were 19,382,410 shares of common stock outstanding held
of record by approximately 1100 stockholders, 1,301,812 exchange warrants held
of record by approximately 34 exchange warrant holders, 2,500,000 private
placement warrants, held of record by approximately 54 private placement warrant
holders, 1,633,098 other warrants, held of record by approximately 11 other
warrant holders, and 1,635,370 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
December 31, 1999, 1,301,812 exchange warrants remained outstanding. The
following discussion of the material terms and provisions of the exchange
warrants is qualified in its entirety by reference to the detailed provisions of
the exchange warrant agreement 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 adjustment
29
<PAGE> 33
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.
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 December 31, 1999, there were other warrants outstanding to
purchase an aggregate of 1,633,098 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
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.
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 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
30
<PAGE> 34
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> 35
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
Batterson, Johnson & Wang Limited
Partners........................ 258,145 258,145 0
Bay City Capital................... 2,880,000 2,880,000 0
Lamon Lynn Bennett................. 100,000 85,000 15,000*
Biotechnology Investment Group
L.L.C. ......................... 50,000 50,000 0
David Blech........................ 609,355 609,355 0
The Edward Blech Trust ............ 425,000 425,000 0
Burrill & Craves................... 83,334 83,334 0
James F. Clark..................... 25,000 25,000 0
James L. Comazzi................... 12,500 12,500 0
Concept Mining, Inc................ 44,000 44,000 0
Cooley, Goward..................... 25,000 25,000 0
Fred B. Craves..................... 454,907 327,407 127,500*
Frontier Charitable Remainder, Nicolas
Madonia (Trustee)............... 140,000 140,000 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*
Grace Brothers Ltd.(3)............. 5,332,693 2,200,000 3,132,693 (12.6%)
John P. Green, Jr.................. 25,000 25,000 0
Goldman Sachs Performance Partners
(Offshore), L.P. ............... 19,700 19,700 0
Goldman Sachs Performance Partners,
L.P. ........................... 27,800 27,800 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..................... 12,500 12,500 0
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
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
</TABLE>
32
<PAGE> 36
<TABLE>
<S> <C> <C> <C>
The Low Family Trust, U/T/A 3-21-82
Thomas B. Low, Trustee.......... 42,500 37,500 5,000*
Joseph D. McKeown.................. 37,500 12,500 25,000*
Kenneth L. Melmon(2)............... 80,999 80,999 0
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..................... 10,000 5,000 5,000
The Olmsted Group, L.L.C.(4)....... 157,500 122,500 35,000*
Oracle Partners, L.P............... 285,715 285,715 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................... 287,500 62,500 225,000*
Stuart G. Stanley.................. 15,000 12,500 2,500*
Michael Steifman................... 17,500 12,500 5,000*
Richard Sullivan................... 12,500 12,500 0
Robert N. Swetnick................. 5,000 5,000 0
Ursula Vollenweider................ 7,143 7,143
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.............................. 14,526,665 10,777,416
</TABLE>
- ------------------
* Less than one percent
(1) _____________________________________.
(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> 37
PLAN OF DISTRIBUTION
Each selling stockholder has informed us that he, she or it may sell
common stock from time to time in transactions on the OTC Bulletin Board, in
negotiated transactions, or otherwise, or by a combination of these methods, at
fixed prices which may be changed, at market prices at the time of sale, at
prices related to market prices or at negotiated prices. The selling
stockholders 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 $33,939.
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 and incorporated by reference in this prospectus and in
the registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, included and incorporated by reference 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. 333-21353. 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
34
<PAGE> 38
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. Statements contained in this prospectus regarding the contents of
any contract or any other document are not necessarily complete, and as such,
you may want to review the complete contract or document filed as an exhibit to
the registration statement.
We are subject to the information and periodic reporting requirements of
the Securities Exchange Act and, in accordance with those requirements, will
continue to file periodic reports, proxy statements and other information with
the SEC. These periodic reports, proxy statements and other information will be
available for inspection and copying at the SEC's public reference rooms and the
SEC's website referred to above.
The SEC allows us to "incorporate by reference" the information we file
with the SEC, which means that we can disclose important information to you by
referring to those documents. We incorporate by reference the documents listed
below and any additional documents filed by us with the SEC under Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until this offering of
securities is terminated. The information we incorporate by reference is an
important part of this prospectus, and any information that we file later with
the SEC will automatically update and supersede this information.
The documents we incorporate by reference are:
1. Our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1999;
2. All other reports filed by us pursuant to Section 13(a) or
15(d) of the SEC Exchange Act since December 31, 1999.
You may request a copy of these filings, at no cost, by writing or
calling us at 12277 134th Court NE, Suite 110, Redmond, Washington 98052, and
our telephone number is (425) 821-7535. Attention: Controller.
You should rely only on the information contained in this prospectus or
any supplement and in the documents incorporated by reference above. 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> 39
EPOCH PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Independent Auditors' Report....................................... F-1
Balance Sheet as of December 31, 1999.............................. F-2
Statements of Operations for the years ended
December 31, 1998 and 1999..................................... F-3
Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1998 and 1999..................................... F-4
Statements of Cash Flows for the years ended
December 31, 1998 and 1999..................................... F-5
Notes to Financial Statements...................................... F-6
</TABLE>
36
<PAGE> 40
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Epoch Pharmaceuticals, Inc.
