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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-K (Mark One)x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2003
 OR o
    
    TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
 Commission file number 0-22170   EPOCH BIOSCIENCES, INC. (Exact name of
Registrant as Specified in its charter)
 Delaware(State or other jurisdiction of incorporation or organization)
    
    91-1311592(I.R.S. Employer Identification No.)
 21720 23rd Drive SE, #150, Bothell, Washington(Address of principal executive offices)
    
    98021(Zip Code)
 (425) 482-5555(Issuers telephone number, including area code) 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 o Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation SK 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-K
or any amendment to this Form 10-K o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES
o NO x As of June 30, 2003 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 $60,348,673. 28,635,671 shares of Common Stock were outstanding at March 5, 2004. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement to be delivered to stockholders in
connection with the Annual Meeting of Shareholders to be held May 17, 2004 are
incorporated by reference into Part III.




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TABLE OF CONTENTS  PART IITEM 1. BusinessITEM 2. PropertiesITEM 3. Legal ProceedingsITEM 4. Submission of Matters to a Vote of Security HoldersPART IIITEM 5. Market for Common Equity and Related Stockholder MattersITEM 6. Selected Financial DataITEM 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsITEM 7A. Quantitative and Qualitative Disclosures About Market RiskITEM 8. Financial Statements and Supplementary DataITEM 9. Changes in, and Disagreements with, Accountants on Accounting and Financial DisclosureITEM 9a. Controls and ProceduresPART IIIITEM 10. Directors and Executive Officers of Epoch.ITEM 11. Executive CompensationITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related MattersITEM 13. Certain Relationships and Related TransactionsITEM 14. Principal Accountant Fees and ServicesPART IVITEM 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-KIndependent Auditors ReportBalance SheetsStatements of OperationsStatements of Stockholders EquityStatements of Cash FlowsNotes To Financial StatementsEXHIBIT INDEXEXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2    Table of Contents  INTRODUCTORY NOTE This Annual Report on Form 10-K contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and we intend that these
forward-looking statements be subject to the safe harbors created thereby.
These forward-looking statements include, without limitation, the development
and commercialization of the companys technology. The forward-looking statements included in this document are based on
current expectations that involve a number of risks and uncertainties. These
forward-looking statements are based on assumptions that products utilizing
Epochs technology will continue to be developed and be effective, and will not
be replaced by new technology, that we will retain key technical and management
personnel, and that there will be no material adverse change in our operations
or business. Assumptions relating to the foregoing involve judgments with
respect to, among other things, future technology, economic, competitive and
market conditions, and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control.
Although we believe that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, there can be no assurance that the results contemplated in
forward-looking statements will be realized. In addition, our business and
operations are subject to substantial risks which increase the uncertainty
inherent in these forward-looking statements. Epoch undertakes no obligation
to revise or publicly release the results of any revision to these
forward-looking statements. In light of the significant uncertainties inherent
in the forward-looking information included in this document, the inclusion of
information should not be regarded as a representation by us or any other
person that the objectives or plans of Epoch will be achieved. Readers should
carefully review the risk factors described in this document as well as in
other documents the company files from time to time with the Securities and
Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed
by the company in fiscal year 2004.




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PART I 
 ITEM 1. Business The Company Epoch Biosciences, Inc. is a biotechnology company developing technologies
and products to help scientists, clinicians, and physicians around the world
perform genetic research to improve our lives and our environment. Genetic
analysis has become a pervasive activity in academic, biopharmaceutical,
clinical, agricultural, veterinary and forensic laboratories. Our technologies
facilitate rapid, accurate and cost-effective genetic analysis at the scale
necessary to generate the massive amounts of genetic information being studied
today. As the human genome and other animal and plant genomes are sequenced, the
task of understanding the structure and function of genes lies before us.
Researchers want to know when and why a gene switches on and begins producing
its protein (gene expression) and what the genes protein does in the body
(proteomics); they also want to know what the genetic differences among
individuals mean for their health and susceptibility to disease. For example,
single nucleotide polymorphisms, or SNPs, are tiny differences in our DNA that
make humans different from one another. SNPs have been linked to
susceptibility to diseases, and to peoples response to medications. Because of the importance of understanding the structure and function of
genes, companies have moved quickly to design and manufacture automated genetic
analysis systems. We develop patented technologies that improve the output of
these systems and that are compatible with many of the genetic analysis systems
currently in use or in development. Just as microprocessors are found in
essentially all electronic appliances, our chemistries and technologies have
the potential to be incorporated in nearly all genetic analysis systems. Our technologies are useful in genetic research, drug development,
prenatal testing, clinical diagnostics, including infectious disease, oncology,
genetic disease and population screening to assess our risk of disease or to
predict our response to drugs. Epochs products also have application in
forensics, food testing, and environmental testing, including bio-warfare and
bioterrorism. We earn revenues through a variety of sources. We sell our products to
end-users, both through our direct sales efforts and through distributors that
provide worldwide reach. We license our technology for incorporation into
other companies products and earn license fees and royalties from those
companies and generate product revenue from sales of our chemistries to them.
We also earn revenues through contract research activities, whereby third party
companies pay for specific research and development activities carried out by
our scientists. To date, virtually all of our revenues have been from the
research field. In 2003, through our efforts to apply our MGB Eclipse Probe Systems to the
clinical diagnostics market, we identified several analyte specific reagents
(ASRs) that have high value for routine clinical use in the clinical reference
laboratory and related hospital based laboratory market. We began implementing
FDA compliant manufacturing processes for these new products in the fourth
quarter of 2003. We have registered 17 products to date with the FDA and we
anticipate having our clinical diagnostic products available for sale in 2004. 1




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The following table summarizes our revenues by major category, for the
last three years ($ in thousands): 2001
    
    2002
    
    2003$
    
    %
    
    $
    
    %
    
    $
    
    %Product sales
    
    $
    4,461
    
    
    
    59
    %
    
    $
    6,662
    
    
    
    59
    %
    
    $
    2,745
    
    
    
    31
    %License fees and royalty income
    
    
    936
    
    
    
    13
    %
    
    
    2,694
    
    
    
    24
    %
    
    
    5,214
    
    
    
    58
    %Contract research revenue
    
    
    2,124
    
    
    
    28
    %
    
    
    1,870
    
    
    
    17
    %
    
    
    942
    
    
    
    11
    %Total revenues
    
    $
    7,521
    
    
    
    100
    %
    
    $
    11,226
    
    
    
    100
    %
    
    $
    8,901
    
    
    
    100
    %
 We incorporated in Delaware on August 14, 1985, under the name MicroProbe
Corporation. We changed our name to Epoch Pharmaceuticals, Inc. in December
1995, and to Epoch Biosciences, Inc. in August, 2000. Our principal office is
located at 21720 23rd Drive SE, #150, Bothell, Washington, and our telephone
number is (425) 482-5555. Our website address is www.epochbio.com. Background Nucleic acids are found in all living organisms and are the sole carriers
of the genetic code that specifies an organisms makeup. There are two types
of closely related nucleic acids: deoxyribonucleic acid, or DNA, and
ribonucleic acid, or RNA. DNA carries the permanent genetic information for
construction of all proteins in higher living organisms, while RNA carries a
temporary copy of this information to direct protein synthesis. Proteins
perform most of the normal physiological functions of living organisms, and
aberrant production or activity of proteins may cause numerous diseases. (FIGURE) Figure 1. Segment of Double-Stranded DNA Showing the Base Pair
Relationship DNA is comprised of two linear strands that are formed in a double helix.
Each strand is a sequential array of four nucleotide bases: adenine (A),
guanine (G), thymine (T) and cytosine (C), which are linked together in DNA by
a sugar and phosphate backbone. Every gene contains a unique sequence of these
bases and it is these unique sequences that constitute the genetic code which
guides all cellular processes. The two chains, or strands, normally comprising
DNA are held together by chemical attractions between opposing paired bases
according to the following rules: A always pairs with T, G always pairs with C.
Figure 1 is a schematic diagram of double-stranded DNA showing this highly
specific interaction between the bases in the two strands. This process of
base pairing, called hybridization, can occur between DNA strands of any size,
as long as the paired segments are matched correctly. RNA occurs in several forms in cells, and each of these forms has a
different function. Messenger RNA, or mRNA, is copied from the gene and
carries the genetic code which is translated into the proteins synthesized by
the cell. This process is called gene expression. Synthetic DNA strands, or probes, can be designed to bind selectively to
unique sequences of bases in a sample of DNA from an individual. If the probe
binds to its target sequence a signal is generated. This method of genetic
analysis is widely employed to measure the activity of genes, to identify
infectious organisms, or to identify genetic differences between species or
individuals. Our 2




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expertise in the chemistry, design and synthesis of synthetic
DNA forms the basis of our research and development activities on compounds and
techniques for genetic analysis. Overview Genetic analysis has become the most important laboratory technique in the
life sciences. The massive effort to sequence the human genome is paralleled
by projects to sequence the genomes of infectious organisms, research animals
including fruit flies, worms and rats, and important food crops. It is
estimated that over $3.5 billion was spent worldwide in 2001 on industrial and
academic research to understand human gene function and that the worldwide
market for genomic analysis products, which consists of reagents, assays and
other consumables, was $1 billion in 2001. This research effort is
revolutionizing the pharmaceutical and diagnostic industries, as well as the
fields of crop science, animal breeding and veterinary medicine. In the area
of human health, genetic analysis promises to identify the mutations that cause
hereditary diseases, to elucidate the genetic events that lead to cancer and
determine the relative malignancy of tumors, to identify our individual risk
for developing chronic illnesses like heart disease and arthritis, and to
predict our response to medications. The promise of genetic analysis and a rapid surge in research activity has
created a demand for new technologies and systems to accelerate the pace and
accuracy of genetic research. Techniques to study gene expression levels and
detect differences in gene sequences are rapidly evolving. As the amount of
data being generated grows, the demand for simple, accurate, high throughput
formats is increasing. New technologies are generating great interest, such as
TaqMan® MGB systems from Applied Biosystems, microarray platforms such as
GeneChip® from Affymetrix and MassARRAY® from Sequenom, and microfluidic
platforms under development at Caliper Technologies and others, and the
Invader® operating system from Third Wave Technologies. Historically, genetic analysis has been primarily a research activity
carried out in thousands of academic, industrial, and government laboratories.
Currently these analyses are rapidly being adopted for use in doctors offices
and clinics, on farms and ranches, at food-processing plants, in factories, at
crime scenes, and on the battlefield. We believe that simple, inexpensive DNA
tests have a future in almost every aspect of everyday life. We have developed chemical compounds that broadly facilitate genetic
analysis. Our chemistries include minor groove binders, modified bases, novel
fluorescent molecules and non-fluorescent quenchers. When these chemical
compounds are attached to or incorporated into DNA probes, they enhance methods
to measure gene expression and to detect a difference of a single base in the
DNA of different individuals, called a single nucleotide polymorphism, or SNP.
Our compounds are compatible with multiple technologies, including polymerase
chain reaction, or PCR, and alternative nucleic acid amplification
technologies. Our technologies are used in multiple formats, including high
throughput systems and microtiter plate formats, and they can be used in
solution or on solid surfaces, including microarrays. The commercialization of our technologies has led to development of our
current proprietary products which include MGB Eclipse Probe Systems, which
has application in research, diagnostics, biowarfare, and industrial markets,
and is currently being sold in the research field directly by the Company as
well as through a worldwide distributor. We have also developed several analyte-specific reagents (ASRs), targeting
bacterial and viral infectious diseases, oncology and genetic disease targets.
These products are being developed in 3




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cooperation with key medical institutions
and clinical reference laboratories in the United States. We expect our
initial sales of these products in the second half of 2004. We are collaborating with companies that are interested in improving the
speed, accuracy, and simplicity of their tests and applications by using our
proprietary chemistries. We have a strategic partnership with Applied
Biosystems, where our technology is incorporated into all of their TaqMan® MGB
real-time PCR systems in the research field. We have licensed our technology
to Third Wave Technologies for use in their Invader® operating system, to
BioControl Systems for incorporation into their products in the food testing
field, and to Applied Biosystems for incorporation into their products in the
environmental testing field. We are also entering into agreements with
companies with worldwide reach to market our products. For example, we have
licensed our MGB Eclipse Probe Systems technology to QIAGEN for incorporation
into its QuantiTect Gene Expression Assays that are sold worldwide in the
research field. We anticipate forming business relationships with other
companies to distribute our products and/or incorporate our technologies in
their genetic analysis products in both the research and clinical diagnostics
fields. Genetic analysis In June 2000, the Human Genome Project and Celera announced that they had
sequenced the entire human genome of over 3 billion base pairs. At the same
time, Incyte Genomics and Human Genome Sciences had identified partial
sequences for the majority of human genes. Sequencing the human genome has been likened to the discovery of the
elements and their arrangement in the periodic table: it only reveals the
underlying structure and order of the system. With the human genome completely
sequenced, we know approximately how many genes our chromosomes contain and
where the genes are located on the chromosomes. However, that information
generates many more questions than it answers. Searching for the answers to
those questions will result in a rapid growth in the field of genetic analysis,
with a parallel growth in technologies and products that facilitate that
effort. Among the most important issues that genetic research will address in the
future are:  
    
    How does our genetic diversity  the differences in the
sequence of the four bases that make up our DNA  affect our
response to drugs, and contribute to our susceptibility to chronic
diseases, including cancer and cardiovascular disease?
    
    How do differences in the expression of genes in our various
tissues affect development and contribute to health and illness? SNP detection The sequence of the four nucleotides (A,G,T,C) in our DNA determines our
genetic makeup. Differences in this sequence, in large part, determine the
uniqueness of each individual. Sites in the sequence which differ due to
inheritance are called polymorphisms. One type of polymorphism is due to a
change in a single base in the genetic DNA sequence. These single base
polymorphisms, or SNPs, occur frequently enough along our DNA so that they can
be used as markers on a map of the genome. Such a map can be used to
localize traits such as hypertension, diabetes or sensitivity to therapeutic
drugs by identifying SNPs that occur at a higher frequency in individuals with
the trait than those without the trait. Knowing where the SNPs associated with
the trait occur, one can look for nearby genes responsible for the trait, thus
leading to a genetic understanding of the trait and directing efforts for
treatment. Some 4




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SNPs have been shown to cause disease, or to be associated
with risk for disease or adverse drug response. Presumably, a high proportion
of genetically controlled disease will be caused by or associated
with SNPs. Research on SNPs has proceeded in two phases, (1) discovery by
comparing DNA sequences of different individuals and (2) analysis by studying
populations with or without a given trait. The second phase requires testing
thousands of SNPs in hundreds of individuals and requires accurate, high
throughput automated systems. The performance of these systems is enhanced by
the compounds we have developed. Gene Expression Scientists study how gene expression affects development and contributes
to health and illness by comparing the level of expression of genes in
different tissues, in healthy versus diseased tissues, and at different points
in embryonic development. This approach has been accelerated by the
development of DNA microarrays, or biochips, which contain hundreds or
thousands of sites on their surface to which messenger RNAs expressed by
different genes will bind, allowing their relative levels to be tested and
measured. Hybridization Tests Essentially all of the technologies and products useful for genetic
analysis rely on hybridization, a process in which a synthetic DNA strand,
called a probe, binds to a DNA target that is being detected. If the sequences
of the two strands are perfectly complementary, the probe remains bound to its
target at an elevated temperature. If they are not, the probe separates, or
dissociates from its target. A hybridization assay is designed to detect the
presence of the bound, or hybridized, probe to its nucleic acid target. One of the greatest challenges facing scientists in developing
hybridization tests is that the sequence of the target DNA can complicate the
design of the probe. The process of choosing the optimum region on the target
strand to which to attach the probe can be time-consuming and tedious. In
multiplex formats, where multiple targets are being probed in the same test,
designing probes that bind to their target at similar temperatures can further
complicate the problem. Our technologies facilitate genetic analysis by making the process of
hybridization more efficient, hybridization tests simpler to design, and
detection of the hybridized product easier. Oligonucleotide Probes A DNA probe is synthesized on an automated instrument and is designed to
be complementary to a unique sequence of bases in the DNA of the target cell or
organism. However, short DNA probes do not bind to their target very tightly,
and longer DNA probes bind so tightly that they can hybridize to an incorrect
sequence. The ability to overcome these problems is the key to our technology. 5




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We believe that the ability of DNA probes to precisely bind to matching
DNA sequences will have broad use in the developing fields of molecular
diagnostics and the study of genes. Applications that could benefit from
improved hybridization sensitivity include:  
    
    Accurate detection of mutations;
    
    Identifying infectious organisms, including measuring the
level of HIV viruses in an individuals bloodstream, and genotyping
the virus to determine its resistance to therapy; and
    
    Diagnosing and determining the prognosis of cancers and their
optimum therapies. Epoch Technologies We are an innovative biotechnology company that focuses on the development
and manufacture of unique molecular tools for genetic analysis. Our expertise
in nucleic acid chemistries has led to the development of patented compounds
and methods that make the design of assays to detect DNA sequences easier and
the results more accurate. Our technologies enhance the performance of
synthetic DNA probes used extensively in the fields of genomic research and
clinical diagnostics and fall into the following categories: MGB Technology An MGB is a crescent shaped molecule that we attach to either end of a
synthetic DNA probe. After hybridization, the MGB molecule folds into the
minor groove of the double helix formed by the probe and its target DNA to
stabilize the duplex structure and enable greater flexibility in experimental
design. The tight-binding MGB probes are especially useful for DNA detection
using real-time PCR assay formats and are one of the important components of
MGB Eclipse Probe Systems and QIAGENs QuantiTect Gene Expression assays as
well as the TaqMan® MGB product line sold by Applied Biosystems, a leading
provider of real-time PCR technology. Modified Bases Natures four nucleotide bases  A, G, T, and C  and their sequence
within DNA guide all cellular processes. Unfortunately the A-T and G-C content
of genes can cause problems for genetic analysis. The bond between DNA probes
and A/T rich sequences is inherently unstable, and to study A/T rich regions of
the genome, researchers must use long primers and probes that are less
sensitive to mismatches. G-rich sequences tend to clump together and are
troublesome for scientists to work with. Weve developed modified A, T, and G
bases to solve these inherent problems for researchers, which are marketed
under the brand names Super A, Super T, and Super G. In early 2004, we introduced an additional Superbase called Super
N. Super N is a universal base that binds to all four bases with the same
affinity. It is particularly useful in making probes and primers targeted to
sequences with polymorphic regions or unknown sequencing reads. Fluorescent Dyes and Quencher To enable detection of DNA probes bound to their intended target, a
variety of fluorescent dyes are used to label probes. Weve developed a
selection of proprietary fluorescent dyes for researchers to choose as labels
for their custom probes, including Redmond Red, Yakima Yellow, and Gig 6




