<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
FORM 10-K
(Mark one)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended September 30, 1996
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________
Commission File No. 1-10492
EPITOPE, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0779127
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
8505 S.W. Creekside Place
Beaverton, Oregon 97008
(Address of principal executive offices) (Zip code)
(503) 641-6115
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
registered
Common Stock, no par value American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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. [ ]
State the aggregate market value of voting stock held by non-affiliates
of the registrant, as of November 30, 1996: $157,430,522
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of November 30, 1996: Common Stock, no par value,
13,191,844
Documents Incorporated by Reference:
Definitive Proxy Statement for 1997 Annual Shareholders' Meeting Part III
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Table of Contents
PART I
Page
ITEM 1. Business 3
ITEM 2. Properties 20
ITEM 3. Legal Proceedings 20
ITEM 4. Submission of Matters to a Vote of Security Holders 20
PART II
ITEM 5. Market for the Registrant's Common Stock and Related Stockholder
Matters 21
ITEM 6. Selected Financial Data 21
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 25
ITEM 8. Financial Statements and Supplementary Data 33
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 37
PART III
ITEM 10. Directors and Executive Officers of the Registrant 37
ITEM 11. Executive Compensation 37
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 37
ITEM 13. Certain Relationships and Related Transactions 37
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 37
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PART I
ITEM 1. Business.
Epitope, Inc. ("Epitope" or the "Company"), is an Oregon corporation
incorporated in 1981. Its Epitope Medical Products group ("Epitope Medical
Products") develops and markets oral specimen collection kits and related
diagnostic tests for the detection of the Human Immunodeficiency Virus
("HIV"), the cause of Acquired Immune Deficiency Syndrome ("AIDS"), and for
the detection of other medical conditions and analytes. Epitope Medical
Products' oral specimen HIV testing system is marketed by the Company under
the name EpiScreen(TM) and by SmithKline Beecham plc ("SB") under the name
OraSure(R). The Company's Agritope group ("Agritope") historically has
focused its efforts on the development of novel agricultural products using
plant genetic engineering and other modern methods. Through its acquisition
of Andrew and Williamson Sales, Co. ("A&W") on December 12, 1996 and its
majority ownership of Vinifera, Inc. ("Vinifera"), Agritope now conducts
operations in each step of the production and distribution chain for a broad
range of fruits, vegetables and plants and has an established infrastructure
that will facilitate commercialization of the Company's genetically engineered
agricultural products.
Epitope Medical Products
Epitope Medical Products' lead product, a patented collection device used
as part of an oral fluid diagnostic system ("EpiScreen/OraSure"), is designed
for use in the detection of HIV and other medical conditions and analytes.
The Company markets the device under the brand name EpiScreen in the United
States for use in screening life insurance applicants, and in certain foreign
countries for use in professional markets. In February 1995, the Company
entered into a Development, License and Supply Agreement with SB, under which
SB is marketing the device in the U.S. and certain foreign countries as part
of an integrated test system to physicians, hospitals and other healthcare
professionals under the brand name OraSure. Subject to obtaining required
regulatory approvals, the Company intends to market the system for
over-the-counter sale through SB in the United States and through SB or other
distributors in international markets.
The EpiScreen/OraSure device consists of a small, treated cotton-fiber
pad on a nylon handle that is placed in the patient's mouth for two minutes.
The device collects oral mucosal transudate ("OMT"), a serum-derived fluid
that, unlike saliva, contains high concentrations of HIV antibodies in people
infected with the virus. As a result, OMT testing is a highly accurate method
for detecting HIV infection. Because EpiScreen/OraSure uses a noninvasive,
needle-free collection method, the Company believes that oral fluid testing
has several significant advantages over blood-based testing systems for both
healthcare professionals and patients.
Epitope Medical Products also markets HIV-1 Western blot confirmatory
test kits used to confirm positive results of initial screening tests for
HIV-1 infection. Its OraSure HIV-1 Western blot confirmatory test kit is used
in conjunction with oral-fluid based screening tests, while its EPIBlot(R)
HIV-1 Western blot confirmatory test kit is used in conjunction with
blood-based screening tests. The kits are distributed worldwide under an
exclusive agreement with Organon Teknika Corporation ("Organon Teknika"), a
member of the Akzo Pharma group of Akzo Nobel, NV.
The EpiScreen/OraSure HIV-1 device and the OraSure HIV-1 Western blot and
EPIBlot confirmatory tests have all received clearance from the U.S. Food and
Drug Administration ("FDA") for sale to professional markets in the United
States.
Background
Acquired Immune Deficiency Syndrome is caused by the Human
Immunodeficiency Virus. HIV attacks the immune system, slowly weakening the
body's ability to ward off infection and certain forms of cancer. When these
complications develop, the HIV infection has progressed to clinically
diagnosed AIDS. HIV is spread through sexual contact, blood transfusions, the
sharing of intravenous needles, accidental needle sticks, or contact between a
mother and her child during gestation, childbirth, or breast-feeding. There
is currently no known cure for HIV/AIDS. However, the recent introduction of
a new class of anti-HIV drugs called protease inhibitors, when used in
combination with nucleoside analogs (e.g., AZT), has shown promising results
in slowing progress of the disease. Clinical studies have demonstrated that
the early detection and treatment of HIV can help to curb the effects of the
disease and significantly prolong the life of the patient. Other studies have
shown that treatment with AZT of an HIV-infected pregnant woman may prevent
the transmission of HIV from the mother to her child.
According to the World Health Organization ("WHO"), an estimated 24
million adults and 1.5 million children have been infected with HIV worldwide,
and approximately 10,000 new infections occur each day. WHO also estimates
that over 6 million cases of AIDS have occurred worldwide to date. In North
America, an estimated 1.3 million people have been infected with HIV. AIDS is
currently the leading cause of death for Americans between the ages of 25 and
44. It is estimated that approximately 800,000 people in the United States
are living with the HIV virus. According to the Centers for Disease Control
and Prevention ("CDC"), total federal funding budgeted for HIV/AIDS in 1995
was over $2.7 billion.
Based on industry estimates, the Company believes that approximately 60
million HIV tests were performed in the U.S. in 1995. Of these tests,
approximately 30 million were performed in connection with blood donor
screening, 20 million were performed in healthcare settings such as hospitals
and clinics, 5 million were performed in connection with life insurance
applications, and the balance were performed by public health departments and
the military. Currently, substantially all HIV tests are performed by testing
a patient's blood. There are a number of blood tests for HIV, the most common
of which is the enzyme-linked immunosorbent assay ("ELISA"). In order to
reduce the possibility that an individual without HIV will be diagnosed as
having the virus (a false positive), most countries require the retesting of
the blood sample using a second, more specific test to confirm an initial
positive test result. The most commonly used confirmatory test is the Western
blot.
The Company believes that blood testing has a number of disadvantages
which increase healthcare costs and patient inconvenience, pose a risk of
infection to healthcare professionals and make testing uneconomic or
unavailable in certain applications or settings. The disadvantages of blood
testing include:
Risk of HIV Infection. Blood tests involve the use of needles or lancets
to obtain blood from the patient. Healthcare professionals collecting blood
risk contracting HIV if accidentally stuck by the needle or lancet used to
obtain blood from an infected patient.
Limited Access. Because blood must be collected by trained
professionals, its collection is often difficult or prohibitively expensive in
certain settings. For example, community-based outreach programs, homeless
shelters, rural communities, and other remote settings often lack healthcare
professionals trained in blood collection. As a result, blood testing may not
be available in some of these settings.
Higher Overall Cost. The cost of collecting a blood specimen represents
a significant component of the total cost of HIV testing. Furthermore, when a
healthcare professional must travel to the subject's office or home to collect
a blood sample, as is often the case with life insurance applicant testing,
the cost of collecting the blood specimen is substantially increased.
Patient Discomfort. Blood tests require the use of needles or lancets
that are uncomfortable for patients. In addition, patients with small or
damaged veins, such as intravenous drug users, the elderly and young children,
may require multiple needle sticks in order to obtain an adequate blood
sample.
Epitope Oral Specimen Collection Technology
In order to address the significant drawbacks associated with blood-based
tests, Epitope developed and patented a device to collect oral fluid instead
of blood. The EpiScreen/OraSure device, shaped like a small toothbrush,
consists of a cotton-fiber pad treated with a proprietary salt solution. The
pad, which is mounted on a nylon handle, is placed in the patient's mouth
between the lower cheek and gum for two minutes. The pad collects oral
mucosal transudate, a serum-derived fluid that, unlike saliva, contains high
concentrations of antibodies. OMT contains approximately four times the
amount of antibodies found in ordinary whole saliva. Following collection,
the pad is sealed in a specimen vial containing a proprietary preservative
solution. The treated pad enhances the collection, and the preservative
solution enhances the stabilization, of antibodies and other analytes
originating from the oral mucosae. The specimen in the vial is stable for
three weeks at room temperature, although in most cases laboratory testing
takes place within one to three days.
A schematic representation of the oral fluid collection procedure is
shown below.
[Graphic material demonstrating specimen collection procedure,
containing illustrations and the following captions:
Peel open package.
Place pad between lower cheek and gum. Rub back and forth
until moist.
Keep the pad in place for 2 minutes (maximum 5 minutes) while
timing.
Open vial in upright position.
Insert pad to bottom of vial.
Break the pad handle by snapping it against the side of the
vial.
Replace the cap with a snap.]
Products
EpiScreen/OraSure. In December 1994, the Company received clearance from
the FDA to sell EpiScreen/OraSure to professional markets for the ELISA
screening of HIV-1 antibodies. The device is marketed directly by the Company
under the trade name EpiScreen for use by the U.S. life insurance industry and
in certain international markets, and is marketed by SB under the trade name
OraSure to healthcare professionals in the United States and a number of other
countries. See "Epitope Medical Products--Marketing."
The EpiScreen/OraSure oral specimen collection and HIV-1 testing system
is easily administered and involves three steps: (i) collection of an oral
specimen using the EpiScreen/OraSure collection device, (ii) ELISA screening
of the specimen for HIV antibodies at a laboratory, and (iii) laboratory
confirmation of positive screening test results with the FDA-cleared OraSure
Western blot kit. A trained healthcare professional then conveys test results
and provides appropriate counseling to the patient.
The EpiScreen/OraSure HIV-1 testing system represents a highly accurate
alternative to traditional blood tests. In clinical trials, EpiScreen/OraSure
provided the correct result or triggered appropriate follow-up testing in
3,569 out of 3,570 cases (99.97 percent). The Company believes
EpiScreen/OraSure has several advantages over blood tests, as outlined in the
following table.
Feature Blood Test EpiScreen/OraSure
- ------- ---------- -----------------
Safety Poses risk of HIV Eliminates risk of
infection through needle-stick accidents
accidental needle sticks
Invasiveness Requires use of a Uses noninvasive
needle or lancet collection technique
Ease of use Requires blood Sample collection
collection by a requires minimal
trained healthcare training
professional
Portability Generally performed in Can be used rapidly and
a physician's office efficiently in almost
or other healthcare any setting
setting
Cost Requires a nurse or Eliminates the need for
other trained healthcare and costs associated
professional with a trained
healthcare professional
Oral-based and Serum-based Western Blot Confirmatory Tests. Epitope
Medical Products has also developed, and in June 1996 received FDA clearance
to market, an oral-based HIV-1 Western blot confirmatory test. This test uses
the original oral specimen to confirm positive results of initial
EpiScreen/OraSure HIV-1 ELISA screening tests. Epitope Medical Products has
also marketed EPIblot, a serum-based Western blot HIV-1 confirmatory test kit
since 1987. The kit is used to confirm the positive results of initial blood-
based screening tests for HIV-1 infection.
Markets
Insurance Industry. Epitope Medical Products believes there is a
significant need in the life insurance industry for an easy-to-administer,
noninvasive and cost-effective HIV testing system such as EpiScreen. In the
United States, approximately 5 million HIV tests were administered in 1995 by
the life insurance industry in connection with the issuance of new policies.
In addition, data from the American Council of Life Insurance and the Health
Insurance Association of America indicate that over $1.5 billion in
AIDS-related death benefits were paid in 1994. The organizations also
cautioned that, due to difficulty in identifying all AIDS-related claims, the
data may significantly understate the financial impact of AIDS on the
insurance industry.
Current HIV testing of life insurance applicants involves the use of a
paramedic or other trained healthcare professional to obtain a blood sample.
The cost to the insurance company for an HIV test includes the cost of the
paramedic as well as the cost of the collection kit and laboratory testing
services. These costs average approximately $55 to $70, of which $35 to $50
is the cost of the paramedic. As a result, insurance companies have generally
limited HIV testing to policies with face amounts of $100,000 or more. Based
on industry statistics, Epitope Medical Products estimates that in 1994 over
9 million policies were issued for face amounts of less than $100,000,
representing 68 percent of all policies issued. Epitope Medical Products
believes that the use of EpiScreen can significantly reduce the cost of HIV
testing to the insurance industry because collection of an oral fluid specimen
can be performed by insurance agents or other persons without professional
medical training, eliminating the cost of the paramedic and making testing at
policy levels below $100,000 a cost-effective practice. Moreover, the Company
believes that insurance companies may adopt EpiScreen for use in connection
with applications for insurance policies with face amounts at and above
$100,000.
Epitope Medical Products also believes that the use of EpiScreen will
allow the insurance industry to address "anti-selection." Anti-selection
occurs when an individual who knows that he or she is infected with HIV
intentionally applies for one or more life insurance policies that do not
entail HIV testing. Epitope Medical Products believes that the availability of
two recently approved over-the-counter ("OTC") HIV blood tests may increase
the incidence of anti-selection. By allowing insurance companies to lower the
policy level at which HIV testing is cost-effective, the use of EpiScreen may
allow insurance companies to reduce their exposure to losses from anti-
selection and thereby to lower overall claims costs.
An additional advantage of the EpiScreen testing system is that the oral
specimen used for HIV testing can also be used to identify smokers and users
of cocaine. Cotinine, a metabolite of nicotine, can be detected using
OraSure/EpiScreen. The FDA has advised Epitope Medical Products that
EpiScreen may be used for cocaine testing for the purpose of life insurance
risk assessment while a 510(k) notice is undergoing final review, and may be
used for cotinine testing generally. In a presentation at the 105th annual
meeting of The American Academy of Insurance Medicine, a major life insurance
company reported results of the use of the EpiScreen testing system in Canada
and in the Bahamas from 1992 to 1995. The life insurance company reported
that agent collection reduced its testing costs by $65 per application.
During the four-year study period, the insurer found that it saved $1.7
million by using EpiScreen for HIV and cocaine testing. In addition, the life
insurance company determined that it realized $1.6 million in increased
premiums as a result of identifying smokers who claimed on their applications
that they were nonsmokers.
Physician and Clinical Market. Through SB, Epitope Medical Products is
marketing its oral HIV testing system to the physician, hospital and other
professional healthcare provider markets under the brand name OraSure. OraSure
is now offered to physicians and hospitals in the United States by over 3,300
sales representatives in the SB distribution network. In connection with the
introduction of OraSure to the physician community in August 1996, SB created
the OraSure Confidential Testing Network, a nationwide network for consumers
to identify doctors in their area who offer confidential HIV testing with
OraSure. The Network is accessible to consumers through a toll-free number
(1-800-OraSure) and on the Internet (www.OraSure.com). The SB product launch
was accompanied by an advertising campaign featuring two-page spreads in major
medical professional publications. The OraSure brand was also a major sponsor
of the 1996 AIDS Candlelight March in Washington, D.C., conducted in
connection with the display of the National AIDS Quilts.
OTC Market. A recent study published in the New England Journal of
Medicine reported that 44 percent of Americans age 18 to 24 and 33 percent of
Americans age 25 to 44 were "very or somewhat likely" to purchase over-the-
counter home-collection HIV tests. According to the United States Census
Bureau, as of July 1996 there were 24.7 million Americans in the 18 to 24 age
group and 83.7 million in the 25 to 44 age group. Thus, based on the study,
the number of people "very or somewhat likely" to purchase OTC home-collection
HIV tests in the U.S. exceeds 35 million individuals.
Epitope Medical Products and SB are currently conducting clinical trials
to support an application for FDA clearance to market OraSure as a home
collection testing system. If FDA clearance is obtained, Epitope Medical
Products and SB plan to market the OraSure device for OTC sale as part of an
integrated system including laboratory testing and counseling. Epitope
Medical Products believes the noninvasiveness and ease of use of OraSure
represent significant benefits to the home user over traditional blood-based
methods. There can be no assurance that Epitope Medical Products will receive
FDA clearance to market OraSure to the OTC market on a timely basis, if at
all. See "Description of Business--Epitope Medical Products--Government
Regulation."
If Epitope Medical Products receives FDA clearance of the OraSure home
collection system, a consumer could purchase OraSure at retail outlets such as
pharmacies, drug stores, and other commercial facilities or through a mail
order program. The consumer would collect the specimen and mail it in a
postage prepaid envelope to an SB laboratory for testing. The consumer would
obtain his or her test results and counseling by calling a toll-free number
and providing a confidential identification number included with the test. SB
has established an arrangement under which the American Social Health
Association ("ASHA") would provide test results and counseling to the caller.
ASHA is the leading provider of AIDS counseling services in the United States,
handling over 4,000 calls per day on the National AIDS Hotline.
International. In light of the worldwide scope of the HIV epidemic,
Epitope Medical Products believes there are significant opportunities for sale
of EpiScreen/OraSure in international markets. Epitope Medical Products
believes that the ease of use, portability, increased safety and lower cost of
oral fluid testing will provide significant advantages over blood tests in
international markets. Epitope Medical Products has initiated an
international marketing program that offers a complete EpiScreen testing
system. The program features direct assistance to distributors in
establishing EpiScreen programs that include laboratory services, cooperation
from screening test manufacturers, and provision of Western blot confirmatory
kits in each country. Epitope is currently marketing EpiScreen to
distributors in Canada, Thailand, Argentina and South Africa for use in
professional markets. SB also markets OraSure to the professional market in
several Latin American and African countries and the European Community
through its network of distributors. See "Epitope Medical
Products--Marketing."
Products Under Development
EpiScreen/OraSure. Oral mucosal transudate contains many constituents
found in blood serum. Because of this feature, the Company believes
EpiScreen/OraSure is a platform technology with a wide variety of potential
applications beyond HIV testing. For example, the EpiScreen/OraSure device
may be useful for the diagnosis of a variety of infectious diseases in
addition to HIV, such as viral hepatitis and a number of childhood diseases.
The Company recently applied for regulatory clearance in Canada to market
EpiScreen for the detection of measles, mumps and rubella. In addition, the
Company believes that the use of oral specimens may allow physicians to
diagnose diseases more readily in children without subjecting them to the
discomfort of drawing a blood sample, thereby increasing the frequency of
testing for diseases.
The Company believes the EpiScreen/OraSure device also has potential
application in the detection of drugs of abuse, such as cocaine. A 510(k)
notification for this use is currently undergoing FDA review and, if approved,
will allow Epitope Medical Products to market EpiScreen/OraSure to
professional markets in addition to the life insurance industry. Under an
agreement with STC Technologies, Inc., Epitope Medical Products is conducting
U.S. clinical trials for other drugs of abuse. Physicians may also find the
device useful for monitoring levels and adjusting dosages of therapeutic
drugs, such as those that are toxic at levels only slightly above the level at
which they are effective. Monitoring of these drugs currently requires
frequent blood tests to determine drug concentration. The Company believes
oral fluid testing would eliminate the discomfort and inconvenience associated
with this frequent blood testing.
OraQuick. Epitope Medical Products is currently developing OraQuick(R)
HIV, a one-step, rapid-format oral fluid testing system designed to provide
test results within ten minutes. Epitope Medical Products believes that
OraQuick has significant potential as a rapid laboratory-based HIV test and as
an OTC home-based HIV test. Epitope Medical Products has substantially
completed a prototype of OraQuick HIV. Like EpiScreen/OraSure, OraQuick is a
platform technology with a variety of potential applications in addition to
HIV testing. Modifications of the basic OraQuick technology may allow use of
this approach for detection of antibodies against the ulcer-causing bacterium
Helicobacter pylori, as well as for a variety of infectious diseases such as
syphilis, viral hepatitis, and childhood infections. There can be no
assurance that Epitope Medical Products will complete development of any of
these products or, in the event of successful development, will receive
applicable regulatory clearances or will profitably market the products.
Marketing
Life Insurance Industry. Epitope Medical Products currently markets its
EpiScreen device for use in screening life insurance applicants for HIV,
cocaine, and nicotine. The Company maintains a six-member direct sales force
that markets and sells EpiScreen to the main insurance testing laboratories in
the United States and Canada. The major laboratories currently using the
EpiScreen device include LabOne, Inc., Osborn Laboratories, Clinical Reference
Laboratory, Inc. and GIB Laboratories. Epitope Medical Products also markets
the use of EpiScreen directly to life insurance companies.
U.S. Professional and OTC. In February 1995, Epitope Medical Products
entered into a Development, License and Supply Agreement with SB (the
"Agreement") for the OraSure HIV-1 oral specimen collection device and certain
future diagnostic products. Under the Agreement, SB will sell the OraSure
device to the professional markets in the United States. In addition, if and
when regulatory clearance is received, SB will market the OraSure device to
the U.S. OTC market. SB paid Epitope Medical Products a one-time license fee
of $5 million for the rights granted under the Agreement.
The Agreement provides that SB generally has responsibility for
advertising, promotion, distribution, and regulatory approval expenses in its
markets. Epitope Medical Products will manufacture the OraSure devices for
sale to SB at predetermined transfer prices and will receive certain royalties
on SB product sales. A portion of SB's costs in obtaining and maintaining
regulatory approvals will be credited against royalties payable to Epitope
Medical Products.
The Agreement permits SB to fund Epitope Medical Products' ongoing
development of diagnostic products and technology for its term, which lasts
for a minimum of 15 years, subject to earlier termination on 60 days' notice
if SB elects to stop marketing the products in all markets. SB has the option
to market those products developed with SB funding, which Epitope will
initially manufacture for agreed-upon prices and royalties.
International. Epitope Medical Products also employs a direct sales
force for the marketing and sale of EpiScreen in certain international
markets. The Company complements its direct sales efforts through the use of
selected international distributors who have the expertise and capabilities
appropriate for marketing EpiScreen. In addition, under the terms of the SB
Agreement, SB will act as exclusive director of the OraSure HIV-1 oral
specimen collection device in the professional markets in certain countries,
including the European Economic Community and certain African, Middle Eastern,
and Latin American countries. Epitope Medical Products has retained all
rights to distribute products in markets other than those reserved to SB.
Western Blot Distribution. Epitope Medical Products has entered into
supply and distribution agreements with Organon Teknika Corporation, a member
of the Pharma Division of Akzo Nobel, NV, an international chemical and
pharmaceutical manufacturer based in Arnhem, The Netherlands. The supply
agreement provides that Organon Teknika will supply the HIV-1 antigen used to
manufacture Western blot confirmatory test kits. The distribution agreement
grants Organon Teknika the exclusive right to purchase Western blot
confirmatory test kits from Epitope Medical Products and to market them
worldwide. Epitope Medical Products and Organon Teknika are negotiating terms
for continuing the supply and distribution arrangement after the existing
agreements expire on March 31, 1997.
Competition
Competition in the emerging market for HIV testing is intense and is
expected to increase. The Company believes that the principal competition
will come from existing blood-based HIV assays and from urine-based testing
assays. Epitope Medical Products' competitors include specialized
biotechnology firms as well as pharmaceutical companies with biotechnology
divisions and medical diagnostic companies, many of which have considerably
greater financial, technical, and marketing resources than Epitope Medical
Products. Competition may intensify as technological advances are made and
become more widely known and as products reach the market in greater numbers.
Furthermore, new testing methodologies could be developed in the future that
render Epitope Medical Products' oral-based HIV test impractical, uneconomical
or obsolete. There can be no assurance that Epitope Medical Products'
competitors will not succeed in developing or marketing technologies and
products that are more effective than those developed by Epitope Medical
Products or that would render its technologies or products obsolete or
otherwise commercially unattractive. In addition, there can be no assurance
that competitors will not succeed in obtaining regulatory approval for these
products, or in introducing or commercializing them before Epitope Medical
Products. Such developments could have a material adverse effect on the
Company's and Epitope Medical Products' business, financial condition and
results of operations.
Three companies have submitted applications to the FDA for OTC HIV blood
testing: Direct Access Diagnostics, Home Access Health Corp., and ChemTrak
Incorporated. The FDA has approved a home collection kit for HIV blood
testing developed by Direct Access Diagnostics and another home collection kit
for HIV blood testing developed by Home Access Health Corp.
Cambridge Biotech Corporation and BioRad Laboratories, Inc. manufacture
HIV Western blot confirmatory tests, and Waldheim Pharmazeutika manufactures
immunofluorescent HIV confirmatory tests, which compete with Epitope Medical
Products' EPIblot HIV-1 Western blot serum-based confirmatory test kits.
Several other companies market or have announced plans to market oral
specimen collection devices and tests outside the United States and have
announced plans to seek FDA approval of such tests in the United States.
Epitope Medical Products expects the number of devices competing with its
EpiScreen/OraSure device to increase as the benefits of oral specimen-based
testing become more widely accepted. Epitope Medical Products expects that FDA
approval of the EpiScreen device will also encourage potential competitors to
develop oral diagnostic products. No such devices have yet been approved by
the FDA for HIV testing. See "Epitope Medical Products--Government
Regulation."
The United States Food and Drug Administration ("FDA") recently approved
an HIV ELISA screening test for use with urine. However, no Western blot or
other confirmatory test using urine has been approved by the FDA to date. The
Company believes that absence of an FDA-approved confirmatory test for urine
poses a significant disadvantage to urine testing because a patient who
receives an initial positive screening result must return to give a second,
blood-based sample for confirmatory testing. The Company also believes that
urine collection can be difficult, inconvenient and potentially embarrassing
for the patient, and that privacy and chain-of-custody issues are further
impediments to routine use of urine-based HIV tests.
Government Regulation
General. Many of Epitope Medical Products' proposed and existing
diagnostic products are subject to regulation by the FDA, other federal,
state, and local agencies, and comparable bodies in foreign countries. Such
regulation governs almost all aspects of development and marketing, including
the introduction, advertising, promotion, manufacturing practices, labeling,
distribution, and record keeping for the products. In the United States,
different types of diagnostic products are regulated differently by the FDA,
as discussed below. As part of the FDA clearance process, Epitope Medical
Products often must demonstrate that its products are both safe and effective
for a particular indication or application.
Drugs and Biological Products. Generally, drugs and biological products
require FDA approval before marketing. The steps required before a drug or
biological product may be marketed in the United States include: (1)
preclinical laboratory and animal tests; (2) submission of an application for
an investigational new drug or biological product, which must become effective
before human clinical trials may commence; (3) human clinical trials; (4)
submission of a Product License Application ("PLA") for the biological product
or a New Drug Application ("NDA") for most other new drug products; and (5)
approval of the PLA or NDA.
Preclinical safety and initial efficacy testing is usually undertaken in
animals. Results of such preclinical and other laboratory tests are submitted
to the FDA before human clinical trials can begin. Clinical trials are
typically conducted in three phases. Phase I uses human subjects to determine
safety and tolerance. Phase II uses a limited patient population to determine
effectiveness and dosage and to identify side effects. Compounds found
effective and safe in Phase II are further tested in Phase III with an
expanded patient population at geographically dispersed clinical study sites.
Each phase may last from one to two years or more.
Most products are not approved because of the failure to demonstrate
safety, effectiveness, or both. The FDA may suspend clinical trials at any
time if it is felt that subjects or patients are being exposed to an
unacceptable health risk. Obtaining FDA approval requires substantial time
and effort. There can be no assurance that any approval will be granted to
Epitope Medical Products on a timely basis, if at all. As part of the
approval process, the FDA may require Epitope Medical Products to initiate
post-approval marketing studies.
Medical Devices. Medical devices are classified either in Class I,
Class II, or Class III. Class I devices are subject only to general control
provisions of the Federal Food, Drug, and Cosmetic Act, as amended (the "FDC
Act"). These provisions include requirements that a device not be adulterated
or misbranded. Class II devices are those for which general controls are
insufficient to provide a reasonable assurance of safety and efficacy and for
which a "generic" performance standard or other special controls are
appropriate. Devices that do not meet the criteria for Class I or II are
placed in Class III. Class I and II devices, those Class III devices
initially marketed prior to passage of the Medical Device Amendments of 1976
("MDA") for which premarket approval applications ("PMAs") are not yet
required, and devices substantially equivalent to such devices, may be
marketed upon FDA clearance of a section 510(k) notification (a "510(k)
Notice"). Other Class III devices may be commercially marketed only after FDA
approval of a PMA. Generally, the process of obtaining FDA approval of a PMA
is similar to that for obtaining approval of a biological or other drug
product.
Based upon the information provided in a 510(k) Notice regarding the
device's intended use and technological features, the FDA will determine
whether the device is "substantially equivalent" to a predicate device, i.e.,
a device legally marketed which did not require a PMA. If a device is found
to be substantially equivalent to a predicate device, it may be freely
marketed in the United States so long as the device is otherwise in compliance
with the FDC Act. If it is not so found, it will be considered a Class III
device requiring a PMA. Substantial equivalence means that the FDA has found
that the device has the same intended use as the predicate device, and either
has the same technological characteristics or has different characteristics,
but there is information in the 510(k) Notice that shows the device is as safe
and effective as the predicate and does not present different questions of
safety and effectiveness.
EpiScreen/OraSure Collection Device. Use of the EpiScreen/OraSure
collection device for applications involving the detection of antibodies to
HIV is regulated by the FDA as use of a Class III medical device requiring a
PMA. In December 1994, the FDA approved Epitope Medical Products' PMA for use
of the Episcreen/Orasure device in HIV screening. Post-approval marketing
studies are under way as required as part of the FDA's approval of the
EpiScreen/OraSure device. In June 1996, the FDA approved the PMA for use of
the OraSure oral specimen-based Western blot confirmatory test kit for HIV-1
diagnosis.
In February 1995, Epitope Medical Products submitted a 510(k) Notice for
use of EpiScreen for cocaine testing. The submission is currently undergoing
FDA review. See "Business--Epitope Medical Products--Products Under
Development--EpiScreen." In the meantime, the FDA has advised Epitope Medical
Products that EpiScreen may be used for cocaine testing for the purposes of
life insurance risk assessment.
Western Blot Test Kits. Epitope Medical Products' HIV-1 Western blot
serum-based confirmatory test kits are used to confirm whether individuals are
infected with HIV-1. They are regulated by the FDA as biological products,
unlike most other diagnostic tests which are regulated as medical devices. In
March 1991, the FDA cleared the EPIblot HIV-1 serum-based confirmatory test
kit for commercial distribution. As noted above, a PMA seeking permission to
market the OraSure oral specimen-based Western blot confirmatory test kit for
HIV-1 diagnosis was approved by the FDA in June 1996.
Manufacturing Regulations. Every company that manufactures drugs,
biological products, or medical devices distributed in the United States is
subject to inspections by the FDA and must comply with the FDA's Current Good
Manufacturing Practices regulations. These regulations govern, among other
matters, manufacture, testing, release, packaging, distribution, and
documentation.
Other. Epitope Medical Products is also subject to regulation by the
Occupational Safety and Health Administration and may be subject to regulation
by the U.S. Environmental Protection Agency ("EPA") under the Toxic Substances
Control Act ("TSCA"), the Resource Conservation and Recovery Act, and other
legislation. Epitope Medical Products is also subject to foreign regulations
governing, for example, human clinical trials and marketing with respect to
products distributed outside the United States. Approval processes vary from
country to country, and the length of time required for approval or to obtain
other clearances may in some cases be longer than that required for U.S.
governmental approvals. The extent of potentially adverse governmental
regulation affecting Epitope Medical Products that might arise from future
legislative or administrative action cannot be predicted.
Agritope
Historically, Agritope has focused on the development and
commercialization of novel agricultural products using plant genetic
engineering and other modern methods. Through its acquisition of A&W and its
majority ownership of Vinifera, Agritope positioned itself as a vertically
integrated agribusiness with the production, distribution and marketing
infrastructure necessary to realize better the value of its proprietary
technology. Agritope's products now include a broad range of fruits,
vegetables and plants produced using technologically advanced farming and
plant propagation techniques designed to incorporate advances in
biotechnology, plant breeding, and crop production.
Agritope consists of three major units: Agritope Research and
Development, A&W, and Vinifera. Agritope Research and Development contributes
biotechnology and product development efforts to A&W and Vinifera as well as
to its other business partners. Through A&W, Agritope produces, markets,
distributes and sells a wide variety of fruits and vegetables throughout North
America. Through Vinifera, Agritope believes that it offers the most advanced
grapevine plant propagation and disease screening and elimination programs
available to the worldwide wine and table grape production industry.
Agritope Research and Development
Agritope's biotechnology research and development program is focused on
using the tools and techniques of plant genetic engineering to regulate the
synthesis of ethylene in ripening fruits and vegetables. Ethylene gas is a
plant hormone which in higher plant species is responsible for fruit ripening
and vegetable senescence as well as numerous other physiological effects.
Agritope has identified and patented a single gene that can be inserted into
plants and expressed to regulate the plant's ability to produce ethylene. In
addition, Agritope is conducting research in the area of disease control,
including screening plants for the presence of disease and creating
genetically engineered plants with resistance to pathogens.
Ripening Control. The fresh produce industry is based largely upon
rapid harvesting, processing and distribution of fruits and vegetables in
order to prevent spoilage and ensure the arrival of product at retail outlets
in acceptable condition for consumer purchase and use. The postharvest period
for most fruits and vegetables is one of continuous ripening and senescence,
as evidenced by rapid changes in color, texture, flavor, nutrient content, and
other quality attributes. Product losses due to perishability during
harvesting, processing, packing, shipping and distribution can reach
substantial portions of overall crop yield. Growers frequently incur losses
resulting from the abandonment of crops in the field or having shipments
refused by receivers because the produce is overripe. In addition,
wholesalers and retailers may be forced either to discard or sell overripe
produce at reduced prices and consumers often must use produce shortly after
purchase to avoid spoilage. Studies published in the United States Department
of Agriculture ("USDA") Marketing Research Report have estimated postharvest
losses of 30 percent and 40 percent for strawberries shipped from Florida to
the Chicago and New York markets. In the U.S. fruit and vegetable markets,
postharvest losses are estimated to amount to several billion dollars
annually.
Postharvest losses are largely attributable to the effects of ethylene.
Because ethylene is a gas, it not only affects the plant producing it, but
also surrounding plants as well. The physiological effects of ethylene
include initiation and enhancement of ripening, senescence, leaf abscission
and drooping, and flower fading and wilting. Common examples include the
ripening and subsequent rotting of tomatoes and apples, discoloration in
lettuce and broccoli, and the short bloom life of cut flowers.
The importance of controlling ethylene production in plants has been
recognized for decades, and has been addressed primarily through the use of
controlled atmosphere storage, chemical treatment, and special packaging.
Conventional techniques for controlling ethylene production have serious
disadvantages that include high cost, time-critical handling requirements and
lack of consistent ripening. For example, the majority of product sold in the
fresh tomato market today is composed of "gas-green" tomatoes. These tomatoes
are picked and packed while still green and firm. Prior to shipping to
wholesale customers, green tomatoes are exposed to ethylene gas in order to
initiate ripening of the product. In general, gas-green tomatoes are
perceived by consumers to have less desirable taste and texture than vine
ripened tomatoes.
Agritope believes the ability to regulate ethylene and control ripening
through genetic engineering represents an opportunity to provide a superior
product to consumers while also improving profitability for growers and
distributors. Growers may achieve higher marketable yields due to fewer
losses to overripe product in the field and may lower labor costs by
decreasing frequency of harvest. For packers/shippers, better control of
product perishability may result in improved inventory flexibility and
control, and more uniform product quality.
Agritope Technology. Agritope's ethylene control technology is focused
on the use of a patented gene known as SAMase. The expression of SAMase in
plants produces an enzyme that acts to degrade one of the important precursor
compounds (S-adenosylmethionine or "SAM") necessary for the production of
ethylene. Agritope has genetically engineered plants to express the SAMase
gene only when certain levels of rising ethylene concentrations are reached in
the tissues of the fruit or plant. This feature causes the production of
greater levels of the enzyme that degrades SAM in response to a
correspondingly higher level of ethylene. Agritope believes that this
technology thus offers a major advantage over other approaches to ripening
control in that the production of ethylene may be specifically reduced to
levels that allow for the initiation of ripening but delay the spoiling
effects of excess ethylene. Therefore, the fruit can be maintained at an
optimal level of ripeness for an extended period of time. An additional
benefit of Agritope's technology is that the enzyme produced by the SAMase
gene degrades SAM into compounds normally found in plants. Agritope believes
its SAMase technology can be utilized for the control of ethylene in any plant
species where ethylene affects ripening or senescence.
Agritope's ripening control technology is protected by a U.S. patent
covering the use of any gene that encodes S-adenosylmethionine hydrolase (the
enzyme expressed by the SAMase gene) in any plant species. In addition to the
patent on the SAMase gene, utility claims have been allowed on the
promoter/gene combination used by Agritope in applications currently under
development as well as potential applications in all other fruit-bearing
plants. In the area of regulated ripening control, Agritope has four
additional U.S. and foreign patents pending. In addition, Agritope has three
U.S. and foreign patent applications pending in related areas. See
"Description of Business--Epitope, Inc.--Patents and Proprietary Information."
Development Programs. Agritope's research and development programs are
directed toward several highly perishable fruit and vegetable crops described
below. The development program comprises five stages, including gene
isolation, transformation, product evaluation, seed/plant production and
commercialization.
The following chart shows the approximate progress Agritope has made to
date with various crops, which are described in more detail below.
[Chart titled "Agritope Product Development Program" listing the
stages of development (gene isolation, transformation, product
evaluation, seed/plant production, and product launch). The chart
shows that the following products are in the stages indicated:
Tomato Product Evaluation
Raspberry Product Evaluation
Melon Transformation
Brassica Transformation
Additional Crops Gene Isolation]
Gene Isolation: The initial stage of genetic engineering.
Gene isolation involves the identification and characterization of
genes and gene promoters for use in Agritope's development
programs. These genetic elements are then combined for use in
genetically engineered plants.
Transformation: The stage at which the new genetic material
is introduced into the plant. The transgenic plants which result
are then available for product evaluation.
Product Evaluation: The analysis of transgenic plants in
both laboratory and field settings to determine commercial
utility. This stage also involves the plant breeding and selection
process to develop commercially competitive new varieties that
incorporate the Agritope technology. Regulatory data are also
collected and submitted at this stage.
Seed/Plant Production: Propagation of selected plant
material (either seed or plants) in quantities needed for
commercial production.
Product Launch: Commercial production and sale, following
regulatory clearance.
Tomato. The annual U.S. wholesale fresh market tomato business is
estimated at $1.7 billion. In order to facilitate the commercialization of
its ethylene control technology into this market, Agritope and A&W formed
Superior Tomato Associates, L.L.C. ("STA"), a joint venture with Sunseeds
Company, the developer and producer of several leading fresh market tomato
varieties.
Agritope provides genetic engineering technology and regulatory
expertise, has responsibility for managing the joint venture, and owns a two-
third equity ownership interest in STA. Sunseeds provides elite tomato
germplasm and breeding expertise in the development of transgenic varieties.
A&W contributes testing and production acreage and will oversee the production
and wholesale distribution of fresh tomatoes to the fresh produce industry.
STA is currently in the process of developing and testing transgenic
cherry, roma, and large fruited vine ripe tomato varieties. Agritope has
developed lines of elite tomato germplasm provided by Sunseeds. Recent field
trials have successfully demonstrated the transfer of Agritope's SAMase
ripening control technology to a number of Sunseeds' elite breeding lines.
Sunseeds is conducting further breeding and field trials of these transgenic
lines. These trials will be followed by production scale trials to be
conducted by A&W that, if successful, will lead to regulatory submissions and,
if regulatory clearances are received, commercial-scale seed production.
Subsequently, A&W would commence commercial tomato production and sales to the
industry.
Prior to the formation of STA, Agritope submitted safety, nutritional,
and environmental information on a prototype transgenic tomato line to both
the USDA and the FDA. In March 1996, the USDA issued its finding that this
line has no significant environmental impact and would no longer be considered
a regulated article. During the same month the FDA determined that the
variety did not raise issues that would require pre-market review or approval
by that agency. In addition to receiving these U.S. regulatory clearances,
Agritope is also conducting field evaluations of SAMase tomato lines in Mexico
under permits granted by the Mexican Ministry of Agriculture. In order to
commence sale of selected varieties, Agritope will be required to make
supplemental submissions to the USDA and FDA that establish that such
varieties are comparable to the previously cleared lines.
Raspberry. The wholesale raspberry market, estimated at $48 million
annually in the United States, has experienced limited growth because of the
extreme perishability of the fruit. Agritope believes that the successful
development of raspberries containing its ethylene control technology could
permit a significant expansion of the fresh raspberry market.
In a collaboration with Sweetbriar Development, Inc. ("Sweetbriar"), the
largest fresh raspberry producer in the U.S., Agritope has engineered several
of Sweetbriar's proprietary commercial raspberry varieties to contain the
SAMase gene. Initial field trials of transgenic raspberries are currently
underway at Sweetbriar facilities in California and Agritope facilities in
Woodburn, Oregon. Agritope has already demonstrated the ability to reduce
ethylene synthesis in the fruit. Successful development of a commercial
transgenic raspberry will require further demonstration of improved shelf life
as well as additional field trials to obtain the appropriate regulatory
clearances. If these conditions are met, Sweetbriar would produce the new
raspberries for distribution and marketing by Driscoll Strawberry Associates
("Driscoll"), the largest distributor of fresh raspberries and strawberries in
the U.S. Agritope would receive royalties on wholesale product sales.
Separately, Agritope has integrated its ripening control technology into
commercially successful public domain varieties. A&W would undertake
commercial production and distribution of any improved raspberry products
resulting from this program.
Melon. The U.S. wholesale fresh melon market is estimated at $282
million annually. As with tomatoes, perishability results in substantial
product losses during the processes of production, harvesting, and
distribution. Agritope believes that melons represent a substantial market
opportunity for implementation of its ripening control technology. Recent
scientific reports have demonstrated a dramatic increase in shelf life for
specialty type melons in which the ability to produce ethylene has been
impaired. Using proprietary seed varieties supplied by two units of the
French seed company Limagrain, Clause Semences, and its U.S. affiliate Harris
Moran Seed Company ("Harris Moran"), Agritope is developing commercial melon
varieties with controlled ripening and increased postharvest product life.
Transgenic melons containing Agritope's ethylene control gene are currently
being evaluated jointly by Harris Moran and Agritope technicians. If
successfully developed, the melons will be distributed by A&W and third party
distributors.
Brassica. Agritope has an agreement with Sakata Seed America ("Sakata")
to develop new varieties of certain Brassica species (broccoli and
cauliflower). Sakata is the leading hybrid broccoli and cauliflower seed
supplier in the U.S. Sakata provided Agritope with germplasm from selected
breeding lines and funds to develop broccoli and cauliflower plants
integrating Agritope ripening control technology. Agritope received payment
from Sakata upon the transfer of genetically engineered plants to be used for
the production of hybrid seeds. If the seeds are commercialized, Agritope
will receive a royalty on sales made by Sakata.
Additional Crops. Agritope is also pursuing research and development
programs to incorporate its SAMase technology into other crops where
perishability causes significant losses in the production and distribution
process. These include strawberries, lettuce, bananas, peaches, pears, and
apples. The estimated U.S. wholesale markets for these crops range from $325
million for pears to $2.4 billion for bananas.
Andrew and Williamson Sales, Co.
As part of its vertical integration strategy, Agritope acquired A&W on
December 12, 1996. A&W is a wholly owned operating subsidiary based in San
Diego, California with sales offices in San Diego and Bakersfield, California
and Nogales, Arizona. A&W, founded in 1986, produces fruits and vegetables
and provides sales and distribution services for growers from both mainland
and Baja, Mexico and the San Joaquin Valley in California. A&W produces and
distributes a diversified mix of fresh fruits and vegetables including vine
ripe cherry, roma and fresh market tomatoes, strawberries, raspberries,
melons, tree fruits, table grapes, cucumbers, squash, green, red and yellow
peppers, Brussels sprouts and asparagus. In addition to fresh strawberries,
A&W processes and sells frozen strawberry products. A&W ships fresh produce
every day of the year from its facilities in San Diego and ships seasonally
from its other sites. A&W is one of the United States' largest distributors
of vine ripe cherry and fresh market tomatoes. It is also a major shipper of
fresh strawberries, melons and cucumbers throughout North America. In
connection with its distribution operations, A&W also provides technical
support and short-term loans to certain growers. See Note 13 to Financial
Statements included herein.
The Company acquired A&W pursuant to an Acquisition and Merger Agreement
with A&W and its shareholders, under which a subsidiary of the Company was
merged into A&W. The Company issued 520,000 shares of common stock of
Epitope, Inc., in exchange for all the outstanding common stock of A&W. A&W
also repaid certain loans due to its shareholders. The acquisition was
accounted for as a pooling of interest and qualifies as a tax-free
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended.
The Company has agreed to register for resale the shares issued to the
shareholders of A&W, who have represented that they have no present intention
to sell the shares. Fifteen percent of the shares will bear a legend
prohibiting sale without the Company's consent. The shareholders have agreed
that these shares will be returned to the Company to satisfy claims for breach
of representations and/or warranties arising within approximately one year
after closing.
The four principals of A&W have entered into three-year employment and
five-year noncompetition agreements with the Company. Fred L. Williamson,
president of A&W, is an executive officer of the Company.
Vinifera, Inc.
Vinifera, Inc. was incorporated in 1993 to participate in the grapevine
nursery business. Through proprietary processes, Vinifera propagates and
grafts grape plants for sale to vineyards and to growers of table grapes.
Industry sources have estimated that 44 million grafted wine grape plants were
produced in California in 1996. This number is expected to increase to
between 70 and 90 million by the year 2000.
Traditionally, grapevine plants for sale to vineyards are produced
seasonally using field grown, dormant cuttings that are grafted. In contrast,
Vinifera uses year-round greenhouse propagation and a herbaceous grafting
method that employs very young, actively growing cuttings. As a result of
greenhouse propagation, Vinifera is able to develop in two years a quantity of
new plants that is approximately ten times larger than can be produced with
traditional techniques. In addition, herbaceous grafting with green cuttings
could allow a vineyard to begin commercial production of grapes from a newly
planted vineyard a year sooner than would otherwise be possible. This grafting
process also produces sturdier unions than dormant grafting, resulting in
significantly higher yields of successful grafts, both at the propagation
stage and in the survival of actual plantings in the field. Agritope Research
and Development provides disease testing services for Vinifera.
Vinifera is headquartered in Napa, California, with facilities in
Woodburn, Oregon and Petaluma, California. Its library of grape plants
includes 32 different phylloxera-resistant types of rootstock, 88 different
wine varietal clones, and ten different table grape varietal clones. In
addition, several French and Italian varietals are currently passing through
quarantine and, when released, will be available to the U.S. market
exclusively through Vinifera. Vinifera believes that this collection of
different grapevine clones is one of the largest in the world. Vinifera's
U.S. customer base consists of over 80 vineyards in California, Washington and
Oregon. In 1995, Vinifera established a joint venture in Argentina (Vinifera
Sudamericana S.A.) to begin the propagation of plant material in that country.
The first vines produced are expected to be sold in 1997. Vinifera is
currently in the process of establishing similar ventures in other countries
with large grape and wine production industries.
Vinifera was formed in 1993 as a wholly owned subsidiary of Agritope,
Inc. In June 1995, Agritope, Inc. agreed to sell its equity interest in
Vinifera to a purchaser which subsequently failed to make scheduled payments
of the purchase price. As part of a settlement of claims based on the
purchaser's default, the purchaser retained a minority interest in Vinifera
and relinquished the majority interest to Agritope, Inc. in August 1996.
Competition
The agribusiness and plant biotechnology industry is highly competitive.
Competitors include independent companies that specialize in agribusiness or
biotechnology; chemical, pharmaceutical and food companies that have
biotechnology laboratories; universities; and public and private research
organizations. Agritope believes that many companies including companies with
significantly greater financial resources, such as Monsanto Company,
Calgene Inc., DNAP Holding and Zeneca Seeds are engaged in the development of
mechanisms to control the ripening and senescence of fruit and vegetable
products. Technological advances by others could render Agritope's products
less competitive. The Company believes that, despite barriers to new
competitors such as patent positions and substantial research and development
lead time, competition will intensify, particularly from agricultural
biotechnology firms and major agrichemical, seed and food companies with
biotechnology laboratories. Agritope believes that it can compete
successfully with companies in these markets by developing products that offer
unique and desirable attributes with superior quality.
The produce markets in which Agritope sells its products are highly
competitive. For example, competition in the fresh tomato market is expected
to intensify as other companies introduce tomatoes developed through
biotechnology and as existing "gas green" tomato producers react to
competitive pressures by growing and marketing traditionally developed vine
ripe tomatoes.
In other crops, competition may intensify as technological developments
occur within the agricultural biotechnology industry. In competing with such
companies, Agritope relies primarily on the experience of its production,
sales and marketing staff at A&W, the qualifications of its scientific staff,
and its technological capabilities.
Government Regulation
Regulation by federal, state and local government authorities in the
U.S. and by foreign governmental authorities will be a significant factor in
the future production and marketing of Agritope's genetically engineered fruit
and vegetable products.
The federal government has implemented a coordinated policy for the
regulation of biotechnology research and products. The USDA has primary
federal authority for the regulation of specific research, product development
and commercial applications of certain genetically engineered plants and plant
products. The FDA has principal jurisdiction over plant products that are
used for human or animal food. The EPA has jurisdiction over the field testing
and commercial application of plants genetically engineered to contain
pesticides. Other federal agencies have jurisdiction over certain other
classes of products or laboratory research.
The USDA regulates the growing and transportation of most genetically
engineered plants and plant products. In March 1996 following a request from
Agritope, the USDA issued a determination that allows the growing and shipping
of its prototype variety of ripening controlled cherry tomato anywhere in the
U.S. in the same manner as conventionally developed tomatoes.
In May 1992, the FDA announced its policy on foods developed through
genetic engineering (the "FDA Policy"). The FDA Policy provides that the FDA
will apply the same regulatory standards to foods developed through genetic
engineering as applied to foods developed through traditional plant breeding.
Under the FDA Policy, the FDA will not ordinarily require premarket review of
genetically engineered plant varieties of traditional foods unless their
characteristics raise significant safety questions, such as elevated levels of
toxicants, the presence of allergens, or they are deemed to contain a food
additive.
In March 1996, the FDA announced its determination, based on its review
of food safety data submitted by Agritope, that its prototype variety of
ripening controlled cherry tomato expressing the SAMase gene has not been
significantly altered with respect to food safety or nutritive value when
compared to conventional tomatoes.
The FDA has also issued a food additive regulation permitting the use of
the kanr selectable marker gene, which encodes for the enzyme APH(3')II in
genetically engineering tomatoes, cotton and canola. Agritope tomato products
will fall under this regulation. It is uncertain whether additional food
additive regulations will need to be issued to cover additional fruit and
vegetable products which use the kanr selectable marker gene.
Currently, the FDA Policy does not require that genetically engineered
products be labeled as such, provided that such products are as safe and have
the same nutritional characteristics as conventionally developed products.
However, there can be no assurance that the FDA will not reconsider its
position, or that local, state or international authorities will not enact
labeling requirements, any of which could have a material adverse effect on
marketing of products derived using the tools and techniques of genetic
engineering.
The FDA is currently considering modifying its policy on foods developed
through genetic engineering to include a Premarket Notification ("PMN")
procedure. This policy modification could require companies that develop
genetically engineered foods to inform the FDA that its safety evaluation is
complete and that the company intends to commercialize the product. The
objective of the PMN is to make the FDA and the public aware of all new
genetically engineered food products entering the market. Agritope believes
that any future requirement for a PMN should not delay plans to commercialize
its genetically engineered fruit and vegetable products.
Agritope's complete range of agribusiness and plant biotechnology
activities are subject to general FDA food regulations and are, or may be,
subject to regulation under various other laws and regulations. These include
but are not limited to the Occupational Safety and Health Act, the Toxic
Substances Control Act, the National Environmental Policy Act, other Federal
water, air and environmental quality statutes, import/export control
legislation, and other laws. At the present time most states are generally
deferring to federal agencies (USDA or EPA) for the approval of genetically
engineered plant field trials, although states are provided a review period
prior to the issuance of a field trial permit. Failure to comply with
applicable regulatory requirements could result in enforcement action,
including withdrawal of marketing approval, seizure or recall of products,
injunction or criminal prosecution.
The federal regulatory agencies most involved in the business of A&W,
the production and marketing of fresh fruit and vegetables, are the USDA and
the FDA. The USDA sets standards for raw produce and governs its inspection
and certification. Under the Perishable Agricultural and Commodities Act
("PACA"), the USDA exercises broad control over the marketing of produce in
domestic and foreign commerce, sets standards of fair conduct as to
representations, sales, delivery, shipment and payment for goods and regulates
the licensing of produce merchants and brokers.
Almost every aspect of federal regulation is accompanied by regulation
on the state level. In addition, in its Mexican operations, A&W must comply
with the requirements of Mexican law, most importantly Mexico's environmental
protection law.
International regulatory policies for genetically engineered plants and
plant products are not complete. Consequently, it is possible that additional
data, labeling or other requirements will be required in countries where
Agritope intends to grow and/or commercialize its genetically engineered
products. Foreign regulatory agencies could require Agritope to conduct
further safety assessments and potentially delay product development programs
or commercialization of resulting products.
To date, Agritope to the best of its knowledge has successfully
functioned within the scope of applicable laws and regulations, including
rules administered by the USDA, the FDA and the Mexican Ministry of
Agriculture. Agritope believes it is in compliance with all applicable laws
and regulations pertaining to the development and commercialization of its
products.
Epitope, Inc.
Supplies
The HIV-1 antigen needed to manufacture Epitope Medical Products'
Western blot HIV confirmatory test kits is available from only a limited
number of sources. Organon Teknika, the exclusive distributor of the test
kits, is required to supply Epitope Medical Products' requirements for antigen
for the term of its distribution agreement with Epitope Medical Products,
which ends in March 1997. The parties are negotiating terms for continuing
the supply arrangement. If for any reason Organon Teknika should no longer be
able to supply Epitope Medical Products' antigen needs, management believes
Epitope Medical Products would be able to obtain or produce its own supply of
antigen at a competitive cost. Epitope Medical Products has obtained a
license from the National Technical Information Service which is required for
the production of the HIV-1 antigen currently used in Epitope Medical
Products' Western blot test kits.
Other materials used by Agritope and Epitope Medical Products in
manufacturing, production, and research and development operations are widely
available from a variety of sources.
Grants and Contracts
The Company participates in United States Small Business Innovation
Research ("SBIR") programs sponsored by either the Department of Health and
Human Services or the Department of Agriculture. The SBIR programs have two
phases. Phase I covers a six-month project period and a total award not to
exceed $100,000. Phase II covers a two-year project period and a total award
not to exceed $750,000. Epitope Medical Products has received funds in the
past from the National Institute of Allergy and Infectious Diseases ("NIAID")
for work in developing a rapid test to detect HIV antibodies in oral fluid
specimens and from the National Cancer Institute ("NCI") to fund research for
the treatment of cancer by exploiting a deficiency of certain compounds in
cancer cells.
Agritope was awarded from the USDA a Phase I grant of $50,000 in 1994
and a Phase II grant of $200,000 in 1995 for development of diagnostic tests
for the detection of grapevine leafroll virus. Agritope has been awarded
grant support in the past from the Oregon Strawberry Commission and Oregon
Raspberry and Blackberry Commission for antifungal biocontrol research. The
Company also receives funds for research and development programs from its
strategic partners.
The Company intends to continue to participate in the SBIR programs,
similar grant programs and projects with strategic partners, as it deems
appropriate. The Company regularly makes applications for new grants, but
there is no assurance that grant support will be continued.
Patents and Proprietary Information
Epitope Medical Products has obtained patents in the United States and
certain foreign countries for the EpiScreen/OraSure and OraQuick devices and
related technology. Epitope Medical Products has applied for additional
patents, both in the United States and in certain foreign countries, on the
EpiScreen/OraSure collection device and a number of other technologies and
products. In 1995, Agritope received a U.S. patent relating to its ethylene
control gene. Agritope has also applied for additional U.S. and foreign
patent protection for its ethylene control technology. Agritope's ability to
commercialize products depends in part on the ownership or right to use
relevant enabling technology as well as the ownership or right to use genes of
interest. The Company anticipates filing patent applications for protection
on future products and technology. United States patents generally have a
maximum term of 20 years from the date an application is filed or 17 years
from issuance, whichever is longer.
Much of the technology developed by the Company is subject to trade
secret protection. To reduce the risk of loss of trade secret protection
through disclosure, the Company requires its employees and consultants to
enter into confidentiality agreements. The Company believes that patent and
trade secret protection is important to its business. However, the issuance
of a patent or existence of trade secret protection does not in itself ensure
the Company's success. Competitors may be able to produce products competing
with a patented Company product without infringing on the Company's patent
rights. Issuance of a patent in one country generally does not prevent
manufacture or sale of the patented product in other countries. The issuance
of a patent to the Company or to a licensor is not conclusive as to validity
or as to the enforceable scope of the patent. The validity or enforceability
of a patent can be challenged by litigation after its issuance, and, if the
outcome of such litigation is adverse to the owner of the patent, the owner's
rights could be diminished or withdrawn. Trade secret protection does not
prevent independent discovery and exploitation of the secret product or
technique.
Personnel
At September 30, 1996, the Company and its subsidiaries had 113 full-
time employees, including 66 persons in Epitope Medical Products, 29 in
Agritope, and 18 in corporate administration and support. Epitope Medical
Products employees included 18 persons in research and product development,
eight in administration and marketing, 29 in manufacturing and production, and
ten in regulatory affairs and quality assurance. Agritope employees included
19 in research and development and ten at the Vinifera grape plant nursery
operation which also employs seasonal part-time employees as needed. The
Company considers its relations with its employees to be excellent. None of
its employees are represented by labor unions.
The Company employs nine persons holding Ph.D. or M.D. degrees with
specialties in the following disciplines: analytical chemistry, bacteriology
and public health, biochemistry, biophysics, hematology and internal medicine,
immunology, molecular biology, organic chemistry, plant biology and plant
pathology. From time to time, the Company also engages the services of
scientists as consultants to augment the skills of its scientific staff.
Scientific Advisory Board
The Company also utilizes the services of a Scientific Advisory Board.
The Scientific Advisory Board meets periodically to review the Company's
research and development efforts and to apprise the Company of scientific
developments pertinent to the Company's business. The Scientific Advisory
Board comprises chair Eugene W. Nester, Ph.D., Professor and Chair, Department
of Microbiology, University of Washington; Roger N. Beachy, Ph.D., Member,
Scripps Family Chair, and Head, Division of Plant Biology, The Scripps
Research Institute, and Co-Director of International Laboratory for Tropical
Agricultural Biotechnology; Peter R. Bristow, Ph.D., Associate Plant
Pathologist, Washington State University; J. Richard George, Ph.D., Vice
President of Scientific Affairs of Epitope Medical Products; Lesley M.
Hallick, Ph.D., Vice President for Academic Affairs, Oregon Health Sciences
University; Daniel Malamud, Ph.D., Professor and Chair, Department of
Biochemistry, University of Pennsylvania School of Dental Medicine; and
James I. Mullins, Ph.D., Professor of Microbiology and Medicine, University of
Washington.
ITEM 2. Properties.
The Company leases approximately 35,600 square feet of office,
manufacturing, and laboratory space in Beaverton, Oregon, under two leases
that terminate January 31, 2000. Each lease calls for fixed monthly payments
over its term. The Company also entered into a five-year lease, effective
October 1, 1996, for 2,265 square feet of warehouse space used to store
inventory and equipment.
Agritope, Inc., owns a 15-acre farm which it leases to Vinifera, Inc.,
for use in connection with Vinifera, Inc.'s grapevine micropropagation
operations. Greenhouse capacity at the farm currently totals 60,000 square
feet. Agritope, Inc., also uses a portion of the Company's office space and
research and development facilities in Beaverton, Oregon.
In addition to leasing Agritope, Inc.'s Oregon farm and greenhouse,
Vinifera leases 2,000 square feet of office space in Napa, California under a
lease that expires August 31, 1998 and 250,000 square feet of greenhouse space
in Petaluma, California under a lease that expires January 31, 2001.
A&W leases its main distribution facility in San Diego, California, from
Fred Andrew and Fred L. Williamson, under a lease agreement expiring
August 31, 2001, with an option to extend the lease term for an additional
five years. A&W also leases a 1,000 square foot sales office in Bakersfield,
California, on a month-to-month basis. A&W utilizes 10,000 square feet of a
cold storage facility in San Diego, California, for its frozen strawberry
operations. A&W has the right to use the cold storage space through January
18, 1998.
ITEM 3. Legal Proceedings.
None.
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 the fiscal year covered by this Report.
<PAGE>
PART II
ITEM 5. Market for the Registrant's Common Stock and Related
Stockholder Matters.
The Company's Common Stock is listed for trading on the American Stock
Exchange ("AMEX") under the symbol EPT. High and low sales prices reported by
AMEX during the periods indicated are shown below. The Company has applied
for inclusion of the Common Stock on the national market tier of The Nasdaq
Stock Market.
