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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-22170
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EPOCH PHARMACEUTICALS, INC.
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(Name of Small Business Issuer in its charter)
Delaware 91-1311592
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12277 134th Court N.E., Suite 110, Redmond, Washington 98052
(Address of principal executive offices) (Zip Code)
(425) 821-7535
(Issuer's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Common Stock Purchase Warrants
(Title of class)
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports); and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X]
Issuer's revenues for its most recent fiscal year were $181,094.
As of March 28, 2000, the aggregate market value of the voting stock
held by non-affiliates, computed by reference to the price at which the stock
was sold on such date, was approximately $219,854,496.
23,712,946 shares of Common Stock were outstanding at March 28, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
None
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INTRODUCTORY NOTE
This Annual Report on Form 10-KSB contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and we intend that these
forward-looking statements be subject to the safe harbors created thereby. These
forward-looking statements include, without limitation, the development and
commercialization of the Registrant's technology.
The forward-looking statements included in this document are based on
current expectations that involve a number of risks and uncertainties. These
forward-looking statements are based on assumptions that Epoch's technology will
continue to be developed, and will not be replaced by new technology, that we
will retain key technical and management personnel, and that there will be no
material adverse change in our operations or business. Assumptions relating to
the foregoing involve judgments with respect to, among other things, future
technology, economic, competitive and market conditions, and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond our control. Although we believe that the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
results contemplated in forward-looking statements will be realized. In
addition, our business and operations are subject to substantial risks which
increase the uncertainty inherent in these forward-looking statements. In light
of the significant uncertainties inherent in the forward-looking information
included in this document, the inclusion of information should not be regarded
as a representation by us or any other person that the objectives or plans of
Epoch will be achieved.
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PART I
ITEM 1. BUSINESS
THE COMPANY
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 designing and
synthesizing oligonucleotides (synthetic DNA strands) bearing modifications 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 compounds and techniques being developed
for our gene modification therapeutic program could be adapted 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.
DNA is comprised of two linear strands that are formed in a double
helix. Each strand is a sequential array of four nucleotide bases: adenine (A),
guanine (G), thymine (T) and cytosine (C), which are linked together in DNA by a
sugar and phosphate backbone. Every gene contains unique sequences of these
bases and it is these unique sequences which constitute the genetic information
or code which guides all cellular processes. The two chains, or strands,
normally comprising DNA are held together by chemical attractions between
opposing paired bases according to certain rules: A always pairs with T, G
always pairs with C. Figure 1 is a schematic diagram of double-stranded DNA
showing this highly specific interaction between the bases in the two strands.
This process of base pairing, called hybridization, can occur between DNA
strands of any size, as long as the segments hybridizing are complementary.
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Hybridization can also occur between a DNA strand and a complementary
RNA strand or two complementary RNA strands. RNA occurs in several forms in
cells, and each of these forms has a different function. Messenger RNA (mRNA) is
copied, or transcribed, from the DNA comprising a gene and carries the genetic
code which is translated into the proteins synthesized by the cell. Transfer RNA
(tRNA) transports the necessary building block amino acids to ribosomes, complex
intracellular structures where protein synthesis occurs through the
"translation" of the mRNA message. Ribosomal RNA (rRNA) functions to bring mRNA
and tRNA together so protein synthesis can occur. The process of transcription
and translation which results in protein synthesis is called gene expression.
[Figure 1. Segment of Double-Stranded DNA Showing the Base Pair Relationship]
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 has been estimated that over $3 billion was spent worldwide in 1999
on industrial and academic healthcare 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
such as 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 (PE
Biosystems), based on the polymerase chain reaction (PCR) method, and DNA
microarrays are being widely adopted. New technologies like primer extension
(Orchid Biocomputer) and the InvaderTM assay (Third Wave Technologies) are under
development and 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.
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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
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:
o 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?
o 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 at which heritible differences occur 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
differences, 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 (i.e. one of a pair of polymorphic alleles) 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 influenced by
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 such as those developed at our company.
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Gene Expression
The second issue is being addressed by comparing the level of
expression of genes in different tissues, in healthy versus diseased tissues,
and at different times during development. This approach has been accelerated by
the development of DNA microarrays, or biochips, which contain hundreds or
thousands of sites on their surface to which messenger RNAs expressed by
different genes will bind, allowing their relative levels to be 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 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 being developed. 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 (as a group)
very stable duplexes and longer oligonucleotides can form stable duplexes that
are not perfect complements (i.e., that have mismatches) leading to errors in
sequence determination. The ability to overcome these issues is the key to our
technology.
Certain naturally occurring antibiotics have a shape which allows them
to "fold" into the "minor groove" of the DNA helix. We have found that we can
direct the binding of these "minor groove binders"
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("MGB") to a specific site on DNA by coupling it to a short DNA molecule (an
oligonucleotide). Experiments showed that after such an oligonucleotide reacted
with its complement, the MGB folded into the minor groove of the duplex formed
by the oligonucleotide and its complement, and the MGB-oligonucleotide duplex
could not be disassociated at temperatures that would normally separate the two
strands. When the MGB was coupled to oligonucleotides as short as seven
nucleotides, the duplex formed with its complement was stable at temperatures
15(degree) to 30(degree)C higher than the non-MGB oligonucleotide. However, the
duplex was stabilized to this extent only if a perfect duplex (i.e., with no
mismatches) was formed. This finding enabled us to develop MGB-oligonucleotides
into DNA sequence probes that we believe offer the best solutions yet found for
the following situations:
o Single base mismatch discrimination at high temperatures with
short oligonucleotides;
o Enhancement and sequence-independent equalization of
oligonucleotide hybrid stability concurrently; and
o Mismatch "hiding" with longer oligonucleotide conjugates.
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 which could benefit from improved
hybridization sensitivity include:
o Sensitive detection of mutations by PCR or hybridization
o Identifying infectious organisms including genotyping and
quantitating HIV viruses resistant to reverse transcriptase or
protease inhibitors
o 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 phenotypic (physically evident) characteristics, or genomics is a
developing field. Genetic markers, which are variations in the sequence of DNA
at specific locations which 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 with single nucleotide changes,
single nucleotide polymorphisms (SNPs), have been identified. However, an
estimated hundred thousand more of these sites exist throughout the human
genome. True SNPs are stable genetic markers, likely established thousands of
years ago. As these changes are characterized, they are being linked to genetic
traits. This linking or maping of genetic markers will allow the prediction of,
for instance, the individual's propensity to a given disease or responsiveness
to a given drug. The field of genomics is rapidly growing and depends upon
screening populations to correlate known physical traits with sets (one or more)
of SNPs. In practice, potential SNPs will be discovered as differences in gene
sequences among a few individuals. However, in order to definitively identify
these differences as true allelic polymorphisms, and to link them to relevant
characteristics (disease propensity, drug response, diagnosis and prognosis in
cancer therapy, etc.), large populations must be screened for the sequence
differences. 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.
As correlations between mutations and variations in the DNA sequence of
individuals and disease are made and established, we believe our technology can
be used to make tests designed to detect and monitor these disease states more
sensitive and specific.
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
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for certain of our enabling genetic analysis technology with the PE Biosystems
division of PE Corporation in January 1999. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." There can be no
assurance 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 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 such arrangements on favorable
terms if at all.
RESEARCH AND DEVELOPMENT
We conduct the majority of our research and development activities
through our own staff and facilities. We have assembled a scientific staff with
a variety of complementary skills in a broad range of advanced research
technologies. As of 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 such
inventions, largely because patent applications in the U.S. are maintained in
secrecy until patents issue, and because publications of discoveries in the
scientific or patent literature tend to lag behind actual discoveries by several
months. Moreover, 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
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to obtain licenses or other rights to these other technologies that may be
required for the commercialization of our proposed products.
We require our employees, consultants and advisors to execute
confidentiality agreements upon the commencement of an employment or consulting
relationship with us. Each agreement provides that all confidential information
developed or made known to the individual during the course of the relationship
will be kept confidential and not disclosed to third parties except in specified
circumstances. In the case of employees, the agreements provide that all
inventions conceived by an individual shall be our exclusive property, other
than inventions unrelated to our business and developed entirely on the
employee's own time. We cannot provide assurance, however, that these agreements
will provide meaningful protection or adequate remedies for misappropriation of
trade secrets in the event of unauthorized use or disclosure of this
information.
COMPETITION
Competition in the development and marketing of diagnostics and
genomics, including the detection of 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.
CERTAIN FACTORS THAT MAY AFFECT OUR BUSINESS AND FUTURE RESULTS
Forward Looking Statements
Some of the information included herein contains forward-looking
statements. These statements can be identified by the use of forward-looking
terms such as "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
following risks actually occur, our business could be harmed and the trading
price of our common stock could decline.
History of Operating Losses; Anticipated Future Losses.
Since our formation in 1985, we have generated limited revenues from
the sale of diagnostic products and from research and development grants. In
1995, we sold substantially all of the then existing diagnostic assets that were
used to generate these product revenues. 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 make no guarantee
that we will ever become profitable. We will need additional funds to continue
our research and development activities. See "Management's
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Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
Dependence upon New and Unproven Technology.
The science and technology of oligonucleotide-based products is rapidly
evolving. Our proposed products are in the discovery or early development stage.
The proposed products will require significant further research, development,
and testing and are subject to the risks of failure inherent in the development
of products based on innovative technologies. We also face the risk that any or
all of our proposed products could prove to be ineffective or unsafe, be
unmarketable because third parties hold proprietary rights which prohibit us
from marketing the proposed products, or be an inferior product to products
marketed by others. Accordingly, we cannot predict whether our research and
development activities will result in any commercially viable products.
Reliance on Patent and Proprietary Technology; Risk of Patent Infringement.
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.
The biomedical industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. We were defendants in
one such action which has been settled. Although patent and intellectual
property disputes in the biomedical area have often been settled through
licensing or similar arrangements, costs associated with such arrangements may
be substantial. Further, we make no guarantee that we will obtain necessary
licenses on satisfactory terms or at all. Accordingly, an adverse determination
in a judicial or administrative proceeding or our failure to obtain necessary
licenses could prevent us from manufacturing and selling our products. This
would substantially hurt our operating results, financial condition and
ultimately our business.
Competition and Changing Technology
Many companies do research and development and market products designed
to diagnose infectious diseases based on a number of technologies and are
developing additional DNA probe-based products. Many of these companies have
substantially greater capital resources, larger research and development and
marketing staffs and facilities and greater experience in developing products
than we have. Furthermore, our specific field in which we operate is subject to
significant and rapid technological change. Accordingly, even if we successfully
introduce our products or proposed products, we risk that our technologies will
be replaced by new technologies or that our products or proposed products will
be obsolete or non-competitive.
Dependence on Key Personnel
We are dependent upon our key management and technical personnel and
consultants, and our future success will depend in part upon our ability to
retain these persons and to recruit additional qualified personnel. We must
compete with other companies, universities, research entities and other
organizations in order to attract and retain highly qualified personnel.
Although we have entered into agreements with our key executive officers, we
make no guarantee that we will retain such highly
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qualified personnel or hire additional qualified personnel. We currently
maintain no key man life insurance on any of our management or technical
personnel.
Lack of Listing on an Exchange or on the Nasdaq System; Restrictions on Our
Stock
Our common stock is neither listed on any exchange nor on the Nasdaq
System, although we did apply for listing on the Nasdaq in March of 2000. Our
common stock is reported on the OTC Bulletin Board. Because our shares are not
listed on the Nasdaq System, they are subject to the regulations regarding
trading in "penny stocks" which are those securities trading for less than $5.00
per share.
As a result of our securities not being listed on an exchange or the
Nasdaq System and the rules regarding penny stock transactions, your ability to
convert shares of our common stock into cash or to sell to a third party may be
very limited. We make no guarantee that our current market-makers will continue
to make a market in our securities, or that any market for our securities will
continue.
No Dividends Paid and None Anticipated
We have never paid dividends on our common stock and do not plan to in
the foreseeable future, as any earnings will be invested in the further
expansion of our business.
Volatility of Stock Price
The market price of our common stock may fluctuate significantly. We
are in the biotechnology industry and the market price of securities of
biotechnology companies have fluctuated significantly and these fluctuations
have often been unrelated to the companies' operating performance. Announcements
by us or our competitors concerning technological innovations, new products,
proposed governmental regulations or actions, developments or disputes relating
to patents or proprietary rights, and other factors that affect the market
generally could significantly impact our business and the market price of our
securities. Sales of our securities by existing security holders could also
significantly impact the market price of our securities.
Shares Eligible for Future Sale; Dilution.
Sales of substantial numbers of shares of our common stock in the
public market could substantially reduce the prevailing market price of our
common stock. As of December 31, 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 such
securities without restriction. If these holders sell a large number of shares
of our common stock in the public market, such sales could substantially reduce
the prevailing market price of our common stock. To the extent the trading price
of our common stock exceeds the exercise price of options or warrants at the
time such options or warrants are exercised, such exercise will have a dilutive
effect on the other stockholders.
ITEM 2. 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
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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.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
<PAGE> 13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the OTC Bulletin Board under the symbol
"EPPH." The following table presents quarterly information on the high and low
bid prices on the OTC Bulletin Board, which reflects inter-dealer prices,
without retail mark-up, mark down or commission and may not represent actual
transactions:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1999 HIGH LOW
--------- ----------
<S> <C> <C>
Fourth quarter $ 3.25 $ 1.187
Third quarter 2.93 1.75
Second quarter 3.56 2.00
First quarter 2.75 .52
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1998 HIGH LOW
--------- ----------
<S> <C> <C>
Fourth quarter $ 0.72 $ 0.48
Third quarter 0.76 0.57
Second quarter 0.93 0.70
First quarter 0.94 0.56
</TABLE>
On December 31, 1999, the last reported sale price for our common stock
on the OTC Bulletin Board was $3.25 per share. As of January 31, 2000, there
were approximately 1,159 stockholders of record of our common stock. We have not
paid any dividends on our common stock since our inception and do not anticipate
paying any dividends in the foreseeable future. Any earnings generated in the
foreseeable future will be used for the further expansion of the business.
The following is a summary of our transactions during 1999 involving
sales of our securities that were not registered under the Securities Act.
Exemption from the registration requirements of the Securities Act for the sales
of the securities described above was claimed under Section 4(2) of the
Securities Act, among others, on the basis that such transactions did not
involve any public offering and the purchasers were sophisticated with access to
the kind of information registration would provide. No underwriting or broker's
commissions were paid in connection with the following transactions.
In November 1999, we concluded $7 million of private equity financing.
The financing included:
The sale of 1,200,000 shares of common stock for $3,000,000 in cash at
$2.50 per share.
The conversion by Bay City Capital of $1.2 million of its $3 million
loan to Epoch into 480,000 shares of our common stock at $2.50 per share.
The application by Bay City Capital of $1.8 million of its $3 million
loan to Epoch to the purchase of 2 million shares of our common stock at $.90
per share pursuant to a warrant issued to Bay City Capital in connection with
the $3 million loan.
The conversion of $1 million of prepayments under the license agreement
with PE Biosystems to 400,000 shares of our common stock at $2.50 per share.
The $2.50 price per share of common stock received by us in the private
equity financing represented a premium to the trading price of our common stock
as of the close of the transaction.
12
<PAGE> 14
Investors who purchased the 1,200,000 shares included PE Corporation (the parent
company of PE Biosystems), Bay City Capital, Grace Brothers Ltd. and Hilspen
Capital Management.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of the financial condition and results of
operations should be read in conjunction with the financial statements and
related notes included in the financial section of this form 10-KSB.
