SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
Amendment No. 2
FORM 10-K/A
(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 93-07479127
(State or other jurisdiction of (I.R.S. employer identification
incorporation or organization) number)
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(g) of
the Act:
Common Stock, no par value
(Title of class)
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 January 31, 1997: $195,522,605.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of January 31, 1997: Common Stock, no par value,
13,713,939.
Documents Incorporated by Reference:
None
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Table of Contents
PART I
Page
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ITEM 1. Business 3
ITEM 2. Properties 21
ITEM 3. Legal Proceedings 21
ITEM 4. Submission of Matters to a Vote of Security Holders 21
PART II
ITEM 5. Market for the Registrant's Common Stock and Related Stockholder Matters 22
ITEM 6. Selected Financial Data 22
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 25
ITEM 8. Financial Statements and Supplementary Data 35
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 38
PART III
ITEM 10. Directors and Executive Officers of the Registrant 38
ITEM 11. Executive Compensation 43
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 45
ITEM 13. Certain Relationships and Related Transactions 46
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 47
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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
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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
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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. See "Epitope, Inc.--Patents and
Proprietary Information."
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.
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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
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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
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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. These 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. The Company is, however, in the early stages
of rolling out its product and believes it is too early to predict the degree to
which its product will be utilized by insurance companies.
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
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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
"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.
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 through its
network of distributors. See "Epitope Medical Products--Marketing."
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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. 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, and Clinical
Reference Laboratory, Inc. 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 initially 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.
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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, SB will act as exclusive director of the
OraSure HIV-1 oral specimen collection device in the professional markets in
certain Latin American and African 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.
Manufacturing
Epitope Medical Products manufactures Western blot confirmatory tests
at the Company's Beaverton, Oregon, facility. The Western blot operation is
presently producing current requirements with a one shift operating schedule. If
additional Western blot production is required, the Company can expand operating
hours or add an additional shift. The EpiScreen/OraSure device is manufactured
by a contract manufacturer which also manufacturers medical devices for other
firms. Recent increases in demand for the EpiScreen/OraSure device have been met
by increasing the frequency of production cycles and number of production shifts
while continuing to use the equipment purchased by the Company for use in the
manufacturing process. The Company believes that it will reach full capacity for
its present equipment configuration during 1997. Additional equipment has been
acquired and will be placed into service as required to meet increased demand.
Company quality control personnel inspect products and maintain
documentation for compliance with the FDA's current Good Manufacturing Practices
("GMP") and other government manufacturing regulations. Epitope's manufacturing
facilities are subject to periodic inspection by regulatory authorities. See
"Epitope Medical Products--Government Regulation." Contract manufacturing is
overseen by an on-site employee of the Company who is responsible for monitoring
compliance with Company standard operating procedures, reviewing the
manufacturing process and assuring that the manufacture of Company product is in
compliance with GMP. The Company conducts further quality control tests in its
Beaverton, Oregon, facility.
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 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
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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. In
addition, Abbott Laboratories provides in-house testing services for customers
of its HIV screening products.
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 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.
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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 "Epitope Medical Products--Products Under
Development--EpiScreen/OraSure." 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
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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 is positioned 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 one of the most
technically 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, respectively, 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.
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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 additional U.S. and foreign patents
pending. In addition, Agritope has U.S. and foreign patent applications pending
in related areas. See "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.
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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-thirds 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.
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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,
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.
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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 interests 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
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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 VF Holdings, Inc., an affiliate of a Swiss investment group. The purchaser
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 four percent 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
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unless their characteristics raise significant safety questions, such as
elevated levels of toxicants or 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 is 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.
- 18 -
<PAGE>
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 for work in developing
a rapid test to detect HIV antibodies in oral fluid specimens and from the
National Cancer Institute 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
certain 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, including its
proprietary preservative solution, 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
- 19 -
<PAGE>
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.
- 20 -
<PAGE>
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 owns a 15-acre farm which it leases to Vinifera for use in
connection with Vinifera's grapevine micropropagation operations. Greenhouse
capacity at the farm currently totals 60,000 square feet. Agritope also uses a
portion of the Company's office space and research and development facilities in
Beaverton, Oregon.
In addition to leasing Agritope's Oregon farm and greenhouse, Vinifera
leases 250,000 square feet of greenhouse space in Petaluma, California under a
lease that expires January 31, 2001. The Vinifera California greenhouse is
currently in the final stages of being upgraded to provide the capacity
necessary to meet anticipated 1997 and 1998 production requirements.
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.
The Company believes that its present facilities are adequate to meet
current requirements. See Item 1, "Epitope Medical Products--Manufacturing."
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.
- 21 -
<PAGE>
PART II
ITEM 5. Market for the Registrant's Common Stock and Related
Stockholder Matters.
The Company's Common Stock is traded on the national market tier of The
Nasdaq Stock Market (the "Nasdaq National Market") under the symbol "EPTO."
Prior to January 1, 1997, the Common Stock was traded on the American Stock
Exchange ("AMEX"). High and low sales prices reported by AMEX or the Nasdaq
National Market during the periods indicated are shown below.
<TABLE>
<CAPTION>
Year ended September 30 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
Sales price per share High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
First Quarter ...................... $16-3/8 $10-7/8 $18 $ 9-1/2 $26 $18-1/2
Second Quarter...................... 17-3/8* 10-3/4* 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
- ----------
* Through February 28, 1997.
</TABLE>
On February 28, 1997, there were 1,074 holders of record of the Common
Stock, and the closing price of the Common Stock as reported on the Nasdaq
National Market was $12-7/8. The Company has never paid any cash dividends, and
the Board of Directors does not anticipate paying cash dividends in the
foreseeable future. The Company intends to retain any future earnings to provide
funds for the operation and expansion of its business.
ITEM 6. Selected Financial Data.
Historical Comparative Financial Data
(In thousands, except per share data)
The following table sets forth selected historical consolidated income
and balance sheet data of Epitope, Inc. and its subsidiaries; selected
historical combined income and balance sheet data of Epitope Medical Products;
and selected historical combined income and balance sheet data of Agritope. The
balance sheet data at September 30, 1996 and 1995 and the operating results data
for the years ended September 30, 1996, 1995, and 1994 have been derived from
audited consolidated financial statements and notes thereto included in this
Annual Report on Form 10-K. The balance sheet data at September 30, 1994, 1993
and 1992 and operating results data for the years ended September 30, 1993 and
1992 are unaudited, but, in the opinion of management, include all adjustments
necessary for fair presentation. Net income (loss) per share for Epitope Medical
Products and Agritope is presented on a proforma basis assuming that the
distribution of Agritope Common Stock and redesignation of the Common Stock as
Epitope Medical Products Common Stock had occurred on October 1, 1991. The
following historical financial information has not been restated to give effect
to the merger with Andrew and Williamson Sales,
- 22 -
<PAGE>
Co. on December 12, 1996. The merger has been accounted for as a pooling of
interests. See "Supplemental Comparative Financial Data" below.
<TABLE>
<CAPTION>
Year ended September 30 1996 1995 1994 1993 1992
Epitope Medical Products
Combined operating results
<S> <C> <C> <C> <C> <C>
Revenues..................................$ 5,594 $ 2,856 $ 2,605 $ 2,759 $ 2,985
Operating costs and expenses ............. 10,881 14,463 8,890 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)
Proforma net profit (loss) per share ..... .06 (.91) (.60) (.89) (.59)
Proforma shares used in per share
calculations ............................. 13,440 11,886 10,050 8,828 8,628
Combined balance sheet data
Working capital ..........................$ 20,366 $ 15,449 $ 13,474 $ 7,029 $ 5,255
Total assets ............................. 24,350 21,831 17,183 10,381 7,954
Accumulated deficit ...................... (41,705) (42,444) (31,593) (25,545) (17,652)
Group equity ............................. 22,532 18,035 15,661 9,280 7,178
Agritope
Combined operating results
Revenues .................................$ 585 $ 2,110 $ 2,213 $ 524 $ 58
Operating costs and expenses ............. 2,821 9,920 11,703 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)
Proforma net loss per share .............. (.34) (1.29) (1.91) (1.55) (.62)
Proforma shares used in per share
calculations ............................. 6,331 5,943 5,025 4,414 4,314
Combined balance sheet data
Working capital ..........................$ 1,264 $ 5,082 $ 3,710 $ 1,673 $ 4,368
Total assets ............................. 10,097 8,303 7,372 3,764 6,177
Long-term debt ........................... - 22 38 57 -
Convertible notes, due 1997 .............. 3,620 3,620 4,070 4,630 5,495
Accumulated deficit ...................... (31,280) (29,141) (21,497) (11,912) (5,076)
Group equity (deficit) ................... 5,435 4,312 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 ............. 13,702 24,383 20,593 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 .... 12,661 11,886 10,050 8,828 8,628
Consolidated balance sheet data
Working capital ..........................$ 21,630 $ 20,532 $ 17,184 $ 8,703 $ 9,623
Total assets ............................. 34,447 30,134 24,555 14,145 14,130
Long-term debt ........................... - 22 38 57 -
Convertible notes, due 1997 .............. 3,620 3,620 4,070 4,630 5,495
Accumulated deficit ...................... (72,985) (71,585) (53,090) (37,457) (22,728)
Shareholders' equity ..................... 27,967 22,347 18,470 7,970 7,660
</TABLE>
- 23 -
<PAGE>
Supplemental Comparative Financial Data
(In thousands, except per share data)
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. 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 the Common
Stock as Epitope Medical Products Common Stock had occurred on October 1, 1991.
The following supplemental financial information has 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.
<TABLE>
<CAPTION>
Year ended September 30 1996 1995 1994 1993 1992
Epitope Medical Products
Combined operating results
<S> <C> <C> <C> <C> <C>
Revenues ................................. $ 5,594 $ 2,856 $ 2,605 $ 2,759 $ 2,985
Operating costs and expenses ............. 10,881 14,463 8,890 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)
Proforma net profit (loss) per share ..... .05 (.87) (.57) (.84) (.56)
Proforma shares used in per share
calculations ........................... 13,960 12,406 10,570 9,348 9,148
Combined balance sheet data
Working capital .......................... $ 20,366 $ 15,449 $ 13,474 $ 7,029 $ 5,255
Total assets ............................. 24,350 21,831 17,183 10,381 7,954
Accumulated deficit ...................... (41,705) (42,444) (31,593) (25,545) (17,652)
Group equity ............................. 22,532 18,035 15,661 9,280 7,178
Agritope
Combined operating results
Revenues ................................. $ 63,057 $ 54,289 $ 62,918 $ 39,796 $30,348
Operating costs and expenses ............. 63,390 62,059 71,024 45,503 32,745
Other expense, net ....................... (671) (252) (444) (184) (76)
Net loss ................................. (1,004) (8,022) (8,550) (5,891) (2,473)
Proforma net loss per share .............. (.15) (1.29) (1.62) (1.26) (.54)
Proforma dividends per share ............. .20 .05 .10 .15 .03
Proforma shares used in per share
calculations ........................... 6,591 6,203 5,285 4,674 4,574
Combined balance sheet data
Working capital .......................... $ 754 $ 5,765 $ 5,185 $ 2,553 $ 4,845
Total assets ............................. 20,861 15,597 11,500 9,554 10,103
Long-term debt ........................... 528 1,648 1,714 1,648 1,080
Convertible notes, due 1997 .............. 3,620 3,620 4,070 4,630 5,495
Accumulated deficit ...................... (30,585) (28,255) (19,900) (10,809) (4,219)
Group equity (deficit) ................... 6,152 5,219 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 ............. 74,271 76,522 79,913 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 .... 13,181 12,406 10,570 9,348 9,148
Consolidated balance sheet data
Working capital .......................... $ 21,120 $ 21,214 $ 18,659 $ 9,583 $ 10,100
Total assets ............................. 45,211 37,427 28,682 19,935 18,056
Long-term debt ........................... 528 1,648 1,714 1,648 1,080
Convertible notes, due 1997 .............. 3,620 3,620 4,070 4,630 5,495
Accumulated deficit ...................... (72,290) (70,700) (51,492) (36,354) (21,871)
Shareholders' equity ..................... 28,684 23,254 20,089 9,095 8,539
</TABLE>
- 24 -
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion of operations and financial condition should be read in
conjunction with the Financial Statements and Notes thereto included elsewhere
in this Annual Report on Form 10-K. Special Note: Certain statements set forth
below constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. See "Note Regarding Forward-Looking
Statements" on page 34 for additional factors relating to such statements.
At the 1997 annual meeting, 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 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 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 corporate overhead
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.
- 25 -
<PAGE>
Historical Financial Statements
Epitope Medical Products
Results of Operations
Revenues. The table below shows the percentage of Epitope Medical Products'
total revenue contributed by each of its principal products and by grants and
contracts.