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Harbor Green. In addition, to prevent fluorescence of labeled, but unbound
probes, weve developed the Eclipse Dark Quencher, a proprietary quencher
thats widely used in the commercial marketplace. Design Software Each of the above technologies impact the performance characteristics of
DNA probes and sophisticated algorithms are needed to drive the design and use
of probes incorporating them. Weve developed and continually enhance
proprietary software to aid customers in the design, ordering, and use of
certain of our products, such as MGB Eclipse Design Software for the online
designing and ordering of custom MGB Eclipse Probe Systems. Epoch Products MGB Eclipse Probe Systems In July 2001, we introduced MGB Eclipse Probe Systems that incorporates
the performance advantages of our proprietary technologies, including our minor
groove binder, Eclipse Dark Quencher, modified bases, and MGB Eclipse Design
Software. The MGB Eclipse Probe Systems is compatible with all currently
manufactured real-time PCR instruments and reagent systems in wide use
worldwide, and provides highly effective and reproducible results for academic,
biotech, diagnostic, and pharmaceutical researchers. Our MGB Eclipse Design Software is available on line so that researchers
can design and order assays specific for their application and genetic sequence
of interest. Currently, MGB Eclipse Probe Systems can be purchased directly
from us through MGB Eclipse Online Design and Ordering at www. epochbio.com,
through QIAGENs website at www.qiagen.com, or through our new assay validation
service, MGB Eclipse By Design. MGB Eclipse By Design To address a growing need among customers, we introduced MGB Eclipse By
Design to aid researchers in the design and optimization of real-time PCR
assays. Upon submission of a target sequence, we will design, manufacture, and
functionally validate the performance of an MGB Eclipse Probe assay eliminating
for customers the costly and labor intensive effort of assay development. We offer standard MGB Eclipse By Design assay specifications as well as
custom specifications to accommodate unique customer specific applications.
These assays are developed in cooperation with members of the NCIs Cancer
Genome Anatomy Project in an effort to provide validated assays for single
nucleotide polymorphisms (SNPs) associated with various cancers to researchers
so as to save them time in assay development. These assays can be ordered
directly from us and a complete list can be found at www.epochbio.com. Modified Bases, Florescent Dyes and Quencher Our modified bases are part of MGB Eclipse Probe Systems and Super G is
available for sale in small quantities through distributors. Our fluorescent
dyes and quencher are part of MGB Eclipse Probe Systems and are also available
for sale in small quantities through distributors and as optional modifications
on custom oligonucleotides sold by other vendors such as Eurogentec. 7




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Chemical Intermediates For our collaborative partners, we manufacture chemical intermediates for
incorporation into their products. MGB Eclipse Analyte-Specific Reagents (ASRs) In 2004 we began manufacturing ASRs which will be available to clinical
reference laboratories in the second half of the year. Each ASR product will
incorporate our technologies  MGB, Modified Bases and Fluorescent Dyes and
Quencher  for use on real time PCR platforms, that have become the standard
for genetic analysis in the clinical diagnostics laboratory. The product menu
will be one of the most comprehensive in the industry, with the initial focus
on key bacterial and viral infectious diseases in addition to oncology and
genetic disease products. In the United States, the Food and Drug Administration, or the FDA,
regulates, as medical devices, most diagnostic tests and in vitro reagents that
are marketed as finished test kits. Some clinical laboratories, however,
purchase clinical products which are marketed under FDA regulations as analyte
specific reagents, or ASRs, and develop and prepare their own finished
diagnostic tests called home brews. The FDA also considers ASRs to be
medical devices which are exempt from premarket approval requirements. The FDA
restricts the sale of these products to clinical laboratories certified under
the Clinical Laboratory Improvement Amendments of 1988, known as CLIA, to
perform high complexity testing. Sales and Marketing We market and sell our products through a combination of direct sales
personnel, worldwide distributors, and through collaborative relationships. To
date, virtually all such efforts have been focused on the research market. MGB Eclipse Probe Systems and MGB Eclipse By Design are sold directly
through our field and in-house sales personnel and supported by Technical and
Customer Services that can be contacted by a toll-free number (800-562-5544) or
by email at customerservice@epochbio.com. A variety of promotional activities
are utilized to generate leads for new business such as targeted postal and
electronic mailings, exhibits at specific industry trade shows, and
distribution of product literature. These activities are designed to direct
parties to www.epochbio.com for more comprehensive and current data supporting
the performance of MGB Eclipse Probe Systems as well as to MGB Eclipse Online
Design and Ordering. MGB Eclipse Online Design and Ordering consists of assay
design and order processing software to facilitate delivery of custom assays
starting with the submission of a customers target genetic sequence of
interest. MGB Eclipse Online Design and Ordering is also used to identify new
potential customers for MGB Eclipse By Design. We plan on adding sales and
customer support personnel in 2004. In October 2002, we named QIAGEN N.V. a co-exclusive worldwide sales and
marketing partner to the research field for products that incorporate our MGB
Eclipse Probe Systems for gene expression. We supply components to QIAGEN and
QIAGEN offers custom and catalogue probe systems as part of its QuantiTect
Gene Expression Assays product line launched in 2003. Our MGB Eclipse Design
software is available from QIAGENs website  www.qiagen.com  to enable
customers to rapidly design and order custom and catalogue probes and primers
specifically for a gene of interest. 8




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We sell our fluorescent dyes, quencher, modified bases and other
proprietary technologies worldwide through distributors such as Glen Research
and Takara Bio. Our dyes and quencher are also supplied to Eurogentec S.A. for
incorporation into custom oligonucleotides for sale in Europe through both its
direct sales force and distributors. We sell our chemical intermediates to collaborative partners for
incorporation in their products pursuant to contractual supply agreements. For
instance, we have granted licenses to use some of our genetic analysis
technology to the Applied Biosystems group of Applera Corporation, Third Wave
Technologies, and BioControl Systems. In the clinical diagnostics market, we intend to market our products and
technologies through a direct sales force and through licensing arrangements.
For products designed for selected infectious diseases and inherited disorders,
we will sell directly to clinical reference labs with our own sales force. For
other gene targets, such as blood screening tests, we may license our
technology to others for use in their products which address those targets. Our clinical diagnostic business strategy will concentrate on the
development of key relationships with major medical centers and clinical
reference laboratories to validate our ASR products. In conjunction with this
effort we have organized our first Diagnostics Advisory Board which will work
with us on product development opportunities. Initial promotion activities
will include attending select scientific & medical conferences to promote the
MGB Eclipse ASR portfolio, targeted direct mail, and web based promotions. We currently have a small sales force for marketing our products. In
2004, we anticipate that we will expand our sales and marketing efforts in both
the research and diagnostics markets and/or enter into further distribution
agreements with current and future product offerings to expand the geographical
availability of our products. We are currently in discussions with many companies and institutions to
apply our products to their systems and projects. The companies include those
engaged in developing automated research platforms for genetic analysis and
those developing systems to be used in clinical diagnostic laboratories. Our
corporate development personnel target leading pharmaceutical, biotech and
diagnostic companies and research and academic institutions with the objective
of entering into collaborative agreements. There can be no assurance that we
will be able to enter into any additional collaborative arrangements on
favorable terms or at all. Our largest customer in 2003 was Applied Biosystems, which accounted for
56% of our revenues. Amersham Biosciences, our second largest customer in
2003, accounted for 12% of our revenue. We terminated our distribution
agreement with Amersham Biosciences, which began in 2002, in October 2003, and
future revenues from Amersham Biosciences are not anticipated to reach the
level of 2002 or 2003. Our current business plan relies on the continuation of
our relationship with Applied Biosystems and our business would be adversely
affected if this relationship did not continue. See Certain factors that may
effect our business and future results and the Notes to Financial Statements
for more information about significant customers. Currently, sales of our products are primarily to customers in the United
States. As shipments pursuant to our worldwide distribution agreements
increase, international sales can be expected to increase. 9




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Manufacturing and Supply We manufacture MGB Eclipse Probe Systems, modified bases, fluorescent
dyes, quencher, and chemical intermediate products in our facility in Bothell,
Washington. We have registered the facility used for manufacturing our
diagnostics products with the United States Food and Drug Administration, or
FDA, as a Device Manufacturer and we believe we are in compliance with the
FDAs quality system requirements. Additionally, we use contract manufacturers
to synthesize component chemical reagents when appropriate. We purchase raw materials essential to our business in the ordinary course
of business from numerous suppliers. Substantially all the raw materials used
for our commercial manufacturing of oligonucleotides, assay systems and other
reagent products are available from multiple sources; however, other raw
materials for supply contract and OEM manufacturing are proprietary products of
other companies. Raw materials may be rejected if they do not meet
manufacturing specifications, are contaminated and/or have other failures. A
material shortage, contamination, or failure could adversely impact the
commercial manufacturing of our products and related revenues. We have sufficient manufacturing capacity to meet current customer needs.
Anticipated increases in customer demand over the next year may require us to
expand our manufacturing capacity, acquire additional manufacturing capacity,
or utilize costly third-party manufacturing vendors, as necessary. We
currently have approximately 5,000 square feet of vacant space immediately
adjacent to our Bothell facility which is available for future expansion. Quality Assurance We have implemented modern quality systems and concepts throughout the
organization. Our quality assurance department supervises our quality systems
and is responsible for assuring compliance with all applicable regulations,
standards and internal policies. Our senior management team is actively
involved in setting quality policies and managing internal regulatory and
external quality performance. Research and Development We conduct the majority of our research and development activities through
our own staff and facilities. Our goal is to improve DNA technology thereby
making biotechnology, molecular biology and diagnostics more robust. We have
assembled a scientific staff with a variety of complementary skills in a broad
range of advanced research technologies, representing molecular biology,
biochemistry, physical chemistry, and synthetic chemistry. As of December 31,
2003, we had 18 employees engaged in developing our technology and applying it
to genetic analysis, including 12 with Ph.Ds. Our in-house research and
development efforts are focused primarily on the development of improvements in
DNA synthetic chemistry, hybridization reproducibility and ease of use, and
detection technologies. This research and development focus will further our
efforts to commercialize DNA probes, DNA bases, probe labeling, detection
techniques and reagent chemistries. In addition to our in-house research
programs, we collaborate with academic and research institutions to support
research in areas of interest to us. Our research and development expenses were $4,834,000 in 2001, $4,677,000
in 2002, and $4,121,000 in 2003. 10




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Patents and Proprietary Technology As of March 5, 2004, our core technologies were covered by twenty issued
patents, and we have filed twenty-one additional patent applications in the
United States. To our knowledge, there are no competing patents on our
technology. The expiration dates of these patents range from January 2012 to
July 2020. The patent position of biomedical companies, including our own, is
uncertain and may involve complex legal and factual issues. Consequently, we
do not know whether any of our patent applications will result in the issuance
of any further patents, or whether issued patents will provide significant
proprietary protection or will not be circumvented or invalidated. We cannot
be certain that we were the first creator of inventions covered by pending
patent applications or that we were the first to file patent applications for
such inventions, largely because patent applications in the U.S. are maintained
in secrecy until the patents issue, and because publications of discoveries in
the scientific or patent literature tend to lag behind actual discoveries by
several months. Moreover, we may have to participate in interference
proceedings declared by the U.S. Patent and Trademark Office to determine the
priority of inventions, which could result in substantial costs. We cannot
provide assurance that our patent applications will result in further issued
patents or that our issued patents will offer protection against competitors
with similar technology. Additionally, we cannot provide assurance that any
manufacture, use or sale of our technology or products will not infringe on
patents or proprietary rights of others, and we may be unable to obtain
licenses or other rights to these other technologies that may be required for
the commercialization of our proposed products. We require our employees, consultants and advisors to execute
confidentiality agreements upon the commencement of an employment or consulting
relationship with us. Each agreement provides that all confidential
information developed or made known to the individual during the course of the
relationship will be kept confidential and not disclosed to third parties
except in specified circumstances. In the case of employees, the agreements
provide that all inventions conceived by an individual shall be our exclusive
property, other than inventions unrelated to our business and developed
entirely on the employees own time. We cannot provide assurance, however,
that these agreements will provide meaningful protection or adequate remedies
for misappropriation of trade secrets in the event of unauthorized use or
disclosure of this information. Competition The markets for our technologies and products are very competitive, and we
expect that competition to continue for the foreseeable future. In the
research market, we compete primarily with other companies that are pursuing
technologies and products that provide alternatives to our technologies and
products. In the research market, there are more than 20 competitors in the
development, manufacturing and marketing of reagents for genetic analysis,
including the detection of infectious diseases using a variety of technologies
and specialty oligonucleotides, most of which are larger than us. In the
diagnostics market, we also compete with companies offering alternative
technologies which differ from our product technology platform. Overall, there
are many pharmaceutical, diagnostic and biotechnology companies, public and
private universities and research organizations engaged in the research and
development of diagnostic products. Most of these organizations have
financial, manufacturing, marketing and human resources greater than ours. 11




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Regulation Through 2003 our products were sold to researchers or to partners whose
end-user customers were limited to the research field. As such, our current
products are not subject to regulation by the United States Food and Drug
Administration. However, we are subject to the regulations of various other
federal and state agencies. We believe we are in compliance in all material
respects with the regulations promulgated by the agencies which govern us. In 2004 we intend to introduce a new line of clinical diagnostic products
known as analyte-specific reagents (ASRs). The manufacture, labeling,
distribution and marketing of our ASR products will occur at our Bothell site.
These products and operations are subject to various federal, state, local and
foreign laws and regulations. These ASR products are classified as medical
devices under the United States Food, Drug and Cosmetic Act administered by
the Federal Food and Drug Administration (FDA). The FDA requires these
products to be safe and effective for their intended uses and enforces
regulations including establishment registration, Pre-marketing authorization,
Labeling, Quality Systems, Post-Marketing Reporting and restricts imports and
exports. We believe those products we intend to market in the future as ASRs
are exempt from the 510(k) premarket notification and premarket approval
requirements. We believe we were in compliance with all other relevant
regulations at December 31, 2003, and continue to be in compliance with those
regulations. We also believe that our operations comply in all material respects with
applicable environmental laws and regulations. Such compliance has not had,
and is not expected to have, a material adverse effect on our capital
expenditures, results of operations or competitive position. Insurance We carry property and general liability insurance, product liability
insurance, and director and officers liability insurance in amounts and on
terms deemed adequate by management. Future claims could, however, exceed our
applicable insurance coverage. Employees As of December 31, 2003, we had 35 full-time employees, of which 6 were
devoted to manufacturing, 16 were devoted to research and development
activities, 3 to sales and marketing, and 10 were devoted to general and
administrative activities. In 2004 we expect to significantly increase our
sales and marketing headcount. We believe we have been successful in
attracting skilled employees with experience in the biomedical industry, but we
cannot provide assurance that we will continue to do so in the future. None of
our employees are covered by a collective bargaining agreement, and management
considers relations with its employees to be good. Availability of SEC Filings All reports, proxy and information statements, and other information
regarding the Company and other issuers that file electronically with the SEC
are available free of charge via EDGAR through the SEC website at www.sec.gov.
In addition, the public may read and copy materials filed by the Company with
the SEC at the SECs public reference room located at 450 Fifth St. N.W.,
Washington, D.C., 20549. Information regarding operation of the SECs public
reference room can be obtained by calling the SEC at 1-800-SEC-0330. The
Company also provides copies of its Forms 8-K, 10-K, 10-Q, Proxy 12




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and Annual
Report at no charge to investors upon request and makes its reports available
through its website at www.epochbio.com, as soon as reasonably practicable
after filing such material with the SEC. Certain Factors That May Affect Our Business And Future Results Forward Looking Statements Some of the information included herein contains forward-looking
statements. These statements can be identified by the use of forward-looking
terms such as may, will, expect, anticipates, estimate, continue,
or other similar words. These statements discuss future expectations,
projections or results of operations or of financial condition or state other
forward-looking information. When considering these forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements we make. These risk factors could cause our actual results to
differ materially from those contained in any forward-looking statement. If
any of the following risks actually occur, our business could be harmed and the
trading price of our common stock could decline. We have been profitable in only one quarter and anticipate future losses, and
we may require additional capital Since our formation in 1985, we have generated limited revenues and only
realized one profitable quarter, which was the quarter ended December 31, 2002.
As of December 31, 2003, we had an accumulated deficit of approximately $79
million. While we are commercializing our products and technologies, prior to
adequate revenues being generated from these activities we expect to incur
additional losses as we expand our manufacturing capacity, continue our
research and development activities and fund our product commercialization
efforts. There is no assurance that we will ever become profitable or that we
will sustain profitability if we do become profitable. Should we experience
continued or unforeseen operating losses, our capital requirements would
increase and our stock price would likely decline. Additionally, as of December 31, 2003 we had approximately $4.4 million in
cash and cash equivalents and have a commitment through June 2004 from a bank
for a secured term loan of $1,000,000 of which $59,000 has been drawn, a
working capital line of credit of $750,000 available through August 2004 which
has not been drawn upon, and subsequent to the end of the fiscal year 2003, in
February 2004 we completed a Private Equity Investment under which we raised
$6,175,000 in gross proceeds in a private placement of common stock and
warrants from which net proceeds were approximately $5.7 million. We currently
anticipate that our current cash balances, cash from operations, and unused
borrowing capacity will be sufficient to meet our cash needs through 2005.
However, we may need to seek additional equity and/or debt capital, and there
can be no assurance that such capital will be available to us on favorable
terms, or at all. If additional funds are not available, we would be required
to delay, reduce, or eliminate expenditures for some or all of our programs or
products. There is a risk that our technology may not be effective or might not work The science and technology of synthetic DNA-based products is rapidly
evolving. While we are beginning to produce and supply products to customers
for commercial use, the majority of our products and proposed products are in
the discovery or early development stage. The proposed products will require
significant further research, development, and testing. We face the risk that
any or all of our products and proposed products could prove to be ineffective
or unsafe, or be an inferior product to products marketed by others because our
products are based on new and unproven innovative 13