We have audited the accompanying balance sheet of Epoch Pharmaceuticals, Inc. as
of December 31, 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> 41
EPOCH PHARMACEUTICALS, INC.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Current assets:
Cash and cash equivalents ............................................... $ 1,772,274
Receivables ............................................................. 20,073
Prepaid expenses ........................................................ 34,188
------------
Total current assets ................................................ 1,826,535
Equipment, net .............................................................. 399,705
Other assets ................................................................ 39,344
------------
Total assets ........................................................ $ 2,265,584
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 102,884
Accrued vacations ....................................................... 119,014
Other accrued liabilities ............................................... 274,646
Deferred revenue ........................................................ 277,742
------------
Total current liabilities ........................................... 774,286
------------
Deferred revenue ............................................................ 1,316,129
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;
19,382,410 shares issued and outstanding ............................ 193,824
Additional paid-in capital .............................................. 61,625,990
Deferred compensation expense ........................................... (111,874)
Accumulated deficit ..................................................... (61,532,771)
------------
Total stockholders' equity .......................................... 175,169
------------
Commitments and subsequent events
Total liabilities and stockholders' equity .................................. $ 2,265,584
============
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 42
EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Revenue:
License fees .......................................... $ -- $ 71,942
Research contract revenue ............................. 159,917 109,152
------------ ------------
159,917 181,094
Operating expenses:
Research and development .............................. 2,759,476 2,545,583
General and administrative ............................ 2,014,571 1,414,587
------------ ------------
Total operating expenses .......................... 4,774,047 3,960,170
------------ ------------
Operating loss .................................... (4,614,130) (3,779,076)
Other income (expense):
Interest income ....................................... 104,985 52,069
Interest and financing expense ........................ (727,156) (1,042,947)
Other income .......................................... 23,292 --
------------ ------------
Loss from continuing operations ................... (5,213,009) (4,769,954)
Discontinued operations -
gain on disposal of diagnostics division .............. 110,000 70,000
------------ ------------
Net loss .......................................... $ (5,103,009) $ (4,699,954)
============ ============
Loss per share from continuing operations -
basic and diluted ..................................... $ (0.35) $ (0.31)
Income per share from discontinued operations -
basic and diluted ..................................... 0.01 0.01
------------ ------------
Net loss per share - basic and diluted ............ $ (0.34) $ (0.30)
============ ============
Weighted average number of common shares
outstanding - basic and diluted ....................... 14,818,960 15,607,934
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 43
EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock Additional
----------------------- Paid-In Capital Deferred
Shares Amount Capital Compensation
------------ -------- --------------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 14,814,793 $148,148 52,930,787 --
Exercise of stock options 9,434 94 4,767
Warrants issued in debt financing 1,333,361
Issuance of warrants to a consultant 191,791 (191,791)
Amortization of deferred compensation 31,965
Amortization of deferred financing
expense
Net loss
------------ -------- ---------- --------
Balance at December 31, 1998 14,824,227 148,242 54,460,706 (159,826)
Exercise of stock options 117,342 1,174 74,442
Exercise of warrants 2,360,841 23,608 1,911,642
Private placement of stock 1,600,000 16,000 3,984,000
Exchange of debt for equity 480,000 4,800 1,195,200
Amortization of deferred compensation 47,952
Amortization of deferred financing
expense
Net loss
------------ -------- ---------- --------
Balance at December 31, 1999 19,382,410 $193,824 61,625,990 (111,874)
============ ======== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Total
Deferred Stockholders
Financing Accumulated Equity
Expense Deficit (Deficit)
---------- ----------- -----------
<S> <C> <C> <C>
Balance at December 31, 1997 -- (51,729,808) 1,349,127
Exercise of stock options 4,861
Warrants issued in debt financing (1,333,361) --
Issuance of warrants to a consultant --
Amortization of deferred compensation 31,965
Amortization of deferred financing
expense 515,567 515,567
Net loss (5,103,009) (5,103,009)
---------- ----------- -----------
Balance at December 31, 1998 (817,794) (56,832,817) (3,201,489)
Exercise of stock options 75,616
Exercise of warrants 1,935,250
Private placement of stock 4,000,000
Exchange of debt for equity 1,200,000
Amortization of deferred compensation 47,952
Amortization of deferred financing
expense 817,794 817,794
Net loss (4,699,954) (4,699,954)
---------- ----------- -----------
Balance at December 31, 1999 -- (61,532,771) 175,169
========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 44
EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss ............................................... $(5,103,009) $(4,699,954)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ........................ 61,264 110,200
Amortization of deferred financing expense ........... 515,567 817,794
Amortization of deferred compensation expense ........ 31,965 47,952
Changes in operating assets and liabilities:
Receivables ........................................ 24,984 18,230
Prepaid expenses, and other assets ................. 4,159 26,174
Accounts payable ................................... (21,158) (112,929)
Accrued interest on note payable to related party .. 208,804 (208,804)
Accrued expenses for canceled relocation ........... 391,042 (391,042)
Deferred revenue ................................... -- 1,498,871
Accrued vacation and other accrued liabilities ..... 129,485 37,627
----------- -----------
Net cash used in operating activities ................ (3,756,897) (2,855,881)
----------- -----------
Cash used in investing activities -
acquisition of equipment ............................... (75,084) (241,074)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable ............................ 3,000,000 --
Proceeds from sale of common stock ..................... -- 4,000,000
Exercise of warrants ................................... -- 135,250
Exercise of stock options .............................. 4,861 75,616
----------- -----------
Net cash provided by financing activities .............. 3,004,861 4,210,866
----------- -----------
Net increase (decrease) in cash and cash equivalents ..... (827,120) 1,113,911
Cash and cash equivalents at beginning of period ......... 1,485,483 658,363
----------- -----------
Cash and cash equivalents at end of period ............... $ 658,363 $ 1,772,274
=========== ===========
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 year for interest ........ $ 2,785 $ 433,956
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 45
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.
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.
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 carryforward and temporary differences between the financial
statement carrying amounts of existing assets and liabilities
F-6
<PAGE> 46
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 earnings (loss) per share (EPS) is computed based on weighted
average shares outstanding and excludes any potential dilution. Diluted EPS
reflects potential dilution from the exercise or conversion of securities into
common stock or from other contracts to issue common stock. Epoch's capital
structure includes stock options and stock warrants. The assumed conversion and
exercise of these securities has been excluded from diluted EPS as their effect
would be 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.
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 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>
F-7
<PAGE> 47
(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.
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:
F-8
<PAGE> 48
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -----------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED NUMBER
RANGE OF OUTSTANDING REMAINING YEARS AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE 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 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 value 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-9
<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. 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> <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)
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.
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>
F-10
<PAGE> 50
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 $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
F-11
<PAGE> 51
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-12
<PAGE> 52
_________ SHARES
EPOCH PHARMACEUTICALS, INC.
COMMON STOCK
PROSPECTUS
_____, 2000
<PAGE> 53
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our by-laws provide for indemnification of its directors and officers to
the fullest extent permitted by law. Insofar as indemnification for liabilities
under the Securities Act may be permitted to our directors or officers or
controlling persons of Epoch pursuant to our certificate of incorporation, as
amended, the by-laws and the Delaware General Corporation Law, we have been
informed that, in the SEC's opinion, this indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
Section 102(b)(7) of the Delaware General Corporation Law provides that
a certificate of incorporation may include a provision which eliminates or
limits the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability:
- for any breach of the director's duty of loyalty to the company or
its stockholders,
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- under Section 174 of the Delaware General Corporation Law, relating
to prohibited dividends or distributions or the repurchase or
redemption of stock, or
- for any transaction from which the director derives an improper
personal benefit.
Our certificate of incorporation includes this kind of provision. As a
result of this provision, our company and its stockholders may be unable to
obtain monetary damages from a director for breach of his or her duty of care.
ITEM 25. OTHER EXPENSES OF ISSUANCES AND DISTRIBUTION
The following sets forth the costs and expenses, all of which shall be
borne by our company, in connection with the offering of the common stock
pursuant to this registration statement:
<TABLE>
<S> <C>
SEC registration $ 13,939
Legal fees and expenses* 10,000
Accounting fees and expenses* 10,000
Miscellaneous --
--------
TOTAL $ 33,939
========
</TABLE>
- --------
* Estimated.
II-1
<PAGE> 54
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of our transactions during the past three
years preceding the date hereof involving sales of our securities that were not
registered under the Securities Act:
1. On November 1, 1999, we sold 2,080,000 shares of common stock under
the terms of a Securities Purchase Agreement to accredited investors at a price
of $2.50 per share. Under the Securities Purchase Agreement, the investors may
demand, after sixty (60) days from the date of the agreement, that Epoch
register the 2,080,000 shares under the Securities Act. The stock certificates
representing the shares issued pursuant to this offering bear a standard
Securities Act of 1933 legend, stopping transfer of the shares except as the
transfer satisfies the requirements of Rule 144.