<TABLE>
<CAPTION>
Fiscal Year 1996 1995 1994
Percentage of Revenues from:
<S> <C> <C> <C>
Oral Specimen Collection Devices. . . 59% 34% 34%
HIV Confirmatory Tests. . . . . . . . . 28% 64% 65%
Grants and Contracts. . . . . . . . . . . 13% 2% 1%
</TABLE>
Epitope Medical Products' product sales increased 73 percent in 1996, to $4.9
million, and 9 percent in 1995 as a result of expanded sales volume of its lead
product, the EpiScreen/OraSure oral specimen collection device. Approximately 39
percent 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).
The oral specimen collection device, which is sold by the Company under the
trade name EpiScreen(TM) and by SB under the trade name OraSure(R), 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 1996 sales resulted from increased
sales volume following the June FDA clearance of the OraSure Western blot HIV
confirmatory test. For the quarter ended December 31, 1996, sales of
EpiScreen/OraSure amounted to $1.9 million, primarily due to increased sales
volumes to the insurance testing market. The Company believes that at least 12
U.S. insurance companies currently use EpiScreen for underwriting risk analyses,
including three firms in the top 20 life underwriters, and it believes that
additional companies plan to commence use of EpiScreen in fiscal 1997. The
Company believes that such adoptions of EpiScreen will result in increased
sales, but it does not know the magnitude of such increases.
Epitope Medical Products' Western blot HIV confirmatory test produced sales
revenues of $1.5 million for 1996, 15 percent 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 percent 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 percent 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. For the
fourth quarter of fiscal 1996, gross margins for product sales were 53 percent.
The Company expects gross margins to increase if EpiScreen/OraSure sales volumes
increase.
Research and Development Expenses. Research and development expenses declined 31
percent 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.
- 26 -
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses declined 25 percent 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 (Expense), Net. Other income for 1996 included a $5.0 million
license fee and $200,000 interest income earned from SB as a result of FDA
approval of an extension of dating for the EpiScreen/OraSure device. Interest
income increased from $236,000 in 1994 to $756,000 in 1995 due to an increase in
funds available for investment.
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.
Cash flows from operating activities increased significantly in 1996 due to the
receipt of a non-recurring $5 million licensing fee from SB, as well as improved
operating results from product sales and research contracts. Fluctuations in
working capital components were primarily the result of timing differences. The
Company invests its excess cash in marketable securities, and liquidates these
securities as cash is needed. 1995 additions to property and equipment reflected
investments to expand manufacturing and administrative facilities.
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.
Epitope Medical Products may also receive funds from or transfer funds to
Agritope. Such transfers will be either considered as borrowings or as an
increase or decrease in an Inter-Group Interest as determined by the Board of
Directors, who will also determine the amount of compensatory charges for such
transfers, if any.
- 27 -
<PAGE>
Historical Financial Statements
Agritope
Results of Operations
Revenues. The table below shows the percentage of Agritope's total revenue
contributed by each of its principal products and by grants and contracts:
<TABLE>
<CAPTION>
Fiscal Year 1996 1995 1994
Percentage of Revenues from:
<S> <C> <C> <C>
Grape Plants......................................... --% 4% 1%
Packaged Fresh Flowers............................... --% 91% 97%
Grants and Contracts................................. 100% 5% 2%
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 Agritope's unprofitable wholesale fresh
flower packaging and distribution operations (Agrimax) which were divested in
the third quarter of fiscal 1995. A grant from the U.S. Department of
Agriculture and 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 two Agritope
business units. 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. Costs in 1995 and 1994 included $2.8 million and
$4.1 million, respectively, of costs incurred in Agritope's Agrimax and Vinifera
business units, which were divested in 1995. 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. The amount of allocated
Shared Services decreased in 1996 as a result of the disposition of Agrimax and
Vinifera. With the reacquisition of Vinifera in August 1996, the amount of
allocated Shared Services is expected to increase slightly in 1997 and
subsequent years.
Other Income (Expense), Net. Interest income increased from $217,000 in 1994 to
$408,000 in 1995 due to an increase in funds available for investment.
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 $1.2 million representing the conversion expense in the first
quarter of fiscal year 1997. See Note 13 to Historical Financial Statements.
Cash flows from operating activities improved significantly in 1996 largely due
to the divestiture of Agrimax and Vinifera. Fluctuations in working capital
components were primarily the result of timing differences. Additions to
property and equipment decreased in 1995 primarily due to the divestiture of
Agrimax and Vinifera and increased in 1996 as a result of expansion of
greenhouse capacity at Vinifera, which was reacquired in August 1996.
Expenditures for patents and proprietary technology increased in 1996 primarily
related to the Company's ethylene control technology.
- 28 -
<PAGE>
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 may also receive funds from or transfer funds to Epitope Medical
Products. Such transfers will be either considered as borrowings or as an
increase or decrease in an Inter-Group Interest as determined by the Board of
Directors, who will also determine the amount of compensatory charges for such
transfers, if any.
Agritope's investments include the book value of the investment in two
affiliates. Agritope holds an equity interest of approximately 9 percent in UAF,
Limited Partnership, a fresh flower distributor in Tampa, Florida and a 19.5
percent interest in Petals USA, Inc., which operates a similar business in St.
Paul, Minnesota. These equity interests were obtained in connection with the
divestiture of Agrimax. Recent events have caused the Company to determine that
the value of such investments has been permanently impaired. Accordingly, the
Company anticipates a non-cash charge to results of operations of approximately
$1.9 million in the first quarter of fiscal 1997. See Notes 3 and 13 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 Agrimax and
Vinifera.
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.
In the financial statements, cash equal to 20 percent 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
- 29 -
<PAGE>
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 $7.0 million of total cash to Agritope as
contributed capital.
Cash flows from operating activities improved significantly in 1996 due to the
receipt of a non-recurring $5 million licensing fee from SB, as well as improved
operating results from product sales and research contracts. Fluctuations in
working capital components were primarily the result of timing differences. The
Company invests its excess cash in marketable securities, and liquidates these
securities as cash is needed. Additions to property and equipment decreased in
1995 primarily due to the divestiture of two Agritope business units.
Expenditures for patents and proprietary technology increased in 1996 primarily
related to the Company's ethylene control technology.
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. The Company believes
that it has sufficient capital resources to fund operations and capital
expenditures for at least the next two years based on currently expected future
cash requirements, although no assurance to that effect can be given.
- 30 -
<PAGE>
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 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
Revenues. The table below shows the percentage of Agritope's total revenue
contributed by each of its principal products and by grants and contracts:
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 1996 1995 1994
Percentage of Revenues from:
<S> <C> <C> <C>
Fresh or Frozen Produce.............................. 99% 96% 97%
Packaged Fresh Flowers............................... --% 4% 3%
Grants and Contracts................................. 1% --% --%
</TABLE>
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 percent 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
Agritope's unprofitable wholesale fresh flower packaging and distribution
operations (Agrimax) which were divested in the third quarter of fiscal 1995. A
grant from the U.S. Department of Agriculture and 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. Gross profits in 1995 and 1994 were adversely affected by
negative margins of $1.2 million and $2.4 million, respectively, experienced by
Agritope's former fresh flower packaging operations. A&W realized gross profit
margins of 8 percent, 6 percent, and 8 percent in 1996, 1995, and 1994,
respectively. Gross profits for A&W in 1995 declined by $1.8 million, primarily
due to reduced sales volume as well as a tomato crop failure experienced by one
of A&W's contract growers. A&W gross profits were adversely affected by charges
for costs in excess of the estimated market value of growing crops of $1.8
million, $2.5 million and $2.1 million for 1996, 1995 and 1994, respectively,
representing 3 percent, 5 percent, and 3 percent of A&W sales, respectively.
Such losses arose primarily from crop failures due to disease or weather
conditions. A&W attempts to mitigate the risk of such losses by (1) using
contract growers who assume the primary risk of loss, (2) closely monitoring
crops in the field, (3) providing technical assistance to growers, (4) spreading
its risk over a variety of crops grown at various times throughout the year, (5)
establishing limitations on advances for growing crops to a given grower, based
on past performance and current financial condition, and (6) diversifying its
risk by using a number of different growers located in different geographical
locations. However, it is difficult to completely mitigate such risks and the
Company expects to incur such losses in the future.
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 the Agrimax and
Vinifera business units. See Note 3 to Supplemental Financial Statements.
- 31 -
<PAGE>
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. Costs in 1995 and 1994 included $2.8 million and
$4.1 million, respectively, of costs incurred at Agritope's Agrimax and Vinifera
business units, which were divested in 1995. 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. The amount of allocated
Shared Services decreased in 1996 as a result of the disposition of Agrimax and
Vinifera. With the reacquisition of Vinifera in August 1996, the amount of
allocated Shared Services is expected to increase slightly in 1997 and
subsequent years. The Company does not expect to allocate significant Shared
Services costs to A&W in 1997 since A&W currently performs many of these
services on a stand alone basis.
Other Income (Expense), Net. Interest income increased from $217,000 in 1994 to
$408,000 in 1995 due to an increase in funds available for investment. Interest
expense in 1996 increased primarily due to an increase in borrowings under the
A&W bank credit line.
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 A&W
repaid 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
$1.2 million representing the conversion expense in the first quarter of fiscal
1997. See Note 13 to Supplemental Financial Statements.
Cash flows from operating activities improved significantly in 1996 largely due
to the divestiture of Agrimax and Vinifera. Fluctuations in working capital
components were primarily the result of timing differences and, in 1995, lower
sales volume at A&W. Additions to property and equipment decreased in 1995
primarily due to the divestiture of Agrimax and Vinifera and increased in 1996
as a result of expansion of greenhouse capacity at Vinifera, which was
reacquired in August 1996. Expenditures for patents and proprietary technology
increased in 1996 primarily related to the Company's ethylene control
technology.
Proceeds from the issuance of equity securities of the Company 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 bank borrowings, 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 may also receive funds from or transfer funds to Epitope Medical
Products. Such transfers will be either considered as borrowings or as an
increase or decrease in Inter-Group Interest as determined by the Board of
Directors who will also determine the amount of compensatory charges for such
transfers, if any.
Agritope's investments include the book value of the investment in two
affiliates. Agritope holds an equity interest of approximately 9 percent in UAF,
Limited Partnership, a fresh flower distributor in Tampa, Florida and a 19.5
percent interest in Petals USA, Inc., which operates a similar business in St.
Paul, Minnesota. These equity interests were obtained in connection with
divestiture of Agrimax's fresh flower distribution business. Recent events have
caused the Company to determine that the value of such investments has been
permanently impaired. Accordingly, the Company anticipates a non-cash charge to
results of operations of approximately $1.9 million in the first quarter of
fiscal 1997. See Notes 3 and 13 to Supplemental Financial Statements.
- 32 -
<PAGE>
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 Agrimax and Vinifera
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.
In the financial statements, cash equal to 20 percent 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 $7.0 million
of total cash to Agritope as contributed capital.
Cash flows from operating activities improved significantly in 1996 due to the
receipt of a non-recurring $5 million licensing fee from SB, as well as improved
operating results from product sales and research contracts. Fluctuations in
working capital components were primarily the result of timing differences and,
in 1995, lower sales volume at A&W. The company invests its excess cash in
marketable securities, and liquidates these securities as cash is needed.
Additions to property and equipment decreased in 1995 primarily due to the
divestiture of Agrimax and Vinifera. Expenditures for patents and proprietary
technology increased in 1996 primarily related to the Company's ethylene control
technology.
Proceeds from the issuance of equity securities of the Company and A&W bank
borrowings, 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
- 33 -
<PAGE>
of equity securities or the exercise of outstanding stock options and warrants.
The Company believes that it has sufficient capital resources to fund operations
and capital expenditures for at least the next two years based on currently
expected future cash requirements, although no assurance to that effect can be
given.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K, including
without limitation statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or industry results to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements. These factors with respect to the Company include
unexpected interruption of supply or manufacturing operations, changes in
marketing partners' and customers' strategy or emphasis, development of
competing products, market acceptance of oral testing, changes in insurance
industry practices, unexpected delays or changes in the Company's business
strategy, adverse growing conditions affecting crops, and other risks and
uncertainties described in this Annual Report on Form 10-K. Certain of these
factors are discussed in more detail in the Company's Registration Statement on
Form S-4 (File No. 333-15705), under the caption "Risk Factors" and elsewhere.
Given these uncertainties, shareholders are cautioned not to place undue
reliance on the forward-looking statements.
- 34 -
<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.
- 35 -
<PAGE>
HISTORICAL QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED) (In thousands, except net income
(loss) per share)
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.
