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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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 0-22170
_______________________________________________
EPOCH PHARMACEUTICALS, INC.
(Name of Small Business Issuer in its charter)
Delaware 91-1311592
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1725 220th Street, S.E., No. 104 Bothell, Washington 98021
(Address of principal executive offices) (Zip Code)
(206) 485-8566
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Common Stock Purchase Warrants
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports); and (2) has been subject to such filing requirements for the
past 90 days. YES [X] NO [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB [ ].
Issuer's revenues for its most recent fiscal year were $37,029
As of February 4, 1997, 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 $11,508,871.
14,731,356 shares of Common Stock were outstanding at February 4, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
None
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INTRODUCTORY NOTE
This Annual Report on Form 10-KSB contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and the Registrant intends
that such forward-looking statements be subject to the safe harbors created
thereby. These forward-looking statements relate primarily to (i) the
development of the Registrant's technology, and (ii) the need for, and
availability of, additional financing.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. These
forward-looking statements are based on assumptions that the Registrant will be
able to obtain sufficient financing to continue operations, that the
Registrant's technology will continue to be developed, and will not be replaced
by new technology, that Registrant will retain key technical and management
personnel, and that there will be no material adverse change in the
Registrant's operations or business. Assumptions relating to the foregoing
involve judgments with respect to, among other things, future technology,
economic, competitive and market conditions, and future business decisions, all
of which are difficult or impossible to predict accurately and many of which
are beyond the control of the Registrant. Although the Registrant believes
that the assumptions underlying the forward-looking statements are reasonable,
any of the assumptions could prove inaccurate and, therefore, there can be no
assurance that the results contemplated in forward-looking statements will be
realized. In addition, the business and operations of the Registrant are
subject to substantial risks which increase the uncertainty inherent in such
forward-looking statements. In light of the significant uncertainties inherent
in the forward-looking information included herein, the inclusion of such
information should not be regarded as a representation by the Registrant or any
other person that the objectives or plans of the Registrant will be achieved.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Epoch Pharmaceuticals, Inc. ("Epoch" or the "Company") (formerly
MicroProbe Corporation) is a biomedical company focused on the development of
oligonucleotides (short chains of nucleotides which are the building blocks of
DNA and RNA) as new therapeutic compounds. Utilizing unique and proprietary
technology in the rational design, synthesis and chemical modification of
oligonucleotides, the Company is developing a gene-therapy approach to
inactivate or reverse mutate disease associated genes. The Company was
incorporated in Delaware on August 14, 1985.
CORPORATE NAME CHANGE
The right to use the name "MicroProbe" was included in the assets
purchased by Becton Dickinson and Company, a New Jersey corporation, through
its Becton Dickinson Diagnostic Instrument Systems Division (collectively,
"Becton"). See "Disposition of Diagnostic Assets." It is believed that the
name "Epoch Pharmaceuticals, Inc." appropriately identifies the scope of the
continuing business of the Company, and the shareholders approved the name
change at a special meeting on November 27, 1995, and it was effective on
December 4, 1995.
BACKGROUND
The Company's current therapeutic research and development program is
focused on the modification of gene expression by altering cellular genomic DNA
using oligonucleotide targeting technology combined with chemical reactivity.
The Company's technology is based on its expertise in designing and
synthesizing oligonucleotides bearing modifications that selectively bind to
and interact with the target genes. The Company is currently applying this
novel method of gene therapy to the treatment of certain autoimmune diseases,
viral infections and cancers.
The development of gene modifying oligonucleotides (GMO's) as
pharmaceuticals has been limited by two factors. First, DNA-targeted
oligonucleotides under development by others are, the Company believes, capable
of recognizing and binding to only two of the four bases of the genetic code.
The target sequence therefore must contain only G or A in one of its two
strands, which greatly limits the number of potential target sites. Second,
the triple-stranded complex ("triplex") formed by those oligonucleotides with
DNA lacks the required stability to affect DNA function for the length of time
necessary for therapeutic effectiveness.
The Company's oligonucleotide technology has led to proprietary
advances which it believes can overcome these limitations. By incorporating
these technological advances in the Company's GMO approach, oligonucleotides
can form highly stable three-stranded complexes with DNA base pair sequences
containing any of the four bases of the genetic code. This enables selectively
targeting regions of genomic DNA known to be disease related.
Oligonucleotides are well suited for development as pharmaceuticals
because they can be designed to bind selectively to and inhibit or inactivate,
specific sequences in DNA and RNA, or to the
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proteins they produce. The Company's expertise in the chemistry, design and
synthesis of oligonucleotides forms the basis of the Company's research and
development activities for therapeutic products.
RESEARCH AND DEVELOPMENT
Epoch's current therapeutic research and development program is
focused on the modification of gene expression by altering cellular genomic DNA
using oligonucleotide targeting technology combined with chemical reactivity.
The Company's technology is based on its expertise in designing and
synthesizing oligonucleotides bearing modifications that selectively bind to
and interact with the target genes. The Company is currently applying this
novel method of gene therapy to the treatment of certain autoimmune diseases,
viral infections and cancers.
Pharmaceutical compounds can be developed from oligonucleotides
designed to act at different points in the process of gene expression.
Oligonucleotides may regulate the expression of targeted genes in two ways, at
the mRNA or DNA level. Whereas "antisense" oligonucleotides act against
messenger RNA and are transient, the Company's gene modifying oligonucleotides
("GMOs") could act directly and more permanently on the genetic code itself at
the DNA level.
Epoch's GMOs form sequence-specific three-stranded complexes with the
genetic double-stranded DNA in order to alter its function. This alteration
of function is due to mutations in the gene at the targeted site induced by the
reactive function of the GMO. Because the DNA sequences of many
disease-associated genes are known, the Company believes that it may be able to
treat these diseases by rationally designing and synthesizing GMO's capable of
altering the chosen sequence of the targeted gene. Depending on the desired
effect, the mutation may be designed so as to eliminate the expression of a
disease-associated gene, or to correct a genetic defect.
Oligonucleotide-based gene modification technology potentially
represents a significant advance over other therapeutic approaches. While
traditional drugs generally act on the millions of proteins generated from mRNA
and antisense drugs are designed to act on the thousands of mRNA molecules
generated from a gene, GMOs act directly against the gene. In contrast to
certain antibiotics that also act directly on DNA, GMOs can be targeted by
design to act only on DNA sequences which are disease-related.
Technological Advances
The Company's oligonucleotide technology has led to proprietary
advances which it believes can overcome the current limitations on developing
gene modifying oligonucleotides as pharmaceuticals.
The first of these advances is enzyme mediated complexing
(triplexing) of the oligonucleotide drug with both DNA strands. Under natural
cellular conditions, such as the process of repairing certain damaged DNA, an
enzyme (or a member of a family of enzymes) called recombinase promotes the
sequence-specific binding of single-stranded DNA with double-stranded DNA to
form a three-stranded complex. In the presence of this recombinase, a single
stranded GMO whose sequence can contain all DNA bases can recognize and bind to
its exact complement in the double stranded DNA of a gene, in a rapid and
sequence-specific fashion. Many of the oligonucleotide drugs under
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investigation by others contain chemical modifications to the backbone of the
oligonucleotide which, the Company believes, results in the inability of such
oligonucleotide to take advantage of recombinase promoted association with
double-stranded DNA. By using its proprietary technology, Epoch is able to
design and synthesize sufficiently stable gene modifying oligonucleotides with
non-modified backbones, resulting, the Company believes, in the ability to
interact with naturally occurring recombinase to rapidly form triple-stranded
complexes involving all four DNA bases.
The second of these two advances is the crosslinking of the
oligonucleotide to the double-stranded DNA after the recombinase-promoted
sequence recognition and complexing has occurred. Crosslinking "freezes" this
complex and covalently modifies the targeted gene. By using its proprietary
technology, the Company adds a reactive site to its oligonucleotides which,
when properly aligned in a three-stranded DNA/oligonucleotide complex, forms a
chemically stable (covalent) linkage with a targeted reactive site on the
target DNA. The effect of this reaction will vary by design. Certain
modifications will induce the cell to make errors when it attempts to repair
the lesion. The Company believes that this will irreversibly inactivate the
gene by mutation. Alternatively, rational design of the chemical modification
can, the Company believes, give a targeted change of a single base pair in a
gene at the site of a genetic defect, providing correction of certain of those
genetic defects.
Epoch Pharmaceuticals has refined these crosslinkers so that, in in
vitro studies, crosslinking occurs rapidly and efficiently in systems as
complex as the entire human genome. To enhance the effectiveness of this
technology, the Company believes that by using multiple crosslinkers on a
single oligonucleotide, both DNA strands of the target gene will be
irreversibly bound and the efficiency of inactivation by mutation, hence the
therapeutic effect, will be very high. Alternatively, this binding process may
directly inactivate the gene, halting the expression of disease-associated
proteins. In addition to the pivotal role that the Company's proprietary
crosslinking chemistry plays in the Company's 4-letter targeting technology, it
is also applicable to 2-letter, or triplex, DNA targeting.
The Company believes it was the first to demonstrate the successful
targeting and chemical reaction of an oligonucleotide with both strands of a
double-stranded DNA sequence. It believes that it was the first to show highly
specific targeting and chemical modification of a sequence containing all 4
genetic code letters on a double stranded DNA target, including genomic DNA.
It furthermore believes it has been the first to show covalent modification of
a targeted native gene in living cells.
The Company is currently developing the use of GMOs in a collaborative
drug development program with the Virginia Mason Research Center ("VMRC"),
Seattle, WA. This program will apply GMO technology to type I diabetes and
other autoimmune diseases. VMRC has discovered a gene that indicates
predisposition to type I diabetes, and the Company and its collaborators
believe that inhibition or alteration of the expression of that gene will
attenuate the immunologic response causing the diabetes. Epoch and its
collaborators believe that treatment of blood stem cells with this GMO
treatment, followed by reintroduction of those cells into the patient, will
sufficiently alter the patient's immune response to affect a treatment. If
successful, as to which there can be no assurance, the resultant technology may
have broad application in a wide number of diseases, especially chronic viral
diseases, cancer, and other autoimmune diseases, such as rheumatoid arthritis.
The Company is in the early development stages of its GMO technology
and substantial additional research and development efforts will be required to
develop effective therapeutics,
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including research and development in the area of drug delivery. There can be
no assurance, however, that the Company will be able to successfully
commercialize its GMO technology.
The Company had previously developed lead compounds in two classes of
protein blockers, one for inhibition of human immunodeficiency virus
replication, and the other for potential treatment of certain types of cancers.
Due to limited financial resources, the Company has deferred the substantial
additional research and development that these compounds require.
DISPOSITION OF DIAGNOSTIC ASSETS
In November 1995, pursuant to the terms of an Asset Purchase
Agreement, dated as of September 29, 1995 (the "Asset Purchase Agreement"), the
Company sold substantially all of its assets associated with its diagnostics
division (the "Assets") to Becton. The Assets related to the Company's
development, marketing and sale of diagnostic products which involve the use of
nucleic acid probes to detect and identify microorganisms in biological samples
under the names "Affirm(R) VP," "Affirm(R) VPIII," "Affirm(R) DP,"
"Hybriquick(R)" and "Isoquick(R)" (collectively, the "Business"). The Assets
included: tangible personal property, interests in certain contracts and other
instruments, rights in permits and licenses, raw materials and inventory,
technology, trade secrets, patents, other intellectual property (including the
name "MicroProbe"), rights in customer lists, records and data, computer
software, programs, goodwill and causes of action held by the Company against
third parties. The aggregate purchase price paid by Becton for the Assets and
for the Company's covenant not to compete with Becton for a period of five
years was $8,510,000. The purchase price is subject to an upward adjustment of
$1,500,000 contingent on the occurrence of certain events which the Company
does not expect to occur.
The Assets which the Company sold to Becton relate to the Company's
diagnostics division and products described below.
Epoch's Diagnostic Technology and Products
Oligonucleotides used as diagnostic tools for identification of RNA
and DNA sequences are called probes. The probe molecule is designed to be
complementary to a unique sequence of bases in the DNA or RNA of the target
microorganism. Recognition of and binding to that sequence indicates the
presence of the microorganism.
The Company had developed an inexpensive, rapid, automated DNA
probe-based system which is "user-friendly," enabling it to make available the
advantages of DNA probe-based testing in the physician's or dentist's office or
other alternate care site, in addition to the hospital or reference laboratory.