2. On February 14, 2000, we sold 1,428,577 shares of common stock under
the terms of a Securities Purchase Agreement to accredited investors at a price
of $7.00 per share. Under the Securities Purchase Agreement, Epoch has
undertaken to register the 1,428,577 shares under the Securities Act and to use
its best efforts to cause the registration to become effective within ninety
(90) days of the effective date of the Securities Purchase Agreement. The stock
certificates representing the shares issued pursuant to this offering bear a
standard Securities Act of 1933 legend, stopping transfer of the shares except
as the transfer satisfies the requirements of Rule 144.
Exemption from the registration provisions of the Securities Act for the
transactions described above is claimed under Section 4(2) of the Securities
Act, among others, on the basis that the transactions did not involve any public
offering and the purchasers were sophisticated with access to the kind of
information registration would provide.
II-2
<PAGE> 55
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT LIST
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation (incorporated
by reference to Exhibit 3 of Epoch's quarterly report on Form
10-QSB for the quarter ended June 30, 1998).
3.2* Bylaws of Epoch, as currently in effect.
5.0 Opinion of Stradling Yocca Carlson & Rauth, a Professional
Corporation, Counsel to Epoch (incorporated by reference to the
same numbered exhibit to Epoch's Registration Statement on Form
SB-2, No. 333-21353, filed February 7, 1997).
10.1* MicroProbe Corporation Incentive Stock Option, Nonqualified
Stock Option And Restricted Stock Purchase Plan--1991, as
amended.
10.2* Form of Indemnification Agreement entered into with officers
and directors of Epoch.
10.3 Letter Agreement between Epoch and Fred Craves, dated August 3,
1993 (incorporated by reference to Exhibit 10.12 of Epoch's
Registration Statement on Form SB-2, Registration No. 33-66742,
effective on September 29, 1993).
10.4 Form of Common Stock Warrant issued December 31, 1991
(incorporated by reference to Exhibit 10.22 of Epoch's
Registration Statement on Form SB-2, Registration No. 33-66742,
effective on September 29, 1993).
10.5 Second Amended and Restated Investment Agreement, dated April
28, 1992 among Epoch and the investors set forth in the
agreement (incorporated by reference to Exhibit 10.25 of
Epoch's Registration Statement on Form SB-2, Registration No.
33-66742, effective on September 29, 1993).
10.6 Common Stock and Warrant Purchase Agreement, dated April 28,
1992 as amended June 30, 1992 and July 31, 1992 (with form of
warrant) among Epoch and the investors set forth in the
agreement (incorporated by reference to Exhibit 10.26 of
Epoch's Registration Statement on Form SB-2, Registration No.
33-66742, effective on September 29, 1993).
10.7 Form of Registration Agreement, dated February 12, 1993 among
Epoch and the investors set forth in the agreement
(incorporated by reference to Exhibit 10.30 of Epoch's
Registration Statement on Form SB-2, Registration No. 33-66742,
effective on September 29, 1993).
10.8 MicroProbe Corporation Incentive Stock Option, Nonqualified
Stock Option and Restricted Stock Purchase Plan--1993
(incorporated by reference to Exhibit 10.39 of Epoch's
Registration Statement on Form SB-2, Registration No. 33-66742,
effective on September 29, 1993).
</TABLE>
II-3
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.9 MicroProbe Corporation Non-Employee Directors Stock Option Plan
(incorporated by reference to Exhibit 10.40 of Epoch's
Registration Statement on Form SB-2, Registration No. 33-66742,
effective on September 29, 1993).
10.10* Warrant Agreement between Epoch and American Stock Transfer &
Trust Company dated April 29, 1997, (incorporated by reference
to Exhibit 10.10 of Epoch's Annual Report on 10-KSB for the
year ended December 31, 1998).
10.11 Purchase Agreement dated as of November 30, 1993, by and among
Epoch, Animal Biotechnology Cambridge Limited, and Herbert
Stradler (without exhibits) (incorporated by reference to
Exhibit 10.47 of Epoch's Registration Statement on Form SB-2,
Registration No. 33-76446, effective on July 7, 1994).
10.11.1 Amendment dated April 1, 1994 to Put Agreement (incorporated by
reference to Exhibit 10.48.1 of Epoch's Annual Report on Form
10-KSB for the year ended December 31, 1993).
10.11.2 Amendment dated April 27, 1994 to Put Agreement (incorporated
by reference to Epoch's Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1994).
10.11.3 Amendment dated May 26, 1994 to Put Agreement (incorporated by
reference to Exhibit 10.48.3 of Epoch's Registration Statement
on Form SB-2, Registration No. 33-76446, effective on July 7,
1994).
10.11.4 Amendment dated June 30, 1994 to Put Agreement (incorporated by
reference to Exhibit 10.48.4 of Epoch's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1994).
10.11.5 Amendment dated July 27, 1994 to Put Agreement (incorporated by
reference to Exhibit 10.48.5 of Epoch's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1994).
10.11.6 Amendment dated August 15, 1994 to Put Agreement (incorporated
by reference to Exhibit 10.48.6 of Epoch's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1994).
10.11.7 Amendment dated August 30, 1994 to Put Agreement (incorporated
by reference to Exhibit 10.48.7 of Epoch's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1994).
10.11.8 Amendment dated September 14, 1994 to Put Agreement
(incorporated by reference to Exhibit 10.48.8 of Epoch's
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1994).
10.11.9 Exercise Notice dated September 27, 1994 to Put Agreement
(incorporated by reference to Exhibit 10.48.9 of Epoch's
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1994).
10.12 Put Agreement relating to Ribonetics GmbH dated as of December
1, 1993 between Epoch and David Blech, as amended December 3,
1993 and February 18, 1994 (incorporated by reference to
Exhibit 10.48 of Epoch's Annual Report on Form 10-KSB for the
year ended December 31, 1993).
</TABLE>
II-4
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.13 Registration Rights Agreement dated October 12, 1994
(incorporated by reference to Exhibit 10.57 of Epoch's
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1994).
10.14 Consulting Agreement between Epoch and Sanford S. Zweifach,
dated January 18, 1995 (incorporated by reference to Exhibit
10.59 of Epoch's Annual Report on Form 10-KSB for the year
ended December 31, 1995).
10.15 Asset Purchase Agreement between Epoch and Becton, Dickinson
and Company, dated as of September 29, 1995 (incorporated by
reference to the form of such Asset Purchase Agreement filed
with Epoch's Definitive Proxy Materials for its Special Meeting
of Stockholders held November 27, 1995).
10.16 Consulting Agreement with David Blech dated March 29, 1996
(incorporated by reference to Exhibit 10.65 of Epoch's
Quarterly Report on Form 10-QSB for the quarter ended June 30,
1996).
10.17 Form of Subscription Agreement with Private Placement Investors
(incorporated by reference to Exhibit 4.1 of Epoch's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1996).
10.18 Warrant Agreement between Epoch and American Stock Transfer and
Trust Company dated June 21, 1996, with form of Warrant
(incorporated by reference to Exhibit 4.2 of Epoch's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1996).