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technologies. Some of our current research and development activities may
not result in any commercially viable products. If we do not have commercially
viable products, we will not be able to sell our products, we will not be able
to attract partners, and we will not be able to generate funds internally to
support operations. Our inability to develop and expand our direct sales force would limit our
revenue growth We have limited direct sales and marketing experience in general, little
infrastructure, and no recent experience selling to the clinical diagnostics
market. We believe that to market our products effectively, we must continue
to expand our direct sales operations. This expansion will require significant
management attention and financial resources to successfully develop direct and
indirect U.S. and international sales and support channels, and theres no
assurance that we will be successful or that our expenditures in this effort
will not exceed the amount of any resulting revenues. Competition for qualified
sales personnel is intense and we may not be able to hire and train as many
qualified individuals as we may require in the future. We will continue to
incur the expenses for a sales and marketing infrastructure before we recognize
significant revenue from sales of the product. If we are not able to maintain
or increase market demand for our products and technologies, then we may not be
able to maintain an acceptable rate of growth in our business. We have limited manufacturing experience While we have experience in researching and developing unique, proprietary
technologies to enhance the study of genes, and in manufacturing
oligonucleotides and other chemical intermediates at relatively small scales,
our experience in manufacturing at larger scales is relatively limited. We
have sufficient manufacturing capacity to meet current customer needs.
Anticipated increases in customer demand over the next year may require us to
expand our manufacturing capacity in Bothell, acquire additional manufacturing
capacity, or utilize costly third-party manufacturing vendors, as necessary.
Any delay or inability to expand our manufacturing capacity could materially
adversely affect our manufacturing ability. There is a risk that we do not own exclusive rights to our technology, or that
our competition may have access to our technology which may prevent us from
selling our products We attempt to protect our proprietary technology by relying on several
methods, including United States patents. We also have international patent
applications that correspond to many of the U.S. patents and patent
applications. The issued patents and pending patent applications cover
inventions relating to the components of our core technologies. The expiration
dates of these patents range from January 2012 to July 2020. We make no
guarantee that any issued patents will provide us with significant proprietary
protection, that pending patents will be issued, or that products incorporating
the technology covered by our issued patents or pending applications will be
free from challenges by competitors. Further, third parties may hold
proprietary rights which precede our claims and could therefore prohibit us
from marketing the proposed products. Some of our technology might infringe on the rights of others, which may
prevent us from selling our products There is a great deal of litigation regarding patents and other
intellectual property rights in the biomedical industry. We were defendants in
one action of this kind, which we settled prior to 1997. Although patent and
intellectual property disputes in the biomedical area are sometimes settled
through licensing or similar arrangements, this kind of solution can be
expensive, if a license can be obtained at 14




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all. An adverse determination in a judicial or administrative proceeding
or our failure to obtain necessary licenses could prevent us from manufacturing
and selling our products. This would substantially hurt our business. We face numerous competitors and changing technologies which could make our
products obsolete Many companies do research and development and market products designed to
analyze genes and diagnose conditions based on a number of technologies and are
developing additional products. Many of these companies have substantially
greater capital resources, larger research and development and marketing staffs
and facilities and greater experience in developing products than we have.
Furthermore, the specific field in which we operate is subject to significant
and rapid technological change. Even if we successfully introduce our products
or proposed products, our technologies could be replaced by new technologies or
our products or proposed products might be obsolete or non-competitive. We will be dependent upon our agreement with Applied Biosystems for a
significant portion of our revenues for 2004, and a reduction of sales under or
early termination of this agreement would seriously harm our revenues and
operating results and would likely cause our stock price to decline In January 1999, Epoch and Applied Biosystems entered into a License and
Supply Agreement pursuant to which we licensed some of our technology to
Applied Biosystems for use in its TaqMan® 5-nuclease real-time PCR assays,
(TaqMan® is a registered trademark of Roche Molecular Systems, Inc.). In July
1999, we licensed our proprietary software, which speeds the design of
oligonucleotide probes used in the study of genes, to Applied Biosystems. In
August 2000, the agreement was amended to, among other things, provide for
Epoch manufacturing product for Applied Biosystems. In July 2002 this
agreement was further amended to remove the manufacturing rights from the
contract effective October 2002, redefine product categories, increase the
minimum royalties and royalty rates, and establish that minimum royalties are
measured and paid quarterly. We will depend upon product sales and royalties
from Applied Biosystems sales of its TaqMan® assays under this agreement for a
significant portion of our revenues in 2004 and future periods. Either party may terminate the agreement upon 180 days written notice. In
the event that this agreement is terminated, our revenues, financial condition
and operating results would be adversely affected and our stock price would
likely decline. We
will be dependent on our agreement with QIAGEN N.V. for the distribution of
our MGB Eclipse products and the resultant revenues. Lower than expected
sales, or early termination of this agreement would seriously harm our
projected revenues and operating results and would likely cause our stock price
to decline. In October 2002, Epoch and QIAGEN entered into a license and supply
agreement under which QIAGEN became the co-exclusive worldwide sales, marketing
and distribution partner to the research field of our MGB Eclipse Probe Systems
for gene expression. We will depend
upon product sales to QIAGEN under this agreement for a
significant portion of our revenues in future periods. In the event that
either of these agreements is terminated, or if QIAGEN is unsuccessful at
commercializing our technologies, our revenues, financial condition and
operating results would be adversely affected and our stock price would likely
decline. 15




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Some of our customers may experience financial difficulties, which could
adversely impact our collection of accounts receivable Although historically we have experienced limited credit losses from our
trade receivables, our experience is limited. At December 31, 2003, our
allowance for doubtful accounts was $63,000. We regularly review the
collectibility and credit worthiness of our customers and the receivables to
determine an appropriate allowance for doubtful accounts, however future
uncollectible accounts could exceed our current or future allowances. The loss of key personnel could adversely affect operations by impairing our
research and our efforts to commercialize and license our products Our performance is greatly dependent upon our key management, including
our Chief Executive Officer, Dr. William Gerber, and technical personnel and
consultants. Our future success will depend in part upon our ability to retain
these people and to recruit additional qualified personnel. We must compete
with other companies, universities, research entities and other organizations
in order to attract and retain highly qualified personnel. Although we have
entered into agreements with our key executive officers, we make no guarantee
that we will retain these highly qualified personnel or hire additional
qualified personnel. We currently maintain no key man life insurance on any of
our management or technical personnel. The value of our common stock could change significantly in a very short time The market price of our common stock may fluctuate significantly. For
example, in the year 2003 our stock closed as high as $3.56 in September, and
as low as $1.11 in February. The rapid price changes Epoch has experienced
recently, and throughout our history, place your investment in our common stock
at risk of total loss over a short period of time. We are in the biotechnology
industry and the market price of securities of biotechnology companies have
fluctuated significantly and these fluctuations have often been unrelated to
the companies operating performance. Announcements by us or our competitors
concerning technological innovations, new products, proposed governmental
regulations or actions, developments or disputes relating to patents or
proprietary rights, and other factors that affect the market generally could
significantly impact our business and the market price of our securities. Public opinion regarding ethical issues surrounding the use of genetic
information may adversely affect demand for our products Public opinion regarding ethical issues related to the confidentiality and
appropriate use of genetic testing results may influence governmental
authorities to call for limits on, or regulation of the use of, genetic
testing. In addition, these authorities could prohibit testing for genetic
predisposition to certain conditions, particularly for those that have no known
cure. Furthermore, adverse publicity of public opinion relating to genetic
research and testing, even in the absence of any governmental regulation, could
harm our business. Any of these scenarios could reduce the potential markets
for our products and technologies, which could materially and adversely affect
our revenues. 16




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Government regulation of genetic research or testing may adversely affect the
demand for our products and impair our business and operations Federal, state and local governments may adopt regulations relating to the
conduct of genetic research and genetic testing. These regulations could limit
or restrict genetic research activities as well as genetic testing for research
or clinical purposes. In addition, if state and local regulations are adopted,
these regulations may be inconsistent with, or in conflict with, regulations
adopted by other state or local governments. Regulations relating to genetic
research activities could adversely affect our ability to conduct our research
and development activities. Regulations restricting genetic testing could
adversely affect our ability to market and sell our products and our
technologies. Accordingly, any regulations of this nature could harm our
business. Health care cost containment initiatives could limit the adoption of genetic
testing as a clinical tool, which would harm our revenues and prospects In recent years, health care payers as well as federal and state
governments have focused on containing or reducing health care costs. We
cannot predict the effect that any of these initiatives may have on our
business, and it is possible that they will adversely affect our business.
Health care cost containment initiatives focused on genetic testing could cause
the growth in the clinical market for genetic testing to be curtailed or
slowed. In addition, health care cost containment initiatives could also cause
pharmaceutical companies to reduce research and development spending. In
either case, our business and our operating results would be harmed. We plan to introduce products for the clinical diagnostics market in 2004, and
we will need to comply with FDA quality system regulations and other
regulations relating to the manufacturing, marketing and sale of clinical
products. The manufacturing, labeling, distribution and marketing of our clinical
diagnostic products will be subject to regulation in the United States and in
certain other countries. In the United States, the Food and Drug Administration, or the FDA,
regulates, as medical devices, most diagnostic tests and in vitro reagents that
are marketed as finished test kits. Some clinical laboratories, however,
purchase clinical products which are marketed under FDA regulations as analyte
specific reagents, or ASRs, and develop and prepare their own finished
diagnostic tests called home brews. The FDA also considers ASRs to be
medical devices which are exempt from premarket approval requirements. The FDA
restricts the sale of these products to clinical laboratories certified under
the Clinical Laboratory Improvement Amendments of 1988, known as CLIA, to
perform high complexity testing. Unless otherwise exempt, medical devices require FDA approval or clearance
prior to marketing in the United States. We believe our currently marketed
products, as well as those ASRs we intend to market in the future, are exempt
from 510(k) premarket notification and premarket approval requirements. To
date, we have not applied for FDA or any other regulatory approvals or
clearances with respect to any of our clinical diagnostic products. However,
clinical products that we may seek to introduce in the future may require FDA
approvals or clearances prior to commercial sale in the United States and that
process can be time-consuming, expensive, and uncertain. We may experience
difficulties that could delay or prevent the successful development,
introduction and marketing of new clinical products. There can be no assurance
that FDA will not require us to conduct clinical studies as a 17




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condition of approval or clearance. In addition, we cannot assure you that
regulatory approval or clearance of any clinical products for which we seek
such approvals will be granted by the FDA or foreign regulatory authorities on
a timely basis, if at all. If approval or clearance is obtained we will be
subject to continuing FDA obligations. When manufacturing medical devices, including ASRs, we will be required to
adhere to Quality System regulations, which will require us to manufacture our
products and maintain records in a prescribed manner. Our manufacturing
facility for ASRs is subject to periodic and unannounced inspections by the FDA
and state agencies for compliance with quality system regulations. We have
never been subject to an FDA Quality System inspection, and we cannot assure
you that we can pass an FDA audit or maintain compliance in the future.
Further, the FDA may place substantial restrictions on the indications for
which our products may be marketed or to whom they may be marketed. Failure to
comply with applicable FDA requirements can result in, among other things:  
    
    administrative or judicially imposed sanctions;
    
    injunctions, civil penalties, recall or seizure of our products;
    
    total or partial suspension of production;
    
    failure of the government to grant premarket clearance or
premarket approval for our products;
    
    withdrawal of marketing clearance or approvals; and
    
    criminal prosecution. Customers using our products for clinical diagnostics use in the United
States may be regulated under CLIA. CLIA is intended to ensure the quality and
reliability of clinical laboratories in the United States by mandating specific
standards in the areas of personnel qualification, administration,
participation in proficiency testing, patient test management, quality control,
quality assurance and inspections. The regulations promulgated under CLIA
establish three levels of clinical tests and the standards applicable to a
clinical laboratory depend on the level of the tests it performs. CLIA
requirements may prevent some clinical laboratories from using our products.
Therefore, CLIA regulations and future administrative interpretations of CLIA
could harm our business by limiting the potential market for our products. 
 ITEM 2. Properties Our principal administrative office and research laboratories are located
in Bothell, Washington, where we lease approximately 30,000 square feet of
which we occupy approximately 25,000 square feet and hold 5,000 square feet for
future expansion. We also manufacture chemical intermediates and MGB Eclipse
Probe Systems at our Bothell facility. The current lease was initiated in
February 2000 when we entered into a 12-year non-cancelable lease for space
within a multi-tenant property which we initially occupied in November 2000.
Under the terms of the lease we also have a right to extend the term of the
lease for two consecutive five year periods at the then current market rates. 
 ITEM 3. Legal Proceedings Mordecai Jofen, as Trustee of the Harbor Trust, f/k/a The Edward Blech
Trust v. Epoch Biosciences, Inc., United States District Court for the Southern
District of New York, Case No. 01 CV 4129. 18




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The Harbor Trust (formerly the Edward Blech Trust) filed a complaint
against us in 2001, alleging the breach of a 1996 letter agreement between us
and David Blech, allegedly resulting in damages to Blech and/or the Harbor
Trust of at least $10 million. In July 2002, the Court granted our motion to dismiss without leave to
file an amended complaint and the Harbor Trust appealed the Courts dismissal
of its case to the United States Court of Appeal for the Second Circuit. On
May 14, 2003, the Second Circuit affirmed the dismissal. 
 ITEM 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth
quarter of 2003. 19




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PART II 
 ITEM 5. Market for Common Equity and Related Stockholder Matters On February 4, 2003, our common stock began trading on The Nasdaq SmallCap
Market under the symbol EBIO. From May 10, 2000 through February 3, 2003,
our common stock traded on The Nasdaq National Market under the symbol EBIO.
The table below presents information on the high and low trading prices of our
common stock. Fiscal year ended December 31, 2003
    
    High
    
    LowFourth quarter (October 1 through December 31)
    
    $
    2.79
    
    
    $
    1.98Third quarter (July 1 through September 30)
    
    
    3.56
    
    
    
    2.04Second quarter (April 1 through June 30)
    
    
    2.98
    
    
    
    1.32First quarter (January 1 through March 31)
    
    
    1.75
    
    
    
    1.11
 Fiscal year ended December 31, 2002
    
    High
    
    LowFourth quarter (October 1 through December 31)
    
    $
    1.78
    
    
    $
    0.70Third quarter (July 1 through September 30)
    
    
    1.85
    
    
    
    0.74Second quarter (April 1 through June 30)
    
    
    2.05
    
    
    
    1.51First quarter (January 1 through March 31)
    
    
    2.72
    
    
    
    1.60
 On March 5, 2004, the last reported sale price for our common stock on the
Nasdaq SmallCap Market was $2.46 per share. As of March 5, 2004, there were
approximately 3,033 stockholders of record of our common stock. We have not
paid any dividends on our common stock since our inception and do not
anticipate paying any dividends in the foreseeable future. Any earnings
generated in the foreseeable future will be used for the further expansion of
the business. Recent Sales of Unregistered Securities There were no transactions during 2003 involving sales of our securities
that were not registered under the Securities Act. On February 23, 2004, we consummated the issuance of 2,470,000
newly-issued shares of our common stock, and warrants to purchase 741,000
newly-issued shares of our common stock, to a small number of institutional
investors, resulting in our receipt of approximately $6,175,000 in gross
proceeds, prior to legal and placement agent fees and the exercise of the
warrants. Investors received a warrant to purchase 0.3 shares of common stock
for each share of common stock purchased. The effective price in the private
placement was therefore $2.50 for each unit, consisting of one share of common
stock and a warrant to purchase 0.3 shares of common stock. The warrants have
an exercise period of five years and an exercise price of $3.89 per share.
Reedland Capital Partners acted as our placement agent with respect to the
transaction and received a fee equal to 5.5% of the gross proceeds, and its
affiliates received warrants to purchase an aggregate of 75,000 shares of our
common stock, carrying the same terms as the warrants received by the
investors. None of the shares of common stock, the warrants sold to the
investors, nor the shares of common stock to be issued upon exercise of the
warrants have been registered under the Securities Act of 1933. Accordingly,
these shares and warrants may not be offered or re-sold in the United States,
except pursuant to an effective registration statement or an applicable
exemption from the registration requirements of the Securities Act. We have
agreed to file a registration statement covering resale by the investors of
these shares and shares of common stock issuable upon exercise of the 20




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warrants.
Any opportunity to participate in the private placement was available to a very
limited group of
institutional and other accredited investors. Exemption from the
registration requirements of the Securities Act for the sales of the securities
described above was claimed under Section 4(2) of the Securities Act, among
others, on the basis that such transactions did not involve any public offering
and the purchasers were sophisticated with access to the kind of information
registration would provide. We plan to use proceeds from the private placement
principally to expand our sales and marketing infrastructure to support direct
selling initiatives of products. 
 ITEM 6. Selected Financial Data The information set forth below should be read in conjunction with Item 7
Managements Discussion and Analysis of Financial Condition and Results of
Operations and the financial statements and notes thereto included elsewhere
in this report. Years Ended December 31,(in thousands, except per share data)1999
    
    2000
    
    2001
    
    2002
    
    2003Statement of operations data:Revenues
    
    $
    181
    
    
    $
    1,367
    
    
    $
    7,521
    
    
    $
    11,226
    
    
    $
    8,901Cost of product sales
    
    
    
    
    
    
    317
    
    
    
    3,092
    
    
    
    4,144
    
    
    
    2,198Research and development
    
    
    2,858
    
    
    
    3,468
    
    
    
    4,834
    
    
    
    4,677
    
    
    
    4,121Selling, general and administrative
    
    
    1,102
    
    
    
    3,390
    
    
    
    4,601
    
    
    
    5,723
    
    
    
    4,065Termination of license rights
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    425Loss on sale of San Diego operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,805Operating loss
    
    
    (3,779
    )
    
    
    (5,808
    )
    
    
    (5,006
    )
    
    
    (3,318
    )
    
    
    (4,713
    )Interest income (expense), net
    
    
    (991
    )
    
    
    913
    
    
    
    430
    
    
    
    102
    
    
    
    21Loss from continuing operations
    
    
    (4,770
    )
    
    
    (4,895
    )
    
    
    (4,576
    )
    
    
    (3,216
    )
    
    
    (4,692
    )Discontinued operations
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    (4,700
    )
    
    
    (4,895
    )
    
    
    (4,576
    )
    
    
    (3,216
    )
    
    
    (4,692
    )Loss per share, basic and diluted,
from continuing operations ns
    
    
    (0.31
    )
    
    
    (0.20
    )
    
    
    (0.18
    )
    
    
    (0.13
    )
    
    
    (0.18
    )Loss per share, basic and diluted
    
    
    (0.30
    )
    
    
    (0.20
    )
    
    
    (0.18
    )
    
    
    (0.13
    )
    
    
    (0.18
    )Balance sheet data:Cash and cash equivalents
    
    $
    1,772
    
    
    $
    12,122
    
    
    $
    7,489
    
    
    $
    3,508
    
    
    $
    4,415Total assets
    
    
    2,266
    
    
    
    20,935
    
    
    
    17,306
    
    
    
    15,056
    
    
    
    10,173Current liabilities
    
    
    775
    
    
    
    2,816
    
    
    
    2,192
    
    
    
    3,193
    
    
    
    2,429Long-term liabilities
    
    
    1,316
    
    
    
    2,059
    
    
    
    3,174
    
    
    
    3,082
    
    
    