This system, the inventory and equipment related thereto and the underlying
technology constitute substantially all of the assets transferred to Becton
pursuant to the Asset Purchase Agreement. The Affirm System consists of a
small, easy-to-use instrument, and a reagent kit containing Probe Analysis
Cards ("PAC"), which include the DNA probes, a sample-collection device and
reagents. Using microorganism-specific probes attached to beads in the PAC,
the Affirm System is used to detect and identify multiple microorganisms from a
single specimen. The beads embedded into the PAC include a negative
(specificity) control and positive (procedural) control bead.
The Company's first DNA probe diagnostic product, the Affirm VP
System, was introduced in September 1992 and was used to detect and identify
Trichomonas vaginalis and Gardnerella
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vaginalis in vaginal samples for use as an adjunct to clinical evaluation for
differentiating trichomoniasis and bacterial vaginosis. In June 1993, the
Company received a 510(k) FDA clearance for its Affirm VP III System, which
added a test for Candida species and replaced the Affirm VP System. However,
in May 1994, the Company announced its intentions to withdraw its Affirm VP
line of products from the market.
The Company also had developed an Affirm System (the "Affirm DP") for
the dental market. The Affirm DP is used for the detection and identification
of bacteria associated with periodontal (gum) disease. The test is designed to
identify bacteria from infected sites that may be in the early stage of
deterioration, as well as from sites that are far into the destructive cycle.
Currently, these diagnoses are made by clinical measurements including
subgingival pocket depth, bleeding on probing, attachment loss and bone loss as
indicated by X-ray examination.
In October 1993, the Company entered into an agreement with Procter &
Gamble ("P&G"). Under the agreement P&G paid a fee for an option to obtain an
exclusive, ten year license to sell the Company's dental diagnostic products in
the U.S. and Canada. However, all of the assets related to the dental
diagnostic products were subsequently transferred to Becton pursuant to the
Asset Purchase Agreement, and on November 28, 1995, by mutual consent of P&G
and the Company, the October 1993 agreement was terminated and neither party,
the Company or P&G, has any rights or obligations thereunder. The Company
returned to P&G $480,000 in November 1995, which had been held by the Company
and recorded as deferred income.
Under the Asset Purchase Agreement, if P&G enters into a supply
agreement with Becton within seven years of the Closing and if P&G procures all
clearances from the United States Food and Drug Administration necessary for
the commercial sale of such products in the U.S., Becton will pay the Company
an additional $1,500,000.
The Company was awarded three Small Business Innovation research
("SBIR") grants, one of which is to be used to develop automated DNA probe
tests for HLA disease ("SBIR Grant 1"), one of which is to be used to develop a
DNA probe for the detection of oral spirochetes ("SBIR Grant 2") and one of
which is to be used to detect genetic and metabolic marking for antibiotic
resistance ("SBIR Grant 3"). Pursuant to the terms of the Asset Purchase
Agreement, Becton has granted exclusive, royalty-free licenses to the Company
to enable the Company to perform its obligations under SBIR Grant 1 and SBIR
Grant 2, and the Company shall transfer SBIR Grant 3 to Becton; provided,
however, that if Becton determines that Grant 3 cannot be transferred to Becton
or that such a transfer would render SBIR Grant 3 invalid or less valuable to
Becton than it would be if the Company retained SBIR Grant 3, Becton shall
grant the Company an exclusive, royalty-free license to enable the Company to
fulfill its obligations under SBIR Grant 3 and the Company shall assign to
Becton any and all intellectual property which the Company owns or acquires as
a result of performing its obligations under SBIR Grant 3.
In November 1996, the Company entered into an agreement with Saigene
Corporation (Saigene), whereby Epoch transferred its remaining diagnostic
technologies, including the SBIR grants, to Saigene for $1,100,000. The
$1,100,000 is in the form of an 8% note receivable with terms of $50,000 down
and $10,000 per month. The note is secured by the assets and technologies
transferred to Saigene in the agreement. The balance of the note is due March
31, 1997, or upon Saigene completing financing arrangements, whichever occurs
first.
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Due to the uncertainty of Saigene obtaining financing, the Company has
recorded as Gain on Disposal of Diagnostics Division only that portion of the
gain, $67,000, for which cash payments had been received at year end. The
Company does not anticipate receiving the balance of the note receivable when
due on March 31, 1997, and there is no assurance Saigene will obtain financing
to pay this debt.
SALES AND MARKETING
In May 1994, the Company discontinued sales and marketing of its
diagnostic products. The Company has no experience in marketing therapeutic
products. The Company anticipates that it will seek to enter collaborative
arrangements with pharmaceutical companies to market its therapeutic products.
To date, the Company has not entered into any collaborative arrangements for
any of its proposed therapeutic products and there can be no assurance that the
Company will be able to enter into any such arrangements on favorable terms or
at all.
MANUFACTURING
In connection with the introduction of its Affirm VP System in 1992,
Epoch established a manufacturing and assembly operation in the Company's
facility located in Bothell, Washington. The Company eliminated all of the
staffing of this operation as a part of the restructuring of its diagnostics
division in 1994 and many of the assets used in those operations were sold to
Becton in 1995. All instruments for the Affirm System were manufactured by
Source Scientific Systems, Inc.
The Company's current plan for operations is to enter collaborative
arrangements with pharmaceutical companies to manufacture its therapeutic
products.
RESEARCH AND DEVELOPMENT
The Company conducts the majority of its research and development
activities through its own staff and facilities. The Company has assembled a
scientific staff with a variety of complementary skills in a broad range of
advanced research technologies. As of December 31, 1996, the Company had 19
employees engaged in the research and development of its therapeutic
technologies. Of these 19 employees, 12 have Ph.D.'s and/or M.D.'s. The
Company's in-house research and development efforts are focused primarily on
the development of oligonucleotide therapeutics and reagent chemistries.
In addition to its in-house research programs, the Company
collaborates with academic and research institutions to support research in
areas of interest to the Company.
In October 1996, The National Institute of Arthritis and
Musculoskeletal and Skin Disease, of the National Institutes of Health, awarded
a four-year contract to Virginia Mason Research Center ("VMRC"), and the Company
as subcontractor, to develop and test a compound designed to inactivate a gene
which causes rheumatoid arthritis. The federal research award is for $1.2
million of which Epoch will receive $584,000 over the four year period.
Virginia Mason, with its expertise in arthritis, will partner with
Epoch, with its expertise in gene-modification, to develop novel therapeutic
compounds for the treatment of arthritis. Such
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compounds are expected to search the DNA structure to locate and attach to the
affected gene. Researchers then hope to turn off the genetic element which
causes the patient's immune system to attack cells in patients' joints,
resulting in rheumatoid arthritis.
Research and development expenses related to therapeutics amounted to
approximately $1,443,000 and $2,149,000 for the years ended December 31, 1995,
and 1996, respectively.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company has pursued a patent portfolio to protect its technology.
As of February 4, 1997, the Company had four issued U.S. patents and has
submitted 11 additional U.S. patent applications. There are international
patent applications corresponding to many of the U.S. patents and patent
applications. The issued patents and pending patent applications cover
inventions relating to the components of Epoch's core therapeutics technology.
An additional 18 U.S. patents and patent applications related exclusively to
diagnostic technology were transferred to Becton pursuant to the Asset Purchase
Agreement. Also, the rights to four provisional patent applications were
transferred to Saigene.
The therapeutics technology covered includes solid support synthesis
of oligonucleotides, crosslinking oligonucleotides, and oligonucleotides having
antiviral and anticancer activity. The Company's policy is to file patent
applications to protect technology, inventions and improvements that are
important to the development of its business. The Company also relies upon
trade secrets, know-how, continuing technological innovation and licensing
opportunities to develop and maintain its competitive position.
The patent position of biomedical companies, including Epoch, is
uncertain and may involve complex legal and factual issues. Consequently, the
Company does not know whether any of its patent applications will result in the
issuance of any further patents, or whether issued patents will provide
significant proprietary protection or will not be circumvented or invalidated.
Epoch cannot be certain that it was the first creator of inventions covered by
pending patent applications or that it was the first to file patent
applications for such inventions, largely because patent applications in the
U.S. are maintained in secrecy until patents issue, and because publications of
discoveries in the scientific or patent literature tend to lag behind actual
discoveries by several months. Moreover, the Company may have to participate
in interference proceedings declared by the U.S. Patent and Trademark Office to
determine the priority of inventions, which could result in substantial costs
to the Company. There can be no assurance that the Company's patent
applications will result in further issued patents or that such issued patents
will offer protection against competitors with similar technology.
Additionally, there can be no assurance that any manufacture, use or sale of
the Company's technology or products will not infringe on patents or
proprietary rights of others, and the Company may be unable to obtain licenses
or other rights to these other technologies that may be required for
commercialization of the Company's proposed products.
The Company requires its employees, consultants and advisors to
execute confidentiality agreements upon the commencement of an employment or
consulting relationship with the Company. Each agreement provides that all
confidential information developed or made known to the individual during the
course of the relationship will be kept confidential and not disclosed to third
parties except in specified circumstances. In the case of employees, the
agreements provide that all inventions
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conceived by an individual shall be the exclusive property of the Company,
other than inventions unrelated to the Company's business and developed
entirely on the employee's own time. There can be no assurance, however, that
these agreements will provide meaningful protection or adequate remedies for
misappropriation of the Company's trade secrets in the event of unauthorized
use or disclosure of such information.
COMPETITION
If successfully developed, the Company's therapeutic products will
compete with existing therapies for market share. In addition, a number of
companies are pursuing the development of gene therapy products, some of which
include oligonucleotide technology. The Company competes with fully integrated
pharmaceutical companies, most of which have more experience, financial and
other resources and superior expertise in research and development,
manufacturing, testing, obtaining regulatory approvals, marketing and
distribution. Smaller biotechnology companies may also prove to be significant
competitors, particularly through their collaborative arrangements with large
pharmaceutical companies or academic institutions. Many of the Company's
competitors are significantly more advanced in their research and development
activities. The Company currently does not have any collaborative arrangements
with large pharmaceutical companies. Furthermore, academic institutions,
governmental agencies and other public and private research organizations have
conducted and will continue to conduct research, seek patent protection and
establish arrangements for commercializing products. Such products may compete
directly with any products which may be offered by the Company.
The Company expects that competition among any products approved for
sale will be based, among other things, on product efficacy, safety,
reliability, availability, price, patent position and sales, marketing and
distribution capabilities.
GOVERNMENT REGULATION
Manufacturers of therapeutic products are governed by the Food and
Drug Administration ("FDA") regulations as well as regulations of state
agencies and foreign countries. The testing, preparation of necessary
applications, and subsequent FDA review of those applications is expensive and
time-consuming. Failure to comply with applicable requirements can result in
FDA refusal to approve products or in the revocation of approvals or clearances
previously granted.
The process of obtaining FDA approval for therapeutic products has
historically been costly and time consuming. To obtain such approval, a
company must first conduct pre-clinical studies in the laboratory and in animal
models to evaluate the potential efficacy and the safety of a product. The
results of these studies are submitted to the FDA as part of an Investigational
New Drug (IND) application, which must be approved before human clinical trials
may commence. This pre-clinical stage can take several years to complete and
there can be no assurance that such pre-clinical studies will be successful in
securing FDA approval of the IND so that proposed clinical trials can commence.
Following pre-clinical testing, clinical trials are conducted pursuant to the
FDA-approved clinical protocol, typically in three sequential phases, although
the phases may overlap. In Phase I, clinical trials are conducted with a small
number of human subjects to determine the early safety profile, the pattern of
drug distribution and metabolism. In Phase II, clinical trials are conducted
with groups of patients afflicted with a specific disease in order to determine
preliminary efficacy, optimal dosages and
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expanded indices of safety. In Phase III, large scale, multi-center
comparative trials are conducted with patients afflicted with a target disease
in order to provide enough data to demonstrate the efficacy and safety required
by the FDA. The results of the clinical testing for a pharmaceutical product
are submitted to the FDA in the form of a New Drug Application (NDA) for
approval to commence commercial marketing. In addition, detailed manufacturing
information is also included with each submission. In responding to an NDA,
the FDA may grant marketing approval, request additional information or deny
the application if the FDA determines that the application does not satisfy its
regulatory approval criteria. The process of completing clinical testing
usually takes a number of years and requires the expenditure of substantial
resources. Additionally, the length of time it takes for the FDA to evaluate
an application for marketing approval varies considerably as does the amount of
pre-clinical and clinical data required to demonstrate the safety and efficacy
of a specific product. Historically, the FDA has taken a minimum of two to
four years to review drug applications after submission, although the length of
the review period may vary widely depending upon the nature and indications of
the proposed product. Also, the FDA will require post-market reporting, and
may require surveillance programs to monitor the side effects of the drug
product. There can be no assurance that any of the Company's potential
products will be approved by the FDA or approved on a timely basis or that any
approvals received will not subsequently be revoked. In addition, future
regulations could affect the Company's operations or impose additional
requirements before products are approved.