10.19 Bridge Financing Agreement dated as of February 25, 1998, with
form of note and warrant, between Epoch and Bay City Capital,
LLC (incorporated by reference to Exhibit 10.69 of Epoch's
Annual Report on Form 10-KSB for the year ended December 31,
1997).
10.20* Sublease between Epoch as tenant and Bion Diagnostic Sciences,
Inc. for premises located in Redmond, Washington, dated
September 25, 1998 (incorporated by reference to Exhibit 10.20
of Epoch's Annual Report on 10-KSB for the year ended December
31, 1998).
10.21* License Agreement between Epoch and Perkin-Elmer Corporation
dated January 11, 1999 (portions of this Exhibit are omitted
and were filed separately with the Secretary of the SEC
pursuant to Epoch's application requesting confidential
treatment under Rule 406 of the Securities Act).
10.21.1 First Amendment to the License and Supply Agreement between
Epoch and Perkin-Elmer Corporation dated January 11, 1999.
(Portions of this Exhibit are omitted and were filed separately
with the Secretary of the SEC pursuant to Epoch's application
requesting confidential treatment under Rule 406 of the
Securities Act.) Incorporated by reference to exhibit 10.21.1
of Epoch's Registration Statement on Form SB-2, No. 333-88909,
filed on October 13, 1999.
10.22 Stock Purchase Agreement dated November 1, 1999 by and between
Epoch and the purchasers named in the agreement. (Incorporated
by reference to Exhibit 10.22 of Epoch's Annual Report on Form
10-KSB for the year ended December 31, 1999.)
</TABLE>
II-5
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.23 Stock Purchase Agreement dated February 14, 2000 by and between
Epoch and the purchasers named in the agreement. (Incorporated
by reference to Exhibit 10.23 of Epoch's Annual Report on Form
10-KSB for the year ended December 31, 1999.)
10.24 Employment Agreement dated September 8, 1999 by and between
Epoch and William G. Gerber, M.D.
23.2 Consent of Stradling Yocca Carlson & Rauth, a Professional
Corporation (included in the opinion filed as Exhibit 5.0).
23.1 Consent of KPMG LLP.
25.0 Power of Attorney (included on the signature page).
27.0 Financial Data Schedules (incorporated by reference to Exhibit
27 of Epoch's Annual Report on Form 10-KSB for the year ended
December 31, 1999).
</TABLE>
- -----------------
* Incorporated by reference to the same numbered exhibit of Epoch's
registration statement on Form SB-2, No. 33-66742, effective on
September 29, 1993.
(b) Reports on Form 8-K:
None
II-6
<PAGE> 59
ITEM 28. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of
the Securities Act.
(ii) Reflect in the prospectus any facts or event, which,
individually or together, represent a fundamental change in the
information in the registration statement.
(iii) Include any additional or changed information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be deemed the
initial bona fide offering.
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
(e) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the SEC,
indemnification of this nature is against public policy as expressed in the
Securities Act and is unenforceable. In the event that a claim for
indemnification against these liabilities (other than the payment by the small
business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by a director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether the indemnification by Epoch is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such the issue.
II-7
<PAGE> 60
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Redmond, State of
Washington, on the 1st day of May 2000.
EPOCH PHARMACEUTICALS, INC.
By: /s/ Sanford S. Zweifach
--------------------------------------
Sanford S. Zweifach
President and Chief Financial Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of Epoch Pharmaceuticals,
Inc. do hereby constitute and appoint Fred Craves and Sanford S. Zweifach, or
either of them, as our true and lawful attorneys and agents, to do any and all
acts and things in our name and behalf in our capacities as directors and
officers and to execute any and all instruments for us and in our names in the
capacities indicated below, which said attorneys and agents, or either of them,
may deem necessary or advisable to enable said corporation to comply with the
Securities Act, as amended, and any rules, regulations and requirements of the
SEC in connection with this registration statement, including specifically, but
without limitation, power and authority to sign for us or any of us in our names
and in the capacities indicated below, any and all amendments (including
post-effective amendments) hereto or any related registration statement that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act, as
amended; and we do hereby ratify and confirm all that the said attorneys and
agents, or either of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
II-8
<PAGE> 61
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Fred Craves Chairman of the Board of Directors May 1, 2000
- ----------------------------- (Principal Executive Officer)
Fred Craves, Ph.D.
/s/ William G. Gerber Chief Executive Officer May 1, 2000
- -----------------------------
William G. Gerber, M.D.
/s/ Sanford S. Zweifach President and Chief Financial May 1, 2000
- ----------------------------- Officer (Chief Accounting Officer)
Sanford S. Zweifach
/s/ Richard Dunning Director May 1, 2000
- -----------------------------
Richard Dunning
/s/ Herbert L. Heyneker Director May 1, 2000
- -----------------------------
Herbert L. Heyneker
/s/ Kenneth L. Melmon Director May 1, 2000
- -----------------------------
Kenneth L. Melmon, M.D.
/s/ Riccardo Pigliucci Director May 1, 2000
- -----------------------------
Riccardo Pigliucci
</TABLE>
II-9
<PAGE> 62
EXHIBIT LIST
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation (incorporated
by reference to Exhibit 3 of Epoch's quarterly report on Form
10-QSB for the quarter ended June 30, 1998).
3.2* Bylaws of Epoch, as currently in effect.
5.0 Opinion of Stradling Yocca Carlson & Rauth, a Professional
Corporation, Counsel to Epoch (incorporated by reference to the
same numbered exhibit to Epoch's Registration Statement on Form
SB-2, No. 333-21353, filed February 7, 1997).
10.1* MicroProbe Corporation Incentive Stock Option, Nonqualified
Stock Option And Restricted Stock Purchase Plan--1991, as
amended.
10.2* Form of Indemnification Agreement entered into with officers
and directors of Epoch.
10.3 Letter Agreement between Epoch and Fred Craves, dated August 3,
1993 (incorporated by reference to Exhibit 10.12 of Epoch's
Registration Statement on Form SB-2, Registration No. 33-66742,
effective on September 29, 1993).
10.4 Form of Common Stock Warrant issued December 31, 1991
(incorporated by reference to Exhibit 10.22 of Epoch's
Registration Statement on Form SB-2, Registration No. 33-66742,
effective on September 29, 1993).
10.5 Second Amended and Restated Investment Agreement, dated April
28, 1992 among Epoch and the investors set forth in the
agreement (incorporated by reference to Exhibit 10.25 of
Epoch's Registration Statement on Form SB-2, Registration No.
33-66742, effective on September 29, 1993).
10.6 Common Stock and Warrant Purchase Agreement, dated April 28,
1992 as amended June 30, 1992 and July 31, 1992 (with form of
warrant) among Epoch and the investors set forth in the
agreement (incorporated by reference to Exhibit 10.26 of
Epoch's Registration Statement on Form SB-2, Registration No.
33-66742, effective on September 29, 1993).
10.7 Form of Registration Agreement, dated February 12, 1993 among
Epoch and the investors set forth in the agreement
(incorporated by reference to Exhibit 10.30 of Epoch's
Registration Statement on Form SB-2, Registration No. 33-66742,
effective on September 29, 1993).