<TABLE>
<CAPTION>
Year ended September 30 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales price per share High Low High Low
First Quarter $ 18 $ 9-1/2 $ 26 $ 18-1/2
Second Quarter 19-1/2 13-7/8 21-7/8 13-5/8
Third Quarter 22-7/8 15-1/2 18-3/8 13-5/8
Fourth Quarter 16-1/8 11-3/4 18 13-3/4
</TABLE>
On November 30, 1996, there were 1,080 holders of record of the Common
Stock, and the closing price of the Common Stock was $12-1/4. The Company has
never paid any cash dividends, and the Board of Directors does not anticipate
paying cash dividends in the foreseeable future. The Company intends to
retain any future earnings to provide funds for the operation and expansion of
its business.
ITEM 6. Selected Financial Data.
The following table sets forth selected historical consolidated income
and balance sheet data of Epitope, Inc. and its subsidiaries; selected
historical combined income and balance sheet data of Epitope Medical Products;
and selected historical combined income and balance sheet data of Agritope.
The balance sheet data at September 30, 1996 and 1995 and the operating
results data for the years ended September 30, 1996, 1995, and 1994 have been
derived from audited consolidated financial statements and notes thereto
included in this Annual Report on Form 10-K. The balance sheet data at
September 30, 1994, 1993 and 1992 and operating results data for the years
ended September 30, 1993 and 1992 are unaudited, but, in the opinion of
management, include all adjustments necessary for fair presentation. The
following historical financial information has not been restated to give
effect to the merger with Andrew & Williamson Sales, Co. on December 12, 1996.
The merger has been accounted for as a pooling of interests. See Supplemental
Comparative Financial Data below.
<PAGE>
<TABLE>
<CAPTION>
Historical Comparative Financial Data
(In thousands, except net profit (loss) per share)
<S> <C> <C> <C> <C> <C>
Year ended September 30 1996 1995 1994 1993 1992
Epitope Medical Products
Combined operating results
Revenues. . . . . . . . . . . . .$ 5,594$ 2,856$ 2,605$ 2,759$ 2,985
Operating costs and expenses. . .10,88114,4638,890 9,376 8,312
Other income (expense), net . . .6,027 756 236 (1,276) 221
Net profit (loss). . . . . . .. .739(10,851)(6,048) (7,893) (5,106)
Pro forma net profit (loss) per share...06(.91)(.60) (.89) (.59)
Pro forma shares used in per share
calculations . . . . . . . . . .13,44011,88610,050 8,828 8,628
Combined balance sheet data
Working capital . . . . . . . . .$ 20,366$ 15,449$ 13,474$ 7,029$ 5,255
Total assets. . . . . . . . . . .24,35021,83117,183 10,381 7,954
Accumulated deficit . . . . . . .(41,705)(42,444)(31,593)(25,545)(17,652)
Group equity. . . . . . . . . . .22,53218,03515,661 9,280 7,178
Agritope
Combined operating results
Revenues. . . . . . . . . . . . .$ 585$ 2,110$ 2,213$ 524$ 58
Operating costs and expenses. . .2,8219,92011,703 7,331 2,790
Other income (expense), net . . .97 166 (94) (29) 72
Net loss. . . . . . . . . . . . .(2,139)(7,645)(9,584)(6,836) (2,660)
Pro forma net loss per share. . .(.34)(1.29) (1.91) (1.55) (.62)
Pro forma shares used in per share
calculations . . . . . . . . . .6,3315,943 5,026 4,414 4,314
Combined balance sheet data
Working capital . . . . . . . . .$ 1,264$ 5,082$ 3,710$ 1,673$ 4,368
Total assets. . . . . . . . . . .10,0978,303 7,372 3,764 6,177
Long-term debt. . . . . . . . . .- 22 38 57 -
Convertible notes, due 1997 . . .3,6203,620 4,070 4,630 5,495
Accumulated deficit . . . . . . .(31,280)(29,141)(21,497)(11,912)(5,076)
Group equity (deficit). . . . . .5,4354,312 2,810 (1,310) 482
Epitope, Inc. and Subsidiaries
Consolidated operating results
Revenues. . . . . . . . . . . . .$ 6,179$ 4,965$ 4,819$ 3,283$ 3,043
Operating costs and expenses. . .13,70224,38320,593 16,707 11,102
Other income (expense), net . . .6,123 922 141 (1,305) 293
Net loss. . . . . . . . . . . . .(1,400)(18,496)(15,633)(14,729)(7,765)
Net loss per share. . . . . . . .(.11)(1.56) (1.56) (1.67) (.90)
Shares used in per share
calculations . . . . . . . . . .12,66111,88610,050 8,828 8,628
Consolidated balance sheet data
Working capital . . . . . . . . .$ 21,630$ 20,532$ 17,184$ 8,703$ 9,623
Total assets. . . . . . . . . . .34,44730,13424,555 14,145 14,130
Long-term debt. . . . . . . . . .- 22 38 57 -
Convertible notes, due 1997 . . .3,6203,620 4,070 4,630 5,495
Accumulated deficit . . . . . . .(72,985)(71,585)(53,090)(37,457)(22,728)
Shareholders' equity. . . . . . .27,96722,34718,470 7,970 7,660
</TABLE>
<PAGE>
The following table sets forth selected supplemental consolidated income
and balance sheet data of Epitope, Inc. and its subsidiaries; selected
supplemental combined income and balance sheet data of Epitope Medical
Products; and selected supplemental combined income and balance sheet data of
Agritope. The balance sheet data at September 30, 1996 and 1995 and the
operating results data for the years ended September 30, 1996, 1995, and 1994
have been derived from audited consolidated financial statements and notes
thereto included in this Annual Report on Form 10-K. The balance sheet data
at September 30, 1994, 1993 and 1992 and operating results data for the years
ended September 30, 1993 and 1992 are unaudited, but, in the opinion of
management, include all adjustments necessary for fair presentation. The
following supplemental financial information has been restated to give effect
to the merger with Andrew & Williamson Sales, Co. on December 12, 1996. The
merger has been accounted for as a pooling of interests.
<PAGE>
<TABLE>
<CAPTION>
Supplemental Comparative Financial Data
(In thousands, except net profit (loss) and dividends per share)
<S> <C> <C> <C> <C> <C>
Year ended September 30 1996 1995 1994 1993 1992
Epitope Medical Products
Combined operating results
Revenues. . . . . . . . . . . . .$ 5,594$ 2,856$ 2,605$ 2,759$ 2,985
Operating costs and expenses. . .10,88114,4638,890 9,376 8,311
Other income (expense), net . . .6,027 756 236 (1,276) 221
Net profit (loss). . . . . . .. .739(10,851)(6,048) (7,893) (5,106)
Pro forma net profit (loss) per share...05(.87)(.57) (.84) (.56)
Pro forma shares used in per share
calculations . . . . . . . . . .13,96012,40610,570 9,348 9,148
Combined balance sheet data
Working capital . . . . . . . . .$ 20,366$ 15,449$ 13,474$ 7,030$ 5,255
Total assets. . . . . . . . . . .24,35021,83117,182 10,381 7,953
Accumulated deficit . . . . . . .(41,705)(42,444)(31,593)(25,545)(17,652)
Group equity. . . . . . . . . . .22,53218,03515,660 9,281 7,179
Agritope
Combined operating results
Revenues. . . . . . . . . . . . .$ 63,057$ 54,289$ 62,918$ 39,796$30,348
Operating costs and expenses. . .63,39062,05971,024 45,503 32,745
Other income (expense), net . . .(671)(252) (444) (184) (76)
Net loss. . . . . . . . . . . . .(1,004)(8,022)(8,550)(5,891) (2,473)
Pro forma net loss per share. . .(.15)(1.29) (1.62) (1.26) (.54)
Pro forma dividends per share . ..20 .05 .10 .15 .03
Pro forma shares used in per share
calculations . . . . . . . . . .6,5916,203 5,285 4,674 4,574
Combined balance sheet data
Working capital . . . . . . . . .$ 754$ 5,764$ 5,185$ 2,553$ 4,845
Total assets. . . . . . . . . . .20,86115,59711,500 9,554 10,103
Long-term debt. . . . . . . . . .528 1,648 1,714 1,648 1,080
Convertible notes, due 1997 . . .3,6203,620 4,070 4,630 5,495
Accumulated deficit . . . . . . .(30,584)(28,255)(19,900)(10,809)(4,219)
Group equity (deficit). . . . . .6,1525,219 4,429 (186) 1,360
Epitope, Inc. and Subsidiaries
Consolidated operating results
Revenues. . . . . . . . . . . . .$68,650$ 57,144$ 65,523$ 42,554$ 33,333
Operating costs and expenses. . .74,27176,52279,913 54,878 41,057
Other income (expense), net . . .5,356 504 (208) (1,460) 145
Net loss. . . . . . . . . . . . .(265)(18,874)(14,598)(13,784)(7,578)
Net loss per share. . . . . . . .(.02)(1.52) (1.38) (1.47) (.83)
Dividends per share . . . . . . ..10 .03 .05 .07 .02
Shares used in per share
calculations . . . . . . . . . .13,18112,40610,570 9,348 9,148
Consolidated balance sheet data
Working capital . . . . . . . . .$ 21,120$ 21,213$ 18,659$ 9,583$ 10,100
Total assets. . . . . . . . . . .45,21137,42728,682 19,935 18,056
Long-term debt. . . . . . . . . .528 1,648 1,714 1,648 1,080
Convertible notes, due 1997 . . .3,6203,620 4,07 4,630 5,495
Accumulated deficit . . . . . . .(72,290)(70,700)(51,492)(36,354)(21,871)
Shareholders' equity. . . . . . .28,68423,25420,089 9,095 8,539
</TABLE>
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
At the 1997 annual meeting, the shareholders will vote on a proposal to create
two new classes of common stock, one that will track the performance of the
Company's agricultural operations and one that will track the performance of
the Company's medical products business. The accompanying consolidated
financial statements have been prepared to reflect the operating results and
financial condition of the Company and its subsidiaries. In addition,
combined proforma financial statements have been prepared to reflect, on a
separate basis, assuming shareholder approval of the proposal, the operating
results and financial condition of the two business groups.
Under the proposed plan, a new class of common stock called Agritope Common
Stock (Agritope Stock) will be distributed to Epitope shareholders in the
ratio of one-half share of Agritope Stock for each outstanding share of
existing common stock. In addition, Epitope shareholders will retain their
existing common stock which will be redesignated as Epitope Medical Products
Common Stock (Epitope Medical Products Stock) on a share-for-share basis. The
approval of the distribution will not result in any transfer of assets or
liabilities of the Company. The Company and its subsidiaries will continue to
hold title to all its assets and be responsible for all its liabilities.
Holders of the Epitope Medical Products and Agritope common stock will have no
specific claim against the assets attributed for financial statement
presentation purposes to the group whose performance is associated with the
class of stock they hold. Liabilities or contingencies of either group that
affect the Company's resources or financial condition could affect the
financial condition or results of operations of both groups.
The combined operating statements include the cost of certain services which
are provided on a centralized basis for the benefit of both groups (Shared
Services). Such expenses have been allocated to each group using activity
indicators which, in the opinion of management, represent a reasonable measure
of the respective group's utilization of or benefit from such Shared Services.
Interest earned on investments has been allocated to each group in direct
proportion to the allocation of Shared Services. See Note 2 to Historical
Financial Statements.
On December 12, 1996, the Company merged with Andrew and Williamson Sales, Co.
(A&W) in a transaction accounted for as a pooling of interests. Accordingly,
this Annual Report on Form 10-K includes both historical financial statements
and supplemental financial statements which are restated to include the
financial position and results of operations of A&W as if the merger had
occurred on the first day of the earliest period presented. See Note 13 to
Supplemental Financial Statements.
The following discussion is a summary of key factors management considers
necessary in reviewing the results of operations, liquidity and capital
resources of the Company and its Epitope Medical Products and Agritope groups.
<PAGE>
Historical Financial Statements
Epitope Medical Products
Results of Operations
The table below shows the percentage of Epitope Medical Products' total
revenue contributed by each of its principal products and by grants and
contracts.
Fiscal Year 1996 1995 1994
Percentage of Revenues from:
Oral Specimen Collection Devices. 59% 34% 34%
HIV Confirmatory Tests. . . . . . 28% 64% 65%
Grants and Contracts. . . . . . . 13% 2% 1%
Revenues. Epitope Medical Products' product sales increased 73% in 1996, to
$4.9 million, and 9% in 1995 as a result of expanded sales volume of its lead
product, the EpiScreen/OraSure oral specimen collection device. Approximately
39% of 1996 sales were attributable to shipments in the fourth quarter. Grant
and contract revenues amounted to $729,000 in 1996 due to funding of research
projects by the group's marketing partner, SmithKline Beecham plc. (SB).
Revenues in 1994 were $2.6 million.
The oral specimen collection device, which is sold by the Company under the
trade name EpiScreen(R) and by SB under the trade name OraSure(TM), accounted
for revenues of $3.3 million in 1996, as compared to $981,000 in 1995, and
$833,000 in 1994. The significant increase in sales volume resulted from FDA
clearances for expanded use of EpiScreen/OraSure.
Epitope Medical Products' Western blot HIV confirmatory test produced sales
revenues of $1.5 million for 1996, 15% below prior year levels. Reduced sales
to international markets accounted for the decline. In 1995, on the strength
of increased market share in the U.S., confirmatory tests produced revenues of
$1.8 million, representing a 7% increase over the prior fiscal year.
As of September 30, 1996, Epitope Medical Products had firm orders totaling
$1.8 million and $450,000, respectively, for delivery within 90 days of oral
specimen collection devices and HIV confirmatory tests, as compared to
$488,000 and $329,000, respectively, of firm orders for delivery within 90
days as of September 30, 1995.
Gross Margins. Gross margins on product sales improved to 44.9% of sales in
1996 as a result of increased sales volume of EpiScreen/Orasure devices.
Margins on EpiScreen/OraSure sales were negative in 1995 and 1994.
Research and Development Expenses. Research and development expenses declined
31% to $3.2 million in 1996 as a result of cost reductions associated with the
Company's September 1995 restructuring program as well as lower levels of
clinical trials activity. Research and development expenses increased from
$3.7 million in 1994 to $4.6 million in 1995. The increase resulted primarily
from increased research projects and clinical trial activities.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses declined 25% to $5.0 million in 1996 primarily due to
cost reductions implemented in the Company's restructuring program. Selling,
general and administrative expenses increased by $3.6 million to $6.7 million
in 1995 as a result of increased sales and marketing expenses associated with
product launch following the December 1994 FDA approval of the
EpiScreen/OraSure device for use in HIV screening. Selling, general and
administrative expenses for 1995 included approximately $607,000 for severance
payments and other costs associated with implementing the restructuring
program. Selling, general and administrative expenses also included $3.0
million, $3.6 million and $1.9 million for the allocation of Shared Services
in 1996, 1995 and 1994, respectively.
Other Income, Net. Other income for 1996 included $5.2 million related to
license fees earned from SB as a result of FDA approval of an extension of
dating for the OraSure/EpiScreen device. Other income increased from $236,000
in 1994 to $756,000 in 1995, primarily from higher levels of investment
income.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities allocated to Epitope Medical
Products as of year-end totaled $19.6 million in 1996 and $17.1 million in
1995. At September 30, 1996, Epitope Medical Products had working capital of
$20.4 million, as compared to $15.4 million at September 30, 1995.
In the combined financial statements, cash equal to 20% of the Company's cash,
cash equivalents and marketable securities has been allocated to Agritope.
Historically, cash was transferred to the Agritope operations in the form of
intercompany loans. For the purpose of preparing the separate statements of
Epitope Medical Products and Agritope, such transfers and intercompany
balances have been reflected as equity investments in Agritope. If the
creation of a second class of common stock is approved, the Company will
allocate at least $5 million of cash to Agritope as additional contributed
capital.
Proceeds from the issuance of equity securities of the Company, augmented by
funding from strategic partners and other research grants, have represented
the primary sources of funds for meeting Epitope Medical Products'
requirements for operations, working capital and business expansion.
Epitope Medical Products anticipates that it will continue to need funds to
support its operations and ongoing research and development projects as well
as to provide additional manufacturing capacity and related increases in
working capital. Epitope Medical Products intends to utilize cash reserves,
cash generated from sales of products and research funding from SB and other
strategic partners to provide the necessary funds. Epitope may also receive
additional funds from the sale of equity securities or from the exercise of
outstanding stock options and warrants.
<PAGE>
Historical Financial Statements
Agritope
Results of Operations
The table below shows the percentage of Agritope's total revenue contributed
by each of its principal products and by grants and contracts:
Fiscal Year 1996 1995 1994
Percentage of Revenues from:
Grape Plants. . . . . . . . . . . --% 4% 1%
Packaged Fresh Flowers. . . . . . --% 91% 97%
Grants and Contracts. . . . . . . 100% 5% 2%
Revenues. Revenues declined from $2.1 million in 1995 to $585,000 in 1996.
Revenues for 1994 were $2.2 million. Revenues in 1995 and 1994 included
product sales of $2.0 and $2.2 million, respectively, from the Company's
unprofitable wholesale fresh flower packaging and distribution operations
which were divested in the third quarter of fiscal 1995. A grant from the
U.S. Department of Agriculture plus grants from strategic partners accounted
for the increase of grant and contract revenues from $94,000 in 1995 to
$585,000 in 1996.
Research and Development Expenses. Research and development expenses in 1996,
1995 and 1994 totaled $1.3 million, $2.2 million and $2.4 million,
respectively. The decrease from 1995 to 1996 resulted from the divestiture of
certain businesses. See Note 3 to Historical Financial Statements.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in 1996, 1995, and 1994 were $1.5 million, $4.5
million and $4.8 million, respectively. The higher cost levels in 1995 and
1994 resulted from increased costs at Agritope's Agrimax and Vinifera business
units. Selling, general and administrative expenses include $1.1 million,
$1.9 million and $1.7 million for the allocation of Shared Services in 1996,
1995 and 1994, respectively.
Liquidity and Capital Resources
Cash allocated to Agritope totaled $4.9 million at September 30, 1996 and $4.2
million at September 30, 1995. At September 30, 1996, Agritope had working
capital of $1.3 million, as compared to $5.1 million at September 30, 1995.
The decrease in working capital was principally attributable to the
reclassification to current liabilities of $3.6 million of convertible notes
which are due June 30, 1997. In November 1996, the Company accepted an offer
from a representative of the holders of $3.4 million principal amount of such
notes to convert them into 250,367 shares of common stock of the Company at a
reduced conversion price of $13.50 per share. Accordingly, the Company will
recognize a charge of approximately $1.1 million representing the conversion
expense in the first quarter of fiscal year 1997. See Note 13 to Historical
Financial Statements.
In the combined financial statements, cash equal to 20% of the Company's cash,
cash equivalents and marketable securities has been allocated to Agritope.
Historically, cash was transferred to the Agritope operations in the form of
intercompany loans. For the purpose of preparing the separate statements of
Epitope Medical Products and Agritope, such transfers and intercompany
balances have been reflected as equity investments in Agritope. If the
creation of a second class of common stock is approved, the Company will
allocate at least $5 million of cash to Agritope as additional contributed
capital.
Proceeds from the issuance of equity securities of the Company, augmented by
funding from strategic partners and other research grants, have represented
the primary sources of funds for meeting Agritope's requirements for
operations, working capital and business expansion.
Agritope expects to continue to require funds to support its operations and
research activities. Agritope intends to utilize cash reserves, cash generated
from sales of products and research funding from strategic partners and other
research grants to provide the necessary funds. Agritope may also receive
additional funds from the sale of equity securities or the exercise of
outstanding stock options and warrants.
Agritope's investments include the book value of the investment in two
affiliates. Agritope holds an equity interest of approximately 9% in UAF,
Limited Partnership, a fresh flower distributor in Tampa, Florida and a 19.5%
interest in Petals, USA, Inc., which operates a similar business in St. Paul,
Minnesota. These equity interests were obtained in connection with
divestiture of the fresh flower distribution business. See Note 3 to
Historical Financial Statements.
Historical Financial Statements
Epitope, Inc. and Subsidiaries
Results of Operations
The Company reported revenues of $6.2 million, $5.0 million and $4.8 million,
respectively, for the years ended September 30, 1996, 1995 and 1994. Product
sales in 1996 increased due to higher sales volume for Epitope Medical
Products, which more than offset a $2.0 million reduction in product sales for
Agritope. Grant and contract revenues increased $681,000 for Epitope Medical
Products due to research funding received from SB and $491,000 for Agritope
which was attributable primarily to a Phase II SBIR grant.
Net losses for 1996, 1995 and 1994 amounted to $1.4 million, $18.5 million and
$15.6 million, respectively. The significant improvement in operating results
in 1996 was due to (1) increased sales volumes and improved gross margins for
Epitope Medical Products' EpiScreen/OraSure oral specimen collection device,
(2) a $5.2 million fee and accrued interest from SB to Epitope Medical
Products, (3) cost reductions realized as a result of a September 1995
restructuring program, and (4) reduced operating losses as a result of
divestiture of two Agritope business units.
The Company incurred expenses of $4.1 million, $5.5 million and $3.6 million
in 1996, 1995 and 1994, respectively, to provide Shared Services to Epitope
Medical Products and Agritope. The decrease in such costs in 1996 represented
cost savings realized from the restructuring program implemented in September
1995. Such costs increased in 1995 over 1994 levels as the Company increased
its infrastructure to respond to current growth and anticipated levels of
activity for both groups. See Note 2 to Historical Financial Statements.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities on hand as of September 30,
1996 and 1995 totaled $24.5 million and $21.3 million. At September 30, 1996,
the Company had working capital of $21.6 million, as compared to $20.5 million
at September 30, 1995.
Proceeds from the issuance of equity securities of the Company, augmented by
funding from strategic partners and other research grants, have represented
the primary sources of funds for meeting the Company's requirements for
operations, working capital and business expansion. During 1996, the Company
received proceeds of $5.9 million from the exercise of warrants and options to
purchase common stock, as compared to $21.1 million in 1995.
The Company anticipates that it will continue to need funds to support ongoing
research and development projects as well as to provide additional
manufacturing capacity and related increases in working capital. The Company
intends to utilize cash reserves, cash generated from sales of products and
research funding from SB and other strategic partners to provide the necessary
funds. The Company may also receive additional funds from the sale of equity
securities or the exercise of outstanding stock options and warrants.
Supplemental Financial Statements
Epitope Medical Products
The only modification to the Historical Financial Statements of Epitope
Medical Products appearing in the Supplemental Financial Statements are those
required to reflect the agreed issuance of 520,000 shares of common stock of
the Company in connection with the merger with A&W. The Supplemental
Financial Statements are presented as if the shares were outstanding on the
first day of the earliest period presented. See "Historical Financial
Statements--Epitope Medical Products."
Supplemental Financial Statements
Agritope
(merged with Andrew and Williamson Sales, Co. in a pooling of interests)
Results of Operations
The table below shows the percentage of Agritope's total revenue contributed
by each of its principal products and by grants and contracts:
Fiscal Year 1996 1995 1994
Percentage of Revenues from:
Fresh or Frozen Produce. . . . . 99% 96% 97%
Grape Plants. . . . . . . . . . . --% --% --%
Packaged Fresh Flowers. . . . . . --% 4% 3%
Grants and Contracts. . . . . . . 1% --% --%
Revenues. Revenues increased to $63.1 million in 1996 as compared to $54.3
million in 1995 and $62.9 in 1994, primarily attributable to produce sales of
A&W. Produce sales increased 20% in 1996 due to increased sales volume of
vine ripe tomatoes, peppers and strawberries. For 1995, produce sales
declined as compared to 1994 as a result of scaling back volume of vine ripe
tomatoes, coupled with the loss of one contract grower. Revenues in 1995 and
1994 also included packaged fresh flower sales of $2.0 and $2.2 million,
respectively, from the Company's unprofitable wholesale fresh flower packaging
and distribution operations which were divested in the third quarter of fiscal
1995. A grant from the U.S. Department of Agriculture plus grants from
strategic partners accounted for the increase of grant and contract revenues
from $94,000 in 1995 to $585,000 in 1996.
Gross Profits. A&W realized gross profit margins of 8%, 6% and 8% in 1996,
1995 and 1994, respectively. The decline in 1995 gross profits was due to a
tomato crop failure experienced by one of A&W's contract growers. Gross
profits in 1995 and 1994 were adversely affected by negative margins of
Agritope's former fresh flower packaging operations.
Research and Development Expenses. Research and development expenses in 1996,
1995 and 1994 totaled $1.3 million, $2.2 million and $2.4 million,
respectively. The decrease from 1995 to 1996 resulted from the divestiture of
certain businesses. See Note 3 to Supplemental Financial Statements.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in 1996, 1995 and 1994 were $4.8 million, $7.5 million
and $8.3 million, respectively. The higher cost levels in 1995 and 1994
resulted from increased costs at Agritope's Agrimax and Vinifera business
units. Selling, general and administrative expenses include $1.1 million,
$1.9 million and $1.7 million for the allocation of Shared Services in 1996,
1995 and 1994, respectively.
Other Expense. The primary component of other expense is net interest expense
of $467,000, $274,000 and $440,000 in 1996, 1995 and 1994, respectively. Net
interest expense in 1996 increased primarily due to an increase in borrowings
under the A&W bank credit line. Net interest expense decreased in 1995 as
compared to 1994 due to increased interest income.
Liquidity and Capital Resources
Cash allocated to Agritope totaled $4.9 million at September 30, 1996 and $4.2
million at September 30, 1995. At September 30, 1996, Agritope had working
capital of $0.8 million, as compared to $5.8 million at September 30, 1995.
The decrease in working capital was principally attributable to the
reclassifications to current liabilities of $3.6 million of convertible notes
which are due June 30, 1997, and $2.2 million of subordinated notes which the
Company intends to repay in fiscal 1997. In November 1996, the Company
entered into an agreement with holders of $3.4 million of convertible notes to
convert them into 250,367 shares of common stock of the Company at a reduced
conversion price of $13.50 per share. Accordingly, the Company will recognize
a charge of approximately $1.1 million representing the conversion expense in
the first quarter of fiscal 1997. See Note 13 to Supplemental Financial
Statements.
In the combined financial statements, cash equal to 20% of the Company's cash,
cash equivalents and marketable securities has been allocated to Agritope.
Historically, cash was transferred to the Agritope operations in the form of
intercompany loans. For the purpose of preparing the separate statements of
Epitope Medical Products and Agritope, such transfers and intercompany
balances have been reflected as equity investments in Agritope. If the
creation of a second class of common stock is approved, the Company will
allocate at least $5 million of cash to Agritope as additional contributed
capital.
Proceeds from the issuance of equity securities of the Company, A&W cash flow
from operations and A&W bank borrowings, augmented by funding from strategic
partners and other research grants, have represented the primary sources of
funds for meeting Agritope's requirements for operations, working capital and
business expansion.
Agritope expects to continue to require funds to support its operations and
research activities. Agritope intends to utilize cash reserves, cash generated
from sales of products and research funding from strategic partners and other
research grants to provide the necessary funds. Agritope may also receive
additional funds from the sale of equity securities or the exercise of
outstanding stock options and warrants.
Agritope's investments include the book value of the investment in two
affiliates. Agritope holds an equity interest of approximately 9% in UAF,
Limited Partnership, a fresh flower distributor in Tampa, Florida and a 19.5%
interest in Petals, USA, Inc., which operates a similar business in St. Paul,
Minnesota. These equity interests were obtained in connection with divestiture
of the fresh flower distribution business. See Note 3 to Supplemental
Financial Statements.
Supplemental Financial Statements
Epitope, Inc. and Subsidiaries
(merged with Andrew and Williamson Sales, Co. in a pooling of interests)
Results of Operations
The Company reported revenues of $68.7 million, $57.1 million and $65.5
million, respectively, for the years ended September 30, 1996, 1995 and 1994.
A&W recorded sales of $62.5 million, $52.2 million and $60.7 million,
respectively for such periods. Grant and contract revenues increased $681,000
for Epitope Medical Products due to research funding received from SB and
$491,000 for Agritope which was attributable primarily to a Phase II SBIR
grant.
Net losses for 1996, 1995 and 1994 amounted to $0.3 million, $18.9 million and
$14.6 million, respectively. The significant improvement in operating results
in 1996 was due to (1) increased sales volumes and improved gross margins for
Epitope Medical Products' EpiScreen/OraSure oral specimen collection device,
(2) a $5.2 million fee and accrued interest from SB to Epitope Medical
Products, (3) cost reductions realized as a result of a September 1995
restructuring program, (4) reduced operating losses as a result of divestiture
of two Agritope business units and (5) operating profits from A&W. The
Company incurred expenses of $4.1 million, $5.5 million and $3.6 million in
1996, 1995 and 1994, respectively, to provide Shared Services to Epitope
Medical Products and Agritope. The decrease in such costs in 1996 represented
costs savings realized from the restructuring program implemented in September
1995. Such costs increased in 1995 over 1994 levels as the Company increased
its infrastructure to respond to current growth and anticipated levels of
activity for both groups. See Note 2 to Supplemental Financial Statements.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities on hand as of September 30,
1996 and 1995 totaled $24.5 million and $21.3 million. At September 30, 1996,
the Company had working capital of $21.1 million, as compared to $21.2 million
at September 30, 1995.
Proceeds from the issuance of equity securities of the Company, augmented by
funding from strategic partners and other research grants, have represented
the primary sources of funds for meeting the Company's requirements for
operations, working capital and business expansion. During 1996, the Company
received proceeds of $5.9 million from the exercise of warrants and options to
purchase common stock, as compared to $21.1 million in 1995.
The Company anticipates that it will continue to need funds to support ongoing
research and development projects as well as to provide additional
manufacturing capacity and related increases in working capital. The Company
intends to utilize cash reserves, cash generated from sales of products and
research funding from SB and other strategic partners to provide the necessary
funds. The Company may also receive additional funds from the sale of equity
securities or the exercise of outstanding stock options and warrants.
<PAGE>
ITEM 8. Financial Statements and Supplementary Data.
Information with respect to this Item is (i) set forth below and (ii)
contained in the Company's Consolidated Financial Statements included in Item
14 of this Annual Report on Form 10-K.
The following table presents summarized historical quarterly results of
operations for each of the fiscal quarters in the Company's fiscal years ended
September 30, 1996 and 1995. These quarterly results are unaudited, but, in
the opinion of management, have been prepared on the same basis as the
Company's audited financial information and include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the information set forth therein. The summarized historical
quarterly results of operations have not been restated to give effect to the
merger with Andrew & Williamson Sales, Co. on December 12, 1996. The merger
has been accounted for as a pooling of interests. See Supplemental Quarterly
Results of Operations below. The data should be read in conjunction with the
Financial Statements and related notes included in Item 14 of this Annual
Report on Form 10-K.
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except net income (loss) per share)
<S> <C> <C> <C> <C> <C>
First Second Third Fourth
Epitope Medical Products Quarter Quarter Quarter Quarter Total
Year ended September 30, 1996
Revenues. . . . . . . . . . . . . . .$ 1,225$ 1,207$ 1,107$ 2,055$ 5,594
Operating costs and expenses. . .2,5102,819 2,507 3,045 10,881
Other income, net. . . . . . . . . .224218 5,345 240 6,027
Net income (loss). . . . . . . . . .(1,061)(1,394)3,945(751) 739
Pro forma net income (loss)
per share . . . . . . . . . . . . . .(.08)(.11).29 (.06) .06
Year ended September 30, 1995
Revenues. . . . . . . . . . . . . . .$ 715722 873 546 2,856
Operating costs and expenses. . .2,6793,288 3,823 4,673 14,463
Other income net. . . . . . . . . .101 149 277 227 56
Net loss. . . . . . . . . . . . . . . .(1,863)(2,417)(2,673(3,898)(10,851)
Pro forma net loss per share. . .(.17)(.21) (.22) (.31) (.91)
First Second Third Fourth
Agritope Quarter Quarter Quarter Quarter Total
Year ended September 30, 1996
Revenues. . . . . . . . . . . . . .$ 87$ 263$ 165$ 70 $ 585
Operating costs and expenses. . .675 690 690 766 2,821
Other income (expense), net. . .(3) 5 79 16 97
Net loss. . . . . . . . . . . . . . .(591)(423)(446) (679) (2,139)
Pro forma net loss per share. . .(.09)(.07) (.06) (.11) (.34)
Year ended September 30, 1995
Revenues. . . . . . . . . . . . . .$ 419$ 953$ 695$ 43 $ 2,110
Operating costs and expenses. . .2,8913,433 2,201 1,395 9,920
Other income, net. . . . . . . . .33 65 31 37 166
Net loss. . . . . . . . . . . . . . .(2,439)(2,415)(1,475)(1,316)(7,645)
Pro forma net loss per share. . .(.44)(.41) (.24) (.21) (1.29)
First Second Third Fourth
Epitope, Inc. and SubsidiariesQuarterQuarterQuarter Quarter Total
Year ended September 30, 1996
Revenues. . . . . . . . . . . . . . .$ 1,311$ 1,470$ 1,272$ 2,126$ 6,179
Operating costs and expenses. . .3,1853,510 3,197 3,810 13,702
Other income, net. . . . . . . . .222 223 5,425 253 6,123
Net income (loss). . . . . . . . . .(1,652)(1,817)3,500(1,431)(1,400)
Net income (loss) per share. . . .(.13)(.14) .25 (.11) (.11)
Year ended September 30, 1995
Revenues. . . . . . . . . . . . . . .$ 1,135$ 1,675$ 1,569$ 586$ 4,965
Operating costs and expenses. . .5,5716,721 6,025 6,066 24,383
Other income, net. . . . . . . . .134 214 308 266 922
Net loss. . . . . . . . . . . . . . .(4,302)(4,832)(4,148)(5,214)(18,496)
Net loss per share. . . . . . . . .(.39)(.41) (.34) (.42) (1.56)
</TABLE>
<PAGE>
The following table presents summarized supplemental quarterly results of
operations for each of the fiscal quarters in the Company's fiscal years ended
September 30, 1996 and 1995. These quarterly results are unaudited, but, in
the opinion of management, have been prepared on the same basis as the
Company's audited financial information and include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the information set forth therein. The summarized
supplemental quarterly results of operations have been restated to give effect
to the merger with Andrew and Williamson Sales, Co. on December 12, 1996. The
merger has been accounted for as a pooling of interests. The data should be
read in conjunction with the Financial Statements and related notes included
in Item 14 of this Annual Report on Form 10-K.
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except net income (loss) per share)
<S> <C> <C> <C> <C> <C>
First Second Third Fourth
Epitope Medical Products Quarter Quarter Quarter Quarter Total
Year ended September 30, 1996
Revenues . . . . . . . . . . . . . .$ 1,225$ 1,207$ 1,107 $ 2,055 $ 5,594
Operating costs and expenses . . 2,510 2,819 2,507 3,045 10,881
Other income, net . . . . . . . . . 224 218 5,345 240 6,027
Net income (loss) . . . . . . . . .(1,061)(1,394) 3,945 (751) 739
Pro forma net income (loss)
per share . . . . . . . . . . . . .(.08) (.11) .27 (.06) .05
Year ended September 30, 1995
Revenues . . . . . . . . . . . . . .$ 715 $ 722$ 873 $ 546 $ 2,856
Operating costs and expenses . . 2,679 3,288 3,823 4,673 14,463
Other income net . . . . . . . . . 101 149 277 229 756
Net loss . . . . . . . . . . . . . . .(1,863)(2,417)(2,673) (3,898) (10,851)
Pro forma net loss per share . . (.16) (.20) (.21) (.30) (.87)
First Second Third Fourth
Agritope Quarter Quarter Quarter Quarter Total
Year ended September 30, 1996
Revenues . . . . . . . . . . . . . .$12,978$10,291$26,658 $13,131 $63,057
Operating costs and expenses . . 13,671 9,917 26,323 13,479 63,390
Other expense, net . . . . . . . . (132) (189) (181) (169) (671)
Net income (loss) . . . . . . . . .(825) 184 154 (518) (1,004)
Pro forma net income (loss)
per share . . . . . . . . . . . . .(.13) .03 .02 (.08) (.15)
Year ended September 30, 1995
Revenues . . . . . . . . . . . . . .$15,120$ 9,682$17,080 $12,406 $54,289
Operating costs and expenses . . 18,217 11,499 18,912 13,430 62,059
Other expense, net . . . . . . . . (78) (19) (77) (78) (252)
Net loss . . . . . . . . . . . . . . .(3,175)(1,836)(1,909) (1,102) (8,022)
Pro forma net loss per share . . (.55) (.30) (.30) (.17) (1.29)
First Second Third Fourth
Epitope, Inc. and Subsidiaries Quarter Quarter Quarter Quarter Total
Year ended September 30, 1996
Revenues . . . . . . . . . . . . . .$14,202$11,498$27,765 $15,185 $68,650
Operating costs and expenses . . 16,181 12,737 28,830 16,523 74,271
Other income, net . . . . . . . . . 93 29 5,165 70 5,356
Net income (loss) . . . . . . . . .(1,886)(1,210) 4,100 (1,268) (265)
Net income (loss) per share . . . (.14) (.09) .29 (.09) (.02)
Year ended September 30, 1995
Revenues . . . . . . . . . . . . . .$15,836$10,404$17,954 $12,951 $57,144
Operating costs and expenses . . 20,896 14,788 22,736 18,102 76,522
Other income, net . . . . . . . . . 22 130 200 151 504
Net loss . . . . . . . . . . . . . . .(5,038)(4,253)(4,582) (5,000) (18,874)
Net loss per share . . . . . . . . .(.44) (.35) (.36) (.39) (1.52)
</TABLE>
<PAGE>
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
PART III
The Company has omitted from Part III the information that will appear
in the Company's definitive proxy statement for its 1997 annual meeting of
shareholders (the "Proxy Statement"), which will be filed within 120 days
after the end of the Company's fiscal year pursuant to Regulation 14A.
ITEM 10. Directors and Executive Officers of the Registrant.
The information required by this Item is incorporated by reference to
the information under the captions "Proposal 1: Election of Class 1
Directors" and "Executive Officers" in the Proxy Statement.
ITEM 11. Executive Compensation.
The information required by this Item is incorporated by reference to
the information under the caption "Executive Compensation" in the Proxy
Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.
The information required by this Item is incorporated by reference to
the information under the caption "Principal Shareholders" in the Proxy
Statement.
ITEM 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference to
the information under the caption "Certain Transactions" in the Proxy
Statement.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.
(a)(1) and (a)(2) Consolidated Financial Statements and Schedules.
<PAGE>
Index to Financial Statements Page
Historical Financial Statements
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . .39
Epitope Medical Products
Combined Balance Sheets at September 30, 1996 and 1995 . . . . . . . . . . .40
Combined Statements of Operations for years ended September 30, 1996, 1995,
and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
Combined Statements of Changes in Group Equity for years ended September 30,
1996, 1995, and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
Combined Statements of Cash Flows for years ended September 30, 1996, 1995,
and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
Agritope
Combined Balance Sheets at September 30, 1996 and 1995 . . . . . . . . . . .44
Combined Statements of Operations for years ended September 30, 1996, 1995,
and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Combined Statements of Changes in Group Equity for years ended September 30,
1996, 1995, and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
Combined Statements of Cash Flows for years ended September 30, 1996, 1995,
and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
Epitope, Inc. and Subsidiaries
Consolidated Balance Sheets at September 30, 1996 and 1995 . . . . . . . . .48
Consolidated Statements of Operations for years ended September 30, 1996,
1995, and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
Consolidated Statements of Changes in Shareholders' Equity for years ended
September 30, 1996, 1995, and 1994 . . . . . . . . . . . . . . . . . . . . .50
Consolidated Statements of Cash Flows for years ended September 30, 1996,
1995, and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51
Notes to Historical Financial Statements . . . . . . . . . . . . . . . . . .52
Supplemental Financial Statements
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . .65
Epitope Medical Products
Combined Balance Sheets at September 30, 1996 and 1995 . . . . . . . . . . .66
Combined Statements of Operations for years ended September 30, 1996, 1995,
and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
Combined Statements of Changes in Group Equity for years ended September 30,
1996, 1995, and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
Combined Statements of Cash Flows for years ended September 30, 1996, 1995,
and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
Agritope (merged with Andrew and Williamson Sales, Co. in a pooling of
interests)
Combined Balance Sheets at September 30, 1996 and 1995 . . . . . . . . . . .70
Combined Statements of Operations for years ended September 30, 1996, 1995,
and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71
Combined Statements of Changes in Group Equity for years ended September 30,
1996, 1995, and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . .72
Combined Statements of Cash Flows for years ended September 30, 1996, 1995,
and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73
Epitope, Inc. and Subsidiaries (merged with Andrew and Williamson Sales, Co.
in a pooling of interests)
Consolidated Balance Sheets at September 30, 1996 and 1995 . . . . . . . . .74
Consolidated Statements of Operations for years ended September 30, 1996,
1995, and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75
Consolidated Statements of Changes in Shareholders' Equity for years ended
September 30, 1996, 1995, and 1994 . . . . . . . . . . . . . . . . . . . . .76
Consolidated Statements of Cash Flows for years ended September 30, 1996,
1995, and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77
Notes to Supplemental Financial Statements . . . . . . . . . . . . . . . . .78
<PAGE>
Historical Financial Statements
Report of Independent Accountants
To the Board of Directors and Shareholders of Epitope, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of changes in shareholders'/group equity, and of cash flows
present fairly, in all material respects, the financial position of Epitope
Medical Products group and Agritope group (as described in Note 1 to these
financial statements) and Epitope, Inc. and its subsidiaries at September 30,
1996 and 1995, and the results of their operations and their cash flows for
each of the three years in the period ended September 30, 1996, in conformity
with generally accepted accounting principles. 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 of these statements in accordance with generally accepted
auditing standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Portland, Oregon
October 28, 1996, except for Note 13 as to which the date is November 14,
1996, November 25, 1996, December 12, 1996, and December 26, 1996.
<PAGE>
<TABLE>
<CAPTION>
Historical Financial Statements
Epitope Medical Products
Combined Balance Sheets
<S> <C> <C>
SEPTEMBER 30 1996 1995
Assets
Current assets
Cash and cash equivalents (Note 2) . . . . . . . . . . .$ 795,787$ 13,210
Marketable securities (Note 2) . . . . . . . . .. . . .18,818,12017,080,246
Trade accounts receivable, net (Note 2) . . . . . . . .1,147,599231,621
Other accounts receivable . . . . . . . . . . . . . . .174,083382,753
Inventories (Note 2) . . . . . . . . . . . . . . . . . .1,157,9301,433,746
Prepaid expenses . . . . . . . . . . . . . . . . . . . .89,518103,399
----------------------------
Total current assets . . . . . . . . . . . . . . . . . .22,183,03719,244,975
Property and equipment, net (Notes 2 and 4) . . . . . .1,542,7571,989,769
Patents and proprietary technology, net (Note 2) . . . .601,234415,010
Investments in affiliated companies . . . . . . . . . .-142,510
Other assets and deposits (Note 5) . . . . . . . . . . .22,75838,328
-----------------------------
$24,349,786 $21,830,592
Liabilities and Group Equity
Current liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . .$ 449,170$ 819,424
Salaries, benefits and other accrued liabilities
(Notes 2 and 9) . . . . . . . . . . . . . . . . . . .1,368,1662,976,167
-----------------------------
Total current liabilities . . . . . . . . . . . . . . .1,817,3363,795,591
Commitments and Contingencies (Notes 6,8,9,10 and 11). .- -
Group equity (Note 6)
Contributed capital . . . . . . . . . . . . . . . . . .64,237,35060,479,315
Accumulated deficit . . . . . . . . . . . . . . . . . .(41,704,900)(42,444,314)
-----------------------------
22,532,450 18,035,001
-----------------------------
$24,349,786 $21,830,592
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Historical Financial Statements
Epitope Medical Products
Combined Statements of Operations
<S> <C> <C> <C>
FOR THE YEAR ENDED SEPTEMBER 30 1996 1995 1994
Revenues
Product sales . . . . . . . . . . . . . . .$ 4,864,378$ 2,806,850$ 2,580,798
Grants and contracts . . . . . . . . . . .729,27148,672 24,560
--------------------------------------------
5,593,649 2,855,522 2,605,358
Costs and expenses
Product costs . . . . . . . . . . . . . . .2,681,4293,163,0122,141,319
Research and development costs . . . . . .3,165,8384,617,2463,681,326
Selling, general and administrative expenses5,033,4916,682,8603,066,896
--------------------------------------------
10,880,758 14,463,118 8,889,541
Loss from operations (5,287,109)(11,607,596)(6,284,183)
Other income, net . . . . . . . . . . . . .6,026,523756,424235,926
--------------------------------------------
Net income (loss) . . . . . . . . . . . . .$ 739,414$(10,851,172)$(6,048,257)
Pro forma net income (loss) per share . . .$ .06$ (.91)$ (.60)
Pro forma weighted average number of shares
outstanding . . . . . . . . . . . . . . .13,440,39611,886,23410,050,129
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Historical Financial Statements
Epitope Medical Products
Combined Statements of Changes in Group Equity
<S> <C> <C> <C>
Contributed Accumulated
capital deficit Total
Balances at September 30, 1993. . . . . . .$34,167,582$(25,544,885)$ 8,622,697
Common stock issued upon
exercise of options . . . . . . . . . . .636,293 - 636,293
Common stock issued as
compensation. . . . . . . . . . . . . . .318,386 - 318,386
Compensation expense for
stock option grants . . . . . . . . . . .823,350 - 823,350
Common stock issued upon
exercise of warrants. . . . . . . . . . .9,718,259- 9,718,259
Common stock issued in
private placement . . . . . . . . . . . .17,057,563- 17,057,563
Equity issuance costs . . . . . . . . . . .(3,335,261)-(3,335,261)
Net cash to Agritope . . . . . . . . . . .(12,132,173)(12,132,173)
Net loss for the year . . . . . . . . . . .-(6,048,257)(6,048,257)
---------------------------------------------
Balances at September 30, 1994. . . . . . .47,253,999(31,593,142)15,660,857
Common stock issued upon
exercise of options . . . . . . . . . . .2,145,673- 2,145,673
Common stock issued as
compensation. . . . . . . . . . . . . . .196,802 - 196,802
Compensation expense for
stock option grants . . . . . . . . . . .1,056,335- 1,056,335
Common stock issued upon
exercise of warrants. . . . . . . . . . .18,892,750- 18,892,750
Equity issuance costs . . . . . . . . . . .(735,390)- (735,390)
Net cash to Agritope. . . . . . . . . . . .(8,330,854) (8,330,854)
Net loss for the year . . . . . . . . . . .-(10,851,172)(10,851,172)
---------------------------------------------
Balances at September 30, 1995 . . . . . .60,479,315(42,444,314)18,035,001
Common stock issued upon
exercise of options . . . . . . . . . . .4,886,118- 4,886,118
Common stock issued as compensation. . . . .249,086 - 249,086
Compensation expense for stock
option grants. . . . . . . . . . . . . . .815,019 - 815,019
Common stock issued upon
exercise of warrants . . . . . . . . . . .826,600 - 826,600
Equity issuance costs. . . . . . . . . . . .(152) - (152)
Net cash to Agritope . . . . . . . . . . . .(3,018,636)-(3,018,636)
Net income for the year. . . . . . . . . . .- 739,414 739,414
---------------------------------------------
Balances at September 30, 1996. . . . . . .$64,237,350$(41,704,900)$22,532,450
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Historical Financial Statements
Epitope Medical Products
Combined Statements of Cash Flows
<S> <C> <C> <C>
FOR THE YEAR ENDED SEPTEMBER 30 1996 1995 1994
Cash flows from operating activities
Net income (loss) . . . . . . . . . . . . . . . . .$ 739,414$(10,851,172)$(6,048,257)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization . . . . . . . . . . . .792,885795,295651,076
(Gain) loss on disposition of property . . . . . . .(1,098)319 1,541
Increase in accounts receivable and
other receivables . . . . . . . . . . . . . . . . .(707,308)(76,549)(180,767)
Increase (decrease) in inventories . . . . . . . . .275,816(375,640)(272,279)
Decrease in prepaid expenses . . . . . . . . . . . .13,88138,031 43,354
Decrease (increase) in other assets and deposits15,570(42,658) (6,227)
Increase (decrease) in accounts payable and
accrued liabilities . . . . . . . . . . . . . . . .(2,151,110)2,273,364329,875
Common stock issued as compensation for services249,086196,802 318,386
Compensation expense for stock option grants and
deferred salary increases . . . . . . . . . . . . .815,0191,056,335915,351
------------------------------------------------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . . . . .42,155(6,985,873)(4,247,947)
Cash flows from investing activities
Investment in marketable securities . . . . . . . . .(47,608,270)(16,194,994)(5,603,414)
Proceeds from sale of marketable securities . . . . .45,870,3964,718,162-
Additions to property and equipment . . . . . . . . .(180,112)(1,112,292)(461,914)
Proceeds from sale of property . . . . . . . . . . .7,4321,085 1,000
Expenditures for patents and proprietary
technology . . . . . . . . . . . . . . . . . . . . .(358,319)(126,927)(185,805)
Investment in affiliated companies . . . . . . . . .142,51042,552 64,938
-------------------------------------------------
Net cash used in investing
activities . . . . . . . . . . . . . . . . . . . . .(2,126,363)(12,672,414)(6,185,195)
Cash flows from financing activities
Proceeds from issuance of common stock . . . . . . . .5,885,57321,060,91224,387,702
Cost of common stock issuance . . . . . . . . . . . .(152)(757,877)(310,849)
Cash to Agritope . . . . . . . . . . . . . . . . . .(3,018,636)(8,330,854)(12,132,173)
--------------------------------
Net cash provided by financing activities . . . . . .2,866,78511,972,18111,944,680
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . .782,577(7,686,106)1,511,538
Cash and cash equivalents at beginning of year . . . .13,2107,699,3166,187,778
-------------------------------------------------
Cash and cash equivalents at end of year . . . . . .$ 795,787$ 13,210$7,699,316
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Historical Financial Statements
Agritope
Combined Balance Sheets
<S> <C> <C>
SEPTEMBER 30 1996 1995
Assets
Current assets
Cash and cash equivalents (Note 2) . . . . . . . . . . .$ 4,903,476$ 4,246,687
Trade accounts receivable, net (Note 2) . . . . . . . . .264,986135,866
Other accounts receivable . . . . . . . . . . . . . . . .32,337993,790
Inventories (Note 2) . . . . . . . . . . . . . . . . . . .509,745-
Prepaid expenses . . . . . . . . . . . . . . . . . . . . .81256,064
---------------------------------
Total current assets . . . . . . . . . . . . . . . . . . .5,711,3565,432,407
Property and equipment, net (Notes 2 and 4) . . . . . . . .1,286,196555,003
Patents and proprietary technology, net (Note 2) . . . . . .510,244140,757
Investment in affiliated companies (Note 3) . . .. . . . . .2,448,6231,974,833
Other assets and deposits (Note 5) . . . . . . . . . . . . .140,513200,430
--------------------------------
$10,096,932 $ 8,303,430
Liabilities and Group Equity
Current liabilities
Current portion of installment notes payable . . . . . . .$ -$ 17,758
Convertible notes, due 1997 (Notes 5 and 13) . . . . . . .3,620,003-
Accounts payable . . . . . . . . . . . . . . . . . . . . .91,474125,971
Salaries, benefits and other accrued liabilities
(Notes 2 and 9) . . . . . . . . . . . . . . . . . . . . .735,478206,349
---------------------------------
Total current liabilities . . . . . . . . . . . . . . . . .4,446,955350,078
Long-term portion of installment notes payable . . . . . . .-21,749
Convertible notes, due 1997 (Notes 5 and 13) . . . . . . . .-3,620,003
Commitments and Contingencies (Notes 6,8,9, and 10) . . . . .- -
Minority interest . . . . . . . . . . . . . . . . . . . . . .215,407-
Group equity (Note 6)
Contributed capital . . . . . . . . . . . . . . . . . . .36,714,93233,452,632
Accumulated deficit . . . . . . . . . . . . . . . . . . .(31,280,362)(29,141,032)
----------------------------------
5,434,570 4,311,600
----------------------------------
$10,096,932 $ 8,303,430
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Historical Financial Statements
Agritope
Combined Statements of Operations
<S> <C> <C> <C>
FOR THE YEAR ENDED SEPTEMBER 30 1996 1995 1994
Revenues
Product sales . . . . . . . . . . . . .$ -$ 2,015,318$ 2,179,742
Grants and contracts . . . . . . . . . .585,485 94,370 33,642
------------------------------------------
585,485 2,109,688 2,213,384
Costs and expenses
Product costs . . . . . . . . . . . . . . .- 3,235,675 4,575,149
Research and development costs . . . . . .1,338,7032,204,9932,368,880
Selling, general and administrative expenses1,482,6944,479,4984,759,219
------------------------------------------
2,821,397 9,920,166 11,703,248
Loss from operations . . . . . . . . . . . .(2,235,912)(7,810,478)(9,489,864)
Other income (expense), net . . . . . . . . .96,582165,822 (94,467)
------------------------------------------
Net loss . . . . . . . . . . . . . . . . . .$(2,139,330)$(7,644,656)$(9,584,331)
Pro forma net loss per share . . . . . . . .$ (.34)$ (1.29)$ (1.91)
Pro forma weighted average number of shares
Outstanding . . . . . . . . . . . . . . . .6,330,7105,943,1175,025,064
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Historical Financial Statements
Agritope
Combined Statements of Changes in Group Equity
<S> <C> <C> <C>
Contributed Accumulated
capital deficit Total
Balances at September 30, 1993 . . . . . . . . .$11,259,717$(11,912,045)$ (652,328)
Common stock issued as
compensation . . . . . . . . . . . . . . . . .50,392- 50,392
Compensation expense for
stock option grants . . . . . . . . . . . . . .343,922-343,922
Common stock issued upon
exchange of convertible notes . . . . . . . . .559,964-559,964
Equity issuance costs . . . . . . . . . . . . . .(40,267)-(40,267)
Net cash from Epitope Medical Products . . . . .12,132,173-12,132,173
Net loss for the year . . . . . . . . . . . . . .(9,584,331)(9,584,331)
----------------------------------------
Balances at September 30, 1994 . . . . . . . . . .24,305,901(21,496,376)2,809,525
Common stock issued as
compensation . . . . . . . . . . . . . . . . . .69,998- 69,998
Compensation expense for
stock option grants . . . . . . . . . . . . . .318,375-318,375
Common stock issued upon
exchange of convertible notes . . . . . . . . .449,991-449,991
Equity issuance costs . . . . . . . . . . . . . .(22,487)-(22,487)
Net cash from Epitope Medical Products . . . . . .8,330,854-8,330,854
Net loss for the year . . . . . . . . . . . . . .(7,644,656)(7,644,656)
----------------------------------------
Balances at September 30, 1995 . . . . . . . . . .33,452,632(29,141,032)4,311,600
Common stock issued as compensation . . . . . . .14,500- 14,500
Compensation expense for stock
option grants . . . . . . . . . . . . . . . . .229,164-229,164
Net cash from Epitope Medical Products . . . . . .3,018,636-3,018,636
Net loss for the year . . . . . . . . . . . . . .-(2,139,330)(2,139,330)
----------------------------------------
Balances at September 30, 1996 . . . . . . . . .$36,714,932$(31,280,362)$ 5,434,570
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Historical Financial Statements
Agritope
Combined Statements of Cash Flows
<S> <C> <C> <C>
FOR THE YEAR ENDED SEPTEMBER 30 1996 1995 1994
Cash flows from operating activities
Net loss . . . . . . . . . . . . . . . . . . . . .$(2,139,330)$(7,644,656)$(9,584,331)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization . . . . . . . . . . .294,045663,380505,135
Loss on disposition of property . . . . . . . . . .- 500 74,130
Decrease (increase) in accounts receivable and
other receivables . . . . . . . . . . . . . . . .832,333(945,501)(140,268)
Decrease (increase) in inventories . . . . . . . .(509,745)88,737(385,928)
Decrease (increase) in prepaid expenses . . . . .55,252(55,639)36,965
Decrease (increase) in other assets and deposits(36,219)9,137 6,562
Increase (decrease) in accounts payable and
accrued liabilities . . . . . . . . . . . . . . .494,632(104,680)67,457
Common stock issued as compensation for services14,50069,998 50,392
Compensation expense for stock option grants and
deferred salary increases . . . . . . . . . . . .229,164318,375343,922
------------------------------------------
Net cash used in operating activities . . . . . . .(765,368)(7,600,349)(9,025,964)
Cash flows from investing activities
Additions to property and equipment . . . . . . . .(886,646)(238,558)(2,128,835)
Proceeds from sale of property . . . . . . . . . . .13,258
Expenditures for patents and proprietary
technology . . . . . . . . . . . . . . . . . . . .(411,943)(178,208)135
Investment in affiliated companies . . . . . . . .(473,790)610,146
Minority Interest in affiliated companies . . . . .215,407- -
------------------------------------------
Net cash (used in) provided by investing
activities . . . . . . . . . . . . . . . . . . . .(1,556,972)206,638(2,128,700)
Cash flows from financing activities
Principal payments under installment purchase
and capital lease obligations . . . . . . . . . . . .(39,507)(16,137)(20,726)
Cash from Epitope Medical Products . . . . . . . . . .3,018,6368,330,85412,132,173
------------------------------------------
Net cash provided by financing activities . . . . . .2,979,1298,314,71712,111,447
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . . . .656,789921,006956,783
Cash and cash equivalents at beginning of year . .4,246,6873,325,6812,368,898
------------------------------------------
Cash and cash equivalents at end of year . . . .$4,903,476$4,246,687$3,325,681
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Historical Financial Statements
Epitope, Inc. and Subsidiaries
Consolidated Balance Sheets
SEPTEMBER 30 1996 1995
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents (Note 2) . . . . . . . . . . .$ 5,699,263$ 4,259,897
Marketable securities (Note 2) . . . . . . . . . . . . . .18,818,12017,080,246
Trade accounts receivable, net (Note 2) . . . . . . . .1,412,585367,487
Other accounts receivable . . . . . . . . . . . . . . . . .206,4201,376,543
Inventories (Note 2) . . . . . . . . . . . . . . . . . . . .1,667,6751,433,746
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . .90,330159,463
--------------------------
Total current assets . . . . . . . . . . . . . . . . . . . .27,894,39324,677,382
Property and equipment, net (Notes 2 and 4) . . . . .2,828,9532,544,772
Patents and proprietary technology, net (Note 2) . . .1,111,478555,767
Investment in affiliated companies (Note 3) . . . . . .2,448,6232,117,343
Other assets and deposits (Note 5) . . . . . . . . . . .163,271238,758
--------------------------
$34,446,718$30,134,022
Liabilities and Shareholders' Equity
Current liabilities
Current portion of installment notes payable . . . . . . $-$ 17,758
Convertible notes, due 1997 (Notes 5 and 13) . . . .3,620,003-
Accounts payable . . . . . . . . . . . . . . . . . . . . . .540,644945,395
Salaries, benefits and other accrued liabilities
(Notes 2 and 9) . . . . . . . . . . . . . . . . . . . . . .2,103,6443,182,516
---------------------------
Total current liabilities . . . . . . . . . . . . . . . . .6,264,2914,145,669
Long-term portion of installment notes payable . . . . . . .-21,749
Convertible notes, due 1997 (Notes 5 and 13) . . . . . . . .-3,620,003
Commitments and contingencies (Notes 6, 8, 9, 10 and 11)- -
Minority Interest . . . . . . . . . . . . . . . . . . . . . .215,407-
Shareholders' equity (Note 6)
Preferred stock, no par value - 1,000,000 shares authorized;
no shares issued or outstanding . . . . . . . . . . . .- -
Common stock, no par value - 30,000,000 shares
authorized; 12,937,383 and 12,485,130 shares issued and
outstanding, respectively . . . . . . . . . . . . . . . .100,952,28293,931,947
Accumulated deficit . . . . . . . . . . . . . . . . . . . .(72,985,262)(71,585,346)
--------------------------
27,967,02022,346,601
--------------------------
$34,446,718$30,134,022
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Historical Financial Statements
Epitope, Inc. and Subsidiaries
Consolidated Statements of Operations
FOR THE YEAR ENDED SEPTEMBER 30 1996 1995 1994
<S> <C> <C> <C>
Revenues
Product sales . . . . . . . . . . . . . . .$ 4,864,378$ 4,822,168$ 4,760,540
Grants and contracts . . . . . . . . . . .1,314,756143,042 58,202
--------------------------------------------
6,179,134 4,965,210 4,818,742
Costs and expenses
Product costs . . . . . . . . . . . . . . .2,681,4296,398,6876,716,468
Research and development costs . . . .4,504,5416,822,239 6,050,206
Selling, general and administrative expenses6,516,18511,162,3587,826,115
---------------------------------------------
13,702,155 24,383,284 20,592,789
Loss from operations (7,523,021)(19,418,074)(15,774,047)
Other income, net . . . . . . . . . . . .6,123,105922,246 141,459
----------------------------------------------
Net loss . . . . . . . . . . . . . . . . . .$ (1,399,916)$(18,495,828)$(15,632,588)
Net loss per share . . . . . . . . . . . .$ (.11)$ (1.56)$ (1.56)
Weighted average number of shares
outstanding . . . . . . . . . . . . . . .12,661,42011,886,23410,050,129
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Historical Financial Statements
Epitope, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Common Stock Accumulated
Shares Dollars deficit Total
<S> <C> <C> <C> <C>
Balances at September 30, 1993 . . . . . . . .9,091,922$ 45,427,299$ (37,456,930)$ 7,970,369
Common stock issued upon
exercise of options . . . . . . . . . . . . . . .52,488636,293 - 636,293
Common stock issued as
compensation . . . . . . . . . . . . . . . . . .19,678368,778 - 368,778
Compensation expense for
stock option grants . . . . . . . . . . . . . . .-1,167,272 - 1,167,272
Common stock issued upon
exercise of warrants . . . . . . . . . . . . . .618,2919,718,259-9,718,259
Common stock issued upon
exchange of convertible notes . . . . . . . .28,672559,964 - 559,964
Common stock issued in
private placement . . . . . . . . . . . . . . . .1,115,50017,057,563-7,057,563
Equity issuance costs . . . . . . . . . . . . . .-(3,375,528) -(3,375,528)
Net loss for the year . . . . . . . . . . . . . . .- -(15,632,588)(15,632,588)
--------------------------------------------------------
Balances at September 30, 1994 . . . . . . . .10,926,55171,559,900(53,089,518)18,470,382
Common stock issued upon
exercise of options . . . . . . . . . . . . . . .183,5252,145,673-2,145,673
Common stock issued as
compensation . . . . . . . . . . . . . . . . . .16,013266,800 - 266,800
Compensation expense for
stock option grants . . . . . . . . . . . . . . .-1,374,710 - 1,374,710
Common stock issued upon
exercise of warrants . . . . . . . . . . . . . .1,336,00018,892,750-18,892,750
Common stock issued upon
exchange of convertible notes . . . . . . . .23,041449,991 - 449,991
Equity issuance costs . . . . . . . . . . . . . . .-(757,877) - (757,877)
Net loss for the year . . . . . . . . . . . . . . .- -(18,495,828)(18,495,828)
--------------------------------------------------------
Balances at September 30, 1995 . . . . . . . .12,485,13093,931,947(71,585,346)22,346,601
Common stock issued upon
exercise of options . . . . . . . . . . . . . . .386,5504,886,118-4,886,118
Common stock issued as compensation . . . .19,353263,586 - 263,586
Compensation expense for stock
option grants . . . . . . . . . . . . . . . . . .-1,044,183 - 1,044,183
Common stock issued upon
exercise of warrants . . . . . . . . . . . . . .46,350826,600 - 826,600
Equity issuance costs . . . . . . . . . . . . . . .-(152) - (152)
Net loss for the year . . . . . . . . . . . . . . .- - (1,399,916)(1,399,916)
--------------------------------------------------------
Balances at September 30, 1996 . . . . . . . .12,937,383$ 100,952,282$(72,985,262)$ 27,967,020
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Historical Financial Statements
Epitope, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
FOR THE YEAR ENDED SEPTEMBER 30 1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities
Net loss . . . . . . . . . . . . . . . . . . . . .$(1,399,916)$(18,495,828)$(15,632,588)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization . . . . . . . . . . .1,086,9301,458,6751,156,211
(Gain) loss on disposition of property . . . . . . .(1,098)81975,671
Decrease (increase) in accounts receivable and
other receivables . . . . . . . . . . . . . . . . .125,025(1,022,050)(321,035)
Increase in inventories . . . . . . . . . . . . . . .(233,929)(286,903)(658,207)
Decrease (increase) in prepaid expenses . . . . . . .69,133(17,608)80,319
Decrease (increase) in other assets and deposits . . .20,649(33,521)335
Increase in accounts payable and accrued
liabilities . . . . . . . . . . . . . . . . . . . .(1,656,478)2,168,684397,332
Common stock issued as compensation for services263,586266,800368,778
Compensation expense for stock option grants and
deferred salary increases . . . . . . . . . . . . .1,044,1831,374,7101,259,273
------------------------------------------
Net cash used in operating activities . . . . . . . .(723,213)(14,586,222)(13,273,911)
Cash flows from investing activities
Investment in marketable securities . . . . . . . .(47,608,270)(16,194,994)(5,603,414)
Proceeds from sale of marketable securities . . . . .45,870,3964,718,162-
Additions to property and equipment . . . . . . . .(1,066,758)(1,350,850)(2,590,751)
Proceeds from sale of property . . . . . . . . . . . .7,43214,3431,000
Expenditures for patents and proprietary
technology . . . . . . . . . . . . . . . . . . . . .(770,262)(305,135)(185,670)
Investment in affiliated companies . . . . . . . . . .(331,280)652,69864,938
Minority interest in affiliated companies . . . . . .215,407- -
------------------------------------------
Net cash used in investing
activities . . . . . . . . . . . . . . . . . . . . . . .(3,683,335)(12,465,776)(8,313,897)
Cash flows from financing activities
Principal payments under installment purchase and
capital lease obligations . . . . . . . . . . . .(39,507)(16,137)(20,724)
Proceeds from issuance of common stock . . . . . .5,885,57321,060,91224,387,702
Cost of common stock issuance . . . . . . . . . .(152)(757,877)(310,849)
------------------------------------------
Net cash provided by financing activities . . . . . .5,845,91420,286,89824,056,129
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . . . .1,439,366(6,765,100)2,468,321
Cash and cash equivalents at beginning of year . . .4,259,89711,024,9978,556,676
------------------------------------------
Cash and cash equivalents at end of year . . . . . . .$ 5,699,263$ 4,259,897$ 11,024,997
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
Notes to Historical Financial Statements
Note 1 The Company
Epitope, Inc. (the Company or Epitope) is an Oregon corporation utilizing
biotechnology to develop and market medical diagnostic products through its
Epitope Medical Products group (Epitope Medical Products) and superior new
plants and related products through its Agritope group (Agritope). Upon
approval of the proposal to create a new class of common stock (the Agritope
Stock Proposal), the capital structure of Epitope will be modified to include
two classes of common stock, Epitope Medical Products Common Stock and
Agritope Common Stock. The Epitope Medical Products group (Epitope Medical
Products) will include the medical products business conducted by the Company.