In addition to obtaining FDA approval for each product, each
manufacturing establishment for new drugs must be inspected and approved by the
FDA. Among the conditions for such approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to the FDA's Good Manufacturing Practices ("GMP") regulations, which must be
followed at all times. In complying with standards set forth in these
regulations, manufacturers must continue to expend time, money and effort in
the area of production and quality control to ensure full technical compliance.
Therapeutic products that may be developed and sold by the Company
outside the United States will be subject to regulation by the various
countries in which they are to be distributed. In addition, products
manufactured in the United States which have not yet been cleared for domestic
distribution will require FDA approval in order to be exported to foreign
countries for distribution there.
EMPLOYEES
As of December 31, 1996, the Company had 24 full-time employees, of
which 19 employees were devoted to research and development activities, and 5
were devoted to general and administrative activities. The Company believes it
has been successful in attracting skilled employees with experience in the
biomedical industry, although there can be no assurance that it will continue
to do so in the future. None of the employees is covered by a collective
bargaining agreement, and management considers relations with its employees to
be good.
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ITEM 2. PROPERTIES
The Company's principal administrative offices, research laboratories
and reagent manufacturing facilities are located in Bothell, Washington, where
the Company leases and occupies approximately 21,500 square feet, pursuant to a
lease which expires in November 1997. The Company believes its facilities are
adequate for its current administrative and research and development
activities. The Company believes it will be able to extend its existing lease.
ITEM 3: LEGAL PROCEEDINGS
The Company was named as an additional defendant in In Re Blech
Securities Litigation, 94 Civ. 7696 (RWS), pursuant to an Amended consolidated
Class Action Complaint (the "Amended Complaint") filed on March 28, 1995 in the
United States District Court for the Southern District of New York (the
"Court"). The plaintiffs brought this action as a purported class action on
behalf of persons who purchased, during the period from July 1, 1991 through
September 21, 1994, securities of 24 companies, including securities issued by
the Company. The Amended Complaint names as defendants 11 of 24 issuers,
including the Company, as well as David Blech, D. Blech & Co., Mark S. Germain,
Nicholas Madonia as trustee for various trusts, Mordechai Jofen, as trustee for
The Edward Blech Trust, Chancellor Capital Management, Inc., Parag Saxena,
Bear, Stearns & Company, Inc. and Baird Patrick & Co.
The Amended Complaint sought to allege against the Company violations
of antifraud provisions of the federal securities law and common law fraud and
deceit in connection with a purported scheme to, inter alia, artificially
inflate and maintain prices of the securities issued by the 24 companies
referenced above. In that regard, the Amended Complaint purports to allege
fraudulent activities involving such securities, including without limitation
unlawful "sham" transactions and the providing of undisclosed "incentives" to
investment fund managers and others to purchase such securities. The Amended
Complaint seeks the following relief: (i) certification of this action as a
class action; (ii) damages in an unspecified amount and interest; (iii) costs
and expenses of this action, including reasonable fees of attorneys,
accountants and experts and other disbursements; and (iv) such other and
further relief as may be proper.
The Company moved to dismiss the Amended Complaint as to it on the
grounds that the Amended Complaint failed to plead the purported fraud with the
requisite particularity and failed to state a claim. Plaintiffs opposed the
motion. By decision dated June 6, 1996, the District Court granted the
Company's motion to dismiss for failure to plead fraud with particularity and
declined to exercise jurisdiction over the pendent common law claims asserted
against the Company under state law. The District Court granted plaintiffs
leave to replead their purported claims by July 26, 1996. The Company was not
named in the repleading and by the terms of the June 6, 1996 decision, the
action was dismissed by the District Court with respect to the Company.
Although there remained other party defendants in the action, the Company moved
for entry of final judgment dismissing the action as against the Company. By
decision dated January 16, 1997, the District Court denied the Company's motion
for entry of such final judgment.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the OTC Bulletin Board. The
following table presents quarterly information on the high and low bid prices
on the OTC Bulletin Board, which reflects inter-dealer prices, without retail
mark-up, mark down or commission and may not represent actual transactions:
High Low
---- ---
FISCAL YEAR ENDED DECEMBER 31, 1996
Fourth Quarter $ 1.56 $ 0.63
Third Quarter 1.56 0.95
Second Quarter 2.03 1.50
First Quarter 1.04 0.50
High Low
---- ---
FISCAL YEAR ENDED DECEMBER 31, 1995
Fourth Quarter $ 0.69 $ 0.28
Third Quarter 0.63 0.31
Second Quarter 0.72 0.38
First Quarter 0.69 0.19
As of December 31, 1996, there were approximately 218 stockholders of
record of the Company's Common Stock. The Company has not paid any dividends
on its Common Stock since its inception and does not contemplate or anticipate
paying any dividends upon its Common Stock in the foreseeable future. It is
currently anticipated that earnings, if any, will be used to finance the
development and expansion of the Company's business.
The following is a summary of transactions by the Company during the
fiscal year ended December 31, 1996 involving sales of the Company's securities
that were not registered under the Securities Act:
1. On January 16, 1996 the Company issued five year warrants to
purchase 250,000 shares of Common Stock to Burrill & Craves, a consulting firm
of which Dr. Craves is a principal, and 345,000 shares of Common Stock to the
Olmsted Group, L.L.C., a merchant banking firm of which
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Mr. Zweifach is a principal, at an exercise price of $0.50 per share in
consideration for the services performed by Burrill & Craves and the Olmsted
Group, L.L.C., respectively, in connection with the sale of the Corporation's
diagnostics division and other corporate matters. The warrants vest as follows:
(i) 33 1/3% at issuance; (ii) 33 1/3% upon the earlier of (1) June 30, 1997, or
(2) the date on which the corporation enters into an agreement with a corporate
partner; and (iii) 33 1/3% on January 1, 1999. All such warrants shall vest, to
the extent not already vested upon a change of control.
2. On June 26, 1996, the Company issued 5,000,000 shares of
Common Stock and warrants to purchase 2,500,000 shares of Common Stock at an
exercise price of $2.50 to institutional and accredited individual investors,
for an aggregate purchase price of $5 million. In connection therewith,
pursuant to an agreement with David Blech, its financial advisor on the Private
Placement, the Company issued to Mr. Blech five year warrants to purchase
500,000 shares of Common Stock at $1.00 per share.
3. On October 1, 1996, the Company issued 457,143 shares of
Common Stock at $1.75 per share and warrants to purchase an additional 900,000
shares of Common Stock, 450,000 of which are at an exercise price of $2.00, and
450,000 or which are at an exercise price of $3.00 to VIMRx.
Exemption from the registration provisions of the Securities Act for
the transactions described above is claimed under Section 4(2) of the
Securities Act, among others, on the basis that such transactions did not
involve any public offering and the purchasers were sophisticated with access
to the kind of information registration would provide.
Also in June 1996, the Company announced that it intends to exchange
for every two (2) warrants which were issued in conjunction with the Company's
public offering in September 1993 at $6.50 per share, one (1) new warrant to
purchase one (1) share of the Company's Common Stock with a term of five (5)
years that is exercisable at $2.50 per share. Each warrant shall be redeemable
by the Company at any time after eighteen months from the date that they are
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Since its inception in 1985, the Company has devoted its principal
efforts toward research and development. The Company has an accumulated
deficit of $48 million as of December 31, 1996. The Company expects to incur
substantial operating losses for the next few years as the Company continues
research and development spending in applying its oligonucleotide-based
technology for therapeutic applications.
In November 1995, pursuant to the terms of an Asset Purchase
Agreement, the Company sold substantially all of the Company's assets and
technology associated with its diagnostics division to Becton. The aggregate
purchase price paid by Becton for the Assets and for the Company's covenant not
to compete with Becton for a period of five years was $8,510,000. The Purchase
Price is subject to an upward adjustment of $1,500,000 contingent on the
occurrence of certain events. (See Business - Disposition of Diagnostic
Assets).
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15
In June 1996, the Company completed a private placement (the "Private
Placement") of Units, each Unit consisting of one share of the Company's Common
Stock and one warrant to purchase 0.5 shares of the Company's Common Stock.
The Company sold a total of 5 million Units, for an aggregate purchase price of
$5 million to institutional and accredited individual investors. The term of
the warrants is five years, and they are exercisable at $2.50 per share (or
$1.25 per 0.5 shares). Each warrant is redeemable by the Company at any time
after eighteen months from the date that they are 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.
In connection with the Private Placement, pursuant to an agreement
with David Blech, its financial advisor on the Private Placement, the Company
paid fees of $350,000 to Mr. Blech. In addition, the Company canceled fifty
percent (50%) of the obligations of Mr. Blech arising in connection with the
transactions involving Ribonetics, including the "put" rights contained in an
agreement dated December 1, 1993 between the Company and Mr. Blech. The
aggregate amount canceled was $1,635,588. The balance is accruing interest at
the minimum applicable federal rate. As the obligation had been fully
reserved, and the remaining balance is fully reserved, neither the cancellation
nor the remaining obligation is reflected in the Company's financial
statements. The Company also issued to Mr. Blech five year warrants to
purchase 500,000 shares of Common Stock at $1.00 per share. The warrants are
not exercisable for one year and are held in escrow by the Company until the
balance of the Ribonetics debt is satisfied.
In addition to completion of the Private Placement, major shareholders
of the Company elected to exercise previously existing warrants to purchase
2,200,000 shares of the Company's Common Stock at $0.30 per share generating an
additional $660,000 of cash to the Company in June 1996.
Also in June 1996, the Company announced that it intends to exchange
for every two (2) warrants which were issued in conjunction with the Company's
public offering in September 1993 at $6.50 per share, one (1) new warrant to
purchase one (1) share of the Company's Common Stock with a term of five (5)
years that is exercisable at $2.50 per share. Each warrant shall be redeemable
by the Company at any time after eighteen months from the date that they are
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.
On October 1, 1996, the Company and VIMRx Pharmaceuticals, Inc., a
biotechnology company located in Wilmington, Delaware, entered into a Stock and
Warrant Purchase Agreement (the "VIMRx Agreement") pursuant to which the
Company and VIMRx settled any and all disputes concerning Ribonetics, and the
Company and VIMRx established an alliance to attempt to exploit the synergies
between their respective technologies and markets. Under the VIMRx Agreement,
VIMRx invested approximately $800,000 in exchange for 457,143 shares of the
Company's Common Stock at $1.75 per share. In addition, VIMRx received
warrants to purchase 900,000 shares of the Company's Common Stock, 450,000 of
which are exercisable at $2.00 per share and expire in October 1997, and
450,000 of which are exercisable at $3.00 per share and expire in October 1998.
Additionally, pursuant to the VIMRx Agreement, the Board of Directors of the
Company appointed Richard L. Dunning, the President and Chief Executive Officer
of VIMRx, to fill a vacancy on the Company's Board of Directors. Mr. Dunning
accepted such appointment effective as of October 30, 1996.
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In November 1996, the Company entered into an agreement with Saigene,
whereby the Company transferred its remaining diagnostic technologies to
Saigene for $1,100,000. The $1,100,000 is in the form of an 8% note receivable
with terms of $50,000 down and $10,000 per month. The balance of the note is
due March 31, 1997, or upon Saigene completing financing arrangements,
whichever occurs first.
Due to the uncertainty of Saigene obtaining financing, the Company has
recorded as Gain on Disposal of Diagnostic Division only that portion of the
gain, $67,000, for which cash payments had been received at year end. The
Company does not anticipate receiving the balance of the note receivable when
due on March 31, 1997, and there is no assurance Saigene will obtain financing
to pay this debt.
RESULTS OF OPERATIONS
The following discussion of results of operations reflects the
Company's diagnostics division as discontinued operations.
Years Ended December 31, 1995 and 1996
Research contract revenue reflects revenue from U.S. government grants
and contracts and subcontracts.
Research and development expenses increased in total by approximately
$706,000 for the year ended December 31, 1996 from the prior year. This
increase is the result of increased research funded with proceeds from the sale
of the diagnostics division in November 1995 and with proceeds from the private
placement completed in June 1996.