10.8 MicroProbe Corporation Incentive Stock Option, Nonqualified
Stock Option and Restricted Stock Purchase Plan--1993
(incorporated by reference to Exhibit 10.39 of Epoch's
Registration Statement on Form SB-2, Registration No. 33-66742,
effective on September 29, 1993).
</TABLE>
<PAGE> 63
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.9 MicroProbe Corporation Non-Employee Directors Stock Option Plan
(incorporated by reference to Exhibit 10.40 of Epoch's
Registration Statement on Form SB-2, Registration No. 33-66742,
effective on September 29, 1993).
10.10* Warrant Agreement between Epoch and American Stock Transfer &
Trust Company dated April 29, 1997, (incorporated by reference
to Exhibit 10.10 of Epoch's Annual Report on 10-KSB for the
year ended December 31, 1998).
10.11 Purchase Agreement dated as of November 30, 1993, by and among
Epoch, Animal Biotechnology Cambridge Limited, and Herbert
Stradler (without exhibits) (incorporated by reference to
Exhibit 10.47 of Epoch's Registration Statement on Form SB-2,
Registration No. 33-76446, effective on July 7, 1994).
10.11.1 Amendment dated April 1, 1994 to Put Agreement (incorporated by
reference to Exhibit 10.48.1 of Epoch's Annual Report on Form
10-KSB for the year ended December 31, 1993).
10.11.2 Amendment dated April 27, 1994 to Put Agreement (incorporated
by reference to Epoch's Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1994).
10.11.3 Amendment dated May 26, 1994 to Put Agreement (incorporated by
reference to Exhibit 10.48.3 of Epoch's Registration Statement
on Form SB-2, Registration No. 33-76446, effective on July 7,
1994).
10.11.4 Amendment dated June 30, 1994 to Put Agreement (incorporated by
reference to Exhibit 10.48.4 of Epoch's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1994).
10.11.5 Amendment dated July 27, 1994 to Put Agreement (incorporated by
reference to Exhibit 10.48.5 of Epoch's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1994).
10.11.6 Amendment dated August 15, 1994 to Put Agreement (incorporated
by reference to Exhibit 10.48.6 of Epoch's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1994).
10.11.7 Amendment dated August 30, 1994 to Put Agreement (incorporated
by reference to Exhibit 10.48.7 of Epoch's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1994).
10.11.8 Amendment dated September 14, 1994 to Put Agreement
(incorporated by reference to Exhibit 10.48.8 of Epoch's
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1994).
10.11.9 Exercise Notice dated September 27, 1994 to Put Agreement
(incorporated by reference to Exhibit 10.48.9 of Epoch's
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1994).
10.12 Put Agreement relating to Ribonetics GmbH dated as of December
1, 1993 between Epoch and David Blech, as amended December 3,
1993 and February 18, 1994 (incorporated by reference to
Exhibit 10.48 of Epoch's Annual Report on Form 10-KSB for the
year ended December 31, 1993).
</TABLE>
<PAGE> 64
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.13 Registration Rights Agreement dated October 12, 1994
(incorporated by reference to Exhibit 10.57 of Epoch's
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1994).
10.14 Consulting Agreement between Epoch and Sanford S. Zweifach,
dated January 18, 1995 (incorporated by reference to Exhibit
10.59 of Epoch's Annual Report on Form 10-KSB for the year
ended December 31, 1995).
10.15 Asset Purchase Agreement between Epoch and Becton, Dickinson
and Company, dated as of September 29, 1995 (incorporated by
reference to the form of such Asset Purchase Agreement filed
with Epoch's Definitive Proxy Materials for its Special Meeting
of Stockholders held November 27, 1995).
10.16 Consulting Agreement with David Blech dated March 29, 1996
(incorporated by reference to Exhibit 10.65 of Epoch's
Quarterly Report on Form 10-QSB for the quarter ended June 30,
1996).
10.17 Form of Subscription Agreement with Private Placement Investors
(incorporated by reference to Exhibit 4.1 of Epoch's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1996).
10.18 Warrant Agreement between Epoch and American Stock Transfer and
Trust Company dated June 21, 1996, with form of Warrant
(incorporated by reference to Exhibit 4.2 of Epoch's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1996).
10.19 Bridge Financing Agreement dated as of February 25, 1998, with
form of note and warrant, between Epoch and Bay City Capital,
LLC (incorporated by reference to Exhibit 10.69 of Epoch's
Annual Report on Form 10-KSB for the year ended December 31,
1997).
10.20* Sublease between Epoch as tenant and Bion Diagnostic Sciences,
Inc. for premises located in Redmond, Washington, dated
September 25, 1998 (incorporated by reference to Exhibit 10.20
of Epoch's Annual Report on 10-KSB for the year ended December
31, 1998).
10.21* License Agreement between Epoch and Perkin-Elmer Corporation
dated January 11, 1999 (portions of this Exhibit are omitted
and were filed separately with the Secretary of the SEC
pursuant to Epoch's application requesting confidential
treatment under Rule 406 of the Securities Act).
10.21.1 First Amendment to the License and Supply Agreement between
Epoch and Perkin-Elmer Corporation dated January 11, 1999.
(Portions of this Exhibit are omitted and were filed separately
with the Secretary of the SEC pursuant to Epoch's application
requesting confidential treatment under Rule 406 of the
Securities Act.) Incorporated by reference to exhibit 10.21.1
of Epoch's Registration Statement on Form SB-2, No. 333-88909,
filed on October 13, 1999.
10.22 Stock Purchase Agreement dated November 1, 1999 by and between
Epoch and the purchasers named in the agreement. (Incorporated
by reference to Exhibit 10.22 of Epoch's Annual Report on Form
10-KSB for the year ended December 31, 1999.)
</TABLE>
<PAGE> 65
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.23 Stock Purchase Agreement dated February 14, 2000 by and between
Epoch and the purchasers named in the agreement. (Incorporated
by reference to Exhibit 10.23 of Epoch's Annual Report on Form
10-KSB for the year ended December 31, 1999.)
10.24 Employment Agreement dated September 8, 1999 by and between
Epoch and William G. Gerber, M.D.
23.2 Consent of Stradling Yocca Carlson & Rauth, a Professional
Corporation (included in the opinion filed as Exhibit 5.0).
23.1 Consent of KPMG LLP.
25.0 Power of Attorney (included on the signature page).
27.0 Financial Data Schedules (incorporated by reference to Exhibit
27 of Epoch's Annual Report on Form 10-KSB for the year ended
December 31, 1999).
</TABLE>
- -----------------
* Incorporated by reference to the same numbered exhibit of Epoch's
registration statement on Form SB-2, No. 33-66742, effective on
September 29, 1993.
(b) Reports on Form 8-K:
None
<PAGE> 66
EXHIBIT 23.1
CONSENT OF KPMG LLP
The Board of Directors
Epoch Pharmaceuticals, Inc.:
We consent to the use of our report included and incorporated by reference
herein and to the reference to our firm under the heading "Experts" in the
prospectus.
KPMG LLP
Seattle, Washington
April 28, 2000
<PAGE> 1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into
this 8th day of September, 1999, by and between EPOCH PHARMACEUTICALS, INC., a
Delaware corporation (the "Employer"), and William Gerber, an individual (the
"Employee").