    3,202Stockholders equity
    
    
    175
    
    
    
    16,060
    
    
    
    11,940
    
    
    
    8,781
    
    
    
    4,542
 
 ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements and
related notes included elsewhere in this report. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in the forward-looking
statement as a result of factors including, but not limited to, those set forth
in Certain factors that may affect our business and future results and
elsewhere in this report. 21




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Overview Epoch develops technology and products that enable and accelerate genomic
analysis. The foundation of our business strategy is the continued funding of
innovative research and development and commercialization of the resultant
products through a number of channels. We earn revenues through a variety of sources. We license our technology
for incorporation into other companies products and generate product revenue
and earn license fees and royalties from those companies. We also sell our
products to end-users; both through our direct sales force and through
distributors that provide worldwide reach. We also earn revenues through
contract research activities, whereby third party companies pay for specific
research and development activities carried out by our scientists. In January 1999, Epoch and Applied Biosystems entered into a License and
Supply Agreement pursuant to which we licensed some of our technology to
Applied Biosystems for use in TaqMan® 5-nuclease real-time PCR assays, or
tests. Under the terms of the agreement, Applied Biosystems made payments to
us of initial fees for licensed technology and proprietary know how, and will
make ongoing payments for purchases of chemical compounds as well as royalties
on sales of product which use the licensed technology, subject to minimums. In July 1999, we licensed our proprietary software, which speeds the
design of chemical tools used in the study of genes, to Applied Biosystems.
This agreement increased the scope of the licensing agreement entered into in
January 1999 with Applied Biosystems to include software that allows for the
efficient custom design of TaqMan® probes, which are chemical compounds which
seek out, or probe for a specific location on a gene, by the end user. The
software is incorporated into Applied Biosystems Primer Express software
which is sold with its 7700 Sequence Detection System. In addition to license
fees, we receive royalties on all products that Applied Biosystems sells which
incorporate the software. In August 2000, the agreement was amended to include research and
development funding of $1,000,000 per year, subject to adjustment under terms
of the agreement. This portion of the agreement expired in August of 2002, and
we are not currently doing research work for Applied Biosystems. In October 2001, we further amended our agreement with Applied Biosystems.
Under the terms of this amendment, Applied Biosystems paid us a minimum amount
each quarter for their right to order, and our obligation to manufacture,
probes for them. This amendment was effective from October 2001 through
October 2002. In July 2002, a further amendment removed the manufacturing
rights from the contract effective October 2002, redefined product categories,
increased the minimum royalties and royalty rates, and established that minimum
royalties are measured and paid quarterly. In September 2003 we licensed our Eclipse Dark Quencher to Applied
Biosystems for incorporation into its TaqMan® probes in the field of
environmental testing. This agreement further increased the scope of our
relationship with Applied Biosystems. Under the terms of the agreements, Applied Biosystems can terminate the
agreements upon 180 days written notice. In October 2000, we entered into a Development, License and Supply
Agreement with Third Wave Technologies whereby we licensed our proprietary
fluorescent dye and quencher technologies to Third Wave. Third Wave also has
the option to license other proprietary chemistries of the company, in 22




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which case additional license and royalty fees would be due to us. We received
an initial license fee that is being amortized over the life of the contract
and we receive royalties on sales of Third Wave products which include the
licensed technology. Included in the agreement with Third Wave was a
collaborative research effort to be funded by Third Wave through December 31,
2003, subject to joint approval of annual research plans. In May 2002, Third
Wave informed us that it was ceasing funding development activities with us.
We instituted arbitration proceedings against Third Wave and in March 2003 held
a mediation hearing with Third Wave at which the parties agreed to the terms of
a settlement that was finalized in May 2003. The settlement provided that
Third Wave is no longer obligated to fund research activities. In exchange,
Third Wave paid us $300,000 in two equal installations in May and July 2003, of
which $85,000 had been accrued as contract research revenue in 2002. In the
second quarter of 2003, we recognized $40,000 in contract research revenue and
$175,000 as a reduction of selling, general, and administrative expenses as an
offset against arbitration expenses incurred by us. Third Wave also agreed to
annual minimum royalties through 2006 under its license from us for dye and
quencher technologies subject to amended license termination provisions. In November 2000, we acquired some of the assets and liabilities of
Synthetic Genetics, a San Diego, California manufacturer of non-proprietary
specialty oligonucleotides (San Diego Operations) for approximately $3,788,000
including $3,425,000 in cash paid, the direct costs of the acquisition, and the
assumption of liabilities. The acquisition provided us with manufacturing
capacity to meet the then anticipated order volumes generated by the Applied
Biosystems contract. The acquisition was accounted for as a purchase of a
business and resulted in the recognition of goodwill of approximately
$2,321,000 and other intangibles of approximately $1,119,000. On May 30, 2003, we sold the assets and customer base of our San Diego
Operations to Eurogentec S.A., a Belgium based supplier of products and
services to life sciences companies for $1.4 million in cash. The assets sold
included manufacturing and other equipment, inventory, prepaid maintenance
contracts, and a non-compete agreement from our acquisition of the business in
November 2000. In addition, goodwill of approximately $2,152,000 related to
our original acquisition was written-off in the transaction. The sale resulted
in a loss of $2,805,000. Net cash proceeds from the transaction were
approximately $1.1 million. In July 2001, we launched MGB Eclipse Probe Systems that incorporate the
performance advantages of our unique MGB and MGB Eclipse Dark Quencher
technologies. MGB Eclipse probe assays are compatible with all currently
manufactured real-time PCR systems, and provide highly effective and
reproducible results for academic, biotech, pharmaceutical researchers and for
clinical diagnostic use. The initial release consisted of MGB Eclipse probes
for gene expression, viral detection, and allelic discrimination for single
nucleotide polymorphisms (SNPs). In October 2001, we entered into a license, development, and supply
alliance with Incyte Genomics, Inc. The alliance consists of three elements.
First, we receive access to the gene sequence content from Incytes LifeSeq
Gold® and ZooSeq® databases for use in the design, manufacture, and sale of
MGB Eclipse probe products. Second, under the alliance we are identified as
the preferred provider of custom oligonucleotides and other proprietary
hybridization probes to Incytes users of LifeSeq Gold. Third, we supply
Incyte with MGB Eclipse Probe Systems for their internal development purposes.
Incytes minimum purchase obligations as part of the portion of the alliance
dealing with our supply of MGB Eclipse Probe Systems expires in March 2004. In October 2003, we terminated a distribution and licensing agreement with
Amersham Biosciences, the life sciences business of Amersham plc. The
agreement, which commenced in 2002, established Amersham as the exclusive
worldwide sales, marketing and distribution partner to the 23




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research field of Epochs MGB Eclipse Probe Systems for SNPs, and the
co-exclusive worldwide sales and marketing partner to the research field for
gene expression. We had disclosed in August of 2003 that anticipated revenues
from Amersham would be insignificant for the balance of 2003. In October 2002, we named QIAGEN N.V. a co-exclusive worldwide sales and
marketing partner to the research field for products that incorporate our MGB
Eclipse Probe Systems for gene expression. We supply components to QIAGEN and
QIAGEN offers custom and catalogue probe systems as part of its gene expression
product offerings. Our MGB Eclipse Design software is available from QIAGENs
website to enable customers to rapidly design and order MGB Eclipse probes and
primers specifically for a gene of interest. This agreement is restricted to
the research field. We retain all other rights to MGB Eclipse Probe Systems in
other fields, including diagnostics, bioterroism, and bio-warfare. In September 2003, we licensed our MGB Eclipse Probe Systems technology to
BioControl Systems, Inc. for inclusion in BioControls products for food
testing. We will recognize revenues from the sale of MGB Eclipse Probe Systems
technology to BioControl and will also receive license fees and royalties from
BioControl for sales of products to end users. In January 2004 we entered into a worldwide non-exclusive license with
Celera Diagnostics for incorporation of our MGB technology and Eclipse
Dark Quencher technology into Celera Diagnostics products for selected
infectious diseases. The license allows Celera Diagnostics to manufacture,
sell and distribute TaqMan® probes that utilize our minor groove binder and
quencher in selected products. Under the license agreement, we will receive
license fees and royalties on sales of such licensed products to end users. We expect to incur operating losses for at least the next year as we
continue research and development spending in applying our synthetic DNA-based
technology to genomic analysis to the research, diagnostics, and other fields,
and incur costs commercializing the resultant products through various
channels, including expanded direct sales and marketing efforts. Critical Accounting Policies Our accounting policies are more fully described in Note 1 to our
financial statements. However, certain of our accounting policies are
particularly important to the portrayal of our financial position and results
of operations and require the application of significant judgment by our
management. As a result they are subject to an inherent degree of uncertainty.
In applying those policies, our management uses its judgment to determine the
appropriate assumptions to be used in the determination of certain estimates.
Those estimates are based on our historical experience, terms of existing
contracts, our observance of trends in the industry, information provided by
our customers and information available from other outside sources, as
appropriate. Our critical accounting policy is revenue recognition. Revenue recognition. We earn revenues from product sales of chemical
products and reagents to manufacturers for incorporation into their products,
from the sale of specialty oligonucleotides and value added reagents to end
users and distributors in the research fields of genomics and molecular
diagnostics, from license fees for the use of our proprietary technology and
know-how, and by providing services to third parties for performing research
and development on their behalf. We also have product royalty agreements that
result in royalties to us upon ultimate sales of products by our partners.
Many of our arrangements contain multiple deliverables which require us to
determine the fair value of the various deliverables. To the extent we are
unable to determine the fair value of undelivered elements, we are 24




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required to defer all revenue and recognize it over the appropriate period
or until such time that the fair value of remaining undelivered elements can be
determined.  
    
    Revenues from product sales that require no ongoing
obligations are recognized when shipped to the customer and title
has passed. To the extent that sales are made to distributors and
not sold through to end users our future sales could decline
although distributors generally have no right of return.
    
    License fees are recognized over the term of the agreement to
which the license fees correspond, which may extend to the
expiration of the underlying patents, and based on the terms and
future performance obligations in the underlying agreements. These
upfront fees are generally nonrefundable regardless of future
performance. Deferred revenue principally represents these license
fees received in advance and prepayments for product purchases.
    
    Contract research revenues are recognized as the research and
development activities are performed under the terms of commercial
collaboration and supply agreements and government grants. Direct
costs related to these contracts and grants are reported as research
and development expenses.
    
    Royalty revenues are recognized when earned under the terms
of the related agreements, which is generally upon sale of products
by our partner containing our component products. To the extent our
partners no longer use our component products or sales of their
products are less than expected, our royalty revenues could decrease
in the future. Results of Operations Years Ended December 31,(in thousands)2001
    
    2002
    
    2003RevenuesProduct sales
    
    $
    4,461
    
    
    $
    6,662
    
    
    $
    2,745License fees and royalty income
    
    
    936
    
    
    
    2,694
    
    
    
    5,214Contract research revenue
    
    
    2,124
    
    
    
    1,870
    
    
    
    942Total revenues
    
    
    7,521
    
    
    
    11,226
    
    
    
    8,901Cost of product sales
    
    
    3,092
    
    
    
    4,144
    
    
    
    2,198Research and development
    
    
    4,834
    
    
    
    4,677
    
    
    
    4,121Selling, general and administrative
    
    
    4,601
    
    
    
    5,723
    
    
    
    4,065Termination of license rights
    
    
    
    
    
    
    
    
    
    
    425Loss on sale of San Diego operations
    
    
    
    
    
    
    
    
    
    
    2,805Interest income, net
    
    
    430
    
    
    
    102
    
    
    
    21Net loss
    
    $
    (4,576
    )
    
    $
    (3,216
    )
    
    $
    (4,692
    )
 2003 vs. 2002 Revenues for the year ended December 31, 2003, decreased 21% over 2002,
primarily due to significant increases in royalties offset by reductions in
product sales and contract research revenue. Product Sales. Product sales include sales of specialty oligonucleotides
to end users and to our distribution partners in the research market and sales
of chemical intermediates and our dyes, quencher, and modified bases to
collaborative partners and distributors. Product sales decreased 59% to 25




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$2,745,000 in 2003 from $6,662,000 in 2002. The decrease in product sales were
the result of decreased
revenues from Applied Biosystems for both chemical intermediates and MGB
TaqMan probe manufacturing, and lower sales of non-proprietary oligonucleotides
from our San Diego operations that were sold in May 2003. In October 2002 payments received from Applied Biosystems (in return for
manufacturing rights) which had previously been characterized as product sales
were recharacterized as royalties in accordance with the most recent amendment
to the Licensing and Supply Agreement between the companies. Accordingly,
product sales decreased and royalty revenue increased when comparing 2003
results to those in 2002. The sale of the San Diego Operations on May 30, 2003 resulted in only
five months of shipments in the year ended December 31, 2003 (see note (2) Sale
of San Diego Operations), and a decrease in San Diego Operations product sales
of $1,831,000 compared to 2002. Chemical intermediate revenues represent component chemistries that we
generally supply on cost-plus terms for incorporation in our partners
products, and sales of dyes, quencher, and modified bases through distributors.
These revenues decreased 63% in the year ended December 31, 2003 from the
comparable period of 2002 primarily as a result of reduced shipments to Applied
Biosystems. In 2002 Applied Biosystems was actively building an initial
inventory of finished goods as well as inventory of component materials in
support of their Assays-on-Demand and Assays-by-Design product
launches. Initial inventory levels have been established, the products
launched, and shipments to Applied Biosystems in 2003 were lower than in 2002,
as expected. License Fees and Royalty Income. License fees reflect the amortization of
initial payments for transfers of technology and know-how. These amounts are
amortized over the life of the contract. Royalty income represents amounts due
under license agreements with other companies for their sales of products that
include our technologies and/or for contractual minimum amounts. License fees
and royalty income increased to $5,215,000 in the year ended December 31, 2003
from $2,694,000 in 2002. This increase is the result of higher contractual
minimums due to an amended agreement with Applied Biosystems and, to a lesser
extent, technology access fees from new collaborations with QIAGEN and Amersham
Biosciences. In 2003, Amersham Biosciences paid us technology access fees for
a specified period that expired in June 2003. In October 2003 we terminated
our distribution agreement with Amersham that gave rise to such technology
access fees. Contract Research Revenue. Contract research revenue primarily reflects
payments for contract research and development performed for our corporate
partners. Contract research revenues decreased from $1,870,000 in 2002 to
$942,000 in 2003. This decrease was primarily due to completion of the Applied
Biosystems research contract in August 2002 and termination of contract
research by Third Wave Technologies. We do not have any contract research
agreements at this time. In October 2000, we entered into a Development, License and Supply
Agreement with Third Wave Technologies whereby we licensed our proprietary
quencher and fluorescent dye technologies to Third Wave. Third Wave also has
the option to license other proprietary chemistries of the company, in which
case additional license and royalty fees would be due to us. We received an
initial license fee that is being amortized over the life of the contract and
we receive royalties on sales of Third Wave products which incorporate the
licensed technology. Included in the agreement with Third Wave was a
collaborative research effort to be funded by Third Wave through December 31,
2003, subject to joint approval of annual research plans. In May 2002, Third
Wave informed us that it was ceasing funding development activities with us.
We instituted arbitration proceedings against Third Wave and in March 26




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2003 held
a mediation hearing with Third Wave at which the parties agreed to the terms of
a settlement that was finalized in May 2003. The settlement provided that Third Wave will
no longer be obligated to fund research activities. In exchange, Third Wave
paid us $300,000 in two equal installations in May and July 2003, of which
$85,000 had been accrued as contract research revenue in 2002. In the second
quarter, and reflected in the year to date numbers, of 2003, we recognized
$40,000 in contract research revenue and $175,000 as a reduction of selling,
general, and administrative expenses as an offset against arbitration expenses
incurred by us. Third Wave also agreed to annual minimum royalties through
2006 under its license from us for dye and quencher technologies, subject to
amended license termination provisions. Cost of Product Sales. The cost of product sales represents the cost of
manufacturing products that we sell, including costs of material, labor and
overhead allocations. Also included is the cost of outside manufacturers which
we use to produce some of our chemical intermediates. The cost of product
sales decreased to $2,198,000 in 2003 compared to $4,144,000 in the prior year.
Costs as a percentage of product sales increased from 62% in 2002 to 80% in
the current year. Generally, changes in costs of product sales are tied to changes in
revenues, while the changes in costs as a percentage of product sales are
impacted by the product mix and economies of scale resulting from changes in
volume. The selling prices of the majority of our chemical intermediates and
certain other products, for example, are generally to larger volume customers
and are determined by contracts tied to fully burdened manufacturing costs,
which result in lower gross margins. Further, we manufacture MGB Eclipse
Probe Systems to various customer specifications- custom orders, catalog
orders, and functionally validated assays. The gross margin on these different
products can vary significantly. The increases in costs as a percentage of product sales experienced in the
2003 periods are primarily due to changes in product mix and the loss of
economies of scale caused by decreased product sales. In 2002, a significant
portion of our product sales were initial stocking orders of catalog MGB
Eclipse Probe Systems by one of our distribution partners. Large catalog
orders are relatively high gross margin products and as such, these shipments
had a positive impact on overall gross margin on product sales. Catalog orders
for MGB Eclipse Probe Systems were significantly lower in 2003. Additionally,
many costs of our non-proprietary oligonucleotide manufacturing operations in
San Diego were fixed within a wide range of capacity output. As a result,
significant decreases in volume experienced in early 2003 did not result in a
proportional decrease in costs and we experienced very poor gross margins on
those sales until we sold the assets and customer base in May 2003.
Additionally, payments received from Applied Biosystems which had been
recognized as product sales in 2002 were reclassified as royalties beginning in
October 2002. Research and Development. Research and development costs of $4,121,000 in
2003 decreased 12% compared to 2002. Research and development costs are
heavily impacted by our use of research and development personnel in our
manufacturing operations to meet variations in customer demand. As such, the
use of research and development personnel in manufacturing has, and will
continue to, fluctuate depending on volumes and mix of product sales and the
availability of research and development personnel to conduct such activities.
Significant changes in research and development costs were due to:  
    
    Transfer of personnel from research and development to
manufacturing, staff reductions, and reduced incentive compensation
combined to reduce research and development expenses by $1,159,000
in 2003.
    
    As the result of decreased chemical intermediate sales, the
short term use of research and development personnel in
manufacturing was $1,134,000 lower in 2003 compared to 27




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2002, causing an increase in reported research and
development costs.
    