<TABLE>
<CAPTION>
First Second Third Fourth
Epitope Medical Products Quarter Quarter Quarter Quarter Total
Year ended September 30, 1996
<S> <C> <C> <C> <C> <C>
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
Proforma net income (loss) per share. (.08) (.11) .29 (.06) .06
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)
Proforma 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)
Proforma 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........ 2,891 3,433 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)
Proforma net loss per share......... (.44) (.41) (.24) (.21) (1.29)
First Second Third Fourth
Epitope, Inc. and Subsidiaries Quarter Quarter Quarter Quarter Total
Year ended September 30, 1996
Revenues............................ $1,311 $1,470 $1,272 $2,126 $6,179
Operating costs and expenses........ 3,185 3,510 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........ 5,571 6,721 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>
- 36 -
<PAGE>
SUPPLEMENTAL QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED) (In thousands, except net income
(loss) per share)
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.
<TABLE>
<CAPTION>
First Second Third Fourth
Epitope Medical Products Quarter Quarter Quarter Quarter Total
Year ended September 30, 1996
<S> <C> <C> <C> <C> <C>
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
Proforma 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)
Proforma 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 $13,130 $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 (517) (1,004)
Proforma net income (loss) per share. (.13) .03 .02 (.08) (.15)
Year ended September 30, 1995
Revenues............................ $15,120 $ 9,682 $17,080 $12,407 $54,289
Operating costs and expenses........ 18,217 11,499 18,912 13,431 62,059
Other expense, net.................. (78) (19) (77) (78) (252)
Net loss............................ (3,175) (1,836) (1,909) (1,102) (8,022)
Proforma 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 69 5,356
Net income (loss)................... (1,886) (1,210) 4,100 (1,269) (265)
Net income (loss) per share......... (.14) (.09) .29 (.09) (.02)
Year ended September 30, 1995
Revenues............................ $15,836 $10,404 $17,954 $12,950 $57,144
Operating costs and expenses........ 20,896 14,788 22,736 18,102 76,522
Other income, net................... 22 130 200 152 504
Net loss............................ (5,038) (4,253) (4,582) (5,001) (18,874)
Net loss per share.................. (.44) (.35) (.36) (.39) (1.52)
</TABLE>
- 37 -
<PAGE>
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
Directors
The following table presents the name, age as of February 28, 1997,
principal occupation, period of service, and term of office of each director of
the Company.
<TABLE>
<CAPTION>
DIRECTOR
NAME PRINCIPAL OCCUPATION AGE SINCE
- ---- -------------------- --- -----
Class I (Directors Whose Terms of Office Expire in 1997):
<S> <C> <C> <C>
W. Charles Armstrong Private Investor 52 1989
Adolph J. Ferro, Ph.D. President and Chief Executive 54 1990
Officer of the Company
Roger L. Pringle President of The Pringle Company, 56 1989
a management consulting firm,
Portland, Oregon
Class II (Directors Whose Terms of Office Expire in 1999):
Andrew S. Goldstein Senior Vice President of Advanced 48 1981
Technology Development -
Epitope Medical Products
R. Douglas Norby Executive Vice President and Chief 61 1989
Financial Officer of LSI
Logic Corporation, a designer and
producer of advanced custom
semiconductors,
Milpitas, California
G. Patrick Sheaffer Chairman, President and Chief 57 1983
Executive Officer of Riverview
Savings Bank, Camas, Washington
Class III (Directors Whose Terms of Office Expire in 1998):
Richard K. Donahue Vice Chairman of NIKE, Inc., a 69 1991
sporting goods manufacturer,
Beaverton, Oregon
Margaret H. Jordan President and Chief Executive 54 1995
Officer of Dallas Medical
Resource, a not-for-profit
medical referral firm,
Dallas, Texas
- 38 -
<PAGE>
Michael J. Paxton Chairman, President and Chief 50 1995
Executive Officer of
O'Cedar Holdings, Inc., a
manufacturer of household
cleaning products,
Springfield, Ohio
</TABLE>
W. Charles Armstrong is a director of Pacificorp. He was Chairman and
Chief Executive Officer of Bank of America Oregon from September 1992 until
September 1996. From April to September 1992, he was Chairman and Chief
Executive Officer of Bank of America Idaho. Mr. Armstrong served as President
and Chief Operating Officer of Honolulu Federal Savings Bank from February 1989
to April 1992. Prior to February 1989, he was President and Chief Executive
Officer of West One Bank, Oregon.
Richard K. Donahue has been Vice Chairman of NIKE, Inc. since June
1994. Mr. Donahue served as President and Chief Operating Officer of NIKE, Inc.
from 1990 to June 1994 and has served as a director of that company since 1977.
Mr. Donahue is also a partner in the law firm of Donahue & Donahue, Lowell,
Massachusetts, and a director of Courier Corp.
Adolph J. Ferro, Ph.D., has been President and Chief Executive Officer
of the Company since April 1990. Dr. Ferro was Senior Vice President from
November 1988 until April 1990. From July 1987 until November 1988, he was Vice
President of Research and Development. He was a cofounder of Agricultural
Genetic Systems, Inc., which the Company acquired in 1987. Prior to joining the
Company, he was a Professor in the Department of Microbiology at Oregon State
University ("OSU"). From 1981 to 1986, he was an Associate Professor at OSU, and
from 1978 to 1981, he was an Assistant Professor at OSU. From 1975 to 1978, he
was Assistant Professor at the University of Illinois at Chicago in the
Department of Biological Sciences. Dr. Ferro received a B.A. degree from the
University of Washington in 1965, an M.S. degree in biology from Western
Washington University in 1970, and a Ph.D. in bacteriology and public health
from Washington State University in 1973.
Andrew S. Goldstein is a Senior Vice President of the Company's Epitope
Medical Products group, a position he has held since June 1990. Prior to that
time, he had been Vice President of Product Development from December 1988, Vice
President of Scientific Affairs from July 1987 to December 1988, and Vice
President of Research and Development from 1981 until July 1987. He also has
served as Secretary from December 1988 to February 1993 and from November 1995
to the present and served as Treasurer until March 1991. Mr. Goldstein was
Research Associate and supervisor of the Histocompatibility Laboratory at the
Oregon Health Sciences University ("OHSU"), where he was engaged in paternity
testing and transplantation immunology, from 1974 to 1981. Mr. Goldstein
received a B.S. degree in microbiology from Cornell University in 1969 and an
M.S. degree in cytology from Fordham University in 1973.
Margaret H. Jordan joined Dallas Medical Resource ("DMR") as President
and Chief Executive Officer in February 1996. DMR is a not-for-profit alliance
of major medical organizations of Dallas, Texas, created to make Dallas a
regional, national and international center for medical referrals. Ms. Jordan
had been Vice President of Health Care & Employee Services at Southern
California Edison Co. since December 1992. She had been a Vice President and
Regional Manager with the Kaiser Foundation Health Plan of Texas, Inc. beginning
in 1986, and was an Associate Regional Manager of Kaiser Foundation Health Plan
of Georgia, Inc. from 1984 to 1986. Ms. Jordan received a B.S. degree in Nursing
from Georgetown University in 1964 and an M.S. degree in Public Health from the
University of California, Berkeley, in 1972. She also serves on the board of
directors of Eckerd Corporation.
R. Douglas Norby became Executive Vice President and Chief Financial
Officer of LSI Logic Corporation in October 1996. From July 1993 until assuming
his present position, he was Senior Vice President and Chief Financial Officer
of Mentor Graphics Corporation. Prior to joining Mentor Graphics Corporation, he
had been President and Chief Executive Officer of Pharmetrix Corporation, a
biopharmaceutical company in Menlo Park, California, since July 1992. Prior to
that time, he had been President of Lucasfilm, Ltd., since 1985 and President
and Chief Executive Officer of LucasArts Entertainment Company since 1990.
- 39 -
<PAGE>
Prior to joining Lucasfilm, Ltd., Mr. Norby was Senior Vice President and Chief
Financial Officer of Syntex Corporation from 1979 to 1985. Mr. Norby also serves
on the board of directors of LSI Logic Corporation.
Michael J. Paxton became Chairman, President and Chief Executive
Officer of O'Cedar Holdings, Inc. in January 1996. From March 1992 until joining
O'Cedar Holdings, Inc., he was President and Chief Executive Officer of The
Haagen-Dazs Company, Inc. Prior to that he was President of the Baked Goods
Division of The Pillsbury Company. Both companies are subsidiaries of Grand
Metropolitan PLC. He has been a director of Agritope, Inc. since September 1992
and is also a director of Transport Corporation of America, Inc.
Roger L. Pringle has been Chairman of the Board of the Company since
April 1990, and is also a director of Agritope, Inc. He is President of The
Pringle Company, a management consulting firm in Portland, Oregon, which he
founded in 1975.
G. Patrick Sheaffer has been President of Riverview Savings Bank in
Camas, Washington, since 1979, and has served as a director of the bank since
1983. In 1993, Mr. Sheaffer also became Chairman and Chief Executive Officer of
Riverview Savings Bank and Riverview Mutual Holding Company, a bank holding
company. He has been a director of the Washington Savings League since 1980.
- 40 -
<PAGE>
Executive Officers
The following table presents the names, ages and positions of the
Company's executive officers at February 28, 1997:
<TABLE>
<CAPTION>
NAME OF
EXECUTIVE OFFICER AGE POSITION
<S> <C> <C>
Adolph J. Ferro, Ph.D. 54 President, Chief Executive Officer and
Director(1)
Gilbert N. Miller 55 Executive Vice President, Chief Financial
Officer and Treasurer(1)
John H. Fitchen, M.D. 51 Senior Vice President and Chief Operating
Officer--Epitope Medical Products(1)
Andrew S. Goldstein 48 Senior Vice President of Advanced
Technology Development--Epitope
Medical Products, Secretary and
Director
Richard K. Bestwick, Ph.D. 43 Senior Vice President and Chief Operating
Officer--Agritope(1)
Joseph A. Bouckaert 56 President and Chief Executive Officer--
Vinifera, Inc.(1)
Byron A. Allen, Jr. 65 Vice President of Corporate
Communications(1)
Fred L. Williamson 60 President and Chief Executive Officer--
Andrew and Williamson Sales, Co.(1)
- ---------------
(1) Member of the Company's Business Policy Committee.
</TABLE>
Officers of the Company hold office at the discretion of the Board.
For biographical summaries of Dr. Ferro and Mr. Goldstein, see
"Directors" above.
Gilbert N. Miller joined the Company in June 1989 as Executive Vice
President and Chief Financial Officer and has served as the Company's Treasurer
since March 1991. He has also been a Senior Vice President of Agritope, Inc.
since September 1992 and its Chief Financial Officer since December 1991. From
1987 to 1989, he was Executive Vice President, Finance and Administration, of
Northwest Marine Iron Works, a privately held ship repair contractor located in
Portland, Oregon. From 1986 to 1987, he was Vice President/Controller of the
Manufacturing Group of Morgan Products, Ltd., a manufacturer and distributor of
specialty building products based in Oshkosh, Wisconsin. He also held the
position of Senior Vice President/Finance of Nicolai Company, a Portland wood
door manufacturing concern which became a wholly owned subsidiary of Morgan
Products, Ltd., in 1986. Mr. Miller received a B.S. degree from Oregon State
University and a Master of Business Administration degree from University of
Oregon. He is a certified public accountant.
John H. Fitchen, M.D., joined the Company in July 1990 as Vice
President of Research and Clinical Activities, was appointed Senior Vice
President in September 1993, and assumed the additional position of Chief
Operating Officer-Epitope Medical Products in November 1994. Prior to joining
the Company, Dr. Fitchen was Associate Chief of Staff for Research at the
Portland Veterans Administration Medical Center in Portland,
- 41 -
<PAGE>
Oregon, and Professor of Medicine at OHSU. Dr. Fitchen received his M.D. degree
from the University of Rochester School of Medicine and a B.A. degree from
Amherst College. He completed his clinical training in Internal Medicine at OHSU
in 1976 and in Hematology/Oncology at the University of California, Los Angeles,
in 1978.
Richard K. Bestwick, Ph.D., joined Epitope in August 1987 and was
appointed Senior Vice President of Agritope, Inc. in September 1992. He was
appointed to the additional position of Chief Operating Officer of Agritope,
Inc. in October 1996. Prior to joining Epitope, he was a Research Assistant
Professor in the Department of Biochemistry at the Oregon Health Sciences
University, where he also completed his postdoctoral training. Dr. Bestwick
received a Ph.D. in Biochemistry and Biophysics from Oregon State University and
a B.S. degree from Evergreen State College.