The Agritope group (Agritope) will include the agribusiness and agricultural
biotechnology operations of the Company.
Note 2 Summary of Significant Accounting Policies
Basis of Presentation. The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation. Assets and liabilities of majority-owned subsidiaries are
included in these statements. Minority-owned investments and joint ventures
are accounted for using the equity method. Investments of less than 20% are
carried at cost.
The accompanying combined financial statements of the Epitope Medical Products
and Agritope groups have been prepared using the amounts included in the
consolidated financial statements of the Company. Assets and liabilities
directly attributable to each group are included in the respective balance
sheets of the applicable group. Cash, cash equivalents and marketable
securities have been allocated 80% to Epitope Medical Products and 20% to
Agritope. Cash advanced and allocated by the Company to business units of the
Agritope group has been reflected as paid-in-capital in the accompanying
combined financial statements.
Certain services such as accounting, finance, general management, human
resources, investor relations, information systems and payroll are provided by
the Company on a centralized basis for the benefit of both groups (Shared
Services). Such expenses have been allocated between Epitope Medical Products
and Agritope in the accompanying combined financial statements using activity
indicators which, in the opinion of management, represent a reasonable measure
of the respective group's utilization of such shared services. The activity
measurement indicators will be reviewed periodically and adjusted to reflect
changes in utilization. The accompanying combined financial statements also
include an adjustment to allocate interest income in the same proportion as
the allocation of Shared Services between the two groups. Future interest
income will be based on amounts earned by each group. Shared Services are
included under the caption "Selling, general and administrative expenses" as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30 1996 1995 1994
<S> <C> <C> <C>
Epitope Medical Products . . .$3,028,181$3,575,069$1,899,969
Agritope . . . . . . . . . . . . .1,069,2491,892,3701,735,688
----------------------------------------
Consolidated . . . . . . . . . . .$4,097,430$5,467,439$3,635,657
The allocation of interest income is included under the caption "Other income,
net" as follows:
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30 1996 1995 1994
<S> <C> <C> <C>
Epitope Medical Products . . .$1,025,030$ 756,743$ 237,467
Agritope . . . . . . . . . . . . .361,938 408,097 216,934
----------------------------------------
Consolidated . . . . . . . . . . .$1,386,968$1,164,840$ 454,401
</TABLE>
If the Agritope Stock Proposal is approved, the Company will provide holders
of Epitope Medical Products and Agritope common stock separate financial
statements, management's discussion and analysis of financial condition and
results of operations, descriptions of businesses and other relevant
information for each group. Notwithstanding the attribution of assets and
liabilities (including contingent liabilities) to each group for the purposes
of preparing their respective historical and future financial statements, this
attribution and the change in capitalization contemplated in the Agritope
Stock Proposal will not affect legal title to such assets or responsibility
for such liabilities of the Company or any of its subsidiaries. Holders of
each class of common stock will be common shareholders of the Company and
would be subject to risks associated with an investment in the Company and all
its businesses, assets, and liabilities. Liabilities or contingencies of
either group that affect the Company's resources or financial condition could
affect the financial condition and results of operations of either group.
Under the Agritope Stock Proposal, dividends to be paid to the holders of
either class of common stock will be limited to the lesser of funds of the
Company legally available for the payment of dividends or the Available
Medical Products Dividend Amount or Available Agritope Dividend Amount as
defined in the Company's Articles of Incorporation. The Company has never
paid any cash dividends on shares of Epitope common stock. The Company
currently intends to retain any of its earnings to finance future growth and,
therefore, does not anticipate paying any cash dividends on either class of
common stock in the foreseeable future.
Except as stated in the amended Articles of Incorporation, the accounting
policies applicable to preparation of financial statements of either group may
be modified or rescinded at the sole discretion of the Board of Directors of
the Company without the approval of shareholders, although there is no
intention to do so. In addition, generally accepted accounting principles
require that any change in accounting policy be preferable (in accordance with
such principles) to the previous policy.
Cash and Cash Equivalents; Marketable Securities. For purposes of the
consolidated balance sheets and statements of cash flows, the Company
considers all highly liquid investments with maturities at time of purchase of
three months or less to be cash equivalents. At September 30, 1996,
marketable securities consisted of commercial paper and U.S. Treasury
securities with an original maturity period greater than three months, but
generally less than 12 months. The Company's policy is to invest its excess
cash in securities that maximize (a) safety of principal, (b) liquidity for
operating needs, and (c) after-tax yields.
Effective October 1, 1994, the Company adopted Financial Accounting Standards
Board Statement No. 115 (SFAS 115), Accounting for Certain Investments in Debt
and Equity Securities. Pursuant to SFAS 115, the Company has categorized all
of its investments as available-for-sale securities and, accordingly,
unrealized gains and losses on such investments, if material, will be carried
as a separate component of shareholders' equity. Such unrealized gains and
losses were immaterial as of September 30, 1996 and 1995.
<PAGE>
Inventories. Inventories are recorded at the lower of standard cost (which
approximates actual cost on a first-in, first-out basis) or market. Inventory
components are summarized as follows:
September 30 1996 1995
Epitope Medical Products
Raw materials. . . . . . . .$ 522,824$ 657,568
Work-in-process. . . . . . .389,642379,470
Finished goods . . . . . . .192,882295,032
Supplies . . . . . . . . . .52,582101,676
------------------------
$1,157,930$ 1,433,746
Agritope
Work-in-process. . . . . . .$ 471,208-
Finished goods . . . . . . .38,537 -
------------------------
$ 509,745 $ -
Consolidated
Raw materials. . . . . . . .$ 522,824$ 657,568
Work-in-process. . . . . . .860,850379,470
Finished goods . . . . . . .231,419295,032
Supplies . . . . . . . . . .52,582101,676
------------------------
$1,667,675$ 1,433,746
Depreciation and Capitalization Policies. Property and equipment are stated
at cost less accumulated depreciation. Expenditures for repairs and
maintenance are charged to operating expense as incurred. Expenditures for
renewals and betterments are capitalized.
Depreciation and amortization of property and equipment are calculated
primarily under the straight-line method over the estimated lives of the
related assets (three to seven years). Leasehold improvements are amortized
over the shorter of estimated useful lives or the terms of related leases.
When assets are sold or otherwise disposed, cost and related accumulated
depreciation or amortization are removed from the accounts and any resulting
gain or loss is included in operations.
Accounting for Long-Lived Assets. The Company periodically reviews its long-
lived assets for impairment or as events or circumstances indicate that the
carrying amount of long-lived assets may not be recoverable. If the estimated
net cash flows are less than the carrying amount of the long-lived assets, the
Company recognizes an impairment loss in an amount necessary to write down
long-lived assets to fair value as determined from expected discounted future
cash flows. This accounting policy is consistent with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." There has been no
significant impact to the Company's financial position or results of
operations as the carrying amount of all long-lived assets is recoverable.
Patents and Proprietary Technology. Direct costs associated with patent
submissions and acquired technology are capitalized and amortized over their
minimum estimated economic useful lives, generally five years.
In August 1996, the Company amended an agreement pursuant to which it acquired
Agritope's patented ethylene control technology in 1987. A co-inventor of the
technology relinquished all rights to future compensation under the agreement
in exchange for a one-time cash payment, a research grant and a limited
non-exclusive license to use the technology for one crop. The total
consideration of $365,000 is included in Agritope's combined balance sheet
under the caption "Patents and Proprietary Technology" and is being amortized
over 15 years, the remaining life of the related patent.
Amortization and accumulated amortization are summarized as follows:
<PAGE>
1996 1995 1994
Amortization for the year ended
September 30,
Epitope Medical Products . . . .$ 172,095$ 130,313$ 101,339
Agritope . . . . . . . . . . . . .42,45623,96413,487
-----------------------------------
Consolidated $ 214,551$ 154,277 $ 114,826
Accumulated Amortization at
September 30, . . . . . . . . .
Epitope Medical Products . . . . .$ 621,110$ 449,015$ 318,702
Agritope . . . . . . . . . . . . .79,90737,45113,487
-----------------------------------
Consolidated $ 701,017$ 486,466 $ 332,189
Investments in Affiliated Companies. Investments in affiliated companies are
stated at cost. For reductions in the value of its investments in affiliated
companies that are more than temporary, the Company will write down the value
of its investments in affiliated companies to its recoverable value.
Revenue Recognition. Product revenues are generally derived from the sale of
products and are recognized as revenue when the related products are shipped.
Grant and contract revenues include funds received under research and
development agreements with various entities. Such revenues are recognized in
accordance with contract terms.
Accounts receivable are stated net of an allowance for doubtful accounts as
follows:
SEPTEMBER 30 1996 1995
Epitope Medical Products . . . . .$ 6,872$ 6,872
Agritope . . . . . . . . . . . . .19,57165,172
--------------------
Consolidated . . . . . . . . . . .$ 26,443$ 72,044
Research and Development. Research and development expenditures are comprised
of those costs associated with the Company's own ongoing research and
development activities including the costs to prepare for, obtain and compile
clinical studies and other information to support product license
applications. Expenditures for research and development also include costs
incurred under contracts to develop certain products, including those
contracts resulting in grant and contract revenues. All research and
development costs are expensed as incurred.
Income taxes. The Company accounts for certain revenue and expense items
differently for income tax purposes than for financial reporting purposes.
These differences arise principally from methods used in accounting for stock
options and depreciation rates. The Company accounts for income taxes under
SFAS No. 109 "Accounting for Income Taxes," (SFAS 109) which requires the use
of the asset and liability method approach for accounting for income taxes.
Under SFAS 109, deferred tax assets and liabilities are recognized based on
temporary differences between the financial statement and the tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the temporary differences are expected to reverse.
To date, both Epitope Medical Products and Agritope have experienced operating
losses. Actual tax payment is a liability of Epitope as a whole. The
Agritope Stock Proposal provides that either group may be allocated the tax
benefit of such losses and future losses to reduce current or deferred tax
expense and that such losses will not be carried forward to reduce the losses
of the group which incurred such losses. Accordingly, either group may report
lower earnings than if such losses had been retained for the benefit of the
group which incurred such losses.
Net Income (Loss) Per Share. Net income (loss) per share has been computed
using the weighted average number of shares of common stock and common stock
equivalents outstanding during the period. Common stock equivalents consist
of the number of shares issuable upon exercise of outstanding warrants,
options and convertible notes less the number of shares assumed to have been
purchased for the treasury with the proceeds from the exercise of such. Net
income (loss) per share for Epitope Medical Products and Agritope is presented
on a proforma basis assuming that the distribution of Agritope common stock
and redesignation of Epitope, Inc. common stock as Epitope Medical Products
common stock pursuant to the Agritope Stock Proposal had occurred on
October 1, 1993.
Common stock equivalents are excluded from the computation if their effect is
anti-dilutive. Primary and fully diluted net income (loss) per share are the
same.
Supplemental Cash Flow Information. Non-cash financing and investing
activities not included in the consolidated statements of cash flows are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30 1996 1995 1994
<S> <C> <C> <C>
Epitope Medical Products
Discount on private placement of common stock . . . .- - 3,024,413
Agritope
Conversion of notes to equity (Note 5) . . . . . . . .-$ 427,496$ 600,231
Investment in nonconsolidated subsidiary . . . . . . .-2,584,979 -
</TABLE>
Supplemental Profit and Loss Information. In September 1995, management
announced a company-wide reduction in work force whereby 48 employees were
terminated. The Company charged $607,000 to results of operations for
severance payments and related expenses for this program. As of September 30,
1996 and 1995, $55,000 and $475,000, respectively, of these charges remain
accrued and are included in the accompanying balance sheets of the Company and
Epitope Medical Products under the caption "Salaries, benefits and other
accrued liabilities."
Management Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates relating to assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements as well as the reported amounts of revenues
and expenses during the reporting period. Actual results could vary from these
estimates.
Note 3 Investment in Affiliated Companies
In June 1995, Agritope agreed to sell its wholly owned subsidiary, Vinifera,
Inc. to VF Holdings, Inc. ("VF"), an affiliate of a Swiss investment group,
pursuant to a stock purchase agreement. VF subsequently failed to make all
the payments required under the VF Agreement. As part of a settlement of
claims based on VF's default, VF retained a minority interest in Vinifera and
relinquished the majority interest to Agritope in August 1996.
In May 1995, Agrimax Floral Products, Inc. (Agrimax), a wholly owned
subsidiary, transferred control of its Charlotte facility to Universal
American Flowers, Inc. (UAF), a privately held importer of high quality fresh
flowers engaged in distribution to customers in the eastern U.S. from
facilities in Tampa, Florida and Hammond, Louisiana. As of October 27, 1995,
Agrimax merged the Charlotte fresh flower operation with those of UAF in
return for an equity interest of approximately 18% in the merged entity, UAF,
Limited Partnership. In addition to tangible operating assets, Agrimax
transferred to UAF, Limited Partnership, the rights to use its proprietary
floral preservative as well as the Fresche Blossoms(R), Everguard(R) and
Fresche Blossoms Express(TM) trademarks. In May 1996, the equity interest of
Agrimax was reduced to 9% as a result of a recapitalization of UAF, Limited
Partnership.
The St. Paul, Minnesota, facility of Agrimax ceased operations in June 1995.
In June 1996, Agrimax contributed inventory and operating assets to Petals
USA, Inc. ("Petals"), a newly formed affiliate of a Canadian fresh flower
wholesaler, in return for a 19.5% equity interest in Petals.
The investments by Agrimax are included in the accompanying consolidated
balance sheets of the Company and combined balance sheets of Agritope under
the caption "Investment in affiliated companies." See Note 13.
For the years ended September 30, 1995, 1994 respectively, the accompanying
financial statements of the Company and Agritope include revenues of $2.0
million and $2.2 million, and operating losses of $3.8 million, and $6.4
million attributable to the Agrimax and Vinifera business units. The
accompanying statements of operations of the Company and Agritope for the year
ended September 30, 1995, includes the results of operations of Agrimax and
Vinifera through May and also includes a charge of $500,000 primarily
attributable to the disposition of Agrimax which is included in the
accompanying consolidated balance sheets of the Company and combined balance
sheets of Agritope as of September 30, 1995 under the caption "Salaries,
benefits and other accrued liabilities."
Note 4 Property and Equipment
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30 1996 1995
<S> <C> <C>
Epitope Medical Products
Research and development laboratory equipment . . .$ 1,056,883$ 898,716
Manufacturing equipment . . . . . . . . . . . . . .1,291,5461,296,416
Office furniture and equipment. . . . . . . . . . .1,899,9482,041,897
Leasehold improvements. . . . . . . . . . . . . . .1,084,6601,084,660
Construction in progress. . . . . . . . . . . . . .134,55770,961
----------------------------------
5,467,594 5,392,650
Less accumulated depreciation and amortization. . . .(3,924,837)(3,402,881)
----------------------------------
$ 1,542,757 $1,989,769
Agritope
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 30,020$ 30,020
Buildings and improvements. . . . . . . . . . . . . .717,508717,508
Research and development laboratory equipment . . . .220,919196,255
Manufacturing equipment . . . . . . . . . . . . . . .351,538 -
Office furniture and equipment. . . . . . . . . . . .140,45295,338
Leasehold improvements. . . . . . . . . . . . . . . .23,96223,962
Construction in progress. . . . . . . . . . . . . . .499,98034,650
----------------------------------
1,984,379 1,097,733
Less accumulated depreciation and amortization . . .(698,183)(542,730)
----------------------------------
$ 1,286,196 $ 555,003
Consolidated
Land. . . . . . . . . . . . . . . . . . . . . . . .$ 30,020$ 30,020
Buildings and improvements. . . . . . . . . . . . .717,508717,508
Research and development laboratory equipment . . .1,277,8021,094,971
Manufacturing equipment . . . . . . . . . . . . . .1,643,0841,296,416
Office furniture and equipment. . . . . . . . . . .2,040,4002,137,235
Leasehold improvements. . . . . . . . . . . . . . .1,108,6221,108,622
Construction in progress. . . . . . . . . . . . . .634,537105,611
----------------------------------
7,451,973 6,490,383
Less accumulated depreciation and amortization . . .(4,623,020)(3,945,611)
----------------------------------
$ 2,828,953 $ 2,544,772
</TABLE>
<PAGE>
Note 5 Long-Term Debt
On June 30, 1992, Agritope completed a private placement with several European
institutional investors pursuant to which $5,495,000 of convertible notes were
issued. The notes are unsecured, mature on June 30, 1997 and bear interest at
the rate of 4% per annum which is payable on each June 30 and December 31
until all outstanding principal and interest on the notes have been paid in
full. The notes are convertible into common stock of the Company at a
conversion price of $19.53 per share. In the event of an initial public
offering of Agritope common stock, the notes would be automatically converted
to shares of Agritope common stock at 90% of the public offering price.
During the years ended September 30, 1995 and 1994, respectively, investors
exchanged $449,991 and $559,964 principal amount of convertible notes for the
Company's common stock at a price of $19.53 per share. In conjunction with
the exchanges, unamortized debt issuance costs of $22,487 and $40,267 related
to such notes were recognized as equity issuance costs during 1995 and 1994,
respectively. Debt issuance costs are included in other assets and are being
amortized over the five-year life of the notes. Amortization expense of debt
issuance costs for the years ended September 30, 1996, 1995 and 1994,
respectively, totaled $108,257, $96,136 and $91,715, leaving an unamortized
balance of $88,821 and $197,077 at September 30, 1996 and 1995, respectively.
Note 6 Shareholders' Equity
Authorized Capital Stock. The Company's amended articles of incorporation
authorize 1,000,000 shares of preferred stock and 30,000,000 shares of common
stock. The Company's Board of Directors has authority to determine
preferences, limitations and relative rights of the preferred stock.
Common Stock Reserved for Future Issuance. As of September 30, 1996, the
following shares of the Company's common stock were reserved for future
issuance, as more fully described below:
Purpose Shares
Outstanding warrants. . . . . . . . . . . . . .2,000,640
Outstanding stock options . . . . . . . . . . .3,365,726
Employee Stock Purchase Plan subscriptions. . .42,820
Conversion of notes (Note 5). . . . . . . . . .185,356
--------------
5,594,542
If the Agritope Stock Proposal is approved, the Company will issue to the
holders of the above rights to purchase shares of Epitope common stock or to
convert notes into such shares, as applicable, the equivalent rights with
respect to Agritope common stock on the basis of one-half share of Agritope
common stock for each right to purchase one share of Epitope common stock.
Common Stock Warrants. As of September 30, 1996, the following warrants to
purchase shares of common stock were outstanding:
Date of Issuance Shares Price Expiration Date
September 26, 1991. . . . .159,150$16.00September 30, 1997
December 23, 1992 . . . . .988,39018.50September 30, 1997
July 20, 1993 . . . . . . . .375,00020.00September 30, 1997
August 1, 1993. . . . . . . .200,00018.50September 30, 1997
October 17, 1994. . . . . . .50,00018.50September 30, 1997
November 22, 1994 . . . . .228,10018.50September 30, 1997
-----------
2,000,640
Stock Award Plans. The Company's 1991 Stock Award Plan (the 1991 Plan) was
approved by the shareholders during 1991, replacing the Company's Incentive
Stock Option Plan (ISOP). The 1991 Plan provides for stock-based awards to
employees, outside directors and members of scientific advisory committees or
other consultants. Awards which may be granted under the 1991 Plan include
qualified incentive stock options, nonqualified stock options, stock
appreciation rights, restricted awards, performance awards and other
stock-based awards.
Under the terms of the 1991 Plan, qualified incentive stock options on shares
of common stock may be granted to eligible employees, including officers, of
the Company at an exercise price not less than the fair market value of the
stock on the date of grant. The maximum term during which any option may be
exercised is ten years from the date of grant. To date, options have been
granted with four-year vesting schedules.
Options issued to employees under the Incentive Stock Option Plan (ISOP) were
issued at prices not less than the fair market value of a share of common
stock on the date of grant. The options are exercisable after one year from
the date of grant at the rate of 25% per year cumulatively and expire ten
years from the date of grant.
The Agritope, Inc. 1992 Stock Award Plan (the 1992 Plan) was adopted by
Agritope and approved by the Company in 1992. The 1992 Plan, which has
provisions similar to those of the Company's 1991 Plan, authorizes issuance of
2,000,000 shares of Agritope common stock. Until Agritope is no longer a
wholly owned subsidiary of the Company, shares issued pursuant to exercise of
options under the 1992 Plan will be converted into shares of the Company's
common stock based on the ratio of the fair market value of the Company's
common stock to the fair market value of Agritope common stock on the date of
the grant.
The 1991 Plan and 1992 Plan also provide that nonqualified options may be
granted at a price not less than 75% of the fair market value of a share of
common stock on the date of grant. The option term and vesting schedule of
such awards may either be unlimited or have a specified period in which to
vest and be exercised. For the discounted nonqualified options issued, the
Company amortizes, on a straight-line basis over the vesting period of the
options, the difference between the exercise price and the fair market value
of a share of stock on the date of grant. As of September 30, 1996, 197,181
shares of Epitope common stock remain available for grant under the Company's
stock award plans.
In October 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock-Based Compensation." SFAS 123 allows companies which
have stock-based compensation arrangements with employees to adopt a fair-
value basis of accounting for stock options and other equity instruments or to
continue to apply the existing accounting rules under APB Opinion 25,
"Accounting for Stock Issued to Employees," but with additional financial
statement disclosure. The Company plans to elect the disclosure-only
alternative commencing in fiscal 1997 and therefore does not anticipate that
SFAS 123 will have a material impact on its financial position or results of
operations.
Options granted and outstanding under the Company's stock option plans are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of period3,636,103$1.09-$24.943,483,432$ 1.09-$24.943,052,653$1.09-$24.94
Granted . . . . . . . . .901,3799.81-18.13802,05014.94-18.88589,85014.38-22.94
Exercised. . . . . . . .(386,550)1.09-17.13(183,525)1.84-22.50(52,488)12.43-22.50
Canceled . . . . . . . .(785,206)14.38-24.00(465,854)7.38-22.94(106,583)8.50-22.94
---------------------------------------------------------------------
Outstanding at
end of period . . . . .3,365,726$3.50-$24.943,636,103$1.09-$24.943,483,432$1.09-$24.94
Exercisable. . . . . . .2,302,212$3.50-$24.942,002,925$1.09-$24.941,557,505$1.09-$24.94
</TABLE>
Pursuant to the 1991 Plan, 973, 3,680 and 11,741 shares of common stock were
also awarded to consultants and members of the Company's scientific advisory
committees during 1996, 1995, and 1994, respectively.
Employee Stock Purchase Plans. In 1991, the shareholders approved the
Company's adoption of the 1991 Employee Stock Purchase Plan (1991 ESPP)
covering a maximum of 100,000 shares of common stock for subscription over two
offering periods. The purchase price for stock purchased under the 1991 ESPP
for each of the two 24-month subscription periods was the lesser of 85% of the
fair market value of a share of common stock at the commencement of the
subscription period or the fair market value at the close of each subscription
period. An employee may also elect to withdraw at any time during the
subscription period and receive the amounts paid plus interest at the rate of
6%. During April 1994, 676 shares, at a purchase price of $14.00 per share,
were issued to employees for the second 1991 ESPP purchase period which closed
March 31, 1994.
The 1993 Employee Stock Purchase Plan (1993 ESPP), as amended and restated
effective February 1, 1993, covers a maximum of 250,000 shares of common stock
for subscription over established offering periods. The Company's Board of
Directors was granted authority to determine the number of offering periods,
the number of shares offered, and the length of each period, provided that no
more than three offering periods (other than Special Offering Subscriptions as
described below) may be set during each fiscal year of the Company. Other
provisions of the 1993 ESPP are similar to the 1991 ESPP. During April, 1996,
10,106 shares were issued at a price of $11.90 per share. As of September 30,
1996, 42,820 shares of common stock were subscribed for during two offerings
under the 1993 ESPP. Shares subscribed for under these 1993 ESPP offerings
may be purchased over 24 months and have initial subscription prices of $12.33
and $8.77 per share for the various offerings.
The 1993 ESPP was amended to allow the Company, at its discretion, to provide
Special Offering Subscriptions whereby an employee's annual increase in
compensation could be deferred for a one-year period. At the end of the one-
year period, the employee can elect to receive the deferred compensation
amount in the form of cash or shares of the Company's common stock. The
purchase price for stock issued under a Special Offering Subscription is the
lesser of 85% of the fair market value of a share of common stock on the first
day of the calendar month the employee's increase was effective or the fair
market value at the close of the one-year subscription period. During 1995
and 1994, respectively, 5,569 and 2,314 Special Offering Subscription shares
were issued to employees at an average price of $15.26 and $15.24 per share.
Note 7 Income Taxes
As of September 30, 1996, the Company had net operating loss carryforwards of
approximately $66.7 million and $50.0 million, respectively, to offset federal
and state taxable income. Approximately $6.9 million of the Company's net
operating loss carryforwards were generated as a result of deductions related
to the exercise of stock options. When utilized, such carryforwards, as tax
effected, will be reflected in the Company's financial statements as an
increase in shareholders' equity rather than a reduction of the provision for
income taxes.
As of September 30, 1996 the Company had total gross deferred tax assets of
approximately $28.4 million, consisting primarily of $24.5 million of net
operating loss carryforwards, $1.1 million of research and development tax
credit carryforwards and $2.0 million of accrued deferred compensation costs.
No benefit for these assets has been reflected in the accompanying
consolidated financial statements as they do not satisfy the recognition
criteria set forth in Statement of Financial Accounting Standards No. 109
(SFAS 109). Accordingly, a valuation allowance of $28.4 million, representing
a $1.1 million decrease since the prior fiscal year end, has been recorded.
The expected tax benefit of approximately $476,000 for the year ended
September 30, 1996 is increased by approximately $61,000 for the effect of
state and local taxes (net of federal impact),$1.1 million for the effect of
the decrease in valuation allowance, and $840,000 for the effect of stock
option deductions included in the valuation allowance and is reduced by
approximately $2.5 million for the effect of Vinifera Inc.'s net operating
loss carryforwards and certain state net operating loss carryforwards being
removed from the consolidated tax group.
<PAGE>
Note 8 Research and Development Arrangements
In February 1995, the Company entered into a Development, License and Supply
Agreement with SmithKline Beecham, plc (SB) pursuant to which the Company will
conduct research and development projects funded by SB. Agritope also
performed research work in 1995 with respect to raspberries which was
partially funded by Sweetbriar Development, Inc. under a License Agreement
dated October 18, 1994 and with respect to grapevine disease diagnostics
funded by a Phase I grant from the U.S. Department of Agriculture under the
Small Business Innovation Research Program.
During 1994, the Company participated in a National Cancer Institute program
whereby the Company received funding for research toward the treatment of
cancer. Agritope has also received grant support from the U.S. Department of
Agriculture, Oregon Strawberry Commission, and Oregon Raspberry & Blackberry
Commission for antifungal biocontrol research and from several strategic
partners.
Revenues from research and development arrangements are included in the
accompanying consolidated statements of operations under the caption "Grants
and Contracts."
Note 9 Distribution and Supply Contracts
The Company has entered into several contractual arrangements, including those
discussed in the following paragraphs, for distribution of certain of its
products to customers.
The Company continues to maintain supply and distribution agreements with
Organon Teknika Corporation (Organon Teknika), whereby Organon Teknika
supplies the Company's antigen requirements and exclusively distributes the
Company's EPIblot HIV confirmatory tests (EPIblot) on a worldwide basis. As
of April 1, 1994, the Company renewed the agreements which have an initial
termination date of March 31, 1997 (with successive one-year renewal periods
thereafter) and include pricing incentives based on volumes purchased by
Organon Teknika and penalties for failure to purchase specified minimum
quarterly volumes. For the years ended September 30, 1996, 1995 and 1994,
respectively, revenues generated from sales of EPIblot to Organon Teknika were
$1,539,164, $1,808,431, and $1,688,200, including export sales of $62,539,
$72,369 and $320,700. The Company has notified Organon Teknika that it
intends to renew the agreements on mutually acceptable, but revised, terms
prior to the scheduled termination date.
LabOne, Inc. (previously Home Office Reference Laboratory, Inc.) purchases
oral specimen devices from the Company for use in insurance testing in return
for non-exclusive distribution rights in the United States and Canada under an
agreement which expires on March 13, 2000, with an automatic five-year
renewal, unless either party notifies the other of intent not to renew at
least 180 days prior to the initial expiration date. For the years ended
September 30, 1996, 1995 and 1994, respectively, revenue generated from
product sales to LabOne, Inc. was $1,327,544, $525,628 and $477,186 including
export sales of $394,747, $58,500 and $110,933.
SB has an exclusive agreement to market the Company's oral specimen collection
device worldwide, except in several foreign countries and to the insurance
industry in the U.S., Canada and Japan.
In 1995, SB made an initial license fee payment of $1 million to the Company.
SB also placed $5 million in escrow for future payment to the Company, of
which $1 million was designated for reimbursement of future research project
work and $4 million was designated as an additional license fee to be paid
upon FDA approval of a pending request to amend the labeling of the Company's
oral specimen collection device to indicate a two-year shelf life. The
initial $1 million license fee was included as deferred revenue under the
caption "Salaries, benefits and other accrued liabilities" in the accompanying
consolidated balance sheets as of September 30, 1995. The escrowed funds are
not reflected in the Company's financial statements.
In April 1996, the FDA granted the Company's request for extended dating and
SB disbursed $4 million plus interest from escrow. Accordingly the Company
recognized income of $5 million in 1996 operating results.
<PAGE>
Note 10 Commitments
The Company leases office, manufacturing, warehouse and laboratory facilities
under operating lease agreements which require minimum annual payments as
follows:
<TABLE>
<CAPTION>
Epitope
Medical
YEAR ENDING SEPTEMBER 30 Products Agritope Consolidated
<S> <C> <C> <C>
1997. . . . . . . . . . . . . . . . . .$ 345,577$189,551$ 535,128
1998. . . . . . . . . . . . . . . . . .345,576185,394 530,970
1999. . . . . . . . . . . . . . . . . .346,356150,000 496,356
2000. . . . . . . . . . . . . . . . . .109,992150,000 259,992
2001. . . . . . . . . . . . . . . . . .-- 50,000 50,000
---------- ---------------------
$1,147,501 $724,945 $1,872,446
</TABLE>
Under the agreements for the lease of its office and laboratory facilities,
the Company is obligated to the lessor for its share of certain expenses
related to the use, operation, maintenance and insurance of the property.
These expenses, payable monthly in addition to the base rent, are not included
in the amounts shown above. Rent expense aggregated $538,665, $749,530 and
$616,750 for the years ended September 30, 1996, 1995 and 1994, respectively.
The Company is also contingently liable for a lease of which has been assigned
to UAF, Limited Partnership and the lease of property which has been subleased
to Petals USA, Inc. in the following amounts:
YEAR ENDING SEPTEMBER 30
1997. . . . . . . . . . . . . . . . . . $ 328,953
1998. . . . . . . . . . . . . . . . . . 341,304
1999. . . . . . . . . . . . . . . . . . 347,184
------------
$1,017,441
Note 11 Profit Sharing and Savings Plan
The Company established a profit sharing and deferred salary savings plan in
1986 and restated the plan in 1991. All employees are eligible to participate
in the plan. In addition, the plan permits certain voluntary employee
contributions to be excluded from the employees' current taxable income under
the provisions of Internal Revenue Code Section 401(k) and the regulations
thereunder. Effective October 1, 1991, the Company replaced a discretionary
profit sharing provision with a matching contribution (either in cash, shares
of Epitope common stock, or partly in both forms) equal to 50% of an
employee's basic contribution, not to exceed 2.5% of an employee's
compensation. The Board of Directors has the authority to increase or
decrease the 50% match at any time. During 1996, 1995 and 1994, respectively,
the Company contributed $73,315 (4,653 shares totaling $73,279 and the
remainder in cash), $97,631 (5,562 shares totaling $97,607 and the remainder
in cash), and $79,981 (4,632 shares totaling $79,807 and the remainder in cash
to the plan. As of September 30, 1996, 17,035 shares are held by the plan.
Note 12 Geographic Area Information
The Company's products are included in the medical products and agricultural
products industry segments. (See Note 1 for a description of the Company's
business.) The Company's products are sold principally in the United States,
Canada and Europe. Operating loss represents revenues less operating
expenses. In computing operating loss, allocated corporate administration
expenses have been included; however, other income and expense items such as
interest expense, miscellaneous income, and other charges have not been added
or deducted. Other assets primarily represent cash and cash equivalents,
marketable securities, and prepaid insurance.
<PAGE>
<TABLE>
<CAPTION>
Epitope Medical Products
In thousands
Geographic Operating Identifiable
Areas Revenues Loss Assets
1996 1995 1994 1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United
States . . .$4,903$2,630$2,062$ (5,287)$(11,608)$(6,284)$4,604$3,768$3,464
Canada . . .404 78 111 -- -- -- --
Latin
America . .100 - - -- -- -- --
Europe . . .65 72 329 -- -- -- --
Other . . . .122 76 103 -- -- -- --
- -------------------------------------------------------------------------------------------------------
$5,594 $2,856 $2,605$ (5,287)$(11,608)$(6,284)$4,604 $3,768$3,464
Agritope
In thousands
Geographic Operating Identifiable
Areas Revenues Loss Assets
1996 1995 1994 1996 1995 1994 1996 1995 1994
United
States . . .$585$2,110$2,213 $(2,236) $(7,810)$(9,490)$5,351 $3,923$4,050
- -------------------------------------------------------------------------------------------------------
$585 $2,110 $2,213 $(2,236) $(7,810)$(9,490)$5,351 $3,923$4,050
Epitope, Inc. Consolidated
In thousands
Geographic Operating Identifiable
Area Revenues Loss Assets
1996 1995 1994 1996 1995 1994 1996 1995 1994
United
States . . .$5,488$4,739$4,276$(7,523)$(19,418)$(15,774)$9,955$7,691$7,514
Canada . . .404 78 111 -- -- -- --
Latin
America . .100 - - -- -- -- --
Europe . . . 65 72 329 -- -- -- --
Other . . . .122 76 103 -- -- -- --
- -------------------------------------------------------------------------------------------------------
$6,179 $4,965 $4,819 $(7,523)$(19,418)$(15,774)$9,955$7,691$7,514
</TABLE>
<PAGE>
Note 13 Subsequent Events
On October 25, the Company received an offer from a representative of the
holders of the $3.6 million convertible notes due June 30, 1997, whereby the
holders proposed to convert such notes into common stock of the Company at a
reduced exchange price. On November 14, 1996, the Company agreed to exchange
$3,380,000 principal amount of Agritope notes for 250,367 shares of common
stock of the Company at an exchange price of $13.50 per share. Accordingly,
the Company will recognize a charge to income of approximately $1.1 million
representing the conversion expense in the first quarter of fiscal 1997.
On November 25, 1996, the Company negotiated an extension to the bank line of
credit previously maintained by Andrew and Williamson Sales, Co. (A&W). Under
terms of the commitment letter, the $6.5 million revolving credit line will be
extended until February 5, 1998, and will bear interest at prime or LIBOR plus
2.5% at the Company's option. The new line will be secured by A&W's accounts
receivable, inventory and equipment and will be guaranteed by Epitope, Inc.
The new line will also contain various financial covenants including minimum
working capital and tangible net worth levels and maximum debt to net worth
ratios.
On December 12, 1996, the Company merged with A&W. A&W is a producer and
wholesale distributor of fruits and vegetables based in San Diego, California.
Under the terms of the merger, the Company issued 520,000 shares of common
stock of Epitope, Inc. in exchange for all of the outstanding common stock of
A&W. The merger has been accounted for as a pooling of interests and will
qualify as a tax-free reorganization (see supplemental financial statements).
Based on information available on December 26, 1996, and due to continued
operating losses at UAF, Limited Partnership in the four months ended
October 31, 1996, coupled with a shortfall in sales and larger operating loss
than expected at Petals USA, Inc. in the fourth quarter of calendar 1996, the
Company believes that the value of its investment in affiliated companies has
more than temporarily declined as both companies are now expected to show
operating losses in fiscal 1997. Accordingly, the Company anticipates a
charge to results of operations of $1,900,000 in the first quarter of 1997,
reflecting the permanent impairment in the value of its investment in
affiliated companies.
<PAGE>
Supplemental Financial Statements
Report of Independent Accountants
To the Board of Directors and Shareholders of
Epitope, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of changes in shareholders'/group equity, and of cash flows
present fairly, in all material respects, the financial position of Epitope
Medical Products group and Agritope group (as described in Note 1 to these
financial statements) and Epitope, Inc. and its subsidiaries at September 30,
1996 and 1995, and the results of their operations and their cash flows for
each of the three years in the period ended September 30, 1996, in conformity
with generally accepted accounting principles. 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 of these statements in accordance with generally accepted
auditing standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
As described in Note 13, on November 6, 1996, Epitope, Inc. agreed to a merger
with Andrew and Williamson Sales, Co. in a transaction to be accounted for as
a pooling of interests. The accompanying supplemental financial statements
give retroactive effect to the merger.
In our opinion, based upon our audits and the report of other auditors, the
accompanying supplemental balance sheets and the related supplemental
statements of operations, of changes in shareholders'/group equity and of cash
flows present fairly, in all material respects, the financial position of
Epitope Medical Products group, Agritope group and Epitope, Inc. and its
subsidiaries at September 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended September 30, 1996, in conformity with generally accepted accounting
principles. 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 did not audit the financial
statements of Andrew and Williamson Sales, Co., which statements reflect total
assets of $10,774,100 and $7,293,256 at September 30, 1996 and 1995,
respectively, and total revenues of $62,471,119, $52,178,973 and $62,704,601
for the years ended September 30, 1996, 1995 and 1994, respectively. Those
statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it related to
the amounts included for Andrew and Williamson Sales, Co., is based solely on
the report of the other auditors. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the report
of other auditors provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Portland, Oregon
October 28, 1996, except for Note 13 as to which the date is November 14,
1996, November 25, 1996, December 12, 1996, and December 26, 1996.
<PAGE>
<TABLE>
<CAPTION>
Supplemental Financial Statements
Epitope Medical Products
Combined Balance Sheets
SEPTEMBER 30 1996 1995
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents (Note 2) . . . . . . . . . . .$795,787$13,210
Marketable securities (Note 2) . . . . . . . . . . . . .18,818,12017,080,246
Trade accounts receivable, net (Note 2) . . . . . . . .1,147,599231,621
Other accounts receivable . . . . . . . . . . . . . . . .174,083382,753
Inventories (Note 2) . . . . . . . . . . . . . . . . . . .1,157,9301,433,746
Prepaid expenses . . . . . . . . . . . . . . . . . . . . .89,518103,399
--------------------------
Total current assets . . . . . . . . . . . . . . . . . . . .22,183,03719,244,975
Property and equipment, net (Notes 2 and 4) . . . . . . .1,542,7571,989,769
Patents and proprietary technology, net (Note 2) . . . . .601,234415,010
Investments in affiliated companies . . . . . . . . . . .-142,510
Other assets and deposits (Note 5) . . . . . . . . . . .22,75838,328
--------------------------
$24,349,786$21,830,592
Liabilities and Group Equity
Current liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . . .$449,170$819,424
Salaries, benefits and other accrued liabilities
(Notes 2 and 9) . . . . . . . . . . . . . . . . . . . .1,368,1662,976,167
--------------------------
Total current liabilities . . . . . . . . . . . . . . . .1,817,3363,795,591
Commitments and contingencies (Notes 6, 8, 9, 10 and 11)--
Group equity (Note 6)
Contributed capital . . . . . . . . . . . . . . . . . .64,237,35060,479,315
Accumulated deficit . . . . . . . . . . . . . . . . . . .(41,704,900)(42,444,314)
---------------------------
22,532,45018,035,001
---------------------------
$24,349,786$21,830,592
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Supplemental Financial Statements
Epitope Medical Products
Combined Statements of Operations
FOR THE YEAR ENDED SEPTEMBER 30 1996 1995 1994
<S> <C> <C> <C>
Revenues
Product sales . . . . . . . . . . . . . . . . .$ 4,864,378$ 2,806,850$ 2,580,798
Grants and contracts . . . . . . . . . . . .729,27148,672 24,560
------------------------------------------
5,593,649 2,855,522 2,605,358
Costs and expenses
Product costs . . . . . . . . . . . . . . . . .2,681,4293,163,0122,141,319
Research and development costs . . . . .3,165,8384,617,2463,681,326
Selling, general and administrative expenses5,033,4916,682,8603,066,896
-------------------------------------------
10,880,75814,463,118 8,889,541
Loss from operations . . . . . . . . . . . . . .(5,287,109)(11,607,596)(6,284,183)
Other income, net . . . . . . . . . . . . . .6,026,523756,424235,926
-------------------------------------------
Net income (loss) . . . . . . . . . . . . . .$ 739,414$(10,851,172)$(6,048,257)
Pro forma net income (loss) per share . . . .$ .05$ (.87) $ (.57)
Pro forma weighted average number of shares
outstanding . . . . . . . . . . . . . . . . . .13,960,39612,406,23410,570,129
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Supplemental Financial Statements
Epitope Medical Products
Combined Statements of Changes in Group Equity
Contributed Accumulated
capital deficit Total
<S> <C> <C> <C>
Balances at September 30, 1993. . . . . . . .$34,167,582$(25,544,885)$ 8,622,697
Common stock issued upon
exercise of options . . . . . . . . . . . .636,293 - 636,293
Common stock issued as
compensation. . . . . . . . . . . . . . . .318,386 - 318,386
Compensation expense for
stock option grants . . . . . . . . . . . .823,350 - 823,350
Common stock issued upon
exercise of warrants. . . . . . . . . . . .9,718,259 - 9,718,259
Common stock issued in
private placement . . . . . . . . . . . . .17,057,563 - 17,057,563
Equity issuance costs . . . . . . . . . . . .(3,335,261)- (3,335,261)
Net cash to Agritope . . . . . . . . . . . . . .(12,132,173)(12,132,173)
Net loss for the year . . . . . . . . . . . .- (6,048,257) (6,048,257)
---------------------------------------------------
Balances at September 30, 1994. . . . . . . .47,253,999(31,593,142)15,660,857
Common stock issued upon
exercise of options . . . . . . . . . . . .2,145,673 - 2,145,673
Common stock issued as
compensation. . . . . . . . . . . . . . . .196,802 - 196,802
Compensation expense for
stock option grants . . . . . . . . . . . .1,056,335 - 1,056,335
Common stock issued upon
exercise of warrants. . . . . . . . . . . .18,892,750 - 18,892,750
Equity issuance costs . . . . . . . . . . . .(735,390) - (735,390)
Net cash to Agritope. . . . . . . . . . . . .(8,330,854) (8,330,854)
Net loss for the year . . . . . . . . . . . .-(10,851,172) (10,851,172)
----------------------------------------------------
Balances at September 30, 1995 . . . . . . .60,479,315(42,444,314)18,035,001
Common stock issued upon
exercise of options. . . . . . . . . . . .4,886,118 - 4,886,118
Common stock issued as compensation. . . . .249,086 - 249,086
Compensation expense for stock
option grants. . . . . . . . . . . . . . .815,019 - 815,019
Common stock issued upon
exercise of warrants . . . . . . . . . . .826,600 - 826,600
Equity issuance costs. . . . . . . . . . . .(152) - (152)
Net cash to Agritope . . . . . . . . . . . .(3,018,636) - (3,018,636)
Net income for the year. . . . . . . . . . .- 739,414 739,414
-----------------------------------------------------
Balances at September 30, 1996. . . . . . .$64,237,350$(41,704,900)$22,532,450
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Supplemental Financial Statements
Epitope Medical Products
Combined Statements of Cash Flows
FOR THE YEAR ENDED SEPTEMBER 30 1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) . . . . . . . . . . . . . . . . . . .$ 739,414$(10,851,172)$(6,048,257)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization . . . . . . . . . . . .792,885795,295651,076
(Gain) loss on disposition of property . . . . . . .(1,098)319 1,541
Increase in accounts receivable and
other receivables . . . . . . . . . . . . . . . . .(707,308)(76,549)(180,767)
Increase (decrease) in inventories . . . . . . . . . .275,816(375,640)(272,279)
Decrease in prepaid expenses . . . . . . . . . . . .13,88138,03143,354
Decrease (increase) in other assets and deposits15,570(42,658) (6,227)
Increase (decrease) in accounts payable and
accrued liabilities . . . . . . . . . . . . . . . . .(2,151,110)2,273,364329,875
Common stock issued as compensation for services249,086196,802 318,386
Compensation expense for stock option grants and
deferred salary increases . . . . . . . . . . . . . . .815,0191,056,335915,351
-----------------------------------------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . . . . . . .42,155(6,985,873)(4,247,947)
Cash flows from investing activities
Investment in marketable securities . . . . . . . . .(47,608,270)(16,194,994)(5,603,414)
Proceeds from sale of marketable securities . . . .45,870,3964,718,162-
Additions to property and equipment . . . . . . . .(180,112)(1,112,292)(461,914)
Proceeds from sale of property . . . . . . . . . . .7,4321,085 1,000
Expenditures for patents and proprietary
technology . . . . . . . . . . . . . . . . . . . .(358,319)(126,927)(185,805)
Investment in affiliated companies . . . . . . . . .142,51042,55264,938
-----------------------------------------
Net cash used in investing
activities . . . . . . . . . . . . . . . . . . . . .(2,126,363)(12,672,414)(6,185,195)
Cash flows from financing activities
Principal payments under installment purchase and
capital lease obligations . . . . . . . . . . . . . . .
Proceeds from issuance of common stock . . . . . . . . .5,885,57321,060,91224,387,702
Cost of common stock issuance . . . . . . . . . . . . .(152)(757,877)(310,849)
Cash to Agritope . . . . . . . . . . . . . . . . . . . .(3,018,636)(8,330,854)(12,132,173)
----------------------------------------
Net cash provided by financing activities . . . . . . .2,866,78511,972,18111,944,680
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . . .782,577(7,686,106)1,511,538
Cash and cash equivalents at beginning of year . . . . .13,2107,699,3166,187,778
----------------------------------------
Cash and cash equivalents at end of year . . . . . . . .$ 795,787$ 13,210$7,699,316
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Supplemental Financial Statements
Agritope
Combined Balance Sheets
SEPTEMBER 30 1996 1995
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents (Note 2) . . . . . . . . . .$ 4,903,476$ 4,246,687
Trade accounts receivable, net (Note 2) . . . . . . . .3,123,1721,995,244
Other accounts receivable . . . . . . . . . . . . . . .32,3371,249,554
Inventories (Note 2) . . . . . . . . . . . . . . . . . .6,570,1873,239,441
Prepaid expenses . . . . . . . . . . . . . . . . . . . .90,656143,792
---------------------------
Total current assets . . . . . . . . . . . . . . . . . . . .14,719,82810,874,718
Property and equipment, net (Notes 2 and 4) . . . . .2,658,6552,068,931
Patents and proprietary technology, net (Note 2) . . .510,244140,757
Investment in affiliated companies (Note 3) . . . . . .2,651,2942,185,630
Other assets and deposits (Note 5) . . . . . . . . . . .321,011326,650
---------------------------
$20,861,032$15,596,686
Liabilities and Group Equity
Current liabilities
Borrowings under bank line of credit (Note 5) . . . .$ 4,125,000$ 3,150,000
Subordinated notes (Note 5) . . . . . . . . . . . . .2,236,628-
Current portion of long-term debt (Note 5) . . . . . . 98,368196,134
Convertible notes, due 1997 (Notes 5 and 13) . . . . .3,620,003-
Accounts payable . . . . . . . . . . . . . . . . . . .2,677,8811,488,940
Salaries, benefits and other accrued liabilities
(Notes 2 and 9) . . . . . . . . . . . . . . . . . . .1,208,136274,959
---------------------------
Total current liabilities . . . . . . . . . . . . . . .13,966,0165,110,033
Long-term debt, less current portion (Note 5) . . . . .527,973632,515
Convertible notes, due 1997 (Notes 5 and 13) . . . . .-3,620,003
Subordinated notes (Note 5) . . . . . . . . . . . . . .-1,015,461
Commitments and contingencies (Notes 6, 8, 9, 10 and 11)--
Minority interest . . . . . . . . . . . . . . . . . . .215,407-
Group equity (Note 6)
Contributed capital . . . . . . . . . . . . . . . . . .36,736,34333,474,043
Accumulated deficit . . . . . . . . . . . . . . . . . . . .(30,584,707)(28,255,369)
---------------------------
6,151,636 5,218,674
---------------------------
$20,861,032$15,596,686
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Supplemental Financial Statements
Agritope
Combined Statements of Operations
FOR THE YEAR ENDED SEPTEMBER 30 1996 1995 1994
<S> <C> <C> <C>
Revenues
Product sales . . . . . . . . . . . . . . . . .$62,471,119$54,194,291$62,884,343
Grants and contracts . . . . . . . . . . . . .585,48594,370 33,642
----------------------------------------------
63,056,604 54,288,661 62,917,985
Costs and expenses
Product costs . . . . . . . . . . . . . . . . . . .57,262,34052,337,26660,374,171
Research and development costs . . . . . . . . . . .1,338,7032,204,9932,368,880
Selling, general and administrative expenses4,789,0967,516,4588,280,756
-----------------------------------------------
63,390,139 62,058,717 71,023,807
Loss from operations . . . . . . . . . . . . . . . .(333,535)(7,770,056)(8,105,822)
Other expense, net . . . . . . . . . . . . . . . . .(670,803)(252,406)(443,962)
----------------------------------------------
Net loss . . . . . . . . . . . . . . . . . . . . . .$(1,004,338)$(8,022,462)$(8,549,784)
Pro forma net loss per share . . . . . . . . . . . .$ (.15)$ (1.29)$ (1.62)
Pro forma weighted average number of shares
Outstanding . . . . . . . . . . . . . . . . . . . . .6,590,7106,203,1175,285,064
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Supplemental Financial Statements
Agritope
Combined Statements of Changes in Group Equity
Contributed Accumulated
capital deficit Total
<S> <C> <C> <C>
Balances at September 30, 1993 . . . . . .$11,281,128$(10,809,123)$ 472,005
Common stock issued as
compensation . . . . . . . . . . . . . . . .50,392- 50,392
Compensation expense for
stock option grants . . . . . . . . . . . .343,922- 343,922
Common stock issued upon
exchange of convertible notes . . . . . .559,964 - 559,964
Equity issuance costs . . . . . . . . . . .(40,267)- (40,267)
Net cash from Epitope Medical Products12,132,173 - 12,132,173
Dividends . . . . . . . . . . . . . . . . .-(540,000) (540,000)
Net loss for the year . . . . . . . . . . . .(8,549,784)(8,549,784)
Balances at September 30, 1994 . . . . . .24,327,312(19,898,907)4,428,405
Common stock issued as
compensation . . . . . . . . . . . . . . . .69,998- 69,998
Compensation expense for
stock option grants . . . . . . . . . . . .318,375- 318,375
Common stock issued upon
exchange of convertible notes . . . . . .449,991 - 449,991
Equity issuance costs . . . . . . . . . . . .(22,487)- (22,487)
Net cash from Epitope Medical Products . . . .8,330,854-8,330,854
Dividends . . . . . . . . . . . . . . . . . .-(334,000) (334,000)
Net loss for the year . . . . . . . . . . . .(8,022,462)(8,022,462)
-------------------------------------------
Balances at September 30, 1995 . . . . . .33,474,043(28,255,369)5,218,674
Common stock issued as compensation14,500 - 14,500
Compensation expense for stock
option grants . . . . . . . . . . . . . .229,164 - 229,164
Net cash from Epitope Medical Products . . .3,018,636- 3,018,636
Dividends . . . . . . . . . . . . . . . . .-(1,325,000)(1,325,000)
Net loss for the year . . . . . . . . . . .-(1,004,338)(1,004,338)
--------------------------------------------
Balances at September 30, 1996 . . . . .$36,736,343$(30,584,707)$ 6,151,636
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Supplemental Financial Statements
Agritope
Combined Statements of Cash Flows
FOR THE YEAR ENDED SEPTEMBER 30 1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities
Net loss . . . . . . . . . . . . . .$(1,004,338)$(8,022,462)$(8,549,784)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization . . . . . .474,256859,641 714,420
Loss on disposition of property and investments64,12629,56074,130
Decrease (increase) in accounts receivable and
other receivables . . . . . . . . . . . . .(166,475)(630,054)1,306,977
Decrease (increase) in inventories . . . . .(3,330,746)222,991(5,260,547)
Decrease (increase) in prepaid expenses . . .53,136(100,940)31,402
Decrease (increase) in other assets and deposits(36,219)9,1376,562
Increase (decrease) in accounts payable and
accrued liabilities . . . . . . . . . . . . .2,122,118(12,991)1,678,494
Common stock issued as compensation for services14,50069,99850,392
Compensation expense for stock option grants and
deferred salary increases . . . . . . . . . .229,164318,375343,922
---------------------------------------------
Net cash used in operating activities . . . . .(1,580,478)(7,256,745)(9,604,032)
Cash flows from investing activities
Additions to property and equipment . . . . .(925,388)(308,136)(2,240,743)
Proceeds from sale of property . . . . . . . .-13,258 -
Expenditures for patents and proprietary
technology . . . . . . . . . . . . . . . . . .(411,943)(178,208)135
Investment in affiliated companies . . . . . .(529,790)548,876(81,750)
Minority Interest in affiliated companies . . .215,407- -
Other investments . . . . . . . . . . . . . . .(54,278)48,990(99,122)
---------------------------------------------
Net cash (used in) provided by investing
activities . . . . . . . . . . . . . . . . . .(1,705,992)124,780(2,421,480)
Cash flows from financing activities
Net borrowings under bank line of credit . . .975,000500,0001,075,000
Issuance of long-term debt . . . . . . . . . . .15,57583,03478,760
Principal payments on long-term debt . . . . . .(217,883)(166,955)(116,020)
Dividends . . . . . . . . . . . . . . . . . . .(1,325,000)(334,000)(540,000)
Net borrowings from stockholders . . . . . .1,476,931(359,962)352,382
Cash from Epitope Medical Products . . . . . .3,018,6368,330,85412,132,173
---------------------------------------------
Net cash provided by financing activities . . .3,943,2598,052,97112,982,295
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . . .656,789921,006956,783
Cash and cash equivalents at beginning of year .4,246,6873,325,6812,368,898
--------------------------------------------
Cash and cash equivalents at end of year . .$4,903,476$4,246,687$3,325,681
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Supplemental Financial Statements
Epitope, Inc. and Subsidiaries
Consolidated Balance Sheets
SEPTEMBER 30 1996 1995
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents (Note 2) . . . . . . . . . . .$ 5,699,263$ 4,259,897
Marketable securities (Note 2) . . . . . . . . . . . . .18,818,12017,080,246
Trade accounts receivable, net (Note 2) . . . . . . . .4,270,7712,226,865
Other accounts receivable . . . . . . . . . . . . . . .206,4201,632,307
Inventories (Note 2) . . . . . . . . . . . . . . . . . .7,728,1174,673,187
Prepaid expenses . . . . . . . . . . . . . . . . . . . .180,174247,191
------------------------------
Total current assets . . . . . . . . . . . . . . . . . .36,902,86530,119,693
Property and equipment, net (Notes 2 and 4) . . . . .4,201,4124,058,700
Patents and proprietary technology, net (Note 2) . . .1,111,478555,767
Investment in affiliated companies (Note 3) . . . . . .2,651,2942,328,140
Other assets and deposits (Note 5) . . . . . . . . . .343,769364,978
------------------------------
$45,210,818 $37,427,278
Liabilities and Shareholders' Equity
Current liabilities
Borrowings under bank line of credit (Note 5) . . . . . .$ 4,125,000$ 3,150,000
Subordinated notes (Note 5) . . . . . . . . . . . . . . .2,236,628-
Current portion of long-term debt . . . . . . . . . . . .98,368196,134
Convertible notes, due 1997 (Notes 5 and 13) . . . . . .3,620,003-
Accounts payable . . . . . . . . . . . . . . . . . . . .3,127,0512,308,364
Salaries, benefits and other accrued liabilities
(Notes 2 and 9) . . . . . . . . . . . . . . . . . . . .2,576,3023,251,126
-----------------------------
Total current liabilities . . . . . . . . . . . . . . . .15,783,3528,905,624
Long-term debt, less current portion (Note 5) . . . . . .527,973632,515
Convertible notes, due 1997 (Notes 5 and 13) . . . . . .-3,620,003
Subordinated notes (Note 5) . . . . . . . . . . . . . . .-1,015,461
Commitments and contingencies (Notes 6, 8, 9, 10 and 11)--
Minority Interest . . . . . . . . . . . . . . . . . . .215,407-
Shareholders' equity (Note 6)
Preferred stock, no par value - 1,000,000 shares authorized;
no shares issued or outstanding . . . . . . . . . . . . .- -
Common stock, no par value - 30,000,000 shares
authorized; 13,457,383 and 13,085,130 shares issued and
outstanding, respectively . . . . . . . . . . . . . . .100,973,69393,953,358
Accumulated deficit . . . . . . . . . . . . . . . . . . .(72,289,607)(70,699,683)
28,684,086 23,253,675
------------------------------
$45,210,818 $37,427,278
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Supplemental Financial Statements
Epitope, Inc. and Subsidiaries
Consolidated Statements of Operations
FOR THE YEAR ENDED SEPTEMBER 30 1996 1995 1994
<S> <C> <C> <C>
Revenues
Product sales . . . . . . . . . . . . . . . . . . . $ 67,335,497$ 57,001,141$ 65,465,141
Grants and contracts . . . . . . . . . . . . . . .1,314,756143,04258,202
---------------------------------------------
68,650,253 57,144,183 65,523,343
Costs and expenses
Product costs . . . . . . . . . . . . . . . . . . .59,943,76955,500,27862,515,490
Research and development costs . . . . . . .4,504,5416,822,2396,050,206
Selling, general and administrative expenses9,822,58714,199,31811,347,652
---------------------------------------------
74,270,897 76,521,835 79,913,348
Loss from operations (5,620,644)(19,377,652)(14,390,005)
Other income (expense), net . . . . . . . . . .5,355,720504,018(208,036)
---------------------------------------------
Net loss . . . . . . . . . . . . . . . . . . . . . .$ (264,924)$(18,873,634)$(14,598,041)
Net loss per share . . . . . . . . . . . . . . . .$ (.02)$ (1.52)$ (1.38)
Weighted average number of shares
outstanding . . . . . . . . . . . . . . . . . . . .13,181,42012,406,23410,570,129
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Supplemental Financial Statements
Epitope, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Common Stock Accumulated
Shares Dollars deficit Total
<S> <C> <C> <C> <C>
Balances at September 30, 1993. . .9,611,922$ 45,448,710$ (36,354,008)$ 9,094,702
Common stock issued upon
exercise of options . . . . . . .52,488636,293 - 636,293
Common stock issued as
compensation. . . . . . . . . . .19,678368,778 - 368,778
Compensation expense for
stock option grants . . . . . . .-1,167,272 - 1,167,272
Common stock issued upon
exercise of warrants. . . . . . .618,2919,718,259 - 9,718,259
Common stock issued upon
exchange of convertible notes . .28,672559,964 - 559,964
Common stock issued in
private placement . . . . . . . .1,115,50017,057,563-17,057,563
Equity issuance costs . . . . . . .-(3,375,528) -(3,375,528)
Dividends . . . . . . . . . . . . .- - (540,000) (540,000)
Net loss for the year . . . . . . .- -(14,598,041)(14,598,041)
-----------------------------------------------------
Balances at September 30, 1994. . .11,446,55171,581,311(51,492,049)20,089,262
Common stock issued upon
exercise of options . . . . . . .183,5252,145,673 - 2,145,673
Common stock issued as
compensation. . . . . . . . . . .16,013266,800 - 266,800
Compensation expense for
stock option grants . . . . . . .-1,374,710 - 1,374,710
Common stock issued upon
exercise of warrants. . . . . . .1,336,00018,892,750-18,892,750
Common stock issued upon
exchange of convertible notes . .23,041449,991 - 449,991
Equity issuance costs . . . . . . .-(757,877) - (757,877)
Dividends . . . . . . . . . . . . .- - (334,000) (334,000)
Net loss for the year . . . . . . .- -(18,873,634)(18,873,634)
----------------------------------------------------
Balances at September 30, 1995. . .13,005,13093,953,358(70,699,683)23,253,675
Common stock issued upon
exercise of options . . . . . . .386,5504,886,118 - 4,886,118
Common stock issued as compensation19,353263,586 - 263,586
Compensation expense for stock
option grants . . . . . . . . . .-1,044,183 - 1,044,183
Common stock issued upon
exercise of warrants. . . . . . .46,350826,600 - 826,600
Equity issuance costs . . . . . . .- (152) - (152)
Dividends . . . . . . . . . . . . .- - (1,325,000)(1,325,000)
Net loss for the year . . . . . . .- - (264,924) (264,924)
----------------------------------------------------
Balances at September 30, 1996. . .13,457,383$ 100,973,693$(72,289,607)$ 28,684,086
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Supplemental Financial Statements
Epitope, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
FOR THE YEAR ENDED SEPTEMBER 30 1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities
Net loss . . . . . . . . . . . . . . . . . .$ (264,924)$(18,873,634)$(14,598,041)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization . . . . . . . .1,267,1411,654,9361,365,496
(Gain) loss on disposition of property . . . .63,02829,87975,671
Decrease (increase) in accounts receivable and
other receivables . . . . . . . . . . . . .(873,783)(706,603)1,126,210
Increase in inventories . . . . . . . . . . .(3,054,930)(152,649)(5,532,826)
Decrease (increase) in prepaid expenses . . .67,017(62,909)74,756
Decrease (increase) in other assets and deposits(20,649)(33,521)335
Increase in accounts payable and accrued
liabilities . . . . . . . . . . . . . . . . .(28,992)2,260,3732,008,369
Common stock issued as compensation for services263,586266,800368,778
Compensation expense for stock option grants and
deferred salary increases . . . . . . . . . .1,044,1831,374,7101,259,273
-----------------------------------------
Net cash used in operating activities . . . . .(1,538,323)(14,242,618)(13,851,979)
Cash flows from investing activities
Investment in marketable securities . . . . . .(47,608,270)(16,194,994)(5,603,414)
Proceeds from sale of marketable securities . .45,870,3964,718,162-
Additions to property and equipment . . . . . .(1,105,500)(1,420,428)(2,702,657)
Proceeds from sale of property . . . . . . . .7,43214,343 1,000
Expenditures for patents and proprietary
technology . . . . . . . . . . . . . . . . . . (770,262)(305,135)(185,670)
Investment in affiliated companies . . . . . .(387,280)591,428(16,812)
Other investments . . . . . . . . . . . . . . . .(54,278)48,990(99,122)
Minority interest in affiliated companies . . .215,407- -
-----------------------------------------
Net cash used in investing activities . . . . .(3,832,355)(12,547,634)(8,606,675)
Cash flows from financing activities
Net borrowings under bank line of credit . . .975,000500,0001,075,000
Issuance of long-term debt . . . . . . . . . .15,57583,03478,760
Principal payments on long-term debt . . . . .(217,883)(166,955)(116,020)
Proceeds from issuance of common stock . . . .5,885,57321,060,91224,387,702
Cost of common stock issuance . . . . . . . .(152)(757,877)(310,849)
Net borrowings from stockholders . . . . . . .1,476,931(359,962)352,382
Dividends . . . . . . . . . . . . . . . . . . .(1,325,000)(334,000)(540,000)
----------------------------------------
Net cash provided by financing activities . . .6,810,04420,025,15224,926,975
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . .1,439,366(6,765,100)2,468,321
Cash and cash equivalents at beginning of year .4,259,89711,024,9978,556,676
----------------------------------------
Cash and cash equivalents at end of year . . .$ 5,699,263$ 4,259,897$ 11,024,997
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
Notes to Supplemental Financial Statements
Note 1 The Company
Epitope, Inc. (the Company or Epitope) is an Oregon corporation utilizing
biotechnology to develop and market medical diagnostic products through its
Epitope Medical Products group (Epitope Medical Products) and superior new
plants and related products through its Agritope group (Agritope). Agritope
is also in the business of growing, marketing, selling, and distributing fresh
and frozen produce, primarily tomatoes and strawberries. Upon approval of the
proposal to create a new class of common stock (the Agritope Stock Proposal),
the capital structure of Epitope will be modified to include two classes of
common stock, Epitope Medical Products Common Stock and Agritope Common Stock.