The decrease in selling, general and administrative expenses in 1996
as compared to 1995 of $36,000 is the result of normal business fluctuations.
Interest income in the year ended December 31, 1996 increased compared
with the prior year's results due to significantly higher investable funds
during the 1996 period. Interest expense decreased in the comparable period as
proceeds from the private placement were used to pay off debt. Additionally,
the 1995 period included amortization of $358,000 of discount on notes payable
due to repricing of warrants associated with a bridge financing. The 1996
expense for discount on notes payable was $122,000.
The other income reported in the period ended December 31, 1995
included $300,000 which was received from Mr. Blech in 1994 and recorded as
notes payable at December 31, 1994. In 1995, the Company wrote off the note
payable in partial settlement of Mr. Blech's obligations under the Blech
Agreement.
The income (loss) from discontinued operations relates to the
operations and disposal of the assets of the diagnostics division of the
Company. The Company sold the majority of the diagnostic assets of the Company
to Becton Dickinson in November 1995. See "Business Disposition of Diagnostic
Assets." The Company realized a gain on the sale to Becton Dickinson in 1995
in the amount of $8,786,000.
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17
In November 1996, the Company entered into an agreement with Saigene,
whereby Epoch transferred its remaining diagnostic technologies to Saigene for
$1,100,000. The Company has recognized a gain on the sale in the amount of
$67,000, with the remaining gain and accrued interest of $1,042,000 being
deferred and recognized as cash is received.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had cash and cash equivalents of
$4,890,000. These cash and cash equivalents provides sufficient working capital
to operate approximately 15 months based on the Company's current plan of
operation. Additionally, the Company anticipates cash receipts of $584,000 over
four years under the VMRC subcontract. See "Business -Research and
Development." The Company's current operations will be unable to generate
sufficient working capital to meet current and future obligations.
Since inception, the Company has financed its operations primarily
through the sales of its equity securities. In addition, the Company received
$1,320,000 from the sale of Source in 1993 and $8,510,000 from the sale of the
diagnostics division in 1995. To continue operations, the Company will be
required to sell additional equity securities, borrow additional funds, or
obtain additional financing through licensing, joint venture, or other
collaborative arrangements. The Company has no commitments for such financing
and there can be no assurance that such financing will be available on
satisfactory terms, if at all.
Cash increased by $1,151,000 from December 31, 1995 to December 31,
1996 primarily due to the net cash generated by the private placement in June
1996 of $4,633,000, due to cash generated from the exercise of bridge warrants
in the amount of $660,000, and due to cash generated by the sale of shares and
warrants to VIMRx in the amount of $800,000. These proceeds are being used to
fund the Company's operations as well as to repay notes payable of the Company.
The changes in accounts payable and accrued liabilities are the result
of normal business fluctuations.
Plan of Operations and Capital Requirements
Following the consummation of the Becton Sale, the Company has focused
substantially all of its resources on the development of its therapeutic
products with the goal of entering into corporate partnering arrangements to
further commercialize the technology. See "Business- Therapeutics." The
Company's primary future needs for capital are for continued research and
development as well as expenditures to satisfy litigation related expenses
incurred to date. The Company's working capital requirements may vary
depending upon numerous factors including the progress of the Company's
research and development, competitive and technological advances and other
factors. The Company anticipates operating with approximately 24 employees.
The Company will retain its other assets associated with its therapeutic
research and development activities and does not believe it will require
significant additional capital expenditures for such activities.
The Company will require additional funds to continue its operations
and, over the longer term, will require substantial additional funds to
maintain and expand its research and development activities and to ultimately
commercialize, with or without the assistance of corporate partners, any of its
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proposed products. The Company will seek collaborative or other arrangements
with larger pharmaceutical companies, under which such companies would provide
additional capital to the Company in exchange for exclusive or non-exclusive
license or other rights to certain of the technologies and products the Company
is developing. However, the competition for such arrangements with major
pharmaceutical companies is intense, with a large number of biopharmaceutical
companies attempting to satisfy their funding requirements through such
arrangements. There can be no assurance that an agreement or agreements will
arise from these discussions in a timely manner, or at all, or that revenues
that may be generated thereby will offset operating expenses sufficiently to
reduce the Company's short- or long-term funding requirements.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company required by this item begin on Page F-1
of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
- ---------------------------------------------------------------------------------------
Fred Craves, Ph.D. 51 Chairman of the Board of Directors and
Chief Executive Officer
Richard Dunning 51 Director
Kenneth L. Melmon, M.D. 62 Director
Rich B. Meyer, Ph.D. 53 Vice President, Research and Development-
Therapeutics, Chief Scientific Officer
Sanford S. Zweifach 40 President, Therapeutics and Chief Financial
Officer
Dr. Craves joined the Company as Chairman of the Board of Directors in
July 1993 and became Chief Executive Officer in April 1994. Since January 1997
Dr. Craves has been a principal of the consulting firm of The Craves Group.
From January 1994 until January 1997, Dr. Craves was a principal of the
consulting firm, Burrill & Craves. From January 1991 to May 1993, he was
President and Chief Executive Officer of Berlex Biosciences, a division of
Schering A.G., and Vice President of Berlex Laboratories, Inc., the U.S.
subsidiary of Schering A.G. From 1981 to 1982, Dr. Craves was
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Chief Executive Officer and, from 1982 to June 1990, was Chairman, Chief
Executive Officer and President of Codon, a biotechnology company. Following
Codon's acquisition by Schering A.G., Dr. Craves was President and Chief
Executive Officer of Codon from June 1990 to December 1990. From 1981 to 1983,
Dr. Craves was also a co-founder and director of Creative Biomolecules. From
1979 to 1981, he was a sales and marketing representative for Millipore
Corporation. Dr. Craves received his Ph.D. in Pharmacology and Experimental
Toxicology from the University of California, San Francisco. Dr. Craves is
also Chairman of the Board of Directors of NeoRx Corporation and a director of
InCyte Pharmaceuticals, Inc.
Mr. Dunning has been a Director of the Company since October 1996.
Mr. Dunning is the President and Chief Executive Officer of VIMRx
Pharmaceuticals, Inc. Mr. Dunning spent most of his career at the DuPont
Company, which he joined in 1968. During his career at DuPont, he held
management and executive positions in the Finance and Corporate Plans
Departments. In 1990, Mr. Dunning moved to DuPont's Medical Products
Department to lead the negotiations which established a pharmaceutical joint
venture between DuPont and Merck, the DuPont Merck Pharmaceutical Company. In
1991 he was appointed Executive Vice President and Chief Financial Officer of
DuPont Merck. Mr. Dunning accepted the position of President and Chief
Executive Officer of VIMRx in April 1996. Mr. Dunning received his
Bachelor's Degree in Economics from the University of Delaware in 1968 and his
MBA from the same university in 1971.
Dr. Melmon has been a Director of the Company since November 1991.
Dr. Melmon is Professor of Medicine at Stanford University School of Medicine,
where he joined the faculty in 1978. He was previously on the faculty at the
University of California, San Francisco, specializing in clinical pharmacology.
He is a member of the Institute of Medicine-National Academy of Sciences, and a
past president of the American Federation for Clinical Research and the
American Association of Clinical Investigation. He holds an M.D. from the
University of California Medical Center. He is also on the Board of Directors
of ImmuLogic Pharmaceutical Corporation.
Dr. Meyer joined Epoch in October 1986 as Director of Nucleic Acid
Chemistry. He has been Vice President, Research and Development of the Company
since August 1991 and was appointed Chief Scientific Officer in June 1993.
From 1985 to 1986, Dr. Meyer was a group leader at the Nucleic Acid Research
Institute, a joint venture of ICN Pharmaceuticals, Inc. and Eastman Kodak
Company. From 1980 to 1985 he was Associate Professor of Medicinal Chemistry
and in 1985, Acting Associate Dean for Research of the Graduate School at
Washington State University. From 1975 to 1980, he was Assistant Professor in
the Department of Pharmaceutical Chemistry at the University of California, San
Francisco. Dr. Meyer received his Ph.D. in Chemistry from the University of
California, Santa Barbara.
Mr. Zweifach joined the Company in January 1995 as President and Chief
Financial Officer. Mr. Zweifach is a principal of The Olmsted Group, L.L.C., a
merchant banking firm and is also a principal of The Craves Group, a consulting
firm. Mr. Zweifach served as a director of the Company from July 1994 to
September 1994. 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.
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Dr. Craves and Mr. Zweifach are also employed by other entities and,
although they devote a substantial portion of their time to the Company, they
also devote a portion of their time to their positions at the other entities.
Both Dr. Craves and Mr. Zweifach have been engaged by the Company pursuant to
Consulting Agreements.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Based upon its review of the copies of reporting forms furnished to
the Company, the Company believes that all filing requirements under Section
16(a) of the Securities Exchange Act of 1934 applicable to its directors,
officers and any persons holding ten percent or more of the Company's Common
Stock with respect to the Company's fiscal year ended December 31, 1996, were
satisfied.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning
compensation paid or accrued by the Company for services rendered during the
fiscal years ended December 31, 1996 and 1995, to the Company's Chief Executive
Officer, and the Company's two other most highly compensated executive
officers:
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
-------------------------------------------------- Securities
Name and Other Annual Underlying
Principal Position Year Salary($)(1) Bonus($) Compensation($) Options(#) All Other
- ------------------------- ---- ------------ -------- --------------- ---------- ---------
Fred Craves 1996 $125,000 $ -- $ -- -- $ --
Chief Executive Officer(2) 1995 100,000
Sanford S. Zweifach 1996 135,000 5,625 -- -- --
President and 1995 126,750 21,871
Chief Financial Officer
Rich B. Meyer, Jr. 1996 140,016 2,693 -- -- --
Vice President, Research 1995 135,000 5,625
and Development
(1) Includes amounts deferred during 1995 and 1996 under the Company's 401(k)
employee savings and retirement plan. To date, the Company has not made
any matching contributions under that plan.
(2) Includes $25,000 payment earned in 1993.
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OPTION MATTERS
Option Grants. Rich B. Meyer, Jr., Vice President, Research and
Development was granted 29,000 options, priced at $0.56250 per share, on
January 18, 1996.
Option Exercises. None of the Company's executive officers exercised
options during the fiscal year ended December 31, 1996.
EMPLOYMENT AND SEVERANCE AGREEMENTS
Employment Agreements. Effective August 30, 1994, the Company entered
into one-year employment agreements with all of the executive officers of the
Company, except Dr. Craves and Mr. Zweifach. Upon termination of an
executive's services for reasons other than cause during the one-year term, the
executive will be entitled to either notice or severance pay at the executive's
then current salary, equal to the greater of the balance of the one-year term
or six months, subject to reduction in certain circumstances. In the event of
death or disability during the one-year term, the executive will be entitled to
six months salary (less any amounts received from disability insurance). In
addition, upon termination, the executives are subject to a five-year
non-disclosure obligation and a six-month non-competition obligation. The
contracts have been extended to December 31, 1997.
Consulting Agreements. In July 1993, the Company entered into a
one-year consulting agreement with Dr. Craves under which he received $100,000
per year for his services. This is the amount reflected as salary in the
Summary Compensation Table. The Company has extended the term of Dr. Craves'
consulting agreement. The current extension runs to December 31, 1997.
In January 1995, the Company entered into a three-month consulting
agreement with Mr. Zweifach under which he received a monthly payment of
$11,250. This is the amount reflected as salary in the Summary Compensation
Table. The Company has extended the term of the contract to run through
December 31, 1997.
Dr. Melmon also serves as a consultant to the Company and as a member
of the Company's Scientific Advisory Board and receives compensation in those
capacities.
DIRECTORS' COMPENSATION
The Company pays all non-employee directors a fee of $1,000 for each
Board of Directors meeting attended in person. In July 1993, the Company
adopted a Non-Employee Directors Option Plan (the "Directors Plan") pursuant to
which the Company granted each non-employee director (except Dr. Craves) a
fully-vested 10-year option to purchase 10,000 shares of Common Stock at an
exercise price of $4.00 per share. In addition, upon each anniversary of the
inception of the Directors Plan each non-employee director will receive
fully-vested 10-year options to purchase 5,000 shares of Common Stock at the
then current fair market value. Non-employee directors who subsequently join
the Board of Directors will receive, upon each anniversary of joining the Board
of Directors, fully-vested 10-year options to purchase 5,000 shares of Common
Stock at the then current fair market value.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of February 4, 1997 certain
information with respect to the beneficial ownership of the Company's Common
Stock by (i) each stockholder known by the Company to be the beneficial owner
of more than 5% of its Common Stock, (ii) each director, (iii) each of the
executive officers named in the Summary Compensation Table, and (iv) all
executive officers and directors as a group.