Joseph A. Bouckaert joined Vinifera, Inc. as its President and Chief
Executive Officer at the inception of the Company in March 1993. From 1988 to
1991 he was Vice Chairman of DNA Plant Technology Corporation, a publicly held
agricultural biotechnology company with offices in Cinnaminson, New Jersey, and
Oakland, California. He also was a co-founder and member of the board of
directors of Florigene, B.V., an agricultural biotechnology company focused on
the flower business and located in the Netherlands. From 1985 to 1988, he served
as President and Chief Executive Officer of Advanced Genetic Sciences Inc. a
publicly held biotechnology company located in Oakland, California. In 1982, Mr.
Bouckaert co-founded Plant Genetic Systems, N.V., a privately held agricultural
biotechnology company located in Brussels, Belgium, and served as its first
Managing Director from 1982 through 1986. Mr. Bouckaert received a Juris Doctor
degree from the University of Leuven in Belgium and postgraduate degrees in
Business Administration from the University of Ghent in Belgium, and the
University of Kentucky in Lexington, Kentucky.
Byron A. Allen, Jr., joined the Company in July 1995. Prior to joining
the Company, from 1993 to 1995, Mr. Allen was Senior Vice President, Equity
Portfolio Manager, for C.J. Lawrence/Deutsche Bank Securities Corporation, New
York. From 1978 to 1993, he was Director of Retail Brokerage Service, C.J.
Lawrence, Incorporated. Mr. Allen holds an A.B. degree from Dartmouth College
and a Master of Business Administration degree from the Amos Tuck School of
Business Administration.
Fred L. Williamson has been President of Andrew and Williamson Sales,
Co., which produces, markets, distributes and sells a wide variety of fresh
fruits and vegetables throughout North America, since 1987. A&W was acquired by
the Company in December 1996. Mr. Williamson has been involved in the business
of marketing and shipping fresh produce since 1962.
There are no family relationships between any of the Company's
directors or executive officers.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's officers and
directors and persons who own more than 10 percent of the Epitope Common Stock
(collectively, "Reporting Persons") to file reports of ownership and changes in
ownership with the Securities and Exchange Commission (the "Commission").
Reporting persons are required by the Commission's regulations to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms and written
representations regarding the absence of a filing requirement received from
Reporting Persons, the Company believes that with respect to the 1996 fiscal
year, all Reporting Persons complied with all applicable filing requirements,
except that T. J. Paulsen, the Company's principal accounting officer until
November 11, 1996, filed one report relating to one transaction after the filing
deadline; Richard K. Bestwick, Ph.D., Senior Vice President and Chief Operating
Officer--Agritope, and Joseph A. Bouckaert, President and Chief Executive
Officer--Vinifera, Inc., each filed his initial report of his stockholdings upon
becoming an executive officer of Epitope after the filing deadline; and Byron A.
Allen, Jr., Vice President of Corporate Communications of the Company, and
Richard K. Donahue, a director of the Company, each filed one report of an
option grant after the filing deadline.
- 42 -
<PAGE>
ITEM 11. Executive Compensation.
SUMMARY COMPENSATION TABLE
The following table summarizes the compensation for the last three
fiscal years of the Chief Executive Officer and the four other most highly
compensated executive officers of the Company (together, the "Named Executive
Officers") during the 1996 fiscal year.
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
Annual Compensation Securities All Other
Underlying Compen-
Name and Principal Position Year Salary Bonus Options (#)(1) sation(2)
<S> <C> <C> <C> <C> <C>
Adolph J. Ferro, Ph.D. 1996 $214,183 $ 50,000 - $ 4,237
President and Chief Executive 1995 200,769 113,245 74,000 5,390
Officer 1994 135,000 - - 3,375
Gilbert N. Miller 1996 128,510 33,075 - 3,206
Executive Vice President, 1995 130,962 - 34,000 5,021
Chief Financial Officer, 1994 120,000 - - 3,000
and Treasurer
John H. Fitchen, M.D. 1996 147,548 37,200 - 3,540
Senior Vice President and 1995 148,606 - 43,000 3,578
Chief Operating Officer-- 1994 131,250 - - 3,057
Epitope Medical Products
Andrew S. Goldstein 1996 128,510 30,000 - 3,206
Senior Vice President of 1995 126,923 - 34,000 3,182
Advanced Technology 1994 105,000 - - 2,625
Development--Epitope Medical
Products
Richard K. Bestwick, Ph.D.(3) 1996 91,385 20,160 - 2,280
Senior Vice President and
Chief Operating Officer--
Agritope
(1) Represents the number of shares for which options were awarded. No SARs
have been granted to any Named Executive Officer during the years
indicated.
(2) Represents amounts contributed to the Company's 401(k) Profit Sharing
Plan as employer matching contributions in the form of Epitope Common
Stock.
(3) Dr. Bestwick was not an executive officer of Epitope during fiscal 1995
or 1994.
</TABLE>
- 43 -
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES
IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES(1)
Number of Securities
Underlying Unexercised Value of Unexercised In-the-Money
Shares Options at Fiscal Year-End Options at Fiscal Year-End(2)
Acquired On Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Adolph J. Ferro, Ph.D. 20,000 $173,722 496,061 60,143 $2,800,693 $69,583
Gilbert N. Miller 16,000 141,440 181,299 27,805 1,024,121 642
John H. Fitchen, M.D. - - 160,133 28,667 1,001,375 -
Andrew S. Goldstein 25,000 188,034 165,444 28,556 1,092,090 37,910
Richard K. Bestwick, Ph.D. 2,750 32,313 57,632 18,472 31,058 642
</TABLE>
- --------------------
(1) The Named Executive Officers did not hold any SARs at September 30,
1996.
(2) In-the-money stock options are options for which the exercise price is
less than the market value of the underlying stock on a particular
date. The values shown in the table are based on the difference between
$15.0625, which was the average of the high and low sales prices of the
Epitope Common Stock on the AMEX on September 30, 1996, and the
applicable exercise price.
Compensation of Directors
Under the terms of the Epitope, Inc. 1991 Stock Award Plan (the "Award
Plan") in effect during the 1996 fiscal year, nonemployee directors of the
Company were eligible to receive nonqualified stock options granted on a
nondiscretionary basis, as described below.
Initial Options. Upon becoming a nonemployee director, each such
director has been granted a stock option to purchase 50,000 shares of Epitope
Common Stock (an "Initial Option"). A newly-elected Chairman of the Board has
been entitled to receive an Initial Option to purchase an additional 25,000
shares (75,000 shares if not previously a nonemployee director). Until December
1994, Initial Options were granted at an exercise price equal to 75 percent of
the fair market value of a share of Epitope Common Stock on the date of grant;
beginning in December 1994, Initial Options have been granted at an exercise
price equal to the fair market value of a share on the date of grant minus the
lesser of (a) $2.00 or (b) 25 percent of the fair market value. Each Initial
Option becomes exercisable in annual installments based on continued service as
a director and expires at the end of five years following the director's
retirement or one year following the director's death, disability or cessation
of service as a director for any other reason. An Initial Option will generally
become fully exercisable by the date of the fourth annual meeting of
shareholders through which the director has served on the Board. Initial Options
become exercisable in full immediately upon the happening of a change in control
of the Company. A change in control of the Company would occur on the happening
of such events as the beneficial ownership by a person or group of 30 percent or
more of the outstanding common stock, certain changes in Board membership
affecting a majority of positions, certain mergers or consolidations, a sale or
other transfer of all or substantially all the Company's assets, or approval by
the shareholders of a plan of liquidation or dissolution of the Company, as well
as any change in control required to be reported by the proxy disclosure rules
of the Commission.
Payment of the exercise price may be made in cash or by delivery of
previously acquired shares of common stock having a fair market value equal to
the aggregate exercise price. To the extent that payment is made in previously
acquired shares, the director is automatically granted a replacement ("reload")
option for a number of shares equal to the number delivered upon exercise with
an exercise price equal to the fair market value of a share of common stock on
the date of exercise. Reload options become exercisable in full six months after
the grant date.
Renewal Options. Additional nonqualified stock options are also granted
to each nonemployee director to purchase 15,000 shares of Epitope Common Stock
("Renewal Options") as of the December 15 prior to the
- 44 -
<PAGE>
annual meeting of shareholders at which the options most recently granted to the
nonemployee director fully vest. Renewal Options vest in three equal annual
installments beginning with the second annual meeting of shareholders following
the date of grant, subject to acceleration of vesting upon the occurrence of a
change in control of the Company. The other terms of Renewal Options are
comparable to those of Initial Options, except that Renewal Options do not
provide for reload options.
Agritope Options. Mr. Paxton and Mr. Pringle, as nonemployee directors
of Agritope, were each awarded nonqualified options for 50,000 shares of
Agritope common stock under the Agritope, Inc. 1992 Stock Award Plan. The
options have an exercise price of $5.625 per share, which was equal to 75
percent of the fair market value of Agritope, Inc. common stock on the date of
grant, September 14, 1992, based on a good faith determination of fair market
value by the Agritope, Inc. board of directors. The options are fully vested.
Until Agritope, Inc. ceases to be a wholly owned subsidiary of the Company,
shares of Agritope, Inc. common stock received upon exercise of the foregoing
options must be exchanged for shares of Epitope Common Stock based on a ratio of
2.433 shares of Agritope, Inc. common stock for each share of Epitope Common
Stock. Accordingly, upon exercise of the foregoing options in full, Messrs.
Paxton and Pringle would each receive a total of 20,552 shares of Epitope Common
Stock, or a corresponding number of shares of Medical Products Stock and
Agritope Stock if the Agritope Stock Proposal is approved.
Employment Agreements
Pursuant to written employment agreements with the Company, the Named
Executive Officers each are entitled to receive one year of salary in the event
of termination without cause (two years in the case of Dr. Ferro) or two years
of salary if terminated without cause within 12 months following a change in
control (within the meaning of the Exchange Act) or sale of substantially all
the assets of the Company (three years in the case of Dr. Ferro). The agreements
in each case prohibit the officer from competing with the Company for one year
unless the officer elects to waive the right to amounts otherwise payable. The
agreements do not expire by their terms and are terminable by the Company on 90
days' notice with cause or, subject to payment of the salary amounts described
above, without cause.
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.
The following table sets forth information as of September 30, 1996,
regarding the beneficial ownership of Epitope Common Stock by (a) each person
who is known to the Company to be the beneficial owner of more than 5 percent of
Epitope Common Stock outstanding, (b) each director and nominee for election as
director, (c) each of the Named Executive Officers, and (d) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
Amount and Nature Percent
5% Shareholders, Directors and of Beneficial of
Officers Ownership(1)(2) Class
<S> <C> <C>
Groupe des Assurances Nationales 1,242,108(3) 9.1%
61 Rue Monceau
Paris 75008 France
W. Charles Armstrong 59,540(4) *
Richard K. Bestwick, Ph.D. 67,382 *
Richard K. Donahue 57,000(4) *
Adolph J. Ferro, Ph.D. 496,901(5) 3.7
John H. Fitchen, M.D. 164,461(4) 1.3
Andrew S. Goldstein 427,921(5) 3.3
- 45 -
<PAGE>
Margaret H. Jordan 10,000 *
Gilbert N. Miller 182,961(5) 1.4
R. Douglas Norby 58,750 *
Michael J. Paxton 30,552 *
Roger L. Pringle 114,677 *
G. Patrick Sheaffer 80,000 *
All directors and executive
officers as a group
(15 persons) 1,794,545(4)(5) 12.5
</TABLE>
*Less than 1%
(1) Subject to community property laws where applicable, beneficial
ownership consists of sole voting and investment power except as
otherwise indicated.
(2) Includes shares subject to options and warrants exercisable within 60
days of September 30, 1996, by directors and executive officers as
follows: Mr. Armstrong, 55,000 shares; Dr. Bestwick, 67,382 shares
(including options for 9,750 shares held by his wife); Mr. Donahue,
50,000 shares; Dr. Ferro, 496,061 shares; Dr. Fitchen, 160,133 shares;
Dr. Goldstein, 165,444 shares; Ms. Jordan, 10,000 shares; Mr. Miller,
181,299 shares; Mr. Norby, 55,000 shares; Mr. Paxton, 30,552 shares;
Mr. Pringle, 100,552 shares; Mr. Sheaffer, 67,500 shares; and all
directors and executive officers as a group, 1,454,173 shares.
(3) Includes 595,000 shares subject to warrants exercisable within 60 days
of September 30, 1996 and 128,008 shares issuable upon conversion of
convertible notes.
(4) Includes shares as to which the individual has shared voting and
dispositive power as follows: Mr. Armstrong, 165 shares; Mr. Donahue,
1,000 shares; Dr. Fitchen, 100 shares; and all directors and executive
officers as a group, 2,265 shares.