The Epitope Medical Products group (Epitope Medical Products) will include the
medical products business conducted by the Company. The Agritope group
(Agritope) will include the agribusiness and agricultural biotechnology
operations of the Company.
Note 2 Summary of Significant Accounting Policies
Basis of Presentation. The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation. Assets and liabilities of majority-owned subsidiaries are
included in these statements. Minority-owned investments and joint ventures
are accounted for using the equity method. Investments of less than 20% are
carried at cost.
The accompanying combined financial statements of the Epitope Medical Products
and Agritope groups have been prepared using the amounts included in the
consolidated financial statements of the Company. Assets and liabilities
directly attributable to each group are included in the respective balance
sheets of the applicable group. Cash and marketable securities have been
allocated 80% to Epitope Medical Products and 20% to Agritope. Cash advanced
and allocated by the Company to business units of the Agritope group has been
reflected as paid-in-capital in the accompanying combined financial
statements.
On November 6, 1996 the Company agreed to merge with Andrew and Williamson
Sales, Co. (A&W) in a transaction to be accounted for as a pooling of
interests (Note 13). The accompanying consolidated financial statements and
the combined financial statements of the Agritope Group have been restated to
reflect the merger as if it had occurred at the beginning of the earliest
period presented.
Certain services such as accounting, finance, general management, human
resources, investor relations, information systems and payroll are provided by
the Company on a centralized basis for the benefit of both groups (Shared
Services). Such expenses have been allocated between Epitope Medical Products
and Agritope in the accompanying combined financial statements using activity
indicators which, in the opinion of management, represent a reasonable measure
of the respective group's utilization of such shared services. The activity
measurement indicators will be reviewed periodically and adjusted to reflect
changes in utilization. The accompanying combined financial statements also
include an adjustment to allocate interest income in the same proportion as
the allocation of Shared Services between the two groups. Future interest
income will be based on amounts earned by each group. Shared Services are
included under the caption "Selling, general and administrative expenses" as
follows:
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30 1996 1995 1994
<S> <C> <C> <C>
Epitope Medical Products . . .$3,028,181$3,575,069$1,899,969
Agritope . . . . . . . . . . .1,069,249 1,892,370 1,735,688
------------------------------------------
Consolidated . . . . . . . . .$4,097,430$5,467,439$3,635,657
</TABLE>
The allocation of interest income is included under the caption "Other
income, net" as follows:
YEAR ENDED SEPTEMBER 30 1996 1995 1994
Epitope Medical Products . . .$1,025,030$ 756,743$ 237,467
Agritope . . . . . . . . . . .361,938408,097 216,934
-------------------------------------------
Consolidated . . . . . . . . .$1,386,968$1,164,840$ 454,401
If the Agritope Stock Proposal is approved, the Company will provide holders
of Epitope Medical Products and Agritope common stock separate financial
statements, management's discussion and analysis of financial condition and
results of operations, descriptions of businesses and other relevant
information for each group. Notwithstanding the attribution of assets and
liabilities (including contingent liabilities) to each group for the purposes
of preparing their respective historical and future financial statements, this
attribution and the change in capitalization contemplated in the Agritope
Stock Proposal will not affect legal title to such assets or responsibility
for such liabilities of the Company or any of its subsidiaries. Holders of
each class of common stock will be common shareholders of the Company and
would be subject to risks associated with an investment in the Company and all
its businesses, assets, and liabilities. Liabilities or contingencies of
either group that affect the Company's resources or financial condition could
affect the financial condition and results of operations of either group.
Under the Agritope Stock Proposal, dividends to be paid to the holders of
either class of common stock will be limited to the lesser of funds of the
Company legally available for the payment of dividends or the Available
Medical Products Dividend Amount or Available Agritope Dividend Amount as
defined in the Company's Articles of Incorporation. The Company has never
paid any cash dividends on shares of Epitope common stock. The Company
currently intends to retain any of its earnings to finance future growth and,
therefore, does not anticipate paying any cash dividends on either class of
common stock in the foreseeable future. The dividends reflected in these
financial statements were paid by A&W to its shareholders prior to the merger
of A&W with the Company.
Except as stated in the amended Articles of Incorporation, the accounting
policies applicable to preparation of financial statements of either group may
be modified or rescinded at the sole discretion of the Board of Directors of
the Company without the approval of shareholders, although there is no
intention to do so. In addition, generally accepted accounting principles
require that any change in accounting policy be preferable (in accordance with
such principles) to the previous policy.
Cash and Cash Equivalents; Marketable Securities. For purposes of the
consolidated balance sheets and statements of cash flows, the Company
considers all highly liquid investments with maturities at time of purchase of
three months or less to be cash equivalents. At September 30, 1996,
marketable securities consisted of commercial paper and U.S. Treasury
securities with an original maturity period greater than three months, but
generally less than 12 months. The Company's policy is to invest its excess
cash in securities that maximize (a) safety of principal, (b) liquidity for
operating needs, and (c) after-tax yields.
Effective October 1, 1994, the Company adopted Financial Accounting Standards
Board Statement No. 115 (SFAS 115), Accounting for Certain Investments in Debt
and Equity Securities. Pursuant to SFAS 115, the Company has categorized all
of its investments as available-for-sale securities and, accordingly,
unrealized gains and losses on such investments, if material, will be carried
as a separate component of shareholders' equity. Such unrealized gains and
losses were immaterial as of September 30, 1996 and 1995.
Inventories. Medical products inventories are recorded at the lower of
standard cost (which approximates actual cost on a first-in, first-out basis)
or market. Growing crops (included in work-in-process) are valued at the
lower of cost or estimated market. Frozen strawberry inventories (included in
finished goods) are valued at the lower of average cost or market. Inventory
components are summarized as follows:
September 30 1996 1995
Epitope Medical Products
Raw materials. . . . . . . . $ 522,824 $ 657,568
Work-in-process. . . . . . . 389,642 379,470
Finished goods . . . . . . . 192,882 295,032
Supplies . . . . . . . . . . 52,582 101,676
---------------------------
$1,157,930 $ 1,433,746
Agritope
Work-in-process. . . . . . . $4,466,880 $2,201,073
Finished goods . . . . . . . 1,740,689 741,424
Supplies . . . . . . . . . . 362,618 296,944
---------------------------
$6,570,187 $3,239,441
Consolidated
Raw materials. . . . . . . . $ 522,824 $ 657,568
Work-in-process. . . . . . . 4,856,522 2,580,543
Finished goods . . . . . . . 1,933,571 1,036,456
Supplies . . . . . . . . . . 415,200 398,620
---------------------------
$7,728,117 $ 4,673,187
The Company grows crops primarily in Mexico in cooperation with various
Mexican farmers. Under the agreements, the Company generally shares in the
costs of growing, picking, packing, and distribution. The Company recovers
its costs plus a gross profit percentage of approximately ten percent from the
sale of the crops in the United States. Cost of sales is charged for costs in
excess of estimated market. During 1996, 1995, and 1994, the Company charged
to cost of sales growing costs in excess of estimated market of approximately
$1,811,000, $2,544,037, and $2,106,181, respectively.
Depreciation and Capitalization Policies. Land is stated at cost. Property
and equipment are stated at cost less accumulated depreciation. Expenditures
for repairs and maintenance are charged to operating expense as incurred.
Expenditures for renewals and betterments are capitalized.
Depreciation and amortization of property and equipment are calculated
primarily under the straight-line method over the estimated lives of the
related assets (three to seven years). Leasehold improvements are amortized
over the shorter of estimated useful lives or the terms of related leases.
When assets are sold or otherwise disposed, cost and related accumulated
depreciation or amortization are removed from the accounts and any resulting
gain or loss is included in operations.
Accounting for Long-Lived Assets. The Company periodically reviews its long-
lived assets for impairment or as events or circumstances indicate that the
carrying amount of long-lived assets may not be recoverable. If the estimated
net cash flows are less than the carrying amount of the long-lived assets, the
Company recognizes an impairment loss in an amount necessary to write down
long-lived assets to fair value as determined from expected discounted future
cash flows. This accounting policy is consistent with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." There has been no
significant impact to the Company's financial position or results of
operations as the carrying amount of all long-lived assets is recoverable.
Patents and Proprietary Technology. Direct costs associated with patent
submissions and acquired technology are capitalized and amortized over their
minimum estimated economic useful lives, generally five years.
In August 1996, the Company amended an agreement pursuant to which it acquired
Agritope's patented ethylene control technology in 1987. A co-inventor of the
technology relinquished all rights to future compensation under the agreement
in exchange for a one-time cash payment, a research grant and a limited non-
exclusive license to use the technology for one crop. The total consideration
of $365,000 is included in Agritope's combined balance sheet under the caption
"Patents and Proprietary Technology" and is being amortized over 15 years, the
remaining life of the related patent.
Amortization and accumulated amortization are summarized as follows:
1996 1995 1994
Amortization for the year ended
September 30,
Epitope Medical Products . . . .$ 172,095$ 130,313$ 101,339
Agritope . . . . . . . . . . . .42,45623,96413,487
------------------------------------
Consolidated . . . . . . . . . .$ 214,551$ 154,277$ 114,826
Accumulated Amortization at
September 30,
Epitope Medical Products . . . .$ 621,110$ 449,015$ 318,702
Agritope . . . . . . . . . . . .79,90737,45113,487
------------------------------------
Consolidated. . . . . . . . . . .$ 701,017$ 486,466$ 332,189
Investments in Affiliated Companies. Investments in affiliated companies are
stated at cost. For reductions in the value of its investments in affiliated
companies that are more than temporary, the Company will write down the value
of its investments in affiliated companies to its recoverable value.
Revenue Recognition. Product revenues are generally derived from the sale of
products and are recognized as revenue when the related products are shipped.
Grant and contract revenues include funds received under research and
development agreements with various entities. Such revenues are recognized in
accordance with contract terms.
Accounts receivable are stated net of an allowance for doubtful accounts as
follows:
September 30 1996 1995
Epitope Medical Products . . . . . . .$ 6,872$ 6,872
Agritope . . . . . . . . . . . . . . .64,571119,172
--------------------
Consolidated . . . . . . . . . . . . .$ 71,443$126,044
Research and Development. Research and development expenditures are comprised
of those costs associated with the Company's own ongoing research and
development activities including the costs to prepare for, obtain and compile
clinical studies and other information to support product license
applications. Expenditures for research and development also include costs
incurred under contracts to develop certain products, including those
contracts resulting in grant and contract revenues. All research and
development costs are expensed as incurred.
Income Taxes. The Company accounts for certain revenue and expense items
differently for income tax purposes than for financial reporting purposes.
These differences arise principally from methods used in accounting for stock
options and depreciation rates. The Company accounts for income taxes under
SFAS No. 109 "Accounting for Income Taxes,"(SFAS 109) which requires the use
of the asset and liability method approach for accounting for income taxes.
Under SFAS 109, deferred tax assets and liabilities are recognized based on
temporary differences between the financial statement and the tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the temporary differences are expected to reverse.
As a separate company, A&W had elected S-Corporation tax treatment. As an S-
Corporation, income or losses passed through to A&W's shareholders, and no
provision for federal income taxes was reflected in the financial statements.
State income taxes applicable to A&W were provided at a reduced rate under S-
Corporation status. Following the merger (see Note 13), A&W will be taxed as
a C-Corporation and will join with the Company in filing a consolidated
federal income tax return.
To date, both Epitope Medical Products and Agritope have experienced operating
losses. Actual tax payment is a liability of Epitope as a whole. The
Agritope Stock Proposal provides that either group may be allocated the tax
benefit of such losses and future losses to reduce current or deferred tax
expense and that such losses will not be carried forward to reduce the losses
of the group which incurred such losses. Accordingly, either group may report
lower earnings than if such losses had been retained for the benefit of then
group which incurred such losses.
Net Income (Loss) Per Share. Net income (loss) per share has been computed
using the weighted average number of shares of common stock and common stock
equivalents outstanding during the period. Common stock equivalents consist
of the number of shares issuable upon exercise of outstanding warrants,
options and convertible notes less the number of shares assumed to have been
purchased for the treasury with the proceeds from the exercise of such. Net
income (loss) per share for Epitope Medical Products and Agritope is presented
on a proforma basis assuming that the distribution of Agritope common stock
and redesignation of Epitope, Inc. common stock as Epitope Medical Products
common stock pursuant to the Agritope Stock Proposal had occurred on
October 1, 1993.
Common stock equivalents are excluded from the computation if their effect is
anti-dilutive. Primary and fully diluted earnings per share are the same.
Supplemental Cash Flow Information. Non-cash financing and investing
activities not included in the consolidated statements of cash flows are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30 1996 1995 1994
<S> <C> <C> <C>
Epitope Medical Products
Discount on private placement of common stock- - $3,024,413
Agritope
Conversion of notes to equity (Note 5). . .-$ 427,496 $600,231
Investment in nonconsolidated subsidiary. .- 2,584,979 -
</TABLE>
In addition, Agritope paid $568,835; $455,783; and $407,929, for interest
during the years ended September 30 1996, 1995, and 1994, respectively.
Supplemental Profit and Loss Information. In September 1995, management
announced a company-wide reduction in work force whereby 48 employees were
terminated. The Company charged $607,000 to results of operations for
severance payments and related expenses for this program. As of September 30,
1996 and 1995, $55,000 and $475,000, respectively, of these charges remain
accrued and are included in the accompanying balance sheets of the Company and
Epitope Medical Products under the caption "Salaries, benefits and other
accrued liabilities."
Management Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates relating to assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements as well as the reported amounts of revenues
and expenses during the reporting period. Actual results could vary from these
estimates.
<PAGE>
Note 3 Investment in Affiliated Companies
In June 1995, Agritope agreed to sell its wholly owned subsidiary, Vinifera,
Inc. to VF Holdings, Inc. ("VF"), an affiliate of a Swiss investment group,
pursuant to a stock purchase agreement. VF subsequently failed to make all
the payments required under the VF Agreement. As part of a settlement of
claims based on VF's default, VF retained a minority interest in Vinifera and
relinquished the majority interest to Agritope in August 1996.
In May 1995, Agrimax Floral Products, Inc. (Agrimax), a wholly owned
subsidiary, transferred control of its Charlotte facility to Universal
American Flowers, Inc. (UAF), a privately held importer of high quality fresh
flowers engaged in distribution to customers in the eastern U.S. from
facilities in Tampa, Florida and Hammond, Louisiana. As of October 27, 1995,
Agrimax merged the Charlotte fresh flower operation with those of UAF in
return for an equity interest of approximately 18% in the merged entity, UAF,
Limited Partnership. In addition to tangible operating assets, Agrimax
transferred to UAF, Limited Partnership, the rights to use its proprietary
floral preservative as well as the Fresche Blossoms(R), Everguard(R) and
Fresche Blossoms Express(TM) trademarks. In May 1996, the equity interest of
Agrimax was reduced to 9% as a result of a recapitalization of UAF, Limited
Partnership.
The St. Paul, Minnesota, facility of Agrimax ceased operations in June 1995.
In June 1996, Agrimax contributed inventory and operating assets to Petals
USA, Inc. ("Petals"), a newly formed affiliate of a Canadian fresh flower
wholesaler, in return for a 19.5% equity interest in Petals.
The investments by Agrimax are included in the accompanying consolidated
balance sheets of the Company and combined balance sheets of Agritope under
the caption "Investment in affiliated companies." See Note 13.
For the years ended September 30, 1995, 1994 respectively, the accompanying
financial statements of the Company and Agritope include revenues of $2.0
million and $2.2 million, and operating losses of $3.8 million, and $6.4
million attributable to the Agrimax and Vinifera business units. The
accompanying statements of operations of the Company and Agritope for the year
ended September 30, 1995, includes the results of operations of Agrimax and
Vinifera through May and also includes a charge of $500,000 primarily
attributable to the disposition of Agrimax which is included in the
accompanying consolidated balance sheets of the Company and combined balance
sheets of Agritope as of September 30, 1995 under the caption "Salaries,
benefits and other accrued liabilities."
<PAGE>
Note 4 Property and Equipment
Property and equipment are summarized as follows:
SEPTEMBER 30 1996 1995
Epitope Medical Products
Research and development laboratory equipment .$ 1,056,883$ 898,716
Manufacturing equipment . . . . . . . . . . . .1,291,5461,296,416
Office furniture and equipment. . . . . . . . .1,899,9482,041,897
Leasehold improvements. . . . . . . . . . . . .1,084,6601,084,660
Construction in progress. . . . . . . . . . . .134,55770,961
------------------------
5,467,5945,392,650
Less accumulated depreciation and amortization(3,924,837)(3,402,881)
------------------------
$ 1,542,7571,989,769
Agritope
Land. . . . . . . . . . . . . . . . . . . . . .$ 420,817$ 420,817
Buildings and improvements. . . . . . . . . . .717,508717,508
Research and development laboratory equipment .220,919196,255
Manufacturing and transportation equipment . .2,088,6691,789,933
Office furniture and equipment. . . . . . . . .188,251196,119
Leasehold improvements. . . . . . . . . . . . .166,398173,262
Construction in progress. . . . . . . . . . . .499,98034,650
--------------------------
4,302,5423,528,544
Less accumulated depreciation and amortization(1,643,887)(1,459,613)
--------------------------
$ 2,658,655$ 2,068,931
Consolidated
Land. . . . . . . . . . . . . . . . . . . . . .$ 420,817$ 420,817
Buildings and improvements. . . . . . . . . . .717,508717,508
Research and development laboratory equipment .1,277,8021,094,971
Manufacturing and transportation equipment. . .3,380,2153,086,349
Office furniture and equipment. . . . . . . . .2,088,1992,238,016
Leasehold improvements. . . . . . . . . . . . .1,251,0581,257,922
Construction in progress. . . . . . . . . . . .634,537105,611
--------------------------
9,770,1368,921,194
Less accumulated depreciation and amortization(5,568,724)(4,862,494)
--------------------------
$ 4,201,412$ 4,058,700
Note 5 Debt
Bank Line of Credit. At September 30, 1996, the Company had a bank line of
credit which provided for borrowings of up to $6,500,000 and was to expire in
August 1997. Borrowings under the line bore interest at the bank's prime
interest rate plus .5%; were collateralized by substantially all of the assets
of A&W; and were guaranteed by A&W's shareholders. The Company had the option
to fix the interest rate for a specified period of time at the LIBOR rate for
such period. See Note 13, Subsequent Events.
Convertible Notes. On June 30, 1992, Agritope completed a private placement
with several European institutional investors pursuant to which $5,495,000 of
convertible notes were issued. The notes are unsecured, mature on June 30,
1997 and bear interest at the rate of 4% per annum which is payable on each
June 30 and December 31 until all outstanding principal and interest on the
notes have been paid in full. The notes are convertible into common stock of
the Company at a conversion price of $19.53 per share. In the event of an
initial public offering of Agritope common stock, the notes would be
automatically converted to shares of Agritope common stock at 90% of the
public offering price.
During the years ended September 30, 1995 and 1994, respectively, investors
exchanged $449,991 and $559,964 principal amount of convertible notes for the
Company's common stock at a price of $19.53 per share. In conjunction with
the exchanges, unamortized debt issuance costs of $22,487 and $40,267 related
to such notes were recognized as equity issuance costs during 1996 and 1995,
respectively. Debt issuance costs are included in other assets and are being
amortized over the five-year life of the notes. Amortization expense of debt
issuance costs for the years ended September 30, 1996, 1995 and 1994,
respectively, totaled $108,257, $96,136 and $91,715, leaving an unamortized
balance of $88,821 and $197,077 at September 30, 1996 and 1995, respectively.
See Note 13, Subsequent Events.
LONG-TERM DEBT. Long-term debt is summarized as follows:
SEPTEMBER 30 1996 1995
Agritope
Note payable, interest at 7%,
due on demand, unsecured . . . . . . . . . .$ -$ 50,000
Installment notes, interest at 5.9% to 12.75%
due various, secured by equipment. . . . . . .59,824138,976
Installment note, interest at 9.25%,
due June 1997, secured by equipment. . . . . .263,717319,973
Note payable, interest at prime,
due October 1997, unsecured. . . . . . . . . .100,000100,000
Bank installment note, interest at prime plus
1.25%, due March 1998, secured by property . .202,800219,700
-----------------------
626,341 828,649
Less current portion. . . . . . . . . . . . .(98,368)(196,134)
-----------------------
$ 527,973 $ 632,515
The installment note payable of $263,717 at September 30, 1996 has a balloon
payment of $217,989 due in June 1997. The amount of the balloon payment has
been classified as long-term based on the Company's intent and ability to
refinance this borrowing on a long-term basis. Certain of the notes above
have been guaranteed by the shareholders of A&W. Certain of the note
agreements provide various financial and other covenants including minimum
working capital and net worth levels and restricted capital expenditures.
As of September 30, 1996, maturities for long-term debt are as follows:
YEAR ENDING SEPTEMBER 30
1997. . . . . . . . . . . . . . . . . .$ 98,368
1998. . . . . . . . . . . . . . . . . .525,532
1999. . . . . . . . . . . . . . . . . .2,441
--------
$626,341
Subordinated Notes. The Company has notes payable to shareholders which are
subordinated to the claims of its bank. These notes are due on demand and
bear interest at 10%. The Company intends to pay these notes in full
following the effective date of the merger (see Note 13).
<PAGE>
Note 6 Shareholders' Equity
Authorized Capital Stock. The Company's amended articles of incorporation
authorize 1,000,000 shares of preferred stock and 30,000,000 shares of common
stock. The Company's Board of Directors has authority to determine
preferences, limitations and relative rights of the preferred stock.
Common Stock Reserved for Future Issuance. As of September 30, 1996, the
following shares of the Company's common stock were reserved for future
issuance, as more fully described below:
Purpose Shares
Outstanding warrants. . . . . . . . . . . . .2,000,640
Outstanding stock options . . . . . . . . . .3,365,726
Employee Stock Purchase Plan subscriptions.42,820
Conversion of notes (Notes 5 and 13). . . . .185,356
---------
5,594,542
If the Agritope Stock Proposal is approved, the Company will issue to the
holders of the above rights to purchase shares of Epitope common stock or to
convert notes into such shares, as applicable, the equivalent rights with
respect to Agritope common stock on the basis of one-half share of Agritope
common stock for each right to purchase one share of Epitope common stock.
Common Stock Warrants. As of September 30, 1996, the following warrants to
purchase shares of common stock were outstanding:
<TABLE>
<CAPTION>
DATE OF ISSUANCE Shares Price Expiration Date
<S> <C> <C> <C>
September 26, 1991. . . . .159,150 $16.00 September 30, 1997
December 23, 1992 . . . . .988,390 18.50 September 30, 1997
July 20, 1993 . . . . . . .375,000 20.00 September 30, 1997
August 1, 1993. . . . . . .200,000 18.50 September 30, 1997
October 17, 1994. . . . . .50,000 18.50 September 30, 1997
November 22, 1994 . . . . .228,100 18.50 September 30, 1997
--------
2,000,640
</TABLE>
Stock Award Plans. The Company's 1991 Stock Award Plan (the 1991 Plan) was
approved by the shareholders during 1991, replacing the Company's Incentive
Stock Option Plan (ISOP). The 1991 Plan provides for stock-based awards to
employees, outside directors and members of scientific advisory committees or
other consultants. Awards which may be granted under the 1991 Plan include
qualified incentive stock options, nonqualified stock options, stock
appreciation rights, restricted awards, performance awards and other stock-
based awards.
Under the terms of the 1991 Plan, qualified incentive stock options on shares
of common stock may be granted to eligible employees, including officers, of
the Company at an exercise price not less than the fair market value of the
stock on the date of grant. The maximum term during which any option may be
exercised is ten years from the date of grant. To date, options have been
granted with four-year vesting schedules.
Options issued to employees under the Incentive Stock Option Plan (ISOP) were
issued at prices not less than the fair market value of a share of common
stock on the date of grant. The options are exercisable after one year from
the date of grant at the rate of 25% per year cumulatively and expire ten
years from the date of grant.
The Agritope, Inc. 1992 Stock Award Plan (the 1992 Plan) was adopted by
Agritope and approved by the Company in 1992. The 1992 Plan, which has
provisions similar to those of the Company's 1991 Plan, authorizes issuance of
2,000,000 shares of Agritope common stock. Until Agritope is no longer a
wholly owned subsidiary of the Company, shares issued pursuant to exercise of
options under the 1992 Plan will be converted into shares of the Company's
common stock based on the ratio of the fair market value of the Company's
common stock to the fair market value of Agritope common stock on the date of
the grant.
The 1991 Plan and 1992 Plan also provide that nonqualified options may be
granted at a price not less than 75% of the fair market value of a share of
common stock on the date of grant. The option term and vesting schedule of
such awards may either be unlimited or have a specified period in which to
vest and be exercised. For the discounted nonqualified options issued, the
Company amortizes, on a straight-line basis over the vesting period of the
options, the difference between the exercise price and the fair market value
of a share of stock on the date of grant. As of September 30, 1996, 197,181
shares of Epitope common stock remain available for grant under the Company's
stock award plans.
In October 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock-Based Compensation." SFAS 123 allows companies which
have stock-based compensation arrangements with employees to adopt a fair-
value basis of accounting for stock options and other equity instruments or to
continue to apply the existing accounting rules under APB Opinion 25,
"Accounting for Stock Issued to Employees," but with additional financial
statement disclosure. The Company plans to elect the disclosure-only
alternative commencing in fiscal 1997 and therefore does not anticipate that
SFAS 123 will have a material impact on its financial position or results of
operations.
Options granted and outstanding under the Company's stock option plans are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of period .3,636,103$1.09-$24.943,483,432$ 1.09-$24.943,052,653$1.09-$24.94
Granted. . . . . . . .901,3799.81-18.13802,05014.94-18.88589,85014.38-22.94
Exercised. . . . . . .(386,550)1.09-17.13(183,525)1.84-22.50(52,488)12.43-22.50
Canceled . . . . . . .(785,206)14.38-24.00(465,854)7.38-22.94(106,583)8.50-22.94
---------- ---------- ----------
Outstanding at
end of period . . . . .3,365,726$3.50-$24.943,636,103$1.09-$24.943,483,432$1.09-$24.94
Exercisable. . . . . . .2,302,212$3.50-$24.942,002,925$1.09-$24.941,557,505$1.09-$24.94
</TABLE>
Pursuant to the 1991 Plan, 973, 3,680 and 11,741 shares of common stock were
also awarded to consultants and members of the Company's scientific advisory
committees during 1996, 1995, and 1994, respectively.
Employee Stock Purchase Plans. In 1991, the shareholders approved the
Company's adoption of the 1991 Employee Stock Purchase Plan (1991 ESPP)
covering a maximum of 100,000 shares of common stock for subscription over two
offering periods. The purchase price for stock purchased under the 1991 ESPP
for each of the two 24-month subscription periods was the lesser of 85% of the
fair market value of a share of common stock at the commencement of the
subscription period or the fair market value at the close of each subscription
period. An employee may also elect to withdraw at any time during the
subscription period and receive the amounts paid plus interest at the rate of
6%. During April 1994, 676 shares, at a purchase price of $14.00 per share,
were issued to employees for the second 1991 ESPP purchase period which closed
March 31, 1994.
The 1993 Employee Stock Purchase Plan (1993 ESPP), as amended and restated
effective February 1, 1993, covers a maximum of 250,000 shares of common stock
for subscription over established offering periods. The Company's Board of
Directors was granted authority to determine the number of offering periods,
the number of shares offered, and the length of each period, provided that no
more than three offering periods (other than Special Offering Subscriptions as
described below) may be set during each fiscal year of the Company. Other
provisions of the 1993 ESPP are similar to the 1991 ESPP. During April, 1996,
10,106 shares were issued at a price of $11.90 per share. As of September 30,
1996, 42,820 shares of common stock were subscribed for during two offerings
under the 1993 ESPP. Shares subscribed for under these 1993 ESPP offerings
may be purchased over 24 months and have initial subscription prices of $12.33
and $8.77 per share for the various offerings.
The 1993 ESPP was amended to allow the Company, at its discretion, to provide
Special Offering Subscriptions whereby an employee's annual increase in
compensation could be deferred for a one-year period. At the end of the one-
year period, the employee can elect to receive the deferred compensation
amount in the form of cash or shares of the Company's common stock. The
purchase price for stock issued under a Special Offering Subscription is the
lesser of 85% of the fair market value of a share of common stock on the first
day of the calendar month the employee's increase was effective or the fair
market value at the close of the one-year subscription period. During 1995
and 1994, respectively, 5,569 and 2,314 Special Offering Subscription shares
were issued to employees at an average price of $15.26 and $15.24 per share.
Note 7 Income Taxes
As of September 30, 1996, the Company had net operating loss carryforwards of
approximately $66.7 million and $50.0 million, respectively, to offset federal
and state taxable income. Approximately $6.9 million of the Company's net
operating loss carryforwards were generated as a result of deductions related
to the exercise of stock options. When utilized, such carryforwards, as tax
effected, will be reflected in the Company's financial statements as an
increase in shareholders' equity rather than a reduction of the provision for
income taxes.
As of September 30, 1996 the Company had total gross deferred tax assets of
approximately $28.4 million, consisting primarily of $24.5 million of net
operating loss carryforwards, $1.1 million of research and development tax
credit carryforwards and $2.0 million of accrued deferred compensation costs.
No benefit for these assets has been reflected in the accompanying
consolidated financial statements as they do not satisfy the recognition
criteria set forth in Statement of Financial Accounting Standards No. 109
(SFAS 109). Accordingly, a valuation allowance of $28.4 million, representing
a $1.1 million decrease since the prior fiscal year end, has been recorded.
The expected tax benefit of approximately $476,000 for the year ended
September 30, 1996 is increased by approximately $61,000 for the effect of
state and local taxes (net of federal impact),$1.1 million for the effect of
the decrease in valuation allowance, and $840,000 for the effect of stock
option deductions included in the valuation allowance and is reduced by
approximately $2.5 million for the effect of Vinifera Inc.'s net operating
loss carryforwards and certain state net operating loss carryforwards being
removed from the consolidated tax group.
Note 8 Research and Development Arrangements
In February 1995, the Company entered into a Development, License and Supply
Agreement with SmithKline Beecham, plc (SB) pursuant to which the Company will
conduct research and development projects funded by SB. Agritope also
performed research work in 1995 with respect to raspberries which was
partially funded by Sweetbriar Development, Inc. under a License Agreement
dated October 18, 1994 and with respect to grapevine disease diagnostics
funded by a Phase I grant from the U.S. Department of Agriculture under the
Small Business Innovation Research Program.
During 1994, the Company participated in a National Cancer Institute program
whereby the Company received funding for research toward the treatment of
cancer. Agritope has also received grant support from the U.S. Department of
Agriculture, Oregon Strawberry Commission, and Oregon Raspberry & Blackberry
Commission for antifungal biocontrol research and from several strategic
partners.
Revenues from research and development arrangements are included in the
accompanying consolidated statements of operations under the caption "Grants
and Contracts."
Note 9 Distribution and Supply Contracts
The Company has entered into several contractual arrangements, including those
discussed in the following paragraphs, for distribution of certain of its
products to customers.
The Company continues to maintain supply and distribution agreements with
Organon Teknika Corporation (Organon Teknika), whereby Organon Teknika
supplies the Company's antigen requirements and exclusively distributes the
Company's EPIblot HIV confirmatory tests (EPIblot) on a worldwide basis. As
of April 1, 1994, the Company renewed the agreements which have an initial
termination date of March 31, 1997 (with successive one-year renewal periods
thereafter) and include pricing incentives based on volumes purchased by
Organon Teknika and penalties for failure to purchase specified minimum
quarterly volumes. For the years ended September 30, 1996, 1995 and 1994,
respectively, revenues generated from sales of EPIblot to Organon Teknika were
$1,539,164, $1,808,431, and $1,688,200, including export sales of $62,539,
$72,369 and $320,700. The Company has notified Organon Teknika that it
intends to renew the agreements on mutually acceptable, but revised, terms
prior to the scheduled termination date.
LabOne, Inc. (previously Home Office Reference Laboratory, Inc.) purchases
oral specimen devices from the Company for use in insurance testing in return
for non-exclusive distribution rights in the United States and Canada under an
agreement which expires on March 13, 2000, with an automatic five-year
renewal, unless either party notifies the other of intent not to renew at
least 180 days prior to the initial expiration date. For the years ended
September 30, 1996, 1995 and 1994, respectively, revenue generated from
product sales to LabOne, Inc. was $1,327,544, $525,628 and $477,186 including
export sales of $394,747, $58,500 and $110,933.
SB has an exclusive agreement to market the Company's oral specimen collection
device worldwide, except in several foreign countries and to the insurance
industry in the U.S., Canada and Japan.
In 1995, SB made an initial license fee payment of $1 million to the Company.
SB also placed $5 million in escrow for future payment to the Company, of
which $1 million was designated for reimbursement of future research project
work and $4 million was designated as an additional license fee to be paid
upon FDA approval of a pending request to amend the labeling of the Company's
oral specimen collection device to indicate a two-year shelf life. The
initial $1 million license fee was included as deferred revenue under the
caption "Salaries, benefits and other accrued liabilities" in the accompanying
consolidated balance sheets as of September 30, 1995. The escrowed funds are
not reflected in the Company's financial statements.
In April 1996, the FDA granted the Company's request for extended dating and
SB disbursed $4 million plus interest from escrow. Accordingly the Company
recognized income of $5 million in 1996 operating results.
Note 10 Commitments and Contingencies
The Company leases office, manufacturing, warehouse and laboratory facilities,
and equipment under operating lease agreements which require minimum annual
payments as follows:
<TABLE>
<CAPTION>
Epitope
Medical
YEAR ENDING SEPTEMBER 30 Products AgritopeConsolidated
<S> <C> <C> <C>
1997. . . . . . . . . . . . . . . . . .$ 345,577$399,731$ 745,308
1998. . . . . . . . . . . . . . . . . .345,576317,394662,970
1999. . . . . . . . . . . . . . . . . .346,356282,000628,356
2000. . . . . . . . . . . . . . . . . .109,992282,000391,992
2001. . . . . . . . . . . . . . . . . .-182,000 182,000
--------- -------- ----------
$1,147,501 $1,463,125 $2,610,626
Under the agreements for the lease of its office and laboratory facilities,
the Company is obligated to the lessor for its share of certain expenses
related to the use, operation, maintenance and insurance of the property.
These expenses, payable monthly in addition to the base rent, are not included
in the amounts shown above. The Company also incurs rent expense for the
short-term storage of produce. Rent expense aggregated $1,466,368, $1,336,021
and $1,441,940 for the years ended September 30, 1996, 1995 and 1994,
respectively. Rent expense and the future minimum lease commitments above
include rent of $132,000 for facilities leased from certain shareholders. The
Company is also contingently liable for a lease of which has been assigned to
UAF, Limited Partnership and the lease of property which has been subleased to
Petals USA, Inc. in the following amounts:
YEAR ENDING SEPTEMBER 30
1997. . . . . . . . . . . . . . . . . . $ 328,953
1998. . . . . . . . . . . . . . . . . . 341,304
1999. . . . . . . . . . . . . . . . . . 347,184
--------------
$ 1,017,441
Certain produce growers in the United States have alleged that Mexican growers
of tomatoes are illegally dumping their crops into United States markets.
United States regulatory authorities are investigating the allegations.
Although it is not possible to determine the final outcome of this matter, the
Company believes that its resolution will not have a material adverse effect
on its operations or financial position.
Note 11 Profit Sharing and Savings Plan
The Company established a profit sharing and deferred salary savings plan in
1986 and restated the plan in 1991. All employees are eligible to participate
in the plan. In addition, the plan permits certain voluntary employee
contributions to be excluded from the employees' current taxable income under
the provisions of Internal Revenue Code Section 401(k) and the regulations
thereunder. Effective October 1, 1991, the Company replaced a discretionary
profit sharing provision with a matching contribution (either in cash, shares
of Epitope common stock, or partly in both forms) equal to 50% of an
employee's basic contribution, not to exceed 2.5% of an employee's
compensation. The Board of Directors has the authority to increase or
decrease the 50% match at any time. During 1996, 1995 and 1994, respectively,
the Company contributed $73,315 (4,653 shares totaling $73,279 and the
remainder in cash), $97,631 (5,562 shares totaling $97,607 and the remainder
in cash), and $79,981 (4,632 shares totaling $79,807 and the remainder in cash
to the plan. As of September 30, 1996, 17,035 shares are held by the plan.
Note 12 Geographic Area Information
The Company's products are included in the medical products and agricultural
products industry segments. (See Note 1 for a description of the Company's
business.) The Company's products are sold principally in the United States,
Canada and Europe. Operating loss represents revenues less operating
expenses. In computing operating loss, allocated corporate administration
expenses have been included; however, other income and expense items such as
interest expense, miscellaneous income, and other charges have not been added
or deducted. Other assets primarily represent cash and cash equivalents,
marketable securities, and prepaid insurance.
</TABLE>
<TABLE>
<CAPTION>
Epitope Medical Products
In thousands
Geographic
Areas Revenues Operating Loss Identifiable Assets
1996 1995 1994 1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United
States . . . .$4,903$2,630$2,062$ (5,287)$(11,608)$(6,284)$4,604$3,768$3,464
Canada . . . .404 78 111 -- -- -- --
Latin
America . . .100 - - -- -- -- --
Europe . . . .65 72 329 -- -- -- --
Other . . . . .122 76 103 -- -- -- --
- --------------------------------------------------------------------------------------------
$5,594 $2,856 $2,605 $ (5,287)$(11,608)$(6,284)$4,604$3,768 $3,464
Agritope
In thousands
Geographic
Areas Revenues Operating Loss Identifiable Assets
1996 1995 1994 1996 1995 1994 1996 1995 1994
United
States . . . .$63,057$54,289$62,918$ (333)$(7,770)$(8,106)$16,875$13,396$8,197
Latin
America . . .- - - - - - 3,996 2,201 3,303
- ---------------------------------------------------------------------------------------------
$63,057$54,289$62,918 $ (333)$(7,770)$(8,106)$20,871$15,597$11,500
Epitope, Inc. Consolidated
In thousands
Geographic
Areas Revenues Operating Loss Identifiable Assets
1996 1995 1994 1996 1995 1994 1996 1995 1994
United
States . . . .$67,959$56,918$64,981$ (5,621)$(19,377)$(14,390)$41,825$35,226$25,379
Canada . . . .404 78 111 - - - - - -
Latin
America . . .100 - - - - - 3,396 2,201 3,303
Europe . . . .65 72 329 - - - - - -
Other . . . . .122 76 103 - - - - - -
- ----------------------------------------------------------------------------------------
$68,650$57,144$65,523 $ (5,621)$(19,377)$(14,390)$45,221$37,427$28,682
</TABLE>
<PAGE>
Note 13 Subsequent Events
On October 25, the Company received an offer from a representative of the
holders of the $3.6 million convertible notes due June 30, 1997, whereby the
holders proposed to convert such notes into common stock of the Company at a
reduced exchange price. On November 14, 1996, the Company agreed to exchange
$3,380,000 principal amount of Agritope notes for 250,367 shares of common
stock of the Company at an exchange price of $13.50 per share. Accordingly,
the Company will recognize a charge to income of approximately $1.1 million
representing the conversion expense in the first quarter of fiscal 1997.
On November 25, 1996, the Company negotiated an extension to the bank line of
credit previously maintained by Andrew and Williamson Sales, Co. (A&W). Under
terms of the commitment letter, the $6.5 million revolving credit line will be
extended until February 5, 1998, and will bear interest at prime or LIBOR plus
2.5% at the Company's option. The new line will be secured by A&W's accounts
receivable, inventory and equipment and will be guaranteed by Epitope, Inc.
The new line will also contain various financial covenants including minimum
working capital and tangible net worth levels and maximum debt to net worth
ratios.
On December 12, 1996, the Company merged with A&W. A&W is a producer and
wholesale distributor of fruits and vegetables based in San Diego, California.
Under the terms of the merger, the Company issued 520,000 shares of common
stock of Epitope, Inc. in exchange for all of the outstanding common stock of
A&W. The merger has been accounted for as a pooling of interests in the
accompanying financial statements which have been restated as if the merger
occurred on the first day of the earliest period presented. The merger will
qualify as a tax-free reorganization for income tax purposes.
Based on information available on December 26, 1996, and due to continued
operating losses at UAF, Limited Partnership in the four months ended October
31, 1996, coupled with a shortfall in sales and larger operating loss than
expected at Petals USA, Inc. in the fourth quarter of calendar 1996, the
Company believes that the value of its investment in affiliated companies has
more than temporarily declined as both companies are now expected to show
operating losses in fiscal 1997. Accordingly, the Company anticipates a
charge to results of operations of $1,900,000 in the first quarter of 1997,
reflecting the permanent impairment in the value of its investment in
affiliated companies.
No schedules are included with the foregoing financial statements because the
required information is inapplicable or is presented in the financial
statements or related notes thereto.
(a)(3) Exhibits.
See Index to Exhibits following the signature pages of this report.
(b) Reports on Form 8-K. None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on December 26, 1996.
EPITOPE, INC.
By /s/ GILBERT N. MILLER
Gilbert N. Miller
Executive Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on December 26, 1996, by the following persons on
behalf of the Registrant and in the capacities indicated.
SIGNATURE TITLE
*ADOLPH J. FERRO, PH.D. President, Chief Executive Officer
Adolph J. Ferro, Ph.D. and Director
(Principal Executive Officer)
/S/ GILBERT N. MILLER Executive Vice President and
Gilbert N. Miller Chief Financial Officer
(Principal Financial Officer)
*MARK V. ALLRED Controller
Mark V. Allred (Principal Accounting Officer)
*W. CHARLES ARMSTRONG Director
W. Charles Armstrong
*RICHARD K. DONAHUE Director
Richard K. Donahue
*ANDREW S. GOLDSTEIN Director
Andrew S. Goldstein
*MARGARET H. JORDAN Director
Margaret H. Jordan
*R. DOUGLAS NORBY Director
R. Douglas Norby
*MICHAEL J. PAXTON Director
Michael J. Paxton
*ROGER L. PRINGLE Director
Roger L. Pringle
*G. PATRICK SHEAFFER Director
G. Patrick Sheaffer
By*/S/ GILBERT N. MILLER
Gilbert N. Miller
(Attorney-in-Fact)
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Exhibit
- ------- -------
2.1 Stock Purchase Agreement among Vinifera, Inc., Agritope, Inc.,
Epitope, Inc., and VF Holding, Inc., dated May 31, 1995.
Incorporated by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K dated June 1, 1995.
2.2 Operating and Transition Agreement dated as of May 1, 1995, among
Agrimax Floral Products, Inc., William C. McClure, Gary W. Butler,
Dorothea J. Owens, Timothy C. Finn, John W. Suber, and Anthony J.
Wright. Incorporated by reference to Exhibit 2.2 to the
Registrant's Current Report on Form 8-K dated June 1, 1995.
2.3 Agreement and Plan of Reorganization dated as of October 27, 1995,
by and among Fresche Blossoms L.L.C., UAF, L.P., Agrimax Floral
Products, Inc., Universal American Flowers, Inc., William C.
McClure, Gary W. Butler, Dorothea J. Owens, Timothy C. Finn,
John W. Suber, Jr., Anthony J. Wright, Doug Bauer, and Roxanne E.
Bakula. Incorporated by reference to Exhibit 2.3 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1995 (the "1995 10-K").
2.4 Acquisition and Merger Agreement among Epitope, Inc., Thamscoe,
Inc., Andrew and Williamson Sales, Co., and the shareholders of
Andrew and Williamson Sales, Co., dated November 6, 1996.
Incorporated by reference to Exhibit 2 to the Company's Current
Report on Form 8-K dated November 6, 1996.
3.1 Restated Articles of Incorporation, as amended, of Registrant.
Incorporated by reference to Exhibit 3.1 to the Registrant's
Current Report on Form 8-K dated May 29, 1991.
3.2 Restated Bylaws of Registrant.
4.1 Stock Purchase Agreement dated November 9, 1990, between certain
investors and Registrant. Copies of the agreements with
individual investors shall be filed with the Commission upon
request pursuant to Instruction 2 of Item 601 of Regulation S-K
("Item 601, Instruction 2"). Incorporated by reference to
Exhibit 4.2 to the Registrant's Annual Report on Form 10-K for the
year ended September 30, 1994 (the "1994 10-K").
4.2 Unit Purchase Agreement dated September 1991 between certain
investors and Registrant. Copies of the agreements with
individual investors shall be filed with the Commission upon
request pursuant to Item 601, Instruction 2. Incorporated by
reference to Exhibits 4.1 and 4.2 to the Registrant's Current
Report on Form 8-K dated September 17, 1991.
4.3 Note Purchase Agreement dated June 10, 1992, among Agritope, Inc.,
Registrant, and certain investors. Copies of the agreements with
individual investors shall be filed with the Commission upon
request pursuant to Item 601, Instruction 2. Incorporated by
reference to Exhibit 4.2 to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarterly period ended June 30, 1992.
4.4 Warrant Purchase Agreement dated as of November 25, 1992, between
certain investors and Registrant. Copies of the agreements with
individual investors shall be filed with the Commission upon
request pursuant to Item 601, Instruction 2. Incorporated by
reference to Exhibit 4.5 to the Registrant's Annual Report on Form
10-K for the year ended September 30, 1992 (the "1992 10-K").
4.5 1993 Technology Transfer Warrant Issuance Agreement dated as of
June 15, 1993, between certain investors and Registrant. Copies
of the agreements with individual investors shall be filed with
the Commission upon request pursuant to Item 601, Instruction 2.
Incorporated by reference to Exhibit 4.3 to the Registrant's
Registration Statement on Form S-3 (No. 33-68510) ("Registration
Statement No. 33-68510").
4.6 Form of Letter dated August 1, 1993, from Registrant regarding
modification of the terms of the 1993 Technology Transfer
Warrants. Incorporated by reference to Exhibit 4.5 to
Registration Statement No. 33-68510.
4.7 1993 Warrant Purchase Agreement dated as of July 6, 1993, between
certain investors and Registrant. Copies of the agreements with
individual investors shall be filed with the Commission upon
request pursuant to Item 601, Instruction 2. Incorporated by
reference to Exhibit 4.6 to Registration Statement No. 33-68510.
4.8 Forms of Notice to Warrantholders and Agreement Regarding
Extension of Expiration Date. Incorporated by reference to
Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated
March 29, 1995.
4.9 Notice to warrantholders and current form of warrant certificate
for warrants issued in September 1991 offering, reflecting
extension of expiration date. Incorporated by reference to
Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated
September 17, 1996.
4.10 Notice to warrantholders and current form of warrant certificate
for warrants issued in December 1992 offering, reflecting
extension of expiration date. Incorporated by reference to
Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated
September 17, 1996.
4.11 Notice to warrantholders and current form of warrant certificate
for warrants issued in July 1993 offering, reflecting extension of
expiration date. Incorporated by reference to Exhibit 4.3 to the
Registrant's Current Report on Form 8-K dated September 17, 1996.
4.12 Notice to warrantholders and current form of warrant certificate
for warrants issued in August 1993 offering, reflecting extension
of expiration date. Incorporated by reference to Exhibit 4.4 to
the Registrant's Current Report on Form 8-K dated September 17,
1996.
10.1 Incentive Stock Option Plan of Registrant, as amended.
Incorporated by reference to Exhibit 10.1 to the 1994 10-K.*
10.2 Amended and Restated Epitope, Inc., 1991 Stock Award Plan.
Incorporated by reference to Exhibit 10.2 to the 1994 10-K.*
10.3 Agritope, Inc., 1992 Stock Award Plan. Incorporated by reference
to Exhibit 10.3 to the 1992 10-K.*
10.4 Form of Nonqualified Stock Option Agreement to be issued to
certain officers and directors of Registrant pursuant to Agritope,
Inc., 1992 Stock Award Plan. Incorporated by reference to Exhibit
10.4 to the 1992 10-K.*
10.5 Lease dated July 17, 1990, among Registrant, Koll Woodside
Associates, a California general partnership, and Petula
Associates, Ltd., an Iowa corporation. Incorporated by reference
to Exhibit 10.5 to the 1994 10-K.
10.6 Fourth Amendment dated May 20, 1994, to Lease dated July 17, 1990,
among Registrant, Koll Woodside Associates, a California general
partnership, and Petula Associates, Ltd., an Iowa corporation.
Incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarterly period
ended June 30, 1994 ("June 1994 10-Q").
10.7 Business Park Lease dated May 5, 1994, among Registrant, Koll
Woodside Associates, a California general partnership, and Petula
Associates, Ltd., an Iowa corporation. Incorporated by reference
to Exhibit 10.2 to the June 1994 10-Q.
10.8 Business Park Lease dated as of December 16, 1994, among
Registrant, Petula Associates Ltd., an Iowa corporation, and Koll
Portland Associates, a California general partnership.
Incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarterly period
ended December 31, 1994.
10.9 Lease Agreement dated as of October 15, 1993, between Kathryne L.
Brown and Agrimax Floral Products, Inc. Incorporated by reference
to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarterly period ended December 31, 1993 ("December
1993 10-Q").
10.10 Building Lease dated as of October 1, 1993, between Hermes Land
Company and Agrimax Floral Products, Inc. Incorporated by
reference to Exhibit 10.2 to the December 1993 10-Q.
10.11 Office/Warehouse Lease dated as of August 25, 1994, between Tonka
Bay Associates as agent for M Corp. of Illinois and Agrimax Floral
Products, Inc. Incorporated by reference to Exhibit 10.10 to the
1994 10-K.
10.12 Lease dated as of December 12, 1996, between Williamson and Andrew
and Andrew and Williamson Sales, Co.*
10.13 Agreement dated December 9, 1987, between Registrant and Adolph
Ferro, Ph.D. Incorporated by reference to Exhibit 4.3 to the 1988
S-1.*
10.14 Amendment to Agreement of December 9, 1987, dated November 11,
1996, between Registrant and Adolph J. Ferro, Ph.D.*
10.15 Agreement dated October 3, 1989, between Sakata Seed America, Inc.
and Agritope, Inc. Incorporated by reference to Exhibit 10.13 to
the 1994 10-K.
10.16 Distribution Agreement dated as of April 1, 1994, between
Registrant and Organon Teknika Corporation. Incorporated by
reference to Exhibit 10.3 to the June 1994 10-Q.
10.17 Supply Agreement dated as of April 1, 1994, between Registrant and
Organon Teknika Corporation. Incorporated by reference to Exhibit
10.4 to the June 1994 10-Q.
10.18 Superior Tomato Associates, L.L.C. Operating Agreement dated as of
February 19, 1996, among Sunseeds Company, Andrew and Williamson
Sales, Co., and Agritope, Inc.
10.19 Development and Marketing Agreement dated as of February 19, 1996,
among Superior Tomato Associates, L.L.C., Agritope, Inc., Sunseeds
Company, and Andrew and Williamson Sales, Co.
10.20 Form of Indemnification Agreement for directors and officers.
Incorporated by reference to Exhibit 10.4 to the Registrant's
Registration Statement on Form S-4 (No. 333-15705).*
10.21 Amended and Restated Employment Agreement dated January 8, 1991
between Andrew S. Goldstein and Registrant. Incorporated by
reference to Exhibit 10.28 to the Registrant's Annual Report on
Form 10-K for the year ended September 30, 1991 (the "1991
10-K").*
10.22 Amended and Restated Employment Agreement dated January 9, 1991,
between Adolph J. Ferro, Ph.D., and Registrant. Incorporated by
reference to Exhibit 10.29 to the 1991 10-K.*
10.23 Employment Agreement dated January 28, 1990, between Gilbert N.
Miller and Registrant. Incorporated by reference to Exhibit 10.19
to the 1994 10-K.*
10.24 Employment Agreement dated July 1, 1990, between John H. Fitchen,
M.D. and Registrant. Incorporated by reference to Exhibit 10.20
to the 1994 10-K.*
10.25 Employment Agreement dated July 15, 1995, between Byron A.
Allen, Jr., and Registrant. Incorporated by reference to Exhibit
10.23 to the 1995 10-K.*
10.26 Employment Agreement dated August 17, 1992, between Richard K.
Bestwick, Ph.D., and Agritope, Inc. Incorporated by reference to
Exhibit 10.21 to Registrant's Registration Statement on Form S-4
(No. 333-15705).*
10.27 Employment Agreement dated May 31, 1995, between Joseph A.
Bouckaert and Vinifera, Inc. Incorporated by reference to Exhibit
10.20 to Registrant's Registration Statement on Form S-4 (No. 333-
15705).*
10.28 Employment Agreement dated December 12, 1996, between Fred L.
Williamson and Andrew and Williamson Sales, Co.*
10.29 Credit Agreement dated August 5, 1996, between Wells Fargo Bank,
National Association and Andrew and Williamson Sales, Co.
10.30 Development, License and Supply Agreement between Registrant and
SmithKline Beecham plc dated February 24, 1995, as amended.
Portions of this agreement have been granted confidential
treatment. Incorporated by reference to Exhibit 10.1 to Amendment
No. 2 to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarterly period ended June 30, 1995.
21. The Registrant's subsidiaries are Agritope, Inc., an Oregon
corporation, Vinifera, Inc., an Oregon corporation, Andrew and
Williamson Sales, Co., a California corporation, and Agrimax
Floral Products, Inc., a Minnesota corporation. The Registrant
also owns a 67 percent interest in Superior Tomato Associates,
L.L.C., a Delaware limited liability company, and a 60 percent
interest in Epitope KK, a Japanese limited liability company.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Boros and Farrington, APC.
24. Powers of Attorney.
27. Financial Data Schedules.
99. Report of Boros and Farrington, APC, dated November 6, 1996.
<PAGE>
EXHIBIT 3.2
RESTATED BYLAWS OF EPITOPE, INC.