    Professional fees and facility charges declined $343,000 in
2003 compared to the prior year period as a result of fewer
personnel and our continued focus on controlling costs. Selling, General and Administrative. Selling, general and administrative
expenses of $4,065,000 in 2003 decreased $1,658,000, or 29%, compared to 2002.
Significant changes in 2003 were primarily the result of:  
    
    Decreases in selling and marketing expenses of $602,000
compared to 2002, due primarily to reduced expenditures on print
advertising related to the San Diego Operations and the fact that we
had completed worldwide distribution agreements for MGB Eclipse
Probe Systems with Amersham Biosciences and QIAGEN.
    
    The sale of our San Diego Operations in May 2003 resulted in
the elimination of our administrative functions which supported
those operations and reduced administrative expenses by
approximately $476,000 in the year ended 2003, as compared to 2002.
    
    Recovery of $175,000 in arbitration expenses incurred by us
in our dispute with Third Wave which was settled in the second
quarter of 2003 and was applied against legal expenses recognized in
earlier periods.
    
    A reduction in incentive compensation expense of $273,000
compared to the prior year. Loss on Sale of San Diego Operations. On May 30, 2003, we sold the assets
and customer base of our San Diego Operations to Eurogentec S.A., a Belgium
based supplier of products and services to life sciences companies, for
$1,400,000 in cash. The assets sold included manufacturing and other
equipment, inventory, prepaid maintenance contracts, and a non-compete
agreement from our acquisition of the business in November 2000. In addition,
goodwill of $2,152,000 related to our original acquisition was written-off in
the transaction. The sale resulted in a loss of $2,805,000. Termination of License Rights. In the fourth quarter of 2003, we
terminated a license agreement related to MGB technology after the relevant
patent was reexamined by the U.S. patent office and the scope of the claims was
narrowed such that they do not apply to our current or future products. As a
result of the termination, we recognized a $425,000 non-cash charge in the
fourth quarter, representing the remaining book value of the consideration
originally paid for the license. Termination of this agreement eliminates the
future payment of royalties that were required by this license. Interest Income, net. Interest income, net, throughout 2003 has been
lower than the comparable periods of 2002 due to reduced cash balances
available for investment, lower interest rates, and higher interest expense as
a result of the term loan facility we entered into with Silicon Valley Bank in
late 2002, and amended in 2003. 2002 vs. 2001 Revenues for the year ended December 31, 2002, increased 49% over 2001,
primarily due to increases in product sales and royalties. Product Sales. Product sales include sales of specialty oligonucleotides
to end users and to our distribution partners in the research market and sales
of chemical intermediates and our dyes, quencher, and modified bases to
collaborative partners and distributors. Product sales increased to $6,662,000
in 2002 from $4,461,000 in 2001, reflecting increased sales of MGB Eclipse
Probe Systems, including initial shipments to worldwide marketing partners
Amersham Biosciences and QIAGEN, and increases in sales of other custom
oligonucleotides and chemical intermediates to corporate partners. 28




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Revenue from the sale of specialty oligonucleotides grew significantly in
2002 for three primary reasons. First, sales of MGB Eclipse Probe Systems
increased due to a full year revenue from Incyte and initial shipments in the
third and fourth quarters to Amersham and QIAGEN pursuant to our distribution
agreements. In 2001, we had limited revenue from Incyte and no shipments to
Amersham or QIAGEN. Second, a major customer for specialty oligonucleotides
from our San Diego Operations relocated one of its manufacturing facilities
during the year and outsourced the work to us during the move. We had sales of
approximately $1,005,000 from this customer in 2002. Third, revenues from
Applied Biosystems for MGB TaqMan probe manufacturing increased. These
manufacturing rights ceased in September 2002 pursuant to the most recent
amendment to that agreement, with the value of those rights recharacterized as
product royalties. Chemical intermediate revenues represent component chemistries that we
generally supply on cost-plus terms for incorporation in our partners products
and sales of our dyes, quencher, and modified bases through distributors.
These revenues increased 39% in 2002 as a result of growth in our shipments to
Applied Biosystems in support of their Assays-on-Demand and
Assays-by-Design product launches. Initial shipments of our dyes,
quencher, and modified bases to our new distribution partners also contributed
to the increase in these revenues. License Fees and Royalty Income. License fees reflect the amortization of
initial payments for technology and know-how transfers. These amounts are
amortized over the life of the contract. Royalty income represents the royalty
amounts under license agreements. License fees and royalty income increased to
$2,694,000 in 2002 from $936,000 in 2001 as the result of higher product sales
by corporate partners and contractual minimums. In the fourth quarter of 2002,
we received the last annual minimum royalty payment from Applied Biosystems
under the agreement in effect through September 30, 2002. Also during that
quarter, we accrued the first quarterly minimum royalty amount pursuant to the
amended agreement that became effective October 1, 2002. The resultant
recognition of two minimum royalty amounts from Applied Biosystems in the same
quarter is unlikely to recur. Contract Research Revenue. Contract research revenue primarily reflects
payments for contract research and development performed for our corporate
partners. Contract research revenues decreased from $2,124,000 in 2001 to
$1,870,000 in 2002 due to the expiration of the Applied Biosystems research
contract in August 2002 and suspended activity in the Third Wave Technologies
research contract in April 2002, offset by increases in funded research
activities that centered on applications for our MGB Eclipse technologies. Cost of Product Sales. The cost of product sales represents the cost of
manufacturing products that we sell, including costs of material, labor and
overhead allocations. Also included is the cost of outside manufacturers which
we use to produce some of our chemical intermediates. The cost of product
sales increased to $4,144,000 in 2002 compared to $3,092,000 in the prior year.
Costs as a percentage of product sales decreased from 69% in 2001 to 62% in
2002. Increases in costs of product sales are generally tied to the increases in
revenues, while the changes in costs as a percentage of product sales are
generally impacted by the product mix and economies of scale resulting from
higher volumes. The selling prices of the majority of our chemical
intermediates and certain other products, for example, are generally to larger
volume customers and are determined by contracts tied to fully burdened
manufacturing costs, which results in lower gross margins. The decrease in costs as a percentage of product sales experienced in 2002
is the result of three factors: 1) economies of scale driven by the increase
in product sales; 2) a different product mix, 29




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specifically higher MGB Eclipse
revenues, including one-time shipments of catalog products to Amersham in the third and fourth quarters of 2002; and 3) the impact of
changes in manufacturing processes which resulted in lower costs. Research and Development. Research and development costs decreased
$157,000, or 3%, in 2002 compared to 2001. Significant changes in research and
development costs were impacted by:  
    
    An increase in payroll expenses of $451,000 which primarily
resulted from the addition of a Senior Vice President of Research
and Development early in 2002, severance payments for staff
reductions late in the year, and higher health insurance and other
employee benefit costs.
    
    Reduced expenses of $169,000 incurred for the recruitment and
relocation of senior scientific personnel.
    
    As the result of increased chemical intermediate sales, the
short term use of research and development personnel in
manufacturing was $687,000 higher in 2002 compared to 2001, causing
a decrease in reported research and development costs. Selling, General and Administrative.Selling, general and administrative
expenses increased $1,122,000, or 24%, in 2002 over 2001. The increase in 2002
was primarily the result of:  
    
    Selling and marketing expenses increased $704,000 as we
continued our efforts to increase revenues from our San Diego
Operations and, to a lesser extent, costs incurred to establish MGB
Eclipse Probe Systems in the research field through the addition of
sales and product marketing personnel and print advertising
programs.
    
    Licensing expenses increased $261,000 due to increased
royalty revenues.
    
    Personnel costs increased $139,000 in our San Diego facility
as we changed staffing to meet customer needs, including the
addition of a Vice President of Operations.
    
    Legal expenses increased $98,000 during the year for various
general corporate matters including the completion of agreements
with Amersham and QIAGEN. Interest Income, net. Interest income, net, in 2002 was lower than 2001
due to reduced cash balances available for investment, lower interest rates,
and higher interest expense as a result of our new term loans to Silicon Valley
Bank in late 2002. Liquidity and Capital Resources 2003 Cash Flows. Cash and cash equivalents amounted to $4,415,000 at
December 31, 2003, a $908,000 increase from December 31, 2002 balances,
primarily as a result of the impact of changes in working capital accounts, net
cash proceeds from the sale of our non-proprietary oligonucleotide operations
located in San Diego, and proceeds from the exercise of stock options and
warrants. Cash used in operations during the year ended December 31, 2003 amounted
to $277,000 primarily as a result of our net loss of $4,692,000 adjusted for
the loss on the sale of our San Diego Operations of $2,805,000 and for certain
non-cash reconciling items and fluctuations in working capital accounts. The
most significant changes in working capital accounts that impacted cash used in
operations were decreases in accounts receivable of $664,000 and in inventories
of $259,000 reflecting our decreased product sales, offset by a net decrease in
accounts payable and accrued liabilities of $581,000, due primarily to payment
of 2002 incentive compensation amounts, which included our San Diego
operations, and normal fluctuations in the timing of payments. Non-recurring
items included in 30




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the reduction of accounts receivable balances were the
collection of remaining San Diego Operations
balances of approximately $260,000 and collection of amounts due from Amersham
at December 31, 2002 of $795,000, primarily due to their initial inventory
build-up of MGB Eclipse Probe Systems. Changes in deferred revenue,
representing up front license and technology access payments subject to
recognition over the terms of the underlying agreements, also impacts cash flow
from operations. During 2003, we received higher cash license fees, including
the second installment of technology access fees from QIAGEN as part of our
license and distribution agreement, payments from Amersham as part of that
license agreement, and other smaller up-front license fees. In 2002, we only
received payments from QIAGEN. Cash provided by investing activities of $646,000 in the year ended
December 31, 2003 consisted of $1,082,000 received from the sale of our San
Diego operations offset by the purchase of $436,000 of equipment required for
manufacturing operations in Bothell. Future capital expenditures may include
increased manufacturing capacity for our Bothell facility and other investments
to support our operational growth. We may also require a larger inventory of
raw materials and products to provide better service to our customers or to
meet our customers demand. We may finance these purchases from our cash and
cash equivalents on hand, cash generated from our operations, borrowings,
equity offerings, or a combination thereof. Cash provided by financing activities in the year ended December 31, 2003
of $539,000 was the result of $657,000 in proceeds from the term loans and
$450,000 received from the exercise of stock options and warrants, offset by
repayments on term loans of $568,000. Included in the repayment of term loans
is the early repayment of $108,000 which was secured by assets sold with our
San Diego operations. 2002 Cash Flows. In 2002, cash used in operations totaled $3,895,000,
basically representing our decrease in cash for the year. Within operations,
our net loss of $3,216,000 and the aggregate change in working capital accounts
of $1,517,000 were the primary components, offset by non-cash expenses such as
depreciation and amortization amounting to $1,181,000. During the year, we
financed most of our capital expenditures through a new term loan credit
facility with Silicon Valley Bank. Other sources and uses of cash in 2003 were
not significant. Of the significant use of cash caused by changes in our working capital
accounts in 2002, accounts receivable increased $1,678,000, as a result of the
timing of product sales in December 2002 and the accrual of contractual minimum
royalties due from Applied Biosystems at December 31, 2002. Inventories
increased $304,000 as the result of our decision to have higher levels of
finished chemical intermediates inventory on hand to meet the needs of our
customers. Increases in accounts payable and accrued liabilities are the
result of normal business fluctuations of a growing company. Deferred revenue,
representing up front licensing payments subject to recognition over the terms
of the underlying agreements and prepayments for royalties and product
purchases, also impacts cash flows from operations. Deferred revenue decreased
during 2002, thereby increasing our cash used in operations, due to normal
amortizations and the offset of royalty and product prepayments by our
customers, reduced by the receipt of a portion of the technology access fee
from QIAGEN as part of our license and distribution agreement. Cash used in investing activities decreased to $881,000 in 2002 compared
to $2,963,000 in 2001 due primarily to lower levels of capital expenditures and
license rights payments. Cash provided by financing activities increased to
$795,000 in 2002 from $349,000 in 2001 due to proceeds from borrowings from our
new credit facility offset by lower proceeds from the exercise of warrants and
stock options. 31




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Bank Financing. In September 2003, we finalized an amendment to our term
loan facility whereby we can borrow up to an additional $1,000,000 to finance
manufacturing equipment and other assets and we continue to have a working
capital line of credit of up to $750,000 from a commercial bank. Funds may be
drawn on the equipment facility at any time through June 2004, and on the
working capital line of credit at any time through August 2004, provided we are
in compliance with the loan covenants. Advances under the term loan and
working capital line of credit are secured by a first position security
interest in our assets excluding intellectual property. Amounts advanced under
term loans are repayable in 36 monthly payments of principal and interest at
the banks prime rate plus 0.5%. On the working capital line of credit,
interest is payable monthly on any unpaid balances at the banks prime rate
plus 0.5%, with principal payable in full in September 2004. As of December
31, 2003, we have $941,000 of available financing under the current term loan
facility and $750,000 available from the working capital line of credit. February 2004 Private Equity Transaction. We completed a private
placement of common stock and common stock warrants in February 2004 in which
we raised $6,175,000. Net proceeds will be approximately $5.7 million after
transaction expenses. Summary. Based on cash and cash equivalents on hand at December 31, 2003,
funds raised in the February 2004 private equity transaction, as well as on
2003 results of operations and cash flows, we currently anticipate that
existing cash balances, projected cash from operations and unused borrowing
capacity under existing bank loans will be sufficient to meet our anticipated
working capital and capital expenditures needs through at least 2005. However,
our future capital requirements depend on numerous factors, including but not
limited to:  
    
    magnitude of our future losses;
    
    timing and terms of new technology licensing agreements or
other strategic relationships that may provide up front license fees
or other payments;
    
    resources that we devote to research and development and
sales and marketing in support of our business strategy; and
    
    capital expenditures necessary to expand manufacturing
capacity. It is possible that we may need to raise additional capital to fund our
activities and/or to consummate acquisitions of other businesses, products or
technologies. We may be able to raise such funds by selling more stock to the
public or to selected investors, or by borrowing money. In addition, even
though we may not need additional funds, we may still elect to sell additional
equity securities or obtain credit facilities for other reasons. We may not be
able to obtain additional funds on terms that would be favorable to our
shareholders and us, or at all. If we raise additional funds by issuing
additional equity or convertible debt securities, the ownership percentages of
existing shareholders would be reduced. In addition, the equity or debt
securities that we issue may have rights, preferences or privileges senior to
those of the holders of our common stock. 32




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Aggregate Contractual Obligations We have various contractual obligations impacting our liquidity. The
following represents our contractual obligations as of December 31, 2003: Scheduled payments under contractual obligations (in thousands): Within
    
    Years
    
    Years
    
    After1 Year
    
    2-3
    
    4-5
    
    5 Years
    
    TotalTerm debt obligations
    
    $
    525
    
    
    $
    358
    
    
    $
    
    
    
    $
    
    
    
    $
    883Operating leases
    
    
    706
    
    
    
    1,487
    
    
    
    1,592
    
    
    
    3,534
    
    
    
    7,319Total
    
    $
    1,231
    
    
    $
    1,845
    
    
    $
    1,592
    
    
    $
    3,534
    
    
    $
    8,202
 Recent Accounting Pronouncements Epoch adopted the provisions of Statement 141 immediately and Statement
142 effective January 1, 2002. As of the date of adoption, Epoch had
unamortized goodwill in the amount of $2,152,000 and unamortized identifiable
intangible assets in the amount of $2,263,000 all of which were subject to the
transition provisions of Statements 141 and 142. Amortization expense related
to goodwill was $155,000 for the year ended December 31, 2001. In November 2002, the Financial Accounting Standards Board Emerging Issues
Task Force issued its consensus concerning Revenue Arrangements with Multiple
Deliverables (EITF 00-21). EITF 00-21 addresses how to determine whether a
revenue arrangement involving multiple deliverables should be divided into
separate units of accounting, and, if separation is appropriate, how the
arrangement consideration should be measured and allocated to the identified
accounting units. The guidance in EITF 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
adoption of EITF 00-21 did not have a material impact on our consolidated
financial statements. In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation and was revised in December
2003. The Interpretation applied immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable interests in
variable interest entities obtained after January 31, 2003. For public
enterprises, such as the Company, with a variable interest in a variable
interest entity created before February 1, 2003, the Interpretation is applied
to the enterprise no later than March 31, 2004. The application of this
Interpretation is not expected to have a material effect on our financial
statements. 
 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk Our financial instruments include cash and short-term investment grade
debt securities. We also have term loans on capital equipment through a
commercial bank. At December 31, 2002 and 2003 the carrying values of our
financial instruments approximated their fair values based on current market
prices and rates. We do not believe that fluctuations in interest rates would
have a material impact on us. It is 33




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our policy not to enter into derivative financial instruments. We do not
currently have material foreign currency exposure as our international
transactions are minimal and the majority of our international transactions are
denominated in U.S. currency. Accordingly, we do not have significant exposure
to foreign currency exchange rate risk at December 31, 2003. In the future,
under the terms of the QIAGEN agreement, we will be conducting some of our
business in Euros for QIAGEN sales in Europe and in Yen for QIAGEN sales in
Japan. We do not anticipate that these transactions will create significant
exposure to foreign currency exchange rate risk. 
 ITEM 8. Financial Statements and Supplementary Data The financial statements required by this item begin on Page F-1 of this Report. 
 ITEM 9. Changes in, and Disagreements with, Accountants on Accounting and Financial Disclosure Not applicable. 
 ITEM 9a. Controls and Procedures The Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Companys disclosure controls and procedures as of the end of the period
covered by this report, pursuant to Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended. Based on that evaluation, the
Companys Chief Executive Officer and Chief Financial Officer have concluded
that the Companys disclosure controls and procedures, as of the end of the
period covered by this report, were effective in timely alerting them to
material information relating to the Company required to be included in the
Companys periodic SEC filings. There has been no change in the Companys internal control over financial
reporting during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting. 
 PART III 
 ITEM 10. Directors and Executive Officers of Epoch. In compliance with Section 406 of the Sarbanes-Oxley Act of 2002 and the
Nasdaq corporate governance listing standards, the Company has adopted a code
of conduct that is applicable to all of the Companys employees and directors.
Interested parties may request a copy of this code of conduct, free of charge,
by delivering a written request addressed to the Chief Financial Officer, Epoch
Biosciences, Inc., 21720 23rd Drive SE, Suite 150, Bothell, Washington 98021.
The Company will disclose any amendments to the code of conduct and any waivers
from the code of conduct for directors and executive officers by posting such
information on its website at www.epochbio.com. The other information required hereunder is incorporated by reference from
the information contained in the sections entitled Directors, Other
Executive Officers, Section 16(a) Beneficial Ownership Reporting
Compliance and Corporate Governance Matters in the Companys definitive
Proxy Statement for its 2004 Annual Meeting of the Stockholders to be held on
May 17, 2004 to be filed with the Securities and Exchange Commission. 34