(5) Does not include 17,035 shares of Epitope Common Stock held in the
401(k) Plan, as to which Messrs. Ferro, Goldstein and Miller share
voting power as trustees of the 401(k) Plan. Messrs. Ferro, Goldstein
and Miller disclaim any economic beneficial interest in such shares
other than the 798, 636, and 711 shares, respectively, allocated to
their individual accounts under the 401(k) Plan.
ITEM 13. Certain Relationships and Related Transactions.
In connection with the December 1987 merger of Agricultural Genetic
Systems, Inc. ("AGS"), with and into Agritope, Inc. Dr. Ferro, as an executive
officer and principal shareholder of AGS, was granted a royalty equal to 4
percent of net sales of products resulting from the technology transferred to
Agritope pursuant to the merger; royalties with respect to a particular product
were to be paid for a period equal to the life of the patent on the product or
an equivalent period if a patent is not issued. On November 11, 1996, Dr. Ferro
agreed to accept a one-time payment of $590,000 in lieu of the royalties that
would otherwise be due him.
In September 1996, the Company extended the expiration date of certain
warrants issued in private placement transactions in September 1991, December
1992, and July and August 1993, to purchase Epitope Common Stock at prices of
$16.00, $16.00, $20.00 and $18.50 per share, respectively. The warrants would
have otherwise expired in September 1996 and March 1997, if not exercised. The
Company extended the
- 46 -
<PAGE>
expiration date of the warrants to September 30, 1997. The warrants were
extended because they represent a significant potential source of additional
capital.
Holders of the warrants included Groupe des Assurances Nationales
("GAN"), which beneficially owns more than 5 percent of the Epitope Common Stock
outstanding. As of September 30, 1996, GAN held September 1991 warrants to
purchase 80,000 shares of Epitope Common Stock, December 1992 warrants to
purchase 270,000 shares of Epitope Common Stock, July 1993 warrants to purchase
195,000 shares of Epitope Common Stock, and August 1993 warrants to purchase
50,000 shares of Epitope Common Stock.
On November 14, 1996, the Company agreed to exchange $3,380,000
principal amount of Agritope 4% Convertible Notes Due 1997 for 250,367 shares of
Epitope Common Stock at a reduced exchange price of $13.50 per share. The
original terms of the notes permitted the holders to exchange them for Epitope
Common Stock at an exchange price of $19.53 per share. Holders exchanging their
notes at the reduced exchange price included GAN, which exchanged $2,500,000
principal amount of notes for 185,185 shares of Epitope Common Stock.
In connection with the acquisition of A&W on December 12, 1996, the
Company renegotiated the terms of a $6.5 million line of credit extended to A&W
by Wells Fargo Bank, National Association. The line of credit had previously
been guaranteed by the four former shareholders of A&W, including Fred L.
Williamson, now an executive officer of the Company. Under the renegotiated
terms of the line of credit, Epitope, Inc. will guarantee A&W's obligations
under the line of credit and the guarantees of the former shareholders will be
released. See Note 13 to Historical Financial Statements included in Annex III.
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.
The lease calls for rent payments of $11,000 per month during the initial term.
See Item 2, Properties.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a)(1) and (a)(2) Consolidated Financial Statements and Schedules.
- 47 -
<PAGE>
<TABLE>
<CAPTION>
Index to Financial Statements
Page
----
Historical Financial Statements
<S> <C>
Report of Independent Accountants......................................................................................49
Epitope Medical Products
Combined Balance Sheets at September 30, 1996 and 1995.................................................................50
Combined Statements of Operations for years ended September 30, 1996, 1995, and 1994...................................51
Combined Statements of Changes in Group Equity for years ended September 30, 1996, 1995, and 1994......................52
Combined Statements of Cash Flows for years ended September 30, 1996, 1995, and 1994...................................53
Agritope
Combined Balance Sheets at September 30, 1996 and 1995.................................................................54
Combined Statements of Operations for years ended September 30, 1996, 1995, and 1994...................................55
Combined Statements of Changes in Group Equity for years ended September 30, 1996, 1995, and 1994......................56
Combined Statements of Cash Flows for years ended September 30, 1996, 1995, and 1994...................................57
Epitope, Inc. and Subsidiaries
Consolidated Balance Sheets at September 30, 1996 and 1995.............................................................58
Consolidated Statements of Operations for years ended September 30, 1996, 1995, and 1994...............................59
Consolidated Statements of Changes in Shareholders' Equity for years ended September 30, 1996, 1995,
and 1994.............................................................................................................60
Consolidated Statements of Cash Flows for years ended September 30, 1996, 1995, and 1994...............................61
Notes to Historical Financial Statements...............................................................................62
Supplemental Financial Statements
Report of Independent Accountants......................................................................................77
Report of Independent Auditors.........................................................................................78
Epitope Medical Products
Combined Balance Sheets at September 30, 1996 and 1995.................................................................79
Combined Statements of Operations for years ended September 30, 1996, 1995, and 1994 ..................................80
Combined Statements of Changes in Group Equity for years ended September 30, 1996, 1995, and 1994......................81
Combined Statements of Cash Flows for years ended September 30, 1996, 1995, and 1994...................................82
Agritope (merged with Andrew and Williamson Sales, Co. in a pooling of interests)
Combined Balance Sheets at September 30, 1996 and 1995.................................................................83
Combined Statements of Operations for years ended September 30, 1996, 1995, and 1994 ..................................84
Combined Statements of Changes in Group Equity for years ended September 30, 1996, 1995, and 1994......................85
Combined Statements of Cash Flows for years ended September 30, 1996, 1995, and 1994...................................86
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.............................................................87
Consolidated Statements of Operations for years ended September 30, 1996, 1995, and 1994 ..............................88
Consolidated Statements of Changes in Shareholders' Equity for years ended September 30, 1996, 1995,
and 1994.............................................................................................................89
Consolidated Statements of Cash Flows for years ended September 30, 1996, 1995, and 1994...............................90
Notes to Supplemental Financial Statements.............................................................................91
</TABLE>
- 48 -
<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.
- 49 -
<PAGE>
<TABLE>
<CAPTION>
Historical Financial Statements
Epitope Medical Products
Combined Balance Sheets
September 30 1996 1995
Assets
Current assets
<S> <C> <C>
Cash and cash equivalents (Note 2).................................... $ 795,787 $ 13,210
Marketable securities (Note 2)........................................ 18,818,120 17,080,246
Trade accounts receivable, net (Note 2)............................... 1,147,599 231,621
Other accounts receivable............................................. 174,083 382,753
Inventories (Note 2).................................................. 1,157,930 1,433,746
Prepaid expenses...................................................... 89,518 103,399
------------ -------------
Total current assets.................................................. 22,183,037 19,244,975
Property and equipment, net (Notes 2 and 4)........................... 1,542,757 1,989,769
Patents and proprietary technology, net (Note 2)...................... 601,234 415,010
Investments in affiliated companies................................... - 142,510
Other assets and deposits (Note 5).................................... 22,758 38,328
------------- -------------
$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)..................................................... 1,368,166 2,976,167
----------- -----------
Total current liabilities............................................. 1,817,336 3,795,591
Commitments and Contingencies (Notes 6,8,9,10 and 11)................. - -
Group equity (Note 6)
Contributed capital................................................... 64,237,350 60,479,315
Accumulated deficit................................................... (41,704,900) (42,444,314)
------------- -------------
22,532,450 18,035,001
$24,349,786 $21,830,592
</TABLE>
The accompanying notes are an integral part of these statements.
- 50 -
<PAGE>
<TABLE>
<CAPTION>
Historical Financial Statements
Epitope Medical Products
Combined Statements of Operations
For the Year Ended September 30 1996 1995 1994
Revenues
<S> <C> <C> <C>
Product sales........................................ $ 4,864,378 $ 2,806,850 $ 2,580,798
Grants and contracts ................................ 729,271 48,672 24,560
------------ ------------ -----------
5,593,649 2,855,522 2,605,358
Costs and expenses
Product costs........................................ 2,681,429 3,163,012 2,141,319
Research and development costs....................... 3,165,838 4,617,246 3,681,326
Selling, general and administrative expenses......... 5,033,491 6,682,860 3,066,896
------------ ------------- -------------
10,880,758 14,463,118 8,889,541
Loss from operations................................. (5,287,109) (11,607,596) (6,284,183)
Other income (expense), net
Interest income...................................... 1,025,030 756,743 237,467
License fee.......................................... 5,000,000 - -
Other, net .......................................... 1,493 (319) (1,541)
------------ -------------- --------------
6,026,523 756,424 235,926
Net income (loss).................................... $ 739,414 $(10,851,172) $(6,048,257)
Proforma net income (loss) per share................. $ .06 $ (.91) $ (.60)
Proforma weighted average number of shares
outstanding......................................... 13,440,396 11,886,234 10,050,129
The accompanying notes are an integral part of these statements.
</TABLE>
- 51 -
<PAGE>
<TABLE>
<CAPTION>
Historical 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>
- 52 -
<PAGE>
<TABLE>
<CAPTION>
Historical Financial Statements
Epitope Medical Products
Combined Statements of Cash Flows
For the Year Ended September 30 1996 1995 1994
Cash flows from operating activities
<S> <C> <C> <C>
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 ............................ 792,885 795,295 651,076
(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 ............................. 13,881 38,031 43,354
Decrease (increase) in other assets and deposits.......... 15,570 (42,658) (6,227)
Increase (decrease) in accounts payable and
accrued liabilities ..................................... (2,151,110) 2,273,364 329,875
Common stock issued as compensation for services.......... 249,086 196,802 318,386
Compensation expense for stock option grants and
deferred salary increases ............................... 815,019 1,056,335 915,351
---------- ------------ -----------
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 .............. 45,870,396 4,718,162 -
Additions to property and equipment ...................... (180,112) (1,112,292) (461,914)
Proceeds from sale of property ........................... 7,432 1,085 1,000
Expenditures for patents and proprietary
technology .............................................. (358,319) (126,927) (185,805)
Investment in affiliated companies ....................... 142,510 42,552 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 ................... 5,885,573 21,060,912 24,387,702
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 ................ 2,866,785 11,972,181 11,944,680
Net increase (decrease) in cash and cash equivalents ..... 782,577 (7,686,106) 1,511,538
Cash and cash equivalents at beginning of year ........... 13,210 7,699,316 6,187,778
----------- ------------- ------------
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>
- 53 -
<PAGE>
<TABLE>
<CAPTION>
Historical Financial Statements
Agritope
Combined Balance Sheets
September 30 1996 1995 1996
Proforma (1)
Assets
Current assets
<S> <C> <C> <C>
Cash and cash equivalents (Note 2) ......................... $ 4,903,476 $ 4,246,687 $ 4,903,476
Trade accounts receivable, net (Note 2) .................... 264,986 135,866 264,986
Other accounts receivable .................................. 32,337 993,790 32,337
Inventories (Note 2) ....................................... 509,745 - 509,745
Prepaid expenses ........................................... 812 56,064 812
------------- ------------- ------------
Total current assets ....................................... 5,711,356 5,432,407 5,711,356
Property and equipment, net (Notes 2 and 4) ................ 1,286,196 555,003 1,286,196
Patents and proprietary technology, net (Note 2) ........... 510,244 140,757 510,244
Investment in affiliated companies (Note 3) ................ 2,448,623 1,974,833 2,448,623
Other assets and deposits (Note 5) ......................... 140,513 200,430 54,379
------------- ------------- -------------
$ 10,096,932 $ 8,303,430 $ 10,010,798
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 - 240,003
Accounts payable ........................................... 91,474 125,971 91,474
Salaries, benefits and other accrued liabilities
(Notes 2 and 9) .......................................... 735,478 206,349 735,478
------------- ------------ ------------
Total current liabilities .................................. 4,446,955 350,078 1,066,955
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 - 215,407
Group equity (Note 6)
Contributed capital ........................................ 36,714,932 33,452,632 41,225,452
Accumulated deficit ........................................ (31,280,362) (29,141,032) (32,497,016)
------------- ------------- --------------
5,434,570 4,311,600 8,728,436
$ 10,096,932 $ 8,303,430 $ 10,010,798
</TABLE>
(1) Reflects the proforma effect of conversion of $3,380,000 principal amount of
Agritope notes into 250,367 shares of common stock of Epitope at an exchange
price of $13.50 per share (see Note 13).
The accompanying notes are an integral part of these statements.
- 54 -
<PAGE>
<TABLE>
<CAPTION>
Historical Financial Statements
Agritope
Combined Statements of Operations
For the Year Ended September 30 1996 1995 1994
Revenues
<S> <C> <C> <C>
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 ............................ 1,338,703 2,204,993 2,368,880
Selling, general and administrative expenses............... 1,482,694 4,479,498 4,759,219
----------- ----------- -----------
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
Interest income............................................ 361,938 408,097 216,934
Interest expense........................................... (265,356) (241,775) (236,121)
Other, net................................................. - (500) (75,280)
-------------- ------------ -------------
96,582 165,822 (94,467)
Net loss ................................................. $(2,139,330) $(7,644,656) $(9,584,331)
Proforma net loss per share .............................. $ (.34) $ (1.29) $ (1.91)
Proforma weighted average number of shares
outstanding ............................................ 6,330,710 5,943,117 5,025,064
The accompanying notes are an integral part of these statements.