In January 1999, Epoch and PE Biosystems entered into a License and
Supply Agreement pursuant to which we licensed certain of our enabling genetic
analysis technology to PE Biosystems. Under the terms of the agreement, PE
Biosystems' made payments to us for initial fees on 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, we granted 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 such
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. See item 5. 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.
RESULTS OF OPERATIONS
The following discussion of results of operations reflects Epoch's
diagnostics division as discontinued operations.
13
<PAGE> 15
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.
LIQUIDITY AND CAPITAL RESOURCES
We have experienced recurring losses from operations and had a total
stockholders' equity of approximately $175,000 at December 31, 1999.
14
<PAGE> 16
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 a total of $6,500,000 from the
exercise of warrants through March 14, 2000 and anticipate receipts of an
additional $3,000,000 by the end of the first quarter, 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 2001.
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. 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.
PLAN OF OPERATIONS
Using the proceeds of the February 2000 financing, the warrant
redemption, and the PE Biosystems licensing agreement, 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 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 anticipate operating with approximately 25 employees.
We will require additional funds to continue our operations and, over
the longer term, will require substantial additional funds to maintain and
expand our research and development activities and to further commercialize,
with or without the assistance of corporate partners, any of our proposed
products. We will seek collaborative or other arrangements with larger
pharmaceutical companies, under which such companies would provide additional
capital in exchange for an exclusive or non-exclusive license or other rights to
certain of the technologies and products we are developing. However, the
competition for such arrangements with major pharmaceutical companies is
intense, with a large number of biopharmaceutical companies attempting to
satisfy their funding requirements through such arrangements. We cannot provide
assurance that an agreement or agreements will arise from these
15
<PAGE> 17
discussions in a timely manner, or at all, or that revenues that may be
generated thereby will offset operating expenses sufficiently to reduce our
long-term funding requirements.
NEW ACCOUNTING BULLETIN
The United States Securities and Exchange Commission recently issued
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, which is effective beginning in our second fiscal quarter in 2000.
The interpretation of SAB No. 101 is currently uncertain as it relates to
biotechnology companies and, consequently, the impact on our financial
statements is unknown. We are in the process of determining the potential impact
on our financial statements.
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.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this item begin on Page F-1 of
this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
16
<PAGE> 18
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Epoch 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
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
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<PAGE> 19
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.
Dr. Heyneker is the Chief Technology Officer of EOS Biotechnology,
Inc., a company focused on drug target discovery, where he has been since its
inception in 1997. Prior to joining EOS, Dr. Heyneker was involved with Array
Technologies, Inc., a company devoted to the development of oligonucleotide and
cDNA arrays, which he co-founded in 1996. From 1994 to 1996, Dr. Heyneker served
as Chairman of the Board of ProtoGene Laboratories, Inc. which he co-founded.
Dr. Heyneker was also a founder and Chief Executive Officer of GlycoGen, Inc.,
which later merged with Cytel Corporation. Dr. Heyneker became the first Vice
President of Research of Genecor International, Inc., a joint venture between
Genetech and Corning, after joining Genetech as a senior scientist in 1978. He
is a Director of IntroGene, B.V., Chairman of the Scientific Advisory Board of
Pharming, B.V., and as advisor for Genencor and Energy Biosystems Corp. Dr.
Heyneker received his undergraduate degree and Ph.D. from the University of
Leiden, The Netherlands.
Dr. Melmon has been a Director of Epoch since November 1991. Dr. Melmon
is Professor of Medicine at Stanford University School of Medicine, where he
joined the faculty in 1978. He was previously on the faculty at the University
of California, San Francisco, specializing in clinical pharmacology. He is a
member of the Institute of Medicine-National Academy of Sciences, and a past
president of the American Federation for Clinical Research and the American
Association of Clinical Investigation. He holds an M.D. from the University of
California Medical Center. He is also on the Board of Directors of Vysis.
Mr. Pigliucci became a director of Epoch in February 2000. Mr.
Pigliucci is Chairman and Chief Executive Officer of Discovery Partners
International, a San Diego, CA-based corporation providing platforms, services,
and information to augment the internal drug discovery efforts of pharmaceutical
and biopharmaceutical companies. Before joining Discovery Partners, Mr.
Pigliucci was Chief Executive Officer of Life Sciences International PLC from
1996 to 1997, a global supplier of scientific equipment and consumables to
research, clinical and industrial markets based in London (England). Prior to
that, during a 23-year career at the Perkin-Elmer Corporation, he held numerous
management positions including President and Chief Operating Officer. Mr.
Pigliucci received his degree in Chemistry in Milan, Italy and is a graduate of
the Management Program of Northeastern University, Boston, Massachusetts. Mr.
Pigliucci is director of Biosphere Medical and Dionex Corporation and a trustee
of The Worcester Foundation for Biomedical Research.
Mr. Zweifach joined Epoch in January 1995 as President and Chief
Financial Officer. From July 1994 to September 1994, and since September 1996,
Mr. Zweifach also served as a director of Epoch. Mr. Zweifach has served as the
Chief Financial Officer since 1997, and as the Managing Director since January
of 1999 of Bay City Capital. Mr. Zweifach previously served as a Managing
Director of The Olmsted Group, L.L.C., a merchant-banking firm since January
1995. Mr. Zweifach was a Managing Director of D. Blech & Co. from 1991 to
September 1994, and prior to 1991, he was a Vice President of J.S. Frelinghuysen
& Co., Inc., a risk capital and merchant banking firm. He is a Certified Public
Accountant and holds an M.S. in Human Physiology from the University of
California, Davis.
Dr. Craves and Mr. Zweifach are also employed by other entities and,
although they devote a substantial portion of their time to Epoch, they also
devote a portion of their time to their positions at the other entities. Both
Dr. Craves and Mr. Zweifach have been engaged by Epoch pursuant to Consulting
Agreements.
18
<PAGE> 20
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Based upon our review of the copies of reporting forms furnished to us,
we believe that all filing requirements were satisfied under Section 16(a) of
the Securities Exchange Act of 1934 applicable to our directors, officers and
any persons holding ten percent or more of our common stock with respect to our
fiscal year ended December 31, 1999, were satisfied.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning
compensation paid or accrued by us for services rendered during 1997, 1998 and
1999, to our Chief Executive Officer, and our other executive officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------------------------------------ ------------
Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary($) Bonus($) Compensation($) Options(#) Compensation
------------------ ---- --------- -------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Fred Craves 1999 $100,000 $ -- $ -- -- $ --
Chairman of the Board 1998 100,000 -- -- -- --
of Directors 1997 100,000 -- -- -- --
William G. Gerber
Chief Executive Officer 1999 78,688 -- -- 100,000 --
Sanford S. Zweifach 1999 135,000 -- -- -- --
President and 1998 135,000 -- -- -- --
Chief Financial Officer 1997 140,625 -- -- -- --
</TABLE>
OPTION MATTERS
The following table sets forth the options granted to those persons
listed in the Summary Compensation table above. Options granted have a term of
10 years, and are subject to earlier termination in certain situations related
to termination of employment.
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
Number of Securities % of Total Options Granted Exercise Price Expiration
Name Underlying Options Granted to Employees in Fiscal Year (%/Share) Date
- ---- -------------------------- --------------------------- --------- ----
<S> <C> <C> <C> <C>
William G. Gerber 100,000 14.3% $1.87 9/8/2009
</TABLE>
Dr. Gerber was granted options to purchase 100,000 shares of common
stock in September 1999 when he accepted the position of Chief Executive
Officer. The shares vest evenly over 12 months and have an exercise price of
$1.87.
19
<PAGE> 21
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 such existing stock options and the
fiscal year end price of our common stock $3.25 per share.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Number of Value of
securities underlying unexercised in-the-
unexercised options/ money options/
SARs at FY-end(#) SARs at FY-end($)
Shares acquired Value Exercisable/ Exercisable/
Name on exercise(#) realized($) Unexercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fred Craves 160,741 $ 246,482 616,666/0 458,332/0
William G. Gerber -- -- 33,333/66,667 43,666/87,334
Sanford S. Zweifach -- -- 101,250/0 278,438/0
</TABLE>
Dr. Craves exercised 160,741 warrants in December 1999 at a total price
of $75,000.
CONSULTING AGREEMENTS
In July 1993, Epoch entered into a one-year consulting agreement with
Dr. Craves. The agreement has been extended for successive one year periods and
the agreement is currently in effect through February 28, 2001 at a rate of
$7,500 per month.
In January 1995, Epoch entered into a consulting agreement with Mr.
Zweifach. The agreement has been extended for successive one year periods and
the agreement is currently in effect through February 28, 2001 at a rate of
$7,500 per month.
Dr. Melmon also serves as a consultant to Epoch and 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 (the "Directors 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 Plans 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 1999 certain
information 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, each director, each of the executive officers named in the
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<PAGE> 22
summary compensation table, and all executive officers and directors as a group.
Except as indicated in the footnotes to this table and pursuant to applicable
community property laws, the persons named in this table have sole voting and
investment power with respect to all shares of common stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED, SUBJECT NUMBER OF SHARES PERCENTAGE OF
NAME AND ADDRESS TO WARRANTS OR OPTIONS BENEFICIALLY OWNED OUTSTANDING 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. Heyneker, Ph.D. 602 *
All executive officers and directors 1,002,249 1,316,092 6.5%
as a group (6 persons)(5)
</TABLE>
- -------------
* Less than one percent
(1) Includes warrants to purchase 83,334 shares which are held by Burrill &
Craves, of which Fred Craves is a general partner. Also includes 2,880,000
shares which are held by Bay City Capital, LLC. See footnote (2). Fred
Craves disclaims beneficial ownership of the Bay City Capital shares except
to the extent of his pecuniary interest in Bay City Capital, LLC.
(2) Represents 2,880,000 shares held by Bay City Capital Fund I, L.P. Bay City
Capital, LLC, the general partner of Bay City Capital Fund I, L.P., is a
merchant banking partnership formed by The Craves Group and The Pritzker
Family business interest. Fred Craves, Ph.D., the chairman 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 such persons actual pecuniary
interest therein.
(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 such 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 such warrants held by Bay City
Capital LLC. Excludes 457,143 shares of common stock held by VIMRx
Pharmaceuticals, Inc.
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<PAGE> 23
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1999, Epoch concluded $7 million of private equity
financing. Bay City Capital LLC, ("Bay City Capital"), San Francisco,
California, participated in the financing by paying $1 million in cash and
converting their $3 million note to equity. See Item 5.
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.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-KSB:
(a) Exhibits:
EXHIBIT LIST
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3 of
the Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1998).
3.2* Bylaws of the Registrant, as currently in effect.
5.0 Opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Counsel to the
Registrant (incorporated by reference to the same numbered exhibit to the Company's
Registration Statement on Form SB-2, No. 333-21353, filed February 7, 1997).
10.1* MicroProbe Corporation Incentive Stock Option, Nonqualified Stock Option And Restricted Stock
Purchase Plan--1991, as amended.
10.2* Form of Indemnification Agreement entered into with officers and directors of the Registrant.
10.3 Letter Agreement between the Registrant and Fred Craves, dated August 3, 1993 (incorporated
by reference to Exhibit 10.12 of the Registrant's Registration Statement on Form SB-2,
Registration No. 33-66742, effective on September 29, 1993).
10.4 Form of Common Stock Warrant issued December 31, 1991 (incorporated by reference to Exhibit
10.22 of the Registrant's Registration Statement on Form SB-2, Registration No. 33-66742,
effective on September 29, 1993).
10.5 Second Amended and Restated Investment Agreement, dated April 28, 1992 among the Registrant
and certain investors (incorporated by reference to Exhibit 10.25 of the Registrant's
Registration Statement on Form SB-2, Registration No. 33-66742, effective on September 29,
1993).
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.6 Common Stock and Warrant Purchase Agreement, dated April 28, 1992 as amended June 30, 1992
and July 31, 1992 (with form of warrant) among the Registrant and certain investors
(incorporated by reference to Exhibit 10.26 of the Registrant's Registration Statement on
Form SB-2, Registration No. 33-66742, effective on September 29, 1993).
10.7 Form of Registration Agreement, dated February 12, 1993 among the Registrant and certain
investors (incorporated by reference to Exhibit 10.30 of the Registrant's Registration
Statement on Form SB-2, Registration No. 33-66742, effective on September 29, 1993).
10.8 MicroProbe Corporation Incentive Stock Option, Nonqualified Stock Option and Restricted Stock
Purchase Plan--1993 (incorporated by reference to Exhibit 10.39 of the Registrant's
Registration Statement on Form SB-2, Registration No. 33-66742, effective on September 29,
1993).
10.9 MicroProbe Corporation Non-Employee Directors Stock Option Plan (incorporated by reference to
Exhibit 10.40 of the Registrant's Registration Statement on Form SB-2, Registration No.
33-66742, effective on September 29, 1993).
10.10* Warrant Agreement between the Registrant and American Stock Transfer & Trust Company dated
April 29, 1997, (incorporated by reference to Exhibit 10.10 of the Registrant's Annual Report
on 10-KSB for the year ended December 31, 1998).
10.11 Purchase Agreement dated as of November 30, 1993, by and among the Registrant, Animal
Biotechnology Cambridge Limited, and Herbert Stradler (without exhibits) (incorporated by
reference to Exhibit 10.47 of the Registrant's Registration Statement on Form SB-2,
Registration No. 33-76446, effective on July 7, 1994).
10.11.1 Amendment dated April 1, 1994 to Put Agreement (incorporated by reference to Exhibit 10.48.1
of the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1993).
10.11.2 Amendment dated April 27, 1994 to Put Agreement (incorporated by reference to the
Registrant's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1994).
10.11.3 Amendment dated May 26, 1994 to Put Agreement (incorporated by reference to Exhibit 10.48.3
of the Registrant's Registration Statement on Form SB-2, Registration No. 33-76446, effective
on July 7, 1994).
10.11.4 Amendment dated June 30, 1994 to Put Agreement (incorporated by reference to Exhibit 10.48.4
of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1994).
10.11.5 Amendment dated July 27, 1994 to Put Agreement (incorporated by reference to Exhibit 10.48.5
of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1994).
10.11.6 Amendment dated August 15, 1994 to Put Agreement (incorporated by reference to Exhibit
10.48.6 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September
30, 1994).
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.11.7 Amendment dated August 30, 1994 to Put Agreement (incorporated by reference to Exhibit
10.48.7 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September
30, 1994).
10.11.8 Amendment dated September 14, 1994 to Put Agreement (incorporated by reference to Exhibit
10.48.8 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September
30, 1994).
10.11.9 Exercise Notice dated September 27, 1994 to Put Agreement (incorporated by reference to
Exhibit 10.48.9 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1994).
10.12 Put Agreement relating to Ribonetics GmbH dated as of December 1, 1993 between the Registrant
and David Blech, as amended December 3, 1993 and February 18, 1994 (incorporated by reference
to Exhibit 10.48 of the Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1993).
10.13 Registration Rights Agreement dated October 12, 1994 (incorporated by reference to Exhibit
10.57 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September 30,
1994).
10.14 Consulting Agreement between the Registrant and Sanford S. Zweifach, dated January 18, 1995
(incorporated by reference to Exhibit 10.59 of the Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1995).