ARTICLE I
Shareholders
Section 1. Annual Meeting. The annual meeting of the shareholders of
the corporation shall be held each year on a date designated by the Board of
Directors, for the purpose of electing directors and for the transaction of
such other business as may come before the meeting. In case of incomplete
financial or other information, unavailability of shareholders, directors,
officers or other persons whose attendance at the annual meeting would be
desirable, or other similar circumstances, the president in his discretion may
postpone the annual meeting. If the annual meeting is postponed, or if the
election of directors shall not be held on the day designated herein for any
annual meeting of the shareholders, or at any adjournment thereof, a special
meeting shall be held as soon as may be convenient as determined by the
president, either in lieu of the annual meeting if the annual meeting was
postponed or for the election of directors if the election was not held at the
annual meeting or at any adjournment thereof. Written or printed notice,
stating the place, day, hour and purpose of the special meeting shall be
delivered not less than ten nor more than sixty days before the date of the
special meeting, either personally or by mail, by the president or, at the
direction of the president, by the secretary to each shareholder of record
entitled to vote at the meeting. If mailed, such notice shall be deemed to be
delivered when deposited in the United States mails addressed to the
shareholder at his address as it appears on the stock transfer books of the
corporation, with postage thereon prepaid.
Section 2. Special Meetings. Special meetings of the shareholders may
be called for any purpose or purposes by the president, the Board of
Directors, the holders of not less than one-tenth (1/10) of all the shares
entitled to vote at the meeting or as provided in the Oregon Business
Corporation Act. Notice of special meetings shall be given by the president
or, at the direction of the president, by the secretary or assistant secretary
to each shareholder of record entitled to vote at such meetings in the same
manner as hereinabove provided in Section 1 of this Article.
Section 3. Place of Meeting. Meetings, annual or special, of the
shareholders shall be held at such place either within or without the state of
Oregon as shall be designated by the Board of Directors, or in the absence of
such a designation, at the main office of the corporation.
Section 4. Quorum; Waiver of Notice. A proposal voted upon by the
shareholders, other than the election of directors, shall be approved if the
votes cast favoring the matter exceed the votes cast opposing the matter,
unless the corporation's articles of incorporation, bylaws, or applicable
provisions of the Oregon Business Corporation Act require a greater number of
affirmative votes. If a quorum be not present at any annual or special
meeting, a majority of the shareholders present, either in person or by proxy,
may adjourn to such time and place as may be decided upon by the holders of
the majority of the shares present, and notice of such adjournment shall be
given in accordance with Section 4 of this Article; but if a quorum be
present, adjournment may be taken from day to day or to such time and place as
may be decided by the holders of the majority of the shares present, and no
notice of such adjournment need be given. No business shall be transacted at
an adjourned meeting that could not have been transacted at the meeting from
which the adjournment was taken. Whenever any notice is required to be given
pursuant to statute, to the articles of incorporation, or to these bylaws, a
waiver thereof signed by the shareholder entitled to notice, whether before or
after the time stated therein, shall be deemed equivalent thereto. Any
shareholder attending a meeting without objection thereof shall be deemed to
have waived notice of such meeting. Notice otherwise complying with the terms
hereof may be given by prepaid telegram as the equivalent of notice by mail.
Section 5. Proxies. At all meetings of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or by his duly authorized
attorney in fact. Such proxy shall be filed with the secretary of the
corporation before or at the time of the meeting. No proxy shall be valid
after 11 months from the date of its execution, unless otherwise provided in
the proxy.
ARTICLE II
Board of Directors
Section 1. Board of Directors. The business and affairs of the
corporation shall be managed by a Board of Directors.
Section 2. Meetings. A regular annual meeting of the Board of Directors
shall be held immediately after, and at the same place as, the annual meeting
of shareholders. No notice of the annual meeting other than this bylaw need
be given unless the meeting is to be held at a place other than the main
office of the corporation, in which case the notice shall be given in the
manner provided in Section 1 of Article I of these restated bylaws. The Board
of Directors may provide, by resolution, the time and place for the holding of
additional regular meetings without other notice than such resolution.
Special meetings of the Board of Directors may be called by or at the request
of the president or any director. Notice of any special meeting shall be
given at least three (3) days prior thereto by oral notice given in person, by
telephone, or by other means of oral electronic two-way communication, or by
written notice delivered personally or sent by mail, courier, fax, or similar
means to the director's residential or business address. Directors may waive
notice of meetings of the Board of Directors, and a waiver thereof signed by
the director entitled to notice, whether before or after the time stated
therein, shall be deemed equivalent thereto. Attendance of a director at a
meeting shall constitute a waiver of notice of such meeting, except where the
director attends the meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or
convened.
Section 3. Quorum and Voting. A majority of the elected and acting
directors shall constitute a quorum for the transaction of business. If at
any meeting of the Board of Directors there shall be less than a quorum
present, a majority of the directors present may adjourn to such time and
place as may be decided upon by the majority of the directors present, and
notice of such adjournment shall be given in accordance with Section 2 of this
Article; but if a quorum be present, adjournment may be taken from day to day
or to such time and place as may be decided by the majority of the directors
present, and no notice of such adjournment need be given. When a quorum
exists, action may be taken by a majority vote of the directors present.
Section 4. Notification of Nominations. Nominations for the election of
directors may be made by the Board of Directors or a proxy committee appointed
by the Board of Directors or by a shareholder entitled to vote in the election
of directors generally. However, any shareholder entitled to vote in the
election of directors generally may nominate one or more persons for election
as directors at a meeting only if written notice of such shareholder's intent
to make such nomination or nominations has been given, either by personal
delivery or by United States mail, postage prepaid, to the secretary of the
corporation not later than (a) with respect to an election to be held at an
annual meeting of shareholders, 60 days in advance of the date of the previous
year's annual meeting of shareholders, and (b) with respect to an election to
be held at a special meeting of shareholders for the election of directors,
the close of business on the seventh day following the date on which notice of
such meeting is first given to shareholders. Each such notice shall set
forth: (i) the name and address of the shareholder who intends to make the
nomination and of the person or persons to be nominated; (ii) a representation
that the shareholder is a holder of record of stock of the corporation
entitled to vote at such meeting and intends to appear in person or by proxy
at the meeting to nominate the person or persons specified in the notice;
(iii) a description of all arrangements or understandings between the
shareholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made; (iv) such other information regarding each nominee proposed by such
shareholder as would be required to be included in a proxy statement filed
with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, and the related proxy regulations of the Securities and
Exchange Commission promulgated thereunder, had the nominee been nominated, or
intended to be nominated, by the Board of Directors; and (v) the consent of
each nominee to serve as a director of the corporation if so elected. The
chairman of the meeting may refuse to acknowledge the nomination of any person
not made in compliance with the foregoing procedure.
ARTICLE III
Executive Committee
The majority of the Board of Directors may designate two or more
directors to constitute an executive committee, which committee between
meetings of the Board of Directors shall have and may exercise all of the
authority and powers of the Board of Directors in the management of the
business and affairs of the corporation, except that the committee may not:
(a) authorize distributions, except as permitted by clause (g) below;
(b) approve or propose to shareholders actions that the Oregon Business
Corporation Act requires to be approved by shareholders; (c) fill vacancies on
the board of directors or on any of its committees; (d) amend the articles of
incorporation, except as permitted by the Oregon Business Corporation Act;
(e) adopt, amend, or repeal bylaws; (f) approve a plan of merger not requiring
shareholder approval; (g) authorize or approve reacquisition of shares, except
within limits prescribed by the board of directors; (h) authorize or approve
the issuance or sale or contract for sale of shares or determine the
designation and relative rights, preferences and limitations of a class or
series of shares, except as permitted by the Oregon Business Corporation Act;
or (i) appoint or remove officers of the corporation.
ARTICLE IV
Officers and Agents
Section 1. Executive Officers.
(a) Number: The officers of the corporation shall consist
of a chairman of the board, president, chief executive officer, that
number of vice presidents which the Board of Directors may from time
to time determine and with such designations and seniority as the
directors may assign, a secretary and a treasurer. Any two or more
offices may be held by one person.
(b) Election and Tenure: The officers of the corporation
shall be elected at the organizational meeting and thereafter at
each regular annual meeting. In the event of a failure to hold the
annual meeting as herein provided, officers may be elected at any
time thereafter at a special meeting of directors called for that
purpose. Each officer shall hold office for the term of one year
and until his successor shall be elected except where expressly
provided to the contrary in a contract authorized by the Board of
Directors. All officers and agents shall be subject to removal at
any time by the vote of a majority of the entire Board of Directors
whenever in the judgment of the directors the best interests of the
corporation will be served by such removal, without prejudice,
however, to any contract rights of the person so removed.
(c) Vacancies: A vacancy in any office shall be filled by
the Board of Directors at any regular meeting, or at any special
meeting called for that purpose.
(d) Additional Officers and Agents: The Board of Directors
may also elect one or more assistant secretaries, one or more
assistant treasurers, and such other officers or agents as it may
deem necessary, with such authority and duties as from time to time
may be prescribed by the Board of Directors.
Section 2. Chairman of the Board. The chairman of the board, if one is
elected by the Board of Directors, shall preside at and conduct all meetings
of the shareholders and directors. The Chairman shall exercise such other
powers and perform such other duties as shall be prescribed by the directors
from time to time.
Section 3. Chief Executive Officer. The chief executive officer shall
have general and active charge of the business and management of the
corporation, subject to control by the Board of Directors. When present, he
shall preside at all meetings of the shareholders and directors. He is
authorized to sign all certificates of stock, and all deeds, leases, notes,
mortgages and contracts, including those in any way affecting real property or
interests therein, as the same may be required in the regular course of the
corporation's business. He shall have the power to appoint and discharge
agents and employees, subject to approval of the Board of Directors.
Section 4. President. The president shall exercise such powers and
perform such duties as may be prescribed by the Board of Directors or by the
chief executive officer. In the absence or incapacity of the chief executive
officer, and at the direction of the Board of Directors, he is authorized to
sign all certificates of stock, and all deeds, leases, notes, mortgages and
contracts, including those in any way affecting real property or interests
therein, as the same may be required in the regular course of the
corporation's business.
Section 5. Vice Presidents. The vice presidents, in the order of
seniority as designated by the Board of Directors, shall in the absence or
disability of the president exercise the powers and perform the duties of the
president. Each vice president shall also exercise such other powers and
perform such other duties as shall be prescribed by the directors, and such
powers and duties of the president as may be designated by the president.
Section 6. Secretary. The secretary shall give such notices of meetings
of the shareholders and of the Board of Directors as required by these
restated bylaws, and shall keep a record of the proceedings of all such
meetings. Such record shall be kept at the principal or registered office of
the corporation. He shall have custody of all books and records and papers of
the company except those which are in the care of the treasurer or some other
person authorized to have custody and possession thereof by resolution of the
Board of Directors. He shall, with the president, sign all certificates of
stock of the corporation and shall affix the seal of the corporation to such
certificates of stock. He is authorized to sign with the president or vice
president in the name of the corporation all deeds, notes, mortgages and
contracts including those in any way affecting real property or interests
therein and shall affix the seal of the corporation thereto when required in
the regular course of business. He shall submit such reports to the Board of
Directors as may be requested by them from time to time.
Section 7. Assistant Secretary. The assistant secretary shall, in the
absence or disability of the secretary, exercise the powers and perform the
duties of the secretary. He shall also exercise such other powers and perform
such other duties as may be prescribed by the Board of Directors and such
powers and duties of the secretary as may be designated by the president or
secretary.
Section 8. Treasurer. The treasurer shall from time to time make such
reports to the officers, Board of Directors and shareholders as may be
required, and shall perform such other duties as the Board of Directors shall
from time to time delegate to him.
Section 9. Assistant Treasurer. The assistant treasurer shall, in the
absence or disability of the treasurer, exercise the powers and perform the
duties of the treasurer. He shall also exercise such other powers and perform
such other duties as may be prescribed by the Board of Directors and such
powers and duties of the treasurer as may be designated by the president or
treasurer.
ARTICLE V
Section 1. Right to Indemnification. The corporation shall indemnify
any director or former director of the corporation or any person who may have
served at its request as a director of another corporation in which it owns
shares of capital stock or of which it is a creditor against expenses and
liability actually and necessarily incurred by such director in connection
with any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative and whether formal or
informal, in which such director is a party by reason of being or having been
such director, except in relation to matters as to which indemnification is
prohibited by the Oregon Business Corporation Act as it shall be amended from
time to time (the "Act"); but such indemnification shall not be deemed
exclusive of any other rights to which such director may be entitled, under
any bylaw, agreement, general or specific action of the Board of Directors,
vote of shareholders or otherwise. As used herein, "expenses" shall include,
without limitation, expenses of investigations, arbitrations, mediations,
judicial or administrative proceedings or appeals, attorney fees and
disbursements and any expenses of establishing a right to indemnification.
"Liability" shall include the obligation to pay a judgment, settlement,
penalty, fine, including an excise tax assessed with respect to an employee
benefit plan, or reasonable expenses incurred with respect to an arbitration,
mediation, action, suit or proceeding in which a director is entitled to
indemnification hereunder.
Section 2. Procedure for Indemnification. After the final disposition
of any threatened, pending or completed arbitration, mediation, action, suit
or proceeding, whether civil, criminal, administrative or investigative and
whether formal or informal, in which a director may be entitled to
indemnification, such director may send to the corporation a written request
for indemnification. The corporation shall, in accordance with the provisions
of the Act regarding the determination and authorization of indemnification,
make a finding whether the indemnification requested is permitted by the laws
of the state of Oregon no later than 60 days following receipt by the
corporation of such request. The corporation shall cause the indemnification
requested to be authorized and paid unless the corporation finds that the
indemnification requested is not so permitted. The director shall be given an
opportunity to be heard and to present evidence in connection with the
consideration of the party or parties determining the right to indemnification
under the Act. If the corporation does not authorize indemnification
hereunder, the director shall have the right to seek court-ordered
indemnification in accordance with the provisions of the Act. In any such
action, neither the making of, nor the failure to make, any finding by the
corporation that indemnification of the director is proper or not proper in
the circumstances shall be a defense to such action or create a presumption
that the director has not met the standard of conduct required by the Act. In
making its determination and in any court proceeding, the corporation shall
have the burden of proving that the director has not met the standards of
conduct required by the Act to authorize indemnification.
Section 3. Procedure for Advancement of Expenses. The corporation shall
pay for or reimburse the reasonable expenses incurred by a director as a
result of being party to a threatened, pending or completed arbitration,
mediation, action, suit or proceeding, whether civil, criminal, administrative
or investigative and whether formal or informal, in advance of final
disposition of such arbitration, mediation, action, suit or proceeding
promptly upon receipt of a written request for payment of such expenses that
is in accordance with requirements of the Act for such written statement.
Such written statement shall also include or be accompanied by documentation
of the expenses incurred and, when available, such documentation of expenses
shall include copies of bills or statements evidencing the expenses incurred.
If the requirements of this provision are met, the corporation shall pay the
amount requested promptly notwithstanding the absence of a final disposition
of the arbitration, mediation, action, claim or proceeding.
Section 4. Indemnification of Officers, Employees and Agents. The
corporation may, by action of its Board of Directors from time to time,
provide indemnification and pay expenses in advance of the final disposition
of a proceeding to officers, employees and agents of the corporation to the
same extent and effect as provided in this Article with respect to the
indemnification and advancement of expenses of directors of the corporation or
pursuant to rights granted pursuant to, or provided by, the Act or otherwise.
Section 5. Insurance. The corporation may, but shall not be required
to, purchase and keep in force a policy or policies of liability insurance on
behalf of its officers and directors against liability and expenses incurred
in any arbitration, mediation, action, suit or proceeding, whether civil,
criminal, administrative or investigative and whether formal or informal.
Section 6. Nonexclusivity; Nature of Rights. The indemnification
provided herein shall not be deemed exclusive of any other rights consistent
with the laws of the state of Oregon to which a director may be entitled under
the corporation's articles of incorporation, bylaws or any other agreement,
vote of shareholders, or otherwise, both as to action in the director's
official capacity and as to action in another capacity while holding office,
and shall continue notwithstanding that the director may have ceased to be
connected with the corporation. The right of indemnification provided for
herein shall be deemed to create contractual rights in favor of directors
entitled to indemnification hereunder and shall be applicable to claims
commenced after the adoption hereof, whether arising from acts or omissions
occurring before or after the adoption hereof. The right of indemnification
provided for herein may not be amended or repealed so as to limit in any way
the indemnification provided for herein with respect to any acts or omissions
occurring prior to any such amendment or repeal.
ARTICLE VI
Action Without a Meeting
Section 1. Written Consent. Any action required to be taken or which
may be taken at a meeting of the shareholders or directors may be taken
without a meeting if a consent in writing setting forth the action so taken
shall be signed by all of the shareholders or directors entitled to vote; and
such consent shall have the same force and effect as a unanimous vote of such
shareholders or directors.
Section 2. Electronic Communications. The Board of Directors, or any
committee designated by the directors, may hold any meeting of the directors
or committee, by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can
simultaneously hear each other. Participation in such a meeting shall
constitute presence in person at the meeting.
ARTICLE VII
Section 1. Certificates. Shares of stock of the corporation shall be
represented by stock certificates which shall be in a form adopted by the
Board of Directors, provided all such stock certificates within one series of
the same class of stock shall be consecutively numbered, and shall express
upon their face the number thereof, the date of issuance, the number of shares
for which and the person to whom issued and the class and series, if any,
thereof, and all such stock certificates shall be signed by the president or a
vice president and by the secretary or assistant secretary and may be sealed
with the corporate seal, if any. In addition, each certificate shall express
upon its face that the corporation is organized under the laws of the state of
Oregon and shall also express the par value of the shares represented by the
certificate, or shall state that the shares are without par value, as may be
appropriate. Each certificate shall state upon the face or back thereof, in
full or in summary, all of the designations, preferences, limitations,
restrictions on transfer and relative rights of the shares of each class and
series authorized to be issued, or shall indicate where such information may
be found.
Section 2. Subscriptions. Subscriptions for shares of stock of the
corporation shall be paid in full at such time, or in such installments and at
such times, as the Board of Directors may determine. In case of default in
the payment of any installment or call when such payment is due, the Board of
Directors may declare the shares and all previous payments thereon forfeited
for the use of the corporation, in the manner prescribed by the Oregon
Business Corporation Act.
Section 3. Transfer of Shares. Transfer of shares of the corporation
shall be made only on the stock transfer books of the corporation by the
holder of record thereof or by his legal representative, who shall furnish
proper evidence of authority to transfer, or by his attorney thereunto
authorized by power of attorney duly executed and filed with the secretary of
the corporation, and on surrender for cancellation of the certificate for such
shares. The person in whose name shares stand on the books of the corporation
shall be deemed by the corporation to be owner thereof for all purposes. All
certificates surrendered to the corporation for transfer shall be canceled and
no new certificate shall be issued until the former certificate for a like
number of shares shall have been surrendered and canceled, except that in case
of a lost, destroyed or mutilated certificate a new one may be issued therefor
upon such terms and indemnity to the corporation as the Board of Directors may
prescribe. The record of shareholder and stock transfer books shall be kept
at the principal or registered office of the corporation or at the office of
its transfer agent or registrar, if any.
ARTICLE VIII
Amendments
Bylaws may be adopted, altered, amended or repealed, in whole or in part,
at any regular or special meeting of the Board of Directors.
Approved by the Board of Directors December 17, 1996.
<PAGE>
EXHIBIT 10.12
LEASE
This lease is entered into by and between Williamson & Andrew,
hereinafter referred to as "Lessor", and Andrew and Williamson Sales, Co., a
California corporation, hereinafter referred to as "Lessee."
ARTICLE I
DEFINITIONS
As used in this Lease:
1.1 "Lease": The term "Lease" refers to this Lease Agreement consisting
of fourteen (14) Articles, subdivided into numbered sections.
1.2 "Leased Premises": The term "Leased Premises" refers to that
certain real property, including the building located thereon, together with
all appurtenances thereto, constituting the property located at 9940 Marconi
Drive, San Diego, California.
1.3 "Lease Term": The term "Lease Term" refers to the period commencing,
commencing on the date of this Lease and continuing through August 31, 2001,
unless sooner terminated as hereinafter provided.
1.4 "Total Taking, Partial Taking": The term "Total Taking" refers to
the taking of the entire Leased Premises by public authority under the power
of eminent domain, or a taking of so much of the Leased Premises, or of
Lessee's interest therein, as to prevent or substantially prevent the Lessee
from operating the Leased Premises for the uses authorized in Article III.
The term, "Partial Taking," refers to the taking of a portion only of the
Leased Premises, or of Lessee's interest therein, which taking does not
constitute a Total Taking.
1.5 "Real Property Taxes": The term "Real Property Taxes" refers to all
real property taxes and general and special assessments levied and assessed
against the Leased Premises. The term shall also include any tax which may at
any time be levied or imposed upon rentals under this Lease or otherwise in
respect of the Leased Premises in lieu of, in addition to, or as an off-set to
a real estate tax.
1.6 "Party", "Parties": The term "party" refers to either Lessor or
Lessee, while the term "parties" refers to Lessor and Lessee.
ARTICLE II
DEMISE OF LEASED PREMISES:
ESSENTIAL TERMS
2.1 Demise of Leased Premises: Lessor leases to Lessee, and Lessee
hires from Lessor, the Leased Premises for the Lease Term, unless sooner
terminated as provided in this Lease or by law.
2.2 Rent: Lessee shall pay rent to Lessor in advance, on or before the
first day of each calendar month during the Lease Term, without abatement,
deduction or offset, in the sum of Eleven Thousand Dollars ($11,000).
2.3 Lessee's Option to Extend Term: Lessee is given the option to
extend the term on all provisions contained in this lease, except for the
monthly rent, for a five (5) year period ("Extended Term"), by giving written
notice of exercise of the option ("option notice") to Lessor at least six (6)
months but not more than one (1) year before the expiration of the term.
Provided that, if Lessee is in default on the date of giving the option
notice, the option notice shall be totally ineffective, or if Lessee is in
default on the date the Extended Term is to commence, the Extended Term shall
not commence and this lease shall expire at the end of the initial term. The
amount of Rent to be paid by Lessee during the period of the Extended Term
shall be determined by Section 2.4. After the exercise of the option, all
references in this Lease to the "Lease Term" shall be considered to mean the
Extended Term. Lessee shall have no right to extend the Lease Term beyond the
Extended Term.
2.4 Rent for Extended Term to be Negotiated by Parties or Determined by
Appraisal:
If Lessee exercises the option granted by Lessor in Section 2.3, the
parties shall have thirty (30) days after Lessor receives the option notice in
which to agree on the monthly rent during the Extended Term. If the parties
agree on the monthly rent for the Extended Term during that period, they shall
immediately execute an amendment to this Lease stating the monthly rent.
If the parties do not agree on the monthly rent for the Extended Term
within thirty (30) days after notice of election to renew, the rent shall be
determined by a qualified, independent real property appraiser familiar with
commercial rental values in the area. The appraiser shall be chosen by the
Lessee from a list of not fewer than five such individuals submitted by the
Lessor. If Lessee does not make the choice within five days after submission
of the list, Lessor may do so. If the Lessor does not submit such a list
within ten (10) days after a written request from the Lessee to do so, Lessee
may name as an arbitrator any individual with the qualifications noted above.
Within thirty (30) days after appointment, the appraiser shall return his
decision, which shall be final and binding upon both parties. The cost of the
appraisal shall be borne equally by both the Lessee and the Lessor.
ARTICLE III
USE
3.1 Permitted Use: During the Lease Term, Lessee shall use and occupy
the Leased Premises for office, warehousing, processing, and distribution of
produce, fruits, and berries, and for purposes incidental thereto, or for such
other use or purpose as shall first be approved in writing by Lessor, which
approval shall not be unreasonably withheld.
3.2 Limits on Use: During the Lease Term:
a. Lessee shall use the Leased Premises only as permitted in this
Article;
b. Lessee shall at all times conform to, and cause all persons
using or occupying any part of the Leased Premises to comply with, all public
laws, ordinances and regulations from time to time applicable to the Leased
Premises, or to operations thereon, including the laws relating to nuisance;
c. Lessee shall not commit waste or suffer any waste to be
committed upon the Leased Premises;
d. Lessee shall not, by action or inaction, conduct any activity
that would make it impossible to insure the Leased Premises against casualty.
3.3 Contest of Validity of Law: Lessee shall have the right to contest
by appropriate legal proceedings, without cost or expense to Lessor, the
validity of any law, ordinance or regulation which limits or restricts the
uses permitted in this Article.
ARTICLE IV
TAXES
4.1 Real Property Taxes: Lessee shall pay, before delinquency, all Real
Property Taxes and assessments levied and assessed against the Leased Premises
during the Lease Term. If permitted by applicable law, Lessee shall be
entitled to pay Real Property Taxes in installments. On demand by Lessor,
Lessee shall furnish Lessor with satisfactory evidence of these payments.
Lessee's obligation to pay assessments as provided in this Section shall
be calculated on the basis of the amount due if the Lessor allows the
assessment to go to bond and the assessment is to be paid in installments,
even if Lessor pays the assessment in full.
Lessor shall use its best efforts to cause the tax bills to be sent
directly to Lessee from the tax collector.
4.2 Assessments: Lessee shall pay, before delinquency, all assessments,
including but not limited to water assessments, levied against the Leased
Premises during the Lease Term. If permitted by applicable law, Lessee shall
be entitled to pay assessments in installments. On demand by Lessor, Lessee
shall furnish Lessor with satisfactory evidence of these payments.
Lessor shall use its best efforts to cause the assessment bills to be
sent directly to Lessee from the tax collector.
4.3 Personal Property Taxes: Lessee shall pay, before delinquency, all
taxes, assessments, license fees and other charges that are levied and
assessed against Lessee's personal property installed or located in or on the
Leased Premises, and that become payable during the Lease Term. On demand by
Lessor, Lessee shall furnish Lessor with satisfactory evidence of these
payments.
Lessor shall use its best efforts to cause the tax bills to be sent
directly to Lessee from the tax collector.
ARTICLE V
MAINTENANCE, REPAIRS, ALTERATIONS
AND UTILITIES
5.1 Maintenance and Repairs: Lessee, at its cost, shall maintain, in
good condition, all portions of the Leased Premises, and shall repair,
replace, repaint, and clean all portions of the Leased Premises as may be
necessary in order to keep the Leased Premises in good condition. Lessor
shall have no responsibility for repairing or maintaining any portion of the
Leased Premises.
5.2 Alterations: Except as provided in this Section, Lessee shall not
make any structural or material alterations or improvements to the Leased
Premises without Lessor's written consent, which consent shall not be
unreasonably withheld. With the exception of Lessee's moveable furniture,
furnishings, inventory, equipment, trade fixtures and signs, any alterations
or improvements made shall remain on and be surrendered with the Leased
Premises on expiration or termination of the Lease Term, and shall belong to
Lessor without the payment of any additional consideration. Lessee, at its
cost, shall have the right to make, without Lessor's consent, nonstructural
alterations and improvements to the Leased Premises that Lessee requires in
order to conduct its business on the Leased Premises, including, without
limitation, the installation of trade fixtures and signs advertising Lessee's
business. If Lessee makes any alterations or improvements to the Leased
Premises with the Lessor's consent as provided in this Section, the
alterations or improvements shall not be commenced until thirty (30) days
after Lessor has received notice from Lessee stating the date the installation
of the alterations or improvements is to commence so that Lessor may post and
record an appropriate notice of nonresponsibility.
5.3 Mechanics' Liens: Lessee shall pay all costs for construction done
by it or caused to be done by it on the Leased Premises as permitted by this
Lease. Lessee shall keep the Leased Premises free and clear of all mechanics'
liens resulting from construction done by or for Lessee. Lessee shall have the
right to contest the correctness or the validity of any such lien, if, within
ten (10) days after demand by Lessor, Lessee procures and records a lien
release bond issued by a corporation authorized to issue surety bonds in
California in an amount equal to one and one-half (1-1/2) times the amount of
the claim of lien. The bond shall meet the requirements of Civil Code Section
3143 and shall provide for the payment of any sum that the claimant may
recover on the claim (together with costs of suit, if it recovers in the
action). Nothing in this Lease shall be deemed or construed as in any way
constituting the consent or request of Lessor, express or implied, by
inference or otherwise, to any contractor, subcontractor, laborer or
materialman for the performance of any labor or for the furnishing of any
materials for any specific improvement, alteration or repair of, or to, the
Leased Premises, or any part thereof. Lessor shall have the right to post and
keep posted on the Leased Premises such notices of nonresponsibility as Lessor
may deem necessary for the protection of Lessor and the fee of the Leased
Premises from mechanics' liens.
5.4 Utilities and Services: Lessee shall make all arrangements for, and
shall pay for, all utilities and services furnished to the Leased Premises,
including, without limitation, gas, electricity, water, telephone service and
trash collection, and for all connection charges.
ARTICLE VI
INSURANCE AND INDEMNIFICATION
6.1 Liability and Property Damage Insurance: Lessee, at its cost, shall
maintain comprehensive general liability insurance with limits of not less
than $300,000 for injury to one person, $1,000,000 for injury to two or more
persons in one occurrence, and $300,000 for damage to property or commercial
general liability insurance (occurrence version) with coverage for bodily
injury and property damage liability, personal and advertising injury
liability, and medical payment with a general aggregate limit of not less than
$3,000,000 and a per occurrence limit of not less than $1,000,000, insuring
against all liability of Lessee and its officers, agents, employees or
independent contractors, arising out of and in connection with Lessee's use or
occupancy of the Leased Premises. All insurance shall insure performance by
Lessee of the indemnity provisions of Section 6.7. Lessor shall be named as
an additional insured, and the policy shall contain cross-liability
endorsements.
6.2 Fire Insurance on the Leased Premises: Lessee at its cost, shall
maintain on the building and other improvements that are a part of the Leased
Premises, a policy of standard fire and extended coverage insurance, with
vandalism and malicious mischief endorsements, to the extent of at least full
replacement value.
The insurance policy shall be issued in the names of the Lessor and
Lessee, as their interests appear. The insurance policy shall provide that any
payments shall be made payable to Lessor.
6.3 Determination of Full Replacement Value: The "full replacement
value" of the Leased Premises, and of Lessee's personal property, fixtures,
improvements and alterations, shall be determined by the company issuing the
insurance policy at the time the policy is initially obtained.
6.4 Waiver of Subrogation: Each party releases the other, and the
other's officers, employees, agents and independent contractors, from any
claims for damage or injury to any person or to the Leased Premises, or to the
fixtures, personal property, improvements and alterations of either Lessor or
Lessee in or on the Leased Premises, that are caused by or result from risks
insured against under any insurance policies carried by either party and in
force for the benefit of the releasing party at the time of any such damage,
but only to the extent of such insurance coverage. Each party shall cause each
insurance policy obtained by it to provide that the insurance company waives
all right of recovery by way of subrogation against either party in connection
with any damage covered by that policy. Nothing in this Section shall be
deemed a waiver of any provision of Article VII.
6.5 Other Insurance Matters: All the insurance required under this
Lease shall:
a. Be issued by insurance companies authorized to do business in
the State of California, with a financial rating of at least an A+3 status as
rated in the most recent edition of Best's Insurance Reports;
b. Contain an endorsement requiring thirty (30) days' written
notice from the insurance company to both parties before cancellation or
change in the coverage, scope, or amount of any policy.
c. Be issued as a primary policy.
Each policy, or a certificate of the policy, together with evidence
of payment of premiums, shall be deposited with the Lessor at the commencement
of the Lease Term, or as soon thereafter as is reasonably practicable, and on
renewal of the policy not less than fifteen (15) days before expiration of the
term of the policy.
6.6 Exculpation of Lessee and Indemnity: Lessee shall not be liable to
Lessor for any death, injury, deterioration or loss sustained by Lessor, its
officers, agents, employees and independent contractors or Lessor's property
from any cause other than the willful misconduct or active negligence of
Lessee. Lessor shall indemnify and hold Lessee harmless, and shall defend
Lessee against any and all liability, losses, penalties, damages, costs,
expenses (including, without limitation, reasonable attorneys' fees), causes
of action, claims or judgments arising out of or related to:
a. The failure or refusal by Lessor to comply with any of the
provisions of this Lease, including, without limitation, those provisions
relating to taxes, mechanics' liens, utilities, repairs, insurance, and use of
the Leased Premises; or,
b. Any death, injury, loss or deterioration sustained by any
person or property on or adjoining the Leased Premises, occasioned by any
willful or negligent act or omission, whether passive or active, of Lessor, or
Lessor's agents, employees, officers, independent contractors, invitees,
sublessees, assignees or licensees.
6.7 Exculpation of Lessor and Indemnity: Lessor shall not be liable to
Lessee for any death, injury, deterioration or loss sustained by Lessee, its
officers, agents, employees and independent contractors, or Lessee's property
from any cause other than the willful misconduct or active negligence of
Lessor. Lessee shall indemnify and hold Lessor harmless, and shall defend
Lessor against any and all liability, losses, penalties, damages, costs,
expenses (including, without limitation, reasonable attorneys' fees), causes
of action, claims or judgments arising out of or related to:
a. The failure or refusal by Lessee to comply with any of the
provisions of this Lease, including, without limitation, those provisions
relating to taxes, mechanics' liens, utilities, repairs, insurance, and use of
the Leased Premises; or
b. Any death, injury, loss or deterioration sustained by any
person or property on or adjoining the Leased Premises, occasioned by any
willful or negligent act or omission, whether passive or active, of Lessee or
Lessee's agents, employees, officers, independent contractors, invitees,
sublessees, assignees or licensees.
ARTICLE VII
DAMAGE OR DESTRUCTION
7.1 Destruction Due to Risk Covered by Insurance
If, during the term, the premises are totally or partially destroyed from
a risk covered by the insurance described in Section 6.2, rendering the
premises totally or partially inaccessible or unusable, Lessee shall restore
the Leased Premises to substantially the same condition as they were in
immediately before destruction, provided that the insurance proceeds are
sufficient to cover the actual cost of restoration. Such destruction shall
not terminate the Lease so long as the insurance proceeds are sufficient to
cover the actual costs of restoration, provided that if any insufficiency in
coverage is caused by any act or omission of Lessee or Lessee's agents,
employees, officers, independent contractors, invitees, sublessees, assignees,
or licensees, the Lessee shall not have the option of terminating the Lease
and, instead, shall restore the Leased Premises to substantially the same
condition as they were in immediately before the destruction. If the existing
laws do not permit the restoration, either party can terminate this lease
immediately by giving notice to the other party.
7.2 Destruction Due to Risk Not Covered by Insurance
If, during the term, the Leased Premises are totally or partially
destroyed from a risk not covered by the insurance described in Section 6.2,
rendering the Leased Premises totally or partially inaccessible or unusable,
Lessee shall either restore the Leased Premises to substantially the same
condition as they were in immediately before destruction or terminate the
lease. If, however, the destruction is caused by any act or omission of
Lessee or Lessee's agents, employees, officers, independent contractors,
invitees, sublessees, assignees, or licensees, such destruction shall not
terminate the Lease and, instead, Lessee shall restore the Leased Premises to
substantially the same condition as they were in immediately before the
destruction. If the existing laws do not permit the restoration, either party
can terminate this lease immediately by giving notice to the other party.
7.3 Procedure for Lessee's Restoration of Leased Premises
Within thirty (30) days after the date that Lessee is obligated to
restore the premises, Lessee at its cost shall prepare final plans and
specifications and working drawings complying with applicable laws that will
be necessary for restoration of the premises. The plans and specifications
and working drawings must be approved by Lessor. Lessor shall have thirty
(30) days after receipt of the plans and specifications and working drawings
to either approve or disapprove the plans and specifications and working
drawings and return them to Lessee. If Lessor disapproves the plans and
specifications and working drawings, Lessor shall notify Lessee of its
objections and Lessor's proposed solution to each objection. Lessee
acknowledges that the plans and specifications and working drawings shall be
subject to approval of the appropriate government bodies and that they will be
prepared in such a manner as to obtain that approval.
The restoration shall be accomplished as follows:
1. Lessee shall complete the restoration within ninety (90) working
days after final plans and specifications and working drawings have been
approved by the appropriate government bodies and all required permits have
been obtained (subject to a reasonable extension for delays resulting from
causes beyond Lessee's reasonable control).
2. Lessee shall retain a licensed contractor that is bondable. The
contractor shall be required to carry public liability and property damage
insurance, standard fire and extended coverage insurance, with vandalism and
malicious mischief endorsements, during the period of construction. Such
insurance shall contain waiver of subrogation clauses in favor of Lessor and
Lessee in accordance with the provisions of Section 6.4.
3. Lessee shall notify Lessor of the date of commencement of the
restoration not later than two (2) days before the commencement of the
restoration to enable Lessor to post and record notices of nonresponsibility.
The contractor retained by Lessee shall not commence construction until a
completion bond and a labor and materials bond have been delivered to Lessor
to insure completion of the construction.
4. Lessee shall accomplish the restoration in a manner that will cause
the least inconvenience, annoyance, and disruption at the premises.
5. On completion of the restoration Lessee shall immediately record a
notice of completion in the county in which the premises are located.
7.4 Abatement or Reduction of Rent
In case of destruction, there shall be no abatement or reduction of rent
unless the destruction was caused by Lessor.
7.5 Loss During Last Part of Term
If destruction to the premises occurs during the last one (1) year of the
term, either Lessor or Lessee can terminate this lease by giving notice to the
other party not more than fifteen (15) days after the destruction.
7.6 Waiver of Civil Code Sections
Lessee waives the provisions of Civil Code Section 1932(2) and Civil Code
Section 1933(4) with respect to any destruction of the premises.
ARTICLE VIII
CONDEMNATION
8.1 Effect of Total Taking: If there is a Total Taking during the Lease
Term, the Lease shall terminate on the date that the condemnor has the right
to take actual physical possession of the Leased Premises. At that time and
thereafter, Lessee shall be discharged from all of Lessee's future obligations
under this Lease.
8.2 Effect of Partial Taking: If there is a Partial Taking during the
Lease Term, then this Lease shall continue in full force and effect as to the
remainder of the Leased Premises, except that Lessee can elect to terminate
this Lease if one-third (33.33) or more of the Leased Premises is taken. If
Lessee elects to terminate this Lease, Lessee must exercise its right to
terminate pursuant to this Section by giving notice to Lessor within ten (10)
days after the nature and the extent of the taking have been finally
determined. If Lessee elects to terminate this Lease as provided in this
Section, Lessee also shall notify Lessor of the date of termination, which
date shall not be earlier than ten (10) days nor later than thirty (30) days
after Lessee has notified Lessor of its election to terminate; except that
this Lease shall terminate on the date of taking if the date of taking falls
on a date before the date of termination as designated by Lessee. If Lessee
does not terminate this Lease within the ten (10) day period, this Lease shall
continue in full force and effect, except that on the date that the condemnor
becomes entitled to take actual physical possession of the Leased Premises,
the rent shall be reduced by an amount that is in the same ratio to the rent
as the value of the area of the portion of the Leased Premises taken bears to
the total value of the Leased Premises immediately before that date. All
replacements, repairs, alterations or modifications to the Leased Premises
required by reason of a Partial Taking shall be made by Lessee to the extent
condemnation proceedings are available. If the Leased Premises are taken for
less than the remainder of the Lease Term, the rent shall cease to be abated
or reduced on the date that the condemnor surrenders or abandons the Leased
Premises.
Each party waives the provisions of Code of Civil Procedure Section
1265.130 allowing either party to petition the superior court to terminate
this lease in the event of a partial taking of the premises.
8.3 Distribution of Condemnation Award: The condemnation award shall be
divided as the respective interests of the Lessor and Lessee are determined
pursuant to California Code of Civil Procedure Section 1260.220(a); provided,
however, that if Lessee is in default under the terms of this Lease at the
time of the condemnation award, Lessee shall not receive any part of the
award; and provided further that the award shall be applied toward restoration
of the Leased Premises necessitated by a Partial Taking.
ARTICLE IX
DEFAULT AND REMEDIES
9.1 Lessee's Default Defined: The occurrence of any of the following
shall constitute a default by Lessee:
a. Failure to make payment of any sum of money, including rent, to
Lessor when due, if the failure continues for ten (10) days after notice has
been given to Lessee.
b. Failure to perform any of the provisions of Sections 6.1
through 6.2 of this Lease, if the failure continues for ten (10) days after
notice has been given to Lessee.
c. Failure to perform any other provision of this Lease if the
failure to perform is not cured within thirty (30) days after notice has been
given to Lessee. If the default cannot reasonably be cured within thirty (30)
days, Lessee shall not be in default under this Lease if Lessee commences to
cure the default within the thirty (30) day period and diligently and in good
faith continues to cure the default.
d. An assignment or subletting of the premises, either voluntary
or involuntary, in violation of Sections 10.2 and 10.3 of this lease.
e. Any condition defined as an "Event of Default" in Section
12.9.
f. The filing by Lessee of a voluntary petition in bankruptcy;
the adjudication of Lessee as a bankrupt; or the filing of any involuntary
petition of bankruptcy and failure of Lessee to secure dismissal of the
petition within forty-five (45) days after filing.
9.2 Notice of Default: Notices given pursuant to Section 9.1 shall be
in writing and shall specify the alleged default and the applicable Lease
provisions, and shall demand that Lessee perform the provisions of this Lease
or pay the rent or other monies that are in arrears, as the case may be,
within the applicable period of time, or quit the premises. No such notice
shall be deemed a forfeiture or a termination of this Lease unless Lessor
expressly so elects in the notice.
9.3 Lessor's Remedies for Default by Lessee: In the event that Lessee
is in default under Section 9.1, Lessor shall be entitled to resort to any and
all remedies provided by California law or in this Lease.
ARTICLE X
SALE, TRANSFER, OR ASSIGNMENT OF LEASED PREMISES
10.1 Effect on Lease of Sale by Lessor: If Lessor sells or transfers
all or any portion of the Leased Premises, Lessor, on consummation of the sale
or transfer, shall be released from any liability accruing under this Lease if
Lessor's successor has assumed in writing, for the benefit of Lessee, Lessor's
obligations under this Lease.
10.2 Prohibition Against Voluntary Assignment, Subletting, and
Encumbering: Lessee shall not voluntarily assign or encumber its interest in
this lease or in the premises, or sublease all or any part of the premises, or
allow any other person or entity (except Lessee's authorized representatives)
to occupy or use all or any part of the premises, without first obtaining
Lessor's consent, which consent shall not be unreasonably withheld. Any
assignment, encumbrance, or sublease without Lessor's consent shall be
voidable and, at Lessor's election, shall constitute a default. No consent to
any assignment, encumbrance, or sublease shall constitute a further waiver of
the provisions of this Section.
Lessee immediately and irrevocably assigns to Lessor, as security for
Lessee's obligations under this lease, all rent from any subletting of all or
part of the premises as permitted by this lease, and Lessor, as assignee and
as attorney-in-fact for Lessee, or a receiver for Lessee appointed on Lessor's
application, may collect such rent and apply it toward Lessee's obligations
under this lease; except that, until the occurrence of an act of default by
Lessee, Lessee shall have the right to collect such rent.
If Lessee requests Lessor to consent to a proposed assignment or
subletting, Lessee shall pay to Lessor, whether or not consent is ultimately
given, Lessor's reasonable attorneys' fees incurred in connection with each
such request.
10.3 Involuntary Assignment: Except for assignments that occur in
conjunction with a merger or acquisition of Lessee, no interest of Lessee in
this lease shall be assignable by operation of law (including, without
limitation, the transfer of this lease by testacy or intestacy). Each of the
following acts shall be considered an involuntary assignment:
1. If Lessee is or becomes bankrupt or insolvent, makes an assignment
for the benefit of creditors, or institutes a proceeding under the Bankruptcy
Act in which Lessee is the bankrupt; or, if Lessee is a partnership or
consists of more than one person or entity, if any partner of the partnership
or other person or entity is or becomes bankrupt or insolvent, or makes an
assignment for the benefit of creditors;
2. If a writ of attachment or execution is levied on this lease;
3. If, in any proceeding or action to which Lessee is a party, a
receiver is appointed with authority to take possession of the premises.
An involuntary assignment shall constitute a default by Lessee and Lessor
shall have the right to elect to terminate this lease, in which case this
lease shall not be treated as an asset of Lessee.
If a writ of attachment or execution is levied on this lease, Lessee
shall have ten (10) days in which to cause the attachment or execution to be
removed. If any involuntary proceeding in bankruptcy is brought against
Lessee, or if a receiver is appointed, Lessee shall have sixty (60) days in
which to have the involuntary proceeding dismissed or the receiver removed.
ARTICLE XI
SURRENDER AND REMOVAL
11.1 Surrender of Leased Premises: Upon the expiration of the Lease
Term, or any earlier termination of the Lease, Lessee shall surrender the
Leased Premises to Lessor in as good a condition as they were in at the time
Lessee took possession of the Leased Premises, including all improvements and
alterations to the Leased Premises except as otherwise specified in Section
11.2.
11.2 Removal of Lessee's Personal Property: Upon the expiration of the
Lease Term or any earlier termination of the Lease if Lessee is not in
default, Lessee may remove or cause to be removed all movable furniture,
furnishings, inventory,' equipment, trade fixtures and signs installed or
located on the Leased Premises. Any such property that is not removed from the
Leased Premises within sixty (60) days after the date of any expiration or
termination of this Lease, shall thereafter belong to Lessor without the
payment of any consideration. Lessee shall promptly repair any damage to the
Leased Premises caused by the removal of Lessee's property.
11.3 Lessee's Quitclaim: Upon the expiration of the Lease Term or any
earlier termination of this Lease, Lessee shall execute, acknowledge and
deliver to Lessor a proper instrument in writing, releasing and quitclaiming
to Lessor all right, title and interest of Lessee in and to the Leased
Premises, including all alterations and improvements which Lessee is not
entitled to remove.
ARTICLE XII
ENVIRONMENTAL MATTERS
12.1 Definition of "Environmental Condition": As used in this
Agreement, the term "Environmental Condition" shall mean the presence of any
"hazardous substance" as defined in Section 12.2.
12.2 Definition of "Hazardous Substances.": As used in this Agreement,
the term "Hazardous Substances" shall mean any hazardous, toxic, or
radioactive substances, materials or wastes, pollutants, or contaminants as
defined, listed, or regulated by any federal, state, or local law, regulation,
or order, or by common law decision applicable to the Leased Premises,
excluding those used for "Everyday Uses" as defined in Section 12.4.
12.3 Definition of "Remediate" and "Remedial Work": "Remediate" and
"Remedial Work" shall include all activities for the cleanup of contamination
or Environmental Conditions on the property, including excavation, removal,
replacement, or reinjection of contaminated soils and groundwater;
installation, maintenance, and replacement of other facilities for soil and
ground water decontamination; monitoring and reporting; and final site
restoration for the remediation activities.
12.4 Definition of "Everyday Uses": "Everyday Uses" shall mean the
normal use of (i) fuel oil and natural gas for heating; (ii) lubricating,
cleaning, coolant, and other compounds customarily used in building
maintenance; (iii) materials routinely used in the day-to-day operations of an
office project, such as copier toner; (iv) consumer products; (v) materials
reasonably necessary and customarily used in construction and repair of the
Leased Premises; and (vi) fertilizers, pesticides and herbicides commonly used
for routine office landscaping.
12.5 Use of Hazardous Substances: Lessee shall not cause, or allow any
guest, invitee, employee, or agent of Lessee to cause, any Hazardous
Substances (as defined in Section 12.2, above) to be used, generated, stored,
or disposed of on or about the Premises, other than Everyday Uses, without the
prior written consent of Lessor, which consent may be withheld in the
reasonable discretion of Lessor, and which consent may be revoked at any time.
12.6 Hazardous Discharges or Environmental Complaints:
(a) If Lessee receives any notice of the happening of any event
involving an emission, spill, release, or discharge into or upon (i) the air,
(ii) soils or any improvements located thereon, (iii) surface water or ground
water, or (iv) the sewer, septic system or waste treatment, storage or
disposal system servicing the Leased Premises, of any toxic or hazardous
substances or wastes (intended hereby and hereafter to include any and all
such material listed in any federal, state or local law, code and ordinance
and all rules and regulations promulgated thereunder, as hazardous or
potentially hazardous) (any of which is hereafter referred to as a "Hazardous
Discharge"), or any complaint, order, directive, claim, citation or notice by
any governmental authority or any other person or entity with respect to (v)
air emissions, (vi) spills, releases or discharges to soils or any
improvements located thereon, surface water, ground water or the sewer, septic
system or waste treatment, storage or disposal systems servicing the Leased
Premises, (vii) noise emissions, (viii) solid or liquid waste disposal, (ix)
the use, generation, storage, transportation or disposal of toxic or hazardous
substances or wastes or (x) or other environmental, health or safety matters
affecting Lessee, the Leased Premises, any improvements located thereon, or
the business therein conducted (any of which is hereafter referred to as an
"Environmental Complaint"), then Lessee shall give immediate oral and written
notice of same to Lessor, detailing all relevant facts and circumstances.
(b) Without limitation on the foregoing, Lessor shall have the
option, but shall not be obligated, to exercise any of its rights as provided
in this Agreement and may enter onto the Leased Premises and take any actions
as it deems necessary or advisable to cleanup, remove, resolve or minimize the
impact of, or otherwise deal with, any Hazardous Discharge or Environmental
Complaint upon Lessor's receipt of any notice from any person or entity
asserting the happening of a Hazardous Discharge or an Environmental Complaint
on or pertaining to the Leased Premises. All costs and expenses incurred by
Lessor in the exercise of any such rights shall be deemed to be additional
rent hereunder and shall be payable to Lessor upon demand.
12.7 Environmental Indemnification:
Lessee agrees to indemnify, defend by counsel acceptable to Lessor and
hold harmless Lessor, its subsidiaries, affiliates, successors, and assigns
and their respective directors, officers, employees, shareholders,
representatives and agents (hereinafter referred to collectively as "Lessor")
from and against and in respect of any and all claims, damages (including,
without limitation, diminution in value), losses, liabilities and expenses,
lawsuits, deficiencies, interest, penalties, attorneys' fees, and all amounts
paid in defense or settlement of the foregoing whether or not arising out of
third-party claims, which may be imposed upon or incurred by Lessor or
asserted against Lessor by any other party or parties (including Governmental
Entities), in connection with any Environmental Conditions or the remediation
of any Environmental Conditions (whether now known or hereafter discovered),
or any Environmental Noncompliance arising out of, resulting from, or
attributable to, the assets, business, or operations of Lessee at the Leased
Premises, including without limitation any claims, expenses, losses,
liabilities, etc. resulting from the alleged exposure of any person to
Environmental Conditions, if resulting from activities of Lessee or Lessee's
agents, representatives, employees or independent contractors, and the breach
of any of Lessee's representations and warranties below. Lessee's obligations
pursuant to this Article shall exist regardless of whether Lessor is alleged
or held to be strictly or jointly and severally liable.
Lessor agrees to indemnify, defend by counsel acceptable to Lessee and
hold harmless Lessee, its subsidiaries, affiliates, successors, and assigns
and their respective directors, officers, employees, shareholders,
representatives and agents (hereinafter referred to collectively as "Lessee")
from and against and in respect of any and all claims, damages (including,
without limitation, diminution in value), losses, liabilities and expenses,
lawsuits, deficiencies, interest, penalties, attorneys' fees, and all amounts
paid in defense or settlement of the foregoing whether or not arising out of
third-party claims, which may be imposed upon or incurred by Lessee or
asserted against Lessee by any other party or parties (including Governmental
Entities), in connection with any Environmental Conditions or the remediation
of any Environmental Conditions (whether now known or hereafter discovered),
or any Environmental Noncompliance arising out of, resulting from, or
attributable to, the assets, business, or operations of Lessor at the Leased
Premises, including without limitation any claims, expenses, losses,
liabilities, etc. resulting from the alleged exposure of any person to
Environmental Conditions, if resulting from activities of Lessor or Lessor's
agents, representatives, employees or independent contractors, and the breach
of any of Lessor's representations and warranties below. Lessor's obligations
pursuant to this Article shall exist regardless of whether Lessee is alleged
or held to be strictly or jointly and severally liable.
12.8 Reporting Requirements: Lessee shall promptly supply Lessor with
copies of all notices, reports, correspondence, and submissions made by Lessee
to EPA, the United States Occupational Safety an Health Administration or any
other local, state, or federal authority which requires submission of any
information concerning environmental matters or hazardous or toxic wastes or
substances.
12.9 Events of Default: The occurrence of any of the following
events shall constitute an Event of Default under this Lease, entitling Lessor
to all of the rights and remedies provided in Article IX;
(a) If Lessor receives its first notice of a Hazardous Discharge
or Environmental Complaint from a source other than Lessee, and the Lessor
does not receive notice (which may be given in oral form, provided same is
followed with all due dispatch by written notice given by Certified Mail,
Return Receipt Requested) of such Hazardous Discharge or Environmental
Complaint from Lessee within twenty-four (24) hours of the time Lessor first
receives said notice from a source other than Lessee; or
(b) If any federal, state, or local agency asserts or creates a
lien upon the Leased Premises or any portion thereof by reason of the
occurrence of a Hazardous Discharge or Environmental Complaint and such lien
is not released within ten (10) days of its creation; or
(c) If any federal, state, or local agency asserts a claim
against Lessee or Lessor for damages or cleanup costs relating to a Hazardous
Discharge or Environmental Complaint; provided, however, such claim shall not
constitute a default if, within five (5) days of the occurrence giving rise to
the claim;
(i) Lessee can prove to Lessor's satisfaction that Lessee
has commenced and is diligently pursuing either (1) a cure or correction of
the event which constitutes the basis for the claim and continues diligently
to pursue such cure or correction to completion or (2) proceedings for an
injunction, a restraining order or other appropriate emergent relief
preventing such agency or agencies from asserting such claim, which relief is
granted within ten (10) days of the occurrence giving rise to the claim and
the injunction, order, or emergent relief is not thereafter dissolved or
reversed on appeal; and
(ii) In either of the foregoing events, Lessee has posted a
bond, letter of credit, or other security satisfactory in form, substance, and
amount to Lessor and the agency or entity asserting the claim to secure the
proper and complete cure or correction of the event which constitutes the
basis for a claim.
12.10 Lessee's Remedial Action Responsibility:
(a) With respect to any known or subsequently discovered
Environmental Noncompliance or Environmental Condition caused by Lessee, and
without in any way limiting the scope of Lessee's obligations under the
Environmental Indemnification provisions of this Article, including Section
12.7 above, as between Lessee and Lessor, Lessee will be responsible for all
investigations, studies, cleanup, corrective action, or response or remedial
action required by any local, state, or federal government agency now or
hereafter authorized to regulate environmental matters (hereinafter
"Government Entities"), or by any consent decree, or court or administrative
order now or hereafter applicable to the Leased Premises, or by any federal,
state, or local law, regulation, rule, or ordinance now or hereafter in
effect.
(b) As between Lessor and Lessee, Lessee will pay all costs in
connection with any investigations, studies, cleanup, repair, and remedial
action relating to the matters acknowledged in Section 12.10, paragraph (a)
above including, without limitation, all capital improvements, installation,
operation, maintenance, testing, monitoring costs, preparation of plans,
designs, applications, studies, and reports by or for Governmental Entities or
other regulating agencies, the preparation of closure or other required plans,
the retention of legal counsel, engineers, and other expert consultants.
(c) As between Lessor and Lessee, Lessee shall have the
responsibility and right to participate in the management and control of all
investigations and any environmental cleanup, remediation, or related
activities relating to matters acknowledged in Section 12.10, paragraph (a)
above. Lessee, however, may not negotiate with, fulfill any requirements or
claims made by a Governmental Entity or third party, settle or contest such
requirement or third-party claim without the express approval of Lessor, and
Lessor shall have the right to participate fully in any and all meetings,
negotiations, or decisions relevant to the investigation or remediation of
Environmental Conditions at the Leased Premises.
(d) In the event that Environmental Conditions are discovered at
the Leased Premises subsequent to the date hereof, Lessee shall promptly
notify Lessor of the condition, and if Lessor determines in its sole
discretion that such Environmental Conditions are attributable to the
activities of Lessee's predecessors in interest, Lessor shall have the
exclusive right to manage and control all investigations and any environmental
cleanup, remediation, or related activities, and the exclusive right to
negotiate with and to fulfill any requirements or claims made by a
Governmental Entity or third party related to such Environmental Conditions,
including the right to settle or contest such requirement or third-party
claim. Lessee shall maintain the confidentiality of, and not disclose to
others, any information provided to it by Lessor, pursuant to the terms and
conditions specified by Lessor. Lessor's rights pursuant to this section do
not alter or diminish Lessee's indemnity obligations pursuant to this Article,
including Section 12.7 above.
(e) In the event that Environmental Noncompliance is discovered or
alleged to exist at the Leased Premises subsequent to the date hereof caused
by Lessee, Lessee will pay all reasonable costs incurred by Lessor in
defending and correcting the conditions which constitute Environmental
Noncompliance. Lessor shall promptly notify Lessee of any such Environmental
Noncompliance, but Lessor shall have the exclusive right to manage and control
the resolution of such issues. The provisions of this section do not diminish
Lessee's obligations under this Article, including Section 12.7 above.
12.11 Inspection Rights: Notwithstanding any other provision of this
lease to the contrary, Lessor shall have the right to enter and inspect the
Leased Premises, including but not limited to all structures thereon and the
business operations of Lessee, upon reasonable notice and in a manner so as
not to interfere unreasonably with the conduct of Lessee's business, to
investigate the possibility of any Environmental Condition or Environmental
Noncompliance at, upon, about, or under the Leased Premises. Lessor may
exercise this right at its sole discretion. During such inspection, landlord
shall have the right to take such samples and conduct such tests as it may
determine in its sole discretion to be necessary or advisable. Lessee shall
have the right to split samples of any samples so taken. The incurrence by
Lessor of any expense under the provisions of this shall not impair any claim
for indemnification Lessor may have under the provisions of this Article,
including Section 12.7 above.
12.12 Environmental Assessment: Lessee shall have the right, at its
expense, to conduct an environmental assessment of the Leased Premises at any
time during the Lease Term or Extended Term; provided that, if the
environmental assessment would require any structural or material alterations
to the Leased Premises, Lessee shall obtain the written consent of the Lessor
prior to conducting such an assessment, which consent shall not be
unreasonably withheld; and provided further that the Leased Premises are
restored to their pre-assessment condition by Lessee, at its expense, upon the
completion of the environmental assessment.
ARTICLE XIII
MISCELLANEOUS PROVISIONS
13.1 Lessee's Taking of Possession: Prior to taking possession of the
Leased Premises, Lessee shall have the right to physically inspect the Leased
Premises, including all common areas, to make sure it is in good working order
and condition. Lessee's taking possession of the Leased Premises shall
constitute Lessee's acknowledgement that Lessee is satisfied with the
condition of the Leased Premises. Lessee shall be entitled to take possession
of the Leased Premises upon the execution hereof.
13.2 Lessor's Right of Entry and Inspection: Lessor, and its authorized
agents and representatives, shall, upon reasonable notice, have the right to
enter the Leased Premises at all reasonable times for any of the following
purposes:
a. To determine whether the Leased Premises are in good condition
and whether Lessee is complying with its obligations under this Lease;
b. To do any necessary maintenance and to make any restoration,
replacement or repair of the Leased Premises that Lessor has the right or
obligation to perform;
c. To serve, post or keep posted any notices required or allowed
by this Lease;
d. To post "for sale" signs at any time during the Lease Term, to
post "for rent" or "for lease" signs during the last three months of the Lease
Term, or during any period when Lessee is in default;
e. To show the Leased Premises to prospective brokers, agents,
buyers, tenants, or persons interested in an exchange, at any time during the
Lease Term.
Lessor shall conduct its activities on the Leased Premises as
allowed in this in a manner that will not cause unreasonable inconvenience,
annoyance or disturbance to Lessee.
13.3 Time of Essence: Time is of the essence of each provision of this
Lease.
13.4 Entire Agreement: This Lease contains the entire agreement of the
parties with respect to the matters covered by this Lease, and no other
agreement, statement or promise made by any party, or to any employee, officer
or agent of any party, which is not contained in this Lease shall be binding
or valid.
13.5 Partial Invalidity: If any term, covenant, condition or provision
of this Lease is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the terms, covenants, conditions and
provisions of this Lease shall remain in full force and effect and shall not
be invalidated.
13.6 Interpretation and Headings: The language in all parts of this
Lease shall in all cases be simply construed according to its fair meaning and
not strictly for or against Lessor or Lessee. Captions of the articles and
sections of this Lease are for the purposes of convenience only, and the words
contained in said captions shall in no way be held to explain, modify, amplify
or aid in the interpretation, construction or meaning of the provisions of
this Lease.
13.7 Attorneys' Fees: In the event that either Lessor or Lessee bring
any action or proceeding for damages or for an alleged breach or default of
any provision of this Lease, or to recover rents, or to enforce, protect or
establish any right or remedy of either party, the prevailing party shall be
entitled to recover as a part of such action or proceeding reasonable
attorney's fees and court costs.
13.8 Modification: This Lease is not subject to modification except in
a writing signed by Lessor and Lessee.
13.9 Notices: All notices, demands or requests from one party to
another may be personally delivered or sent by mail, certified or registered,
postage prepaid, to the addresses stated in this Section, and shall be deemed
to have been given at the time of personal delivery, or forty-eight (48) hours
after mailing. Each party shall have the right, from time to time, to
designate a different address by notice given in conformity with this Section.
Lessee: Andrew and Williamson Sales, Co.
Attention: President
9940 Marconi Drive
San Diego, California 92173
Fax: (619) 661-6007
Copy to: Epitope, Inc.
Attention: President
8505 S.W. Creekside Place
Beaverton, Oregon 97008
Fax: (503) 641-8665
Lessor: Williamson & Andrew
Attention: Fred L. Williamson
9940 Marconi Drive
San Diego, California 92173
Fax: (619) 661-6007
Copy to: Fred W. Andrew
P.O. Box 9993
Bakersfield, California 93389
Fax: (805) 397-0557
13.10 Successors, Heirs and Assigns: Each and all of the covenants,
conditions and restrictions contained in this Lease shall be deemed to run
with the land, and shall be binding on and inure to the benefit of the parties
and their successors, heirs, assignees, transferees and subtenants.