</TABLE>
- 55 -
<PAGE>
<TABLE>
<CAPTION>
Historical Financial Statements
Agritope
Combined Statements of Changes in Group Equity
Contributed Accumulated
capital deficit Total
<S> <C> <C> <C>
Balances at September 30, 1993 .............................. $11,259,717 $(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>
- 56 -
<PAGE>
<TABLE>
<CAPTION>
Historical Financial Statements
Agritope
Combined Statements of Cash Flows
For the Year Ended September 30 1996 1995 1994
Cash flows from operating activities
<S> <C> <C> <C>
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 ............................. 294,045 663,380 505,135
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 services........... 14,500 69,998 50,392
Compensation expense for stock option grants and
deferred salary increases ................................ 229,164 318,375 343,922
----------- ----------- -----------
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 ........................ 3,018,636 8,330,854 12,132,173
----------- ----------- -----------
Net cash provided by financing activities ................. 2,979,129 8,314,717 12,111,447
Net increase in cash and cash equivalents ................. 656,789 921,006 956,783
Cash and cash equivalents at beginning of year ............ 4,246,687 3,325,681 2,368,898
----------- ----------- -----------
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>
- 57 -
<PAGE>
<TABLE>
<CAPTION>
Historical Financial Statements
Epitope, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30 1996 1995 1996
Proforma (1)
Assets
Current assets
<S> <C> <C> <C>
Cash and cash equivalents (Note 2) ........................ $ 5,699,263 $ 4,259,897 $ 5,699,263
Marketable securities (Note 2) ............................ 18,818,120 17,080,246 18,818,120
Trade accounts receivable, net (Note 2) ................... 1,412,585 367,487 1,412,585
Other accounts receivable ................................. 206,420 1,376,543 206,420
Inventories (Note 2) ...................................... 1,667,675 1,433,746 1,667,675
Prepaid expenses .......................................... 90,330 159,463 90,330
------------ ------------ ------------
Total current assets ...................................... 27,894,393 24,677,382 27,894,393
Property and equipment, net (Notes 2 and 4) ............... 2,828,953 2,544,772 2,828,953
Patents and proprietary technology, net (Note 2) .......... 1,111,478 555,767 1,111,478
Investment in affiliated companies (Note 3) ............... 2,448,623 2,117,343 2,448,623
Other assets and deposits (Note 5) ........................ 163,271 238,758 77,137
------------ ------------- -------------
$ 34,446,718 $ 30,134,022 $ 34,360,584
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 - 240,003
Accounts payable .......................................... 540,644 945,395 540,644
Salaries, benefits and other accrued liabilities
(Notes 2 and 9) ........................................... 2,103,644 3,182,516 2,103,644
----------- ----------- -----------
Total current liabilities ................................. 6,264,291 4,145,669 2,884,291
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 - 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 ............................... 100,952,282 93,931,947 105,462,802
Accumulated deficit ....................................... (72,985,262) (71,585,346) (74,201,916)
------------- ------------- --------------
27,967,020 22,346,601 31,260,886
$ 34,446,718 $ 30,134,022 $ 34,360,584
</TABLE>
(1) Reflects the proforma effect of conversion of $3,380,000 principal amount of
Agritope notes into 250,367 shares of common stock of Epitope at an exchange
price of $13.50 per share (see Note 13).
The accompanying notes are an integral part of these statements.
- 58 -
<PAGE>
<TABLE>
<CAPTION>
Historical Financial Statements
Epitope, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Year Ended September 30 1996 1995 1994
Revenues
<S> <C> <C> <C>
Product sales ............................................... $ 4,864,378 $ 4,822,168 $ 4,760,540
Grants and contracts ........................................ 1,314,756 143,042 58,202
------------ ------------ ------------
6,179,134 4,965,210 4,818,742
Costs and expenses
Product costs .............................................. 2,681,429 6,398,687 6,716,468
Research and development costs ............................. 4,504,541 6,822,239 6,050,206
Selling, general and administrative expenses................ 6,516,185 11,162,358 7,826,115
----------- ----------- -----------
13,702,155 24,383,284 20,592,789
Loss from operations........................................ (7,523,021) (19,418,074) (15,774,047)
Other income (expense), net
Interest income ............................................ 1,386,968 1,164,840 454,401
Interest expense ........................................... (265,356) (241,775) (236,121)
License fee................................................. 5,000,000 - -
Other, net.................................................. 1,493 (819) (76,821)
------------ ------------ ------------
6,123,105 922,246 141,459
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 .............................................. 12,661,420 11,886,234 10,050,129
The accompanying notes are an integral part of these statements.
</TABLE>
- 59 -
<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 .................................. 52,488 636,293 - 636,293
Common stock issued as
compensation ......................................... 19,678 368,778 - 368,778
Compensation expense for
stock option grants .................................. - 1,167,272 - 1,167,272
Common stock issued upon
exercise of warrants ................................. 618,291 9,718,259 - 9,718,259
Common stock issued upon
exchange of convertible notes ........................ 28,672 559,964 - 559,964
Common stock issued in
private placement .................................... 1,115,500 17,057,563 - 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 ......................... 10,926,551 71,559,900 (53,089,518) 18,470,382
Common stock issued upon
exercise of options .................................. 183,525 2,145,673 - 2,145,673
Common stock issued as
compensation ......................................... 16,013 266,800 - 266,800
Compensation expense for
stock option grants .................................. - 1,374,710 - 1,374,710
Common stock issued upon
exercise of warrants ................................. 1,336,000 18,892,750 - 18,892,750
Common stock issued upon
exchange of convertible notes ........................ 23,041 449,991 - 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 ......................... 12,485,130 93,931,947 (71,585,346) 22,346,601
Common stock issued upon
exercise of options .................................. 386,550 4,886,118 - 4,886,118
Common stock issued as compensation .................... 19,353 263,586 - 263,586
Compensation expense for stock
option grants ........................................ - 1,044,183 - 1,044,183
Common stock issued upon
exercise of warrants ................................. 46,350 826,600 - 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>
- 60 -
<PAGE>
<TABLE>
<CAPTION>
Historical Financial Statements
Epitope, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Year Ended September 30 1996 1995 1994
Cash flows from operating activities
<S> <C> <C> <C>
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 .............................. 1,086,930 1,458,675 1,156,211
(Gain) loss on disposition of property ..................... (1,098) 819 75,671
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) 2,168,684 397,332
Common stock issued as compensation for services............ 263,586 266,800 368,778
Compensation expense for stock option grants and
deferred salary increases ................................ 1,044,183 1,374,710 1,259,273
----------- ----------- -----------
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 ................ 45,870,396 4,718,162 -
Additions to property and equipment ........................ (1,066,758) (1,350,850) (2,590,751)
Proceeds from sale of property ............................. 7,432 14,343 1,000
Expenditures for patents and proprietary
technology ............................................... (770,262) (305,135) (185,670)
Investment in affiliated companies ......................... (331,280) 652,698 64,938
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 ..................... 5,885,573 21,060,912 24,387,702
Cost of common stock issuance .............................. (152) (757,877) (310,849)
----------- --------------- -------------
Net cash provided by financing activities .................. 5,845,914 20,286,898 24,056,129
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 ............. 4,259,897 11,024,997 8,556,676
------------- ------------- ------------
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>
- 61 -
<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 percent 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, liabilities, revenues
and expenses of each group are included in the respective financial statements
of the applicable group. Cash, cash equivalents and marketable securities have
been allocated 80 percent to Epitope Medical Products and 20 percent to
Agritope. Cash advanced and allocated by the Company to business units of the
Agritope group has been reflected as contributed capital in the accompanying
combined financial statements.
Certain corporate overhead 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. These activity indicators, which will be reviewed periodically and
adjusted to reflect changes in utilization, include number of employees, number
of computers, and level of expenditures. 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 .......................................... 1,069,249 1,892,370 1,735,688
------------ ------------ ------------
Consolidated ...................................... $4,097,430 $5,467,439 $3,635,657
</TABLE>
If the Agritope Stock Proposal is approved, the Company will provide holders of
Epitope Medical Products and Agritope common stock separate financial statements
prepared in accordance with generally accepted accounting principles,
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
- 62 -
<PAGE>
Notes to Historical Financial Statements, Continued
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.
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:
<TABLE>
<CAPTION>
September 30 1996 1995
Epitope Medical Products
<S> <C> <C>
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 .............................................. $ 471,208 $ -
Finished goods ............................................... 38,537 -
----------- --------------
$ 509,745 $ -
Consolidated
Raw materials ................................................ $ 522,824 $ 657,568
Work-in-process .............................................. 860,850 379,470
Finished goods ............................................... 231,419 295,032
Supplies ..................................................... 52,582 101,676
----------- -----------
$1,667,675 $1,433,746
</TABLE>
- 63 -
<PAGE>
Notes to Historical Financial Statements, Continued
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 reviews its long-lived assets for
impairment periodically 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 considered 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:
<TABLE>
<CAPTION>
1996 1995 1994
Amortization for the year ended
September 30,
<S> <C> <C> <C>
Epitope Medical Products ............................ $ 172,095 $ 130,313 $ 101,339
Agritope ............................................ 42,456 23,964 13,487
----------- ---------- ----------
Consolidated......................................... $ 214,551 $ 154,277 $ 114,826
Accumulated Amortization at
September 30,
Epitope Medical Products ............................ $ 621,110 $ 449,015 $ 318,702
Agritope ............................................ 79,907 37,451 13,487
---------- ---------- ----------
Consolidated......................................... $ 701,017 $ 486,466 $ 332,189
</TABLE>
Fair Value of Financial Instruments. The carrying amount for cash equivalents,
marketable securities, accounts receivable, borrowings under bank line of
credit, subordinated notes, and accounts payable approximates fair value because
of the immediate or short-term maturity of these financial instruments. The
carrying amount for long-term debt and convertible notes approximates fair value
because the related interest rates are comparable to rates currently available
to the Company for debt with similar terms and maturities.
- 64 -
<PAGE>
Notes to Historical Financial Statements, Continued
Revenue Recognition. Product revenues are recognized when the related products
are shipped. Grant and contract revenues include funds received under research
and development agreements with various entities. These grants and contracts
generally provide for progress payments as expenses are incurred and certain
research milestones are achieved. Revenue related to such grants and contracts
is recognized as research milestones are achieved.
Accounts receivable are stated net of an allowance for doubtful accounts as
follows:
<TABLE>
<CAPTION>
September 30 1996 1995
<S> <C> <C>
Epitope Medical Products ..................................... $ 6,872 $ 6,872
Agritope ..................................................... 19,571 65,172
--------- ---------
Consolidated ................................................. $ 26,443 $ 72,044
</TABLE>
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. 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.
- 65 -
<PAGE>
Notes to Historical Financial Statements, Continued
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
Epitope Medical Products
<S> <C> <C> <C>
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 grape plant propagation
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 4 percent minority
interest in Vinifera and relinquished the majority interest to Agritope in
August 1996.
The reacquisition of Vinifera in August 1996 has been accounted for under the
purchase method. The net purchase price of $916,000 has been allocated to
tangible net assets. Vinifera's results of operations are including in the
Agritope Combined Statements of Operations and in the Consolidated Statements of
Operations through May 1995, and for the month of September 1996. The following
summarized proforma results of operations are presented as if the reacquisition
had occurred on the first day of each period shown.
<TABLE>
<CAPTION>
Year Ended September 30 1996 1995
Proforma Proforma
Historical Adjustments Proforma Historical Adjustments Proforma
Agritope
<S> <C> <C> <C> <C> <C> <C>
Revenues................. 585,485 833,949 1,419,434 2,109,688 276,588 2,386,276
Net loss.................(2,139,330) (1,464,002) (3,603,332) (7,644,656) (460,296) (8,104,952)
Proforma loss per share.. (0.34) (0.23) (0.57) (1.29) (0.08) (1.36)
Consolidated
Revenues................. 6,179,134 833,949 7,013,083 4,965,210 276,588 5,241,798
Net loss.................(1,399,916) (1,464,002) (2,863,918) (18,495,828) (460,296) (18,956,124)
Loss per share........... (0.11) (0.12) (0.23) (1.56) (0.04) (1.59)
</TABLE>
- 66 -
<PAGE>
Notes to Historical Financial Statements, Continued
In May 1995, Agritope's wholly owned subsidiary, Agrimax Floral Products, Inc.