10.15 Asset Purchase Agreement between the Registrant and Becton, Dickinson and Company, dated as
of September 29, 1995 (incorporated by reference to the form of such Asset Purchase Agreement
filed with the Registrant's Definitive Proxy Materials for its Special Meeting of
Stockholders held November 27, 1995).
10.16 Consulting Agreement with David Blech dated March 29, 1996 (incorporated by reference to
Exhibit 10.65 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended June
30, 1996).
10.17 Form of Subscription Agreement with Private Placement Investors (incorporated by reference to
Exhibit 4.1 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended June
30, 1996).
10.18 Warrant Agreement between the Registrant and American Stock Transfer and Trust Company dated
June 21, 1996, with form of Warrant (incorporated by reference to Exhibit 4.2 of the
Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1996).
10.19 Bridge Financing Agreement dated as of February 25, 1998, with form of note and warrant,
between the Registrant and Bay City Capital, LLC (incorporated by reference to Exhibit 10.69
of the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1997).
10.20* Sublease between the Registrant as Tenant and Bion Diagnostic Sciences, Inc. for premises
located in Redmond, Washington, dated September 25, 1998 (incorporated by reference to
Exhibit 10.20 of Registrant's Annual Report on 10-KSB for the year ended December 31, 1998).
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.21* License Agreement between the Registrant and Perkin-Elmer Corporation dated January 11, 1999
(portions of this Exhibit are omitted and were filed separately with the Secretary of the SEC
pursuant to the Registrant's application requesting confidential treatment under Rule 406 of
the Securities Act) (incorporated by reference to Exhibit 10.21 of Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1998).
10.21.1 First Amendment to the License and Supply Agreement between the Registrant and Perkin-Elmer
Corporation dated January 11, 1999. (Portions of this Exhibit are omitted and were filed
separately with the Secretary of the SEC pursuant to the Registrant's application requesting
confidential treatment under Rule 406 of the Securities Act.) Incorporated by reference to
exhibit 10.21.1 of the Registrant'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 Pharmaceuticals, Inc.
and the purchasers set forth therein.
10.23 Stock Purchase Agreement dated February 14, 2000 by and between Epoch Pharmaceuticals and the
purchasers set forth therein.
23.2 Consent of Stradling Yocca Carlson & Rauth, a Professional Corporation (included in the
Opinion filed as Exhibit 5.0).
23.1 Consent of KPMG LLP.
25.0 Power of Attorney (included on the signature page).
27.0 Financial Data Schedules (incorporated by reference to Exhibit 27 of Registrant's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1999).
</TABLE>
* Incorporated by reference to the same numbered exhibit of the Registrant's
Registration Statement on Form SB-2, No. 33-66742, effective on September
29, 1993.
(b) Reports on Form 8-K:
None
25
<PAGE> 27
EPOCH PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION PAGE NUMBER
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
<PAGE> 28
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> 29
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> 30
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> 31
EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock Additional Deferred
Shares Amount Paid-In Capital Compensation
---------- -------- --------------- ----------------
<S> <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>
Deferred Total
Financing Accumulated Stockholders
Expense Deficit Equity (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> 32
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 .................................... (74,084) (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> 33
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.
F-6
<PAGE> 34
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 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.
F-7
<PAGE> 35
(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:
Machinery and equipment............................ $ 1,709,950
Furniture and fixtures............................. 214,301
-----------
$ 1,924,251
Less accumulated depreciation...................... (1,524,546)
-----------
Equipment, net..................................... $ 399,705
===========
(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.
F-8
<PAGE> 36
A summary of the stock option plans follows.
<TABLE>
<CAPTION>
1998 1999
--------------------------- ------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- ---------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,248,516 $2.00 1,242,316 $2.11
Granted 29,000 0.70 697,513 1.74
Exercised (9,434) 0.52 (117,342) 0.64
Forfeited (25,766) 0.65 (187,117) 0.73
---------- ----- ---------- -----
Outstanding at end of year 1,242,316 $2.11 1,635,370 $2.14
========== ===== ========== =====
Options exercisable at year end 911,413 $1.96 957,299 $2.48
</TABLE>
The following table summarizes information about stock options at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------- -----------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF EXERCISE OUTSTANDING AT REMAINING YEARS WEIGHTED AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
PRICES 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE 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
F-9
<PAGE> 37
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-10
<PAGE> 38
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.
F-11
<PAGE> 39
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:
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................................ $ --
=============
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.
F-12
<PAGE> 40
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
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:
YEAR ENDING
DECEMBER 31,
---------------------------------------------------
2000 $ 327,578
2001 584,056
2002 604,501
2003 625,655
2004 647,553
Thereafter 6,066,590
---------------------------------------------------
$ 8,855,933
==============
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
F-13
<PAGE> 41
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-14
<PAGE> 42
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes Fred Craves
and/or Sanford Zweifach, as attorney-in-fact, to sign in his behalf and in each
capacity stated below, and to file, all amendments and/or supplements to this
Annual Report on Form 10-KSB.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: March 29, 2000 EPOCH PHARMACEUTICALS, INC.
(Registrant)
By: /s/ Sanford S. Zweifach
---------------------------------
Sanford S. Zweifach
President/Chief Financial Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons of the registrant in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Frederick B. Craves Chairman of the Board of Directors March 29, 2000
- -----------------------------------
Frederick B. Craves, Ph.D.
/s/ William G. Gerber Chief Executive Officer March 29, 2000
- ----------------------------------- and Director
William G. Gerber, M.D.
/s/ Sanford S. Zweifach President/Chief Financial Officer (Chief March 29, 2000
- ----------------------------------- Accounting Officer), and Director
Sanford S. Zweifach
/s/ Richard L. Dunning Director March 29, 2000
- -----------------------------------
Richard L. Dunning
</TABLE>
F-15
<PAGE> 43
<TABLE>
<S> <C> <C>
/s/ Herbert L. Heyneker Director March 29, 2000
- -------------------------------------
Herbert L. Heyneker, Ph.D.
/s/ Kenneth L. Melmon Director March 29, 2000
- -------------------------------------
Kenneth L. Melmon, M.D.
/s/ Riccardo Pigliucci Director March 29, 2000
- -------------------------------------
Riccardo Pigliucci
</TABLE>
F-16
<PAGE> 44
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3 of
the Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1998).
3.2* Bylaws of the Registrant, as currently in effect.
5.0 Opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Counsel to the
Registrant (incorporated by reference to the same numbered exhibit to the Company's
Registration Statement on Form SB-2, No. 333-21353, filed February 7, 1997).
10.1* MicroProbe Corporation Incentive Stock Option, Nonqualified Stock Option And Restricted Stock
Purchase Plan--1991, as amended.
10.2* Form of Indemnification Agreement entered into with officers and directors of the Registrant.
10.3 Letter Agreement between the Registrant and Fred Craves, dated August 3, 1993 (incorporated
by reference to Exhibit 10.12 of the Registrant's Registration Statement on Form SB-2,
Registration No. 33-66742, effective on September 29, 1993).
10.4 Form of Common Stock Warrant issued December 31, 1991 (incorporated by reference to Exhibit
10.22 of the Registrant's Registration Statement on Form SB-2, Registration No. 33-66742,
effective on September 29, 1993).
10.5 Second Amended and Restated Investment Agreement, dated April 28, 1992 among the Registrant
and certain investors (incorporated by reference to Exhibit 10.25 of the Registrant's
Registration Statement on Form SB-2, Registration No. 33-66742, effective on September 29,
1993).
10.6 Common Stock and Warrant Purchase Agreement, dated April 28, 1992 as amended June 30, 1992
and July 31, 1992 (with form of warrant) among the Registrant and certain investors
(incorporated by reference to Exhibit 10.26 of the Registrant's Registration Statement on
Form SB-2, Registration No. 33-66742, effective on September 29, 1993).
10.7 Form of Registration Agreement, dated February 12, 1993 among the Registrant and certain
investors (incorporated by reference to Exhibit 10.30 of the Registrant's Registration
Statement on Form SB-2, Registration No. 33-66742, effective on September 29, 1993).
10.8 MicroProbe Corporation Incentive Stock Option, Nonqualified Stock Option and Restricted Stock
Purchase Plan--1993 (incorporated by reference to Exhibit 10.39 of the Registrant's
Registration Statement on Form SB-2, Registration No. 33-66742, effective on September 29,
1993).
10.9 MicroProbe Corporation Non-Employee Directors Stock Option Plan (incorporated by reference to
Exhibit 10.40 of the Registrant's Registration Statement on Form SB-2, Registration No.
33-66742, effective on September 29, 1993).
10.10* Warrant Agreement between the Registrant and American Stock Transfer & Trust Company dated
April 29, 1997, (incorporated by reference to Exhibit 10.10 of the Registrant's Annual Report
on 10-KSB for the year ended December 31, 1998).
10.11 Purchase Agreement dated as of November 30, 1993, by and among the Registrant, Animal
Biotechnology Cambridge Limited, and Herbert Stradler (without exhibits) (incorporated by
reference to Exhibit 10.47 of the Registrant's Registration Statement on Form SB-2,
Registration No. 33-76446, effective on July 7, 1994).
10.11.1 Amendment dated April 1, 1994 to Put Agreement (incorporated by reference to Exhibit 10.48.1
of the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1993).
10.11.2 Amendment dated April 27, 1994 to Put Agreement (incorporated by reference to the
Registrant's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1994).
10.11.3 Amendment dated May 26, 1994 to Put Agreement (incorporated by reference to Exhibit 10.48.3
of the Registrant's Registration Statement on Form SB-2, Registration No. 33-76446, effective
on July 7, 1994).
10.11.4 Amendment dated June 30, 1994 to Put Agreement (incorporated by reference to Exhibit 10.48.4
of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1994).
10.11.5 Amendment dated July 27, 1994 to Put Agreement (incorporated by reference to Exhibit 10.48.5
of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1994).
10.11.6 Amendment dated August 15, 1994 to Put Agreement (incorporated by reference to Exhibit
10.48.6 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September
30, 1994).
</TABLE>
<PAGE> 45
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.11.7 Amendment dated August 30, 1994 to Put Agreement (incorporated by reference to Exhibit
10.48.7 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September
30, 1994).
10.11.8 Amendment dated September 14, 1994 to Put Agreement (incorporated by reference to Exhibit
10.48.8 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September
30, 1994).
10.11.9 Exercise Notice dated September 27, 1994 to Put Agreement (incorporated by reference to
Exhibit 10.48.9 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1994).
10.12 Put Agreement relating to Ribonetics GmbH dated as of December 1, 1993 between the Registrant
and David Blech, as amended December 3, 1993 and February 18, 1994 (incorporated by reference
to Exhibit 10.48 of the Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1993).
10.13 Registration Rights Agreement dated October 12, 1994 (incorporated by reference to Exhibit
10.57 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September 30,
1994).
10.14 Consulting Agreement between the Registrant and Sanford S. Zweifach, dated January 18, 1995
(incorporated by reference to Exhibit 10.59 of the Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1995).
10.15 Asset Purchase Agreement between the Registrant and Becton, Dickinson and Company, dated as
of September 29, 1995 (incorporated by reference to the form of such Asset Purchase Agreement
filed with the Registrant's Definitive Proxy Materials for its Special Meeting of
Stockholders held November 27, 1995).
10.16 Consulting Agreement with David Blech dated March 29, 1996 (incorporated by reference to
Exhibit 10.65 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended June
30, 1996).
10.17 Form of Subscription Agreement with Private Placement Investors (incorporated by reference to
Exhibit 4.1 of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended June
30, 1996).
10.18 Warrant Agreement between the Registrant and American Stock Transfer and Trust Company dated
June 21, 1996, with form of Warrant (incorporated by reference to Exhibit 4.2 of the
Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1996).
10.19 Bridge Financing Agreement dated as of February 25, 1998, with form of note and warrant,
between the Registrant and Bay City Capital, LLC (incorporated by reference to Exhibit 10.69
of the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1997).
10.20* Sublease between the Registrant as Tenant and Bion Diagnostic Sciences, Inc. for premises
located in Redmond, Washington, dated September 25, 1998 (incorporated by reference to
Exhibit 10.20 of Registrant's Annual Report on 10-KSB for the year ended December 31, 1998).
10.21* License Agreement between the Registrant and Perkin-Elmer Corporation dated January 11, 1999
(portions of this Exhibit are omitted and were filed separately with the Secretary of the SEC
pursuant to the Registrant's application requesting confidential treatment under Rule 406 of
the Securities Act) (incorporated by reference to Exhibit 10.21 of Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1998).
10.21.1 First Amendment to the License and Supply Agreement between the Registrant and Perkin-Elmer
Corporation dated January 11, 1999. (Portions of this Exhibit are omitted and were filed
separately with the Secretary of the SEC pursuant to the Registrant's application requesting
confidential treatment under Rule 406 of the Securities Act.) Incorporated by reference to
exhibit 10.21.1 of the Registrant'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 Pharmaceuticals, Inc.
and the purchasers set forth therein.
10.23 Stock Purchase Agreement dated February 14, 2000 by and between Epoch Pharmaceuticals and the
purchasers set forth therein.
23.2 Consent of Stradling Yocca Carlson & Rauth, a Professional Corporation (included in the
Opinion filed as Exhibit 5.0).
23.1 Consent of KPMG LLP.
25.0 Power of Attorney (included on the signature page).
27.0 Financial Data Schedules (incorporated by reference to Exhibit 27 of Registrant's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1999).
</TABLE>
* Incorporated by reference to the same numbered exhibit of the Registrant's
Registration Statement on Form SB-2, No. 33-66742, effective on September
29, 1993.
<PAGE> 1
EXHIBIT 10.22
STOCK PURCHASE AGREEMENT
DATED NOVEMBER 1, 1999
BETWEEN
EPOCH PHARMACEUTICALS, INC.
AND
THE INVESTORS LISTED ON
SCHEDULE A HERETO
<PAGE> 2
EPOCH PHARMACEUTICALS, INC.
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of the 1st
day of November, 1999, by and between Epoch Pharmaceuticals, Inc., a Delaware
corporation (the "Company"), and the persons or entities listed on Schedule A
attached hereto (individually, an "Investor" and collectively, the "Investors").
WHEREAS, the Company and Investors wish to enter into this Agreement to
set forth the terms of Investors' purchase of Common Stock from the Company.
NOW THEREFORE, BE IT RESOLVED, that the parties hereto, intending to be
legally bound, hereby agree as follows:
1. PURCHASE AND SALE OF COMMON STOCK.
1.1 SALE AND ISSUANCE OF COMMON STOCK. Subject to the terms and
conditions of this Agreement, each Investor agrees to purchase, and the Company
agrees to sell and issue to each Investor, at the Initial Closing and the Second
Closing (collectively, the "Closings," defined in Section 1.2(a) below), that
number of shares of the Company's Common Stock set forth opposite such
Investor's name on Schedule A (the "Shares") for the purchase price set forth
thereon, which shall not be less than $2.50 per share.
1.2 CLOSINGS.
(a) Initial Closing. Subject to the satisfaction or waiver
of the conditions set forth in Sections 4 and 5 hereof, the purchase and sale of
2,080,000 of the Shares to the Investors shall take place at the offices of
Stradling Yocca Carlson & Rauth, a Professional Corporation, 660 Newport Center
Drive, Suite 1600, Newport Beach, California, at 10:00 a.m., on November 1,
1999, or at such other time and place as the Company and Investors mutually
agree upon, either orally or in writing (which time and place is designated as
the "Initial Closing").