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ITEM 11. Executive Compensation The information required hereunder is incorporated by reference from the
information contained in the sections entitled Compensation of Executive
Officers, Option Matters, Employment and Severance Agreements, Directors
Fees and Compensation Committee Interlocks and Insider Participation in the
Companys definitive Proxy Statement for its 2004 Annual Meeting of the
Stockholders to be held on May 17, 2004 to be filed with the Securities and
Exchange Commission. 
 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Matters Equity Compensation Plan Information The following table sets forth information regarding outstanding options,
warrants and rights and shares reserved for future issuance under the Companys
existing equity compensation plans as of the fiscal year ended December 31,
2003. The Companys stockholder approved plans consist of the 2003 Stock
Incentive Plan, the Epoch Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan  1993 and the Epoch Incentive Stock Option,
Nonqualified Stock Option and Restricted Stock Purchase Plan  1991. Number of securities remainingNumber of securities to be
    
    
    
    
    
    available for future issuanceissued upon exercise of
    
    
    
    
    
    under equity compensationwarrants outstanding options,
    
    Weighted-average exercise
    
    plans as of December 31, 2003and rights as of
December 31,
    
    price of outstanding options,
    
    (excluding securities reflected2003
    
    warrants and rights
    
    in column (a))Plan category
    
    (a)
    
    (b)
    
    (c) (1)Equity compensation
plans approved by
security holders(2)
    
    
    2,384,145
    
    
    $
    3.09
    
    
    
    1,022,626Equity compensation
plans not approved
by security holders (3)
    
    
    90,000
    
    
    $
    7.39
    
    
    
    0Total
    
    
    2,474,145
    
    
    $
    3.25
    
    
    
    1,022,626
  (1)
    
    The 2003 Stock Incentive Plan, the Epoch Incentive Stock Option,
Nonqualified Stock Option and Restricted Stock Purchase Plan  1993 and
the Epoch Incentive Stock Option, Nonqualified Stock Option and Restricted
Stock Purchase Plan  1991, in addition to providing for the issuance of
options, warrants and rights, also provide for the issuance of restricted
stock awards and unrestricted stock awards up to the number of remaining
 shares authorized under such plans as set forth in column (c) above.(2)
    
    Includes the 2003 Stock Incentive Plan, the Epoch Incentive Stock Option,
Nonqualified Stock Option and Restricted Stock Purchase Plan  1993 and
the Epoch Incentive Stock Option, Nonqualified Stock Option and Restricted
Stock Purchase Plan  1991.(3)
    
    Consists of non-stockholder approved arrangements described below. Summary of Non-Shareholder Approved Equity Arrangements. In September 2000, the Company issued a fully vested warrant to purchase
25,000 shares of common stock at $7.00 per share to First Security Van Kasper
for consulting services related to a private placement and warrant call
conducted by the Company in 2000. The warrant is exercisable for a period of
five years from the date of grant. 35




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In November 2000, the Company issued a fully vested warrant to purchase
40,000 shares of common stock at $10.19 per share to a Bay City Capital entity
managed by Bay City Capital, LLC in lieu of cash fees for investment banking
and consulting services. Bay City Capital, a merchant banking partnership that
was formed by The Craves Group and The Pritzker Family business interests, has
a 13.9% equity interest in Epoch at December 31, 2003. The Chairman of Epochs
Board of Directors, Fred Craves, Ph.D., is a founding partner of The Craves
Group, and is the Chairman and Managing Director of Bay City Capital, LLC.
Sanford S. Zweifach, a member of Epochs Board of Directors was a Managing
Director and Chief Financial Officer of Bay City Capital, LLC at the time of
the transaction. The warrant is exercisable for a period of five years from the
date of grant. In December 2000, the Company issued a five-year warrant to purchase
10,000 shares of common stock at $6.69 per share to Mark Matteucci, a
consultant to the Company. The shares vest monthly over four years. If vested,
the options may be exercised after termination of service for a period of
ninety days following the effective date of termination. If the Company
terminates the consultant without cause on or following a change in control,
all of the unvested options will vest and become fully exercisable. In January 2002, the Company issued a warrant to purchase 15,000 shares of
common stock at $2.53 per share to The Trout Group for investor relations
services. The shares vested in equal monthly installments over one year. The
warrant is exercisable for a period of five years from the date of grant. Subsequent to our fiscal year ended December 31, 2003, on February 23,
2004, we issued fully-vested warrants to purchase 741,000 newly-issued shares
of our common stock, to a small number of institutional investors in connection
with a private placement of 2,470,000 newly-issued shares of our common stock,
and issued warrants to purchase 75,000 shares of our common stock to affiliates
of Reedland Capital Partners, who acted as our placement agent with respect to
the transaction. The warrants are fully-vested, have an exercise period of
five-years and an exercise price of $3.89 per share. Neither the warrants, nor
the shares of common stock to be issued upon exercise of the warrants have been
registered under the Securities Act of 1933. We have agreed to file a
registration statement covering resale by the investors of the newly-issued
shares of our common stock and the shares of common stock issuable upon
exercise of the warrants. The other information required hereunder is incorporated by reference from
the information contained in the section entitled Security Ownership of
Certain Beneficial Owners and Management in Epochs definitive Proxy Statement
for its 2004 Annual Meeting of the Stockholders to be held on May 17, 2004 to
be filed with the Securities and Exchange Commission. 
 ITEM 13. Certain Relationships and Related Transactions The information required hereunder is incorporated by reference from the
information contained in the section entitled Certain Relationships and
Related Transactions in Epochs definitive Proxy Statement for its 2004 Annual
Meeting of the Stockholders to be held on May 17, 2004 to be filed with the
Securities and Exchange Commission. 
 ITEM 14. Principal Accountant Fees and Services The information required hereunder is incorporated by reference from the
information contained in the section entitled Fees Paid to KPMG in Epochs
definitive Proxy Statement for its 2004 Annual Meeting of the Stockholders to
be held on May 17, 2004 to be filed with the Securities and Exchange
Commission. 36




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PART IV 
 ITEM 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K  (a)
    
    Documents filed as part of this report:  (1)
    
    Financial Statements. The financial
statements required to be filed hereunder are listed on
page F-1.(2)
    
    Financial Statement Schedules. Not applicable.(3)
    
    Exhibits. An exhibit index has been
filed as part of this Report beginning on page F-20 and
is incorporated herein by this reference.  (b)
    
    Reports on Form 8-K:On October 14, 2003, Epoch filed a report on Form 8-K
announcing it terminated a distribution and licensing
agreement with Amersham Biosciences Corp.On November 4, 2003, Epoch furnished a report on Form 8-K
regarding a press release issued by Epoch to announce Epochs
third quarter 2003 results. (The information in the foregoing
report on Form 8-K, including all exhibits thereto, was
furnished pursuant to Item 12 of Form 8-K and shall not be
deemed filed for the purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise
subject to the liability of that section, nor shall it be
deemed incorporated by reference herein). 37




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##### Table of Contents



Epoch Biosciences, Inc.
Index to Financial Statements
( Item 15(a)(1) ) PageFinancial Statements
    
    NumberIndependent Auditors Report
    
    
    F-1Balance Sheets as of December 31, 2002 and 2003
    
    
    F-2Statements of Operations for the years ended
December 31, 2001, 2002 and 2003
    
    
    F-3Statements of Stockholders Equity for the years ended
December 31, 2001, 2002 and 2003
    
    
    F-4Statements of Cash Flows for the years ended
December 31, 2001, 2002 and 2003
    
    
    F-5Notes to Financial Statements
    
    
    F-6




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Independent Auditors Report The Board of Directors and Stockholders
Epoch Biosciences, Inc. We have audited the accompanying balance sheets of Epoch Biosciences, Inc. as
of December 31, 2002 and 2003, and the related statements of operations,
stockholders equity, and cash flows for each of the years in the three-year
period ended December 31, 2003. 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 auditing standards generally
accepted in the United States of America. 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 Biosciences, Inc. as of
December 31, 2002 and 2003, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States
of America. As discussed in Note 1 to the financial statements, the Company has adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets. SFAS No. 142 provides that beginning
in January 2002, goodwill will no longer be amortized. It is now subject to
testing for impairment at least annually. /s/KPMG LLP Seattle, Washington
February 23, 2004 F-1




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Epoch Biosciences, Inc.
Balance Sheets December 31,
    
    December 31,2002
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    3,507,645
    
    
    $
    4,415,298Accounts receivable, net of allowance of $32,086 and $63,311
    
    
    2,031,600
    
    
    
    1,342,377Inventory
    
    
    461,381
    
    
    
    97,540Prepaid expenses and other assets
    
    
    348,778
    
    
    
    216,547Total current assets
    
    
    6,349,404
    
    
    
    6,071,762Property and equipment, net
    
    
    3,947,995
    
    
    
    2,569,552Identifiable intangible assets, net
    
    
    1,967,632
    
    
    
    867,647Goodwill
    
    
    2,151,846
    
    
    
    Restricted cash
    
    
    614,739
    
    
    
    653,723Other assets
    
    
    24,550
    
    
    
    10,000Total assets
    
    $
    15,056,166
    
    
    $
    10,172,684Liabilities and Stockholders EquityCurrent liabilities:Current portion of long-term obligations
    
    $
    282,451
    
    
    $
    524,562Accounts payable and accrued liabilities
    
    
    2,033,575
    
    
    
    1,452,733Deferred revenue  current portion
    
    
    877,258
    
    
    
    451,338Total current liabilities
    
    
    3,193,284
    
    
    
    2,428,633Long-term obligations, less current portion
    
    
    511,731
    
    
    
    358,764Deferred revenue, less current portion
    
    
    2,324,744
    
    
    
    2,510,548Deferred rent
    
    
    245,582
    
    
    
    332,984Stockholders equity:Preferred stock, par value $.01; 10,000,000 shares
authorized; no shares issued and outstanding
    
    
    
    
    
    
    Common stock, par value $.01; 50,000,000 shares
authorized; shares issued and outstanding:25,683,589 at December 31, 2002 and 26,155,484
at December 31, 2003
    
    
    256,836
    
    
    
    261,555Additional paid-in capital
    
    
    82,743,658
    
    
    
    83,191,731Accumulated deficit
    
    
    (74,219,669
    )
    
    
    (78,911,531
    )Total stockholders equity
    
    
    8,780,825
    
    
    
    4,541,755Total liabilities and stockholders equity
    
    $
    15,056,166
    
    
    $
    10,172,684
 See accompanying notes to financial statements. F-2




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Epoch Biosciences, Inc.
Statements of Operations Years Ended December 31,2001
    
    2002
    
    2003Revenues:Product sales
    
    $
    4,461,349
    
    
    $
    6,661,817
    
    
    $
    2,744,695License fees and royalty income
    
    
    935,768
    
    
    
    2,693,874
    
    
    
    5,214,511Contract research revenue
    
    
    2,123,984
    
    
    
    1,870,253
    
    
    
    942,064Total revenues
    
    
    7,521,101
    
    
    
    11,225,944
    
    
    
    8,901,270Operating expenses:Cost of product sales
    
    
    3,092,057
    
    
    
    4,143,924
    
    
    
    2,197,901Research and development
    
    
    4,833,926
    
    
    
    4,677,306
    
    
    
    4,121,117Selling, general and administrative
    
    
    4,601,617
    
    
    
    5,722,619
    
    
    
    4,065,201Termination or license rights
    
    
    
    
    
    
    
    
    
    
    424,828Loss on sale of San Diego operations
    
    
    
    
    
    
    
    
    
    
    2,804,862Total operating expenses
    
    
    12,527,600
    
    
    
    14,543,849
    
    
    
    13,613,909Operating loss
    
    
    (5,006,499
    )
    
    
    (3,317,905
    )
    
    
    (4,712,639
    )Interest income, net
    
    
    430,350
    
    
    
    102,199
    
    
    
    20,777Net loss
    
    $
    (4,576,149
    )
    
    $
    (3,215,706
    )
    
    $
    (4,691,862
    )Net loss per
share - basic and diluted
    
    $
    (0.18
    )
    
    $
    (0.13
    )
    
    $
    (0.18
    )Weighted average number of common shares
outstanding basic and diluted
    
    
    25,588,856
    
    
    
    25,663,171
    
    
    
    25,982,269
 See accompanying notes to financial statements. F-3




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##### Table of Contents



Epoch Biosciences, Inc.
Statements of Stockholders Equity Common Stock
    
    Additional
    
    Deferred
    
    Accumulated
    

TotalStockholdersShares
    
    Amount
    
    Paid-In Capital
    
    Compensation
    
    Deficit
    
    EquityBalance at December 31, 2000
    
    
    24,969,118
    
    
    $
    249,691
    
    
    
    82,302,448
    
    
    
    (63,922
    )
    
    
    (66,427,814
    )
    
    
    16,060,403Exercise of stock options
    
    
    51,143
    
    
    
    512
    
    
    
    50,381
    
    
    
    
    
    
    
    
    
    
    
    50,893Exercise of warrants
    
    
    631,416
    
    
    
    6,314
    
    
    
    326,061
    
    
    
    
    
    
    
    
    
    
    
    332,375Issuance of warrant to consultant
    
    
    
    
    
    
    
    
    
    
    8,859
    
    
    
    
    
    
    
    
    
    
    
    8,859Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,922
    
    
    
    
    
    
    
    63,922Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,576,149
    )
    
    
    (4,576,149
    )Balance at December 31, 2001
    
    
    25,651,677
    
    
    $
    256,517
    
    
    
    82,687,749
    
    
    
    
    
    
    
    (71,003,963
    )
    
    
    11,940,303Exercise of stock options
    
    
    31,912
    
    
    
    319
    
    
    
    17,825
    
    
    
    
    
    
    
    
    
    
    
    18,144Issuance of warrant to consultant
    
    
    
    
    
    
    
    
    
    
    38,084
    
    
    
    
    
    
    
    
    
    
    
    38,084Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,215,706
    )
    
    
    (3,215,706
    )Balance at December 31, 2002
    
    
    25,683,589
    
    
    $
    256,836
    
    
    
    82,743,658
    
    
    
    
    
    
    
    (74,219,669
    )
    
    
    8,780,825Exercise of stock options
    
    
    188,562
    
    
    
    1,886
    
    
    
    235,456
    
    
    
    
    
    
    
    
    
    
    
    237,342Exercise of warrants
    
    
    283,333
    
    
    
    2,833
    
    
    
    209,667
    
    
    
    
    
    
    
    
    
    
    
    212,500Issuance of warrant to consultant
    
    
    
    
    
    
    
    
    
    
    2,950
    
    
    
    
    
    
    
    
    
    
    
    2,950Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,691,862
    )
    
    
    (4,691,862
    )Balance at December 31, 2003
    
    
    26,155,484
    
    
    $
    261,555
    
    
    
    83,191,731
    
    
    
    
    
    
    
    (78,911,531
    )
    
    
    4,541,755
 See accompanying notes to financial statements. F-4




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Epoch Biosciences, Inc.
Statements of Cash Flows Years Ended December 31,2001
    
    2002
    
    2003Cash flows from operating activities:Net loss
    
    $
    (4,576,149
    )
    
    $
    (3,215,706
    )
    
    $
    (4,691,862
    )Adjustments to reconcile net loss to net
cash used in operating activities:Depreciation and amortization:Property and equipment
    
    
    694,761
    
    
    
    885,715
    
    
    
    788,827Intangible assets
    
    
    523,477
    
    
    
    295,498
    
    
    
    178,833Deferred stock compensation
    
    
    63,922
    
    
    
    
    
    
    
    Issuance of common stock warrants for services
    
    
    8,859
    
    
    
    38,084
    
    
    
    2,950Loss on sale of San Diego operations
    
    
    
    
    
    
    
    
    
    
    2,804,862Termination of license rights
    
    
    
    
    
    
    
    
    
    
    424,828Interest accrued on restricted cash
    
    
    (45,024
    )
    
    
    (40,093
    )
    
    
    (38,984
    )Deferred revenue
    
    
    1,267,866
    
    
    
    (444,053
    )
    
    
    (240,116
    )Deferred rent
    
    
    143,503
    
    
    
    102,079
    
    
    
    87,402Changes in operating assets and liabilities, net
of assets sold or acquired:Accounts receivable
    
    
    (155,904
    )
    
    
    (1,678,010
    )
    
    
    664,223Inventory
    
    
    (80,499
    )
    
    
    (303,681
    )
    
    
    258,806Prepaid expenses and other assets
    
    
    9,134
    
    
    
    (9,775
    )
    
    
    63,896Accounts payable and accrued liabilities
    
    
    126,709
    
    
    
    474,558
    
    
    
    (580,842
    )Net cash used in operating activities
    
    
    (2,019,345
    )
    
    
    (3,895,384
    )
    
    
    (277,177
    )Cash flows from investing activities:Release of security deposit on facilities
    
    
    
    
    
    
    100,000
    
    
    
    Investment in license rights
    
    
    (1,000,000
    )
    
    
    
    
    
    
    Proceeds from sale of assets, net
    
    
    
    
    
    
    
    
    
    
    1,081,561Acquisition of property and equipment
    
    
    (1,605,147
    )
    
    
    (981,351
    )
    
    
    (435,717
    )Acquisition of assets
    
    
    (357,692
    )
    
    
    
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (2,962,839
    )
    
    
    (881,351
    )
    
    
    645,844Cash flows from financing activities:Proceeds from bank loan
    
    
    
    
    
    
    847,352
    
    
    
    657,379Repayment of long-term obligations
    
    
    (34,146
    )
    
    
    (70,515
    )
    
    
    (568,235
    )Proceeds from exercise of warrants
    
    
    332,375
    
    
    
    
    
    
    
    212,500Proceeds from exercise of stock options
    
    
    50,893
    
    
    
    18,144
    
    
    
    237,342Net cash provided by financing activities
    
    
    349,122
    
    
    
    794,981
    
    
    
    538,986Net increase (decrease) in cash and cash equivalents
    
    
    (4,633,062
    )
    
    
    (3,981,754
    )
    
    
    907,653Cash and cash equivalents at beginning of year
    
    
    12,122,461
    
    
    
    7,489,399
    
    
    
    3,507,645Cash and cash equivalents at end of year
    
    $
    7,489,399
    
    
    $
    3,507,645
    
    
    $
    4,415,298Supplemental disclosure of cash flow information Interest payments
    
    $
    9,156
    
    
    $
    7,918
    
    
    $
    38,946Non-cash investing activitiesSale of San Diego Operations:Assets
    
    $
    
    
    
    $
    
    
    
    $
    4,204,862Liabilities
    
    $
    
    
    
    $
    
    
    
    $
    318,439
 See accompanying notes to financial statements. F-5




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Epoch Biosciences, Inc.
Notes To Financial Statements December 31, 2003 (1) Nature of Business and Summary of Significant Accounting Policies Nature of Business Epoch Biosciences, Inc. develops technologies and products to help
scientists, clinicians, and physicians around the world perform genetic
research to improve our lives and our environment. Genetic analysis has become
a pervasive activity in academic, biopharmaceutical, clinical, agricultural,
veterinary and forensic laboratories. Our technologies facilitate rapid,
accurate and cost-effective genetic analysis at the scale necessary to generate
the massive amounts of genetic information being studied today. As the human genome and other animal and plant genomes are sequenced, the
task of understanding the structure and function of genes lies before us.
Researchers want to know when and why a gene switches on and begins producing
its protein (gene expression) and what the genes protein does in the body
(proteomics); they also want to know what the genetic differences among
individuals mean for their health and susceptibility to disease. For example,
single nucleotide polymorphisms, or SNPs, are tiny differences in our DNA that
make humans different from one another. SNPs have been linked to
susceptibility to diseases, and to peoples response to medications. Because of the importance of understanding the structure and function of
genes, companies have moved quickly to design and manufacture automated genetic
analysis systems. We develop patented technologies that improve the output of
these systems and that are compatible with many of the genetic analysis systems
currently in use or in development. Our technologies are useful in genetic research, diagnostics, drug
development, clinical diagnostics, infectious disease, oncology, genetic
disease, and population screening to assess our risk of disease or to predict
our response to drugs. Epochs products also have application in forensics,
food testing, and environmental testing, including bio-warfare and
bioterrorism. Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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. Cash Equivalents All highly liquid investments with a maturity of three months or less at
the date of purchase are considered to be cash equivalents. Cash equivalents
consist of money market accounts and treasury bills. Financial Instruments and Concentrations of Credit Risk The Companys financial instruments consist of cash, cash equivalents,
accounts receivable, accounts payable and accrued liabilities and equipment
loans from a commercial bank. The fair value of F-6




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##### Table of Contents



these instruments approximates their financial statement carrying amounts
due to their short maturities or floating interest rates. Credit is extended based on an evaluation of a customers financial
condition and collateral is generally not required. The majority of revenues
are derived from private and public companies and public enterprises in the
research market in the United States. The table below summarizes the revenue and accounts receivable of our
customers where our risk is significantly concentrated. Percent of Revenues
    
    Accounts ReceivableCustomer
    
    Years Ended December 31,
    
    At December 31,2001
    
    2002
    
    2003
    
    2002
    
    2003Applied Biosystems, Inc.
    