Number of Shares Percentage of
Name and Address Beneficially Owned (1) Outstanding Shares
- ---------------- ---------------------- ------------------
Grace Brothers Ltd 3,695,193 25.1%
1560 Sherman Avenue
Evanston, Illinois 60201
Entities and Persons affiliated with 2,644,018 17.9%
Biotechnology Investment Group, L.L.C. (2)
c/o Collinson Howe Venture Partners
1055 Washington Blvd
Stamford, Connecticut 06901
VIMRx Pharmaceuticals, Inc.(3) 1,357,143 8.7%
2751 Centerville Road, Suite 210
Little Falls II
Wilmington, Delaware 19808
The Edward Blech Trust (4) 1,050,000 7.0%
c/o Rabbi Mordechai Jofan
418 Avenue I
Brooklyn, New York 11230
United Equities Commodities Company (5) 750,000 5.0%
c/o Phillippe D. Katz
160 Broadway
New York, New York 10038
Fred Craves, Ph.D. (6) 725,000 4.8%
Rich Meyer, Jr., Ph.D. (8) 150,665 1.1%
Kenneth L. Melmon, M.D. (9) 70,999 *
Sanford Zweifach (10) 30,000 *
Richard C. Dunning (11) 0 *
All executive officers and directors as a group (5 976,663 6.3%
persons) (12)
* Less than one percent
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(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in this table have sole
voting and investment power with respect to all shares of Common Stock.
(2) Biotechnology Investment Group, L.L.C. ("BIG") is a limited liability
company which invests in and otherwise deals with securities of biotechnology
and other companies. The members of BIG are (i) the managing member, Collinson
Howe Venture Partners, Inc. ("CHVP"), an investment management firm of which
Jeffrey J. Collinson is President, sole director and majority stockholder and
Timothy F. Howe is Vice President and a stockholder. (ii) The Edward Blech
Trust ("EBT"), a trust for the benefit of the minor child of David Blech, a
financial advisor to the Company, and (iii) Wilmington Trust Company ("WTC"),
as voting trustee under a voting trust agreement (the "Voting Trust
Agreement"), among WTC, BIG and BIO Holdings, L.L.C. ("Holdings"). The
managing member of BIG is CHVP. Each of Citibank, N.A. ("Citibank") and
Holdings has the right pursuant to the Voting Trust Agreement to direct the
actions of WTC as a member of BIG. WTC, as the member holding a majority
interest in Holdings, has the right to direct the actions of Holdings under the
Voting Trust Agreement. Citibank, pursuant to a separate voting trust
agreement among WTC, David Blech and Holdings, has the right to direct the
actions of WTC as a member of Holdings with respect to the rights of Holdings
under the Voting Trust Agreement. By virtue of their status as members of BIG,
each of CHVP and EBT may be deemed the beneficial owner of all shares held of
record by BIG (the "Biotechnology Group Shares"). By virtue of his status as
the majority owner and controlling person of CHVP, Jeffrey J. Collinson may
also be deemed and beneficial owner of the Biotechnology Group Shares. Each of
CHVP, EBT and Jeffrey J. Collinson disclaims beneficial ownership of any
Biotechnology Group Shares except to the extent, if any, of such person's
actual pecuniary interest therein.
(3) Includes 900,000 shares subject to warrants exercisable within 60
days.
(4) Includes 350,000 shares subject to warrants exercisable within 60
days.
(5) Includes 250,000 shares subject to warrants exercisable within 60
days.
(6) Includes 504,462 shares subject to warrants and options exercisable
within 60 days, including warrants to purchase 383,325 shares which are held by
Burrill & Craves, of which Fred Craves is a general partner. Fred Craves
disclaims beneficial ownership of such warrants and the shares underlying such
warrants except to the extent of his pecuniary interest in Burrill & Craves.
(7) Includes 83,333 shares subject to warrants exercisable within 60 days.
(8) Includes 117,159 shares subject to warrants and options exercisable
within 60 days.
(9) Includes 70,999 shares subject to options and warrants exercisable
within 60 days.
(10) Includes 30,000 shares subject to warrants exercisable within 60 days.
22
24
(11) Excludes 1,375,143 shares and 900,000 warrants held by VIMRx
Pharmaceuticals, Inc. Mr. Dunning is the President and Chief Executive Officer
of VIMRx Pharmaceuticals, Inc. and disclaims beneficial ownership of all such
shares.
(12) Includes directors' and executive officers' shares listed above,
including 664,997 shares subject to warrants and options exercisable within 60
days. Excludes 1,357,143 shares and 900,000 warrants to purchase common stock
held by VIMRx Pharmaceuticals, Inc. and 115,000 shares held by the Olmsted
Group - see footnotes (3), (9) and (10).
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 1993, the Company concluded its Initial Public Offering
of 2,500,000 shares of Common Stock and 2,875,000 Warrants. D. Blech &
Company, Incorporated acted as one of the two underwriters for the offering.
In connection with the offering, the Company sold to D. Blech & Company,
Incorporated and certain of its affiliates options to purchase up to 250,000
shares of Common Stock and/or 250,000 Warrants (the "Purchase Options") at a
price of $.001 per option. The Purchase Options are exercisable for shares of
Common Stock and/or warrants for a period of two years, commencing September
29, 1996, at an initial exercise price equal to 160% of the Initial Public
Offering price per share of Common Stock or Warrant, $10.40 and $.16,
respectively. The Warrants underlying the Purchase Options are identical in
all respects to the Warrants issued to the public, except that while the
Warrants are held by the initial issuers, or certain transferees of such
issuers, they are not redeemable by the Company under any circumstances. On
January 27, 1995, D. Blech & Company, Incorporated and its principal, Mr. David
Blech, transferred 789,900 shares of Common Stock and Warrants to purchase
1,154,899 shares of Common Stock to Biotechnology Investment Group, L.L.C., a
Delaware limited liability company ("BIG"), in exchange for Class C Units in
BIG. D. Blech & Company, Incorporated and David Blech subsequently
transferred such Class C Units in BIG. The Warrants transferred to BIG have
registration rights, which were also transferred to BIG, with respect to the
shares of Common Stock issuable upon exercise of such warrants.
In October 1994, the Company raised $1,200,000 in gross proceeds from
a private placement of debt and warrants. In the private placement, Grace
Brothers, Ltd., and two other stockholders of the Company, received notes from
the Company, which were paid off in June 1996, as well as 5-year warrants to
purchase an aggregate of 2,400,000 shares of the Company's Common Stock at an
exercise price of $.50 per share. The warrants can be exercised through
October 1999 and had an exercise price of $0.50 per share. In May 1995, in
connection with the extension of these notes to March 31, 1996, the exercise
price of such warrants was reduced to $0.30 resulting in a discount on notes
payable of $480,000. The discount was amortized over the original term of the
notes. In June 1996, Grace Brothers, Ltd., exercised warrants to purchase
2,200,000 shares of the Company's common stock at an exercise price of $0.30
per share. At December 31, 1996, 200,000 of these warrants remain outstanding.
In June 1994 the Company issued 5-year warrants to purchase 150,000
shares of Common Stock at an exercise price of $3.875 per share to Burrill &
Craves, a consulting firm of which Dr. Craves is a principal. Such warrants
were issued in connection with Dr. Craves acceptance of the position of interim
Chief Executive Officer for the Company.
23
25
In December 1994 the Company issued 5-year warrants to purchase
150,000 shares of Common Stock at an exercise price of $0.50 per share to
Burrill & Craves, a consulting firm of which Dr. Craves is a principal. Such
warrants were issued to Burrill & Craves in connection with the renewal of Dr.
Craves' Consulting Agreement with the Company.
On January 16, 1996 the Company issued five year warrants to purchase
250,000 shares of Common Stock to Burrill & Craves, and 345,000 shares of
Common Stock to the Olmsted Group, L.L.C., a merchant banking firm of which Mr.
Zweifach is a principal, at an exercise price of $0.50 per share, in
consideration for the services performed by Burrill & Craves and The Olmsted
Group, L.L.C., respectively, in connection with the sale of the Corporation's
diagnostics division and other corporate matters. The warrants vest as
follows: (i) 33 1/3% at issuance; (ii) 33 1/3% upon the earlier of (a) June
30, 1997, or (b) the date on which the Corporation enters into an agreement
with a corporate partner; and (iii) 33 1/3% on January 1, 1999. All such
warrants shall vest, to the extent not already vested, upon a change of
control.
In June 1996, the Company completed the Private Placement of Units,
each Unit consisting of one share of the Company's Common Stock and one warrant
to purchase 0.5 shares of the Company's Common Stock. The Company sold a total
of 5 million Units, for an aggregate purchase price of $5 million to
institutional and accredited individual investors. The term of the warrants is
five years, and they are exercisable at $2.50 per share (or $1.25 per 0.5
shares). Each warrant is redeemable by the Company at any time after eighteen
months from the date that they are 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.
In connection with the Private Placement, pursuant to an agreement
with David Blech, its financial advisor on the Private Placement, the Company
paid fees of $350,000 to Mr. Blech. In addition, the Company canceled fifty
percent (50%) of the obligations of Mr. Blech arising in connection with the
transactions involving Ribonetics, including the "put" rights contained in an
agreement dated December 1, 1993 between the Company and Mr. Blech. The
aggregate amount canceled was $1,635,588. The balance is accruing interest at
the minimum applicable federal rate. As the obligation had been fully
reserved, and the remaining balance is fully reserved, neither the cancellation
nor the remaining obligation impacted the Company's results of operations. The
Company also issued to Mr. Blech five year warrants to purchase 500,000 shares
of Common Stock at $1.00 per share. The warrants are not exercisable for one
year and are held in escrow by the Company until the balance of the Ribonetics
debt is satisfied.
Also in June 1996, the Company announced that it intends to exchange
for every two (2) warrants which were issued in conjunction with the Company's
public offering in September 1993 at $6.50 per share, one (1) new warrant to
purchase one (1) share of the Company's Common Stock with a term of five (5)
years that is exercisable at $2.50 per share. Each warrant shall be redeemable
by the Company at any time after eighteen months from the date that they are
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.
In November 1996, the Company entered into an agreement with Saigene
Corporation (Saigene), whereby Epoch transferred its remaining diagnostic
technologies to Saigene for $1,100,000. The $1,100,000 is in the form of an 8%
note receivable with terms of $50,000 down and $10,000 per
24
26
month. The note is secured by the assets and technologies transferred to
Saigene in the agreement. The balance of the note is due March 31, 1997, or
upon Saigene completing financing arrangements, whichever occurs first.
Saigene was formed in 1996 by a group which included several former
Epoch diagnostic division employees, including Mr. Allan G. Cochrane who had
been the President of Epoch's diagnostic division from October 1, 1993 to
September 20, 1995 and also served on Epoch's Board of Directors from June 10,
1993 to November 27, 1995.
Due to the uncertainty of Saigene obtaining financing, the Company has
recorded as Gain on Disposal of Diagnostics Division only that portion of the
gain, $67,000, for which cash payments had been received at year end. The
Company does not anticipate receiving the balance of the note receivable when
due on March 31, 1997, and there is no assurance Saigene will obtain financing
to pay this debt.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-KSB:
(a) Exhibits:
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1* Amended and Restated Certificate of Incorporation of the Company,
as amended (incorporated by reference to Exhibit 3 of the
Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1996).
25
27
3.1.1 Restated Certificate of Amendment, as amended through December
4, 1995 (incorporated by reference to Exhibit 3 of the Company's
Current Report on Form 8-K filed December 4, 1995).
3.2* Bylaws of the Company, as currently in effect.
10.1* MicroProbe Corporation Incentive Stock Option, Nonqualified
Stock Option And Restricted Stock Purchase Plan -- 1991, as
amended.
10.2* Form of Indemnification Agreement entered into with officers and
directors of the Company.
10.12* Letter Agreement between the Company and Fred Craves, dated
August 3, 1993.
10.13* Scientific Advisory Board Agreement between the Company and
Kenneth L. Melmon, M.D., dated September 4, 1991.
10.14* Scientific Advisory Board Agreement between the Company and Roy
Page, Ph.D., D.D.S., dated September 4, 1991.
10.15* Form of Scientific Advisory Board Agreement.