(b) Second Closing. Subject to the satisfaction or waiver of
the conditions set forth in Sections 4 and 5 hereof, the purchase and sale of up
to 1,320,000 of the Shares to the Investors shall take place at the offices of
Stradling Yocca Carlson & Rauth, a Professional Corporation, 660 Newport Center
Drive, Suite 1600, Newport Beach, California, at 10:00 a.m., on November 15,
1999, or at such other time and place as the Company and Investors mutually
agree upon, either orally or in writing (which time and place is designated as
the "Second Closing"), but in no event later than forty-five (45) days after the
date of the Initial Closing.
(c) Subject to the terms of this Agreement, at the Closings,
the Company shall deliver to each Investor a certificate representing that
number of Shares set forth opposite such Investor's name on Schedule A, against
payment of the purchase price therefor by check, wire transfer, evidence of the
cancellation of debt, or evidence of the cancellation of certain prepayments, as
set forth on Schedule A.
<PAGE> 3
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
Except as disclosed in the Schedules attached hereto by reference to the
specific Section or Sections hereof to which the disclosure pertains, the
Company represents and warrants to the Investors as follows:
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to own and operate its properties and assets and to carry on its
business as presently conducted. The Company is duly qualified and authorized to
transact business and is in good standing as a foreign corporation in each
jurisdiction where the nature of its activities and of its properties makes such
qualification necessary, except where failure to so qualify would not have a
material adverse effect upon the Company.
2.2 CAPITALIZATION. The authorized capital stock of the Company
consists of 50,000,000 shares of Common Stock, $.01 par value, and 10,000,000
shares of Preferred Stock, $.01 par value. As of October 22, 1999, there were
issued and outstanding 15,132,669 shares of Common Stock and no shares of
Preferred Stock. Immediately following the Closings all issued and outstanding
shares of the Company's capital stock will have been duly authorized, validly
issued, fully paid and non-assessable and issued in compliance with federal and
state securities laws. The Company has reserved (a) an aggregate of 1,301,812
shares of Common Stock for issuance upon the exercise of certain warrants at an
exercise price of $2.50 per share (the "Exchange Warrants"), (b) an aggregate of
2,500,000 shares of Common Stock for issuance upon the exercise of certain other
warrants at an exercise price of $2.50 per share (the "Private Placement
Warrants"), (c) an aggregate of 3,796,963 shares of Common Stock for issuance
upon the exercise of certain other warrants at an exercise price ranging from
$.30 to $9.21 per share (the "Other Warrants"), and (d) an aggregate of
1,936,470 shares of Common Stock for issuance pursuant to the Company's
Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase
Plans, of which 1,623,269 shares are subject to currently outstanding options.
Except as set forth in the immediately preceding sentence, none of the Common
Stock is subject to any preemptive or subscription right, any voting trust
agreement or other contract, agreement, arrangement, option, warrant, call,
commitment or other right of any character obligating or entitling the Company
to issue, sell, redeem or repurchase any of its securities, and there is no
outstanding security of any kind convertible into or exercisable or exchangeable
for Common Stock. Except as set forth on Schedule 2.2 attached hereto, there are
no agreements or arrangements pursuant to which the Company is or could be
required to register shares of the Company's capital stock or other securities
under the Securities Act of 1933, as amended (the "Securities Act"), or other
agreements or arrangements (including voting agreements) with or, to the
knowledge of the Company, among any security holders of the Company with respect
to any securities of the Company.
2.3 AUTHORIZATION. All corporate action on the part of the
Company, its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement, the performance of the
Company's obligations hereunder and the authorization, issuance, sale and
delivery of the Shares has been taken or will be taken prior to the Closings.
This Agreement when executed and delivered by the Company, shall constitute a
valid and legally binding obligation of the Company, enforceable against the
Company in accordance with its terms except (a) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, and other laws of general
application affecting enforcement of creditors' rights generally, (b) as limited
by laws relating to the availability of specific performance, injunctive relief
or other equitable remedies, or (c) to the extent the
2
<PAGE> 4
indemnification provisions in Section 6.5 below may be limited by applicable
federal or state securities law.
2.4 VALID ISSUANCE OF THE SHARES; COMPLIANCE WITH SECURITIES
LAWS. When issued, sold and delivered in compliance with the provisions of this
Agreement and the Company's certificate of incorporation, the Shares will be
duly and validly issued, fully paid and nonassessable and will be free of any
liens, encumbrances, and restrictions on transfer other than restrictions on
transfer under this Agreement and applicable state and federal securities laws.
Assuming the accuracy of the representations and warranties of the Investors set
forth in this Agreement, the offer, sale and issuance of the Shares as
contemplated by this Agreement are exempt from the registration requirements of
the Securities Act, and have been registered or qualified (or are exempt from
registration or qualification) under the registration, permit, or qualification
requirements under all applicable state securities laws.
2.5 GOVERNMENTAL CONSENTS. All consents, approvals, orders, or
authorizations of, or registrations, qualifications, designations, declarations,
or filings with, any governmental authority, required on the part of the Company
in connection with the valid execution and delivery of this Agreement, the
offer, sale or issuance of the Shares, or the consummation of any other
transaction contemplated hereby have been obtained, or will be effective at the
Closings, except for notices required or permitted to be filed with certain
state and federal securities commissions after the Closings, which notices will
be filed by the Company on a timely basis.
2.6 SEC FILINGS. The Company has filed with the Securities and
Exchange Commission (the "SEC") all reports, schedules, forms, statements and
other documents required pursuant to the Securities Act and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), since January 1, 1998
(collectively, and in each case including all exhibits and schedules thereto and
documents incorporated by reference therein, the "SEC Documents"). As of their
respective dates, the SEC Documents complied as to form in all material respects
with the requirements of the Securities Act or the Exchange Act, as the case may
be, and the rules and regulations of the SEC promulgated thereunder applicable
to such SEC Documents. As of their respective dates, (i) none of the SEC
Documents (including any and all financial statements included therein) filed
pursuant to the Securities Act or any rule or regulation thereunder contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading, and (ii) none of the SEC Documents (including any and
all financial statements included therein) filed pursuant to the Exchange Act or
any rule or regulation thereunder contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. Except to the extent
that information contained in any SEC Document has been revised or superseded by
a later filed SEC Document, none of the SEC Documents (including any and all
financial statements included therein) contains any untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The consolidated
financial statements of the Company included in all SEC Documents filed since
January 1, 1998 (the "SEC Financial Statements") comply as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, have been prepared in
accordance with generally accepted accounting principles (except, in the case of
unaudited consolidated quarterly statements, as permitted by Form 10-Q of the
SEC), applied on a consistent basis during the periods involved (except as may
be indicated in the notes thereto). The
3
<PAGE> 5
SEC Financial Statements fairly present the consolidated financial position of
the Company as of the dates thereof and the consolidated results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited quarterly statements, to normal recurring audit adjustments). The
Company does not have any liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) required by generally accepted
accounting principles to be recognized or disclosed on a consolidated balance
sheet of the Company or in the notes thereto, except (i) liabilities reflected
in the consolidated unaudited balance sheet of the Company as of December 31,
1998 or the notes thereto (subject to ordinary year-end adjustments), (ii)
liabilities disclosed in any SEC Documents filed by the Company prior to the
date of this Agreement with respect to any period ending, or date occurring,
after December 31, 1998, and (iii) liabilities incurred since December 31, 1998
in the ordinary course of business consistent with past practice.
2.7 FULL DISCLOSURE. The Company has provided Investors with all
the information that Investors have requested for deciding whether to purchase
the Shares. Neither this Agreement nor the representations and warranties
contained herein, nor any other written statements or certificates made or
delivered in connection herewith, when read together, contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements herein or therein not misleading.
2.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed on
Schedule 2.8 attached hereto, since December 31, 1998, the Company has conducted
its business only in the ordinary course consistent with past practice, and
there is not and has not been: (i) since December 31, 1998, any condition, event
or occurrence which has had a material adverse effect on the business,
properties, financial condition or results of operations of the Company (a
"Material Adverse Effect"); (ii) since December 31, 1998, any condition, event
or occurrence which as of the date of this Agreement, individually or in the
aggregate, could reasonably be expected to have a Material Adverse Effect with
respect to the Company; or (iii) since December 31, 1998, any condition, event
or occurrence which, individually or in the aggregate, could reasonably be
expected to prevent or materially delay the ability of the Company to consummate
the transactions contemplated by this Agreement or perform its obligations
hereunder.
2.9 LITIGATION. Except as disclosed on Schedule 2.9 attached
hereto, there is (a) no suit, action, arbitration or proceeding pending, and (b)
to the knowledge of the Company, no suit, action, arbitration or proceeding
threatened against or investigation pending with respect to the Company that,
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect with respect to the Company or prevent or materially
delay the ability of the Company to consummate the transactions contemplated by
this Agreement or to perform its obligations hereunder, nor is there any
judgment, decree, citation, injunction, rule or order of any court or
administrative or governmental body or agency (a "Governmental Entity") or
arbitrator outstanding against the Company which, individually or in the
aggregate, has or could reasonably be expected to have, any such effect.
2.10 NO CONFLICTS OR DEFAULTS. The execution and delivery of this
Agreement by the Company and the consummation of the transactions contemplated
hereby do not and will not (a) contravene the certificate of incorporation or
by-laws of the Company or (b) with or without the giving of notice or the
passage of time, (i) violate, conflict with, or result in a breach of, or a
default or loss of rights under, any material covenant, agreement, mortgage,
indenture, lease, instrument, permit or license to which the Company is a party
or by which the Company or any of its assets is bound, or any judgment, order or
decree, or any law, rule or regulation to which the Company or any
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of its assets is subject, or (ii) result in the creation of, or give any party
the right to create, any lien, charge, security interest, encumbrance or any
other right or adverse interest upon any of the capital stock or assets of the
Company.
2.11 COMPLIANCE WITH LAWS. The Company holds all permits,
licenses, variances, exemptions, orders and approvals of all Governmental
entities which are material to the operation of the businesses of the Company
(the "Company Permits"). The Company is in compliance with the terms of the
Company Permits, except where the failure so to comply, individually or in the
aggregate, would not have a Material Adverse Effect with respect to the Company.
The businesses of the Company are not being conducted in violation of any law
(domestic or foreign), ordinance or regulation of any Governmental Entity,
except for possible violations which, individually or in the aggregate, do not
and could not reasonably be expected to have a Material Adverse Effect with
respect to the Company.
3. REPRESENTATIONS AND WARRANTIES OF INVESTORS.
Each Investor, severally and not jointly, hereby represents and warrants
to the Company as follows:
3.1 LEGAL POWER. Investor has the power and authority to enter
into this Agreement, to purchase the Shares hereunder and to carry out and
perform its obligations under the terms of this Agreement.
3.2 DUE EXECUTION. This Agreement has been duly authorized,
executed and delivered by Investor, and, upon due execution and delivery by the
Company, this Agreement will be a valid and binding obligation of Investor,
enforceable in accordance with its terms, except (a) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, and other laws of general
application affecting enforcement of creditors' rights generally, (b) as limited
by laws relating to the availability of specific performance, injunctive relief
or other equitable remedies, or (c) to the extent the indemnification provisions
in Section 6.5 below may be limited by applicable federal or state securities
law.
3.3 INFORMATION. Investor believes that it, or its
representatives, have received all information Investor considers necessary for
evaluating the risks and merits of acquiring the Shares. Investor further
represents that Investor has had the opportunity to ask questions and receive
answers from the Company regarding the terms and conditions of the Shares and
the business, properties, prospects and financial condition of the Company. The
foregoing, however, does not limit or modify the representations and warranties
of the Company in Section 2 of this Agreement or the right of Investor to rely
thereon.
3.4 INVESTMENT REPRESENTATIONS.
(a) Investor is acquiring the Shares for its own account,
not as nominee or agent, for investment and not with a view to, or for resale in
connection with, any distribution or public offering thereof within the meaning
of the Securities Act .
(b) Investor understands that (i) the Shares have not been
registered under the Securities Act by reason of a specific exemption therefrom,
that the securities are "restricted securities" and the Investor must hold the
Shares indefinitely, and that it must, therefore, bear the
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economic risk of such investment indefinitely, unless a subsequent disposition
thereof is registered under the Securities Act or is exempt from such
registration; (ii) each certificate representing the Shares will be endorsed
with the following legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (THE
"1933 ACT") AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR
HYPOTHECATED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE 1933 ACT COVERING SUCH SECURITIES OR IF THE
COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE
SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT
SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM
THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE 1933
ACT."
and (iii) the Company will instruct any transfer agent not to register the
transfer of any of the Shares unless the conditions specified in the foregoing
legend are satisfied; provided, however, that no such opinion of counsel shall
be necessary if the sale, transfer or assignment is made pursuant to SEC Rule
144 and the Investor provides the Company with evidence reasonably satisfactory
to the Company and its counsel that the proposed transaction satisfies the
requirements of Rule 144. The Company agrees to remove the foregoing legend from
any securities if the requirements of SEC Rule 144(k) (or any successor rule or
regulation) apply with respect to such securities and the Company and its
counsel are provided with reasonably satisfactory evidence that the requirements
of Rule 144(k) apply.
(c) Investor has not been offered the Shares by any form of
advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio, or
any seminar or meeting whose attendees have been invited by such media.
(d) Investor acknowledges that it is able to fend for
itself, can bear the economic risk of its investment and has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of acquisition of the Shares and of making an informed
investment decision with respect thereto.
(e) Investor's principal place of business or address is as
set forth on the signature page hereto, and, if it is an individual, it does not
reside in any state of the United States other than the state, if any, specified
in its address on the signature page.
(f) Investor acknowledges that an investment in the Shares
is speculative and involves a high degree of risk of loss of all or part of
Investor's investment therein.
(g) Investor understands that the foregoing representations
and warranties are to be relied upon by the Company as a basis for exemption of
the sale of the Shares under the Securities Act, under the securities laws of
all applicable states and for other purposes. In the event
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any of such representations and warranties become inaccurate or untrue prior to
the Closings, the Investor will promptly notify the Company.
(h) Investor was not formed for the specific purpose of
acquiring the Shares.
3.5 FURTHER REPRESENTATIONS BY FOREIGN INVESTORS. If Investor is
not a U.S. person or entity such Investor hereby represents that it is satisfied
as to the full observance of the laws of such Investor's jurisdiction in
connection with the purchase of the Shares or any use of this Agreement,
including (i) the legal requirements with such Investor's jurisdiction for the
purchase of the Shares, (ii) any foreign exchange restrictions applicable to
such purchase, (iii) any governmental or other consents that may need to be
obtained, and (iv) the income tax and other tax consequences, if any, which may
be relevant to the purchase, holding, redemption, sale, or transfer of the
Shares. Such Investor's purchase of and payment for, and such Investor's
continued beneficial ownership of, the Shares will not violate any applicable
securities or other laws of such Investor's jurisdiction.
4. CONDITIONS OF THE INVESTORS' OBLIGATIONS AT CLOSINGS.
The obligations of Investors under subsection 1.1 of this Agreement are
subject to the fulfillment on or before the Closings of each of the following
conditions, the waiver of which shall not be effective against Investors unless
consented to by Investors in writing thereto:
4.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in Section 2 shall be true and correct in
all material respects on and as of the Closings, except those representations
and warranties qualified by materiality, which shall be true and correct in all
respects, with the same force and effect as though such representations and
warranties had been made on and as of the Closings.
4.2 PERFORMANCE OF OBLIGATIONS. The Company shall have performed
and complied in all material respects with all agreements, obligations and
conditions contained herein that are required to be performed or complied with
by it on or prior to the Closings.