(Agrimax), ceased operations as an independent entity. UAF, Limited Partnership
(UAF), in which Agrimax obtained an 18 percent interest, was formed to combine
the Agrimax operations in Charlotte, North Carolina, with those of Universal
American Flowers, Inc. in Tampa, Florida and Hammond, Louisiana. In connection
with the UAF transaction, Agrimax contributed inventory, operating assets and
the right to use its proprietary floral preservative and certain trademarks. In
May 1996, the equity interest of Agrimax was reduced to 9 percent as the result
of a recapitalization of UAF.
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 percent 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.
- 67 -
<PAGE>
Notes to Historical Financial Statements, Continued
Note 4 Property and Equipment
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
September 30 1996 1995
Epitope Medical Products
<S> <C> <C>
Research and development laboratory equipment ................ $ 1,056,883 $ 898,716
Manufacturing equipment ...................................... 1,291,546 1,296,416
Office furniture and equipment ............................... 1,899,948 2,041,897
Leasehold improvements ....................................... 1,084,660 1,084,660
Construction in progress ..................................... 134,557 70,961
----------- -----------
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 ................................... 717,508 717,508
Research and development laboratory equipment ................ 220,919 196,255
Manufacturing equipment ...................................... 351,538 -
Office furniture and equipment ............................... 140,452 95,338
Leasehold improvements........................................ 23,962 23,962
Construction in progress ..................................... 499,980 34,650
----------- -----------
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 ................................... 717,508 717,508
Research and development laboratory equipment ................ 1,277,802 1,094,971
Manufacturing equipment ...................................... 1,643,084 1,296,416
Office furniture and equipment ............................... 2,040,400 2,137,235
Leasehold improvements ....................................... 1,108,622 1,108,622
Construction in progress ..................................... 634,537 105,611
----------- -----------
7,451,973 6,490,383
Less accumulated depreciation and amortization ............... (4,623,020) (3,945,611)
------------ ------------
$ 2,828,953 $ 2,544,772
</TABLE>
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 percent 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 percent of the public offering price.
- 68 -
<PAGE>
Notes to Historical Financial Statements, Continued
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.
See Note 13.
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:
<TABLE>
<CAPTION>
Purpose Shares
<S> <C>
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
</TABLE>
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.
- 69 -
<PAGE>
Notes to Historical Financial Statements, Continued
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 percent 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 percent 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 $ 1.09-24.94 3,483,432 $ 1.09-24.94 3,052,653 $ 1.09-24.94
Granted.................... 901,379 9.81-18.13 802,050 14.94-18.88 589,850 14.38-22.94
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 $ 3.50-24.94 3,636,103 $ 1.09-24.94 3,483,432 $ 1.09-24.94
Exercisable................ 2,302,212 $ 3.50-24.94 2,002,925 $ 1.09-24.94 1,557,505 $ 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.
- 70 -
<PAGE>
Notes to Historical Financial Statements, Continued
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 percent 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 percent. 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 percent
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. These net operating loss carryforwards will generally
expire from 2001 through 2011 if not used by the Company. 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.
Significant components of the Company's deferred tax asset were as follows (in
thousands):
<TABLE>
<CAPTION>
September 30 1996 1995
<S> <C> <C>
Net operating loss carryforwards.......................... $ 24,489 $ 26,110
Deferred compensation..................................... 1,997 1,665
Research & experimentation credit carryforwards........... 1,151 1,151
Accrued expenses.......................................... 317 238
Other..................................................... 495 384
-------- ---------
Gross deferred tax assets................................. 28,449 29,548
Valuation allowance....................................... (28,449) (29,548)
-------- ---------
Net deferred tax asset.................................... - -
</TABLE>
- 71 -
<PAGE>
Notes to Historical Financial Statements, Continued
No benefit for the Company's deferred tax assets has been recognized in the
accompanying financial statements as they do not satisfy the recognition
criteria set forth in SFAS 109. The valuation allowance decreased $1.1 million
in 1996, increased $7.5 million in 1995, and increased $6.2 million in 1994. The
research and development tax credit carryforwards will generally expire from
2001 through 2010 if not used by the Company.
The expected federal statutory 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 1996 and 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 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." Expenses related to such arrangements are included under the caption
"Research and development costs." The activity related to these arrangements is
summarized as follows:
<TABLE>
<CAPTION>
Year Ended September 30 1996 1995 1994
Epitope Medical Products
<S> <C> <C> <C>
SB research projects...................................... 712,000 40,000 -
Other..................................................... 17,271 8,672 24,560
--------- -------- --------
729,271 48,672 24,560
Project related expenses.................................. 1,087,713 108,645 46,493
Agritope
Government research grants................................ 144,987 16,358 33,642
Research projects with strategic partners................. 326,462 40,000 -
Other..................................................... 114,036 38,012 -
--------- -------- -----------
585,485 94,370 33,642
Project related expenses.................................. 461,460 318,401 35,728
</TABLE>
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
- 72 -
<PAGE>
Notes to Historical Financial Statements, Continued
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. When such funds are disbursed they will be
recognized as revenue in accordance with the Company's revenue recognition
policy. See Note 2.
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
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
<C> <C> <C> <C>
1997 .............................................. $ 345,577 $189,551 $ 535,128
1998 .............................................. 345,576 185,394 530,970
1999 .............................................. 346,356 150,000 496,356
2000 .............................................. 109,992 150,000 259,992
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.
- 73 -
<PAGE>
Notes to Historical Financial Statements, Continued
The Company is also contingently liable for a lease which has been assigned to
UAF and the lease of property which has been subleased to Petals in the
following amounts:
<TABLE>
<CAPTION>
Year Ending September 30
<C> <C>
1997............................................................................................. $ 328,953
1998............................................................................................. 341,304
1999............................................................................................. 347,184
----------
$1,017,441
</TABLE>
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 percent of an employee's basic
contribution, not to exceed 2.5 percent of an employee's compensation. The Board
of Directors has the authority to increase or decrease the 50 percent 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.
- 74 -
<PAGE>
Notes to Historical Financial Statements, Continued
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.
Epitope Medical Products
In thousands
<TABLE>
<CAPTION>
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 $3,464
Agritope
In thousands
Geographic
Areas Revenues Operating Loss Identifiable Assets
1996 1995 1994 1996 1995 1994 1996 1995 1994
United
States ..........$ 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
Consolidated
In thousands
Geographic
Areas Revenues Operating Loss Identifiable 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>
- 75 -
<PAGE>
Notes to Historical Financial Statements, Continued
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 $1.2 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 percent 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 in the four months ended October 31, 1996, coupled with a
shortfall in sales and larger operating loss than expected at Petals 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 non-cash charge to results of operations of
approximately $1.9 million in the first quarter of fiscal 1997, reflecting the
permanent impairment in the value of its investment in affiliated companies.
- 76 -
<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 December 12, 1996, Epitope, Inc. merged with Andrew
and Williamson Sales, Co. in a transaction 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.
- 77 -
<PAGE>
Supplemental Financial Statements
Report of Independent Auditors
To the Board of Directors of
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 shareholders' 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
- 78 -
<PAGE>
<TABLE>
<CAPTION>
Supplemental Financial Statements
Epitope Medical Products
Combined Balance Sheets
September 30 1996 1995
Assets
Current assets
<S> <C> <C>
Cash and cash equivalents (Note 2) ....................... $ 795,787 $ 13,210
Marketable securities (Note 2) ........................... 18,818,120 17,080,246
Trade accounts receivable, net (Note 2) .................. 1,147,599 231,621
Other accounts receivable ................................ 174,083 382,753
Inventories (Note 2) ..................................... 1,157,930 1,433,746
Prepaid expenses ......................................... 89,518 103,399
------------ ------------
Total current assets ..................................... 22,183,037 19,244,975
Property and equipment, net (Notes 2 and 4) .............. 1,542,757 1,989,769
Patents and proprietary technology, net (Note 2) ......... 601,234 415,010
Investments in affiliated companies ...................... - 142,510
Other assets and deposits (Note 5) ....................... 22,758 38,328
----------- -----------
$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) ......................................... 1,368,166 2,976,167
----------- -----------
Total current liabilities ................................ 1,817,336 3,795,591
Commitments and contingencies (Notes 6, 8, 9,
10 and 11)............................................... - -
Group equity (Note 6)
Contributed capital ....................................... 64,237,350 60,479,315
Accumulated deficit ....................................... (41,704,900) (42,444,314)
------------- -------------
22,532,450 18,035,001
$24,349,786 $21,830,592
</TABLE>
The accompanying notes are an integral part of these statements.
- 79 -
<PAGE>
<TABLE>
<CAPTION>
Supplemental Financial Statements
Epitope Medical Products
Combined Statements of Operations
For the Year Ended September 30 1996 1995 1994
Revenues
<S> <C> <C> <C>
Product sales ....................................... $ 4,864,378 $ 2,806,850 $ 2,580,798
Grants and contracts ................................ 729,271 48,672 24,560
---------- ----------- -----------
5,593,649 2,855,522 2,605,358
Costs and expenses
Product costs ....................................... 2,681,429 3,163,012 2,141,319
Research and development costs ...................... 3,165,838 4,617,246 3,681,326
Selling, general and administrative expenses......... 5,033,491 6,682,860 3,066,896
---------- ----------- -----------
10,880,758 14,463,118 8,889,541
Loss from operations ................................ (5,287,109) (11,607,596) (6,284,183)
Other income (expense), net
Interest income...................................... 1,025,030 756,743 237,467
License fee.......................................... 5,000,000 - -
Other, net........................................... 1,493 (319) (1,541)
---------- ----------- ------------
6,026,523 756,424 235,926
Net income (loss) ................................... $ 739,414 $(10,851,172) $(6,048,257)
Proforma net income (loss) per share ................ $ .05 $ (.87) $ (.57)
Proforma weighted average number of shares
outstanding ....................................... 13,960,396 12,406,234 10,570,129
</TABLE>
The accompanying notes are an integral part of these statements.
- 80 -
<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
</TABLE>
The accompanying notes are an integral part of these statements.
- 81 -
<PAGE>
<TABLE>
<CAPTION>
Supplemental Financial Statements
Epitope Medical Products
Combined Statements of Cash Flows
For the Year Ended September 30 1996 1995 1994
Cash flows from operating activities
<S> <C> <C> <C>
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 ........................... 792,885 795,295 651,076
(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 ............................ 13,881 38,031 43,354
Decrease (increase) in other assets and deposits......... 15,570 (42,658) (6,227)
Increase (decrease) in accounts payable and
accrued liabilities .................................... (2,151,110) 2,273,364 329,875
Common stock issued as compensation for services......... 249,086 196,802 318,386
Compensation expense for stock option grants and
deferred salary increases .............................. 815,019 1,056,335 915,351
---------- ----------- ----------
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 ............. 45,870,396 4,718,162 -
Additions to property and equipment ..................... (180,112) (1,112,292) (461,914)
Proceeds from sale of property .......................... 7,432 1,085 1,000
Expenditures for patents and proprietary
technology ............................................ (358,319) (126,927) (185,805)
Investment in affiliated companies ...................... 142,510 42,552 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 .................. 5,885,573 21,060,912 24,387,702
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 ............... 2,866,785 11,972,181 11,944,680
Net increase (decrease) in cash and cash equivalents .... 782,577 (7,686,106) 1,511,538
Cash and cash equivalents at beginning of year .......... 13,210 7,699,316 6,187,778
------------- ------------ ------------
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>
- 82 -
<PAGE>
<TABLE>
<CAPTION>
Supplemental Financial Statements
Agritope
Combined Balance Sheets
September 30 1996 1995 1996
Proforma (1)
Assets
Current assets
<S> <C> <C> <C>
Cash and cash equivalents (Note 2) ................ $ 4,903,476 $ 4,246,687 $ 4,903,476
Trade accounts receivable, net (Note 2) ........... 3,123,172 1,995,244 3,123,172
Other accounts receivable ......................... 32,337 1,249,554 32,337
Inventories (Note 2) .............................. 6,570,187 3,239,441 6,570,187
Prepaid expenses .................................. 90,656 143,792 90,656
------------- ------------ ------------
Total current assets .............................. 14,719,828 10,874,718 14,719,828
Property and equipment, net (Notes 2 and 4) ....... 2,658,655 2,068,931 2,658,655
Patents and proprietary technology, net (Note 2) .. 510,244 140,757 510,244
Investment in affiliated companies (Note 3) ....... 2,651,294 2,185,630 2,651,294
Other assets and deposits (Note 5) ................ 321,011 326,650 234,877
------------- ------------- ------------
$20,861,032 $15,596,686 $20,774,898
Liabilities and Group Equity
Current liabilities
Borrowings under bank line of credit (Note 5) ..... $ 4,125,000 $ 3,150,000 $ 4,125,000
Subordinated notes (Note 5) ....................... 2,236,628 - 2,236,628
Current portion of long-term debt (Note 5) ........ 98,368 196,134 98,368
Convertible notes, due 1997 (Notes 5 and 13) ...... 3,620,003 - 240,003
Accounts payable .................................. 2,677,881 1,488,940 2,677,881
Salaries, benefits and other accrued liabilities
(Notes 2 and 9) ................................. 1,208,136 274,959 1,208,136
------------ ------------ ------------
Total current liabilities ......................... 13,966,016 5,110,033 10,586,016
Long-term debt, less current portion (Note 5) ..... 527,973 632,515 527,973
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 - 215,407
Group equity (Note 6)
Contributed capital ............................... 36,736,343 33,474,043 41,246,863
Accumulated deficit ............................... (30,584,707) (28,255,369) (31,801,361)
------------- ------------ ------------
6,151,636 5,218,674 9,445,502
$20,861,032 $15,596,686 $20,774,898
</TABLE>
(1) Reflects the proforma effect of conversion of $3,380,000 principal amount of
Agritope notes into 250,367 shares of common stock of Epitope at an exchange
price of $13.50 per share (see Note 13).