10.16* Lease between the Company as Tenant and WRC Properties, Inc. for
premises located in Bothell, Washington, dated January 30, 1986,
as amended March 21, 1986, January 20, 1988, February 4, 1988,
July 1, 1991, October 20, 1992 and February 8, 1993.
10.16.1 Amendment to Lease between the Company and WRC Properties dated
November 15, 1995 (incorporated by reference to Exhibit 10.16.1
of the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995).
10.22* Form of Common Stock Warrant issued December 31, 1991.
10.25* Second Amended and Restated Investment Agreement, dated April
28, 1992 among the Company and certain investors.
10.26* 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 Company and certain investors.
26
28
10.28* Sales Agency Agreement, dated December 14, 1992, as amended
February 3, 1993 between the Company and D. Blech & Company,
Incorporated, with form of Sales Agent Warrant.
10.30* Form of Registration Agreement, dated February 12, 1993 among
the Company and certain investors.
10.32* License Agreement between the Company and Yale University, dated
May 1, 1993. (Portions of this Exhibit are omitted and were
filed separately with the Secretary of the Commission pursuant
to the Company's application requesting confidential treatment
under Rule 406 of the Securities Act of 1933).
10.33* Material Transfer Agreement between the Company and Yale
University, dated May 1, 1993. (Portions of this Exhibit are
omitted and were filed separately with the Secretary of the
Commission pursuant to the Company's application requesting
confidential treatment under Rule 406 of the Securities Act of
1933).
10.34* Consulting Agreement between the Company and Dr. Y. C. Cheng,
dated April 7, 1993. (Portions of this Exhibit are omitted and
were filed separately with the Secretary of the Commission
pursuant to the Company's application requesting confidential
treatment under Rule 406 of the Securities Act of 1933).
10.36* Consulting Agreement between the Company and Dr. Arthur D.
Broom, dated October 1, 1992. (Portions of this Exhibit are
omitted and were filed separately with the Secretary of the
Commission pursuant to the Company's application requesting
confidential treatment under Rule 406 of the Securities Act of
1933).
10.39* MicroProbe Corporation Incentive Stock Option, Nonqualified
Stock Option and Restricted Stock Purchase Plan--1993.
10.40* MicroProbe Corporation Non-Employee Directors Stock Option Plan.
10.42** Warrant Agreement between the Company and American Stock
Transfer & Trust Company with Form of Warrant dated September
29, 1993.
10.43** Underwriting Agreement by and among the Company, D. Blech &
Company, Incorporated and Commonwealth Associates dated
September 28, 1993.
10.45** Supply Contract dated as of January 21, 1994, by and among the
Company, Source Scientific Systems, Inc. and The Altron Group,
Inc.
27
29
10.46** License Agreement dated as of January 21, 1994, by and among the
Company, Source Scientific Systems, Inc. and The Alton Group,
Inc.
10.47** Purchase Agreement dated as of November 30, 1993, by and among
the Company, Animal Biotechnology Cambridge Limited, and Herbert
Stradler (without exhibits).
10.48** Put Agreement relating to Ribonetics GmbH dated as of December
1, 1993 between the Company and David Blech, as amended December
3, 1993 and February 18, 1994 (incorporated by reference to
Exhibit 10.48 of the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1993).
10.48.1 Amendment dated April 1, 1994 to Put Agreement (incorporated by
reference to Exhibit 10.48.1 of the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1993).
10.48.2 Amendment dated April 27, 1994 to Put Agreement (incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for
the quarter ended March 31, 1994).
10.48.3** Amendment dated May 26, 1994 to Put Agreement.
10.48.4 Amendment dated June 30, 1994 to Put Agreement (incorporated by
reference to Exhibit 10.48.4 of the Company's Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1994).
10.48.5 Amendment dated July 27, 1994 to Put Agreement (incorporated by
reference to Exhibit 10.48.5 of the Company's Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1994).
10.48.6 Amendment dated August 15, 1994 to Put Agreement (incorporated
by reference to Exhibit 10.48.6 of the Company's Quarterly
Report on Form 10-QSB for the quarter ended September 30, 1994).
10.48.7 Amendment dated August 30, 1994 to Put Agreement (incorporated
by reference to Exhibit 10.48.7 of the Company's Quarterly
Report on Form 10-QSB for the quarter ended September 30, 1994).
10.48.8 Amendment dated September 14, 1994 to Put Agreement
(incorporated by reference to Exhibit 10.48.8 of the Company's
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1994).
10.48.9 Exercise Notice dated September 27, 1994 to Put Agreement
(incorporated by reference to Exhibit 10.48.9 of the Company's
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1994).
28
30
10.50 Sublease between the Company as sublessee and Abbott
Laboratories as Sublessor for premises located in Bothell,
Washington, dated November 12, 1993, as amended November 18,
1993 and January 28, 1994 (incorporated by reference to Exhibit
10.50 of the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1993).
10.51 Employment Agreement between the Company and Allan G. Cochrane,
dated August 30, 1994 (incorporated by reference to Exhibit
10.51 of the Company's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1994).
10.53 Employment Agreement between the Company and Rich B. Meyer, Jr.,
dated August 30, 1994 (incorporated by reference to Exhibit
10.53 of the Company's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1994).
10.55 Bridge Financing Agreement dated October 12, 1994 with form of
note and warrant (incorporated by reference to Exhibit 10.55 of
the Company's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1994).
10.55.1 Amendment to Bridge Financing Agreement dated May 22, 1995, with
form of note and warrant (incorporated by reference to Exhibit
10.55.1 of the Company's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1995).
10.56 Security Agreement dated October 12, 1994 (incorporated by
reference to Exhibit 10.56 of the Company's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1994).
10.57 Registration Rights Agreement dated October 12, 1994
(incorporated by reference to Exhibit 10.57 of the Company's
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1994).
10.58 Purchase Price Adjustment, Royalty and Release Agreement dated
as of November 23, 1994 between MicroProbe Corporation and Alton
Group, Inc. (incorporated by reference to Exhibit 10.58 of the
Company's Current Report on Form 8-K filed December 7, 1994).
10.58.1 First Amendment to Purchase Price Adjustment, Royalty and
Release Agreement between MicroProbe Corporation and Alton
Group, Inc., dated March 2, 1995 (incorporated by reference to
Exhibit 10.58.1 of the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1995).
29
31
10.59 Consulting Agreement between the Company and Sanford S. Zweifach,
dated January 18, 1995 (incorporated by reference to Exhibit 10.59 of
the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995).
10.60 Promissory Note executed by the Company in favor of Becton, Dickinson
and Company, dated March 14, 1995 (incorporated by reference to
Exhibit 10.60 of the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1995).
10.61 Equipment Purchase Agreement between the Company and CELx
Corporation, effective as of January 6, 1995 (incorporated by
reference to Exhibit 10.61 of the Company's Quarterly Report on Form
10-QSB for the quarter ended March 31, 1995).
10.61.1 Letter Agreement between the Company and CELx Corporation dated
January 8, 1995 amending the Equipment Purchase Agreement of even
date (incorporated by reference to Exhibit 10.61.1 of the Company's
Quarterly Report on Form 10-QSB for the quarter ended March 31,
1995).
10.62 License Agreement between the Company and CELx Corporation, effective
as of January 6, 1995 (incorporated by reference to Exhibit 10.62 of
the Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1995).
10.63 Amendment to License Agreement between Orca Research, Inc. and the
Company, dated September 20, 1995 (incorporated by reference to
Exhibit 10.63 of the Company's Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1995).
10.64 Asset Purchase Agreement between the Company 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
Company's Definitive Proxy Materials for its Special Meeting of
Stockholders held November 27, 1995).
10.65 Consulting Agreement with David Blech dated March 29, 1996
(incorporated by reference to Exhibit 10.65 of the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 30, 1996).
10.66 Form of Subscription Agreement with Private Placement Investors
(incorporated by reference to Exhibit 4.1 of the Company's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1996).
10.67 Warrant Agreement between the Company and American Stock Transfer and
Trust Company dated June 21, 1996, with form of
30
32
Warrant (incorporated by reference to Exhibit 4.2 of the
Company's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1996).
10.68 Stock and Warrant Purchase Agreement dated as of October 1,
1996, between the Company and VIMRx Pharmaceuticals, Inc.
(incorporated by reference to Exhibit 10.65 of the Company's
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1996).
21 Subsidiaries of the Company.
23.1 Consent of KMPG Peat Marwick LLP.
25.0 Power of Attorney (included on the signature page).
- -------------------
* Incorporated by reference to the same numbered exhibit of the Company's
Registration Statement on Form SB-2, No. 33-66742, effective on
September 29, 1993.
** Incorporated by reference to the same numbered exhibit of the Company's
Registration Statement on Form SB-2, No. 33-76446, effective on July 7,
1994.
31
33
(b) Reports on Form 8-K:
None.
32
34
EPOCH PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
PART I. FINANCIAL INFORMATION PAGE
NUMBER
ITEM 1. FINANCIAL STATEMENTS
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . F-1
Balance Sheet as of December 31, 1996 . . . . . . . . . . . . . . . . F-2
Statements of Operations for the years ended
December 31, 1995 and 1996 . . . . . . . . . . . . . . . . . . . F-3
Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1995 and 1996 . . . . . . . . . . . . . . . . . . . F-4
Statements of Cash Flows for the years ended
December 31, 1995 and 1996 . . . . . . . . . . . . . . . . . . . F-5
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . F-6
35
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Epoch Pharmaceuticals, Inc.
We have audited the accompanying balance sheet of Epoch Pharmaceuticals, Inc.
(formerly MicroProbe Corporation) as of December 31, 1996, 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, 1996. 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, 1996, and the results of its operations and its cash flows for
each of the years in the two-year period ended December 31, 1996 in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Seattle, Washington
March 14, 1997
F-1
36
EPOCH PHARMACEUTICALS, INC.
BALANCE SHEET
ASSETS
DECEMBER 31,
1996
------------
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 4,890,358
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,742
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . 69,989
------------
Total current assets . . . . . . . . . . . . . . . . . . . . . 5,019,089
Equipment and leasehold improvements, net . . . . . . . . . . . . . . 277,498
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,150
------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,317,737
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,188
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . 200,236
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . 230,555
------------
Total current liabilities . . . . . . . . . . . . . . . . . . . 441,979
------------
Stockholders' equity:
Preferred stock, par value $.01; authorized 10,000,000
shares; no shares issued and outstanding . . . . . . . . . . . . --
Common stock, par value $.01; authorized
30,000,000, shares issued and outstanding
14,723,856 shares . . . . . . . . . . . . . . . . . . . . . . . . 147,239
Additional paid in capital . . . . . . . . . . . . . . . . . . . . 52,892,549
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . (39,029)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . (48,125,001)
------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . 4,875,758
------------
Commitments and contingencies
Total liabilities and stockholders' equity . . . . . . . . . . . . . $ 5,317,737
============
See accompanying notes to financial statements.
F-2
37
EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED
DECEMBER 31,
-----------------------------
1995 1996
----------- -----------
Research contract revenue . . . . . . . . . . . . . . . . . . . . . . . . $ 93,197 $ 37,029
----------- -----------
Operating expenses:
Research and development . . . . . . . . . . . . . . . . . . . . . . . 1,442,957 2,148,615
Selling, general and administrative . . . . . . . . . . . . . . . . . . 1,220,843 1,256,495
----------- -----------
Total operating expenses . . . . . . . . . . . . . . . . . . . . . 2,663,800 3,405,110
----------- -----------
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . (2,570,603) (3,368,081)
Other income (expense):
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,609 189,813
Interest and financing expense . . . . . . . . . . . . . . . . . . . . (488,191) (183,371)
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329,600 35,795
----------- -----------
Loss from continuing operations . . . . . . . . . . . . . . . . . . (2,713,585) (3,325,844)
Discontinued operations:
Income (loss) from operations
of Diagnostics Division . . . . . . . . . . . . . . . . . . . . . . . 586,372 (193,386)
Gain on disposal of Diagnostics Division . . . . . . . . . . . . . . . 8,785,712 67,072
----------- -----------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . 6,658,499 (3,452,158)
=========== ===========
Loss per share from continuing operations . . . . . . . . . . . . . . . . $ (0.38) $ (0.31)
Income (loss) per share from discontinued operations . . . . . . . . . . 1.31 (0.01)
----------- -----------
Net income (loss) per share . . . . . . . . . . . . . . . . . . . . $ 0.93 $ (0.32)
=========== ===========
Weighted average number of common
and common equivalent shares outstanding . . . . . . . . . . . . . . . 7,155,322 10,854,993
See accompanying notes to financial statements
F-3
38
EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock Additional Deferred Accumulated Total Stockholders
Shares Amount Paid-In Capital Compensation Deficit Equity (Deficit)
---------- -------- --------------- ------------ ------- ----------------
Balance at December 31, 1994 7,005,261 $ 70,053 $46,424,815 $(189,638) $(51,331,342) $(5,026,112)
Exercise of stock options 18,139 181 5,244 5,425
Warrant price adjustment 480,000 480,000
Forfeiture of compensatory stock options (50,000) 38,281
Amortization of deferred compensation 51,845 51,845
Net income for the year ended December 31, 1995 6,658,499 6,658,499
---------- -------- ---------- --------- ------------ -----------
Balance at December 31, 1995 7,023,400 70,234 46,860,059 (99,512) (44,672,843) 2,157,938
Private placement of stock 5,000,000 50,000 4,582,500 4,632,500
Sale of shares to VIMRx 457,143 4,571 795,429 800,000
Exercise of stock options 43,313 434 16,561 16,995
Exercise of warrants 2,200,000 22,000 638,000 660,000
Amortization of deferred compensation 60,483 60,483
Net loss for the year ended December 31, 1996 (3,452,158) (3,452,158)
---------- -------- ---------- --------- ------------ -----------
Balance at December 31, 1996 14,723,856 147,239 52,892,549 (39,029) (48,125,001) 4,875,758
========== ======== ========== ========= ============ ===========
See accompanying notes to financial statements.