    
    56
    %
    
    
    52
    %
    
    
    56
    %
    
    $
    875,000
    
    
    $
    1,133,541Amersham Biosciences
    
    
    0
    %
    
    
    11
    %
    
    
    12
    %
    
    
    795,000
    
    
    
    18,026
 On October 6, 2003, we terminated our distribution and licensing agreement
with Amersham Biosciences. The agreement, which began in 2002, established
Amersham as the exclusive worldwide sales, marketing and distribution partner
to the research field of Epochs MGB Eclipse Probe Systems for SNPs, and the
co-exclusive worldwide sales and marketing partner to the research field for
gene expression. We had two active grants from the Federal Government which were completed
in 2003. We recognized $114,000, $380,000, and $402,000 in grant revenue in
2001, 2002, and 2003, respectively. We do not have any active grants at this
time. Inventory Inventories are stated at the lower of cost, measured by the first-in and
first-out method, or market value, as follows: December 31,2002
    
    2003Raw materials inventory.
    
    $
    125,582
    
    
    $
    Finished goods inventory
    
    
    335,799
    
    
    
    97,540Total inventory
    
    $
    461,381
    
    
    $
    97,540
 Property and Equipment Property and equipment are stated at cost. Depreciation of equipment is
provided on the straight-line method over the assets estimated useful lives,
generally three to five years. Amortization of leasehold improvements and
capital leases is provided on the straight-line method over the lesser of the
estimated useful life or the term of the lease. Repairs and maintenance are
expensed as incurred. Identifiable Intangible Assets Intangible assets are stated at cost. Amortization of identifiable
intangible assets is provided on the straight-line method over the life of the
asset. License rights are tied to the expiration date of the underlying patent
which generally results in a life of 15 to 17 years. F-7




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Goodwill The excess of the aggregate purchase price over the fair value of the net
tangible and specifically identifiable intangible assets of businesses acquired
in purchase transactions is recorded as goodwill. Through December 31, 2001,
goodwill was amortized over 15 years using the straight-line method. Business
acquisition costs allocated to covenants not to compete are amortized over the
terms of the agreement using the straight-line method. In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets. Under SFAS No. 142, goodwill and other indefinite-lived
intangible assets, including any such intangibles recorded in past business
combinations, are no longer amortized beginning January 1, 2002. SFAS No. 142
specifies that no amortization is recorded for goodwill and other
indefinite-lived intangible assets resulting from business combinations
completed during the last six months of 2001. SFAS No. 142 also requires the
assets to be written down with a goodwill impairment charge against current
earnings whenever the recorded values exceed their fair values. If this
standard had been implemented as of January 1, 2001, amortization expense would
have been reduced by $154,797 in 2001, and earnings per share would have been
increased by $0.01. Impairment of Long-Lived Assets For long-lived assets, including property and equipment and intangible
assets other than goodwill, we evaluate the carrying value of the assets by
comparing the estimated undiscounted future cash flows generated from the use
of the assets and their eventual disposition with the assets reported net book
value. If assets are impaired, we write them down to their fair market values.
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. Restricted Cash Restricted cash represents long-term certificates of deposit pledged under
a security agreement, in lieu of a cash deposit, on a facility subject to an
operating lease. Revenue Recognition We earn revenues from product sales of chemical products and reagents to
manufacturers for incorporation into their products, from the sale of our
products to distributors and end users in the research and clinical diagnostic
fields, from license fees for the use of our proprietary technology and
know-how, and by providing services to third parties for performing research
and development on their behalf. We also have product royalty agreements that
result in royalties to us upon ultimate sales of products by our partners. Revenues from product sales to customers and distributors that require no
ongoing obligations are recognized when shipped to the customer and title has
passed. License fees are recognized over the term of the agreement to which the
license fees correspond, which may extend to the expiration of the underlying
patents, and based on the terms and future performance obligations in the
underlying agreements. F-8




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##### Table of Contents



Deferred revenue principally represents license fees received in advance
and prepayments for product purchases. Contract research revenues are recognized as the research and development
activities are performed under the terms of commercial collaboration and supply
agreements and government grants. Direct costs related to these contracts and
grants are reported as research and development expenses. Royalty revenues are recognized when earned under the terms of the related
agreements, which is generally upon sale by our partner of products containing
our component products. Income Taxes Deferred income taxes are provided based on the estimated future tax
effects of carryforwards and temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those carryforwards and temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the period that includes the enactment date. A
valuation allowance is recorded for deferred tax assets when it is more likely
than not that such deferred tax assets will not be realized. Research and Development Costs Research and development costs are expensed as incurred. Stock-Based Compensation Epoch applies APB Opinion No. 25, Accounting for Stock Issued to Employees
and related interpretations in measuring compensation costs for its employee
stock option plans. We disclose proforma net loss and net loss per share as if
compensation cost had been determined consistent with Statement of Financial
Accounting Standard (SFAS) No. 123, Accounting for Stock-Based Compensation.
The disclosure requirements of SFAS No. 123 were amended by SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure. Stock
options and warrants issued to non-employees are accounted for using the fair
value method prescribed by SFAS 123 and Emerging Issues Task Force 96-18. F-9




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##### Table of Contents



Had we determined compensation cost based on the fair value of our stock
options on the grant date under SFAS 123, our net loss and net loss per share
would have been the pro forma amounts indicated below: Year ended December 31,2001
    
    2002
    
    2003Net loss:As reported
    
    $
    (4,576,149
    )
    
    $
    (3,215,706
    )
    
    $
    (4,691,862
    )Add: Stock-based employee
compensation expense included in
reported net loss
    
    
    
    
    
    
    
    
    
    
    Deduct: Stock-based employee
compensation determined under
fair value based method for all
awards
    
    
    (1,615,505
    )
    
    
    (1,314,802
    )
    
    
    (1,051,470
    )Pro forma
    
    $
    (6,191,654
    )
    
    $
    (4,530,508
    )
    
    $
    (5,743,332
    )Net loss per share  basic and diluted:As reported
    
    $
    (0.18
    )
    
    $
    (0.13
    )
    
    $
    (0.18
    )Pro forma
    
    $
    (0.24
    )
    
    $
    (0.18
    )
    
    $
    (0.22
    )
 The per share weighted-average fair value of stock options granted during
2001, 2002, and 2003 was $4.25, $1.67, and $1.74, respectively, on the grant
date using the Black-Scholes option pricing model with the following
assumptions: Year ended December 31,2001
    
    2002
    
    2003Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Risk-free interest rate
    
    
    4.72
    %
    
    
    3.78
    %
    
    
    2.97
    %Expected volatility
    
    
    182
    %
    
    
    128
    %
    
    
    121
    %Expected life in years.
    
    
    5
    
    
    
    5
    
    
    
    5
 Net Loss Per Share Basic loss per share is computed based on weighted average shares
outstanding during the reporting period and excludes any potential dilution.
Diluted per share amounts reflect potential dilution from the exercise or
conversion of securities into common stock or from other contracts to issue
common stock. Our capital structure includes common stock options and common
stock warrants, all of which have been excluded from net loss per share
calculations as they are antidilutive, as follows: At December 31,2002
    
    2003Outstanding options.
    
    
    2,764,033
    
    
    
    2,384,145Outstanding warrants
    
    
    398,333
    
    
    
    90,000
 Reclassifications Certain 2001 and 2002 balances have been reclassified to conform to the
2003 presentation. F-10




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Recent Accounting Pronouncements. In November 2002, the Financial Accounting Standards Board Emerging Issues
Task Force issued its consensus concerning Revenue Arrangements with Multiple
Deliverables (EITF 00-21). EITF 00-21 addresses how to determine whether a
revenue arrangement involving multiple deliverables should be divided into
separate units of accounting, and, if separation is appropriate, how the
arrangement consideration should be measured and allocated to the identified
accounting units. The guidance in EITF 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
adoption of EITF 00-21 did not have a material impact on our consolidated
financial statements. In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation and was revised in December
2003. The Interpretation applied immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable interests in
variable interest entities obtained after January 31, 2003. For public
enterprises, such as the Company, with a variable interest in a variable
interest entity created before February 1, 2003, the Interpretation is applied
to the enterprise no later than March 31, 2004. The application of this
Interpretation is not expected to have a material effect on the Companys
financial statements. We do not believe we have any variable interest entities
at this time. (2) Sale of San Diego Operations On May 30, 2003, we sold the assets and customer base of our
non-proprietary oligonucleotide operations located in San Diego, California to
Eurogentec S.A., a Belgium based supplier of products and services to life
sciences companies for $1.4 million in cash. The assets sold included
manufacturing and other equipment, inventory, prepaid maintenance contracts,
and a non-compete agreement from our acquisition of the business in November
2000. In addition, goodwill of $2,151,846 related to our original acquisition
was written-off in the transaction. The sale resulted in a loss of $2,804,862.
Net cash proceeds from the transaction were approximately $1.1 million. (3) Termination of License Rights In the fourth quarter of 2003, we terminated a license agreement related
to MGB technology after the relevant patent was reexamined by the U.S. patent
office and the scope of the claims was narrowed such that they do not apply to
our current or future products. As a result of the termination, we recognized
a $424,828 non-cash charge in the fourth quarter, representing the remaining
book value of the consideration originally paid for the license. Termination
of this agreement eliminates the future payment of royalties that were required
by this license. F-11




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##### Table of Contents



(4) Property and Equipment Property and equipment consists of the following as of December 31: 2002
    
    2003Machinery and equipment
    
    $
    4,829,389
    
    
    $
    3,526,306Furniture and fixtures
    
    
    242,332
    
    
    
    206,847Leasehold improvements
    
    
    2,057,228
    
    
    
    2,057,228$
    7,128,949
    
    
    $
    5,790,381Less accumulated depreciation
    
    
    3,180,954
    
    
    
    3,220,829Property and equipment, net
    
    $
    3,947,995
    
    
    $
    2,569,552
 (5) Identifiable Intangible Assets Identifiable intangible assets consist of the following as of December 31: 2002
    
    2003Non-compete agreement
    
    $
    1,000,000
    
    
    $
    License rights
    
    
    1,556,250
    
    
    
    1,000,000$
    2,556,250
    
    
    $
    1,000,000Less accumulated amortization
    
    
    588,618
    
    
    
    132,353Identifiable intangible assets, net
    
    $
    1,967,632
    
    
    $
    867,647
 Scheduled amortization charges from identifiable intangible assets as of
December 31, 2003 are as follows: Year
    
    License Rights2004
    
    
    58,8242005
    
    
    58,8242006
    
    
    58,8242006
    
    
    58,8242007
    
    
    58,824Thereafter
    
    
    573,527
 F-12




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##### Table of Contents



(6) Long-Term Obligations Long-term obligations consist of the following as of December 31: 2002
    
    2003Term loans, payable in monthly payments of
principal
and interest at prime rate plus 0.5%
through December 2006
    
    $
    794,182
    
    
    $
    883,326$
    794,182
    
    
    $
    883,326Less current portion
    
    
    282,451
    
    
    
    524,562Long-term obligations, less current portion.
    
    $
    511,731
    
    
    $
    358,764
 In addition to previously existing term loans, we currently have a loan
agreement with a commercial bank that provides for new term loans of up to
$1,000,000 to finance manufacturing equipment and other assets and a working
capital line of credit of up to $750,000. Funds may be drawn on the equipment
facility at any time through June 2004, and on the working capital line of
credit at any time through August 2004, provided that we are in compliance with
the following financial covenants:  
    
    Adjusted Quick Ratio of 1.3:1. Adjusted Quick Ratio is
defined as the sum of unrestricted cash and cash equivalents and
trade accounts receivable divided by the sum of current liabilities,
excluding current deferred revenues, and bank debt.
    
    Minimum Tangible Net Worth of $1,500,000. Minimum Tangible
Net Worth is defined as total equity in accordance with generally
accepted accounting principles less intangible assets. We are currently in compliance with each of these covenants. Advances
under term loans and the working capital line of credit are secured by a first
position security interest in our assets excluding intellectual property.
Amounts advanced under term loans are repayable in 36 monthly payments of
principal and interest at the banks prime rate plus 0.5%. This rate was 4.0%
on December 31, 2003. On the working capital line of credit, interest is
payable monthly on any unpaid balances at the banks prime rate plus 0.5%, with
principal payable in full in September 2004. The banks prime rate on March 5,
2004 was 4.0%. As of December 31, 2003, we have drawn $59,336 against the new
term loan limit. No amounts have been drawn on the working capital line of
credit. The aggregate amount of long-term obligations at December 31, 2003
maturing by calendar year is as follows: Obligations2004
    
    $
    524,5622005
    
    $
    277,3442006
    
    $
    81,420
 F-13




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(7) Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities consist of the following as of
December 31: 2002
    
    2003Payroll and employee benefits
    
    $
    949,177
    
    
    $
    566,764License fees
    
    
    232,675
    
    
    
    261,557Trade payables
    
    
    348,012
    
    
    
    165,141Other
    
    
    503,711
    
    
    
    459,271Total accounts payable and accrued liabilities
    
    $
    2,033,575
    
    
    $
    1,452,733
 (8) Retirement Savings Plan Epoch has a profit sharing plan which is qualified under Section 401(k) of
the United States Internal Revenue Code. The plan allows eligible employees to
contribute up to 20% of their salary. The Company, at its discretion, makes
matching contributions to the plan. No matching contributions were made to the
plan in 2001, 2002 or 2003. (9) Equity Options to Purchase Common Stock In 2003, Epochs Board of Directors and shareholders adopted the 2003
Stock Incentive Plan (2003 Plan), under which 1,000,000 shares of common
stock, including shares rolled over from prior stock option plans, were
initially reserved for issuance of stock options granted by the Company. The
2003 Plan provides for incentive stock options and non-qualified options to
purchase common stock to be granted to employees, directors and other
non-employee individuals responsible for management, growth, and financial
success of the Company. The Board of Directors determines the exercise price
of stock options at the time the option is granted, and, in the case of
incentive stock options, the exercise price must be at least equal to the fair
market value of the common stock at the time of the grant. Options granted to
employees generally vest over a 4-year period of continuous employment while
options granted to non-employee members of the Board of Directors vest over one
year. As of December 31, 2003, there were 1,022,626 shares available for
issuance under the 2003 Plan. The 2003 Plan provides for annual increases in
the number of shares available for issuance on the first day of each year,
beginning January 1, 2004, equal to the lesser of 750,000 shares, 2.5% of the
fully diluted outstanding shares on the date of annual increase, or such amount
as may be determined by the Board. In January 2004, an additional 500,000
shares became issuable under the 2003 Plan. F-14




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##### Table of Contents



A summary of the 2003 and prior stock option plans follows: 2001
    
    2002
    
    2003Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    -Average
    
    
    
    
    
    -AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOutstanding at beginning of year
    
    
    1,887,777
    
    
    $
    3.44
    
    
    
    2,388,509
    
    
    $
    3.59
    
    
    
    2,764,033
    
    
    $
    3.17Granted
    
    
    637,000
    
    
    
    4.38
    
    
    
    568,667
    
    
    
    1.90
    
    
    
    274,500
    
    
    
    2.12Exercised
    
    
    (51,143
    )
    
    
    3.41
    
    
    
    (31,912
    )
    
    
    0.57
    
    
    
    (188,562
    )
    
    
    1.26Forfeited or cancelled
    
    
    (85,125
    )
    
    
    7.58
    
    
    
    (161,231
    )
    
    
    5.21
    
    
    
    (465,826
    )
    
    
    3.75Outstanding at end of year
    
    
    2,388,509
    
    
    $
    3.59
    
    
    
    2,764,033
    
    
    $
    3.17
    
    
    
    2,384,145
    
    
    $
    3.09Options exercisable at year end
    
    
    1,481,166
    
    
    $
    3.13
    
    
    
    1,854,633
    
    
    $
    3.26
    
    
    
    1,831,664
    
    
    
    3.17Average fair value of options granted
    
    
    
    
    
    $
    4.25
    
    
    
    
    
    
    $
    1.67
    
    
    
    
    
    
    $
    1.74
 The following table summarizes information about stock options at December
31, 2003: Options Outstanding
    