WITNESSETH:
WHEREAS Employer desires to employ Employee in the capacity hereinafter
stated, and the Employee desires to enter into the employ of the Employer in
that capacity for the period and pursuant to the terms and conditions set forth
herein.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein, the Employer and the Employee,
intending to be legally bound, hereby agree as follows:
1. EMPLOYMENT/POSITION AND DUTIES. Effective upon the date of this
Agreement (a) Employer shall employ Employee as the Chief Executive Officer of
Employer and Employee shall accept such employment and (b) Employee shall be
appointed to the Board of Directors of Employer and Employee shall accept such
appointment. During the term of this Agreement, Employee agrees to devote
substantially all of Employee's skills and efforts to the performance of, and to
perform diligently and on a timely basis, such duties as shall be assigned to
Employee from time to time by the Employer's Board of Directors.
2. TERM. The term of the Employee's employment hereunder shall be
eighteen (18) months commencing on the date hereof and expiring on the first day
following such eighteen (18) month period beginning on the date hereof (the
"Expiration Date"), unless sooner terminated as hereinafter specified in Section
4.
3. COMPENSATION.
3.1 Base Salary. As compensation for all services to be rendered by
the Employee during the first year of employment under this Agreement, the
Employee shall accrue a base salary of Two Hundred Fifty Thousand Dollars
($250,000) per year (the "Base Salary"), which shall be payable by Employer to
Employee as follows: (a) Seventy-Two percent (72%) of the Base Salary shall be
paid on a regular basis in accordance with Employer's normal payroll procedures
and policies, and (b) the remaining Twenty-Eight percent (28%) of the Base
Salary shall be paid on the earlier to occur of (i) the first anniversary of the
date hereof or (ii) the closing of additional financing or licensing
transactions generating net proceeds or up-front licensing fees to the Company
of at least Two Million Dollars ($2,000,000). As compensation for all serviced
to be rendered by the Employee following the first year of employment under this
Agreement, the Employer shall pay to Employee such Base Salary in accordance
with Employer's normal payroll procedures and policies.
3.2 Bonus Compensation. During the Term of this Agreement Employee
shall be eligible to receive annual incentive compensation of up to forty
percent (40%) of Employee's Base Salary upon the achievement of certain
performance goals set by the Board of Directors and participate in any other
incentive compensation or bonus program adopted for management employees of the
Employer. The terms on which Employee shall be eligible to participate in any
such incentive compensation or bonus program shall be comparable to the terms
that shall apply to
<PAGE> 2
other management employees of the Employer or its subsidiaries that are employed
in positions that are comparable to the position in which Employee is employed
by the Employer. Employee understands that adoption of any management incentive
compensation or bonus program by the Employer requires the prior approval of the
Board of Directors of the Employer. Employee's participation in any such program
that is approved by the Board of Directors of the Employer shall be subject to
the provisions, rules and regulations of any such program.
3.3 Stock Option. Concurrent herewith, Employer shall grant
Employee a stock option to purchase One Hundred Thousand (100,000) shares of
Employer's Common Stock pursuant to the terms and conditions of that certain
Stock Option Agreement of even date herewith, at the exercise price set forth in
such Stock Option Agreement, which shall vest at 8,33333 shares on the 8th day
of each month commencing on October 8, 1999 for twelve months.
3.4 Participation in Benefit Plans. The Employee shall be
entitled to participate in all employee benefit plans or programs (including
vacation time, sick leave and holidays) generally available to all employees of
the Employer, to the extent that Employee's position, title, tenure, salary,
age, health and other qualifications make Employee eligible to participate
therein. The Employee's participation in any such plan or program shall be
subject to the provisions, rules and regulations thereof that are generally
applicable to all participants therein.
3.5 Expenses. In accordance with the Employer's policies
established from time to time, the Employer will pay or reimburse the Employee
for all reasonable and necessary out-of-pocket expenses incurred by Employee in
the performance of Employee's duties under this Agreement, subject to the
presentment of appropriate documentation confirming the amount and nature and
the business purposes of such expenses.
4. TERMINATION AND COMPENSATION UPON THE TERMINATION OF THE EMPLOYEE'S
EMPLOYMENT BY THE EMPLOYER. In the event of a termination of Employee's
employment with the Employer in accordance with the provisions hereof, this
Agreement shall also terminate concurrently therewith.
4.1 Termination Without Cause. The Employer may terminate Employee's
employment at any time during the Term of this Agreement without Cause (as
hereinafter defined), for any reason or no reason, including Employee's death or
total disability (as hereinafter defined). A termination without Cause shall be
effective upon thirty (30) days prior written notice to Employee, except that
such termination shall be effective immediately and without the necessity of any
notice in the case of Employee's death and on delivery of written notice of
termination to Employee in the case of Employee's total disability (as
hereinafter defined) (the "Employment Termination Date"). In the event of any
such termination, the Employer's sole obligation and liability to Employee shall
be as follows:
(a) To pay to Employee (or in the case of death, to his estate)
the portion of his Base Salary and vacation and sick time that, as of the
Termination Date, had accrued for services rendered up to, but was unpaid as of,
such Employment Termination Date;
(b) In the event of a termination without Cause for reasons other
than death or disability, severance compensation in an amount equal to the
portion of Base Salary that
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would have been payable to Employee during the then remaining term of the
Agreement (the "Post-Termination Severance Compensation"), which shall be
payable in the manner and times provided below; and
(c) The amount of any bonus or incentive compensation that had
become Vested (as hereinafter defined) prior to the Employment Termination Date
if (A) a bonus had been awarded to Employee prior to the Employment Termination
Date (a "Bonus Award"), under any management incentive or bonus program
described in Paragraph 3.2 above in which Employee was a participant at or prior
to the Employment Termination Date, and (B) any conditions precedent (such as
those described below) to Employee's right to receive the payment of such Bonus
Award had been satisfied or had been waived, in writing, by the Employer prior
to such Employment Termination Date, then, the unpaid portion of such Bonus
Award that had become payable prior to the Employment Termination Date as a
result of the satisfaction or waiver of any such conditions precedent shall be
deemed to have become vested ("Vested") and shall be paid to Employee (or
Employee's estate, in the case of Employee's death) in the manner and times
provided below. By way of example, conditions precedent to the payment of a
Bonus Award may include, but shall not be limited to, any requirement that
Employee shall have remained in the Employer's employ continuously to a specific
date, or that specified operating results shall have been achieved, or specified
performance goals shall have been satisfied by the Employer, or the Employee (as
the case may be).
All payments required to be made by the Employer to the Employee
pursuant to this Subsection 4.1, including, without limitation, any Severance
Compensation and any incentive or bonus compensation, shall be paid on a regular
basis in accordance with the Employer's normal payroll procedures and policies
at such times and in such installments in which such compensation would
otherwise have been paid to Employee had there been no such termination of
employment. For purposes of this Subsection 4.1, the term "totally disabled" or
"total disability" shall mean an inability of Employee, due to a physical or
mental illness, injury or impairment, to perform the essential functions of her
position even with reasonable accommodation as required by law, for a period of
120 consecutive days, or for non-consecutive periods aggregating more than 180
days in any period of 12 consecutive months, as determined by a medical
physician mutually selected by the Employee (or his guardian) and the Employer;
provided, however, that if the two parties cannot agree on a physician, then
each party shall select a physician and the two physicians shall select a third
physician who will make the determination.