4.3 COMPLIANCE CERTIFICATE. The Company shall deliver to
Investors at the Closings a Certificate, executed by the President of the
Company, certifying that the conditions specified in subsections 4.1 and 4.2
have been fulfilled.
4.4 QUALIFICATIONS. All authorizations, approvals, or permits, if
any, of any governmental authority or regulatory body of the United States, of
any state or any foreign country that are required in connection with the lawful
sale and issuance of the Shares pursuant to this Agreement shall have been duly
obtained and shall be effective on and as of the Closings. No stop order or
other order enjoining the sale of the Shares shall have been issued and no
proceedings for such purpose shall be pending or, to the knowledge of the
Company, threatened by the SEC, the California Commissioner of Corporations, or
any commissioner of corporations or similar officer of any other state or
foreign country having jurisdiction over this transaction. At the time of the
Closings, the sale and issuance of the Shares shall be legally permitted by all
laws and regulations to which Investor and the Company are subject.
4.5 PROCEEDINGS AND DOCUMENTS. All corporate and other
proceedings in connection with the transactions contemplated at the Closings and
all documents and instruments
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incident thereto shall be reasonably satisfactory in form and substance to
Investor, which shall have received all such counterpart original and certified
or other copies of such documents as it may reasonably request.
5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSINGS.
The obligations of the Company to Investors under this Agreement are
subject to the fulfillment, on or before the Closings, of each of the following
conditions by Investor:
5.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Investors contained in Section 3 hereof shall be true and correct
in all material respects on and as of the Closings, except those representations
and warranties qualified by materiality, which shall be true and correct in all
respects, with the same force and effect as though such representations and
warranties had been made on and as of the Closings.
5.2 QUALIFICATIONS. All authorizations, approvals, or permits, if
any, of any governmental authority or regulatory body of the United States, of
any state or any foreign country that are required in connection with the lawful
sale and issuance of the Shares pursuant to this Agreement shall have been duly
obtained and shall be effective on and as of the Closings. No stop order or
other order enjoining the sale of the Shares shall have been issued and no
proceedings for such purpose shall be pending or, to the knowledge of the
Company, threatened by the SEC, the California Commissioner of Corporations, or
any commissioner of corporations or similar officer of any other state or
foreign country having jurisdiction over this transaction. At the time of the
Closings, the sale and issuance of the Shares shall be legally permitted by all
laws and regulations to which Investor and the Company are subject.
5.3 CANCELLATION OF PROMISSORY NOTE. The Company shall have
received from Bay City Fund I, LLP ("Bay City") (one of the Investors hereunder)
satisfactory evidence of the cancellation of that certain $3,000,000 promissory
note from the Company in favor of Bay City, dated February, 1998 (the "Note"),
as referenced in Schedule A.
5.4 CANCELLATION OF PRE-PAYMENT. The Company shall have received
from PE Corporation (formerly known as The Perkin-Elmer Corporation) ("PE") (one
of the Investors hereunder) satisfactory evidence acknowledging the cancellation
of $1,000,000 in pre-payments made by PE for future purchases of MGB
Oligonucleotides and MGB Intermediates, pursuant to Section 5.11 of that certain
License and Supply agreement by and between the Company and PE dated as of the
January 11, 1999 (the "License Agreement"), as referenced in Schedule A.
5.5 PERFORMANCE. All covenants, agreements and conditions
contained in this Agreement to be performed by Investors on or prior to the
Closings shall have been performed or complied with in all material respects.
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6. REGISTRATION OF SHARES.
The Company hereby grants to each of the Investors the registration
rights set forth in this Section 6 with respect to the Registrable Securities
(as hereinafter defined) owned by such Investors. The Company and the Investors
agree that the registration rights provided herein set forth the sole and entire
agreement on the subject matter between the Company and the Investors.
6.1 DEFINITIONS.
(a) The terms "register," "registered," and "registration"
refer to a registration effected by filing with SEC a registration statement
(the "Registration Statement") in compliance with the Securities Act, and the
declaration or ordering by the SEC of the effectiveness of such Registration
Statement.
(b) The term "Registrable Shares" means the Shares issued to
the Investors pursuant to this Agreement, as well as the Warrant Shares to be
issued to Bay City (as set forth in Schedule A) and any Common Stock of the
Company issued as (or issuable upon the conversion or exercise of any warrant,
right, or other security that is issued as) a dividend or other distribution
with respect to, or in exchange or in replacement of, such Registrable Shares.
In the event of any recapitalization by the Company, whether by stock split,
reverse stock split, stock dividend or the like, the number of shares of
Registrable Shares used throughout this Agreement for various purposes shall be
proportionately increased or decreased, provided, however, that any such
security shall cease to be a Registrable Share at such time as it is publicly
saleable without restriction, pursuant to Rule 144(k) of the SEC, or otherwise.
(c) The term "Initiating Investors" means any Investor or
Investors of not less than fifty percent (50%) of the Registrable Shares held by
all of the Investors then outstanding and not registered pursuant to paragraph
6.2 of this Agreement.
6.2 DEMAND REGISTRATION. If the Company shall receive from the
Initiating Investors a written demand (a "Demand Registration") that the Company
effect any registration under the Securities Act with respect to all or a part
of the Registrable Shares held by the Initiating Investors the Company will (i)
as soon as reasonably practicable, give written notice of such request to all
Investors; (ii) use its best efforts to effect such registration as soon as
practicable and as will permit or facilitate the sale and distribution of all or
such portion of the Initiating Investors' Registrable Shares as are specified in
such demand (including any Registrable Shares which are held by Investors, which
such Investors request to include in such registration within twenty (20) days
after the receipt of the notice given pursuant to (i) above), and (iii) use its
best efforts to cause such registration to remain effective until the earlier to
occur of the date (A) the Registrable Shares covered thereby have been sold, or
(B) the Investors are able to use Rule 144 of the Securities Act to sell the
Shares without restriction, provided that the Company shall not be obligated to
take any action to effect any such registration, pursuant to this Section 6.2:
(a) At any time prior to six (6) months following the
Closings;
(b) After the Company has effected one registration pursuant
to this Section 6.2; or
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(c) If the Company shall furnish to the Initiating Investors
a certificate signed by the President of the Company, stating that in the good
faith judgment of the Board of Directors of the Company it would be seriously
detrimental to the Company and its shareholders for such Registration Statement
to be filed at the date filing would be required, in which case the Company
shall have an additional period of not more than 180 days within which to file
such Registration Statement.
6.3 REGISTRATION PROCEDURES. When the Company effects the
registration of the Registrable Shares under the Securities Act pursuant to
Section 6.2 hereof, the Company will, at its expense, as expeditiously and as
reasonably possible, use its reasonable best efforts, to:
(a) In accordance with the Securities Act and the rules and
regulations of the SEC, prepare and file with the SEC a Registration Statement
with respect to such securities and use its best efforts to cause such
Registration Statement to become and remain effective for the period described
in Section 6.2, and prepare and file with the SEC such amendments to such
Registration Statement and supplements to the prospectus contained therein as
may be necessary to keep such Registration Statement effective for such period
and such Registration Statement and prospectus accurate and complete for such
period;
(b) Furnish to Investors such reasonable number of copies of
the Registration Statement, preliminary prospectus, final prospectus and such
other documents as Investor may reasonably request in order to facilitate the
public offering of such securities;
(c) Use its best efforts to register or qualify the
securities covered by such Registration Statement under such state securities or
blue sky laws of such jurisdictions as Investor may reasonably request within
twenty (20) days following the original filing of such Registration Statement,
except that the Company shall not for any purpose be required to execute a
general consent to service of process or to qualify to do business as a foreign
corporation in any jurisdiction where it is not so qualified;
(d) Notify Investors, promptly after it shall receive notice
thereof, of the date and time when such Registration Statement and each
post-effective amendment thereto has become effective or a supplement to any
prospectus forming a part of such Registration Statement has been filed;
(e) Notify Investors promptly of any request by the SEC for
the amending or supplementing of such Registration Statement or prospectus or
for additional information;
(f) Notify Investors promptly if, at the time when a
prospectus relating to such securities is required to be delivered under the
Securities Act, any event has occurred as the result of which any such
prospectus or any other prospectus as then in effect would include an untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading and
prepare and promptly file with the SEC, and promptly notify Investors of the
filing of, such amendments or supplements to such Registration Statement or
prospectus as may be necessary to correct such statements or omissions;
(g) In case any Investor is required to deliver a prospectus
at a time when the prospectus then in circulation is not in compliance with the
Securities Act or the rules and
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regulations of the SEC, prepare promptly upon request such amendments or
supplements to such Registration Statement and such prospectus as may be
necessary in order for such prospectus to comply with the requirements of the
Securities Act and such rules and regulations;
(h) Advise Investors, promptly after it shall receive notice
or obtain knowledge thereof, of the issuance of any stop order by the SEC
suspending the effectiveness of such Registration Statement or the initiation or
threatening of any proceeding for that purpose and promptly use its best efforts
to prevent the issuance of any stop order or to obtain its withdrawal if such
stop order should be issued;
(i) Use its best efforts to obtain a comfort letter from the
Company's independent public accountants in customary form and covering such
matters of the type customarily covered by comfort letters with respect to
offerings of such type as the Investors may reasonably request; and
(j) Cause all such securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed, provided that the applicable listing requirements are satisfied.
6.4 EXPENSES. With respect to any registration effected pursuant
to Section 6.2 hereof, the Company agrees to bear all fees, costs and expenses
of and incidental to such registration and the public offering in connection
therewith, provided however, that Investors shall bear all underwriting
discounts and commissions, state transfer taxes and brokerage commissions. The
fees, costs and expenses of registration to be borne by the Company as provided
in this Section 6.4 shall include, without limitation, all registration, filing
and NASD fees, printing expenses, fees and disbursements of counsel and
accountants for the Company, and all legal fees and disbursements and other
expenses of complying with state securities or blue sky laws of any
jurisdictions in which the securities to be offered are to be registered or
qualified.
6.5 INDEMNIFICATION.
(a) The Company will, and does hereby undertake to,
indemnify and hold harmless each Investor, each of such Investor's officers,
directors, partners and agents, and each person controlling such Investor, with
respect to any registration, qualification, or compliance effected pursuant to
this Section 6, and each underwriter, if any, and each person who controls
within the meaning of Section 15 of the Securities Act any underwriter, of the
Registrable Shares held by or issuable to such Investor, against all claims,
losses, damages, and liabilities (or actions in respect thereto) to which they
may become subject under the Securities Act, the Exchange Act, or other federal
or state law arising out of or based on (i) any untrue statement (or alleged
untrue statement) of a material fact contained in any prospectus, offering
circular, or other similar document (including any related Registration
Statement, notification, or the like) incident to any such registration,
qualification, or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, or (ii) any violation or alleged
violation by the Company of any federal, state or common law rule or regulation
applicable to the Company in connection with any such registration,
qualification, or compliance, and will reimburse, as incurred, each Investor,
each underwriter, and each director, officer, partner, agent and controlling
person, for any legal and any other expenses reasonably incurred in connection
with investigating or defending any such claim, loss, damage, liability, or
action; provided that the Company will not be liable in any such case to the
extent that any such
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claim, loss, damage, liability or expense, arises out of or is based on any
untrue statement or omission based upon written information furnished to the
Company by an instrument duly executed by any of the Investors or underwriter
and stated to be specifically for use therein.
(b) Each Investor will, if Registrable Securities held by or
issuable to such Investor are included in such registration, qualification, or
compliance, severally and not jointly, indemnify the Company, each of its
directors, officers, legal counsel and accountants and each underwriter, if any,
of the Company's securities covered by such Registration Statement, each person
controlling the Company or such underwriter, within the meaning of Section 15 of
the Securities Act, against all claims, losses, damages, and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any such Registration
Statement, prospectus, offering circular, or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse,
as incurred, the Company, and each such underwriter or other person, for any
legal or any other expenses reasonably incurred in connection with investigating
or defending any such claim, loss, damage, liability, or action, in each case to
the extent, but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) was made in such
Registration Statement, prospectus, offering circular, or other document, in
reliance upon and in conformity with written information furnished to the
Company by an instrument duly executed by such Investor and stated to be
specifically for use therein; provided, however, that the liability of each such
Investor hereunder shall be limited to the gross proceeds received by such
Investor from the sale of securities under such Registration Statement. In no
event will any Investor be required to enter into any agreement or undertaking
in connection with any registration under this Section 6 providing for any
indemnification or contribution obligations on the part of such Investor greater
than such Investor's obligations under this Section 6.
(c) Promptly after receipt by a party indemnified pursuant
to the provisions of paragraph (a) or (b) of this Section 6.5 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions, such indemnified party shall, if a claim thereof is to be
made against the indemnifying party pursuant to the provisions of such Sections
6.5(a) or 6.5(b), notify the indemnifying party of the commencement thereof;
provided, however, that the failure to so notify the indemnifying party shall
not relieve the indemnifying party from any liability which it may have to the
indemnified party otherwise than hereunder unless the failure to give such
notice is materially prejudicial to the indemnifying party's ability to defend
such action. In case such action is brought against any indemnified party and it
notifies the indemnifying party of the commencement thereof, the indemnifying
party shall have the right to participate in, and to the extent that it may
wish, jointly assume the defense thereof, with counsel reasonably satisfactory
to such indemnified party, and after notice from the indemnifying party to such
indemnified party of its election to so assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party pursuant to the
provisions of Section 6.5(a) or 6.5(b) for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation (except if representation
of such indemnified party by counsel to the indemnifying party would be
inappropriate due to actual or potential conflicting interests between the
indemnified party and any other party represented by such counsel). No
indemnifying party shall be liable to an indemnified party for any settlement of
any action or claim without the consent of the indemnifying party.
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6.6 REPORTING REQUIREMENTS UNDER THE EXCHANGE ACT. The Company
shall timely file such information, documents and reports as the SEC may require
or prescribe under Section 13 or 15(d) of the Exchange Act. The Company
acknowledges and agrees that the purposes of the requirements contained in this
Section 6.6 are to enable Investors to comply with the current public
information requirement contained in paragraph (c) of Rule 144 should any
Investor ever wish to dispose of any of the Registrable Shares without
registration under the Securities Act in reliance upon Rule 144 (or any other
similar exemptive provision).
6.7 INVESTOR INFORMATION. The Company may require Investors to
furnish the Company such information with respect to Investors and the
distribution of the Registrable Shares as the Company may from time to time
reasonably request in writing as shall be required by law or by the SEC in
connection therewith.
6.8 TRANSFER OF REGISTRATION RIGHTS. The registration rights of
the Investors under this Agreement may be transferred (i) in the case of an
individual, to any member of the immediate family of such individual or to any
trust for the benefit of the individual or any such family member or members,
(ii) to any partner or affiliate of such Investor, (iii) to any transferee
provided (1) that the transferee receives the lesser of (A) at least 800,000
Registrable Shares (as constituted on the date hereof) or (B) all of the
Registrable Shares held by such Investor; (2) the transferee is bound by the
terms of this Agreement; and (3) the Company is given written notice prior to
such transfer. Notwithstanding the foregoing, the registration rights of
Investors under this Agreement may not be transferred to an entity, or a person
controlled by, under common control with or controlling such entity, which is a
direct competitor of the Company.