F-4
39
EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996
----------- -----------
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,658,499 $(3,452,158)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Continuing operations:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 290,032 201,963
Amortization of discount on notes payable . . . . . . . . . . . . . . . . . 357,674 122,326
(Gain) loss on disposal of assets . . . . . . . . . . . . . . . . . . . . . (53,260) --
Note payable forgiven in settlement
of obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (300,000) --
Interest capitalized to notes payable . . . . . . . . . . . . . . . . . . . 119,201 --
Changes in operating assets and liabilities:
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,144 90,425
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . (1,108,657) (462,288)
Discontinued operations:
Gain on sale of discontinued operations . . . . . . . . . . . . . . . . . . (8,785,712) (67,072)
Changes in current assets and current liabilities . . . . . . . . . . . . . (1,902,723) --
Decrease in net noncurrent assets
in excess of noncurrent liabilities . . . . . . . . . . . . . . . . . . . 77,931 --
----------- -----------
Net cash used in operating activities . . . . . . . . . . . . . . . . . . . (4,607,871) (3,566,804)
----------- -----------
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements . . . . . . . . . . . . (5,972) (132,816)
Proceeds from disposal of assets . . . . . . . . . . . . . . . . . . . . . . 1,585 3,400
Proceeds from sale of net assets
of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . 8,510,000 67,072
----------- -----------
Net cash provided by (used in) investing activities . . . . . . . . . . . . 8,505,613 (62,344)
----------- -----------
Cash flows from financing activities:
Principal payments on notes payable . . . . . . . . . . . . . . . . . . . . (160,553) (1,329,133)
Principal payments on capital lease. . . . . . . . . . . . . . . . . . . . . (13,454) --
Proceeds from sale of common stock . . . . . . . . . . . . . . . . . . . . . -- 5,432,500
Exercise of warrants and stock option . . . . . . . . . . . . . . . . . . . 5,425 676,995
----------- -----------
Net cash provided by (used in) financing activities . . . . . . . . . . . . (168,582) 4,780,362
----------- -----------
Net increase in cash and cash equivalents. . . . . . . . . . . . . . . . . . . 3,729,160 1,151,214
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . 9,984 3,739,144
----------- -----------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . $ 3,739,144 $ 4,890,358
----------- -----------
Supplemental disclosure of cash flow information
cash payments made during the year for interest . . . . . . . . . . . . . . $ 26,542 89,853
=========== ===========
Supplemental disclosure of non-cash financing
activity discount on notes payable incurred on
repricing of stock warrants . . . . . . . . . . . . . . . . . . . . . . . . $ 480,000 --
=========== ===========
See accompanying notes to financial statements.
F-5
40
EPOCH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Epoch Pharmaceuticals, Inc. ("Epoch" or "the Company"), formerly
MicroProbe Corporation, was organized to develop, manufacture and market
therapeutic and diagnostic products utilizing oligonucleotide technology. In
November 1995, the Company sold its diagnostics assets to Becton, Dickinson and
Company (see note 8). The Company's continuing activities are focused on the
development of therapeutic technologies and products. The Company's revenues
from continuing operations to date are primarily from Federal government and
other research grants and contracts.
Discontinued Operations
In 1995, the Company disposed of its diagnostics division (see note
8). Accordingly, amounts related to the diagnostics division have been
reported as a discontinued operation in all years presented.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation
and amortization are provided on the straight-line method over the shorter of
the assets' estimated useful lives, generally three to five years, or the lease
term.
For long-lived assets, including equipment and leasehold improvements,
the Company evaluates the carrying value of the assets by comparing the
estimated future cash flows generated from the use of the asset and its
eventual disposition with the assets reported net book value. The carrying
value of assets are evaluated for impairment when events or changes in
circumstances occur which may indicate the carrying amount of the asset may not
be recoverable.
Revenue Recognition
Research contract revenue is recognized as research and development
activities are performed under the terms of related agreements.
Income Taxes
Deferred income taxes are provided based on the estimated future tax
effects of temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on the
deferred tax assets and liabilities of a change in tax rates is recognized in
the
F-6
41
period that includes the enactment date. A valuation allowance is recorded for
deferred tax assets when it is more likely than not that such deferred tax
assets will not be realized.
Stock-Based Compensation
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees and related Interpretations in measuring compensation costs for its
stock option plans. The Company discloses proforma net income (loss) and net
income (loss) per share as if compensation cost had been determined consistent
with Statement of Financial Accounting Standard (FAS) No. 123, Accounting for
Stock-Based Compensation.
Per Share Data
Income (loss) per share is calculated by dividing net income (loss) by
the weighted average number of common shares and dilutive common share
equivalents outstanding. Common share equivalents include unexercised stock
options and warrants. Common share equivalents are excluded from the
calculation in loss periods as such equivalents would be antidilutive.
Financial Instruments
The Company has financial instruments consisting of cash and cash
equivalents, receivables, notes payable and accounts payable. The fair value
of the Company's financial instruments based on their short term nature and
current market indicators approximates their carrying amounts.
Cash Equivalents
All highly liquid investments with a maturity of three months or less
at date of purchase are considered to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
Machinery and equipment . . . . . . . . . . . . . . . . $ 1,685,102
Furniture and fixtures . . . . . . . . . . . . . . . . . 329,422
Leasehold improvements . . . . . . . . . . . . . . . . . 145,723
------------
$ 2,160,247
Less accumulated depreciation and amortization . . . . . (1,882,749)
------------
Equipment and leasehold improvements, net . . . . . . . $ 277,498
============
F-7
42
(3) COMMITMENTS
Leases
The Company leases its facilities and certain equipment under
noncancelable operating leases. Future minimum payments under such leases at
December 31, 1996, are as follows:
1997 . . . . . . . . . . . . . . . . . . . . . . $ 312,933
1998 . . . . . . . . . . . . . . . . . . . . . . 8,456
1999 . . . . . . . . . . . . . . . . . . . . . . 512
----------
$ 321,901
==========
During 1995 and 1996, the Company incurred rent expense on operating
leases of $436,000 and $338,444, respectively.
Consulting Agreements
In July 1993, the Company entered into a one-year consulting agreement
with Dr. Craves, CEO of the Company, under which he received $100,000 per year
for his services. The Company has extended the term of Dr. Craves' consulting
agreement. The current extension runs to December 31, 1997.
In January 1995, the Company entered into a three-month consulting
agreement with Mr. Zweifach, President and CFO of the Company, under which he
received a monthly payment of $11,250. The Company has extended the term of the
contract to run through December 31, 1997.
(4) RETIREMENT SAVINGS PLAN
The Company has a profit sharing plan, which is qualified under
Section 401(k) of the United States Internal Revenue Code. The plan allows
eligible employees to contribute up to 20% of their salary. The Company, at
its discretion, makes matching contributions to the plan. No matching
contributions were made to the plan in 1995 or 1996.
(5) EQUITY
At December 31, 1996, the Company had three stock-based compensation
plans, which are described below. Had compensation cost for the Company's
three stock-based compensation plans been determined consistent with FASB
Statement No. 123, the Company's net income (loss) and earnings (loss) per
share would have been reduced to the pro forma amounts below:
1995 1996
----------- ------------
Net income (loss) As Reported $ 6,658,499 $ (3,452,158)
Pro forma $ 6,649,139 $ (3,638,782)
Net income (loss) per share As Reported $ 0.93 $ (0.32)
Pro forma $ 0.93 $ (0.34)
F-8
43
The Company's three stock based compensation plans are as follows:
The 1991 Plan
In August 1991, the Company established the 1991 Incentive Stock
Option Plan, Nonqualified Stock Option and Restricted Stock Purchase Plan (the
"1991 Plan"). The 1991 Plan provides for the granting of options or rights to
purchase up to 1,436,470 shares of common stock. Incentive stock options were
granted at the fair market value on the date of grant and nonqualified options
were granted at not less than 85% of the fair market value on the date of the
grant. All options generally expire 10 years from the date of grant. At
December 31, 1996, there were 318,381 shares available for grant under this
plan.
The 1993 Plan
In July 1993, the Company established the 1993 Incentive Stock Option,
Nonqualified Stock Option and Restricted Stock Purchase Plan (the "1993 Plan").
The 1993 Plan provides for the grant of options or rights to purchase up to
500,000 shares of Common Stock to employees, officers, directors and
consultants of the Company. Under the 1993 Plan, 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. Options are exercisable
over a period of ten years and vest over a period of three years after the date
of grant. At December 31, 1996 there were 175,857 shares available for grant
under this plan.
The Directors Plan
In July 1993, the Company adopted a Non-Employee Directors Option Plan
(the "Directors Plan") pursuant to which the Company granted each non-employee
director who was a director prior to July 27, 1993, a fully-vested 10-year
option to purchase 10,000 shares of Common Stock at an exercise price of $4.00
per share for a total of 60,000 shares. In addition, upon each anniversary of
the inception of the Directors Plan, each non-employee director will receive
fully-vested 10-year options to purchase 5,000 shares of Common Stock at the
then current fair market value. Non-employee directors who subsequently join
the Board of Directors will receive, upon each anniversary of joining the Board
of Directors, fully-vested 10-year options to purchase 5,000 shares of Common
Stock at the then current fair market value.
The fair value of each option grant is estimated on the date of grant
using the Black Scholes option-pricing model with the following weighted
average assumptions used for grants in 1995 and 1996: dividend yield of 0.0
percent for both years; expected volatility of 277 percent in 1995 and 209 and
218 percent in 1996; risk free interest rates of 7.0 percent in 1995 and 1996;
and expected lives of 5 and 10 years in both 1995 and 1996.
F-9
44
A summary of the status of the Company's three fixed stock option
plans as of December 31, 1995, and 1996, and changes during the years ended on
those dates is presented below.
1995 1996
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------------------------------------------------------
Outstanding at beginning of year 1,383,693 $ 2.05 826,765 $ 1.96
Granted 10,000 0.38 667,879 1.33
Exercised (18,139) 0.30 (43,313) 0.39
Forfeited (548,789) 2.21 (143,573) 0.62
Outstanding at end of year 826,765 1.96 1,307,758 1.84
--------- ---------
Options exercisable at year end 626,820 $ 2.01 696,016 $ 2.06
========= =========
Weighted - average fair value of options
granted during the year $ 0.23 $ 0.28
The following table summarizes information about stock options
outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------------------------------------
RANGE OF NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
EXERCISE OUTSTANDING AT REMAINING YEARS AVERAGE EXERCISABLE AVERAGE
PRICES 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- -------------------------------------------------------------------------------------------------------------
0.30 - 1.00 792,726 7.9 $ 0.50 370,201 $ 0.45
1.01 - 3.00 44,352 8.1 1.79 44,352 1.79
3.87 - 5.00 450,640 7.4 4.03 261,423 4.09
5.01 - 10.00 20,040 6.8 5.88 20,040 5.88
--------- -------
0.30 - 10.00 1,307,758 7.7 $ 1.84 696,016 $ 2.06
========= =======
Stock Warrant Price Adjustment
In connection with the notes payable to stockholders of the Company
due March 31, 1996, the Company issued for $220, 5-year warrants to purchase
2,400,000 shares of the Company's common stock. The warrants can be exercised
through October 1999 and had an exercise price of $0.50 per share. In May
1995, in connection with the extension of these notes to March 31, 1996, the
exercise price of such warrants was reduced to $0.30 resulting in a discount on
notes payable of $480,000. The discount was amortized over the remaining term
of the notes. In June 1996, warrants to purchase 2,200,000 shares of the
Company's common stock were exercised at a price of $0.30 per share and the
notes payable were repaid. At December 31, 1996, 200,000 of these warrants
remain outstanding.