4.2 Termination for Cause. The Employer may terminate Employee's
employment at any time for "Cause" (as hereinafter defined), effective
immediately upon written notice to Employee. As used herein, the term "Cause"
shall mean Employee's:
(a) commission of a material breach of this Agreement or of
Employee's duty of loyalty to the Employer, including, but not limited to, a
breach of any of Employee's obligations under any of Sections 5, 6, 7 or 8
hereof;
(b) commission of an act that, under applicable law or government
regulations, could be held to constitute the commission of a felony, or a
misdemeanor involving moral turpitude, or could subject the Employer to civil or
criminal penalties or fines;
(c) commission of an act that, in the sole judgment of the Board
of Directors of the Employer could adversely affect, or has adversely affected,
the reputation of the
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Employer, or the relationship of the Employer with any federal, state or local
government agency or any client of the Employer, the loss of which could
reasonably be expected to materially affect the Employer or its business;
(d) refusal or failure to perform any of Employee's material
duties to the reasonable satisfaction of the Board of Directors of the Employer.
Notwithstanding the foregoing, Employee shall not be deemed to
have been terminated for cause without (i) reasonable notice to Employee setting
forth the reason for the Company's intention to terminate for cause, (ii)
reasonable opportunity for Employee to cure, and (iii) an opportunity for
Employee, together with his counsel, if any, to be heard before the Board.
If Employee's employment is terminated for Cause, the Employee shall not
be entitled to any compensation, nor shall the Employer have any obligation to
pay any sum or have any liability to Employee, whether as compensation for
Employee's services or as a result of such termination of employment, other than
the unpaid portion of Employee's Base Salary and vacation and sick time that
have accrued for services rendered by Employee to the Employer through the
effective date of such termination for Cause. All payments required to be made
by the Employer to the Employee pursuant to this Subsection 4.2 shall be paid in
such installments in which such compensation would otherwise have been paid to
Employee had there been no such termination of employment and in accordance with
the Employer's normal payroll procedures and policies.
4.3 Termination by Employee for Employer Breach. In the event of a
breach by the Employer of any of its material obligations to Employee under this
Agreement, then Employee shall be entitled (i) to give a written default notice
to the Employer identifying, in reasonable detail, the nature of such breach and
stating that Employee intends to terminate this Agreement and Employee's
employment with the Employer if such breach is not cured within the succeeding
thirty (30) days (the "Cure Period") and (ii) if the Employer fails to cure such
breach in all material respects within the Cure Period, to terminate Employee's
employment with the Employer by a written termination notice delivered to the
Employer no later than the 15th day after the end of such Cure Period. In the
event of any such breach by the Employer and the termination by Employee of
Employee's employment pursuant to this Subsection 4.3, the Employer's sole
liability and obligation to Employee shall be to pay to Employee the same
compensation, on the same payment schedule, that applies to a termination of
Employee's employment without Cause, as provided in Subsection 4.1 hereof. If
Employee fails to exercise Employee's right of termination hereunder within the
15 day period specified above, then, notwithstanding anything to the contrary
contained herein, the Employer's breach and its failure to cure such breach
shall be deemed to have been waived by Employee, Employee's employment shall
continue hereunder and Employee shall not be entitled to terminate this
Agreement or Employee's employment or to receive any amounts or other payments
from the Employer by reason of such breach and failure to cure on the part of
the Employer.
5. VENTURES AND ACQUISITIONS. If, during the term of this Agreement,
Employee is engaged in or associated with the planning or implementing of any
project, program or venture involving the Employer and a third party or parties
(a "Venture"), or any discussions, analyses or negotiations with respect to an
investment in, merger, acquisition or purchase, directly or indirectly, of the
stock, assets or business of any entity (an "Acquisition"), all rights in the
Venture and the Acquisition and any opportunity to make any investment in the
entity to be so acquired (the "Target") shall belong to the Employer and shall
constitute a corporate opportunity belonging exclusively to the Employer. Except
as approved by the Employer's Board of Directors, the
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Employee shall not be entitled to any interest in any such Venture or to invest
or solicit any third party to invest in the Target or consummate the
Acquisition, or to receive any commission, finder's fee or other compensation in
connection therewith other than the salary to be paid to Employee as provided in
this Agreement.
6. CONFIDENTIAL INFORMATION. At all times during and after the Term of
this Agreement, Employee will hold in strict confidence and, without the express
prior written authorization of the Employer's Board of Directors, Employee shall
not disclose to any person or entity, any financial or marketing data of the
Employer (including, without limitation, financial statements of the Employer),
or any technique, process, formula, developmental or experimental work, work in
progress, business methods, business or marketing plans or trade secrets of or
used in the business of the Employer, or any other proprietary or confidential
information relating to the Employer or the services, business affairs of the
Employer, including, without limitation, any information relating to inquiries
made by the Employer or negotiations with respect to any Venture or Acquisition,
as such terms are defined in Section 5 above (collectively, the "Confidential
Information"). Employee agrees that Employee will not make use of any of the
Confidential Information during the Term of this Agreement other than for the
exclusive benefit of the Employer and that Employee shall not make any use
whatsoever of the Confidential Information at any time after termination of
Employee's employment with the Employer. Upon termination of such employment,
Employee shall deliver to the Employer (i) all documents, records, notebooks,
work papers and all similar repositories containing any Confidential Information
or any other information concerning the Employer, whether prepared by Employee,
the Employer or anyone else and (ii) all tangible personal property belonging to
the Employer that is in Employee's possession. The foregoing restrictions shall
not apply to (a) information which is or becomes, other than as a result of a
breach of this Agreement, generally available to the public, (b) information
related to the terms of Employee's compensation or benefits as an employee of
the Employer, or (c) the disclosure of information required pursuant to a
subpoena or other legal process; provided that the Employee shall notify the
Employer, in writing, of the receipt of any such subpoena or other legal process
requiring such disclosure immediately after receipt thereof and the Employee
shall assist the Employer in any efforts it may undertake to quash such subpoena
or other legal process or obtain an appropriate protective order prior to any
such disclosure by the Employee.
7. COVENANTS AGAINST ACTIONS DAMAGING THE EMPLOYER. The Employee agrees
that Employee will not, during Employee's employment by the Employer hereunder,
and for a period of two (2) years following the termination of such employment
(whether by the Employer or by Employee and regardless of the reason for such
termination), (i) make any claim that the Employee has any right, interest or
title, of any kind or nature whatsoever, in or to any proprietary products,
services methods, practices, processes, discoveries, ideas, improvements,
devices, creations, business or marketing plans or systems, or, subject to
applicable labor laws, inventions relating to the business of the Employer, or
(ii) for Employee or on behalf of or in conjunction with any third party, hire
any employee of the Employer or induce or entice any employee of the Employer to
leave his or her employment with the Employer.