    Options ExercisableNumber
    
    Weighted-Average
    
    Weighted -
    
    Number
    
    Weighted-Range of
    
    outstanding
    
    Remaining Years
    
    Average
    
    Exercisable
    
    AverageExercise Prices
    
    at 12/31/03
    
    Contractual Life
    
    Exercise Price
    
    at 12/31/03
    
    Exercise Price$0.30 - 1.00
    
    
    225,179
    
    
    
    2.44
    
    
    $
    0.62
    
    
    
    225,179
    
    
    $
    0.621.12 - 1.95
    
    
    863,140
    
    
    
    6.88
    
    
    
    1.74
    
    
    
    641,381
    
    
    
    1.712.00 - 3.88
    
    
    611,375
    
    
    
    6.25
    
    
    
    2.68
    
    
    
    404,583
    
    
    
    2.824.50 - 5.38
    
    
    487,458
    
    
    
    5.50
    
    
    
    4.85
    
    
    
    370,634
    
    
    
    4.807.25 - 8.81
    
    
    148,493
    
    
    
    6.41
    
    
    
    7.48
    
    
    
    146,493
    
    
    
    7.479.50 - 14.63
    
    
    48,500
    
    
    
    6.46
    
    
    
    12.64
    
    
    
    43,394
    
    
    
    12.72$0.30 - 14.63
    
    
    2,384,145
    
    
    
    5.98
    
    
    $
    3.09
    
    
    
    1,831,664
    
    
    $
    3.17
 Warrants to Purchase Common Stock A summary of our outstanding warrants follows. 2001
    
    2002
    
    2003Exercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseShares
    
    Price Range
    
    Shares
    
    Price Range
    
    Shares
    
    Price RangeOutstanding at beginning of year
    
    
    1,514,749
    
    
    $
    0.50 - 16.00
    
    
    
    383,333
    
    
    $
    0.75 - 16.00
    
    
    
    398,333
    
    
    $
    0.75 - 16.00Granted
    
    
    
    
    
    
    0.00 - 0.00
    
    
    
    15,000
    
    
    
    2.53 - 2.53
    
    
    
    
    
    
    
    0.00 - 0.00Exercised
    
    
    (631,416
    )
    
    
    0.50 - 0.75
    
    
    
    
    
    
    
    0.00 - 0.00
    
    
    
    (283,333
    )
    
    
    0.75 - 0.75Expired
    
    
    (500,000
    )
    
    
    1.00 - 1.00
    
    
    
    
    
    
    
    0.00 - 0.00
    
    
    
    (25,000
    )
    
    
    8.00 - 16.00Outstanding at end of year
    
    
    383,333
    
    
    $
    0.75 - 16.00
    
    
    
    398,333
    
    
    $
    0.75 - 16.00
    
    
    
    90,000
    
    
    $
    2.53 - 10.19Warrants exercisable at year end
    
    
    376,021
    
    
    $
    0.75 - 16.00
    
    
    
    393,709
    
    
    $
    0.75 - 16.00
    
    
    
    88,064
    
    
    
    2.53 - 10.19Weighted average exercise price
    
    
    
    
    
    $
    3.03
    
    
    
    
    
    
    $
    3.01
    
    
    
    
    
    
    $
    7.49
 Our warrants have expiration dates that range to 2007 and all warrants are
fully vested at December 31, 2003 with the exception of 1,936 warrants issued
to a consultant that vest monthly through 2004. Non-cash expenses resulting
from the issuance of warrants was $8,859 in 2001, $38,084 in 2002, and $2,950
in 2003. F-15




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##### Table of Contents



(10) Income Taxes There was no income tax benefit recognized for our net losses in 2001,
2002, and 2003. The difference between taxes computed by applying the U.S.
Federal corporate tax rate of 34% and the actual income tax provision in 2001,
2002, and 2003 is primarily the result of limitations on utilizing net
operating losses. The tax effects of temporary differences and carryforwards that give rise
to significant portions of the deferred tax assets at December 31, 2002 and
2003 are presented below: 2002
    
    2003Net operating loss carryforwards
    
    $
    16,236,671
    
    
    $
    17,156,617Research and development credit
carryforwards
    
    
    2,328,070
    
    
    
    2,500,417Capitalized research and development
    
    
    4,844,200
    
    
    
    5,389,203Bad debt write-off
    
    
    1,117,270
    
    
    
    1,117,270Deferred revenue
    
    
    1,088,681
    
    
    
    1,007,041Other
    
    
    1,386,905
    
    
    
    1,589,909Total gross deferred tax assets
    
    
    27,001,797
    
    
    
    28,760,457Less deferred tax asset valuation allowance
    
    
    27,001,797
    
    
    
    28,760,457Net deferred tax assets
    
    $
    
    
    
    $
    
 The net change in the valuation allowance for 2001, 2002, and 2003 was an
increase of approximately $1,898,000, $1,299,000, and $1,759,000 respectively,
due primarily to doubt as to our ability to utilize net operating losses and
research and development credits. At December 31, 2003, we had net operating loss carryforwards for income
tax purposes of approximately $50,461,000 and unused research and development
tax credits of approximately $2,500,000 available to offset future taxable
income and income taxes, respectively, expiring through 2020. Our ability to
utilize net operating loss and credit carryforwards is limited pursuant to the
Tax Reform Act of 1986, due to cumulative changes in stock ownership in excess
of 50%. F-16




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##### Table of Contents



(11) Leases In February of 2000, we entered into a 12-year non-cancelable operating
lease for 25,000 square feet of office and laboratory space in Bothell,
Washington, which we occupied in November 2000. In April 2003 we amended our
existing lease by adding 5,000 square feet of contiguous unimproved space. Future minimum cash payments under non-cancelable operating leases are as
follows: Year ending December 31,2004
    
    $
    705,9162005
    
    
    730,6232006
    
    
    756,1952007
    
    
    782,6622008
    
    
    810,055Thereafter
    
    
    3,533,837$
    7,319,288
 Rent expense is recognized on the straight-line method over the term of
the leases. Rent expense on operating leases was $793,019 in 2001, $781,667 in
2002, and $787,900 in 2003. (12) Legal Proceedings Mordecai Jofen, as Trustee of the Harbor Trust, f/k/a The Edward Blech
Trust v. Epoch Biosciences, Inc., United States District Court for the Southern
District of New York, Case No. 01 CV 4129 The Harbor Trust (formerly the Edward Blech Trust) filed a complaint
against us in 2001, alleging the breach of a 1996 letter agreement between us
and David Blech, allegedly resulting in damages to Blech and/or the Harbor
Trust of at least $10 million. In July 2002, the Court granted our motion to dismiss without leave to
file an amended complaint and the Harbor Trust appealed the Courts dismissal
of its case to the United States Court of Appeal for the Second Circuit. On
May 14, 2003, the Second Circuit affirmed the dismissal. F-17




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##### Table of Contents



(13) Selected Quarterly Financial Data (unaudited) Summary unaudited quarterly financial data for 2002 and 2003 is as
follows: 2002March 31
    
    June 30
    
    September 30
    
    December 31Total revenue
    
    $
    2,281,956
    
    
    $
    2,488,063
    
    
    $
    2,658,863
    
    
    $
    3,797,062Net income (loss)
    
    $
    (1,216,752
    )
    
    $
    (1,201,584
    )
    
    $
    (860,983
    )
    
    $
    63,613Net loss per share
 basic and diluted
    
    $
    (0.05
    )
    
    $
    (0.05
    )
    
    $
    (0.03
    )
    
    $
    0.00
 2003March 31
    
    June 30
    
    September 30
    
    December 31Total revenue
    
    $
    2,415,498
    
    
    $
    2,452,301
    
    
    $
    2,009,910
    
    
    $
    2,023,561Net income (loss)
    
    $
    (874,428
    )
    
    $
    (3,059,736
    )
    
    $
    (331,591
    )
    
    $
    (426,107
    )Net loss per share
 basic and diluted
    
    $
    (0.03
    )
    
    $
    (0.12
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
 During the second quarter of 2003 we sold our San Diego Operations (see
note (2) Sale of San Diego Operations). During the fourth quarter of 2003 we terminated a license agreement (see
note (3) Termination of License Rights). (14) Subsequent Event  Private Equity Investment In February 2004, we raised $6,175,000 in gross proceeds in a private
placement of common stock and common stock warrants. In the transaction, we
sold 2,470,000 shares of common stock at $2.50 per share and granted the
investors five-year warrants to purchase an additional 741,000 shares of the
Companys common stock at an exercise price of $3.89 per share. F-18




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Power Of Attorney Each person whose signature appears below hereby authorizes Bert W. Hogue
and/or William G. Gerber, 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-K. Signatures In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. Dated: March 26, 2004
    EPOCH BIOSCIENCES, INC.
(Registrant)By:
    /s/ Bert W. HogueBert W. HogueVice President, Secretary, and 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/s/ Frederick B. Craves
Frederick B. Craves, Ph.D.
    
    Chairman of the Board of Directors
    
    March 26, 2004/s/ William G. Gerber
William G. Gerber, M.D.
    
    Chief Executive Officer, President,
and Director
    
    March 26, 2004/s/ Sanford S. Zweifach
Sanford S. Zweifach
    
    Director
    
    March 26, 2004/s/ Richard L. Dunning
Richard L. Dunning
    
    Director
    
    March 26, 2004
 F-19




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##### Table of Contents



Signature
    
    Title
    
    Date/s/ Herbert L. Heyneker
Herbert L. Heyneker, Ph.D.
    
    Director
    
    March 26, 2004/s/ Michael Ybarra Lucero
Michael Ybarra Lucero
    
    Director
    
    March 26, 2004/s/ R. Janet Whitmore
R. Janet Whitmore
    
    Director
    
    March 26, 2004/s/ Riccardo Pigliucci
/s/ Riccardo Pigliucci
    
    Director
    
    March 26, 2004/s/ Bert W. Hogue
Bert Hogue
    
    Vice President, Secretary and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
    
    March 26, 2004
 F-20




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##### Table of Contents



EXHIBIT INDEX Exhibit #
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3 of Epochs
quarterly report on Form 10-QSB for the quarter ended June 30, 1998).3.2*
    
    Bylaws of Epoch, as currently in effect.10.1*
    
    Epoch Biosciences Incentive Stock Option, Nonqualified Stock Option And Restricted Stock Purchase
Plan1991, as amended.10.2*
    
    Form of Indemnification Agreement entered into with officers and directors of Epoch.10.8
    
    Epoch Biosciences Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase
Plan1993 (incorporated by reference to Exhibit 10.39 of Epochs Registration Statement on Form SB-2,
Registration No. 33-66742, effective on September 29, 1993).10.19
    
    Bridge Financing Agreement dated as of February 25, 1998, with form of note and warrant, between
Epoch and Bay City Capital, LLC (incorporated by reference to Exhibit 10.69 of Epochs Annual Report
on Form 10-KSB for the year ended December 31, 1997).10.21.1
    
    Second Amended and Restated Collaboration, License and Supply Agreement between Epoch and Applera
Corporation (formerly PE Corporation) dated August 17, 2000. (Incorporated by reference to exhibit
10.21.1 of Epochs Annual Report on Form 10-K for the year ended December 31, 2001). (Portions of
this exhibit are omitted and were filed separately with the Secretary of the SEC pursuant to the
Registrants application requesting confidential treatment under Rule 406 of the Securities Act).10.21.2
    
    First Side Agreement dated October 31, 2001 by and between Epoch and Applera Corporation (formerly PE
Corporation). (Incorporated by reference to exhibit 10.21.2 of Epochs Annual Report on Form 10-K
for the year ended December 31, 2001). (Portions of this Exhibit are omitted and were filed
separately with the SEC pursuant to Rule 406 of the Securities Act).10.21.3
    
    Amendment No. 1 to Second Amended and Restated Collaboration, License and Supply Agreement between
Epoch and Applera Corporation (formerly PE Corporation) dated July 26, 2002 (incorporated by
reference to Exhibit 10.21.3 of Epochs quarterly report on form 10-Q for the period ending June 30,
2002). (Portions of this exhibit are omitted and were filed separately with the Secretary of the SEC
pursuant to the Registrants application requesting confidential treatment under Rule 406 of the
Securities Act).10.22
    
    Stock Purchase Agreement dated November 1, 1999 by and between Epoch and the purchasers named in the
agreement (incorporated by reference to Exhibit 10.22 of Epochs Annual Report on Form 10-KSB for the
year ended December 31, 1999).10.24
    
    Second Amended and Restated Employment Agreement dated January 10, 2002 by and between Epoch and
William G. Gerber, M.D. (Incorporated by reference to exhibit 10.24 of Epochs Annual Report on Form
10-K for the year ended December 31, 2001).10.24.1
    
    First Amendment to Second Amended and Restated Employment Agreement dated February 28, 2003 by and
between Epoch and William G. Gerber, M.D. (Incorporated by reference to exhibit 10.24.1 of Epochs
Annual Report on Form 10-K for the year ended December 31, 2002).10.25
    
    Lease Agreement dated February 2000, by and between Epoch Biosciences and Nexus Canyon Park LLC
(incorporated by reference to Exhibit 10.1 of Epochs quarterly report on form 10-QSB for the period
ending September 30, 2000).10.26
    
    Letter Agreement dated November 7, 2000 between Epoch Biosciences and Bay City Capital BD LLC
(incorporated by reference to Exhibit 10.26 of Epochs Annual Report on Form 10-KSB for the year
ended December 31, 2001). (Portions of this Exhibit are omitted and were filed separately with the
SEC pursuant to Rule 406 of the Securities Act).




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##### Table of Contents



Exhibit #
    
    Description10.26.1
    
    Extension of Letter Agreement dated November 13, 2001, between Epoch Biosciences and Bay City Capital
BD LLC. (Incorporated by reference to exhibit 10.26.1 of Epochs Annual Report on Form 10-K for the
year ended December 31, 2001).10.27
    
    Employment Agreement dated March 8, 2001 by and between Epoch and Merl F. Hoekstra (incorporated by
reference to Exhibit 10.27 of Epochs quarterly report on form 10-Q for the period ending June 30,
2001).10.27.1
    
    First Amendment to Employment Agreement dated February 12, 2002, by and between Epoch and Merl F.
Hoekstra. (Incorporated by reference to exhibit 10.27.1 of Epochs Annual Report on Form 10-K for
the year ended December 31, 2001).10.28
    
    Employment Agreement dated February 28, 2001 by and between Epoch and Bert W. Hogue (incorporated by
reference to Exhibit 10.28 of Epochs quarterly report on form 10-Q for the period ending June 30,
2001).10.28.1
    
    First Amendment to Employment Agreement dated February 12, 2002, by and between Epoch and Bert W.
Hogue (incorporated by reference to Exhibit 10.28.1 of Epochs Annual Report on Form 10-K for the
year ended December 31, 2001).10.29
    
    Employment Agreement dated January 7, 2002 by and between Epoch and Walter Mahoney (incorporated by
reference to Exhibit 10.29 of Epochs Annual Report on Form 10-K for the year ended December 31,
2001).10.30
    
    Employment Agreement dated May 13, 2002 by and between Epoch and Cirilo Cabradilla (incorporated by
reference to Exhibit 10.30 of Epochs quarterly report on Form 10-Q for the period ending June 30,
2002).10.31
    
    Letter Agreement dated June 10, 2002 between Epoch Biosciences and Bay City Capital BD LLC
(incorporated by reference to Exhibit 10.31 of Epochs quarterly report on Form 10-Q for the period
ending June 30, 2002). (Portions of this Exhibit are omitted and were filed separately with the SEC
pursuant to Rule 406 of the Securities Act).10.32
    
    Loan and Security Agreement between Epoch and Silicon Valley Bank, dated September 17, 2002
(incorporated by reference to Exhibit 10.32 of Epochs quarterly report on Form 10-Q for the period
ending September 30, 2002).10.32.1
    
    Loan Modification Agreement between Epoch and Silicon Valley Bank, dated September 18, 2003.
(incorporated by reference to Exhibit 10.32.1 of Epochs quarterly report on Form 10-Q for the period
ending September 30, 2003).10.33
    
    Exclusive Distribution and License Agreement between Epoch and Amersham Biosciences Corp., dated July
25, 2002 (incorporated by reference to Exhibit 10.33 of Epochs quarterly report on Form 10-Q for the
period ending September 30, 2002). (Portions of this exhibit are omitted and were filed separately
with the Secretary of the SEC pursuant to the Registrants application requesting confidential
treatment under Rule 406 of the Securities Act).10.34
    
    Co-Exclusive License and Supply Agreement between Epoch Biosciences, Inc. and QIAGEN NV, dated
November 4, 2002 (incorporated by reference to exhibit 10.34 of Epochs Annual Report on Form 10-K
for the year ended December 31, 2002). (Portions of this exhibit are omitted and were filed
separately with the Secretary of the SEC pursuant to the Registrants application requesting
confidential treatment under Rule 406 of the Securities Act.)10.35
    
    Asset Purchase Agreement, dated as of May 22, 2003, by and between Epoch Biosciences, Inc. and
Eurogentec North America, Inc. (incorporated by reference to Exhibit 2.1 of Epochs current report on
Form 8-K filed with the SEC on June 16, 2002). (Portions of this exhibit are omitted and were filed
separately with the Secretary of the SEC pursuant to the Registrants application requesting
confidential treatment under Rule 406 of the Securities Act.)




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##### Table of Contents



Exhibit #
    
    Description10.36
    
    2003 Stock Incentive Plan. (incorporated by reference to Exhibit 4.1 of Epochs Registration
Statement on Form S-8, Registration No. 333-112141, effective on January 23, 2004). ).10.37
    
    Securities Purchase Agreement, dated February 23,
2004, by and among Epoch Biosciences, Inc. and the
investors a party thereto (incorporated by
reference to Exhibit 4.1 of Epochs current report
on Form 8-K filed with the SEC on February 25,
2004).10.38
    
    Registration Rights Agreement, dated February 23,
2004, by and among Epoch Biosciences, Inc. and the
investors a party thereto (incorporated by
reference to Exhibit 4.2 of Epochs current report
on Form 8-K filed with the SEC on February 25,
2004).10.39
    
    Form of Warrant issued pursuant to the Securities
Purchase Agreement, dated February 23, 2004, by
and among Epoch Biosciences, Inc. and the
investors a party thereto (incorporated by
reference to Exhibit 4.3 of Epochs current report
on Form 8-K filed with the SEC on February 25,
2004).23.1
    
    Consent of KPMG LLP.24.1
    
    Power of Attorney (included on the signature page).31.1
    
    Certification of Chief Executive Officer Pursuant
to Rule 13a-14(a)/15d-14(a), As Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant
to Rule 13a-14(a)/15d-14(a), As Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer Pursuant
to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*
    
    Incorporated by reference to the same numbered exhibit of Epochs registration statement on Form SB-2, No.
33-667742, effective on September 19, 1993.