13.11 California Law to Govern: The rights and obligations of each of
the parties to this Lease, and the terms of the Lease itself, shall be
interpreted, enforced and governed by the laws of the State of California.
13.12 Real Estate Brokers: Each party represents that it has not had
dealings with any real estate broker, finder or other such person, with
respect to this Lease in any manner. Each party shall indemnify and hold
harmless the other party from all damages resulting from any claims that may
be asserted against the other party by any broker, finder or other person with
whom the indemnifying party has dealt.
13.13 Corporate Authority: Lessee shall deliver to Lessor on execution
of this Lease a certified copy of a resolution of its board of directors
authorizing the execution of this Lease and naming the officers that are
authorized to execute this Lease on behalf of Lessee.
ARTICLE XIV
FORMALITIES
14.1 Recordation: Neither party shall record this Lease without the
written consent of the other party. However, upon the request of either party,
the other party shall join in the execution of a memorandum or "short form" of
this Lease for the purpose of recordation. The memorandum shall, at the
minimum, describe the parties, the Leased Premises and the Lease Term, and
shall incorporate this Lease by reference, and shall be in a form satisfactory
to both parties.
14.2 Counterparts: This Lease, consisting of twenty-two (23) pages, may
be executed by the parties in several counterparts, each of which shall be
deemed to be an original copy.
This Lease was executed by the parties on the dates shown next to the
respective signatures of each of the parties.
LESSOR
WILLIAMSON & ANDREW
Dated: December 12, 1992 By: /s/Fred W. Andrew
Title: Partner
LESSEE
ANDREW AND WILLIAMSON SALES,
CO.
Dated: December 12, 1992 By: /s/ Fred L. Williamson
Title: President
<PAGE>
EXHIBIT 10.14
AMENDMENT TO AGREEMENT
Ferro: Adolph J. Ferro, Ph.D., 5868 Suncreek, Lake Oswego,Oregon 97034
Epitope: Epitope, Inc., 8505 S.W. Creekside Place, Beaverton, Oregon
97008
Agritope: Agritope, Inc., 8505 S.W. Creekside Place, Beaverton, Oregon
97008
SAMase
Technology: SAMase ethylene control technology described and claimed in
United States patent 5,416,250, issued May 16, 1995, for an
invention titled "Genetic Control of Ethylene Biosynthesis in
Plants using S-Adenosylmethionine Hydrolase," invented by
Adolph J. Ferro, Richard K. Bestwick, and Lyle R. Brown.
Date: November 11, 1996
BACKGROUND
Ferro is a co-inventor of the SAMase Technology, which was transferred to
Agritope in 1987 upon the merger of Agricultural Genetic System, Inc., into
Agritope. On December 9, 1987, Ferro and Epitope entered into an Agreement
(the "1987 Agreement") providing for payment of a royalty on the SAMase
Technology to Ferro in connection with the acquisition of the SAMase
Technology by Agritope. The parties wish to amend the 1987 Agreement to
provide for a one-time payment.
AGREEMENT
Payment. Upon execution of this agreement, Epitope shall pay Ferro
$590,000 as the final payment for the acquisition of the SAMase Technology.
Amendment and Release. Ferro accepts the foregoing payment in full
satisfaction of Epitope's remaining obligations with respect to acquisition of
the SAMase Technology under the 1987 Agreement, and agrees that the 1987
Agreement is superseded by this agreement. Ferro hereby releases Epitope from
any further obligations under the 1987 Agreement. Ferro warrants that he has
not assigned any interest in the 1987 Agreement to any other party.
Miscellaneous. This agreement is the entire agreement with respect to
its subject matter, is governed by Oregon law, and shall be binding upon and
inure to the benefit of the parties and their permitted successors and
assigns.
EPITOPE, INC.
By
Adolph J. Ferro, Ph.D. Gilbert N. Miller
Executive Vice President
and Chief Financial Officer
AGRITOPE, INC.
By
Gilbert N. Miller
Executive Vice President
and Chief Financial Officer
<PAGE>
EXHIBIT 10.18
SUPERIOR TOMATO ASSOCIATES, L.L.C.
OPERATING AGREEMENT
February 19, 1996
<PAGE>
TABLE OF CONTENTS
Page
Article I Certain Definitions. . . . . . . . . . . . . . . . . . . . . . 2
1.1 Certain Definitions. . . . . . . . . . . . . . . . . . . . . . 2
(a) Accounting Period. . . . . . . . . . . . . . . . . . . . 2
(b) Additional Member. . . . . . . . . . . . . . . . . . . . 2
(c) Adjusted Asset Value . . . . . . . . . . . . . . . . . . 2
(d) Affiliate. . . . . . . . . . . . . . . . . . . . . . . . 2
(e) Capital Account. . . . . . . . . . . . . . . . . . . . . 2
(f) Capital Commitment . . . . . . . . . . . . . . . . . . . 3
(g) Code . . . . . . . . . . . . . . . . . . . . . . . . . . 3
(h) Company Income Or Loss . . . . . . . . . . . . . . . . . 3
(i) Company Percentage . . . . . . . . . . . . . . . . . . . 3
(j) Depreciation . . . . . . . . . . . . . . . . . . . . . . 3
(k) Development And Marketing Agreement. . . . . . . . . . . 3
(l) Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . 3
(m) in interest; Majority In Interest. . . . . . . . . . . . 3
(n) Manager. . . . . . . . . . . . . . . . . . . . . . . . . 3
(o) Member . . . . . . . . . . . . . . . . . . . . . . . . . 3
(p) Members' Council . . . . . . . . . . . . . . . . . . . . 4
(q) Officers . . . . . . . . . . . . . . . . . . . . . . . . 4
(r) Treasury Regulations . . . . . . . . . . . . . . . . . . 4
Article II Name, Purposes And Place Of Business Of Company. . . . . . . . 4
2.1 Company Name . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.2 Company Purposes . . . . . . . . . . . . . . . . . . . . . . . 4
2.3 Principal Place Of Business. . . . . . . . . . . . . . . . . . 4
2.4 Registered Agent And Office. . . . . . . . . . . . . . . . . . 4
Article III Period Of Duration . . . . . . . . . . . . . . . . . . . . . . 5
3.1 Period Of Duration . . . . . . . . . . . . . . . . . . . . . . 5
Article IV Names, Admission, Rights And Obligations . . . . . . . . . . . 5
4.1 Names And Addresses. . . . . . . . . . . . . . . . . . . . . . 5
4.2 Admission Of Members . . . . . . . . . . . . . . . . . . . . . 5
4.3 Limitation Of Liability. . . . . . . . . . . . . . . . . . . . 5
4.4 Company Debt Liability . . . . . . . . . . . . . . . . . . . . 5
4.5 Restrictions On Transfers Of Company Interests . . . . . . . . 5
4.6 Withdrawal Of Member . . . . . . . . . . . . . . . . . . . . . 6
Article V Management, Duties And Restrictions. . . . . . . . . . . . . . 6
5.1 Management . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5.2 Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5.3 The Members' Council . . . . . . . . . . . . . . . . . . . . . 6
5.4 Resignation Of Manager, Officers And Members Of Members'
Council; Removal of Manager. . . . . . . . . . . . . . . . . . 6
5.5 Determination By The Manager. . . . . . . . . . . . . . . . . 6
5.6 Restrictions On The Members. . . . . . . . . . . . . . . . . . 7
5.7 Manager's And Officers' Standard Of Care . . . . . . . . . . . 7
5.8 No Exclusive Duty To Company . . . . . . . . . . . . . . . . . 7
5.9 Indemnity Of The Manager And Officers. . . . . . . . . . . . . 7
Article VI Capital Accounts; Capital Commitment . . . . . . . . . . . . . 8
6.1 Capital Accounts . . . . . . . . . . . . . . . . . . . . . . . 8
6.2 Initial Capital Contributions. . . . . . . . . . . . . . . . . 8
6.3 Additional Capital Commitments . . . . . . . . . . . . . . . . 8
6.4 Noncontributing Members. . . . . . . . . . . . . . . . . . . . 9
6.5 Additional Capital Contributions; Right Of First Refusal . . . 9
6.6 Allocations To New Members . . . . . . . . . . . . . . . . . . 10
Article VII Allocations. . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.1 Allocation Of Company Income Or Loss . . . . . . . . . . . . . 10
7.2 Income Tax Allocations . . . . . . . . . . . . . . . . . . . . 10
Article VIII Fees And Expenses. . . . . . . . . . . . . . . . . . . . 10
8.1 Management Compensation. . . . . . . . . . . . . . . . . . . . 10
Article IX Distributions To And Withdrawals By Members. . . . . . . . . . 10
9.1 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
9.2 Withdrawals By Members . . . . . . . . . . . . . . . . . . . . 10
9.3 Distributions. . . . . . . . . . . . . . . . . . . . . . . . . 11
9.4 Members' Obligation To Repay Or Restore. . . . . . . . . . . . 11
Article X Protective Rights. . . . . . . . . . . . . . . . . . . . . . . 11
10.1 Approval By Members. . . . . . . . . . . . . . . . . . . . . . 11
10.2 Approval By Other Members. . . . . . . . . . . . . . . . . . . 12
Article XI Dissolution Of Company . . . . . . . . . . . . . . . . . . . . 12
11.1 Early Termination Of The Company . . . . . . . . . . . . . . . 12
11.2 Dissolution Procedures . . . . . . . . . . . . . . . . . . . . 12
Article XII Reports And Financial Accounting . . . . . . . . . . . . . . . 13
12.1 Financial Records. . . . . . . . . . . . . . . . . . . . . . . 13
12.2 Annual Reports . . . . . . . . . . . . . . . . . . . . . . . . 13
12.3 Tax Matters Member . . . . . . . . . . . . . . . . . . . . . . 13
12.4 Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . 14
12.5 Audit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Article XIII Amendment. . . . . . . . . . . . . . . . . . . . . . . . 14
13.1 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Article XIV Other Provisions . . . . . . . . . . . . . . . . . . . . . . . 14
14.1 Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
14.2 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
14.3 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 14
14.4 Binding Agreement. . . . . . . . . . . . . . . . . . . . . . . 14
14.5 Entire Agreement; Captions . . . . . . . . . . . . . . . . . . 15
14.6 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . 15
14.7 Waiver Of Action For Partition . . . . . . . . . . . . . . . . 15
14.8 Execution Of Additional Instruments. . . . . . . . . . . . . . 15
14.9 Waivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
14.10 Rights And Remedies Cumulative . . . . . . . . . . . . . . . . 15
14.11 Severability . . . . . . . . . . . . . . . . . . . . . . . . . 15
14.12 Heirs, Successors And Assigns. . . . . . . . . . . . . . . . . 15
14.13 Creditors. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
<PAGE>
SUPERIOR TOMATO ASSOCIATES, L.L.C.
OPERATING AGREEMENT
This Operating Agreement (the "Agreement") is made as of the 19th day of
February, 1996, by and among Agritope, Inc., a Delaware corporation
("Agritope"), Sunseeds Company, a --------------- corporation ("Sunseeds"),
and Andrew and Williamson Sales Company, Inc., a --------------- corporation
("A&W") with respect to the operation of Superior Tomato Associates, L.L.C., a
Delaware limited liability company (the "Company").
Whereas, Superior Tomato Associates is being formed, pursuant to the
provisions of the Delaware Limited Liability Company Act (the "Delaware Act"),
upon the filing of a Certificate of Formation with the Secretary of State of
the State of Delaware;
Whereas, the purpose of the Company is to combine Sunseeds' tomato seed
genetics and know-how with Agritope's SAMase technology and know-how and A&W's
growing, packing and distribution know-how to produce and commercialize in
North America economically superior tomatoes for the fresh market; the product
(the "Product") shall be fresh market cherry, roma and vine ripened large
fruited tomato varieties using seed developed by the Company;
Whereas, the Members have entered into this Agreement, setting forth
their respective ownership interests in the Company and the principles by
which it will be operated and governed;
Whereas, concurrently with the execution and delivery of this Agreement,
the parties are entering into a Development and Marketing Agreement, under
which:
Agritope will grant to the Company a non-exclusive license to Agritope's
proprietary technology of regulating ethylene production in tomato
(hereinafter "SAMase");
Sunseeds will grant to the Company a non-exclusive license to Sunseeds'
proprietary tomato germplasm and associated know-how;
Agritope and Sunseeds will collaborate to develop seed for the Product;
and
A&W will supply the production acreage and distribution infrastructure
for the development and testing of the Product, will arrange for the
growing of the Product and will pack and distribute the Product.
Whereas, the parties recognize that there exist significant risks
associated with the business to be carried on by the Company, including
without limitation: the risk that the Product might not be successfully
developed, or if successfully developed, might not receive regulatory
approval, the risk that the Product might not generate savings, the risk that
the Product might not achieve market acceptance, the risk of crop failure, the
risk associated with the highly volatile tomato market, the credit risk that
growers may not make the payments due from the growers with respect to the
Product, the risk created by the existence of numerous patents held by
different parties in the field of plant genetics and the possibility that
development or marketing of the Product might be impinged by the existence of
any of such patents.
Now, Therefore, in consideration of mutual covenants and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereby agree as follows:
<PAGE>
Article I
Certain Definitions
1.1 Certain Definitions. For purposes of this Agreement, certain
terms used in this Agreement shall be defined as follows:
(a) Accounting Period. An Accounting Period shall be (i) the
Fiscal Year, if there are no changes in the Members' respective interests in
Company income, gain, loss or deductions during such Fiscal Year except on the
first day thereof, or (ii) any other period beginning on the first day of a
Fiscal Year, or any other day during the Fiscal Year upon which occurs a
change in such respective interests, and ending on the last day of a Fiscal
Year, or on the day preceding an earlier day upon which any change in such
respective interest shall occur.
(b) Additional Member. Additional Member shall mean any person
or entity, other than Agritope, Sunseeds or A&W, who or which is admitted to
the Company as a Member pursuant to the terms of this Agreement.
(c) Adjusted Asset Value. Adjusted Asset Value is defined in
Exhibit B to this Agreement.
(d) Affiliate. An Affiliate of a Member is a person or entity
controlling, controlled by, or under common control with, a Member.
(e) Capital Account. The Capital Account of each Member shall
consist of such Member's original capital contribution (i) increased by any
additional capital contribution, such Member's share of Company Income that is
allocated to it pursuant to this Agreement, and the amount of any Company
liabilities that are assumed by such Member or that are secured by any Company
property distributed to such Member, and (ii) decreased by the amount of any
distributions to, or withdrawals by, such Member, such Member's share of any
Company Loss that is allocated pursuant to this Agreement, and the amount of
any liabilities of such Member that are assumed by the Company or that are
secured by any property contributed by such Member to the Company. The
foregoing provision relating to the maintenance of Capital Accounts is
intended to comply with Treasury Regulation Section 1.704-1(b)(2)(iv) and
shall be interpreted and applied in a manner consistent with such Regulations.
Capital contributions may be made in cash or, to the extent agreed to by a
Majority in Interest of the Members, by an in kind contribution of property or
services at the value agreed to by such Members.
(f) Capital Commitment. A Member's Capital Commitment, if any,
shall mean the amount that such Member has agreed to contribute to the capital
of the Company upon such Member's admission to the Company and from time to
time thereafter, as set forth opposite such Member's name on Exhibit A hereto.
(g) Code. The Code, or the Internal Revenue Code, is the
Internal Revenue Code of 1986, as amended from time to time (or any
corresponding provisions of succeeding law).
(h) Company Income Or Loss. Company Income or Loss is defined
on Exhibit B to this Agreement.
(i) Company Percentage. The Company Percentage for each Member
shall be as set forth on Exhibit A hereto, as amended from time to time in
accordance with the terms of this Agreement.
(j) Depreciation. Depreciation is defined on Exhibit B to this
Agreement.
(k) Development And Marketing Agreement. Development and
Marketing Agreement means the agreement referred to in the fourth Whereas
clause of the Agreement.
(l) Fiscal Year. The Company's Fiscal Year for the period
between the date hereof and March 1, 1996 shall be such period, and for all
years thereafter shall commence on March 1 of each year and end on February 28
or February 29, as the case may be, of the following year except for the final
Fiscal Year of the Company, which shall begin on March 1 of such final Fiscal
Year and end on the date of termination of the Company.
(m) in interest; Majority In Interest. The term "in interest"
shall mean a specified fraction or percentage of the Company Percentages of
all Members (including the Manager) or of designated Members (including the
Manager if within the class of designated Members). A Majority in Interest
shall mean more than 50% in interest.
(n) Manager. Manager shall mean a Member designated or elected
by the Members as Manager pursuant to the terms of this Agreement. As of the
effective date of this Agreement, Agritope is hereby designated as the Manager
pursuant to Section 18-101(10) of the Delaware Act.
(o) Member. Member shall mean each of the Initial Members and
Additional Members as of a given time.
(p) Members' Council. Members' Council shall mean a council
comprised of three individuals, one of whom is appointed by each Initial
Member, for the purpose of providing advice and counsel on the management of
the Company to the Manager. As of the effective date of this Agreement, the
three members of the Members' Council are Adolph Ferro, who is appointed by
Agritope, David Atkinson, who is appointed by Sunseeds, and Fred Williamson,
Sr., who is appointed by A&W, or their respective designees. Each member of
the Members' Council may be removed and replaced at any time by the Member
that appointed such individual.
(q) Officers. Officer shall mean one or more individuals
designated as such by the Manager pursuant to this Agreement.
(r) Treasury Regulations. Treasury Regulations shall mean the
Income Tax Regulations promulgated under the Code, as such Regulations may be
amended from time to time (including corresponding provisions of succeeding
Regulations).
Article II
Name, Purposes And Place Of Business Of Company
2.1 Company Name. The Company shall conduct its activities under the
name Superior Tomato Associates, L.L.C. or such other name as the Manager may
designate.
2.2 Company Purposes. The purpose of the Company is to (i) combine
Sunseeds' tomato seed genetics and know-how with Agritope's SAMase technology
and know-how and A&W's growing, packing and distribution know-how to produce
and commercialize in North American economically superior tomatoes for the
fresh market; the Product shall be fresh market cherry, roma and vine ripened
large fruited tomato varieties using seed developed by the Company,
(ii) engage in any lawful act or activity for which a limited liability
company may be organized under the laws of the State of Delaware and
(iii) engage in all activities necessary, customary, convenient or incident to
any of the foregoing. The Company shall have the power to make and perform
all contracts and to engage in all actions and transactions necessary or
advisable to carry out the purposes of the Company and shall possess all other
powers available to it as a limited liability company under the laws of the
State of Delaware.
2.3 Principal Place Of Business. The principal place of business of
the Company shall be at 8505 SW Creekside Drive, Beaverton, Oregon 97008, or
at such other place or places as the Manager may from time to time determine.
2.4 Registered Agent And Office. The name of the registered agent for
service of process of the Company and the address of the Company's registered
office in the State of Delaware shall be The Prentice-Hall Corporation
Services, 1013 Centre Road, Wilmington, Delaware 19805, or such other agent or
office in the State of Delaware as a Majority in Interest of the Members may
from time to time designate.
Article III
Period Of Duration
3.1 Period Of Duration. The Company's existence commences upon of the
filing with the Secretary of State of the State of Delaware of the Company's
Certificate of Formation and shall continue for a period of thirty (30) years,
unless sooner dissolved as provided in Section 11.1 below.
Article IV
Names, Admission, Rights And Obligations
4.1 Names And Addresses. The names and addresses of the Members, the
amount of their respective Capital Commitments to the Company, if any, and
their respective Company Percentages are set forth on Exhibit A hereto. The
Manager shall cause Exhibit A to be amended from time to time to reflect the
admission of any Additional Member, the withdrawal of any Member, receipt by
the Company of notice of any change of address of a Member, the change in any
Member's Capital Commitment, the change in any Member's Company Percentage, or
the occurrence of any other event requiring amendment of Exhibit A.
4.2 Admission Of Members. Additional Members may be admitted to the
Company upon the written consent of the Manager and with the approval of a
Majority in Interest of the Members.
4.3 Limitation Of Liability. Each Member's liability shall be limited
as set forth in the Delaware Act and other applicable law.
4.4 Company Debt Liability. No Member shall personally be liable for
any debts or losses of the Company beyond such Member's respective Capital
Commitment.
4.5 Restrictions On Transfers Of Company Interests.
(a) Without the written consent of a Majority in Interest of the
non-transferring Members, no Member shall sell, assign, transfer, or otherwise
dispose of such Member's share in the Company.
(b) In the event of any voluntary or involuntary transfer of a
Member's interest in the Company, or any part thereof, the transferee shall
receive only the transferor's economic interest in the Company, and the
transferee shall not be admitted as a Member or have any right as a result of
such transfer to participate in the affairs of the Company, except as provided
by written consent of a Majority in Interest of the non-transferring Members
which consent may be withheld for any reason or for no reason.
4.6 Withdrawal Of Member. A Member may not withdraw or resign without
the consent of a Majority in Interest of the non-resigning or non-withdrawing
Members to such withdrawal and the terms thereof.
Article V
Management, Duties And Restrictions
5.1 Management. Except as otherwise set forth herein, the Manager
shall have the sole right to manage, control, and conduct the affairs of the
Company and to do any and all acts on behalf of the Company, subject to the
provisions of this Agreement which may require the consent of the Members.
5.2 Officers. Subsequent to the date of this Agreement, one or more
Officers may be designated and appointed by the Manager, in consultation with
the members of the Members' Council. The Manager may delegate a portion of
its day-to-day management responsibilities to any such Officers, and such
Officers shall have the authority to execute documents for, contract for,
negotiate on behalf of and otherwise represent, the interests of the Company
as authorized by the Manager in any job description created by the Manager.
Any number of offices may be held by the same person.
5.3 The Members' Council.
(a) The purpose of The Member's Council is to review and advise
concerning the direction and progress of the Company.
(b) Meetings of the Members' Council may be held at any time and
place within or without the State of Delaware whenever called by the Manager
or any Member.
(c) Written notice of the time and place of all meetings of the
Members' Council shall be given by the Manager (or any Member) upon ten (10)
day's notice, unless the Manager, in its sole discretion, determines that a
lesser period of notice is appropriate.
(d) Any member of the Members' Council may participate in a
meeting thereof by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other.
5.4 Resignation Of Manager, Officers And Members Of Members' Council;
Removal of Manager. Any Manager, Officer or member of the Members' Council
may resign at any time by giving written notice to each of the Members. The
Manager may be removed, with or without cause, upon the written direction of a
Majority in Interest of the Members.
5.5 Determination By The Manager. All matters concerning allocations,
distributions and tax elections (except as may otherwise be required by the
income tax laws) and accounting procedures not expressly and specifically
provided for by the terms of this Agreement shall be determined in good faith
by the Manager. Such determination shall be final and conclusive as to all of
the Members.
5.6 Restrictions On The Members. Members other than the Manager shall
not have any power or authority to act for or on behalf of the Company.
5.7 Manager's And Officers' Standard Of Care. In discharging duties,
the Manager or an Officer shall be fully protected in relying in good faith
upon any such records and upon such information, opinions, reports or
statements by any other person, as to matters the Manager or any Officer
reasonably believes are within such other person's professional or expert
competence and who has been selected with reasonable care by or on behalf of
the Company, including information, opinions, reports or statements as to the
value and amount of the assets, liabilities, profits or losses of the Company
or any other facts pertinent to the existence and amount of assets from which
distributions to Members might properly be paid. Unless fraud, deceit or a
wrongful taking shall be proved by a nonappealable court order, judgment,
decree or decision, neither the Manager nor an Officer shall be liable or
obligated to the Members for any mistake of fact or judgment or for the doing
of any act or the failure to do any act by the Manager or any Officer in
conducting the business, operations and affairs of the Company, which may
cause or result in any loss or damage to the Company or its Members. The
Manager or an Officer does not, in any way, guarantee the return of the
Member's Capital Commitment or a profit for the Members from the operations of
the Company. Neither the Manager nor an Officer shall be responsible to any
Member because of a loss of investments or a loss in operations, unless the
loss shall have been the result of fraud, deceit or a wrongful taking by the
Manager or an Officer proved as set forth in this Section 5.7. Neither the
Manager nor an Officer shall incur liability to the Company or to any of the
Members as a result of engaging in any other business or venture.
5.8 No Exclusive Duty To Company. Neither the Manager nor an Officer
shall be required to manage the Company as such party's sole and exclusive
function, and such party and any Member may have other business interests and
may engage in other activities (including, without limitation, activities in
development, production and marketing of tomatoes) in addition to those
relating to the Company. Neither the Company nor any Member shall have any
right, by virtue of this Agreement, to share or participate in such other
investments or activities of the Manager or other Member or to the income or
proceeds derived therefrom.
5.9 Indemnity Of The Manager And Officers.
(a) The Manager (and the directors, officers, employees and
agents of such Manager) or an Officer of the Company (and the heirs,
executors, personal representatives or administrators of such Manager or
Officer) who was or is made a party to, or is involved in any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person is or
was a Manager (or a person acting on behalf of such Manager) or an Officer of
the Company ("Indemnitee"), shall be indemnified and held harmless by the
Company to the fullest extent permitted under Section 18-108 of the Delaware
Act, as the same exists or may hereafter be amended. In addition to the
indemnification conferred in this Article, the Indemnitee shall also be
entitled to have paid directly by the Company the expenses reasonably incurred
in defending any such proceeding against such Indemnitee in advance of its
final disposition, to the fullest extent authorized by applicable law, as the
same exists or may hereafter be amended. The right to indemnification
conferred in this Article shall be a contract right.
(b) The rights and authority conferred in this Article shall not
be exclusive of any other right which any person may have or hereafter acquire
under any statute, provision of the articles of organization or operating
agreement of the Company, agreement, vote of Members, or otherwise.
(c) Any repeal or amendment of this Article by the Members of
the Company shall not adversely affect any right or protection of a Manager or
Officer existing at the time of such repeal or amendment.
Article VI
Capital Accounts; Capital Commitment
6.1 Capital Accounts. An individual Capital Account shall be
maintained on the Company's books for each Member.
6.2 Initial Capital Contributions.
(a) Agritope and Sunseeds will each make capital contributions
to the Company up to $100,000. Said contributions shall be made in the form
of invoices submitted to the Company by Agritope and Sunseeds with Agritope
and Sunseeds receiving capital account credits for the amount of such invoices
up to $100,000 each. Each invoice shall represent the cost of Agritope or
Sunseeds, as applicable, of performing its assigned work under the Development
and Marketing Agreement as determined based on generally accepted cost
accounting principles, to include: (i) direct labor, payroll and related
costs, including taxes and benefits, (ii) direct material costs, and (iii) an
additional amount, not to exceed 30% of direct labor costs, for indirect costs
(i.e., overhead). Invoices submitted in excess of $100,000 by either Agritope
or Sunseeds shall be paid out of contributions made by A&W to the extent
provided for in subsection (b).
(b) A&W will contribute capital to the Company at the level of
$8,000 per month, with the first contribution due on the signing of this
Agreement, and each subsequent contribution due on the fifteenth day of each
month thereafter (the final contribution being $4,000) up to a total of
$100,000. Invoices submitted in excess of $100,000 by either Agritope or
Sunseeds shall be reimbursed out of cash contributions made by A&W as per the
budget approved by the Members' Council.
6.3 Additional Capital Commitments. Within ten (10) days of a written
notice of the Manager, each Member shall contribute to the Company by wire
transfer or check the amount set forth opposite such Member's name under the
heading "Additional Capital Commitment" on Exhibit A hereto, which amount
shall be credited to each Member's Capital Account. The Manager may give the
notice for the first $100,000 of each Members's Additional Capital Commitment
at any time after January 1, 1997 and may give the notice for the second
$100,000 of each Member's Additional Capital Commitment at any time after
January 1, 1998.
6.4 Noncontributing Members. The Company will be entitled to enforce
the obligations of each Member to make the contributions to capital specified
in Sections 6.2 and 6.3 above, including the obligations of Agritope and
Sunseeds to perform their assigned work under the Development and Marketing
Agreement and submit invoices therefor, and the Company will have all remedies
available at law or in equity in the event any such contribution is not so
made. If any legal proceedings relating to the failure of a Member to make
such a contribution are commenced, such Member shall pay all costs and
expenses incurred by the Company, including attorneys' fees, in connection
with such proceedings, but the payment of such costs and expenses shall not be
treated as a capital contribution to the Company. Without limiting the
foregoing remedies, if a Member fails to make a Capital Contribution within
the time period set forth in Sections 6.2 above, then, at the election of a
Majority in Interest of the other Members, the Company Percentage of the
defaulting Member shall be reduced to zero (0) and the Company Percentages of
the non-defaulting Members shall be increased by an equal amount and in
proportion to their Company Percentages prior to the default. In addition, a
defaulting Member whose Company Percentage has been so reduced to zero (0)
shall no longer be entitled to receive distribution pursuant to this
Agreement, except distribution as provided in Article XI upon dissolution of
the Company.
6.5 Additional Capital Contributions; Right Of First Refusal.
(a) Each Member shall have a right of first refusal to make its
pro rata share of all capital contributions that the Company may, from time to
time, propose to accept after the date of this Agreement from any other
Member, or from a proposed new Member. Each Member's pro rata share of
capital contributions is the Member's Company Percentage immediately prior to
such new capital contribution.
(b) If the Company proposes to accept additional capital
contributions, it shall give each Member written notice of its intention, the
amount of the capital contribution and the Company Percentage that will be
allocated to the contributor(s) in consideration of such capital contribution.
Each other Member shall have twenty (20) days from the giving of such notice
to agree to contribute its pro rata share of such capital contribution upon
the terms and conditions specified in the notice by giving written notice to
the Company and stating therein the amount to be contributed.
(c) If any Member fails to exercise in full the rights of first
refusal within such twenty (20) day period, (i) the Company shall have sixty
(60) days thereafter to accept the capital contributions in respect of which
such Member's rights were not exercised upon terms and conditions no more
favorable to the contributors thereof than specified in the Company's notice
to the Members pursuant to this Section 6.5. If the Company has not accepted
the capital contributions within such sixty (60) days, the Company shall not
thereafter accept any additional capital contributions, without first offering
such interests to the Member in the manner provided above.
6.6 Allocations To New Members. No Additional Member shall be
entitled to any retroactive allocation of losses, income or expense deductions
incurred by the Company. The Manager may, at its option, at the time an
Additional Member is admitted, close the Company books (as though the
Company's tax year had ended) or make pro rata allocations of loss, income and
expense deductions to an Additional Member for that portion of the Company's
tax year in which an Additional Member was admitted, in accordance with the
provisions of Section 706(d) of the Code and the Treasury Regulations
promulgated thereunder.
Article VII
Allocations
7.1 Allocation Of Company Income Or Loss. Subject to the "Qualified
Income Offset" provisions set forth in Exhibit B, Company Income or Loss for
each Accounting Period shall be allocated one hundred percent (100%) to the
Capital Accounts of the Members in proportion to their respective Company
Percentages.
7.2 Income Tax Allocations. Except as otherwise required by the Code
and the rules and Treasury Regulations promulgated thereunder, a Member's
distributive share of Company income, gain, loss, deduction, or credit for
income tax purposes shall be the same as is entered in the Member's Capital
Account pursuant to this Agreement.
Article VIII
Fees And Expenses
8.1 Management Compensation. The Manager shall be entitled to
compensation on the basis of its reasonable costs for all management services
it provides to the Company as Manager, as approved by a Majority in Interest
of the Members.
Article IX
Distributions To And Withdrawals By Members
9.1 Interest. No interest shall be paid to any Member on account of
its interest in, or Capital Commitment to, the Company.
9.2 Withdrawals By Members. Except as provided herein, no Member may
withdraw any amount from the Company without the consent of all of the other
Members, except upon dissolution of the Company.
9.3 Distributions. At the end of each Fiscal Year, each Member shall
promptly (and in no event later than ninety (90) days after the end of each
Fiscal Year) be paid in cash, fifty percent (50%) of the Company's taxable
income allocable to such Member for the Fiscal Year then ended; provided,
however, the foregoing percentage can be changed by the Manager with the
consent of a Majority in Interest of the Members. In addition to the
foregoing distributions, the Company may ratably distribute cash, securities
and other assets to each of the Members at such times and on such terms and
conditions as the Manager shall deem appropriate if the Manager determines
that such assets are not needed for use (or retained for reasonable reserves)
in the business of the Company. Any such distributions shall be distributed
to the Members pro rata in accordance with Company Percentages, but in no
event shall exceed the cumulative undistributed net income from operations. A
Member's right to participate in distributions under this Section 9.3 shall be
restricted to the extent provided for in Sections 6.4 and 6.5(c).
9.4 Members' Obligation To Repay Or Restore. Except as required by
law, no Member shall be obligated at any time to repay or restore to the
Company all or any part of any distribution made to it from the Company in
accordance with the terms of this Article IX.
Article X
Protective Rights
10.1 Approval By Members. The following will require approval by two-
thirds in interest of the Members.
(a) Any amendment of the Certificate of Formation of the Company
or this Agreement;
(b) The filling of a vacancy in the position of the Manager;
(c) Admission of a new Member;
(d) Approval of the budget on an annual basis, and any
modification to the budget;
(e) Any agreement committing the Company to an obligation in
excess of $10,000;
(f) Any single expenditure or related expenditures in excess of
$5,000;
(g) Creation of any lien or encumbrance on the assets of the
Company;
(h) An alteration of the primary purpose of the Company;
(i) A vote to dissolve the Company;
(j) The sale, exchange or other disposition of all, or
substantially all, of the Company's assets as part of a single transaction or
plan;
(k) The merger of the Company with another limited liability
company, a limited partnership, a general partnership or other entity;
(l) Determination of transfer prices or royalties to be paid to
the Company; and
(m) Approval of growers.
10.2 Approval By Other Members.
(a) A transaction between the Company and any Member, or any
party related to that Member, will require approval of a Majority in Interest
of other Members; and
(b) A decision to compromise the obligation of a Member to
return money or property paid or distributed unlawfully will require approval
of a Majority in Interest of other Members.
Article XI
Dissolution Of Company
11.1 Early Termination Of The Company. The Company shall dissolve and
the affairs of the Company shall be wound up prior to the term provided in
Section 3.1
(a) one hundred eighty (180) days following the death,
dissolution, insanity, retirement, resignation, bankruptcy or expulsion of any
Member or the occurrence of any other event which terminates the continued
membership of a Member, unless two-thirds in interest of the remaining
Members, within ninety (90) days of such event, agree to continue the Company;
(b) upon the vote or written consent of all the Members; or
(c) upon the entry of a decree of judicial dissolution under
Section 18-802 of the Delaware Act;
11.2 Dissolution Procedures. Upon dissolution of the Company at the
expiration of the Company term or as set forth in Section 11.1:
(a) The affairs of the Company shall be wound up and terminated
under the direction of the Manager or the remaining Members in event of the
withdrawal of the Manager. All matters relating to the dissolution and
liquidation of the Company shall be determined by the Manager, or the
remaining Members, as the case may be.
(b) The proceeds of liquidation shall be distributed by the
Company in payment of its liabilities in the following order:
(i) to creditors, other than Members, in the order of
priority established by law;
(ii) to Members in repayment of loans made to the Company;
and
(iii) to all the Members in accordance with the positive
balances in their Capital Accounts and if any Member's Capital Account has a
deficit balance such Member shall not be required to contribute capital to the
Company with respect to such deficit balance.
Article XII
Reports And Financial Accounting
12.1 Financial Records. The books of the Company shall be kept in
accordance with the terms of this Agreement and otherwise in accordance with
generally accepted accounting principles. The records and books of account of
the Company shall be kept at the principal place of business of the Company.
12.2 Annual Reports.
(a) The Company shall transmit to each Member and to each person
(or such Member's or person's legal representative) who was a Member during
any part of the Fiscal Year in question within ninety (90) days after the end
of each Fiscal Year of the Company the following: (1) a balance sheet for the
Company as of the close of the Fiscal Year and a profit and loss statement for
the Fiscal Year then ended, all in reasonable detail; and (2) a report setting
forth the Capital Accounts of each Member and a description of the manner of
their calculation.
(b) The Company shall also transmit within such ninety (90) day
period to each Member then a member of the Company and to each person (or such
Member's or person's legal representative) who was a Member during any part of
the Fiscal Year in question a Schedule K-1 showing such Member's taxable
income from the Company for such Fiscal Year.
(c) The Manager will be responsible to prepare such reports, at
the expense of the Company.
12.3 Tax Matters Member. The Manager shall be the Company's tax
matters member under the Code and under any comparable provision of state law
(the "Tax Matters Member"). A Majority in Interest of the Members may remove,
with or without cause, the Tax Matters Member, and may appoint a new Tax
Matters Member. The Tax Matters Member shall have the same rights and
obligations as the Manager pursuant to Sections 5.7, 5.8 and 5.9 hereof.
12.4 Inspection. Each Member will have the right, at its own expense,
to inspect the books and records of the Company during reasonable business
hours at any time, provided that inspections in excess of once per fiscal year
will be at the inspecting Member's expense.
12.5 Audit. The Manager will arrange, at the Company's expense, for an
audit of the books of the Company as a Majority in Interest of the Members
shall instruct the Manager in writing, and with such accounting firm as a
Majority in Interest of the Members shall approve in writing.
Article XIII
Amendment
13.1 Amendment. This Agreement may be amended by two-thirds in
interest of the Members, provided that, except as provided in Section 6.3
(1) any reduction of a Member's Company Percentage, except in connection with
the contribution of additional capital by one or more Members or addition of a
new Member, (2) any increase in the Capital Commitment of any Member or other
increase in the liabilities, duties, obligations or responsibility of any
member, (3) any modification to the allocation provisions of this Agreement or
(4) any reduction of a Member's Capital Account may only be made with the
consent of such Member.
Article XIV
Other Provisions
14.1 Loans. Subject to Section 10.2 of this Agreement, Members may
make loans to the Company upon such terms and conditions as the Manager may
prescribe.
14.2 Notice. All notices given hereunder shall be in writing. Any
notice herein required to be given to the Company by any of the Members shall
be deemed to have been given when delivered by hand or upon transmission by
telefax or receipt by U.S. Mail or upon confirmed delivery by commercial air
courier at the address set forth in Section 2.3. Any written notice herein
required to be given to a Member shall be deemed to have been given when
delivered by hand or upon transmission by telefax or receipt by U.S. mail or
upon confirmed delivery by commercial air courier at such Member's address set
forth on the signature page hereof, or such other address as may subsequently
be recorded in the records of the Company.
14.3 Counterparts. This Agreement may be executed in more than one
counterpart with the same effect as if the Members executing the several
counterparts had all executed one counterpart.
14.4 Binding Agreement. This Agreement shall be binding on the
assignees and legal successors of the Members.
14.5 Entire Agreement; Captions. This Agreement constitutes the entire
agreement of the parties and supersedes all prior written and verbal
agreements among the Members with respect to the Company. Descriptive titles
are used herein for convenience only and shall not be considered in the
interpretation of this Agreement.
14.6 Governing Law. This Agreement, and the application and
interpretation hereof, shall be governed exclusively by the terms of the
Delaware Limited Liability Company Act.
14.7 Waiver Of Action For Partition. Each Member irrevocably waives
during the term of the Company any right that it may have to maintain any
action for partition with respect to the property of the Company.
14.8 Execution Of Additional Instruments. Each Member hereby agrees to
execute such other and further statements of interest and holdings,
designations, powers of attorney and other instruments necessary to comply
with any laws, rules or regulations.
14.9 Waivers. The failure of any party to seek redress for violation
of or to insist upon the strict performance of any covenant or condition of
this Agreement shall not prevent a subsequent act, which would have originally
constituted a violation, from having the effect of an original violation.
14.10 Rights And Remedies Cumulative. The rights and remedies provided
by this Agreement are cumulative, and the use of any one right or remedy by
any party shall not preclude or waive the right to use any or all other
remedies. Such rights and remedies are given in addition to any other rights
the parties may have by law, statute, ordinance or otherwise.
14.11 Severability. If any provision of this Agreement or the
application thereof to any person or circumstance shall be invalid, illegal or
unenforceable to any extent, the remainder of this Agreement and the
application thereof shall not be affected and shall be enforceable to the
fullest extent permitted by law.
14.12 Heirs, Successors And Assigns. Each and all of the covenants,
terms, provisions and agreements herein contained shall be binding upon and
inure to the benefit of the parties hereto and, to the extent permitted by the
Agreement, their respective heirs, legal representatives, successors and
assigns.
14.13 Creditors. None of the provisions of this Agreement shall be for
the benefit of or enforceable by any creditor of the Company.
In Witness Whereof, the parties hereto have executed this Agreement as
of the date first above written.
Members:
Agritope, Inc.
By: Adolph J. Ferro
Title: President/CEO
Address: 8505 SW Creekside Place
Beaverton, OR 97008
Attn: Chief Executive Officer
Sunseeds Company
By: David Atkinson
Title: President/CEO
Address: 18640 Sutter Blvd.
Morgan Hill, CA 95038
Attn: Chief Executive Officer
Andrew and Williamson Sales Company, Inc.
By: Fred Williamson
Title: President/CEO
Address: 9940 Marconi Drive
San Diego, CA 92173
Attn: Chief Executive Officer
<PAGE>
Exhibit A
SCHEDULE OF MEMBERS
Name Initial Additional
and Capital Capital Company
Address Contribution Commitment Percentage
Agritope, Inc. $100,000 $200,000 33 1/3%
Sunseeds Company $100,000 $200,000 33 1/3%
Andrew and Williamson $100,000 $200,000 33 1/3%
Total $300,000 $600,000 100%
* Exclusive of initial capital contribution
<PAGE>
Exhibit B
CERTAIN DEFINITIONS AND ALLOCATION PROVISIONS
Adjusted Asset Value. The Adjusted Asset Value with respect to any
Company asset shall be the asset's adjusted basis for federal income tax
purposes, except as follows:
(i) The initial Adjusted Asset Value of any asset contributed by a
Member to the Company shall be the gross fair market value of such asset at
the time of contribution, as determined by the contributing Member and the
Company.
(ii) In the discretion of the Manager, the Adjusted Asset Values of all
Company assets may be adjusted to equal their respective gross fair market
values and the resulting unrecognized Company Income or Loss allocated to the
Capital Accounts of the Members, as of the following times: (i) the
acquisition of an additional interest in the Company by any new or existing
Member in exchange for more than a de minimis capital contribution; and (ii)
the distribution by the Company to a Member of more than a de minimis amount
of Company assets, unless all Members receive simultaneous distributions of
either undivided interests in the distributed property or identical Company
assets in proportion to their interests in Company distributions as provided
in Sections 9.3 and 11.2.
(iii) The Adjusted Asset Values of all Company assets shall be adjusted
to equal their respective gross fair market values and the resulting
unrecognized Company Income or Loss allocated to the Capital Accounts of the
Members, as of the following times: (i) the termination of the Company for
federal income tax purposes pursuant to Code Section 708(b)(1)(B); and (ii)
the termination of the Company, either by expiration of the Company's term or
in accordance with Section 10.1.
Company Income or Loss. Company Income or Loss shall be an amount
computed for each Accounting Period as of the last day thereof that is equal
to the Company's taxable income or loss for such Accounting Period, determined
in accordance with Section 703(a) of the Code (for this purpose, all items of
income, gain, loss, or deduction required to be stated separately pursuant to
Code Section 703(a)(1) of the Code shall be included in taxable income or
loss), with the following adjustments:
(i) Any income of the Company that is exempt from federal income tax
and not otherwise taken into account in computing Company Income or Loss
pursuant to this paragraph shall be added to such taxable income or loss;
(ii) Any expenditures of the Company described in Section 705(a)(2)(B)
of the Code or treated as Section 705(a)(2)(B) of the Code expenditures
pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(i) and not otherwise
taken into account in computing Company Income or Loss pursuant to this
paragraph shall be subtracted from such taxable income or loss.
(iii) In the event the Adjusted Asset Value of any Company asset is
adjusted to clause (ii) or (iii) of this definition of Adjusted Asset Value,
the amount of such adjustment shall be taken into account as gain or loss from
the disposition of such asset for purposes of computing Company Income or
Loss.
(iv) Gain or loss resulting from any disposition property with respect
to which gain or loss is recognized for federal income tax purposes shall be
computed by reference to the Adjusted Asset Value of the property disposed of;
and
(v) In lieu of the depreciation, amortization, and other cost recovery
deductions taken into account in computing such taxable income or loss, there
shall be taken into account Depreciation for such Accounting Period.
Depreciation. Depreciation means, for each Accounting Period, an amount
equal to the depreciation, amortization, or other cost recovery deduction
allowable with respect to an asset for such Accounting Period, except that if
the Adjusted Asset Value of an asset differs from its adjusted basis for
federal income tax purposes at the beginning of such Accounting Period,
Depreciation shall be an amount which bears the same ratio to such beginning
Adjusted Asset Value as the federal income tax depreciation, amortization, or
other cost recovery deduction for such Accounting Period bears to such
beginning adjusted tax basis; provided, however, that if the adjusted basis
for federal income tax purposes of an asset at the beginning of such
Accounting Period is zero, Depreciation shall be determined with reference to
such beginning Adjusted Asset Value using any reasonable method selected by
the Manager.
Qualified Income Offset. The allocations provided for in Article VII
shall be subject to the following exceptions:
(i) Any loss or expense otherwise allocable to a Member that exceeds
the balance in such Member's Capital Account shall instead be allocated first
to all Members who have positive balances in their Capital Accounts in
proportion to such positive balances, and when all Members' Capital Accounts
have been reduced to zero (0), then to all Members in proportion to Company
Percentages.
(ii) In the event any Member unexpectedly receives any adjustments,
allocations, or distributions described in Treasury Regulation Section 1.704-
1(b)(2)(ii)(d)(4) through (d)(6), that causes the balance in such Member's
Capital Account to be reduced below zero (0), items of Company income and gain
shall be specially allocated to such Member in an amount and manner sufficient
to eliminate the deficit balance in its Capital Account created by such
adjustments, allocations, or distributions as quickly as possible.
(iii) For purposes of the foregoing, the balance in a Member's Capital
Account shall take into account the adjustments provided in Treasury
Regulation Section 1.704-1(b)(2)(ii)(d)(4) through (d)(6).
(iv) Any special allocations of items of profit, income, gain, loss or
expense pursuant to subparagraphs (i) and (ii) shall be taken into account in
computing subsequent allocations, so that the net amount of any items so
allocated and the profit, gain, loss, income, expense, and all other items
allocated to each Member shall, to the extent possible, be equal to the net
amount that would have been allocated to each such Member if such special
allocations pursuant to subparagraphs (i) and (ii) had not occurred.
<PAGE>
INDEX OF DEFINITIONS
Defined Term Page
Accounting Period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Additional Member. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Adjusted Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Affiliate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Capital Account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Capital Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Company Income Or Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Company Percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Delaware Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Development And Marketing Agreement. . . . . . . . . . . . . . . . . . . . . 3
Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
In Interest; Majority In Interest. . . . . . . . . . . . . . . . . . . . . . 3
Indemnitee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Initial Member . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Internal Revenue Code. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Manager. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Member . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Members' Council . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Tax Matters Member . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Treasury Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE>
EXHIBIT 10.19
DEVELOPMENT AND MARKETING AGREEMENT
THIS AGREEMENT ("Agreement") between SUPERIOR TOMATO ASSOCIATES, L.L.C.,
a Delaware limited liability company ("STA"), AGRITOPE, INC., a Delaware
corporation ("Agritope"), SUNSEEDS COMPANY, a _______________ corporation
("Sunseeds"), and ANDREW AND WILLIAMSON SALES COMPANY, INC., a _______________
corporation ("A&W") is effective as of the 19th day of February, 1996
("Effective Date").
1. Background.
1.1 Concurrently with this Agreement, Agritope, Sunseeds and A&W are
entering into an Operating Agreement of even date (the "Operating Agreement")
for Superior Tomato Associates, L.L.C.
1.2 The parties desire to combine Sunseeds' tomato seed genetics and
know-how with Agritope's SAMase technology and know-how and A&W's growing,
packing and distribution know-how to produce and commercialize in North
America economically superior tomatoes for the fresh market; the product shall
be fresh market cherry, roma and vine-ripened large fruited tomato varieties
using seed developed by STA.
2. Definition Of Terms.
The words appearing in capitalized form throughout this Agreement shall
have the meanings assigned to them in this Section 2.
Affiliate means, for the company, an entity controlling, controlled by,
or under common control with such company. "Control" for the purposes of this
definition shall mean ownership of fifty percent (50%) or more of voting
securities.
Agritope Know-How means unpatented inventions, data, processes,
compositions, techniques and other technical information proprietary to
Agritope, which is solely owned by Agritope or which Agritope has the right to
control the use of, relating to methods for ethylene regulation in the Field.
Agritope Licensed Know-How means all Agritope Know-How in existence as of
the Effective Date or created or acquired during the term of the Cooperative
Development Work.
Agritope Licensed Patents means all Agritope Patents in existence as of
the Effective Date of this Agreement, or claiming an invention conceived or
discovery made, or which are acquired, during the term of the Cooperative
Development Work.
Agritope Patents means all those United States and foreign patent
applications and patents (a) listed on Schedule B to this Agreement to the
extent of claims reading on methods for regulation of ethylene production, (b)
all United States and foreign patent applications and patents, including
continuations and divisions, claiming an invention conceived or discovery made
(including any discovery or breeding of a Novel Variety) solely by employees
and/or agents of Agritope pursuant to the Cooperative Development Work, that
is necessary or useful to apply inventions in clause (a) to the Field, and (c)
any reissues, re-examinations and foreign counterparts of the foregoing. As
used in this definition, the word "patent" includes a certificate issued under
the U.S. Plant Protection Act (and foreign counterparts thereof) and the words
"patent application" includes an application for such certificate.
Applicable Royalty Percentage for a particular variety of Product means
the royalty percentage established pursuant to Section 6.1 of this Agreement
as a function of the Savings Per Box for such variety of Product that is
determined pursuant to Section 3.2 of this Agreement.
Approved Grower means a grower approved pursuant to Section 10.1 of the
Operating Agreement.
Box means, for any variety of tomatoes, a box of a size in which such
variety of tomatoes is most customarily packed.
Comparison Tomato has the meaning set forth in Section 3.2.
Cooperative Development Work means the Cooperative Development Work
described in Section 3 of this Agreement.
Cost of Goods for a product means the full cost of producing or acquiring
the product, as determined by generally accepted cost accounting procedures.
Cost of Goods shall not include general corporate allocations or other
allocations which are not directly related to production of the item and shall
not include amortization of development expenditures. In the event any item
is acquired by a party from an Affiliate of such party, "cost of manufacturing
or acquiring" shall be deemed to mean such Affiliate's cost of manufacturing
or acquiring.
The Field means seeds and fruit for fresh market cherry, roma and vine-
ripened large fruited tomato varieties, which seeds and fruit contain
recombinant genetic material that regulates production of ethylene.
Joint Patents means all United States and foreign patent applications and
patents, including continuations and divisions, claiming an invention
conceived or discovery made (including any discovery or breeding of a Novel
Variety) jointly by employees and/or agents of both Agritope and Sunseeds,
including any reissues, re-examinations and all foreign counterparts thereof.
Ownership of an invention shall conclusively be considered "joint" when one or
more employees or agents from Agritope and one or more employees or agents
from Sunseeds must be indicated as co-inventors or joint breeders under United
States laws on the patent application. As used in this definition, the word
"patent" includes a certificate issued under the U.S. Plant Protection Act
(and foreign counterparts thereof) and the words "patent application" includes
an application for such certificate.
Net Sales means the gross invoice price of each variety of Product sold
by A&W or its agents, on A&W's own behalf or on behalf of any growers, less
the following items, but only insofar as such items are separately invoiced
and included in the gross selling prices: (i) customs duties, import, export,
excise, and sales taxes directly imposed with reference to particular sales;
(ii) costs of transportation; and (iii) credit for returns of defective
Products. In the event of any transfer of Product in other than a bona fide
arm's-length transaction exclusively for money, or any transfer of Product
which otherwise does not result in customary sales revenue, such transfer
shall be (unless the parties agree otherwise) deemed to constitute a sale at
the then current average selling price for the Product.
Novel Variety shall mean "novel variety", as such term is defined in the
U.S. Plant Protection Act (7 U.S.C. Section 2541), as the same may be amended
from time to time.
Product means any product in the Field developed through the Cooperative
Development Work under this Agreement.
Project means the Cooperative Development Work performed by the Parties
to develop, obtain regulatory approval and market a particular variety within
the Field.
Regulatory Approval means (1) in the United States, deregulation from the
U.S.D.A. (or successor agency) and completion of food safety consultations
with the FDA (or successor agency) for production and sales of the Product, or
(2) outside of the United States, analogous order(s) by non-U.S. governmental
agencies which require regulatory approval prior to production and sales of a
Product in such non-U.S. country.
Savings Per Box has the meaning set forth in Section 3.2.
Sharing Payment means any payment provided for in Section 6 hereof.
Sunseeds Know-How means unpatented inventions, data, processes,
compositions, techniques and other technical information proprietary to
Sunseeds, and biological material, which is solely owned by Sunseeds or which
Sunseeds has the right to control the use of, relating to use of tomato
varieties potentially applicable to the Field, including without limitation
proprietary germplasm.
Sunseeds Licensed Know-How means all Sunseeds Know-How in existence as of
the Effective Date or created or acquired during the term of the Cooperative
Development Work.
Sunseeds Licensed Patents means all Sunseeds Patents in existence as of
the effective date of this Agreement, or claiming an invention created, or
discovery made, or which are acquired, during the term of the Cooperative
Development Work.
Sunseeds Patents means all those United States and foreign patent
applications and patents (a) listed on Schedule C to this Agreement, (b) all
United States and foreign patent applications and patents, including
continuations and divisions, claiming an invention conceived or discovery made
(including any discovery or breeding of a Novel Variety) solely by employees
and/or agents of Sunseeds pursuant to the Cooperative Development Work that is
necessary or useful to apply the inventions in clause (a), and any other
matter included within the definition of Sunseeds Patents, to the Field, and
(c) any reissues, re-examinations and foreign counterparts of the foregoing.
Sunseeds Patents also includes Sunseeds' biological material, including
proprietary germplasm, to the extent it is covered by a patent or patent
application. Without limiting the foregoing, Sunseeds Patents shall include
all patent applications and patents on those varieties of tomatoes that may
become the subject of Projects under this Agreement. As used in this
definition, the word "patent" includes a certificate issued under the U.S.
Plant Protection Act (and foreign counterparts thereof) and the words "patent
application" includes an application for such certificate.
Territory means the United States and Canada.
3. Cooperative Development Work.
3.1 Period; Objective. From the Effective Date, Agritope, Sunseeds and
A&W shall work together to develop and obtain any required Regulatory Approval
for Products for STA. STA shall from time-to-time approve specific Projects
for different varieties of Product within the Field. In connection with such
efforts, Sunseeds will furnish to Agritope tomato germplasm for the particular
varieties to be developed in the Projects. Agritope will implant its genetic
material into such germplasm. Sunseeds will make the foundation seed and
hybrid seed. Sunseeds will conduct the breeding activities. Agritope and A&W
will participate in the breeding activities, including selection of hybrid
seed from foundation seed. A&W will supply the production acreage and
distribution infrastructure for the development and testing of the Product.
3.2 Production Testing; Agreement On Cost Savings. At such time as
Agritope and Sunseeds conclude that a particular variety of Product is ready
for production testing, they will so notify A&W. Using seeds provided by
Sunseeds, A&W will then provide approximately 3-5 acres for production testing
of such variety (covering as broad a range of growers and as many locations as
possible) and will grow, or cause Approved Growers to grow, fruit under
conditions resembling as nearly as possible the conditions of large scale
commercial growing. STA will keep detailed records of the cost of growing,
picking and packing such fruit, of the quantity produced, and of shrinkage,
and will furnish such records to Agritope and Sunseeds. A&W will cooperate,
and will obtain the cooperation of each Approved Grower, to furnish to STA
information that STA may reasonably require for such record keeping. A&W will
also grow, or cause Approved Growers to grow, and furnish to STA the same
information concerning the cost of growing, picking and packing, and shrinkage
of, an equivalent quantity of fruit of similar variety using seeds of the type
A&W is then using most commonly in its commercial operations (the "Comparison
Tomato"). Based upon such information (and other industry information as is
available concerning growing, picking and packing of such tomato varieties)
STA will determine in good faith the dollar amount per Box that may be
reasonably expected to be saved by use of such Product, instead of the
Comparison Tomato, in large scale commercial growing, picking and packing.
Such dollar amount per Box, will be referred to in this Agreement as the
"Savings Per Box." STA will inform Agritope, Sunseeds and A&W of such
determination and provide them with the data supporting such determination.
3.3 Exchange Of Information. During the term of the Cooperative
Development Work, Agritope and Sunseeds will exchange with each other and
share with STA all material information developed pursuant to the Cooperative
Development Work, excluding the exchange of Agritope Know-How and information
concerning Agritope Patents and Sunseeds Know-How and information concerning
Sunseeds Patents, relating to the Field. Agritope and Sunseeds will also
furnish to A&W all information concerning the Product that is pertinent to its
production testing. A&W will share with STA and the other parties all
material information concerning the Product developed by A&W in the course of
growing, picking and packing the Product, including quantity and cost.
3.4 Funding.
(a) STA shall fund the Cooperative Development Work for each
Project on a full cost-reimbursement basis in accordance with budgets pre-
approved by STA. STA will have no obligations to fund any expenditures that
are not within such approved budgets. STA will not reimburse parties for any
costs incurred prior to the date of this Agreement.
(b) Each party shall maintain detailed records which accurately
identify costs and expenses incurred and paid in connection with the
Cooperative Development Work for each specific Project. Each party shall
submit this information to STA as of the last day of each month (or such
alternative dates as STA may establish) for the preceding month and shall
submit to STA on January 15 and July 15 of each year an estimate of expenses
to be incurred during the current six months.
4. Production And Supply Of Seeds.
4.1 Sunseeds Responsibilities. Sunseeds will produce and store seeds
for Product and ship such seeds on behalf of and at the direction of STA. STA
will remit to Sunseeds Sunseeds' Cost of Goods for such seeds from STA's
proceeds of sale of such seeds. Sunseeds shall at all times use its best
efforts to supply STA's demand for seeds for Product.
4.2 Seed Allocations.
(a) A&W will have the first right each season to obtain its
requirements of seeds for Product. A&W will provide to STA A&W's forecasts
for seed six months prior to anticipated shipment, and firm orders for seed
(which will not deviate from forecast by more than twenty percent (20%)) 60
days prior to shipment, which orders must be placed by June 1 and December 1
of each year. To the extent firm orders are not received by such dates, STA
may allocate available seeds to third parties. A&W will pay to STA, no later
than thirty (30) days after invoice, STA's Cost of Goods for such seeds, plus
fifteen percent (15%) of such Cost of Goods.
(b) If seeds remain in excess of A&W's requirements, STA may
supply such seeds to third party Approved Growers on the such terms as STA
deems advisable.
4.3 Seed Specifications. Sunseeds shall supply seed for Product that
shall meet the specifications for such seed as approved in writing by STA.
4.4 Failure Of Sunseeds To Meet STA Requirements. To the extent that
Sunseeds cannot meet STA's requirements for seed for Product, STA shall be
free to obtain such seeds from a third party or parties. Sunseeds agrees to
provide the third party that STA selects with the necessary information and
Sunseeds Know-How to allow the third party to produce the seeds. As a
condition to the disclosure to the third party, the third party will execute a
non-disclosure agreement substantially in the form of Exhibit A of this
Agreement.
4.5 Restricted Rights; Labels. A&W will have the right to use the seed
furnished under this Agreement solely to produce fruit in accordance with the
terms of this Agreement and shall require Approved Growers not to propagate
the seed or use it for other purposes. Sunseeds and A&W shall insure that all
seeds provided under Section 4 and under Section 3.2 shall be provided under a
label containing either the words "Unauthorized Propagation Prohibited" or
"Unauthorized Seed Multiplication Prohibited" and, after a certificate issues
under the U.S. Plant Protection Act, words such as "U.S. Protected Variety".
Seeds transferred outside the United States will be transferred under
comparable labels appropriate in the country to which the seeds are
transferred.
5. Marketing And Distribution Rights.
5.1 Commercialization. A&W shall use best efforts to arrange for
Approved Growers to grow fresh tomato Product, and to market and sell fresh
tomato Product in the Territory. STA will not fund or reimburse any growing,
picking, packing or distribution costs for production or sale of Product
(including those expenses incurred pursuant to Section 3.2). A&W will market
and sell all tomato Product under a trade name and mark to be determined by
STA, which trade name and mark will be owned solely by STA.
5.2 Reserved Right To Compete. Each party expressly reserves the right
to research, develop and market products (expressly including tomato products)
which compete indirectly or directly with the Products developed and marketed
under this Agreement.
6. Sharing Of Savings And Premium.
6.1 Applicable Royalty Percentage. STA, in consultation with the other
parties to this Agreement, and with the concurrence of at least two of the
three other parties, will establish an Applicable Royalty Percentage for each
variety of Product based on the Savings Per Box established pursuant to
Section 3.2. In conjunction with its commercialization efforts, A&W will
require each Approved Grower to agree in writing to pay to STA, the Applicable
Royalty Percentage. Any exceptions to the standard Applicable Royalty
Percentage must be approved in writing by STA. In the event that A&W desires
to act as an Approved Grower, the Applicable Royalty Percentage for A&W will
be the Applicable Royalty Percentage established by STA or such other
Applicable Royalty Percentage as STA and A&W shall negotiate. Notwithstanding
any other provision hereof, no Approved Grower (including A&W) will receive
any seed for Product, until such Approved Grower has entered into an agreement
in form and substance satisfactory to STA committing to pay the Applicable
Royalty Percentage.