8. NON-COMPETITION. Employee agrees that, during the term of Employee's
employment with the Employer, Employee will not engage or participate, in any
capacity (whether as an owner, shareholder, partner, lender, director, officer,
employee or independent contractor or consultant or advisor) in, or provide any
services (financial, advisory or other) to, any Person or business (including
any sole proprietorship, partnership, limited liability company, corporation,
unincorporated association or other entity) that is the same as, substantially
similar to, or competition
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with the Employer or is involved in any business activity in which the Employer
now is, or during the past 12 months was engaged, or in which the Employer has
been planning, and had begun material preparations, to engage in hereafter.
Nothing herein shall prevent Employee from holding, for investment purposes
only, no more than five (5) percent of any class of equity securities of a
company engaged in activities that are the same as, substantially similar to, or
competitive with the Employer if such class of equity securities is traded on a
national securities exchange or on the Nasdaq National Market. However, Employee
may continue to serve on the Board of Directors of Sangamo Biosciences.
9. OTHER EMPLOYEE AGREEMENTS. Employee agrees to execute and deliver all
other agreements customarily entered into by the Company with its executive
level employees, including, without limitation, proprietary rights and invention
assignments.
10. ASSIGNMENT. This Agreement shall not be assignable, in whole or in
part, by either party without the written consent of the other party, except
that the Employer may, without the consent of the Employee, assign its rights
and delegate its obligations under this Agreement to an Affiliate; or to any
unaffiliated corporation, firm or other business entity (i) with or into which
the Employer may merge or consolidate, or (ii) to which the Employer may sell or
transfer all or substantially all of its assets. After any such assignment by
the Employer, the Employer shall be discharged from all further liability
hereunder and such assignee shall thereafter be deemed to be the Employer for
the purposes of all provisions of this Agreement including this Section 9.
11. SURVIVAL; REMEDIES.
11.1 Survival. Any payment obligations of the Employer to Employee
that arise under Section 4 by reason of a termination of Employee's employment
in accordance with Section 4 hereof shall survive any such termination until
such obligations have been satisfied and Sections 5, 6, 7, and 8 of this
Agreement shall survive the expiration of the Term of this Agreement and any
termination of Employee's employment with the Employer.
11.2 Remedies. Employee acknowledges and agrees that Employee's
covenants and the restrictions on Employee contained in the foregoing Sections
5, 6, 7, and 8 of this Agreement are reasonable and necessary in order to
protect the legitimate interests of the Employer, and that any violation thereof
by Employee would result in irreparable injuries to the Employer. Therefore,
Employee acknowledges and agrees that, in the event of a violation by Employee
of any of those covenants or any of those restrictions the Employer shall be
entitled to obtain, from any court of competent jurisdiction, temporary,
preliminary and permanent injunctive relief to prevent a threatened breach or to
obtain a halt to an actual breach by Employee of any of Employee's covenants
contained in any of Sections 5, 6, 7, and 8 of this Agreement, in addition to
any other rights or remedies to which the Employer may be entitled at law or in
equity by reason of any such breach or threatened breach of this Agreement.
12. MISCELLANEOUS.
12.1 Governing Law. This Agreement is made under and shall be
governed by and construed in accordance with the laws of the State of
Washington.
12.2 Prior Agreements. This Agreement contains the entire agreement
of the parties relating to the subject matter hereof and supersedes all prior
agreements and understanding
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with respect to such subject matter, and the parties hereto have made no
agreements, representations or warranties relating to the subject matter of this
Agreement which are not set forth herein.
12.3 Withholding Taxes. The Employer shall withhold from any salary
and benefits payable under this Agreement all federal, state, city or other
taxes or amounts as shall be required to be withheld pursuant to any law or
governmental regulation or ruling.
12.4 Amendments; Waiver. No amendment or modification of this
Agreement shall be deemed effective unless made in writing signed by the parties
hereto. No waiver of any provision hereof shall be construed as a further or
continuing waiver of such provision or any other provision hereof.
12.5 Severability. To the extent any provision of this Agreement
shall be invalid or unenforceable, it shall be considered deleted herefrom and
the remainder of such provision and of this Agreement shall be unaffected and
shall continue in full force and effect.
12.6 Definitions. The following terms used in this Agreement shall
have the meanings set forth below:
(a) "Affiliate" when used with reference to the Employer, means
any Person that controls is controlled by or is under common control of the
Employer and shall include any corporation, limited liability company or
partnership (including a joint venture in partnership form) at least fifty (50)
percent of the voting stock or membership or partnership interests of which are
owned by the Employer, directly or through the ownership by either of them of at
least fifty (50) percent of the voting stock or membership or partnership
interests of any other corporation, limited liability company or partnership.
(b) "Person" shall mean any natural person, sole proprietorship,
firm, corporation, limited liability company, partnership, joint venture or
unincorporated association or any other business entity.
12.7 Interpretation; Headings. This Agreement is the result of
arms'-length negotiations between the parties hereto and no provision hereof,
because of any ambiguity found to be contained therein or otherwise, shall be
construed against a party by reason of the fact that such party or its legal
counsel was the draftsman of that provision. Unless otherwise indicated
elsewhere in this Agreement, (i) the term "or" shall not be exclusive; (ii) the
term "including" shall mean "including, but not limited to," and (iii) the terms
"herein," "hereof," "hereto," "hereunder" and other terms similar to such terms
shall refer to this Agreement as a whole and not merely to the specific section,
subsection, paragraph or clause where such terms may appear. The section,
subsection and any paragraph headings contained herein are for the purpose of
convenience only and are not intended to define or limit or affect, and shall
not be considered in connection with, the interpretation of any of the terms or
provisions of this Agreement.
12.8 Counterpart Execution. This Agreement may be executed by
facsimile and in counterparts, each of which shall be deemed an original and all
of which when taken together shall constitute but one and the same instrument.
12.9 Arbitration. All disputes between the parties hereto shall be
determined solely and exclusively by arbitration in accordance with the
commercial arbitration rules then in
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effect of the American Arbitration Association, or any successors hereto
("AAA"), in King County, Washington, unless the parties otherwise agree in
writing. The parties shall jointly select an arbitrator. In the event the
parties fail to agree upon an arbitrator within ten (10) days, then each party
shall select an arbitrator and such arbitrators shall then select a third
arbitrator to serve as the sole arbitrator; provided, that if either party, in
such event, fails to select an arbitrator within seven (7) days, such arbitrator
shall be selected by the AAA upon application of either party. Judgment upon the
award of the agreed upon arbitrator or the so chosen third arbitrator, as the
case may be, shall be binding and shall be entered into by a court of competent
jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year set forth above.
"EMPLOYER"
EPOCH PHARMACEUTICALS, INC.
a Delaware corporation
By: /s/ Sanford S. Zweifach
-------------------------------------------
Its: President and Chief Financial Officer
"EMPLOYEE"
/s/ William Gerber
----------------------------------------------
William Gerber
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CONSENT OF KPMG LLP
EXHIBIT 23.1
The Board of Directors
Epoch Pharmaceuticals, Inc.:
We consent to the use of our report included and incorporated by reference
herein and to the reference to our firm under the heading "Experts" in the
prospectus.
KPMG LLP
Seattle, Washington
April 28, 2000