7. AFFIRMATIVE COVENANTS OF COMPANY
7.1 ATTENDANCE AT BOARD MEETINGS. So long as PE (or an affiliate
of PE) continues to hold at least fifty percent (50%) of the total number of
shares of Common Stock originally purchased by PE pursuant to this Agreement, PE
will be entitled to appoint a representative (the "PE Representative") to attend
all meetings of the Board of Directors of the Company, and the Company will
provide the PE Representative with copies of all notices of such meetings and
all other written materials provided to the Directors of the Company at the same
time as such notices and written materials are provided to the Directors of the
Company. PE acknowledges and agrees that the Company's management will have the
right to exclude the PE Representative from all or portions of meetings of the
Board of Directors, or omit to provide the PE Representative with certain
information, if the Company's management believes it is necessary in order to
preserve the attorney-client privilege, or fulfill the Company's obligations
with respect to confidential or proprietary information of third parties, or if
such meeting or information involves matters concerning the Company's
relationship or prospective relationship with PE or its affiliates or
competitors of PE or its affiliates, or other situations where a director would
customarily not participate in a meeting or be provided such information. In
addition, PE and the PE Representative will maintain the confidentiality of all
information obtained through the PE Representative's position, except to the
extent that (i) such information is already in PE's position, (ii) such
information becomes public knowledge other than as a result of PE's actions or
inactions, (iii) PE rightfully obtains such information subsequently from a
third party, (iv) PE develops such information independently and without use of
the information provided by the Company or (v) such information is approved in
writing for release by the Company.
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<PAGE> 15
8. MISCELLANEOUS.
8.1 ENTIRE AGREEMENT. This Agreement, the Schedules hereto, and
the documents referred to herein constitute the full and entire understanding
and agreement between the parties and no party shall be liable or bound to any
to any other party in any manner by any warranties, representations or covenants
except as specifically set forth herein or therein.
8.2 SURVIVAL OF WARRANTIES. Unless otherwise set forth in this
Agreement, the warranties, representations and agreements of the Company and
Investors contained herein shall survive the execution and delivery of this
Agreement and the Closings and shall in no way be affected by any investigation
of the subject matter thereof made by or on behalf of Investors or the Company.
8.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly
provided herein, the terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the respective successors and assigns of the
parties (including permitted transferees of any Shares sold hereunder). Nothing
in this Agreement, express or implied, is intended to confer upon any party
other than the parties hereto or their respective successors and assigns any
rights, remedies, obligations or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement.
8.4 GOVERNING LAW; JURISDICTION AND VENUE; ATTORNEY'S FEES. This
Agreement and all acts and transactions pursuant hereto and the rights and
obligations of the parties hereto shall be governed by and construed under the
laws of the State of Washington without reference to principles of conflicts of
laws. The parties hereby consent and agree that the United States District Court
for the Western District of Washington will have exclusive jurisdiction over any
legal action or proceeding arising out of or relating to this Agreement, and
each party consents to the in personam jurisdiction of such courts for the
purpose of any such action or proceeding and agrees that venue is proper in such
courts. If any action at law or in equity is necessary to enforce or interpret
the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorney's and expert witness fees, costs and necessary disbursements
in addition to any other relief to which such party may be entitled.
8.5 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
8.6 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
8.7 NOTICES. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery, delivery by nationally recognized
overnight courier or five days after deposit with the United States Post Office,
by registered or certified mail, postage prepaid and addressed to the party to
be notified at the address indicated for such party on the signature page
hereto, or at such address as such party may designate by ten days advance
written notice to the other party.
8.8 FINDERS' FEES. Each Investor agrees to indemnify and to hold
harmless the Company from any liability for any commission or compensation in
the nature of a finders' fee to
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<PAGE> 16
any broker or other person or firm (and the costs and expenses of defending
against such liability or asserted liability) for which such Investor or any of
its officers, partners, employees or representatives is responsible. The Company
agrees to indemnify and hold harmless Investors from any liability for any
commission or compensation in the nature of a finders' fee to any broker or
other person or firm (and the costs and expenses of defending against such
liability or asserted liability) for which the Company or any of its officers,
employees or representatives is responsible.
8.9 EXPENSES. Irrespective of whether the Closings are effected,
the Company and each Investor shall each pay all costs and expenses that it
incurs with respect to the negotiation, execution, delivery and performance of
this Agreement.
8.10 AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and Investors
holding a majority of the Shares purchased hereunder. Any amendment or waiver
effected in accordance with this paragraph shall be binding upon all the
Investors and the securities purchased under this Agreement at the time
outstanding (including securities into which such securities have been
converted), each future holder of all such securities and the Company.
Notwithstanding the foregoing, Section 7.1 of this Agreement shall only be
amended or waived by the written consent of PE and the Company.
8.11 SEVERABILITY. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and the balance of the
Agreement shall be enforceable in accordance with its terms.
8.12 INFORMATION CONFIDENTIAL. Each Investor acknowledges that
the information received by it pursuant hereto is confidential and for such
Investor's use only, and it will refrain from using such information or
reproducing, disclosing, or disseminating such information to any other person
(other than its employees, affiliates, agents, or partners having a need to know
the contents of such information and its attorneys), except in connection with
the exercise of rights under this Agreement, unless the Company has made such
information available to the public generally or it is required by a
governmental body to disclose such information.
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<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have caused this Stock Purchase
Agreement to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
Address: EPOCH PHARMACEUTICALS, INC.
12277 134th Court NE, #110 By: /s/ William G. Gerber
Redmond, Washington 98052 William G. Gerber,
Chief Executive Officer
Address: BAY CITY FUND I, LLP
750 Battery Street, Suite 600 By: /s/ Fred Craves
San Francisco, California 94111 Fred Craves
(Additional signatures on following page)
<PAGE> 18
Address: GRACE BROTHERS LTD.
1560 Sherman Avenue By: /s/ Bradford T. Whitmore
Evanston, Illinois 60201 Bradford T. Whitmore
General Partner
Address: PE CORPORATION
761 Main Avenue By: /s/ Michael Hunkapiller
Norwalk, Connecticut 06859 Michael W. Hunkapiller
Senior Vice President
Address: HILSPEN CAPITAL MANAGEMENT
330 Primrose Road, Suite 312 By: /s/ Robert Duich
Burlingame, California 941010 Robert Duich
Chief Operating Officer
(Additional signatures on following page)
<PAGE> 19
Address: Grace Brothers, Ltd.
1560 Sherman Avenue By: /s/ Bradford T. Whitmore
Evanston, Illinois 60201 Bradford T. Whitmore
General Partner
Address: PE Corporation
761 Main Avenue By: /s/ Michael Hunkapiller
Norwalk, Connecticut 06859 Michael Hunkapiller
Senior Vice President
Address: Hilspen Capital Management
330 Primrose Rd., Suite 312 By: /s/ Joseph Craves
Burlingame, California 94101 Joseph Craves
<PAGE> 1
EXHIBIT 10.23
STOCK PURCHASE AGREEMENT
DATED FEBRUARY 14, 2000
BETWEEN
EPOCH PHARMACEUTICALS, INC.
AND
THE INVESTORS LISTED ON
SCHEDULE A HERETO
<PAGE> 2
EPOCH PHARMACEUTICALS, INC.
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of the 14th
day of February, 2000, by and between Epoch Pharmaceuticals, Inc., a Delaware
corporation (the "Company"), and the persons or entities listed on Schedule A
attached hereto (individually, an "Investor" and collectively, the "Investors").
WHEREAS, the Company and Investors wish to enter into this Agreement to
set forth the terms of Investors' purchase of securities from the Company.
NOW THEREFORE, BE IT RESOLVED, that the parties hereto, intending to be
legally bound, hereby agree as follows:
1. PURCHASE AND SALE OF COMMON STOCK.
1.1 SALE AND ISSUANCE OF COMMON STOCK. Subject to the terms and
conditions of this Agreement, each Investor agrees to purchase, and the Company
agrees to sell and issue to each Investor, at the Closing (as defined in Section
1.2 below), that number of shares of the Company's common stock, $0.01 par value
("Common Stock") set forth opposite such Investor's name on Schedule A (the
"Shares") for the purchase price set forth thereon, which shall not be less than
$7.00 per share.
1.2 CLOSING.
(a) Subject to the satisfaction or waiver of the conditions
set forth in Sections 4 and 5 hereof, the purchase and sale of the Shares to the
Investors shall take place at the offices of Stradling Yocca Carlson & Rauth, a
Professional Corporation, 660 Newport Center Drive, Suite 1600, Newport Beach,
California, at 10:00 a.m., on February 14, 2000, or at such other time and place
as the Company and Investors mutually agree upon, either orally or in writing
(which time and place is designated as the "Closing").
(b) Subject to the terms of this Agreement, at the Closing,
the Company shall deliver to each Investor a certificate representing that
number of Shares set forth opposite such Investor's name on Schedule A, against
payment to the Company of the purchase price therefor by wire transfer in the
amount set forth on Schedule A.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
Except as disclosed in the Schedules attached hereto by reference to the
specific Section or Sections hereof to which the disclosure pertains, the
Company represents and warrants to the Investors as follows:
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to own and operate its properties and assets and to carry on its
business as presently conducted. The Company is duly qualified and
<PAGE> 3
authorized to transact business and is in good standing as a foreign corporation
in each jurisdiction where the nature of its activities and of its properties
makes such qualification necessary, except where failure to so qualify would not
have a material adverse effect upon the Company.
2.2 CAPITALIZATION. The authorized capital stock of the Company
consists of 50,000,000 shares of Common Stock and 10,000,000 shares of preferred
stock, $.01 par value ("Preferred Stock"). As of December 31, 1999, there were
issued and outstanding 19,382,410 shares of Common Stock and no shares of
Preferred Stock. Immediately following the Closing all issued and outstanding
shares of the Company's capital stock will have been duly authorized, validly
issued, fully paid and non-assessable and issued in compliance with federal and
state securities laws. The Company has reserved (a) an aggregate of 1,301,812
shares of Common Stock for issuance upon the exercise of certain warrants at an
exercise price of $2.50 per share (the "Exchange Warrants"), (b) an aggregate of
2,500,000 shares of Common Stock for issuance upon the exercise of certain other
warrants at an exercise price of $2.50 per share (the "Private Placement
Warrants"), (c) an aggregate of 1,633,098 shares of Common Stock for issuance
upon the exercise of certain other warrants at an exercise price ranging from
$.30 to $2.50 per share (the "Other Warrants"), and (d) an aggregate of
1,584,243 shares of Common Stock for issuance pursuant to the Company's
Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase
Plans, of which 1,500,370 shares are subject to currently outstanding options.
From January 1, 2000 through February 9, 2000, approximately
347,400 of the Exchange Warrants and approximately 698,500 of the Private
Placement Warrants were exercised resulting in the issuance of approximately
1,045,900 shares of Common Stock.
Except as set forth in the immediately preceding sentence, none
of the Common Stock is subject to any preemptive or subscription right, any
voting trust agreement or other contract, agreement, arrangement, option,
warrant, call, commitment or other right of any character obligating or
entitling the Company to issue, sell, redeem or repurchase any of its
securities, and there is no outstanding security of any kind convertible into or
exercisable or exchangeable for Common Stock. Except as set forth on Schedule
2.2 attached hereto, there are no agreements or arrangements pursuant to which
the Company is or could be required to register shares of the Company's capital
stock or other securities under the Securities Act of 1933, as amended (the
"Securities Act"), or other agreements or arrangements (including voting
agreements) with or, to the knowledge of the Company, among any security holders
of the Company with respect to any securities of the Company.
2.3 AUTHORIZATION. All corporate action on the part of the
Company, its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement, the performance of the
Company's obligations hereunder and the authorization, issuance, sale and
delivery of the Shares has been taken or will be taken prior to the Closing.
This Agreement when executed and delivered by the Company, shall constitute a
valid and legally binding obligation of the Company, enforceable against the
Company in accordance with its terms except (a) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, and other laws of general
application affecting enforcement of creditors' rights generally, (b) as limited
by laws relating to the availability of specific performance, injunctive relief
or other equitable remedies, or (c) to the extent the indemnification provisions
in Section 6.5 below may be limited by applicable federal or state securities
law.
2
<PAGE> 4
2.4 VALID ISSUANCE; COMPLIANCE WITH SECURITIES LAWS. When issued,
sold and delivered in compliance with the provisions of this Agreement and the
Company's certificate of incorporation, the Shares will be duly and validly
issued, fully paid and nonassessable and will be free of any liens,
encumbrances, and restrictions on transfer other than restrictions on transfer
under this Agreement and applicable state and federal securities laws. Assuming
the accuracy of the representations and warranties of the Investors set forth in
this Agreement, the offer, sale and issuance of the Shares as contemplated by
this Agreement are exempt from the registration requirements of the Securities
Act, and have been registered or qualified (or are exempt from registration or
qualification) under the registration, permit, or qualification requirements
under all applicable state securities laws.
2.5 GOVERNMENTAL CONSENTS. All consents, approvals, orders, or
authorizations of, or registrations, qualifications, designations, declarations,
or filings with, any governmental authority, required on the part of the Company
in connection with the valid execution and delivery of this Agreement, the
offer, sale or issuance of the Shares, or the consummation of any other
transaction contemplated hereby have been obtained, or will be effective at the
Closing, except for notices required or permitted to be filed with certain state
and federal securities commissions after the Closing, which notices will be
filed by the Company on a timely basis.
2.6 SEC FILINGS. The Company has filed with the Securities and
Exchange Commission (the "SEC") all reports, schedules, forms, statements and
other documents required pursuant to the Securities Act and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), since January 1, 1998
(collectively, and in each case including all exhibits and schedules thereto and
documents incorporated by reference therein, the "SEC Documents"). As of their
respective dates, the SEC Documents complied as to form in all material respects
with the requirements of the Securities Act or the Exchange Act, as the case may
be, and the rules and regulations of the SEC promulgated thereunder applicable
to such SEC Documents. As of their respective dates, (i) none of the SEC
Documents (including any and all financial statements included therein) filed
pursuant to the Securities Act or any rule or regulation thereunder contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading, and (ii) none of the SEC Documents (including any and
all financial statements included therein) filed pursuant to the Exchange Act or
any rule or regulation thereunder contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. Except to the extent
that information contained in any SEC Document has been revised or superseded by
a later filed SEC Document, none of the SEC Documents (including any and all
financial statements included therein) contains any untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in all SEC Documents filed since January 1,
1998 (the "SEC Financial Statements") comply as to form in all material respects
with applicable accounting requirements and the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles (except, in the case of unaudited quarterly
statements, as permitted by Form 10-QSB of the SEC), applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto). The SEC Financial Statements fairly present the financial position of
the Company as of the dates thereof and the results of its operations and cash
flows for the periods then ended (subject, in the case of unaudited quarterly
statements, to normal recurring audit adjustments). The Company does not have
any liabilities or
3
<PAGE> 5
obligations of any nature (whether accrued, absolute, contingent or otherwise)
required by generally accepted accounting principles to be recognized or
disclosed on a balance sheet of the Company or in the notes thereto, except (i)
liabilities reflected in the unaudited balance sheet of the Company as of
December 31, 1998 or the notes thereto (subject to ordinary year-end
adjustments), (ii) liabilities disclosed in any SEC Documents filed by the
Company prior to the date of this Agreement with respect to any period ending,
or date occurring, after December 31, 1998, and (iii) liabilities incurred since
December 31, 1998 in the ordinary course of business consistent with past
practice.