6.2 Sharing Payments. In consideration of the Cooperative Development
Work to be undertaken and other obligations set forth herein, A&W agrees to
pay STA as follows: No later than thirty (30) days after the first and all
subsequent calendar months following the first sale of Product, A&W shall pay
to STA for each variety of Product an amount equal to the Applicable Royalty
Percentage multiplied by Net Sales of such variety of Product shipped in such
month by A&W and by Approved Growers arranged by A&W. The Sharing Payments
due and payable hereunder shall be computed for each calendar month in the
currency in which the sale was made, but shall be definitively discharged by
payment to STA in U.S. dollars converted from such currency using the closing
spot exchange rate between the two currencies quoted in the Wall Street
Journal (or, if not available, such other mutually agreeable financial
publication of international circulation) in effect on the last business day
of the calendar quarter to which the payment relates.
7. Patents, Know-How, License Grants.
7.1 Agritope Sole Ownership. Agritope shall own all Agritope Patents
and Agritope Know-How.
7.2 Sunseeds Sole Ownership. Sunseeds shall own all Sunseeds Patents
and Sunseeds Know-How.
7.3 A&W Sole Ownership. A&W shall own all A&W patents, trademarks and
labels.
7.4 Joint Patents; Rights In Product.
(a) STA shall own, and is hereby assigned, all Joint Patents on
inventions created or discoveries made in the Cooperative Development Work.
(b) Within the Field STA shall use any Joint Patents solely for
the development and sale of Products pursuant to this Agreement.
(c) Whether or not any Product qualifies as a Joint Patent, the
Product shall be owned by STA, and each party hereby assigns all rights in the
Product to STA.
7.5 Agritope License To STA. Subject to the terms and conditions of
this Agreement, for Product whose production or sale is covered by a claim of
an Agritope Licensed Patent, or which use Agritope Licensed Know-How, Agritope
hereby grants STA a non-exclusive, paid-up, royalty free (except as provided
herein), license, with the right to sublicense with the prior written approval
of Agritope (not to be unreasonably withheld), under Agritope Licensed Patents
and Agritope Licensed Know-How to produce or have produced and use, sell or
have sold such Products, in the Territory.
7.6 Sunseeds License To STA. Subject to the terms and conditions of
this Agreement, for Product whose production or sale is covered by a claim of
a Sunseeds Licensed Patent, or which use Sunseeds Licensed Know-How, Sunseeds
hereby grants STA a non-exclusive, paid-up, royalty free (except as provided
herein), license, with the right to sublicense with the prior written approval
of Sunseeds (not to be unreasonably withheld), under Sunseeds Licensed Patents
and Sunseeds Licensed Know-How to produce or have produced and use, sell or
have sold such Products, in the Territory.
7.7 Notice Of Sole Rights. After the Effective Date of this Agreement,
a party asserting sole ownership of any patent rights or know-how in the Field
developed pursuant to the Cooperative Development Work shall provide
reasonable notice to STA of its intention to seek patent protection or to
assert proprietary interest in such Know-How. STA shall have the right to a
reasonable opportunity to review and comment on such assertions prior to
patent applications being filed. Any dispute among the parties to this
Agreement concerning such assertion shall be resolved by arbitration pursuant
to Section 17.8 hereof.
7.8 Regulatory Files. STA, Agritope and Sunseeds shall each have full
access to all materials filed and correspondence with the U.S.D.A., FDA and
other regulatory agencies in connection with the Cooperative Development Work
and each Product, and shall be entitled to use and rely on such materials with
respect to any regulatory approvals for a product sought by either, whether or
not such product relates to this Agreement.
7.9 Cooperation In Filings, Prosecution and Enforcement. Each party
agrees to take such action and execute such documents as shall be necessary or
appropriate for the filing of notices, certificates and acknowledgments of the
licenses granted and assignments made hereunder, for the prosecution of all
Joint Patents, and for the enforcement against third parties of all
intellectual property rights of STA arising under this Agreement. Each party
hereby grants to STA an irrevocable power-of-attorney coupled with an interest
to undertake such activities and to execute and file all instruments necessary
or appropriate in connection with such activities.
8. Prosecution Of Patent Rights.
8.1 Agritope Patents. Agritope shall have the right, but no
obligation, to timely prepare, file, prosecute and maintain, under its
exclusive control and at its expense, Agritope Patents.
8.2 Sunseeds Patents. Sunseeds shall have the right, but no
obligation, to timely prepare, file, prosecute and maintain, under its
exclusive control and at its expense, Sunseeds patents.
8.3 Joint Patents. STA shall employ counsel acceptable to Agritope and
Sunseeds for the purpose of timely preparing, filing, prosecuting and
maintaining Joint Patents. The reasonable expenses of preparing, filing,
prosecuting and maintaining corresponding Joint Patents shall be borne by STA.
8.4 Prior Art; Review And Comment. Agritope and Sunseeds shall each
cooperate with the other to ensure that all prior art that is pertinent to the
examination of a Joint Patent is brought to the attention of the other party.
Each of the parties shall have the right to review and comment on substantive
documents prepared in connection with the preparation, filing, prosecution and
maintenance of the Joint Patents prior to the filing of such papers; however,
such review and comment shall be performed expeditiously so as not to
negatively affect patent rights.
9. Trademarks.
No party to this Agreement shall have the right to use any trademark of
any other party without such party's prior written consent.
10. Confidential Information.
10.1 Confidentiality Agreement. The use and disclosure of proprietary
information shall be governed by the attached Schedule A Non-Disclosure
Agreement. The Schedule A Non-Disclosure Agreement shall survive termination
of this Agreement.
10.2 Use Of Consultants. The parties contemplate that from time to time
during the term of this Agreement third party technical consultants may be
employed by either party in connection with the development of Products. The
parties agree that information designated as confidential may be disclosed to
such consultants provided that the other party is given reasonable notice of
the circumstances and nature of the intended disclosure and that the
disclosure is limited to information necessary to enable the technical
consultant to provide technical consulting services. The consultant will be
required to sign an agreement committing the consultant to protect such
confidential information.
11. Reports.
11.1 Quarterly Sales Reports. Each monthly payment made to STA under
Section 6 shall be accompanied by a full and accurate accounting by A&W. Each
such report shall include at least the following information for each type of
Product as to each country during the month:
(a) The gross invoice price of each variety of Product shipped;
(b) The applicable deductions from such invoice price to yield
Net Sales for each variety of Product shipped; and
(c) Computation of the sharing payment due to STA pursuant to
Section 6.1 of this Agreement.
11.2 Cost Of Goods. Sunseeds will furnish to STA, and STA will furnish
A&W, reports on such party's Cost of Goods for seed Product shipped to such
party.
12. Books And Records.
12.1 Records. Each party shall keep full and accurate books of account
containing all particulars that may be necessary for the purpose of
calculating all amounts owing to the other parties. Books of account
maintained by the parties shall be kept at their principal place of business.
All such reports and data shall be open for inspection on a confidential basis
at all reasonable times and either Party may conduct at its own expense, once
every year during normal business hours through an independent certified
public accountant, an examination of the accounts contemplated above. If any
audit shall show that the selling party underpaid the amounts due under this
Agreement herein as to the period subject of the audit, then the party which
underpaid shall immediately pay such deficiency with interest thereon in
accordance with Section 12.3. If the underpayment shall exceed five percent
(5%) of the amount owed for any calendar year, the party underpaying shall
also reimburse the other for costs related to such audit.
12.2 Retention. Books and records required to be maintained by the
Parties hereunder shall be retained for at least three (3) years from the date
of the payment to which they pertain.
12.3 Interest. All payments due hereunder that are not paid when due
and payable hereunder shall bear interest at an annual rate equal to 4% (four
percent) above the U.S. dollar reference rate ("prime rate") charged from time
to time by Bank of America N.T. & S.A. from the date due until paid or at such
lower rate as shall be the maximum rate permitted by law.
13. Term.
This Agreement shall continue so long as any Product is being developed
or marketed under this Agreement, unless terminated earlier pursuant to
Section 14.
14. Breach.
14.1 Material Breach. STA may terminate this Agreement as to any party
for any material breach by such party of this Agreement or the Operating
Agreement thirty (30) days after providing the other party with written
details of the breach if the breach remains uncured at the end of the thirty
(30) day notice period. Any party may terminate its obligations under this
Agreement for any material breach by STA thirty (30) days after providing STA
with written details of the breach if the breach remains uncured at the end of
such thirty (30) day notice period. In the event of any such termination as
to a party, except arising from a material breach by STA, such party shall
immediately deliver to STA all information and work in process developed under
the Cooperative Development Work.
15. Representations And Indemnities.
15.1 Agritope Representations. Agritope represents and warrants that as
of the Effective Date:
(a) It has granted no prior license or assignment of rights under
the Agritope Patents in the Field.
(b) There are no foreign or United States administrative,
judicial or Patent and Trademark Office proceedings contesting the
inventorship or ownership of any Agritope Patent that is likely to be embodied
or used in a Product;
(c) Neither the execution and delivery of this Agreement, nor the
performance of the obligations of Agritope hereunder shall result in a
violation, breach or event of default (or any event or condition which with
notice or the passage of time or both would constitute an event of default) of
or with respect to any agreement, mortgage, indenture or order of any court of
competent jurisdiction binding upon Agritope or upon the property of Agritope;
(d) It is party to no contract materially adverse to the
obligations undertaken and rights granted in this Agreement;
(e) It holds a patent to the SAMase gene and has obtained a
license to the binary vector system to be used in developing the Product; it
has consulted with patent counsel concerning the patent rights of third
parties and, to the best of its knowledge, it is free to operate using its
technology as contemplated in this Agreement without infringement of the
rights of third parties. There is no assurance, however, that rights of third
parties will not impinge on such freedom to operate.
EXCEPT AS SET FORTH IN THIS SECTION 15.1, AGRITOPE MAKES NO
REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT
LIMITATION ANY WARRANTY OF NON-INFRINGEMENT.
15.2 Agritope Indemnification -- Representations And Warranties.
Agritope shall indemnify STA for any losses sustained or expenses incurred by
STA as a result of a breach by Agritope of any of the foregoing
representations and warranties.
15.3 Sunseeds Representations. Sunseeds represents and warrants to STA
that as of the Effective Date:
(a) It has granted no prior license or assignment of rights under
the Sunseeds Patents that would materially impair its ability to develop,
manufacture or sell Products.
(b) There are no foreign or United States administrative,
judicial or Patent and Trademark Office proceedings contesting the
inventorship or ownership of any Sunseeds Patent that is likely to be embodied
or used in a Product.
(c) Neither the execution and delivery of this Agreement, nor the
performance of the obligations of Sunseeds hereunder shall result in a
violation, breach or event of default (or any event or condition which with
notice or the passage of time or both would constitute an event of default) of
or with respect to any agreement, mortgage, indenture, or order of any court
of competent jurisdiction binding upon Sunseeds or upon the property of
Sunseeds.
(d) It is party to no contract materially adverse to the
obligations undertaken in this Agreement.
(e) It owns all rights in the tomato varieties and germplasm to
be used in developing the Product; it has consulted with patent counsel
concerning the patent rights of third parties and, to the best of its
knowledge, it is free to operate using its technology as contemplated in this
Agreement without infringement of the rights of third parties. There is no
assurance, however, that rights of third parties will not impinge on such
freedom to operate.
EXCEPT AS SET FORTH IN THIS SECTION 15.3, SUNSEEDS MAKES NO
REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT
LIMITATION ANY WARRANTY OF NON-INFRINGEMENT OF THE RIGHTS OF THIRD PARTIES.
15.4 Sunseeds Indemnification -- Representations And Warranties.
Sunseeds shall indemnify STA for losses sustained or expenses incurred by STA
as a result of a breach by Sunseeds of the foregoing representations and
warranties.
15.5 A&W Representations. A&W represents and warrants to STA that as of
the Effective Date:
(a) Neither the execution and delivery of this Agreement, nor the
performance of the obligations of A&W hereunder shall result in a violation,
breach or event of default (or any event or condition which with notice or the
passage of time or both would constitute an event of default) of or with
respect to any agreement, mortgage, indenture, or order of any court of
competent jurisdiction binding upon A&W or upon the property of A&W.
(b) It is party to no contract materially adverse to the
obligations undertaken in this Agreement.
EXCEPT AS SET FORTH IN THIS SECTION 15.5, A&W MAKES NO REPRESENTATIONS OR
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
15.6 A&W Indemnification -- Representations And Warranties. A&W shall
indemnify STA for losses sustained or expenses incurred by STA as a result of
a breach by A&W of the foregoing representations and warranties.
15.7 STA Warranty Disclaimer. STA MAKES NO REPRESENTATION OR WARRANTY,
EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF NON-INFRINGEMENT OR
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
16. Infringement; Third Party Licenses.
16.1 Defense Of Third Party Infringement Suits. In the event that a
third party shall make any claim or sue any party alleging that the production
or sale of a Product (including, without limitation, seeds), infringes a
patent of such third party, then STA shall have the option to control the
defense of such suit. The parties shall provide reasonable cooperation in the
defense of such suit and furnish all evidence in their control. All
attorneys' fees as well as any judgments, settlements, or damages payable with
respect to such claim or suit shall be the responsibility of STA.
Notwithstanding the foregoing, if the claim or suit alleges that the third
party's rights are infringed solely by technology licensed to STA by one of
the three other parties to this Agreement, such party will indemnify, hold
harmless and defend the other two of such parties from and against any
judgments, settlements or damages they may be required to pay with respect to
such suit. The indemnifying party will have the sole right to control the
defense of such claim or suit. No party shall enter into any settlement that
materially affects the other party's rights or interests without such other
party's prior written consent, which consent shall not be unreasonably
withheld.
16.2 Suits For Infringement By Others. In the event any party becomes
aware of any actual or threatened infringement in the Field of the Agritope
Licensed Patents or the Agritope Licensed Know-How, or the Sunseeds Licensed
Patents or Sunseeds Licensed Know-How, that party shall promptly notify STA
and STA shall determine the most appropriate action to take. In the event STA
does not take action against such alleged infringer within a reasonable
period, not to exceed one hundred eighty (180) days, the owner of such patent
rights or know-how shall be entitled to take action against the alleged
infringer.
16.3 Third Party Licenses. In the event that STA determines that it is
necessary or advisable to obtain a license from a third party with respect to
development, production or sale of Products, Agritope, Sunseeds and A&W will
make equal contributions to the capital of STA to pay the amount of any lump
sum license fee payable to such third party and the Applicable Royalty
Percentage will be increased by the amount of royalty payable to such third
party on the sale of Products.
17. General.
17.1 Entire Agreement. This Agreement, the Operating Agreement and the
Schedules hereto and thereto contain the entire agreement between the parties
relating to the subject matter hereof and all prior understandings,
representations and warranties between the parties are superseded; provided,
however, that this Agreement does not limit any agreement restricting
disclosure or use of confidential or proprietary information previously
entered into between the parties. None of the terms of this Agreement shall
be deemed to be waived or amended by any party unless such a waiver or
amendment specifically references this Agreement and is in writing signed by
the party to be bound.
17.2 Relationship Of Parties. Each party acknowledges that it is not an
agent of any other party to this Agreement and has no authority to speak for,
represent, or obligate such other party in any way (except in the case of
Agritope, acting in its capacity as Manager of STA). This Agreement does not
and shall not be deemed to create any relationship of a joint venture or a
partnership.
17.3 Severability. The parties do not intend to violate any public
policy or statutory or common law. However, if any sentence, paragraph,
clause or combination of this Agreement is in violation of any law or is found
to be otherwise unenforceable by a court from which there is no appeal, or no
appeal is taken, such sentence, paragraph, clause, or combination of the same
shall be deleted and the remainder of this Agreement shall remain binding,
provided that such deletion does not alter the basic structure of this
Agreement. In such event, the parties shall renegotiate this Agreement in
good faith, but should such negotiations not result in a new agreement with
ninety (90) days of the initiation of such negotiations, then this Agreement
may be terminated by any party by thirty (30) days notice to the other.
17.4 Force Majeure. Any party shall be excused from the performance of
its obligations under this Agreement and shall not be liable for damages to
the other if such performance is prevented by circumstances beyond its
effective control. Such excuse from performance shall continue so long as the
condition responsible for such excuse continues and for a thirty (30) day
period thereafter. For the purposes of this Agreement, circumstances beyond
the control of a party which excuse that party from performance shall include,
but shall not be limited to, acts of God, acts, regulations or laws of any
government including currency controls, war, civil commotion, commandeer,
destruction of facility or materials by fire, earthquake, storm or other
casualty, labor disturbances, judgment or injunction of any court, epidemic,
and failure of public utilities or common carrier.
17.5 Notices. All notices and demands required or permitted to be given
or made pursuant to this Agreement shall be in writing and shall be effective
when personally given or made or when placed in an envelope and deposited in
the United States certified mail postage prepaid, return receipt requested,
addressed as follows:
If to STA: If to Agritope, in care of:
c/o Agritope, Inc. Agritope, Inc.
8505 SW Creekside Pl. 8505 SW Creekside Pl.
Beaverton, OR 97008 Beaverton, OR 97008
Attention: Chief Executive Officer Attention: Chief Executive Officer
with a copy to: with a copy to:
Howard G. Ervin Howard G. Ervin
Cooley Godward Castro Huddleson Cooley Godward Castro Huddleson
& Tatum & Tatum
One Maritime Plaza, 20th Floor One Maritime Plaza, 20th Floor
San Francisco, CA 94111-3580 San Francisco, CA 94111-3580
If to Sunseeds: If to A&W:
Sunseeds Company Andrew and Williamson Sales Company,
18640 Sutter Blvd. Inc.
Morgan Hill, CA 95038 9940 Marconi Drive
Attention: Chief Executive Officer San Diego, CA 92173
Attention: Chief Executive Officer
or to such other address as to which either party may notify the other.
17.6 Binding. This Agreement shall be binding upon and inure to the
benefit of the parties, their successors and assigns. This Agreement shall be
assignable: (1) by either party without the consent of the other to any
Affiliate of the party or more of the voting securities); (2) by either party
with the written consent of the other; or (3) by either party without the
consent of the other in connection with the purchase of substantially all the
assets of its business to which this Agreement relates. Any attempted
assignment which does not comply with the terms of this Section shall be void.
17.7 Governing Law. This Agreement is deemed to have been executed in
and shall be governed by and construed according to the laws of the State of
California.
17.8 Arbitration. Any disputes under this Agreement will be resolved
by binding arbitration in San Francisco, California, in accordance with the
commercial arbitration rules of the American Arbitration Association. Full
discovery will be accorded in accordance with the California Code of Civil
Procedure. The parties shall bear equally the costs and fees of the
arbitration; however, the arbitrator shall be authorized to determine whether
a party is the prevailing party, and if so, to award to that prevailing party
reimbursement for its reasonable attorneys' fees, disbursements (including,
for example, expert witness fees and expenses, photocopy charges, travel
expenses, etc.), and costs arising from the arbitration.
In Witness Whereof, this Agreement is signed by duly authorized
representatives of each party as of the Effective Date.
SUPERIOR TOMATO ASSOCIATES, L.L.C. AGRITOPE, INC.
By: Agritope, Inc.
Its Manager
By: /s/ Adolph J. Ferro By: /s/ Adolph J. Ferro
President/CEO President/CEO
Date: February 19, 1996 Date: February 19, 1996
ANDREW AND WILLIAMSON SALES COMPANY,
SUNSEEDS COMPANY INC.
By: /s/ David Atkinson By: /s/ Fred L. Williamson
President/CEO Pres.
Date: February 29, 1996
Date: February 21, 1996
<PAGE>
Exhibit A
NON-DISCLOSURE AGREEMENT
(MUTUAL DISCLOSURE)
This Agreement is incorporated by reference in the Development and Marketing
Agreement by and among, Superior Tomatoes Association, L.L.C. ("STA"),
Agritope, Inc., Sunseeds, Inc. and Andrew and Williamson Sales Company, Inc.
to assure the protection and preservation of the confidential and or
proprietary nature of information to be disclosed or made available to each
other in connection with the activities under such Development and Marketing
Agreement and the business of STA.
Whereas, the parties desire to assure the confidential status of the
information which may be disclosed to each other;
Now Therefore, in reliance upon and in consideration of the following
undertakings, the parties agree as follows:
1.Subject to the limitations set forth in Paragraph 2, all information
disclosed to another party to this Agreement shall be deemed to be
"Proprietary Information." The term "Proprietary Information" shall include
trade secrets, confidential knowledge, data or any other proprietary
information. By way of illustration but not limitation, "Proprietary
Information" includes (a) inventions, trade secrets, ideas, processes,
formulas, source and object codes, data, programs, other works of authorship,
compounds, cell lines, know-how, improvements, discoveries, developments, test
results, designs and techniques; and (b) information regarding plans for
research, development, new products, marketing and selling, business plans,
budgets and unpublished financial statements, licenses, prices and costs,
suppliers and customers; and information regarding the skills and compensation
of employees of a party.
2.The term "Proprietary Information" shall not be deemed to include
information which the receiving party can demonstrate by competent written
proof: (i) is now, or hereafter becomes, through no act or failure to act on
the part of the receiving party, generally known or available; (ii) is known
by the receiving party at the time of receiving such information as evidenced
by its records; (iii) is hereafter furnished to the receiving party by a third
party, as a matter of right and without restriction on disclosure; or (iv) is
independently developed by the receiving party without any breach of this
Agreement.
3.Each party shall maintain in trust and confidence and not disclose to any
third party, or use for any purpose other than activities under such
Development and Marketing Agreement and the business of STA, any Proprietary
Information received from the other party. Proprietary Information shall not
be used for any purpose or in any manner that would constitute a violation of
any laws or regulations, including without limitation the export control laws
of the United States. No other rights or licenses to trademarks, inventions,
copyrights, or patents are implied or granted under this Non-Disclosure
Agreement.
4.Proprietary Information supplied shall not be reproduced in any form except
as required to accomplish the intent of this Agreement.
5.The responsibilities of the parties are limited to using their reasonable
and best efforts to protect the Proprietary Information received with the same
degree of care used to protect their own Proprietary Information from
unauthorized use or disclosure. Each party shall advise its employees or
agents who might have access to such Proprietary Information of the
confidential nature thereof. No Proprietary Information shall be disclosed to
any officer, employee or agent of either party who does not have a need for
such information.
6.All Proprietary Information (including all copies thereof) shall remain the
property of the disclosing party, and shall be returned to the disclosing
party after the receiving party's need for it has expired, or upon request of
the disclosing party, and in any event, upon completion or termination of
this Agreement.
7.Notwithstanding any other provision of this Agreement, disclosure of
Proprietary Information shall not be precluded to the extent such disclosure
is required to be disclosed by the Receiving Party by judicial action provided
that the receiving party shall immediately notify the disclosing party of any
such action and the disclosing party shall have the opportunity to pursue all
reasonable legal remedies to maintain such information in secret.
8.This Agreement shall continue in full force and effect for so long as the
parties continue to exchange Proprietary Information. The termination of this
Agreement shall not relieve either party of the obligations imposed by this
Agreement with respect to Proprietary Information disclosed prior to the
effective date of such termination, and the provisions of these paragraphs
shall survive the termination of this Agreement.
9.This Agreement shall be governed by the laws of the State of California as
those laws are applied to contracts entered into and to be performed entirely
in California by California residents.
10.This Agreement contains the entire agreement of the parties concerning use
and protection of Proprietary Information and may not be changed, modified,
amended or supplemented except by a written instrument signed by each party.
11.Each party hereby acknowledges and agrees that in the event of any breach
of this Agreement by another party, including, without limitation, the actual
or threatened disclosure of a disclosing party's Proprietary Information
without the prior express written consent of the disclosing party, the
disclosing party will suffer an irreparable injury, such that no remedy at law
will afford it adequate protection against, or appropriate compensation for,
such injury. Accordingly, each party hereby agrees that such other party shall
be entitled to specific performance of a receiving party's obligations under
this Agreement, as well as such further injunctive relief as may be granted by
a court of competent jurisdiction.
<PAGE>
EXHIBIT 10.28
EMPLOYMENT AGREEMENT
This Agreement, dated as of December 12, 1996, is between Andrew and
Williamson Sales, Co., a California corporation ("A&W"), and Fred L.
Williamson ("Employee").
RECITALS
A.A&W desires to obtain the services of Employee and Employee desires to
secure employment from A&W upon the following terms and conditions.
B.A&W considers the services of Employee to be provided under this Agreement
to be unique, extraordinary, and of intellectual character.
C.A&W is a subsidiary of Epitope, Inc. ("Epitope"), an Oregon corporation.
Epitope, its direct and indirect subsidiaries (whether majority or wholly
owned by Epitope), any other entity controlling, controlled by, or under
common control with Epitope, and any joint venture in which any of the
foregoing has an interest are referred to collectively herein as the "the
Company."
D.The Company has spent significant time, effort, and money to develop
Proprietary Information (as defined below), which the Company considers vital
to its business and goodwill. Certain Proprietary Information will
necessarily be communicated to or acquired by Employee in the course of his
employment with A&W, and A&W desires to obtain the services of Employee, only
if, in doing so, it can protect the Proprietary Information and goodwill.
AGREEMENT
The parties therefore agree as follows:
1.Period of Employment. A&W employs Employee to render services to A&W as
President, with the duties and responsibilities described in Section 2, for
the period (the "Period of Employment") commencing on the date of this
Agreement and ending upon the earlier of (i) December 12, 1999 (the
"Termination Date") or (ii) the date upon which the Period of Employment is
terminated in accordance with Section 4.
2.Position and Responsibilities.
(a)Position. Employee accepts employment with A&W as President and shall
perform all services appropriate to that position, as well as such other
services as may be assigned by the Board of Directors of A&W. Employee shall
devote his best efforts and full-time attention to the performance of his
duties. Employee shall be subject to the direction of the Board of Directors
of A&W, who shall retain full control of the means and methods by which he
performs the above services and of the place(s) at which all services are
rendered. Employee shall report to the Board of Directors of A&W. Employee
shall be expected to travel if necessary or advisable in order to meet the
obligations of his position.
(b)Other Activity. Except with the prior written consent of A&W, Employee
shall not during the Period of Employment (i) accept any other employment; or
(ii) engage, directly or indirectly, in any other business, commercial, or
professional activity (whether or not pursued for pecuniary advantage) that is
or may be competitive with the business of the Company, that might create a
conflict of interest with the Company, or that otherwise might interfere with
the business of the Company.
3.Compensation and Benefits.
(a)Compensation. In consideration of the services to be rendered under this
Agreement, A&W shall pay Employee no less than one hundred eighty thousand
dollars ($180,000) per year, payable monthly during the Period of Employment
in accordance with A&W's usual payroll procedures. A&W shall review
Employee's compensation annually in accordance with A&W's usual procedure for
adjusting salaries for similarly situated employees. All amounts to be paid
to Employee under this Agreement shall be less withholdings required by law
and other customary payroll deductions.
(b)Benefits. During the Period of Employment, Employee shall be entitled to
receive substantially the same benefits that Employee received from A&W
immediately prior to the date of this Agreement; provided, however, that A&W
will not after the date of this Agreement make any further payments in
connection with the Key Man Life Insurance Policy issued in the name of
Employee. Employee may elect to pay his own premiums to continue the policy.
Upon any distribution of benefits under the policy, A&W shall be paid either
directly from the insurance company or from Employee the cash surrender value
of the policy as reflected on A&W's balance sheet as of September 30, 1996.
Employee shall have the right to participate in and to receive benefits from
all present and future benefit plans specified in A&W's policies and generally
made available to similarly situated employees of A&W. The amount and extent
of benefits to which Employee is entitled shall be governed by the specific
benefit plan. No statement concerning benefits or compensation to which
Employee is entitled shall alter in any way the term of this Agreement, any
renewal thereof, or its termination.
(c)Expenses. A&W shall reimburse Employee for reasonable travel and other
business expenses incurred by Employee in performing his duties, in accordance
with A&W's standard policies.
4.Termination of Employment.
(a)By Death. The Period of Employment shall terminate automatically upon the
death of Employee. A&W shall pay to Employee's beneficiaries or estate, as
appropriate, any compensation then due and owing. Thereafter, all obligations
of A&W under this Agreement shall cease. Nothing in this Section shall affect
any entitlement of Employee's heirs to the benefits of any life insurance plan
or other applicable benefits.
(b)By Disability. If, by reason of any physical or mental incapacity,
Employee has been or will be prevented from properly performing his duties
under the Agreement for more than ninety (90) consecutive days, then, to the
extent permitted by law, A&W may terminate the Period of Employment upon two
(2) weeks' advance written notice. A&W shall pay Employee all compensation to
which he is entitled through the last business day of the notice period;
thereafter, all obligations of A&W under this Agreement shall cease. Nothing
in this Section shall affect Employee's rights under any applicable A&W
disability plan.
(c)By Employer For Cause. At any time, A&W may terminate Employee for Cause
(as defined below) on immediate notice. A&W shall pay Employee all
compensation then due and owing; thereafter, all A&W's obligations under this
Agreement shall cease. Termination shall be for "Cause" if Employee:
(i) acts in bad faith and to the detriment of A&W; (ii) refuses or fails to
act in accordance with any specific direction or order of A&W; (iii) exhibits
in regard to his employment unfitness or unavailability for service,
unsatisfactory performance, misconduct, dishonesty, habitual neglect, or
incompetence; (iv) is convicted of a crime involving dishonesty, breach of
trust, or physical or emotional harm to any person; (v) is selected for layoff
pursuant to a bona fide reduction-in-force; or (vi) breaches any material term
of this Agreement. If termination is due to Employee's disability, subsection
4(b) above shall control, and not this subsection on termination for cause.
(d)By Employee for Good Reason. Employee may terminate, without liability,
the Period of Employment for Good Reason (as defined below), provided Employee
gives A&W thirty (30) days' advance written notice of the reason for
termination and his intent to terminate the Agreement. During this period,
A&W shall have an opportunity to correct the condition constituting Good
Reason. If the condition is remedied within this period, Employee's notice to
terminate shall be rescinded automatically; if not remedied, termination shall
become effective upon expiration of the above notice period. In this event,
A&W shall pay Employee all compensation due and owing through the last day
actually worked; thereafter all A&W's obligations under this Agreement shall
cease. A&W shall also have the option, in its complete discretion, to make
Employee's termination effective at any time prior to the end of the notice
period, provided that A&W pays Employee all compensation due and owing through
the balance of the notice period (not to exceed thirty (30) days). Employee
shall be entitled to exercise his right to terminate the Agreement for Good
Reason only if he gives the required notice not more than forty-five (45) days
after the occurrence of the event that is the basis for the Good Reason.
(e)"Good Reason" Defined. Termination shall be for "Good Reason" if:
(i) there is a material and adverse change in Employee's position, duties,
responsibilities, or status with A&W; (ii) there is a reduction in Employee's
salary then in effect, other than a reduction comparable to reductions
generally applicable to similarly situated employees of A&W; (iii) there is a
material reduction in Employee's benefits, other than a reduction comparable
to reductions generally applicable to similarly situated employees of A&W; or
(iv) A&W materially breaches this Agreement. Employee shall not be entitled
to terminate this Agreement for Good Reason if an event occurs that would
otherwise constitute Good Reason, but results from a change in A&W's status as
defined in the next subsection.
(f)Change in Employer Status. To the extent permitted by law, A&W, in its
sole discretion, may terminate the Period of Employment (in which case all
A&W's obligations under this Agreement shall cease after payment of all
compensation due and owing) upon any formal action of A&W's management to
terminate A&W's existence or otherwise wind up its affairs, to sell all or
substantially all of its assets, or to merge with or into another entity.
(g)Termination Obligations.
(i)Employee acknowledges and agrees that all personal property,
including, without limitation, all tangible Proprietary Information (as
defined below), books, manuals, records, reports, notes, contracts, lists,
documents, computer disks (or other computer-generated files, data, or
information), materials, or copies thereof, created on any medium and
furnished to, obtained by, or prepared by Employee in the course of or
incident to his employment, and all equipment and property furnished to
Employee in the course of his employment, belong to A&W and shall be returned
promptly to A&W upon termination of the Period of Employment.
(ii)All benefits to which Employee is otherwise entitled shall cease upon
Employee's termination, unless explicitly continued either under this
Agreement, under any specific written policy or benefit plan of A&W, or as
otherwise required by law.
(iii)Upon termination of the Period of Employment, Employee shall be deemed
to have resigned from all offices and directorships then held with A&W or any
other member of the Company.
(iv)Employee's obligations under this subsection on Termination
Obligations, Section 5 on Proprietary Information, and Section 6 on Inventions
shall survive the termination of the Period of Employment and the expiration
of this Agreement.
(v)Following any termination of the Period of Employment, Employee shall fully
cooperate with A&W in all matters relating to the winding up of pending work
on behalf of A&W and the orderly transfer of work to other employees of A&W.
5.Proprietary Information.
(a)Defined. Proprietary Information is all information in any form, tangible
or intangible, pertaining in any manner to the business of the Company or the
employees, clients, consultants, or business associates of the Company, which
was produced by any employee of the Company in the course of his or her
employment or otherwise produced or acquired by or on behalf of the Company,
which derives independent economic value, actual or potential, from not being
generally known to the public who can obtain economic value from its
disclosure or use and is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy. All Proprietary Information not
generally known outside of the Company, and all Proprietary Information so
known only through improper means, is "Confidential Information." Employee
must consult and follow any A&W procedures instituted to identify and protect
certain types of Confidential Information, which are considered by A&W to be
safeguards in addition to the protection provided by this Agreement. Nothing
contained in those procedures or in this Agreement is intended to limit the
effect of the other.
(b)General Restrictions on Use. During the Period of Employment, Employee
shall use Proprietary Information, and shall disclose Confidential
Information, only for the benefit of A&W and as is necessary to carry out his
responsibilities under this Agreement. Following termination, Employee shall
neither, directly or indirectly, use any Proprietary Information nor disclose
any Confidential Information, except as expressly and specifically authorized
in writing by A&W. The publication of any Proprietary Information through
literature or speeches must be approved in advance in writing by A&W.
(c)Third Party Information. Employee acknowledges that the Company may
receive from third parties their confidential information subject to a duty to
maintain the confidentiality of such information and to use it only for
certain limited purposes. Employee agrees that he owes the Company and such
third parties, during the Period of Employment and thereafter, a duty to hold
all such confidential information in the strictest confidence and not to
disclose or use it except as necessary to perform his obligations hereunder
and as is consistent with any confidentiality agreement with such third
parties.
6.Inventions.
(a)Defined. The term "Inventions" includes any and all ideas, processes,
inventions, technology, computer hardware or software, formulas, discoveries,
patents, products, trademarks, service marks, original works of authorship,
designs, copyrights, and all improvements, know-how, rights, and claims
related to the foregoing. Any Inventions that are conceived, developed, or
reduced to practice by Employee, alone or with others, after the date of this
Agreement shall be deemed "Work-Related Inventions," except to the extent that
California Labor Code Section 2870 lawfully prohibits the assignment of rights
in such Inventions.
(b)Statutory Notice. Employee acknowledges that the definition of Work-
Related Inventions includes only those Inventions that may be lawfully
assigned pursuant to California Labor Code Section 2870, which provides:
"(a)Any provision in an employment agreement which provides that an employee
shall assign, or offer to assign, any of his or her rights in an invention to
his or her employer shall not apply to an invention that the employee
developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
"(1)Relate at the time of conception or reduction to practice of the invention
to the employer's business, or actual or demonstrably anticipated research or
development of the employer; or
"(2)Result from any work performed by the employee for the employer.
"(b)To the extent a provision in an employment agreement purports to require
an employee to assign an invention otherwise excluded from being required to
be assigned under subdivision (a), the provision is against the public policy
of this state and is unenforceable."
Nothing in this Agreement is intended to expand the scope of protection
provided Employee by Sections 2870 through 2872 of the California Labor Code.
(c)Disclosure. Employee agrees to maintain adequate and current written
records on the development of all Inventions and to disclose promptly to A&W
all Work-Related Inventions and relevant records, which records will remain
the sole property of A&W. Employee further agrees that all information and
records pertaining to any Invention that Employee does not believe to be a
Work-Related Invention, but that is conceived, developed, or reduced to
practice by Employee (alone or with others) during the Period of Employment
(or during the post-employment period set forth in Section 6(f) below), shall
be disclosed promptly to A&W (such disclosure to be received in confidence).
A&W shall examine the information disclosed to determine if in fact the
Invention is a Work-Related Invention subject to this Agreement.
(d)Assignment. Employee agrees to assign to A&W, and hereby does assign to
A&W, his entire right, title, and interest throughout the United States and in
all foreign countries, free and clear of all liens and encumbrances, in and to
each Work-Related Invention, which shall be the sole property of A&W, whether
or not patentable. In the event any Work-Related Invention shall be deemed by
A&W to be patentable or otherwise registerable, Employee shall assist A&W (at
its expense) in obtaining letters patent or other applicable registrations
thereon and shall execute all documents and do all other things necessary or
proper (including testifying at A&W's expense) to vest in A&W, or any entity
or person specified by A&W, full title or interest therein. Employee shall
also take any action necessary or advisable in connection with any
continuations, renewals, or reissues thereof or in connection with any related
proceedings or litigation. Should A&W be unable to secure Employee's
signature on any document necessary to apply for, prosecute, obtain, or
enforce any patent, copyright, or other right or protection relating to any
Work-Related Invention, whether due to Employee's mental or physical
incapacity or any other cause, Employee irrevocably designates and appoints
A&W and each of its duly authorized officers and agents as Employee's agent
and attorney in fact, to act for and in Employee's behalf and stead and to
execute and file any such document, and to do all other lawfully permitted
acts to further the prosecution, issuance, and enforcement of patents,
copyrights, or other rights or protections with the same force and effect as
if executed, delivered, and done by Employee.
(e)Exclusions. Employee represents that there are no Inventions that he
desires to exclude from the operation of this Agreement. Employee is not a
party to any existing contract in conflict with this Agreement or contract to
assign Inventions to any other party.
(f)Post-Termination Period. Because of the difficulty of establishing when
any Invention is first conceived or developed by Employee, or whether it
results from access to Confidential Information or the Company's equipment,
supplies, facilities, or data, Employee agrees that any Invention shall be
presumed to be a Work-Related Invention, if reduced to practice by Employee or
with the aid of Employee within one (1) year after termination of the Period
of Employment. Employee can rebut the above presumption if he proves that the
Invention (i) was developed entirely on Employee's own time without using the
Company's equipment, supplies, facilities, or trade secret information;
(ii) was not conceived or reduced to practice during the Period of Employment,
or, if conceived or reduced to practice during the Period of Employment, did
not, at the time of conception or reduction to practice, relate to the
Company's business or actual or demonstrably anticipated research or
development; and (iii) did not result from any work performed by Employee for
the Company.
7.Arbitration.
(a)Arbitrable Claims. All disputes between Employee (and his successors and
permitted assigns) and A&W (and the Company and the shareholders, directors,
officers, employees, agents, successors, attorneys, and assigns of each)
relating in any manner whatsoever to the employment or termination of
Employee, including without limitation, all disputes arising under this
Agreement ("Arbitrable Claims") shall be resolved by arbitration. Arbitrable
Claims shall include, but are not limited to, contract (express or implied)
and tort claims of all kinds, as well as all claims based on any federal,
state, or local law, statute, regulation, or ordinance, excepting only claims
under applicable workers' compensation law. Arbitration shall be final and
binding upon the parties and shall be the exclusive remedy for all Arbitrable
Claims, except that A&W may, at its option, seek injunctive relief and damages
in court for any breach of Section 5 or 6 of this Agreement.
(b)Procedure. Arbitration of Arbitrable Claims shall be in accordance with
the Rules and Procedures for Mediation/Arbitration of Employment Disputes of
JAMS/Endispute ("JAMS Rules"), except as provided otherwise in this Agreement.
Arbitration shall be initiated by providing written notice to the other party
with a statement of the claim(s) asserted and the facts upon which the
claim(s) are based. In any arbitration, the burden of proof shall be
allocated as provided by applicable law. Either party may bring an action in
court to compel arbitration under this Agreement and to enforce an arbitration
award.
(c)Arbitrator Selection and Authority. All disputes involving Arbitrable
Claims shall be decided by a single arbitrator. The arbitrator shall be
selected in accordance with the JAMS Rules. The arbitrator shall have the
authority to award equitable relief, damages, costs, and fees as provided by
law for the particular claim(s) asserted, except that the arbitrator shall
have no authority to award punitive damages. The fees of the arbitrator shall
be paid by the losing party, as identified by the arbitrator. The arbitrator
shall have exclusive authority to resolve all Arbitrable Claims, including,
but not limited to, any claim that all or any part of this Agreement is void
or unenforceable.
(d)Confidentiality. All proceedings in connection with any Arbitrable Claim
shall be confidential and shall not be disclosed to any person other than the
parties to the proceeding, their counsel and experts, the arbitrator, and, if
involved, the court and court staff. All documents filed with the arbitrator
or with a court shall be filed under seal. The parties shall stipulate to all
arbitration and court orders necessary to effectuate fully the provisions of
this subsection concerning confidentiality.
(e)Continuing Obligations. The rights and obligations of Employee and A&W set
forth in this Section 7 shall survive the termination of Employee's employment
and the expiration of this Agreement.
8.Notices. All notices under this agreement shall be in writing and shall be
deemed given when delivered personally, when sent by fax (with prompt
confirmation by mail), four business days after mailed by certified mail
(return receipt requested), or one business day after being sent by a
recognized overnight courier, to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
If to A&W, to:
Andrew and Williamson Sales, Co.
c/o Epitope, Inc.
8505 S.W. Creekside Place
Beaverton, Oregon 97005
Attention: Adolph J. Ferro, Ph.D.
If to Employee, to:
Fred L. Williamson
Andrew and Williamson Sales, Co.
9940 Marconi Drive
San Diego, California 92173
9.Action by A&W. All actions required or permitted to be taken under this
Agreement by A&W, including without limitation, exercise of discretion,
consents, waivers, and amendments to this Agreement, shall be made and
authorized only by the Chairman of the Board of Directors or by his or her
representative specifically authorized to act under this Agreement, unless
Employee holds that position, in which case an officer designated by the Board
of Directors shall have such authority.
10.Entire Agreement. This Agreement is intended to be the final, complete,
and exclusive statement of the terms of Employee's employment by A&W. This
Agreement may not be contradicted by evidence of any prior or contemporaneous
agreement. To the extent that policies and procedures of A&W apply to
Employee and are inconsistent with the terms of this Agreement, the provisions
of this Agreement shall control.
11.Amendments; Waivers. This Agreement may not be modified or amended except
by an instrument in writing, signed by Employee and by A&W. No failure to
exercise and no delay in exercising any right, remedy, or power under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, or power under this Agreement preclude any
other or further exercise thereof, or the exercise of any other right, remedy,
or power provided herein or by law or in equity.
12.Assignment; Successors and Assigns. Employee may not assign any rights or
delegate any obligations under this Agreement. Any purported assignment or
delegation shall be null and void. Nothing in this Agreement shall prevent
the consolidation of A&W with, or its merger into, any other entity, or the
sale by A&W of all or substantially all of its assets, or the otherwise lawful
assignment by A&W of any rights or obligations under this Agreement. Subject
to the foregoing, this Agreement shall be binding upon and shall inure to the
benefit of the parties and their respective heirs, legal representatives,
successors, and permitted assigns, and shall not benefit any person or entity
other than those enumerated above.
13.Severability; Enforcement. It is the intention of the parties that the
covenants contained in Section 5 on Proprietary Information and Section 6 on
Inventions shall be enforced to the greatest extent in time, area, and degree
of participation that is permitted by the law of the jurisdiction whose law is
found to be applicable to any acts allegedly in breach of these covenants.
Notwithstanding any governing law provision in this Agreement, the parties
intend that the foregoing covenants shall be governed by and construed
according to the law of the jurisdiction (from among those jurisdictions
arguably applicable to this Agreement and those in which a breach of this
Agreement is alleged to have occurred or to be threatened) which best gives
them effect. If any provision of this Agreement, or the application thereof
to any person, place, or circumstance, shall be held by an arbitrator or a
court of competent jurisdiction to be invalid, unenforceable, or void, such
provision shall be enforced to the greatest extent permitted by law, and the
remainder of this Agreement and such provisions as applied to other persons,
places, and circumstances shall remain in full force and effect.
14.Attorneys' Fees and Costs. In any legal action, arbitration, or other
proceeding brought to enforce or interpret the terms of this Agreement, the
prevailing party shall be entitled to recover reasonable attorney fees and
costs.
15.Governing Law. This Agreement shall be governed by and construed in
accordance with the law of the State of California.
16.Employee Acknowledgment. Employee acknowledges that he has had the
opportunity to consult legal counsel in regard to this Agreement, that he has
read and understands the Agreement, that he is fully aware of its legal effect
(including notice of his statutory rights under Section 2870 of the California
Labor Code, as set forth in Section 6 on Inventions), and that he has entered
into it freely and voluntarily and based on his own judgment and not based on
any representations or promises other than those contained in this Agreement.
The parties have duly executed this Agreement as of the date first written
above.
Andrew and Williamson Sales, Co.
By:
Fred L. Williamson Gilbert N. Miller
Executive Vice President
<PAGE>
EXHIBIT 10.29
CREDIT AGREEMENT
THIS AGREEMENT is entered into as of August 5, 1996, by and between
ANDREW AND WILLIAMSON SALES, CO., a California corporation ("Borrower"), and
WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").
RECITAL
Borrower has requested from Bank the credit accommodations described
below (each, a "Credit" and collectively, the "Credits"), and Bank has agreed
to provide the Credits to Borrower on the terms and conditions contained
herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Bank and Borrower hereby agree as follows:
ARTICLE I
THE CREDITS
SECTION 1.1. LINE OF CREDIT.
(a) Line of Credit. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make advances to Borrower from time to time
up to and including July 5, 1997, not to exceed at any time the aggregate
principal amount of Six Million Five Hundred Thousand Dollars ($6,500,000.00)
("Line of Credit"), the proceeds of which shall be used for the purposes
described in the subfeatures thereunder, as set forth below. Borrower's
obligation to repay advances under the Line of Credit shall be evidenced by a
promissory note substantially in the form of Exhibit A attached hereto ("Line
of Credit Note"), all terms of which are incorporated herein by this
reference.
(b) Asset-based Line of Credit Subfeature. As a subfeature under the
Line of Credit, Bank hereby agrees to make cash advances to Borrower from time
to time during the term thereof to assist with working capital for Borrower's
fruit and vegetable brokerage business up to an aggregate principal amount of
Six Million Five Hundred Thousand Dollars ($6,500,000.00). Each such advance
under the Asset-based Line of Credit Subfeature shall be deemed an advance
under the Line of Credit and shall be repaid by Borrower in accordance with
the terms and conditions of this Agreement applicable to such advances.
Outstanding borrowings under the Asset-based Line of Credit Subfeature,
to a maximum of the principal amount set forth above, shall not at any time
exceed an aggregate of eighty percent (80%) of the total of Borrower's
eligible accounts receivable less grower payables plus fifty percent (50%) of
the value of Borrower's eligible inventory (exclusive of work in process and
inventory which is obsolete, unsalable or damaged) with inventory defined as
packing materials, processed fruit and produce, and items used in the final
stages of processing, and with value defined as the lower of cost or market
value. All of the foregoing shall be determined by Bank upon receipt and
review of all collateral reports required hereunder and such other documents
and collateral information as Bank may from time to time require. Borrower
acknowledges that said borrowing base was established by Bank with the
understanding that, among other items, the aggregate of all returns, rebates,
discounts, credits and allowances for the immediately preceding three (3)
months at all times shall be less than five percent (5%) of Borrower's gross
sales for said period. If such dilution of Borrower's accounts for the
immediately preceding three (3) months at any time exceeds five percent (5%)
of Borrower's gross sales for said period, or if there at any time exists any
other matters, events, conditions or contingencies which Bank reasonably
believes may affect payment of any portion of Borrower's accounts, Bank, in
its sole discretion, may reduce the foregoing advance rate against eligible
accounts receivable to a percentage appropriate to reflect such additional
dilution and/or establish additional reserves against Borrower's eligible
accounts receivable.
As used herein, "eligible accounts receivable" shall consist solely of
trade accounts created in the ordinary course of Borrower's business, upon
which Borrower's right to receive payment is absolute and not contingent upon
the fulfillment of any condition whatsoever, and in which Bank has a perfected
security interest of first priority, and shall not include:
(i) any account which is past due more than twice Borrower's
standard selling, except with respect to any account for which
Borrower has provided extended payment terms not to exceed one
hundred eighty (180) days, any such account which is more than
thirty (30) days past due;
(ii) that portion of any account for which there exists any
right of setoff, defense or discount (except regular discounts
allowed in the ordinary course of business to promote prompt
payment) or for which any defense or counterclaim has been asserted;
(iii) any account which represents an obligation of any state
or municipal government or of the United States government or any
political subdivision thereof (except accounts which represent
obligations of the United States government and for which Bank's
forms N-138 and N-139 have been duly executed and acknowledged);
(iv) any account which represents an obligation of an account
debtor located in a foreign country other than Mexico or an account
debtor located in the Canadian provinces of Alberta, British
Columbia, Manitoba, Ontario, Saskatchewan or the Yukon Territory so
long as, in Bank's determination, such Canadian jurisdictions
recognize Bank's first priority security interest in and right to
collect such account as a consequence of any security agreements and
UCC filings in favor of Bank, except to the extent any such account,
in Bank's determination, is supported by a letter of credit or
insured under a policy of foreign credit insurance, in each case in
form, substance and issued by a party acceptable to Bank;
(v) any account which arises from the sale or lease to or
performance of services for, or represents an obligation of, an
employee, affiliate, partner, member, parent or subsidiary of
Borrower;
(vi) that portion of any account which represents interim or
progress billings or retention rights on the part of the account
debtor;
(vii) any account which represents an obligation of any
account debtor when twenty percent (20%) or more of Borrower's
accounts from such account debtor are not eligible pursuant to (i)
above;
(viii) that portion of any account from an account debtor
which represents the amount by which Borrower's total accounts from
said account debtor exceeds twenty-five percent (25%) of Borrower's
total accounts;
(ix) any account deemed ineligible by Bank when Bank, in its
sole discretion, deems the creditworthiness or financial condition
of the account debtor, or the industry in which the account debtor
is engaged, to be unsatisfactory.
(c) Grower Line of Credit Subfeature. As a subfeature under the Line
of Credit, Bank hereby agrees to make cash advances to Borrower from time to
time during the term thereof to assist with Borrower's grower financing and
advances up to an aggregate principal amount of Two Million Five Hundred
Thousand Dollars ($2,500,000.00). Each such advance under the Grower Line of
Credit Subfeature shall be deemed an advance under the Line of Credit and
shall be repaid by Borrower in accordance with the terms and conditions of
this Agreement applicable to such advances.
Outstanding borrowings under the Grower Line of Credit Subfeature, to a
maximum of the principal amount set forth above, shall not at any time exceed
an aggregate of fifty percent (50%) of Borrower's eligible growers accounts
receivable. The foregoing shall be determined by Bank upon receipt and review
of all collateral reports required hereunder and such other documents and
collateral information as Bank may from time to time require.
As used herein, "eligible growers accounts receivable" shall consist
solely of trade accounts created in the ordinary course of Borrower's
business, upon which Borrower's right to receive payment is absolute and not
contingent upon the fulfillment of any condition whatsoever, and in which Bank
has a perfected security interest of first priority, and shall not include:
(i) that portion of any account for which there exists any
right of setoff, defense or discount (except regular discounts
allowed in the ordinary course of business to promote prompt
payment) or for which any defense or counterclaim has been asserted;
(ii) any account which arises from the sale or lease to or
performance of services for, or represents an obligation of, an
employee, affiliate, partner, member, parent or subsidiary of
Borrower;
(iii) the amount of Borrower's reserve against growers'
accounts receivable;
(iv) any account deemed ineligible by Bank when Bank, in its
sole discretion, deems the creditworthiness or financial condition
of the account debtor, or the industry in which the account debtor
is engaged, to be unsatisfactory.
(d) Letter of Credit Subfeature. As a subfeature under the Line of
Credit, Bank agrees from time to time during the term thereof to issue standby
letters of credit for the account of Borrower to finance secure sales
commitments for growers (each, a "Letter of Credit" and collectively, "Letters
of Credit"); provided however, that the form and substance of each Letter of
Credit shall be subject to approval by Bank, in its sole discretion; and
provided further, that the aggregate undrawn amount of all outstanding Letters
of Credit shall not at any time exceed One Million Dollars ($1,000,000.00).
Each Letter of Credit shall be issued for a term not to exceed one hundred
fifty (150) days, as designated by Borrower; provided however, that no Letter
of Credit shall have an expiration date subsequent to the maturity date of the
Line of Credit. The undrawn amount of all Letters of Credit shall be reserved
under the Line of Credit and shall not be available for borrowings thereunder.
Each Letter of Credit shall be subject to the additional terms and conditions
of the Letter of Credit Agreement and related documents, if any, required by
Bank in connection with the issuance thereof (each, a "Letter of Credit
Agreement" and collectively, "Letter of Credit Agreements"). Each draft paid
by Bank under a Letter of Credit shall be deemed an advance under the Line of
Credit and shall be repaid by Borrower in accordance with the terms and
conditions of this Agreement applicable to such advances; provided however,
that if advances under the Line of Credit are not available, for any reason,
at the time any draft is paid by Bank, then Borrower shall immediately pay to
Bank the full amount of such draft, together with interest thereon from the
date such amount is paid by Bank to the date such amount is fully repaid by
Borrower, at the rate of interest applicable to advances under the Line of
Credit. In such event Borrower agrees that Bank, in its sole discretion, may
debit any demand deposit account maintained by Borrower with Bank for the
amount of any such draft.
(e) Borrowing and Repayment. Borrower may from time to time during the
term of the Line of Credit borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions contained herein or in the Line of Credit Note; provided however,
that the total outstanding borrowings under the Line of Credit shall not at
any time exceed the maximum principal amount available thereunder, as set
forth above.
SECTION 1.2. TERM LOAN.
(a) Term Loan. Bank has made a loan to Borrower in the original
principal amount of Two Hundred Fifty Three Thousand Five Hundred Dollars
($253,500.00) ("Term Loan"), on which the outstanding principal balance as of
the date hereof is $202,800.00. Borrower's obligation to repay the Term Loan
is evidenced by a promissory note substantially in the form of Exhibit B
attached hereto ("Term Note"), all terms of which are incorporated herein by
this reference. Subject to the terms and conditions of this Agreement, Bank
hereby confirms that the Term Loan remains in full force and effect. Any
reference in the Term Note to any prior loan agreement between Bank and
Borrower shall be deemed a reference to this Agreement.
(b) Repayment. The principal amount of the Term Loan shall continue to
be repaid in accordance with the provisions of the Term Note.
(c) Prepayment. Borrower may prepay principal on the Term Loan at any
time, in any amount and without penalty. All prepayments of principal shall
be applied on the most remote principal installment or installments then
unpaid.
SECTION 1.3. LOAN LIMIT.
(a) Loan Limit. Subject to the terms and conditions of this Agreement,
Bank hereby agrees to make advances to Borrower from time to time up to and
including July 5, 1997, not to exceed the aggregate principal amount of One
Hundred Fifty Thousand Dollars ($150,000.00) ("Loan Limit"), the proceeds of
which shall be used for the purchasing and financing of equipment. Borrower's
obligation to repay each advance under the Loan Limit shall be evidenced by a
promissory note executed at the time such advance is made, substantially in
the form of Exhibit C attached hereto (each, a "Loan Limit Note" and
collectively, "Loan Limit Notes"), all terms of which are incorporated herein
by this reference.
(b) Limitation on Borrowings. Each request for an advance under the
Loan Limit shall be accompanied by Borrower's written statement as to the use
of the proceeds of such advance and the source of repayment therefor. Each
such advance shall be subject to Bank's prior approval, which shall be at
Bank's sole discretion, of the stated purpose and source of repayment. Each
advance under the Loan Limit shall be available to a maximum of (80%) of the
cost of new equipment, or (75%) of the cost of used equipment.
(c) Borrowing and Repayment. Borrower may from time to time during the
term of the Loan Limit borrow and partially or wholly repay its outstanding
borrowings, and reborrow, subject to all the limitations, terms and conditions
contained herein; provided however, that Borrower shall repay each advance
under the Loan Limit as required herein; and provided further, that the total
outstanding borrowings under the Loan Limit shall not at any time exceed the
maximum principal amount available thereunder, as set forth above. The
principal amount of each advance under the Loan Limit shall be amortized over
a term of less than (60) months and shall be repaid in equal successive
monthly installments, at the times and in the amounts set forth in the Loan
Limit Note executed by Borrower to evidence such advance.
(d) Prepayment. Borrower may prepay principal on any advance under the
Loan Limit at any time, in any amount and without penalty. All prepayments
shall be applied on the most remote principal installment or installments then
unpaid on the advance being prepaid.
SECTION 1.4. INTEREST/FEES.
(a) Interest. The outstanding principal balance of the Line of
Credit, the Term Loan and the Loan Limit shall bear interest at the rate of
interest set forth in the Line of Credit Note, the Term Note and the Loan
Limit Note.
(b) Computation and Payment. Interest shall be computed on the basis
of a 360-day year, actual days elapsed. Interest shall be payable at the
times and place set forth in the Line of Credit Note, the Term Note and the
Loan Limit Note (collectively, the "Notes").
(c) Letter of Credit Fees. Borrower shall pay to Bank (i) fees upon
the issuance of each Letter of Credit equal to one and three-quarters percent
(1.75%) per annum (computed on the basis of a 360-day year, actual days
elapsed) of the face amount thereof, and (ii) fees upon the payment or
negotiation by Bank of each draft under any Letter of Credit and fees upon the
occurrence of any other activity with respect to any Letter of Credit
(including without limitation, the transfer, amendment or cancellation of any
Letter of Credit) determined in accordance with Bank's standard fees and
charges then in effect for such activity.
SECTION 1.5. COLLECTION OF PAYMENTS. Borrower authorizes Bank to
collect all principal, interest and fees due under each Credit by charging
Borrower's demand deposit account number 4160-085460 with Bank, or any other
demand deposit account maintained by Borrower with Bank, for the full amount
thereof. Should there be insufficient funds in any such demand deposit
account to pay all such sums when due, the full amount of such deficiency
shall be immediately due and payable by Borrower.
SECTION 1.6. COLLATERAL. As security for all indebtedness of
Borrower to Bank under the Line of Credit, Borrower grants to Bank security
interests of first priority in all Borrower's accounts receivable and other
rights to payment, general intangibles and inventory.
As security for all indebtedness of Borrower to Bank under the Term Loan,
Borrower grants to Bank a lien of not less than first priority on that certain
real property located at Traver, California, as more fully described on
Exhibit D attached hereto, all terms of which are incorporated herein by this
reference.
As security for all indebtedness of Borrower to Bank under the Loan
Limit, Borrower grants to Bank security interests of first priority in all
Borrower's equipment.
All of the foregoing shall be evidenced by and subject to the terms of
such security agreements, financing statements, deeds of trust and other
documents as Bank shall reasonably require, all in form and substance
satisfactory to Bank. Borrower shall reimburse Bank immediately upon demand
for all costs and expenses incurred by Bank in connection with any of the
foregoing security, including without limitation, filing and recording fees
and costs of appraisals, audits and title insurance.
SECTION 1.7. GUARANTIES. All indebtedness of Borrower to Bank shall
be guaranteed by Fred L. Williamson, Fred W. Andrew, Fred M. Williamson and
Keith Andrew (each, a "Guarantor") in the principal amount of Seven Million
Eight Hundred Twenty-Seven Thousand Dollars ($7,827,000.00) each, as evidenced
by and subject to the terms of guaranties in form and substance satisfactory
to Bank.
SECTION 1.8. SUBORDINATION OF DEBT. All obligations of Borrower to
Fred L. Williamson, Fred W. Andrew, Fred M. Williamson and Keith Andrew in the
minimum aggregate principal amount of $900,000.00 shall be subordinated in
right of repayment to all obligations of Borrower to Bank, as evidenced by and
subject to the terms of subordination agreements in form and substance
satisfactory to Bank.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Borrower makes the following representations and warranties to Bank,
which representations and warranties shall survive the execution of this
Agreement and shall continue in full force and effect until the full and final
payment, and satisfaction and discharge, of all obligations of Borrower to
Bank subject to this Agreement.
SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly
organized and existing and in good standing under the laws of the State of
California, and is qualified or licensed to do business (and is in good
standing as a foreign corporation, if applicable) in all jurisdictions in
which such qualification or licensing is required or in which the failure to
so qualify or to be so licensed could have a material adverse effect on
Borrower.
SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement, the Notes,
and each other document, contract and instrument required hereby or at any
time hereafter delivered to Bank in connection herewith (collectively, the
"Loan Documents") have been duly authorized, and upon their execution and
delivery in accordance with the provisions hereof will constitute legal, valid
and binding agreements and obligations of Borrower or the party which executes
the same, enforceable in accordance with their respective terms.
SECTION 2.3. NO VIOLATION. The execution, delivery and performance
by Borrower of each of the Loan Documents do not violate any provision of any
law or regulation, or contravene any provision of the Articles of
Incorporation or By-Laws of Borrower, or result in any breach of or default
under any contract, obligation, indenture or other instrument to which
Borrower is a party or by which Borrower may be bound.
SECTION 2.4. LITIGATION. There are no pending, or to the best of
Borrower's knowledge threatened, actions, claims, investigations, suits or
proceedings by or before any governmental authority, arbitrator, court or
administrative agency which could have a material adverse effect on the
financial condition or operation of Borrower other than those disclosed by
Borrower to Bank in writing prior to the date hereof.
SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial
statement of Borrower dated May 31, 1996, a true copy of which has been
delivered by Borrower to Bank prior to the date hereof, (a) is complete and
correct and presents fairly the financial condition of Borrower, (b) discloses
all liabilities of Borrower that are required to be reflected or reserved
against under generally accepted accounting principles, whether liquidated or
unliquidated, fixed or contingent, and (c) has been prepared in accordance
with generally accepted accounting principles consistently applied. Since the
date of such financial statement there has been no material adverse change in
the financial condition of Borrower, nor has Borrower mortgaged, pledged,
granted a security interest in or otherwise encumbered any of its assets or
properties except in favor of Bank or as otherwise permitted by Bank in
writing.
SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any
pending assessments or adjustments of its income tax payable with respect to
any year.
SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture,
contract or instrument to which Borrower is a party or by which Borrower may
be bound that requires the subordination in right of payment of any of
Borrower's obligations subject to this Agreement to any other obligation of
Borrower.
SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will
hereafter possess, all permits, franchises and licenses required and rights to
all trademarks, trade names, patents, and fictitious names, if any, necessary
to enable it to conduct the business in which it is now engaged in compliance
with applicable law.
SECTION 2.9. ERISA. Borrower is in compliance in all material
respects with all applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended or recodified from time to time ("ERISA");
Borrower has not violated any provision of any defined employee pension
benefit plan (as defined in ERISA) maintained or contributed to by Borrower
(each, a "Plan"); no Reportable Event as defined in ERISA has occurred and is
continuing with respect to any Plan initiated by Borrower; Borrower has met
its minimum funding requirements under ERISA with respect to each Plan; and
each Plan will be able to fulfill its benefit obligations as they come due in
accordance with the Plan documents and under generally accepted accounting
principles.
SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any
obligation for borrowed money, any purchase money obligation or any other
material lease, commitment, contract, instrument or obligation.
SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower
to Bank in writing prior to the date hereof, Borrower is in compliance in all
material respects with all applicable Federal or state environmental,
hazardous waste, health and safety statutes, and any rules or regulations
adopted pursuant thereto, which govern or affect any of Borrower's operations
and/or properties, including without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the Superfund
Amendments and Reauthorization Act of 1986, the Federal Resource Conservation
and Recovery Act of 1976, the Federal Toxic Substances Control Act and the
California Health and Safety Code, as any of the same may be amended, modified
or supplemented from time to time. None of the operations of Borrower is the
subject of any Federal or state investigation evaluating whether any remedial
action involving a material expenditure is needed to respond to a release of
any toxic or hazardous waste or substance into the environment. Borrower has
no material contingent liability in connection with any release of any toxic
or hazardous waste or substance into the environment.
SECTION 2.12. REAL PROPERTY COLLATERAL. Except as disclosed by
Borrower to Bank in writing prior to the date hereof, with respect to any real
property collateral required hereby:
(a) All taxes, governmental assessments, insurance premiums,
and water, sewer and municipal charges, and rents (if any) which
previously became due and owing in respect thereof have been paid as
of the date hereof.
(b) There are no mechanics' or similar liens or claims which
have been filed for work, labor or material (and no rights are
outstanding that under law could give rise to any such lien) which
affect all or any interest in any such real property and which are
or may be prior to or equal to the lien thereon in favor of Bank.
(c) None of the improvements which were included for purpose
of determining the appraised value of any such real property lies
outside of the boundaries and/or building restriction lines thereof,
and no improvements on adjoining properties materially encroach upon
any such real property.
(d) There is no pending, or to the best of Borrower's
knowledge threatened, proceeding for the total or partial
condemnation of all or any portion of any such real property, and
all such real property is in good repair and free and clear of any
damage that would materially and adversely affect the value thereof
as security and/or the intended use thereof.
ARTICLE III
CONDITIONS
SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The
obligation of Bank to grant any of the Credits is subject to the fulfillment
to Bank's satisfaction of all of the following conditions:
(a) Approval of Bank Counsel. All legal matters incidental
to the granting of each of the Credits shall be satisfactory to
Bank's counsel.
(b) Documentation. Bank shall have received, in form and
substance satisfactory to Bank, each of the following, duly
executed:
(i) This Agreement and the Notes.
(ii) Articles of Incorporation.
(iii) Corporate Borrowing Resolution.
(iv) Articles of Incumbency.
(v) Continuing Guaranties as listed in
Section 1.7.
(vi) Subordination Agreements as listed in
Section 1.8.
(vii) Security Agreement: Equipment and
Fixtures.
(viii) Security Agreement: Crops.
(ix) Continuing Security Agreement: Rights to
Payment and Inventory.
(x) UCC-1 Financing Statements.
(xi) Deed of Trust executed by Borrower.
(xii) Loan Disbursement Order.
(xiii) Such other documents as Bank may require
under any other Section of this Agreement.
(c) Financial Condition. There shall have been no
material adverse change, as determined by Bank, in the financial
condition or business of Borrower or any guarantor hereunder, nor
any material decline, as determined by Bank, in the market value
of any collateral required hereunder or a substantial or material
portion of the assets of Borrower or any such guarantor.
(d) Insurance. Borrower shall have delivered to Bank
evidence of insurance coverage on all Borrower's property, in
form, substance, amounts, covering risks and issued by companies
satisfactory to Bank, and where required by Bank, with loss
payable endorsements in favor of Bank, including without
limitation, policies of fire and extended coverage insurance
covering all real property collateral required hereby, with
replacement cost and mortgagee loss payable endorsements, and such
policies of insurance against specific hazards affecting any such
real property as may be required by governmental regulation or
Bank.
(e) Appraisals. Bank shall have obtained, at Borrower's
cost, an appraisal of all real property collateral required
hereby, and all improvements thereon, issued by an appraiser
acceptable to Bank and in form, substance and reflecting values
satisfactory to Bank, in its discretion.
(f) Title Insurance. Bank shall have received an ALTA
Policy of Title Insurance, with such endorsements as Bank may
require, including without limitation, CLTA endorsements, issued
by a company and in form and substance satisfactory to Bank, in
such amount as Bank shall require, insuring Bank's lien on the
real property collateral required hereby to be of first priority,
subject only to such exceptions as Bank shall approve in its
discretion, with all costs thereof to be paid by Borrower.
(g) Tax Service Contract. Borrower shall have procured
and delivered to Bank, at Borrower's cost, such tax service
contract as Bank shall require for any real property collateral
required hereby, to remain in effect as long as such real property
secures any obligations of Borrower to Bank as required hereby.
SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The
obligation of Bank to make each extension of credit requested by Borrower
hereunder shall be subject to the fulfillment to Bank's satisfaction of each
of the following conditions:
(a) Compliance. The representations and warranties
contained herein and in each of the other Loan Documents shall be
true on and as of the date of the signing of this Agreement and on
the date of each extension of credit by Bank pursuant hereto, with
the same effect as though such representations and warranties had
been made on and as of each such date, and on each such date, no
Event of Default as defined herein, and no condition, event or act
which with the giving of notice or the passage of time or both
would constitute such an Event of Default, shall have occurred and
be continuing or shall exist.
(b) Documentation. Bank shall have received all
additional documents which may be required in connection with such
extension of credit.
ARTICLE IV
AFFIRMATIVE COVENANTS
Borrower covenants that so long as Bank remains committed to extend
credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all
obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise
consents in writing:
SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal,
interest, fees or other liabilities due under any of the Loan Documents at the
times and place and in the manner specified therein, and immediately upon
demand by Bank, the amount by which the outstanding principal balance of any
of the Credits at any time exceeds any limitation on borrowings applicable
thereto.
SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and
records in accordance with generally accepted accounting principles
consistently applied, and permit any representative of Bank, at any reasonable
time, to inspect, audit and examine such books and records, to make copies of
the same, and to inspect the properties of Borrower.
SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the
following, in form and detail satisfactory to Bank:
(a) not later than 90 days after and as of the end of each
fiscal year, an audited financial statement of Borrower, prepared
by a certified public accountant acceptable to Bank, to include a
balance sheet, income statement, statement of cash flow and all
footnotes;
(b) not later than 30 days after and as of the end of each
fiscal quarter, a financial statement of Borrower, prepared by
Borrower, to include balance sheet and income statement;
(c) not later than 15 days after and as of the end of each
month, an aged listing of accounts receivable and accounts
payable, and a reconciliation of accounts, and not later than 30
days after and as of the end of each February, a list of the names
and addresses of all Borrower's account debtors;
(d) not later than 15 days after and as of the end of each
month, a grower accounts receivable borrowing base certificate in
the form of Exhibit 1 attached hereto, and a listing of grower
accounts receivable and accounts payable satisfactory to Bank;
(e) not later than May 15th of each year, a financial
statement of each guarantor hereunder, prepared by each such
guarantor, to include a balance sheet, and copies of each such
guarantor's filed Federal income tax returns for such year;
(f) from time to time such other information as Bank may
reasonably request.
SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses,
permits, governmental approvals, rights, privileges and franchises necessary
for the conduct of its business; and comply with the provisions of all
documents pursuant to which Borrower is organized and/or which govern
Borrower's continued existence and with the requirements of all laws, rules,
regulations and orders of any governmental authority applicable to Borrower
and/or its business.
SECTION 4.5. INSURANCE. Maintain and keep in force insurance of
the types and in amounts customarily carried in lines of business similar to
that of Borrower, including but not limited to fire, extended coverage, public
liability, flood, property damage and workers' compensation, with all such
insurance carried with companies and in amounts satisfactory to Bank, and
deliver to Bank from time to time at Bank's request schedules setting forth
all insurance then in effect.
SECTION 4.6. FACILITIES. Keep all properties useful or necessary
to Borrower's business in good repair and condition, and from time to time
make necessary repairs, renewals and replacements thereto so that such
properties shall be fully and efficiently preserved and maintained.
SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when
due any and all indebtedness, obligations, assessments and taxes, both real or
personal, including without limitation Federal and state income taxes and
state and local property taxes and assessments, except such (a) as Borrower
may in good faith contest or as to which a bona fide dispute may arise, and
(b) for which Borrower has made provision, to Bank's satisfaction, for
eventual payment thereof in the event Borrower is obligated to make such
payment.
SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank
of any litigation pending or threatened against Borrower with a claim in
excess of $250,000.00.
SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's financial
condition as follows using generally accepted accounting principles
consistently applied and used consistently with prior practices (except to the
extent modified by the definitions herein):
(a) Working Capital not at any time less than
$1,700,000.00, with "Working Capital" defined as total current
assets minus total current liabilities.
(b) Tangible Net Worth not at any time less than
$2,250,000.00 with "Tangible Net Worth" defined as the aggregate
of total stockholders' equity plus subordinated debt less any
intangible assets.
SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than
five (5) days after the occurrence of each such event or matter) give written
notice to Bank in reasonable detail of: (a) the occurrence of any Event of
Default, or any condition, event or act which with the giving of notice or the
passage of time or both would constitute an Event of Default; (b) any change
in the name or the organizational structure of Borrower; (c) the occurrence
and nature of any Reportable Event or Prohibited Transaction, each as defined
in ERISA, or any funding deficiency with respect to any Plan; or (d) any
termination or cancellation of any insurance policy which Borrower is required
to maintain, or any uninsured or partially uninsured loss through liability or
property damage, or through fire, theft or any other cause affecting
Borrower's property.
ARTICLE V
NEGATIVE COVENANTS
Borrower further covenants that so long as Bank remains committed to
extend credit to Borrower pursuant hereto, or any liabilities (whether direct
or contingent, liquidated or unliquidated) of Borrower to Bank under any of
the Loan Documents remain outstanding, and until payment in full of all
obligations of Borrower subject hereto, Borrower will not without Bank's prior
written consent:
SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any of the
Credits except for the purposes stated in Article I hereof.
SECTION 5.2. CAPITAL EXPENDITURES. Make any additional investment
in fixed assets in any fiscal year in excess of an aggregate of $150,000.00.
SECTION 5.3. OTHER INDEBTEDNESS. Create, incur, assume or permit
to exist any indebtedness or liabilities resulting from borrowings, loans or
advances, whether secured or unsecured, matured or unmatured, liquidated or
unliquidated, joint or several, except (a) the liabilities of Borrower to
Bank, and (b) any other liabilities of Borrower existing as of, and disclosed
to Bank prior to, the date hereof.
SECTION 5.4. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into
or consolidate with any other entity; make any substantial change in the
nature of Borrower's business as conducted as of the date hereof; acquire all
or substantially all of the assets of any other entity; nor sell, lease,
transfer or otherwise dispose of all or a substantial or material portion of
Borrower's assets except in the ordinary course of its business.
SECTION 5.5. GUARANTIES. Guarantee or become liable in any way as
surety, endorser (other than as endorser of negotiable instruments for deposit
or collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower as security
for, any liabilities or obligations of any other person or entity, except any
of the foregoing in favor of Bank.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.1. The occurrence of any of the following shall
constitute an "Event of Default" under this Agreement:
(a) Borrower shall fail to pay when due any principal,
interest, fees or other amounts payable under any of the Loan
Documents.
(b) Any financial statement or certificate furnished to
Bank in connection with, or any representation or warranty made by
Borrower or any other party under this Agreement or any other Loan
Document shall prove to be incorrect, false or misleading in any
material respect when furnished or made.
(c) Any default in the performance of or compliance with
any obligation, agreement or other provision contained herein or
in any other Loan Document (other than those referred to in
subsections (a) and (b) above), and with respect to any such
default which by its nature can be cured, such default shall
continue for a period of twenty (20) days from its occurrence.
(d) Any default in the payment or performance of any
obligation, or any defined event of default, under the terms of
any contract or instrument (other than any of the Loan Documents)
pursuant to which Borrower or any guarantor hereunder has incurred
any debt or other liability to any person or entity, including
Bank.
(e) The filing of a notice of judgment lien against
Borrower or any guarantor hereunder; or the recording of any
abstract of judgment against Borrower or any guarantor hereunder
in any county in which Borrower or such guarantor has an interest
in real property; or the service of a notice of levy and/or of a
writ of attachment or execution, or other like process, against
the assets of Borrower or any guarantor hereunder; or the entry of
a judgment against Borrower or any guarantor hereunder.
(f) Borrower or any guarantor hereunder shall become
insolvent, or shall suffer or consent to or apply for the
appointment of a receiver, trustee, custodian or liquidator of
itself or any of its property, or shall generally fail to pay its
debts as they become due, or shall make a general assignment for
the benefit of creditors; Borrower or any guarantor hereunder
shall file a voluntary petition in bankruptcy, or seeking
reorganization, in order to effect a plan or other arrangement
with creditors or any other relief under the Bankruptcy Reform
Act, Title 11 of the United States Code, as amended or recodified
from time to time ("Bankruptcy Code"), or under any state or
Federal law granting relief to debtors, whether now or hereafter
in effect; or any involuntary petition or proceeding pursuant to
the Bankruptcy Code or any other applicable state or Federal law
relating to bankruptcy, reorganization or other relief for debtors
is filed or commenced against Borrower or any guarantor hereunder,
or Borrower or any such guarantor shall file an answer admitting
the jurisdiction of the court and the material allegations of any
involuntary petition; or Borrower or such guarantor shall be
adjudicated a bankrupt, or an order for relief shall be entered
against Borrower or any Guarantor by any court of competent
jurisdiction under the Bankruptcy Code or any other applicable
state or Federal law relating to bankruptcy, reorganization or
other relief for debtors.
(g) There shall exist or occur any event or condition
which Bank in good faith believes impairs, or is substantially
likely to impair, the prospect of payment or performance by
Borrower of its obligations under any of the Loan Documents.
(h) The death or incapacity of Borrower or any guarantor
hereunder. The dissolution or liquidation of Borrower; or
Borrower, or any of its directors, stockholders or members, shall
take action seeking to effect the dissolution or liquidation of
Borrower.
(i) Any change in ownership during the term of this
Agreement of an aggregate of twenty-five percent (25%) or more of
the common stock of Borrower.
(j) The sale, transfer, hypothecation, assignment or
encumbrance, whether voluntary, involuntary or by operation of
law, without Bank's prior written consent, of all or any part of
or interest in any real property collateral required hereby.
SECTION 6.2. REMEDIES. Upon the occurrence of any Event of
Default: (a) all indebtedness of Borrower under each of the Loan Documents,
any term thereof to the contrary notwithstanding, shall at Bank's option and
without notice become immediately due and payable without presentment, demand,
protest or notice of dishonor, all of which are hereby expressly waived by
Borrower; (b) the obligation, if any, of Bank to extend any further credit
under any of the Loan Documents shall immediately cease and terminate; and
(c) Bank shall have all rights, powers and remedies available under each of
the Loan Documents, or accorded by law, including without limitation the right
to resort to any or all security for any of the Credits and to exercise any or
all of the rights of a beneficiary or secured party pursuant to applicable
law. All rights, powers and remedies of Bank may be exercised at any time by
Bank and from time to time after the occurrence of an Event of Default, are
cumulative and not exclusive, and shall be in addition to any other rights,
powers or remedies provided by law or equity.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of
Bank in exercising any right, power or remedy under any of the Loan Documents
shall affect or operate as a waiver of such right, power or remedy; nor shall
any single or partial exercise of any such right, power or remedy preclude,
waive or otherwise affect any other or further exercise thereof or the
exercise of any other right, power or remedy. Any waiver, permit, consent or
approval of any kind by Bank of any breach of or default under any of the Loan
Documents must be in writing and shall be effective only to the extent set
forth in such writing.
SECTION 7.2. NOTICES. All notices, requests and demands which any
party is required or may desire to give to any other party under any provision
of this Agreement must be in writing delivered to each party at the following
address:
BORROWER: ANDREW AND WILLIAMSON SALES, CO.
9940 Marconi Drive
San Diego, California 92173
BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION
Bakersfield Regional Commercial Banking Office
5401 California Avenue, 2nd Floor
Bakersfield, California 93309
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit
in the U.S. mail, first class and postage prepaid; and (c) if sent by
telecopy, upon receipt.
SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall
pay to Bank immediately upon demand the full amount of all payments, advances,
charges, costs and expenses, including reasonable attorneys' fees (to include
outside counsel fees and all allocated costs of Bank's in-house counsel),
incurred by Bank in connection with (a) the negotiation and preparation of
this Agreement and the other Loan Documents, Bank's continued administration
hereof and thereof, and the preparation of any amendments and waivers hereto
and thereto, (b) the enforcement of Bank's rights and/or the collection of any
amounts which become due to Bank under any of the Loan Documents, and (c) the
prosecution or defense of any action in any way related to any of the Loan
Documents, including without limitation, any action for declaratory relief,
and including any of the foregoing incurred in connection with any bankruptcy
proceeding relating to Borrower.
SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be
binding upon and inure to the benefit of the heirs, executors, administrators,
legal representatives, successors and assigns of the parties; provided
however, that Borrower may not assign or transfer its interest hereunder
without Bank's prior written consent. Bank reserves the right to sell,
assign, transfer, negotiate or grant participations in all or any part of, or
any interest in, Bank's rights and benefits under each of the Loan Documents.
In connection therewith, Bank may disclose all documents and information which
Bank now has or may hereafter acquire relating to any of the Credits, Borrower
or its business, any guarantor hereunder or the business of such guarantor, or
any collateral required hereunder.
SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the
other Loan Documents constitute the entire agreement between Borrower and Bank
with respect to the Credits and supersede all prior negotiations,
communications, discussions and correspondence concerning the subject matter
hereof. This Agreement may be amended or modified only by a written
instrument executed by each party hereto.
SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made
and entered into for the sole protection and benefit of the parties hereto and
their respective permitted successors and assigns, and no other person or
entity shall be a third party beneficiary of, or have any direct or indirect
cause of action or claim in connection with, this Agreement or any other of
the Loan Documents to which it is not a party.
SECTION 7.7. TIME. Time is of the essence of each and every
provision of this Agreement and each other of the Loan Documents.
SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this
Agreement shall be prohibited by or invalid under applicable law, such
provision shall be ineffective only to the extent of such prohibition or
invalidity without invalidating the remainder of such provision or any
remaining provisions of this Agreement.
SECTION 7.9. GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of California.
SECTION 7.10. ARBITRATION.
(a) Arbitration. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in
accordance with the terms of this Agreement. A "Dispute" shall mean any
action, dispute, claim or controversy of any kind, whether in contract or
tort, statutory or common law, legal or equitable, now existing or hereafter
arising under or in connection with, or in any way pertaining to, any of the
Loan Documents, or any past, present or future extensions of credit and other
activities, transactions or obligations of any kind related directly or
indirectly to any of the Loan Documents, including without limitation, any of
the foregoing arising in connection with the exercise of any self-help,
ancillary or other remedies pursuant to any of the Loan Documents. Any party
may by summary proceedings bring an action in court to compel arbitration of a
Dispute. Any party who fails or refuses to submit to arbitration following a
lawful demand by any other party shall bear all costs and expenses incurred by
such other party in compelling arbitration of any Dispute.
(b) Governing Rules. Arbitration proceedings shall be administered by
the American Arbitration Association ("AAA") or such other administrator as
the parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States
Code), notwithstanding any conflicting choice of law provision in any of the
Loan Documents. The arbitration shall be conducted at a location in
California selected by the AAA or other administrator. If there is any
inconsistency between the terms hereof and any such rules, the terms and
procedures set forth herein shall control. All statutes of limitation
applicable to any Dispute shall apply to any arbitration proceeding. All
discovery activities shall be expressly limited to matters directly relevant
to the Dispute being arbitrated. Judgment upon any award rendered in an
arbitration may be entered in any court having jurisdiction; provided however,
that nothing contained herein shall be deemed to be a waiver by any party that
is a bank of the protections afforded to it under 12 U.S.C. Section 91 or any
similar applicable state law.
(c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary
remedies, including without limitation injunctive relief, sequestration,
attachment, garnishment or the appointment of a receiver, from a court of
competent jurisdiction before, after or during the pendency of any arbitration
or other proceeding. The exercise of any such remedy shall not waive the
right of any party to compel arbitration or reference hereunder.
(d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be
active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may grant
any remedy or relief that a court of the state of California could order or
grant within the scope hereof and such ancillary relief as is necessary to
make effective any award, and (iii) shall have the power to award recovery of
all costs and fees, to impose sanctions and to take such other actions as they
deem necessary to the same extent a judge could pursuant to the Federal Rules
of Civil Procedure, the California Rules of Civil Procedure or other
applicable law. Any Dispute in which the amount in controversy is $5,000,000
or less shall be decided by a single arbitrator who shall not render an award
of greater than $5,000,000 (including damages, costs, fees and expenses). By
submission to a single arbitrator, each party expressly waives any right or
claim to recover more than $5,000,000. Any Dispute in which the amount in
controversy exceeds $5,000,000 shall be decided by majority vote of a panel of
three arbitrators; provided however, that all three arbitrators must actively
participate in all hearings and deliberations.
(e) Judicial Review. Notwithstanding anything herein to the contrary,
in any arbitration in which the amount in controversy exceeds $25,000,000, the
arbitrators shall be required to make specific, written findings of fact and
conclusions of law. In such arbitrations (A) the arbitrators shall not have
the power to make any award which is not supported by substantial evidence or
which is based on legal error, (B) an award shall not be binding upon the
parties unless the findings of fact are supported by substantial evidence and
the conclusions of law are not erroneous under the substantive law of the
state of California, and (C) the parties shall have in addition to the grounds
referred to in the Federal Arbitration Act for vacating, modifying or
correcting an award the right to judicial review of (1) whether the findings
of fact rendered by the arbitrators are supported by substantial evidence, and
(2) whether the conclusions of law are erroneous under the substantive law of
the state of California. Judgment confirming an award in such a proceeding
may be entered only if a court determines the award is supported by
substantial evidence and not based on legal error under the substantive law of
the state of California.
(f) Real Property Collateral; Judicial Reference. Notwithstanding
anything herein to the contrary, no Dispute shall be submitted to arbitration
if the Dispute concerns indebtedness secured directly or indirectly, in whole
or in part, by any real property unless (i) the holder of the mortgage, lien
or security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or
benefits that might accrue to them by virtue of the single action rule statute
of California, thereby agreeing that all indebtedness and obligations of the
parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If
any such Dispute is not submitted to arbitration, the Dispute shall be
referred to a referee in accordance with California Code of Civil Procedure
Section 638 et seq., and this general reference agreement is intended to be
specifically enforceable in accordance with said Section 638. A referee with
the qualifications required herein for arbitrators shall be selected pursuant
to the AAA's selection procedures. Judgment upon the decision rendered by a
referee shall be entered in the court in which such proceeding was commenced
in accordance with California Code of Civil Procedure Sections 644 and 645.
(g) Miscellaneous. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose
the existence, content or results thereof, except for disclosures of
information by a party required in the ordinary course of its business, by
applicable law or regulation, or to the extent necessary to exercise any
judicial review rights set forth herein. If more than one agreement for
arbitration by or between the parties potentially applies to a Dispute, the
arbitration provision most directly related to the Loan Documents or the
subject matter of the Dispute shall control. This arbitration provision shall
survive termination, amendment or expiration of any of the Loan Documents or
any relationship between the parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
WELLS FARGO BANK,
ANDREW AND WILLIAMSON SALES, CO. NATIONAL ASSOCIATION
By: Fred W. Andrew By: Steven M. Del Papa
Title: Secretary Title: Vice President
<PAGE>
EXHIBIT A
REVOLVING LINE OF CREDIT NOTE
$6,500,000.00 Bakersfield, California
August 5, 1996
FOR VALUE RECEIVED, the undersigned ANDREW AND WILLIAMSON SALES, CO.
("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL
ASSOCIATION ("Bank") at its office at Bakersfield RCBO, 5401 California
Avenue, 2nd Floor, Bakersfield, California, or at such other place as the
holder hereof may designate, in lawful money of the United States of America
and in immediately available funds, the principal sum of Six Million Five
Hundred Thousand Dollars ($6,500,000.00), or so much thereof as may be
advanced and be outstanding, with interest thereon, to be computed on each
advance from the date of its disbursement (computed on the basis of a 360-day
year, actual days elapsed) either (i) at a fluctuating rate per annum
one-half percent (.50%) above the Prime Rate in effect from time to time, or
(ii) at a fixed rate per annum determined by Bank to be two and
three-quarters percent (2.75%) above Bank's LIBOR in effect on the first day
of the applicable Fixed Rate Term. When interest is determined in relation to
the Prime Rate, each change in the rate of interest hereunder shall become
effective on the date each Prime Rate change is announced within Bank. With
respect to each LIBOR option selected hereunder, Bank is hereby authorized to
note the date, principal amount, interest rate and Fixed Rate Term applicable
thereto and any payments made thereon on Bank's books and records (either
manually or by electronic entry) and/or on any schedule attached to this Note,
which notations shall be prima facie evidence of the accuracy of the
information noted.
A. DEFINITIONS:
As used herein, the following terms shall have the meanings set forth
after each:
1. "Business Day" means any day except a Saturday, Sunday or any
other day designated as a holiday under Federal or California statute or
regulation.
2. "Fixed Rate Term" means a period commencing on a Business Day and
continuing for one (1) month, as designated by Borrower, during which all or a
portion of the outstanding principal balance of this Note bears interest
determined in relation to Bank's LIBOR; provided however, that no Fixed Rate
Term may be selected for a principal amount less than Two Hundred Fifty
Thousand Dollars ($250,000.00); and provided further, that no Fixed Rate Term
shall extend beyond the scheduled maturity date hereof. If any Fixed Rate
Term would end on a day which is not a Business Day, then such Fixed Rate Term
shall be extended to the next succeeding Business Day.
3. "LIBOR" means the rate per annum (rounded upward, if necessary, to
the nearest whole 1/8 of 1%) and determined pursuant to the following formula:
LIBOR = Base LIBOR
-------------------------------
100% - LIBOR Reserve percentage
(a) "Base LIBOR" means the rate per annum for United States dollar
deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the
understanding that such rate is quoted by Bank for the purpose of calculating
effective rates of interest for loans making reference thereto, on the first
day of a Fixed Rate Term for delivery of funds on said date for a period of
time approximately equal to the number of days in such Fixed Rate Term and in
an amount approximately equal to the principal amount to which such Fixed Rate
Term applies. Borrower understands and agrees that Bank may base its
quotation of the Inter-Bank Market Offered Rate upon such offers or other
market indicators of the Inter-Bank Market as Bank in its discretion deems
appropriate including, but not limited to, the rate offered for U.S. dollar
deposits on the London Inter-Bank Market.
(b) "LIBOR Reserve percentage" means the reserve percentage prescribed
by the Board of Governors of the Federal Reserve System (or any successor) for
"Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve
Board, as amended), adjusted by Bank for expected changes in such
reserve percentage during the applicable Fixed Rate Term.
4. "Prime Rate" means at any time the rate of interest most recently
announced within Bank at its principal office in San Francisco as its Prime
Rate, with the understanding that the Prime Rate is one of Bank's base rates
and serves as the basis upon which effective rates of interest are calculated
for those loans making reference thereto, and is evidenced by the recording
thereof after its announcement in such internal publication or publications as
Bank may designate.
B. INTEREST:
1. Payment of Interest. Interest accrued on this Note shall be
payable on the fifth day of each month, commencing September 5, 1996.
2. Selection of Interest Rate Options. At any time any portion of
this Note bears interest determined in relation to Bank's LIBOR, it may be
continued by Borrower at the end of the Fixed Rate Term applicable thereto so
that all or a portion thereof bears interest determined in relation to the
Prime Rate or in relation to Bank's LIBOR for a new Fixed Rate Term designated
by Borrower. At any time any portion of this Note bears interest determined
in relation to the Prime Rate, Borrower may convert all or a portion thereof
so that it bears interest determined in relation to Bank's LIBOR for a Fixed
Rate Term designated by Borrower. At the time each advance is requested
hereunder or Borrower wishes to select the LIBOR option for all or a portion
of the outstanding principal balance hereof, and at the end of each Fixed Rate
Term, Borrower shall give Bank notice specifying (a) the interest rate option
selected by Borrower, (b) the principal amount subject thereto, and (c) if the
LIBOR option is selected, the length of the applicable Fixed Rate Term. Any
such notice may be given,by telephone so long as, with respect to each LIBOR
selection, (i) Bank receives written confirmation from Borrower not later than
three (3) Business Days after such telephone notice is given, and (ii) such
notice is given to Bank prior to 10:00 a.m., California time, on the first day
of the Fixed Rate Term. For each LIBOR option requested hereunder, Bank will
quote the applicable fixed rate to Borrower at approximately 10:00 a.m.,
California time, on the first day of the Fixed Rate Term. If Borrower does
not immediately accept the rate quoted by Bank, any subsequent acceptance by
Borrower shall be subject to a redetermination by Bank of the applicable fixed
rate; provided however, that if Borrower fails to accept any such rate by
11:00 a.m., California time, on the Business Day such quotation is given, then
the quoted rate shall expire and Bank shall have no obligation to permit a
LIBOR option to be selected on such day. If no specific designation of
interest is made at the time any advance is requested hereunder or at the end
of any Fixed Rate Term, Borrower shall be deemed to have made a Prime Rate
interest selection for such advance or the principal amount to which such
Fixed Rate Term applied.
3. Additional LIBOR Provisions.
(a) If Bank at any time shall determine that for any reason adequate
and reasonable means do not exist for ascertaining Bank's LIBOR, then Bank
shall promptly give notice thereof to Borrower. If such notice is given and
until such notice has been withdrawn by Bank, than (i) no new LIBOR option may
be selected by Borrower, and (ii) any portion of the outstanding principal
balance hereof which bears interest determined in relation to Bank's LIBOR,
subsequent to the end of the Fixed Rate Term applicable thereto, shall bear
interest determined in relation to the Prime Rate.
(b) If any law, treaty, rule, regulation or determination of a court
or governmental authority or any change therein or in the interpretation or
application thereof (each, a "Change in Law") shall make it unlawful for Bank
(i) to make LIBOR options available hereunder, or (ii) to maintain interest
rates based on Bank's LIBOR, then in the former event, any obligation of Bank
to make available such unlawful LIBOR options shall immediately be canceled,
and in the latter event, any such unlawful LIBOR-based interest rates then
outstanding shall be converted, at Bank's option, so that interest on the
portion of the outstanding principal balance subject thereto is determined in
relation to the Prime Rate; provided however, that if any such Change in Law
shall permit any LIBOR-based interest rates to remain in effect until the
expiration of the Fixed Rate Term applicable thereto, then such permitted
LIBOR-based interest rates shall continue in effect until the expiration of
such Fixed Rate Term. Upon the occurrence of any of the foregoing events,
Borrower shall pay to Bank immediately upon demand such amounts as may be
necessary to compensate Bank for any fines, fees, charges, penalties or other
costs incurred or payable by Bank as a result thereof and which are
attributable to any LIBOR options made available to Borrower hereunder, and
any reasonable allocation made by Bank among its operations shall be
conclusive and binding upon Borrower.
(c) If any Change in Law or compliance by Bank with any request or
directive (whether or not having the force of law) from any central bank or
other governmental authority shall:
(i) subject Bank to any tax, duty or other charge with
respect to any LIBOR options, or change the basis of
taxation of payments to Bank of principal, interest,
fees or any other amount payable hereunder (except for
changes in the rate of tax on the overall net income
of Bank); or
(ii) impose, modify or hold applicable any reserve, special
deposit, compulsory loan or similar requirement
against assets held by, deposits or other liabilities
in or for the account of, advances or loans by, or any
other acquisition of funds by any office of Bank; or
(iii) impose on Bank any other condition;
and the result of any of the foregoing is to increase the cost to Bank of
making, renewing or maintaining any LIBOR options hereunder and/or to reduce
any amount receivable by Bank in connection therewith, then in any such case,
Borrower shall pay to Bank immediately upon demand such amounts as may be
necessary to compensate Bank for any additional costs incurred by Bank and/or
reductions in amounts received by Bank which are attributable to such LIBOR
options. In determining which costs incurred by Bank and/or reductions in
amounts received by Bank are attributable to any LIBOR options made available
to Borrower hereunder, any reasonable allocation made by Bank among its
operations shall be conclusive and binding upon Borrower.
4. Default Interest. From and after the maturity date of this Note,
or such earlier date as all principal owing hereunder becomes due and payable
by acceleration or otherwise, the outstanding principal balance of this Note
shall bear interest until paid in full at an increased rate per annum
(computed on the basis of a 360-day year, actual days elapsed) equal to
four percent (4%) above the rate of interest from time to time applicable to
this Note.
C. BORROWING AND REPAYMENT:
1. Borrowing and Repayment. Borrower may from time to time during
the term of this Note borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions of this Note and of any document executed in connection with or
governing this Note; provided however, that the total outstanding borrowings
under this Note shall not at any time exceed the principal amount stated
above. The unpaid principal balance of this obligation at any time shall be
the total amounts advanced hereunder by the holder hereof less the amount of
principal payments made hereon by or for any Borrower, which balance may be
endorsed hereon from time to time by the holder. The outstanding principal
balance of this Note shall be due and payable in full on July 5, 1997.
2. Advances. Advances hereunder, to the total amount of the
principal sum stated above, may be made by the holder at the oral or written
request of (a) Fred W. Andrew or Fred L. Williamson or Alma Chavez or Ira
Gershow, any one acting alone, who are authorized to request advances and
direct the disposition of any advances until written notice of the revocation
of such authority is received by the holder at the office designated above, or
(b) any person, with respect to advances deposited to the credit of any
account of any Borrower with the holder, which advances, when so deposited,
shall be conclusively presumed to have been made to or for the benefit of each
Borrower regardless of the fact that persons other than those authorized to
request advances may have authority to draw against such account. The holder
shall have no obligation to determine whether any person requesting an advance
is or has been authorized by any Borrower.
3. Application of Payments. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments credited to principal shall be applied
first, to the outstanding principal balance of this Note which bears interest
determined in relation to the Prime Rate, if any, and second, to the
outstanding principal balance of this Note which bears interest determined in
relation to Bank's LIBOR, with such payments applied to the oldest Fixed Rate
Term first.
4. Prepayment.
(a) Prime Rate. Borrower may prepay principal on any portion of this
Note which bears interest determined in relation to the Prime Rate at any
time, in any amount and without penalty.
(b) LIBOR. Borrower may prepay principal on any portion of this Note
which bears interest determined in relation to Bank's LIBOR at any time and in
the minimum amount of One Hundred Thousand Dollars ($100,000.00); provided
however, that if the outstanding principal balance of such portion of this
Note is less than said amount, the minimum prepayment amount shall be the
entire outstanding principal balance thereof. In consideration of Bank
providing this prepayment option to Borrower, or if any such portion of this
Note shall become due and payable at any time prior to the last day of the
Fixed Rate Term applicable thereto by acceleration or otherwise, Borrower
shall pay to Bank immediately upon demand a fee which is the sum of the
discounted monthly differences for each month from the month of prepayment
through the month in which such Fixed Rate Term matures, calculated as follows
for each such month:
(i) Determine the amount of interest which would have
accrued each month on the amount prepaid at the
interest rate applicable to such amount had it
remained outstanding until the last day of the Fixed
Rate Term applicable thereto.
(ii) Subtract from the amount determined in (i) above the
amount of interest which would have accrued for the
same month on the amount prepaid for the remaining
term of such Fixed Rate Term at Bank's LIBOR in effect
on the date of prepayment for new loans made for such
term and in a principal amount equal to the amount
prepaid.
(iii) If the result obtained in (ii) for any month is
greater than zero, discount that difference by Bank's
LIBOR used in (ii) above.
Each Borrower acknowledges that prepayment of such amount may result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Each Borrower, therefore, agrees to pay the above-described
prepayment fee and agrees that said amount represents a reasonable estimate of
the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails
to pay any prepayment fee when due, the amount of such prepayment fee shall
thereafter bear interest until paid at a rate per annum four percent (4*)
above the Prime Rate in effect from time to time (computed on the basis of a
360-day year, actual days elapsed).
D. EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and conditions
of that certain Credit Agreement between Borrower and Bank dated as of
August 5, 1996, as amended from time to time (the "Credit Agreement"). Any
default in the payment or performance of any obligation under this Note, or
any defined event of default under the Credit Agreement, shall constitute an
"Event of Default,, under this Note.
E. MISCELLANEOUS:
1. Remedies. Upon the occurrence of any Event of Default, the holder
of this Note, at the holder's option, may declare all sums of principal and
interest outstanding hereunder to be immediately due and payable without
presentment, demand, protest or notice of dishonor, all of which are expressly
waived by each Borrower, and the obligation, if any, of the holder to extend
any further credit hereunder shall immediately cease and terminate. Each
Borrower shall pay to the holder immediately upon demand the full amount of
all payments, advances, charges, costs and expenses, including reasonable
attorneys, fees (to include outside counsel fees and all allocated costs of
the holder's in-house counsel), incurred by the holder in connection with the
enforcement of the holder's rights and/or the collection of any amounts which
become due to the holder under this Note, and the prosecution or defense of
any action in any way related to this Note, including without limitation, any
action for declaratory relief, and including any of the foregoing incurred in
connection with any bankruptcy proceeding relating to any Borrower.
2. Obligations Joint and Several. Should more than one person or
entity sign this Note as a Borrower, the obligations of each such Borrower
shall be joint and several.
3. Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of California, except to the extent Bank
has greater rights or remedies under Federal law, whether as a national bank
or otherwise, in which case such choice of California law shall not be deemed
to deprive Bank of any such rights and remedies as may be available under
Federal law.
ANDREW AND WILLIAMSON SALES, CO.
By: -------------------------------
Title: -------------------------------
<PAGE>
EXHIBIT B
Bakersfield Regional
Commercial Banking Office
5401 California Avenue
Bakersfield, CA 93309
April 19, 1996
Andrew & Williamson Sales, Co.
9940 Marconi Dr.
San Diego, CA 92173
Re: Your $253,500.00 credit accommodation evidenced by promissory note
dated as of March 18, 1993 (the "Note")
Dear Sirs:
This letter is to advise you that, effective as of April 19, 1996, the
variable rate of interest applicable to the above-described credit
accommodation from Wells Fargo Bank, National Association ("Bank") is hereby
reduced to one-half percent (0.50%) above the Prime Rate in effect from time
to time. The Note is hereby deemed modified by this letter to reflect said
interest rate reduction. Except as expressly set forth herein, all terms and
conditions of the Note remain in full force and effect, without waiver or
modification.
Sincerely,
WELLS FARGO BANK,
NATIONAL ASSOCIATION
By: ----------------------------
Mary R. Grider
Vice President
Acknowledged and agreed as of 5/6/96:
ANDREW AND WILLIAMSON SALES, CO.
By: Fred W. Andrew
Title: Secretary
<PAGE>
EXHIBIT B
WELLS FARGO BANK PROMISSORY NOTE
$253,500.00 Bakersfield, California
March 18, 1993
FOR VALUE RECEIVED, the undersigned ANDREW AND WILLIAMSON SALES, CO.
("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL
ASSOCIATION ("Bank"), at its office at 5401 California Avenue, Bakersfield,
California, or at such other place as the holder hereof may designate, in
lawful money of the United States of America and in immediately available
funds, the principal sum of Two Hundred Fifty-Three Thousand Five Hundred and
No/100 Dollars ($253,500.00), with interest thereon at a rate per annum
(computed on the basis of a 360-day year, actual days elapsed) 1.25% above the
Prime Rate in effect from time to time. The "Prime Rate" is a base rate that
the Bank from time to time establishes and which serves as the basis upon
which effective rates of interest are calculated for those loans making
reference thereto. Each change in the rate of interest hereunder shall become
effective on the date each Prime Rate change is announced within the Bank.
Interest accrued on this Note shall be payable on the fifth day of each
month, commencing April 5, 1993.
Principal shall be payable in installments as follows:
Principal shall be payable annually on the fifth day of each March
in four (4) equal successive installments of Sixteen Thousand Nine
Hundred and No/100 Dollars ($16,900.00) each, commencing March 5,
1994, and continuing up to and including March 5, 1997,
with a final installment consisting of all remaining unpaid principal due and
payable in full on March 5, 1998. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof.
From and after the maturity date of this Note, or such earlier date as
all principal owing hereunder becomes due and payable by acceleration or
otherwise, the outstanding principal balance of this Note shall bear interest
until paid in full at an increased rate per annum (computed on the basis of a
360-day year, actual days elapsed) equal to four percent (4%) above the rate
of interest from time to time applicable to this Note.
The occurrence of any of the following shall constitute an "Event of
Default" under this Note:
1. The failure to pay any principal, interest, fees or other charges
when due under this Note or any contract, instrument or document executed in
connection with this Note.
2. The filing of a petition by or against any Borrower, any guarantor
of this Note or any general partner or joint venturer in any Borrower which is
a partnership or a joint venture (with each such guarantor, general partner
and/or joint venturer referred to herein as a "Third Party Obligor") under any
provisions of the Bankruptcy Reform Act, Title 11 of the United States Code,
as amended or recodified from time to time, or under any similar or other law
relating to bankruptcy, insolvency, reorganization or other relief for
debtors; the appointment of a receiver, trustee, custodian or liquidator of or
for any part of the assets or property of any Borrower or Third Party Obligor;
any Borrower or Third Party Obligor becomes insolvent, makes a general
assignment for the benefit of creditors or is generally not paying its debts
as they become due; or any attachment or like levy on any property of any
Borrower or Third Party Obligor.
3. The death or incapacity of any individual Borrower or Third Party
Obligor, or the dissolution or liquidation of any Borrower or Third Party
Obligor which is a corporation, partnership, joint venture or any other type
of entity.
4. Any default in the payment or performance of any obligation, or
any defined event of default, under any provisions of any contract, instrument
or document pursuant to which any Borrower or Third Party Obligor has incurred
any obligation for borrowed money, any purchase obligation or any other
liability of any kind to any person or entity including the holder.
5. Any financial statement provided by any Borrower or Third Party
Obligor to Bank proves false.
6. Any sale or transfer of all or a substantial or material part of
the assets of any Borrower or Third Party Obligor other than in the ordinary
course of business.
7. Any violation or breach of any provision of, or any defined event
of default under, any addendum to this Note or any loan agreement, guaranty,
security agreement, deed of trust or other document executed in connection
with or securing this Note.
Upon the occurrence of any Event of Default, the holder of this Note, at
the holder's option, may declare all sums of principal and interest
outstanding hereunder to be immediately due and payable without presentment,
demand, protest or notice of dishonor, all of which are expressly waived by
each Borrower. Each Borrower shall pay to the holder immediately upon demand
the full amount of all costs and expenses, including reasonable attorneys'
fees (to include outside counsel fees and all allocated costs of the holder's
in-house counsel), incurred by the holder in connection with the enforcement
of the holder's rights and/or the collection of any amounts which become due
to the holder under this Note, and the prosecution or defense of any action in
any way related to this Note, including without limitation, any action for
declaratory relief.
Should more than one person or entity sign this Note as a Borrower, the
obligations of each such Borrower shall be joint and several.
This Note shall be governed by and construed in accordance with the laws
of the State of California, except to the extent Bank has greater rights or
remedies under Federal law, whether as a national bank or otherwise, in which
case such choice of California law shall not be deemed to deprive Bank of any
such rights and remedies as may be available under Federal law.
See Addendum to Promissory Note attached hereto, all terms of which are
incorporated herein by this reference.
ANDREW AND WILLIAMSON SALES CO. This Note is secured by a Deed of
Trust of even date herewith.
By: ------------------------------- --------------------------------
Fred W. Andrew, Secretary
------------------------------- --------------------------------
<PAGE>
ADDENDUM TO PROMISSORY NOTE
THIS ADDENDUM is attached to and made a part of that certain promissory
note executed by ANDREW AND WILLIAMSON SALES, CO. ("Borrower") and payable to
WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"), or order, dated as of
March 18, 1993, in the principal amount of Two Hundred Fifty-Three Thousand
Five Hundred Dollars ($253,500.00) (the "Note").
The following provisions are hereby incorporated into the Note:
1. So long as Bank remains committed to extend credit to Borrower
under this Note and until payment in full of all obligations of Borrower
hereunder, Borrower shall unless Bank otherwise consents in writing:
(a) Provide to Bank all of the following, in form and
detail satisfactory to Bank:
(i) not later than 90 days after and as of the end
of each fiscal year, a reviewed financial statement of
Borrower, prepared by a certified public accountant
acceptable to Bank, to include a balance sheet, income
statement, statement of retained earnings, cash flow and
accompanying footnotes;
(ii) not later than 20 days after and as of the end
of each quarter, a compiled financial statement of Borrower,
prepared by Borrower, to include a balance sheet and income
statement;
(iii) not later than each May 15, a financial
statement of each Guarantor, dated not more than 12
months after the date of the most recent financial
statement received by Bank from each Guarantor,
prepared by each Guarantor, to include a balance
sheet, and within 30 days after filing, but in no
event later than each May 15, a copy of each
Guarantor's filed federal income tax return for such
year;
(iv) from time to time such other information
as Bank may reasonably request.
(b) Maintain its financial condition as follows using
generally accepted accounting principles consistently applied and
used consistently with prior practices, except to the extent
modified by the following definitions:
(i) Working Capital (defined as total current
assets, excluding prepaids, less total current
liabilities) not at any time less than $450,000.00.
(ii) Tangible Net Worth (defined as the
aggregate of total stockholders' equity plus
subordinated debt less the aggregate of any treasury
stock, any intangible assets and any obligations due
from stockholders, employees and/or affiliates) not at
any time less than $1,100,000.00 on an annual basis,
determined as of each fiscal year end.
(iii) Cash Flow Coverage Ratio (defined as the
aggregate of net income after taxes plus depreciation
and other non-cash expenses, less gain on sale of
assets, dividends, withdrawals and treasury stock
purchases divided by the aggregate of the current
portion of long-term debt) not less than 1.5 to 1.0 on
an annual basis, determined as of each fiscal year
end.
(iv) not make any additional investment in
fixed assets in any fiscal year in excess of an
aggregate of $150,000.00.
(v) not declare or pay any dividend or
distribution either in cash, stock or any other
property on Borrower's stock now or hereafter
outstanding; nor redeem, retire, repurchase or
otherwise acquire any shares of any class of
Borrower's stock now or hereafter outstanding;
provided however, that so long as Borrower maintains
its valid election as an S corporation, Borrower may
pay cash dividends or distributions to its
shareholders in any fiscal year to cover its
shareholders' federal income tax liability for the
immediately preceding fiscal year arising as a direct
result of Borrower's reported income for such fiscal
year, but not to exceed the minimum amount so
required, and Borrower shall provide to Bank, upon
request, any documentation required by Bank to
substantiate the appropriateness of amounts paid or to
be paid.
(vi) give notice in writing to Bank of any
litigation pending or threatened against Borrower in
excess of $50,000.00.
2. All obligations of Borrower to Fred L. Williamson and Fred W.
Andrew shall be subordinated in right of repayment to all obligations of
Borrower to Bank, up to an aggregate of $460,000.00, as evidenced by and
subject to the terms of subordination agreements in form and substance
satisfactory to Bank.
3. Borrower shall pay to Bank a non-refundable commitment fee for the
Note in the amount of $3,802.50, which commitment fee shall be due and payable
in full upon execution of loan documents.
IN WITNESS WHEREOF, this Addendum has been executed as of the same date
as the Note.
ANDREW AND WILLIAMSON SALES, CO.
By: --------------------------
Fred W. Andrew, Secretary
<PAGE>
EXHIBIT C
(Form of Promissory Note)
WELLS FARGO BANK PROMISSORY NOTE
$__________________ ______________, California
March 18, 19__
FOR VALUE RECEIVED, the undersigned _____________________________
("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL
ASSOCIATION ("Bank"), at its office at ______________________, California, or
at such other place as the holder hereof may designate, in lawful money of the
United States of America and in immediately available funds, the principal sum
of _______________________ ________________________________ Dollars
($___________), with interest thereon at a rate per annum (computed on the
basis of a ___-day year, actual days elapsed) 1.25% above the Prime Rate in
effect from time to time. The "Prime Rate" is a base rate that Bank from time
to time establishes and which serves as the basis upon which effective rates
of interest are calculated for those loans making reference thereto. Each
change in the rate of interest hereunder shall become effective on the date
each Prime Rate change is announced within Bank.
Interest accrued on this Note shall be payable on the ________ day of
each ________ commencing ___________________.
Principal shall be payable in installments as follows:
with a final installment consisting of all remaining unpaid principal due and
payable in full on _____________. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof.
From and after the maturity date of this Note, or such earlier date as
all principal owing hereunder becomes due and payable by acceleration or
otherwise, the outstanding principal balance of this Note shall bear interest
until paid in full at an increased rate per annum (computed on the basis of a
___-day year, actual days elapsed) equal to four percent (4%) above the rate
of interest from time to time applicable to this Note.
This note is made pursuant to and is subject to the terms of that
certain Credit Agreement between Borrower and Bank dated as of August 5, 1996,
as amended from time to time (the "Credit Agreement"). Upon the occurrence of
any Event of Default as defined in the Credit Agreement, the holder of this
Note, at the holder's option, may declare all sums of principal and interest
outstanding hereunder to be immediately due and payable without presentment,
demand, protest or notice of dishonor, all of which are expressly waived by
each Borrower. Each Borrower shall pay to the holder immediately upon demand
the full amount of all payments, advances, charges, costs and expenses,
including reasonable attorneys' fees (to include outside counsel fees and all
allocated costs of the holder's in-house counsel), incurred by the holder in
connection with the enforcement of the holder's rights and/or the collection
of any amounts which become due to the holder under this Note, and the
prosecution or defense of any action in any way related to this Note,
including without limitation, any action for declaratory relief, and including
any of the foregoing incurred in connection with any bankruptcy proceeding
relating to any Borrower.
Should more than one person or entity sign this Note as a Borrower, the
obligations of each such Borrower shall be joint and several.
This Note shall be governed by and construed in accordance with the laws
of the State of California, except to the extent Bank has greater rights or
remedies under Federal law, whether as a national bank or otherwise, in which
case such choice of California law shall not be deemed to deprive Bank of any
such rights and remedies as may be available under Federal law.
- ----------------------------------- ------------------------------------
- ----------------------------------- ------------------------------------
<PAGE>
EXHIBIT D
Exhibit A to Deed of Trust executed by ANDREW AND WILLIAMSON SALES, CO., as
Trustor, to AMERICAN SECURITIES COMPANY, as Trustee, for the benefit of WELLS
FARGO BANK, NATIONAL ASSOCIATION, as Beneficiary, dated as of March 18, 1993.
DESCRIPTION OF PROPERTY
The land referred to in this report is situated in the State of
California, County of Tulare and is described as follows:
The South half of the West half of the Norwest quarter and the East half of
the Norwest quarter of the Norwest quarter, Section 22, Township 17 South,
Range 23 East, Mount Diablo Base and Meridian, according to the official plat
thereof.
EXCEPTING from the North half of the Southwest quarter of the Norwest quarter
all oil and mineral rights in and to said property as reserved from Dolly E.
Edmiston to J.B. Bare, dated December 1, 1933, recorded December 8, 1933, in
Book 533, Page 371, Official Records.
<PAGE>
EXHIBIT 1
Andrew & Williamson Sales Co.
Grower Accounts Receivable Borrowing Base Certificate for
Period End ----------------
Thousands
Total Grower Accounts Receivable --------
Less: Grower Reserve --------
Less: Other Ineligibles --------
Net Eligible Grower Receivables --------
Maximum Advance on Grower Receivables 50% --------
(not to exceed $2,500M)
Maximum Borrowing Base --------
Total Outstanding-Grower Line of Credit Subfeature --------
Available (Overadvance) --------
The above accounts and inventory are assigned to WELLS FARGO BANK, N.A. and a
security interest granted in accordance with the terms and conditions of the
existing Continuing Security Agreement between undersigned and WELLS FARGO
BANK, N.A. to which reference is made. We hereby certify that the foregoing
is true and correct in all particulars and the accounts described above as
collateral for loans represent accounts which conform to all representations
and warranties set forth in said Agreement.
Andrew & Williamson Sales Co.
- --------------------------------- Date:--------------------
Authorized Signature/Title
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-3 (Numbers 33-
68510, 33-67618, 33-57246, 33-52920, 33-42841, 33-39166, and 33-32673),
Form S-8 (Numbers 33-63220, 33-63218, 33-41712, 33-13416, 33-21545, 33-82788,
33-63106, and 33-60789), and Form S-4 (Number 333-15705) of Epitope, Inc. of
our report dated October 28, 1996, except for Note 13 as to which the date is
November 14, 1996, November 25, 1996, December 12, 1996, and December 26,
1996, relating to the financial statements of Epitope Medical Products group,
Agritope group, and Epitope, Inc., which appears under Item 14 of this
Form 10-K.
Price Waterhouse LLP
Portland, Oregon
December 30, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the reference in this Annual Report on Form 10-K of
Epitope, Inc., to our report dated November 6, 1996, relating to the financial
statements of Andrew and Williamson Sales, Co., which are referenced in such
Form 10-K.
We also consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-3 (Numbers 33-
68510, 33-67618, 33-57246, 33-52920, 33-42841, 33-39166, and 33-32673),
Form S-8 (Numbers 33-63106, 33-63220, 33-63218, 33-41712, 33-13416, 33-21545,
33-82788, and 33-60789), and Form S-4 (Number 333-15705) of Epitope, Inc. of
our report dated November 6, 1996.
Boros & Farrington, APC
December 27, 1996
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the person whose signature
appears below constitutes and appoints ADOLPH J. FERRO, Ph.D., GILBERT N.
MILLER, and each of them his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution for him and in his name,
place, and stead, in any and all capacities, to sign the Annual Report on Form
10-K of Epitope, Inc., for its fiscal year ended September 30, 1996, and any
and all amendments to the report and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents or each of them or their or his substitute
or substitutes may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, this power of attorney has been signed by the
following person in the capacity indicated effective as of November 5, 1996.
Name Title
- ------------------------------------- Director
Roger L. Pringle
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the person whose signature
appears below constitutes and appoints ADOLPH J. FERRO, Ph.D., GILBERT N.
MILLER, and each of them his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution for him and in his name,
place, and stead, in any and all capacities, to sign the Annual Report on Form
10-K of Epitope, Inc., for its fiscal year ended September 30, 1996, and any
and all amendments to the report and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents or each of them or their or his substitute
or substitutes may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, this power of attorney has been signed by the
following person in the capacity indicated effective as of November 5, 1996.
Name Title
- -------------------------------------- Director
W. Charles Armstrong
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the person whose signature
appears below constitutes and appoints ADOLPH J. FERRO, Ph.D., GILBERT N.
MILLER, and each of them his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution for him and in his name,
place, and stead, in any and all capacities, to sign the Annual Report on Form
10-K of Epitope, Inc., for its fiscal year ended September 30, 1996, and any
and all amendments to the report and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents or each of them or their or his substitute
or substitutes may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, this power of attorney has been signed by the
following person in the capacity indicated effective as of November 5, 1996.
Name Title
- ------------------------------------- Director
Richard K. Donohue
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the person whose signature
appears below constitutes and appoints ADOLPH J. FERRO, Ph.D., GILBERT N.
MILLER, and each of them his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution for him and in his name,
place, and stead, in any and all capacities, to sign the Annual Report on Form
10-K of Epitope, Inc., for its fiscal year ended September 30, 1996, and any
and all amendments to the report and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents or each of them or their or his substitute
or substitutes may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, this power of attorney has been signed by the
following person in the capacity indicated effective as of November 5, 1996.
Name Title
- ------------------------------------- Director
Margaret H. Jordan
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the person whose signature
appears below constitutes and appoints ADOLPH J. FERRO, Ph.D., GILBERT N.
MILLER, and each of them his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution for him and in his name,
place, and stead, in any and all capacities, to sign the Annual Report on Form
10-K of Epitope, Inc., for its fiscal year ended September 30, 1996, and any
and all amendments to the report and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents or each of them or their or his substitute
or substitutes may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, this power of attorney has been signed by the
following person in the capacity indicated effective as of November 5, 1996.
Name Title
- -------------------------------------- Director
R. Douglas Norby
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the person whose signature
appears below constitutes and appoints ADOLPH J. FERRO, Ph.D., GILBERT N.
MILLER, and each of them his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution for him and in his name,
place, and stead, in any and all capacities, to sign the Annual Report on Form
10-K of Epitope, Inc., for its fiscal year ended September 30, 1996, and any
and all amendments to the report and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents or each of them or their or his substitute
or substitutes may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, this power of attorney has been signed by the
following person in the capacity indicated effective as of November 5, 1996.
Name Title
- -------------------------------------- Director
Michael J. Paxton
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the person whose signature
appears below constitutes and appoints ADOLPH J. FERRO, Ph.D., GILBERT N.
MILLER, and each of them his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution for him and in his name,
place, and stead, in any and all capacities, to sign the Annual Report on Form
10-K of Epitope, Inc., for its fiscal year ended September 30, 1996, and any
and all amendments to the report and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents or each of them or their or his substitute
or substitutes may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, this power of attorney has been signed by the
following person in the capacity indicated effective as of November 5, 1996.
Name Title
- -------------------------------------- Director
G. Patrick Sheaffer
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the person whose signature
appears below constitutes and appoints ADOLPH J. FERRO, Ph.D., GILBERT N.
MILLER, and each of them his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution for him and in his name,
place, and stead, in any and all capacities, to sign the Annual Report on Form
10-K of Epitope, Inc., for its fiscal year ended September 30, 1996, and any
and all amendments to the report and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents or each of them or their or his substitute
or substitutes may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, this power of attorney has been signed by the
following person in the capacity indicated effective as of December 23, 1996.
Name Title
- ------------------------------------- Controller
Mark V. Allred (Principal accounting officer)
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the person whose signature
appears below constitutes and appoints ADOLPH J. FERRO, Ph.D., GILBERT N.
MILLER, and each of them his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution for him and in his name,
place, and stead, in any and all capacities, to sign the Annual Report on Form
10-K of Epitope, Inc., for its fiscal year ended September 30, 1996, and any
and all amendments to the report and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents or each of them or their or his substitute
or substitutes may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, this power of attorney has been signed by the
following person in the capacity indicated effective as of November 5, 1996.
Name Title
- --------------------------------- President, Chief Executive
Adolph J. Ferro, Ph.D. Officer, and Director
(Principal executive officer)
- --------------------------------- Executive Vice-President,
Gilbert N. Miller Chief Financial Officer, and
Treasurer
(Principal financial officer)
- --------------------------------- Director
Andrew S. Goldstein
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial
information extracted from the condensed
consolidated financial statements included herein
and is qualified in its entirety by reference to
such financial statements.
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<PERIOD-TYPE> 12-MOS
<CASH> 5,699,263
<SECURITIES> 18,818,120
<RECEIVABLES> 4,342,214
<ALLOWANCES> 71,443
<INVENTORY> 7,728,117
<CURRENT-ASSETS> 36,902,865
<PP&E> 9,770,136
<DEPRECIATION> 5,568,724
<TOTAL-ASSETS> 45,210,818
<CURRENT-LIABILITIES> 15,783,351
<BONDS> 0
0
0
<COMMON> 100,973,693
<OTHER-SE> (72,289,607)
<TOTAL-LIABILITY-AND-EQUITY> 45,210,818
<SALES> 67,335,497
<TOTAL-REVENUES> 68,650,253
<CGS> 59,943,769
<TOTAL-COSTS> 74,270,897
<OTHER-EXPENSES> (5,355,720)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 829,231
<INCOME-PRETAX> (264,924)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (264,924)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EXHIBIT 99
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Andrew and Williamson Sales, Co.
We have audited the accompanying balance sheets of Andrew and Williamson
Sales, Co. as of September 30, 1996, and 1995, and the related statements of
operations, changes in stockholders' equity, and cash flows for the three
years in the period ended September 30, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 presently fairly,
in all material respects, the financial position of Andrew and Williamson
Sales, Co. at September 30, 1996, and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended
September 30, 1996, in conformity with generally acceptable accounting
principles.
Boros & Farrington, APC
San Diego, California
November 6, 1996