F-10
45
Warrants to Purchase Common Stock
As of December 31, 1996, warrants were outstanding to purchase an
aggregate of 8,983,021 shares of common stock at exercise prices ranging from
$0.30 to $10.40 per share. These warrants have expiration dates that range to
2001. Commencing September 29, 1994, 1,875,000 warrants are redeemable, in
whole but not in part, for $.05 per warrant, at the option of the Company, upon
30 days written notice at any time after the last sale price of the Company's
common stock has been at least $9.10 for at least 30 consecutive business days
ending within 15 days of the date of the notice of redemption.
On January 16, 1996 the Company issued five year warrants to purchase
250,000 shares of Common Stock to Burrill & Craves, a consulting firm of which
Dr. Craves was a principal, and 345,000 shares of Common Stock to the Olmsted
Group, L.L.C., a merchant banking firm of which Mr. Zweifach is a principal, at
an exercise price of $0.50 per share, in consideration for the services
performed by Burrill & Craves and The Olmsted Group, L.L.C., respectively, in
connection with the sale of the Corporation's diagnostics division and other
corporate matters. The warrants vest as follows: (i) 33 1/3% at issuance;
(ii) 33 1/3% upon the earlier of (1) June 30, 1997, or (2) the date on which
the Corporation enters into an agreement with a corporate partner; and (iii) 33
1/3% on January 1, 1999. All such warrants shall vest, to the extent not
already vested upon a change of control.
In June 1996, the Company successfully completed a private offering of
Units, each Unit consisting of one share of the Company's Common Stock and one
warrant to purchase 0.5 shares of the Company's Common Stock. The Company sold
a total of 5 million Units, for an aggregate purchase price of $5 million to
institutional and accredited individual investors.
The term of the warrants is five (5) years, and they are exercisable
at $2.50 per share (or $1.25 per 0.5 shares). Each warrant is redeemable by
the Company at any time after eighteen months from the date of issuance 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.
In connection with the private offering, pursuant to an agreement with
David Blech, its financial advisor on the Private Placement, the Company paid
fees of $350,000 to Mr. Blech. In addition, the Company canceled fifty percent
(50%) of the obligations of Mr. Blech arising in connection with the
transactions involving Ribonetics, including the "put" rights contained in an
agreement dated December 1, 1993 between the Company and Mr. Blech. The
aggregate amount canceled was $1,635,588. The balance is accruing interest at
the minimum applicable federal rate. As the obligation had been fully
reserved, and the remaining balance is fully reserved, neither the cancellation
nor the remaining obligation is reflected in the Company's financial
statements. The Company also issued to Mr. Blech five year warrants to
purchase 500,000 shares of Common Stock at $1.00 per share. The warrants are
not exercisable for one year and are held in escrow by the Company until the
balance of the Ribonetics debt is satisfied.
Also in June 1996, the Company announced that it intends to exchange
for every two (2) warrants which were issued in conjunction with the Company's
public offering in September 1993 at $6.50 per share, one (1) new warrant to
purchase one (1) share of the Company's Common Stock with a term of five (5)
years that is exercisable at $2.50 per share. Each warrant shall be redeemable
by the Company at any time after eighteen months from the date that they are
issued at $0.05 per warrant,
F-11
46
provided that the closing trading price per share of Common Stock is at least
$3.75 for twenty (20) consecutive trading days.
In October 1996, the Company and VIMRx Pharmaceuticals, Inc.,
Wilmington, Delaware ("VIMRx") announced the establishment of an alliance
between the two companies to attempt to exploit the synergy's between their
respective technologies and markets, and a settlement of the outstanding
dispute between Epoch and VIMRx's German subsidiary, formerly known as
Ribonetics. VIMRx invested $800,000 in exchange for 457,143 shares of Epoch
common stock at $1.75 per share. In addition, VIMRx received 450,000 warrants
to purchase common stock exercisable at $2.00 and 450,000 warrants to purchase
common stock exercisable at $3.00 which expire in October 1997 and 1998
respectively.
Underwriters Option
The underwriters of the Company's initial public offering were issued an
option to purchase up to 250,000 shares of Common Stock and/or 250,000 warrants
with an exercise price of $10.40 and $0.16, respectively. The underwriters
options are exercisable through September.
(6) INCOME TAXES
There was no income tax expense or benefit attributable to net income
or loss for 1995 and 1996. The difference between taxes computed by applying
the U.S. Federal corporate tax rate of 34% and the actual income tax provision
in 1995 and 1996 is primarily the result of the utilization of net operating
loss carryforwards and limitations on utilizing net operating losses,
respectively.
The tax effects of temporary difference that give rise to significant
portions of the deferred tax assets at December 31, 1996 are presented below:
Net operating loss carryforwards . . . . . . . . . . . . . . $ 6,302,000
Research and development credit carryforward . . . . . . . . 1,557,000
Capitalized research and development . . . . . . . . . . . . 160,000
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . 37,000
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (32,000)
-----------
Total gross deferred tax assets . . . . . . . . . . . . . . 8,024,000
Less deferred tax asset valuation allowance . . . . . . . . 8,024,000
-----------
Net deferred tax assets . . . . . . . . . . . . . . . . . . $ --
===========
The net change in the total valuation allowance for 1995 and 1996 was
an increase of approximately $2,461,000 and a decrease of $2,620,000,
respectively, which were primarily due to changes in the amount of net
operating loss carryforwards that could not be utilized and the utilization of
net operating losses, respectively.
At December 31, 1996, the Company had net operating loss carryforwards
for income tax purposes of approximately $18,535,000 and unused research and
development tax credits of approximately $1,557,000 available to offset future
taxable income and income taxes, respectively, expiring through 2011. The
Company's net operating loss and credit carryforwards have been reduced
F-12
47
to reflect the limitations pursuant to the Tax Reform Act of 1986, due to
cumulative changes in stock ownership in excess of 50%.
(7) LITIGATION
The Company was named as an additional defendant in In Re Blech
Securities Litigation, 94 Civ. 7696 (RWS), pursuant to an Amended consolidated
Class Action Complaint (the "Amended Complaint") filed on March 28, 1995 in the
United States District Court for the Southern District of New York (the
"Court"). The plaintiffs brought this action as a purported class action on
behalf of persons who purchased, during the period from July 1, 1991 through
September 21, 1994, securities of 24 companies, including securities issued by
the Company. The Amended Complaint names as defendants 11 of 24 issuers,
including the Company, as well as David Blech, D. Blech & Co., Mark S. Germain,
Nicholas Madonia as trustee for various trusts, Mordechai Jofen, as trustee for
The Edward Blech Trust, Chancellor Capital Management, Inc., Parag Saxena,
Bear, Stearns & Company, Inc. and Baird Patrick & Co.
The Amended Complaint sought to allege against the Company violations
of antifraud provisions of the federal securities law and common law fraud and
deceit in connection with a purported scheme to, inter alia, artificially
inflate and maintain prices of the securities issued by the 24 companies
referenced above. In that regard, the Amended Complaint purports to allege
fraudulent activities involving the foregoing securities, including without
limitation unlawful "sham" transactions and the providing of undisclosed
"incentives" to investment fund managers and others to purchase such
securities. The Amended Complaint seeks the following relief: (i)
certification of this action as a class action; (ii) damages in an unspecified
amount and interest; (iii) and expenses of this action, including reasonable
fees of attorneys, accountants and experts and other disbursements; and (iv)
such other and further relief as may be proper.
The Company moved to dismiss the Amended Complaint as to it on the
grounds that the Amended Complaint failed to plead the purported fraud with the
requisite particularity and failed to state a claim. Plaintiffs opposed the
motion. By decision dated June 6, 1996, the District Court granted the
Company's motion to dismiss for failure to plead fraud with particularity and
declined to exercise jurisdiction over the pendent common law claims asserted
against the Company under state law. The District Court granted plaintiffs
leave to replead their purported claims by July 26, 1996. The Company was not
named in the repleading and by the terms of the June 6, 1996 decision, the
action was dismissed by the District Court with respect to the Company.
Although there remained other party defendants in the action, the Company moved
for entry of final judgment dismissing the action as against the Company. By
decision dated January 16, 1997, the District Court denied the Company's motion
for entry of such final judgment.
(8) SALE OF DIAGNOSTIC DIVISION
In November 1995, the Company sold substantially all of its assets and
technology associated with its Diagnostics Division (the "Assets") to Becton,
Dickinson and Company, a New Jersey corporation, through its Becton Dickinson
Diagnostic Instrument Systems Division (collectively, "Becton"). The Assets
related to the Company's development, marketing and sale of diagnostic products
which involve the use of nucleic acid probes to detect and identify
microorganisms in biological samples under the names "Affirm(R) VP," "Affirm(R)
VPIII," and "Affirm(R) DP(R)," "Hybriquick(R)" and "Isoquick(R)". The Assets
F-13
48
included: tangible personal property, interests in certain contracts and other
instruments, rights in permits and licenses, raw materials and inventory,
technology, trade secrets, patents, other intellectual property (including the
name "MicroProbe"), rights in customer lists, records and data, computer
software programs, goodwill and causes of action held by the Company against
third parties. The aggregate purchase price paid by Becton for the Assets and
for the Company's covenant not to compete with Becton for a period of five
years was $8,510,000. The Purchase Price is subject to an upward adjustment of
$1,500,000 contingent upon Procter & Gamble entering into a supply agreement
with Becton by November 2002, for the dental diagnostic products, which were
transferred by the Company to Becton, and Procter & Gamble obtaining all
clearances from the United States Food and Drug Administration necessary for
the commercial sale of such products in the U.S. The Company does not
anticipate receiving these funds.
(9) SALE OF TECHNOLOGY
In November 1996, the Company entered into an agreement with Saigene
Corporation (Saigene), whereby Epoch transferred its remaining diagnostic
technologies to Saigene for $1,100,000. The $1,100,000 is in the form of an 8%
note receivable with terms of $50,000 down and $10,000 per month. The balance
of the note is due March 31, 1997, or upon Saigene completing financing
arrangements, wherever occurs first.
Due to the uncertainty of Saigene obtaining financing, the Company has
recorded as Gain on Disposal of Diagnostic Division only that portion of the
gain of $67,000, for which cash payments had been received at year end.
The Company does not anticipate receiving the balance of the note receivable
when due on March 31, 1997, and there is no assurance Saigene will obtain
financing to pay this debt.
(10) LIQUIDITY
At December 31, 1996, the Company had cash and cash equivalents of
approximately $4,890,000. Additionally, the Company anticipates cash receipts
of $584,000, over four years, under a subcontract with the Virginia Mason
Research Center to develop and test a compound designed to inactivate a gene
which causes rheumatoid arthritis. Management estimates this provides
sufficient working capital to operate approximately 15 months. The Company's
current operations are research and development and will be unable to generate
sufficient working capital in the near term to fund future obligations.
Since inception, the Company has financed its operations primarily
through the sales of its equity securities. In addition, the Company received
$1,320,000 from the sale of Source Scientific Systems, Inc. and $8,510,000 from
the sale of the diagnostics division. To continue operations, the Company will
be required to sell additional equity securities, borrow additional funds, or
obtain additional financing through licensing, joint venture, or other
collaborative arrangements. The Company is pursuing such financing
arrangements but has no commitments for such financing and there can be no
assurance that such financing will be available on satisfactory terms, if at
all.
F-14
49
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: ____________________ EPOCH PHARMACEUTICALS, INC.
(Registrant)
By: _________________________________
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.
Signature Title Date
- --------- ----- ----
- ---------------------------
Fred Craves Chairman of the Board of Directors and
Chief Executive Officer
- ---------------------------
Richard Dunning Director
- ---------------------------
Sanford S. Zweifach President/Chief Financial Officer
(Chief Accounting Officer)
- ---------------------------
Kenneth L. Melmon, M.D. Director