2.7 FULL DISCLOSURE. The Company has provided Investors with all
the information that Investors have requested for deciding whether to purchase
the Shares. Neither this Agreement nor the representations and warranties
contained herein, nor any other written statements or certificates made or
delivered in connection herewith, when read together, contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements herein or therein not misleading.
2.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed on
Schedule 2.8 attached hereto, since December 31, 1998, the Company has conducted
its business only in the ordinary course consistent with past practice, and
there is not and has not been: (i) since December 31, 1998, any condition, event
or occurrence which has had a material adverse effect on the business,
properties, financial condition or results of operations of the Company (a
"Material Adverse Effect"); (ii) since December 31, 1998, any condition, event
or occurrence which as of the date of this Agreement, individually or in the
aggregate, could reasonably be expected to have a Material Adverse Effect with
respect to the Company; or (iii) since December 31, 1998, any condition, event
or occurrence which, individually or in the aggregate, could reasonably be
expected to prevent or materially delay the ability of the Company to consummate
the transactions contemplated by this Agreement or perform its obligations
hereunder.
2.9 LITIGATION. Except as disclosed on Schedule 2.9 attached
hereto, there is (a) no suit, action, arbitration or proceeding pending, and (b)
to the knowledge of the Company, no suit, action, arbitration or proceeding
threatened against or investigation pending with respect to the Company that,
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect with respect to the Company or prevent or materially
delay the ability of the Company to consummate the transactions contemplated by
this Agreement or to perform its obligations hereunder, nor is there any
judgment, decree, citation, injunction, rule or order of any court or
administrative or governmental body or agency (a "Governmental Entity") or
arbitrator outstanding against the Company which, individually or in the
aggregate, has or could reasonably be expected to have, any such effect.
2.10 NO CONFLICTS OR DEFAULTS. The execution and delivery of this
Agreement by the Company and the consummation of the transactions contemplated
hereby do not and will not (a) contravene the certificate of incorporation or
by-laws of the Company or (b) with or without the giving of notice or the
passage of time, (i) violate, conflict with, or result in a breach of, or a
default or loss of rights under, any material covenant, agreement, mortgage,
indenture, lease, instrument, permit or license to which the Company is a party
or by which the Company or any of its assets is bound, or any judgment, order or
decree, or any law, rule or regulation to which the Company or any of its assets
is subject, or (ii) result in the creation of, or give any party the right to
create, any lien, charge, security interest, encumbrance or any other right or
adverse interest upon any of the capital stock or assets of the Company.
4
<PAGE> 6
2.11 COMPLIANCE WITH LAWS. The Company holds all permits,
licenses, variances, exemptions, orders and approvals of all Governmental
entities which are material to the operation of the businesses of the Company
(the "Company Permits"). The Company is in compliance with the terms of the
Company Permits, except where the failure so to comply, individually or in the
aggregate, would not have a Material Adverse Effect with respect to the Company.
The businesses of the Company are not being conducted in violation of any law
(domestic or foreign), ordinance or regulation of any Governmental Entity,
except for possible violations which, individually or in the aggregate, do not
and could not reasonably be expected to have a Material Adverse Effect with
respect to the Company.
3. REPRESENTATIONS AND WARRANTIES OF INVESTORS.
Each Investor, severally and not jointly, hereby represents and warrants
to the Company as follows:
3.1 LEGAL POWER. Investor has the power and authority to enter
into this Agreement, to purchase the Shares hereunder and to carry out and
perform its obligations under the terms of this Agreement.
3.2 DUE EXECUTION. This Agreement has been duly authorized,
executed and delivered by Investor, and, upon due execution and delivery by the
Company, this Agreement will be a valid and binding obligation of Investor,
enforceable in accordance with its terms, except (a) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, and other laws of general
application affecting enforcement of creditors' rights generally, (b) as limited
by laws relating to the availability of specific performance, injunctive relief
or other equitable remedies, or (c) to the extent the indemnification provisions
in Section 6.5 below may be limited by applicable federal or state securities
law.
3.3 INFORMATION. Investor believes that it, or its
representatives, have received all information Investor considers necessary for
evaluating the risks and merits of acquiring the Shares. Investor further
represents that Investor has had the opportunity to ask questions and receive
answers from the Company regarding the terms and conditions of the Shares and
the business, properties, prospects and financial condition of the Company. The
foregoing, however, does not limit or modify the representations and warranties
of the Company in Section 2 of this Agreement or the right of Investor to rely
thereon.
3.4 INVESTMENT REPRESENTATIONS.
(a) Investor is acquiring the Shares for its own account,
not as nominee or agent, for investment and not with a view to, or for resale in
connection with, any distribution or public offering thereof within the meaning
of the Securities Act .
(b) Investor understands that (i) the Shares have not been
registered under the Securities Act by reason of a specific exemption therefrom,
that the securities are "restricted securities" and the Investor must hold the
Shares indefinitely, and that it must, therefore, bear the economic risk of such
investment indefinitely, unless a subsequent disposition thereof is registered
under the Securities Act or is exempt from such registration; (ii) each
certificate representing the Shares will be endorsed with the following legend:
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<PAGE> 7
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (THE
"1933 ACT") AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR
HYPOTHECATED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE 1933 ACT COVERING SUCH SECURITIES OR IF THE
COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE
SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT
SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM
THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE 1933
ACT."
and (iii) the Company will instruct any transfer agent not to register the
transfer of any of the Shares unless the conditions specified in the foregoing
legend are satisfied; provided, however, that no such opinion of counsel shall
be necessary if the sale, transfer or assignment is made pursuant to SEC Rule
144 and the Investor provides the Company with evidence reasonably satisfactory
to the Company and its counsel that the proposed transaction satisfies the
requirements of Rule 144. The Company agrees to remove the foregoing legend from
any securities if the requirements of SEC Rule 144(k) (or any successor rule or
regulation) apply with respect to such securities and the Company and its
counsel are provided with reasonably satisfactory evidence that the requirements
of Rule 144(k) apply.
(c) Investor has not been offered the Shares by any form of
advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio, or
any seminar or meeting whose attendees have been invited by such media.
(d) Investor acknowledges that it is able to fend for
itself, can bear the economic risk of its investment and has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of acquisition of the Shares and of making an informed
investment decision with respect thereto.
(e) Investor's principal place of business or address is as
set forth on the signature page hereto, and, if it is an individual, it does not
reside in any state of the United States other than the state, if any, specified
in its address on the signature page.
(f) Investor acknowledges that an investment in the Shares
is speculative and involves a high degree of risk of loss of all or part of
Investor's investment therein.
(g) Investor understands that the foregoing representations
and warranties are to be relied upon by the Company as a basis for exemption of
the sale of the Shares under the Securities Act, under the securities laws of
all applicable states and for other purposes. In the event any of such
representations and warranties become inaccurate or untrue prior to the Closing,
the Investor will promptly notify the Company.
(h) Investor was not formed for the specific purpose of
acquiring the Shares.
6
<PAGE> 8
3.5 FURTHER REPRESENTATIONS BY FOREIGN INVESTORS. If Investor is
not a U.S. person or entity such Investor hereby represents that it is satisfied
as to the full observance of the laws of such Investor's jurisdiction in
connection with the purchase of the Shares or any use of this Agreement,
including (i) the legal requirements with such Investor's jurisdiction for the
purchase of the Shares, (ii) any foreign exchange restrictions applicable to
such purchase, (iii) any governmental or other consents that may need to be
obtained, and (iv) the income tax and other tax consequences, if any, which may
be relevant to the purchase, holding, redemption, sale, or transfer of the
Shares. Such Investor's purchase of and payment for, and such Investor's
continued beneficial ownership of, the Shares will not violate any applicable
securities or other laws of such Investor's jurisdiction.
4. CONDITIONS OF THE INVESTORS' OBLIGATIONS AT CLOSING.
The obligations of Investors under subsection 1.1 of this Agreement are
subject to the fulfillment on or before the Closing of each of the following
conditions, the waiver of which shall not be effective against Investors unless
consented to by Investors in writing thereto:
4.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in Section 2 shall be true and correct in
all material respects on and as of the Closing, except those representations and
warranties qualified by materiality, which shall be true and correct in all
respects, with the same force and effect as though such representations and
warranties had been made on and as of the Closing.
4.2 PERFORMANCE OF OBLIGATIONS. The Company shall have performed
and complied in all material respects with all agreements, obligations and
conditions contained herein that are required to be performed or complied with
by it on or prior to the Closing.
4.3 COMPLIANCE CERTIFICATE. The Company shall deliver to
Investors at the Closing a Certificate, executed by the President of the
Company, certifying that the conditions specified in subsections 4.1 and 4.2
have been fulfilled.
4.4 QUALIFICATIONS. All authorizations, approvals, or permits, if
any, of any governmental authority or regulatory body of the United States, of
any state or any foreign country that are required in connection with the lawful
sale and issuance of the Shares pursuant to this Agreement shall have been duly
obtained and shall be effective on and as of the Closing. No stop order or other
order enjoining the sale of the Shares shall have been issued and no proceedings
for such purpose shall be pending or, to the knowledge of the Company,
threatened by the SEC, the California Commissioner of Corporations, or any
commissioner of corporations or similar officer of any other state or foreign
country having jurisdiction over this transaction. At the time of the Closing,
the sale and issuance of the Shares shall be legally permitted by all laws and
regulations to which Investor and the Company are subject.
4.5 PROCEEDINGS AND DOCUMENTS. All corporate and other
proceedings in connection with the transactions contemplated at the Closing and
all documents and instruments incident thereto shall be reasonably satisfactory
in form and substance to Investor, which shall have received all such
counterpart original and certified or other copies of such documents as it may
reasonably request.
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<PAGE> 9
5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING.
The obligations of the Company to Investors under this Agreement are
subject to the fulfillment, on or before the Closing, of each of the following
conditions by Investor:
5.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Investors contained in Section 3 hereof shall be true and correct
in all material respects on and as of the Closing, except those representations
and warranties qualified by materiality, which shall be true and correct in all
respects, with the same force and effect as though such representations and
warranties had been made on and as of the Closing.
5.2 QUALIFICATIONS. All authorizations, approvals, or permits, if
any, of any governmental authority or regulatory body of the United States, of
any state or any foreign country that are required in connection with the lawful
sale and issuance of the Shares pursuant to this Agreement shall have been duly
obtained and shall be effective on and as of the Closing. No stop order or other
order enjoining the sale of the Shares shall have been issued and no proceedings
for such purpose shall be pending or, to the knowledge of the Company,
threatened by the SEC, the California Commissioner of Corporations, or any
commissioner of corporations or similar officer of any other state or foreign
country having jurisdiction over this transaction. At the time of the Closing,
the sale and issuance of the Shares shall be legally permitted by all laws and
regulations to which Investor and the Company are subject.
5.3 PERFORMANCE. All covenants, agreements and conditions
contained in this Agreement to be performed by Investors on or prior to the
Closing shall have been performed or complied with in all material respects.
6. REGISTRATION RIGHTS.
The Company hereby grants to each of the Investors the registration
rights set forth in this Section 6 with respect to the Registrable Shares (as
hereinafter defined) owned by such Investors. The Company and the Investors
agree that the registration rights provided herein set forth the sole and entire
agreement on the subject matter between the Company and the Investors.
6.1 DEFINITIONS.
(a) The terms "register," "registered," and "registration"
refer to a registration effected by filing with SEC a registration statement
(the "Registration Statement") in compliance with the Securities Act, and the
declaration or ordering by the SEC of the effectiveness of such Registration
Statement.
(b) The term "Registrable Shares" means the Shares issued to
the Investors pursuant to this Agreement and any Common Stock of the Company
issued as (or issuable upon the conversion or exercise of any warrant, right, or
other security that is issued as) a dividend or other distribution with respect
to, or in exchange or in replacement of, such Registrable Shares. In the event
of any recapitalization by the Company, whether by stock split, reverse stock
split, stock dividend or the like, the number of shares of Registrable Shares
used throughout this Agreement for various purposes shall be proportionately
increased or decreased, provided, however, that any such security shall cease to
be a Registrable Share at such time as it is publicly saleable without
restriction, pursuant to Rule 144(k) of the SEC, or otherwise.
8
<PAGE> 10
6.2 REGISTRATION OBLIGATION. The Company shall, after the
Closing, (i) use its best efforts to effect a registration under the Securities
Act with respect to all of the Registrable Shares as will permit or facilitate
the sale and distribution of the Registrable Shares, (ii) use its best efforts
to cause such registration to become effective within ninety (90) days after the
Closing and (iii) use its best efforts to cause such registration to remain
effective until the earlier to occur of the date (A) the Registrable Shares
covered thereby have been sold, or (B) the Investors are able to use Rule 144 of
the Securities Act to sell the Shares without restriction.
6.3 REGISTRATION PROCEDURES. When the Company effects the
registration of the Registrable Shares under the Securities Act pursuant to
Sections 6.2 hereof, the Company will, at its expense, as expeditiously and as
reasonably possible, use its reasonable best efforts, to:
(a) In accordance with the Securities Act and the rules and
regulations of the SEC, prepare and file with the SEC a Registration Statement
with respect to such securities and use its best efforts to cause such
Registration Statement to become and remain effective for the period described
in Sections 6.2, and prepare and file with the SEC such amendments to such
Registration Statement and supplements to the prospectus contained therein as
may be necessary to keep such Registration Statement effective for such period
and such Registration Statement and prospectus accurate and complete for such
period;
(b) Furnish to Investors such reasonable number of copies of
the Registration Statement, preliminary prospectus, final prospectus and such
other documents as Investor may reasonably request in order to facilitate the
public offering of such securities;
(c) Use its best efforts to register or qualify the
securities covered by such Registration Statement under such state securities or
blue sky laws of such jurisdictions as Investor may reasonably request within
twenty (20) days following the original filing of such Registration Statement,
except that the Company shall not for any purpose be required to execute a
general consent to service of process or to qualify to do business as a foreign
corporation in any jurisdiction where it is not so qualified;
(d) Notify Investors, promptly after it shall receive notice
thereof, of the date and time when such Registration Statement and each
post-effective amendment thereto has become effective or a supplement to any
prospectus forming a part of such Registration Statement has been filed;
(e) Notify Investors promptly of any request by the SEC for
the amending or supplementing of such Registration Statement or prospectus or
for additional information;
(f) Notify Investors promptly if, at the time when a
prospectus relating to such securities is required to be delivered under the
Securities Act, any event has occurred as the result of which any such
prospectus or any other prospectus as then in effect would include an untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading and
prepare and promptly file with the SEC, and promptly notify Investors of the
filing of, such amendments or supplements to such Registration Statement or
prospectus as may be necessary to correct such statements or omissions;
9
<PAGE> 11
(g) In case any Investor is required to deliver a prospectus
at a time when the prospectus then in circulation is not in compliance with the
Securities Act or the rules and regulations of the SEC, prepare promptly upon
request such amendments or supplements to such Registration Statement and such
prospectus as may be necessary in order for such prospectus to comply with the
requirements of the Securities Act and such rules and regulations;
(h) Advise Investors, promptly after it shall receive notice
or obtain knowledge thereof, of the issuance of any stop order by the SEC
suspending the effectiveness of such Registration Statement or the initiation or
threatening of any proceeding for that purpose and promptly use its best efforts
to prevent the issuance of any stop order or to obtain its withdrawal if such
stop order should be issued;
(i) Use its best efforts to obtain a comfort letter from the
Company's independent public accountants in customary form and covering such
matters of the type customarily covered by comfort letters with respect to
offerings of such type as the Investors may reasonably request; and
(j) Cause all such securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed, provided that the applicable listing requirements are satisfied.
6.4 EXPENSES. With respect to the registration effected pursuant
to Section 6.2 hereof, the Company agrees to bear all fees, costs and expenses
of and incidental to such registration and the public offering in connection
therewith, provided however, that Investors shall bear all underwriting
discounts and commissions, state transfer taxes and brokerage commissions. The
fees, costs and expenses of registration to be borne by the Company as provided
in this Section 6.4 shall include, without limitation, all registration, filing
and NASD fees, printing expenses, fees and disbursements of counsel and
accountants for the Company, and all legal fees and disbursements and other
expenses of complying with state securities or blue sky laws of any
jurisdictions in which the securities to be offered are to be registered or
qualified.
6.5 INDEMNIFICATION.
(a) The Company will, and does hereby undertake to,
indemnify and hold harmless each Investor, each of such Investor's officers,
directors, partners and agents, and each person controlling such Investor, with
respect to any registration, qualification, or compliance effected pursuant to
this Section 6, and each underwriter, if any, and each person who controls
within the meaning of Section 15 of the Securities Act any underwriter, of the
Registrable Shares held by or issuable to such Investor, against all claims,
losses, damages, and liabilities (or actions in respect thereto) to which they
may become subject under the Securities Act, the Exchange Act, or other federal
or state law arising out of or based on (i) any untrue statement (or alleged
untrue statement) of a material fact contained in any prospectus, offering
circular, or other similar document (including any related Registration
Statement, notification, or the like) incident to any such registration,
qualification, or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, or (ii) any violation or alleged
violation by the Company of any federal, state or common law rule or regulation
applicable to the Company in connection with any such registration,
qualification, or compliance, and will reimburse, as incurred, each Investor,
each underwriter, and each director, officer, partner, agent and controlling
person, for any legal and any other expenses reasonably
10
<PAGE> 12
incurred in connection with investigating or defending any such claim, loss,
damage, liability, or action; provided that the Company will not be liable in
any such case to the extent that any such claim, loss, damage, liability or
expense, arises out of or is based on any untrue statement or omission based
upon written information furnished to the Company by an instrument duly executed
by any of the Investors or underwriter and stated to be specifically for use
therein.
(b) Each Investor will, if Registrable Shares held by or
issuable to such Investor are included in such registration, qualification, or
compliance, severally and not jointly, indemnify the Company, each of its
directors, officers, legal counsel and accountants and each underwriter, if any,
of the Company's securities covered by such Registration Statement, each person
controlling the Company or such underwriter, within the meaning of Section 15 of
the Securities Act, against all claims, losses, damages, and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any such Registration
Statement, prospectus, offering circular, or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse,
as incurred, the Company, and each such underwriter or other person, for any
legal or any other expenses reasonably incurred in connection with investigating
or defending any such claim, loss, damage, liability, or action, in each case to
the extent, but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) was made in such
Registration Statement, prospectus, offering circular, or other document, in
reliance upon and in conformity with written information furnished to the
Company by an instrument duly executed by such Investor and stated to be
specifically for use therein; provided, however, that the liability of each such
Investor hereunder shall be limited to the gross proceeds received by such
Investor from the sale of securities under such Registration Statement. In no
event will any Investor be required to enter into any agreement or undertaking
in connection with any registration under this Section 6 providing for any
indemnification or contribution obligations on the part of such Investor greater
than such Investor's obligations under this Section 6.
(c) Promptly after receipt by a party indemnified pursuant
to the provisions of paragraph (a) or (b) of this Section 6.5 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions, such indemnified party shall, if a claim thereof is to be
made against the indemnifying party pursuant to the provisions of such Sections
6.5(a) or 6.5(b), notify the indemnifying party of the commencement thereof;
provided, however, that the failure to so notify the indemnifying party shall
not relieve the indemnifying party from any liability which it may have to the
indemnified party otherwise than hereunder unless the failure to give such
notice is materially prejudicial to the indemnifying party's ability to defend
such action. In case such action is brought against any indemnified party and it
notifies the indemnifying party of the commencement thereof, the indemnifying
party shall have the right to participate in, and to the extent that it may
wish, jointly assume the defense thereof, with counsel reasonably satisfactory
to such indemnified party, and after notice from the indemnifying party to such
indemnified party of its election to so assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party pursuant to the
provisions of Section 6.5(a) or 6.5(b) for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation (except if representation
of such indemnified party by counsel to the indemnifying party would be
inappropriate due to actual or potential conflicting interests between the
indemnified party and any other party represented by such counsel). No
indemnifying party shall be liable to an indemnified party for any settlement of
any action or claim without the consent of the indemnifying party.
11
<PAGE> 13
6.6 REPORTING REQUIREMENTS UNDER THE EXCHANGE ACT. The Company
shall timely file such information, documents and reports as the SEC may require
or prescribe under Section 13 or 15(d) of the Exchange Act. The Company
acknowledges and agrees that the purposes of the requirements contained in this
Section 6.6 are to enable Investors to comply with the current public
information requirement contained in paragraph (c) of Rule 144 should any
Investor ever wish to dispose of any of the Registrable Shares without
registration under the Securities Act in reliance upon Rule 144 (or any other
similar exemptive provision).
6.7 INVESTOR INFORMATION. The Company may require Investors to
furnish the Company such information with respect to Investors and the
distribution of the Registrable Shares as the Company may from time to time
reasonably request in writing as shall be required by law or by the SEC in
connection therewith.
6.8 TRANSFER OF REGISTRATION RIGHTS. The registration rights of
the Investors under this Agreement may be transferred (i) in the case of an
individual, to any member of the immediate family of such individual or to any
trust for the benefit of the individual or any such family member or members,
(ii) to any partner or affiliate of such Investor, (iii) to any transferee
provided (1) that the transferee receives the lesser of (A) at least 200,000
Registrable Shares (as constituted on the date hereof) or (B) all of the
Registrable Shares held by such Investor; (2) the transferee is bound by the
terms of this Agreement; and (3) the Company is given written notice prior to
such transfer. Notwithstanding the foregoing, the registration rights of
Investors under this Agreement may not be transferred to an entity, or a person
controlled by, under common control with or controlling such entity, which is a
direct competitor of the Company.
7. MISCELLANEOUS.
7.1 ENTIRE AGREEMENT. This Agreement, the Schedules hereto, and
the documents referred to herein constitute the full and entire understanding
and agreement between the parties and no party shall be liable or bound to any
to any other party in any manner by any warranties, representations or covenants
except as specifically set forth herein or therein.
7.2 SURVIVAL OF WARRANTIES. Unless otherwise set forth in this
Agreement, the warranties, representations and agreements of the Company and
Investors contained herein shall survive the execution and delivery of this
Agreement and the Closing and shall in no way be affected by any investigation
of the subject matter thereof made by or on behalf of Investors or the Company.
7.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly
provided herein, the terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the respective successors and assigns of the
parties (including permitted transferees of any Shares sold hereunder). Nothing
in this Agreement, express or implied, is intended to confer upon any party
other than the parties hereto or their respective successors and assigns any
rights, remedies, obligations or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement.
7.4 GOVERNING LAW; JURISDICTION AND VENUE; ATTORNEY'S FEES. This
Agreement and all acts and transactions pursuant hereto and the rights and
obligations of the parties hereto shall be governed by and construed under the
laws of the State of Washington without reference to principles of conflicts of
laws. The parties hereby consent and agree that the United States District Court
for the Western District of Washington will have exclusive jurisdiction over any
12
<PAGE> 14
legal action or proceeding arising out of or relating to this Agreement, and
each party consents to the in personam jurisdiction of such courts for the
purpose of any such action or proceeding and agrees that venue is proper in such
courts. If any action at law or in equity is necessary to enforce or interpret
the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorney's and expert witness fees, costs and necessary disbursements
in addition to any other relief to which such party may be entitled.
7.5 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
7.6 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
7.7 NOTICES. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery, delivery by nationally recognized
overnight courier or five days after deposit with the United States Post Office,
by registered or certified mail, postage prepaid and addressed to the party to
be notified at the address indicated for such party on the signature page
hereto, or at such address as such party may designate by ten days advance
written notice to the other party.
7.8 FINDERS' FEES. Each Investor agrees to indemnify and to hold
harmless the Company from any liability for any commission or compensation in
the nature of a finders' fee to any broker or other person or firm (and the
costs and expenses of defending against such liability or asserted liability)
for which such Investor or any of its officers, partners, employees or
representatives is responsible. The Company agrees to indemnify and hold
harmless Investors from any liability for any commission or compensation in the
nature of a finders' fee to any broker or other person or firm (and the costs
and expenses of defending against such liability or asserted liability) for
which the Company or any of its officers, employees or representatives is
responsible.
7.9 EXPENSES. Irrespective of whether the Closing are effected,
the Company and each Investor shall each pay all costs and expenses that it
incurs with respect to the negotiation, execution, delivery and performance of
this Agreement.
7.10 AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and Investors
holding a majority of the Shares purchased hereunder. Any amendment or waiver
effected in accordance with this paragraph shall be binding upon all the
Investors and the securities purchased under this Agreement at the time
outstanding (including securities into which such securities have been
converted), each future holder of all such securities and the Company.
7.11 SEVERABILITY. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and the balance of the
Agreement shall be enforceable in accordance with its terms.
7.12 INFORMATION CONFIDENTIAL. Each Investor acknowledges that
the information received by it pursuant hereto is confidential and for such
Investor's use only, and it will refrain from
13
<PAGE> 15
using such information or reproducing, disclosing, or disseminating such
information to any other person (other than its employees, affiliates, agents,
or partners having a need to know the contents of such information and its
attorneys), except in connection with the exercise of rights under this
Agreement, unless the Company has made such information available to the public
generally or it is required by a governmental body to disclose such information.
14
<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
Address: EPOCH PHARMACEUTICALS, INC.
12277 134th Court NE, #110 By: /s/ William G. Gerber
Redmond, Washington 98052 William G. Gerber,
Chief Executive Officer
Address: LONE CYPRESS, LTD
Two Greenwich Plaza By: /s/ Stephen F. Mandel, Jr.
Greenwich, Connecticut 06830 Stephen F. Mandel, Jr.,
Managing Member
Address: LONE SEQUOIA, LP
Two Greenwich Plaza By: /s/ Stephen F. Mandel, Jr.
Greenwich, Connecticut 06830 Stephen F. Mandel, Jr.,
Managing Member
Address: LONE BALSAM, LP
Two Greenwich Plaza By: /s/ Stephen F. Mandel, Jr.
Greenwich, Connecticut 06830 Stephen F. Mandel, Jr.,
Managing Member
Address: LONE SPRUCE, LP
Two Greenwich Plaza By: /s/ Stephen F. Mandel, Jr.
Greenwich, Connecticut 06830 Stephen F. Mandel, Jr.,
Managing Member
<PAGE> 17
AMERINDO TECHNOLOGY GROWTH FUND II, INC.
Address:
399 Park Avenue, 22nd Floor By:________________________________
New York, New York 10022 ________________,
________________
Address: GOLDMAN SACHS PERFORMANCE PARTNERS
(OFFSHORE), L.P.
c/o Commodities Corporation, LLC By: /s/ Karen M. Judge
701 Mt. Lucas Road Karen M. Judge,
Princeton, New Jersey 08540 Vice President
Address: GOLDMAN SACHS PERFORMANCE PARTNERS, L.P.
c/o Commodities Corporation, LLC By: /s/ Karen M. Judge
701 Mt. Lucas Road Karen M. Judge,
Princeton, New Jersey 08540 Vice President
Address: AMERICAN MASTERS FUND, "HILSPEN SERIES"
c/o Hilspen Capital Management, LLC By: /s/ Robert Duich
330 Primrose Road, Suite 312 Robert Duich,
Burlingame, California 94010 Chief Operating Officer
Address: HILSPEN CAPITAL PARTNERS I, L.P.
c/o Hilspen Capital Management, LLC By: /s/ Robert Duich
330 Primrose Road, Suite 312 Robert Duich,
Burlingame, California 94010 Chief Operating Officer
2
<PAGE> 18
HILSPEN CAPITAL PARTNERS II, L.P.
Address:
c/o Hilspen Capital Management, LLC By: /s/ Robert Duich
330 Primrose Road, Suite 330 Robert Duich,
Burlingame, California 94010 Chief Operating Officer
Address: ORACLE PARTNERS, L.P.
712 Fifth Avenue, 45th Floor By: /s/ Daniel McLorin
New York, New York 10019 Daniel McLorin,
Chief Financial Officer
Address: MERLIN BIOMED INTERNATIONAL
237 Park Avenue, Suite 801 By: /s/ Norman Schleifer
New York, New York 10017 Norman Schleifer,
Chief Financial Officer
Address: PHARMAWEALTH
c/o Merlin BioMed L.P. By: /s/ Norman Schleifer
237 Park Avenue, Suite 801 Norman Schleifer,
New York, New York 10017 Chief Financial Officer
Address: NARRAGANSETT I, L.P.
375 Park Avenue, Suite 1404 By: /s/ Joseph L. Darling
New York, New York 10152 Joseph L. Darling
Address: NARRAGANSETT OFFSHORE, LTD.
375 Park Avenue, Suite 1404 By: /s/ Joseph L. Darling
New York, New York 10152 Joseph L. Darling
3
<PAGE> 19
Address: PENSCO PENSION SERVICES
F/B/O LAWRENCE A. MITCHELL IRA
250 Montgomery Street, Suite 350 By: /s/ Bob Hoff
San Francisco, California 94104
Address: CARL S. GOLDFISCHER, M.D.
161 West 61st Street By: /s/ Carl S. Goldfischer, MD
New York, New York 10023
Address: SETH HARRISON
124 West 18th Street, Apt. 7 By: /s/ Seth Harrison
New York, New York 10011
Address: RICHARD POPS
c/o Alkermes By: /s/ Richard Pops
64 Sidney Street
Cambridge, Massachusettes 02139
U. Vollenweider URSULA VOLLENWEIDER
CH. Marochon
1272 Genolier
Switzerland
By: /s/ Ursula Vollenweider
P.O. Box 53
Route de la Cezille
1272 Genolier
Switzerland
4
<PAGE> 1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Epoch Pharmaceuticals, Inc.:
We consent to incorporation by reference in the registration statement No.
33-66742 on Form S-3 and No. 33-73074 on Form S-8 of Epoch Pharmaceuticals, Inc.
of our report dated March 14, 2000, relating to the balance sheet of Epoch
Pharmaceuticals, Inc. as of December 31, 1999, and related statements of
operations, stockholders' equity (deficit) and cash flows for each of the years
in the two-year period ended December 31, 1999, which report appears in the
December 31, 1999 annual report on Form 10-KSB of Epoch Pharmaceuticals, Inc.
Seattle, Washington
March 29, 2000
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,772,274
<SECURITIES> 0
<RECEIVABLES> 20,073
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,826,535
<PP&E> 399,705
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,265,584
<CURRENT-LIABILITIES> 774,286
<BONDS> 0
0
0
<COMMON> 193,824
<OTHER-SE> (18,655)
<TOTAL-LIABILITY-AND-EQUITY> 2,265,584
<SALES> 0
<TOTAL-REVENUES> 181,094
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,960,170
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,042,947
<INCOME-PRETAX> (4,699,954)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,769,954)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,699,954)
<EPS-BASIC> (0.30)
<EPS-DILUTED> (0.30)
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