The accompanying notes are an integral part of these statements.
- 83 -
<PAGE>
<TABLE>
<CAPTION>
Supplemental Financial Statements
Agritope
Combined Statements of Operations
For the Year Ended September 30 1996 1995 1994
Revenues
<S> <C> <C> <C>
Product sales ....................................... $62,471,119 $54,194,291 $62,884,343
Grants and contracts ................................ 585,485 94,370 33,642
------------- ------------- -----------
63,056,604 54,288,661 62,917,985
Costs and expenses
Product costs........................................ 57,262,340 52,337,266 60,374,171
Research and development costs ...................... 1,338,703 2,204,993 2,368,880
Selling, general and administrative expenses......... 4,789,096 7,516,458 8,280,756
------------ ------------ -----------
63,390,139 62,058,717 71,023,807
Loss from operations ................................ (333,535) (7,770,056) (8,105,822)
Other income (expense), net
Interest income...................................... 361,938 408,097 216,934
Interest expense..................................... (829,231) (681,859) (657,059)
Other, net .......................................... (203,510) 21,356 (3,837)
------------- ------------- -------------
(670,803) (252,406) (443,962)
Net loss ............................................ $(1,004,338) $(8,022,462) $(8,549,784)
Proforma net loss per share ......................... $ (.15) $ (1.29) $ (1.62)
Proforma weighted average number of shares
outstanding ........................................ 6,590,710 6,203,117 5,285,064
The accompanying notes are an integral part of these statements.
</TABLE>
- 84 -
<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 Products............... 12,132,173 - 12,132,173
Distributions to S-corporation shareholders.......... - (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
Distributions to S-corporation shareholders ......... - (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 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
Distributions to S-corporation shareholders ......... - (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
</TABLE>
The accompanying notes are an integral part of these statements.
- 85 -
<PAGE>
<TABLE>
<CAPTION>
Supplemental Financial Statements
Agritope
Combined Statements of Cash Flows
For the Year Ended September 30 1996 1995 1994
Cash flows from operating activities
<S> <C> <C> <C>
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 ........................... 474,256 859,641 714,420
Loss on disposition of property and investments ......... 64,126 29,560 74,130
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) 9,137 6,562
Increase (decrease) in accounts payable and
accrued liabilities ................................... 2,122,118 (12,991) 1,678,494
Common stock issued as compensation for services......... 14,500 69,998 50,392
Compensation expense for stock option grants and
deferred salary increases ............................. 229,164 318,375 343,922
----------- ----------- -----------
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)
Other investments ....................................... (54,278) 48,990 (99,122)
Minority Interest in affiliated companies ............... 215,407 - -
------------ ------------ ------------
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 ................ 975,000 500,000 1,075,000
Issuance of long-term debt .............................. 15,575 83,034 78,760
Principal payments on long-term debt .................... (217,883) (166,955) (116,020)
Borrowings from shareholders ............................ 255,764 8,365 410,741
Principal payments on borrowings from
shareholders........................................... (103,833) (368,327) (58,359)
Distributions to S-corporation shareholders.............. - (334,000) (540,000)
Cash from Epitope Medical Products ...................... 3,018,636 8,330,854 12,132,173
----------- ----------- -----------
Net cash provided by financing activities ............... 3,943,259 8,052,971 12,982,295
Net increase in cash and cash equivalents ............... 656,789 921,006 956,783
Cash and cash equivalents at beginning of year .......... 4,246,687 3,325,681 2,368,898
----------- ----------- -----------
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>
- 86 -
<PAGE>
<TABLE>
<CAPTION>
Supplemental Financial Statements
Epitope, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30 1996 1995 1996
Proforma (1)
Assets
Current assets
<S> <C> <C> <C>
Cash and cash equivalents (Note 2) ............... $ 5,699,263 $ 4,259,897 $ 5,699,263
Marketable securities (Note 2) ................... 18,818,120 17,080,246 18,818,120
Trade accounts receivable, net (Note 2) .......... 4,270,771 2,226,865 4,270,771
Other accounts receivable ........................ 206,420 1,632,307 206,420
Inventories (Note 2) ............................. 7,728,117 4,673,187 7,728,117
Prepaid expenses ................................. 180,174 247,191 180,174
------------ ------------ ------------
Total current assets ............................. 36,902,865 30,119,693 36,902,865
Property and equipment, net (Notes 2 and 4) ...... 4,201,412 4,058,700 4,201,412
Patents and proprietary technology, net
(Note 2) ........................................ 1,111,478 555,767 1,111,478
Investment in affiliated companies (Note 3) ...... 2,651,294 2,328,140 2,651,294
Other assets and deposits (Note 5) ............... 343,769 364,978 257,635
----------- ----------- -----------
$45,210,818 $37,427,278 $45,124,684
Liabilities and Shareholders' Equity
Current liabilities
Borrowings under bank line of credit (Note 5) .... $ 4,125,000 $ 3,150,000 $ 4,125,000
Subordinated notes (Note 5) ...................... 2,236,628 - 2,236,628
Current portion of long-term debt ................ 98,368 196,134 98,368
Convertible notes, due 1997 (Notes 5 and 13) ..... 3,620,003 - 240,003
Accounts payable ................................. 3,127,051 2,308,364 3,127,051
Salaries, benefits and other accrued liabilities
(Notes 2 and 9) ................................ 2,576,302 3,251,126 2,576,302
----------- ------------ -----------
Total current liabilities ........................ 15,783,352 8,905,624 12,403,352
Long-term debt, less current portion (Note 5) .... 527,973 632,515 527,973
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 - 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 ................... 100,973,693 93,953,358 105,484,213
Accumulated deficit .............................. (72,289,607) (70,699,683) (73,506,261)
------------- ------------- -------------
28,684,086 23,253,675 31,977,952
$45,210,818 $37,427,278 $45,124,684
</TABLE>
(1) Reflects the proforma effect of conversion of $3,380,000 principal amount
of Agritope notes into 250,367 shares of common stock of Epitope at an exchange
price of $13.50 per share (see Note 13).
The accompanying notes are an integral part of these statements.
- 87 -
<PAGE>
<TABLE>
<CAPTION>
Supplemental Financial Statements
Epitope, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Year Ended September 30 1996 1995 1994
Revenues
<S> <C> <C> <C>
Product sales .................................... $ 67,335,497 $ 57,001,141 $ 65,465,141
Grants and contracts ............................. 1,314,756 143,042 58,202
------------ ------------ ------------
68,650,253 57,144,183 65,523,343
Costs and expenses
Product costs .................................... 59,943,769 55,500,278 62,515,490
Research and development costs ................... 4,504,541 6,822,239 6,050,206
Selling, general and administrative expenses...... 9,822,587 14,199,318 11,347,652
------------ ------------ ------------
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
Interest income................................... 1,386,968 1,164,840 454,401
Interest expense.................................. (829,231) (681,859) (657,059)
License fee....................................... 5,000,000 - -
Other, net........................................ (202,017) 21,037 (5,378)
------------ ----------- -----------
5,355,720 504,018 (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 ..................................... 13,181,420 12,406,234 10,570,129
The accompanying notes are an integral part of these statements.
</TABLE>
- 88 -
<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 ........... 52,488 636,293 - 636,293
Common stock issued as
compensation .......................................... 19,678 368,778 - 368,778
Compensation expense for
stock option grants ................................... - 1,167,272 - 1,167,272
Common stock issued upon
exercise of warrants .................................. 618,291 9,718,259 - 9,718,259
Common stock issued upon
exchange of convertible notes ......................... 28,672 559,964 - 559,964
Common stock issued in
private placement ..................................... 1,115,500 17,057,563 - 17,057,563
Equity issuance costs .................................. - (3,375,528) - (3,375,528)
Distributions to S-corporation shareholders............. - - (540,000) (540,000)
Net loss for the year .................................. - - (14,598,041) (14,598,041)
----------- ------------- ------------- -------------
Balances at September 30, 1994 ......................... 11,446,551 71,581,311 (51,492,049) 20,089,262
Common stock issued upon
exercise of options ................................... 183,525 2,145,673 - 2,145,673
Common stock issued as
compensation .......................................... 16,013 266,800 - 266,800
Compensation expense for
stock option grants ................................... - 1,374,710 - 1,374,710
Common stock issued upon
exercise of warrants .................................. 1,336,000 18,892,750 - 18,892,750
Common stock issued upon
exchange of convertible notes ......................... 23,041 449,991 - 449,991
Equity issuance costs .................................. - (757,877) - (757,877)
Distributions to S-corporation shareholders............. - - (334,000) (334,000)
Net loss for the years ................................. - - (18,873,634) (18,873,634)
------------ ------------ ------------- -------------
Balances at September 30, 1995 ......................... 13,005,130 93,953,358 (70,699,683) 23,253,675
Common stock issued upon
exercise of options ................................... 386,550 4,886,118 - 4,886,118
Common stock issued as compensation..................... 19,353 263,586 - 263,586
Compensation expense for stock
option grants ......................................... - 1,044,183 - 1,044,183
Common stock issued upon
exercise of warrants .................................. 46,350 826,600 - 826,600
Equity issuance costs .................................. - (152) - (152)
Distributions to S-corporation shareholders............. - - (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>
- 89 -
<PAGE>
<TABLE>
<CAPTION>
Supplemental Financial Statements
Epitope, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Year Ended September 30 1996 1995 1994
Cash flows from operating activities
<S> <C> <C> <C>
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 .......................... 1,267,141 1,654,936 1,365,496
Loss on disposition of property ........................ 63,028 29,879 75,671
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) 2,260,373 2,008,369
Common stock issued as compensation for
services.............................................. 263,586 266,800 368,778
Compensation expense for stock option grants and
deferred salary increases ............................ 1,044,183 1,374,710 1,259,273
----------- ----------- -----------
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 ............ 45,870,396 4,718,162 -
Additions to property and equipment .................... (1,105,500) (1,420,428) (2,702,657)
Proceeds from sale of property ......................... 7,432 14,343 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 ............... 975,000 500,000 1,075,000
Issuance of long-term debt ............................. 15,575 83,034 78,760
Principal payments on long-term debt ................... (217,883) (166,955) (116,020)
Proceeds from issuance of common stock ................. 5,885,573 21,060,912 24,387,702
Cost of common stock issuance .......................... (152) (757,877) (310,849)
Borrowings from shareholders ........................... 255,764 8,365 410,741
Principal payments on borrowings from
shareholders ......................................... (103,833) (368,327) (58,359)
Distributions to S-corporation shareholders............. - (334,000) (540,000)
------------ ------------ ------------
Net cash provided by financing activities .............. 6,810,044 20,025,152 24,926,975
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 ......... 4,259,897 11,024,997 8,556,676
------------ ------------ ------------
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>
- 90 -
<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 percent 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, liabilities, revenues
and expenses of each group are included in the respective financial statements
of the applicable group. Cash, cash equivalents and marketable securities have
been allocated 80 percent to Epitope Medical Products and 20 percent to
Agritope. Cash advanced and allocated by the Company to business units of the
Agritope group has been reflected as contributed 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.
See 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 corporate overhead 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. These activity indicators, which will be reviewed periodically and
adjusted to reflect changes in utilization, include number of employees, number
of computers, and level of expenditures. 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 .......................................... 1,069,249 1,892,370 1,735,688
----------- ---------- ----------
Consolidated ...................................... $4,097,430 $5,467,439 $3,635,657
</TABLE>
- 91 -
<PAGE>
Notes to Supplemental Financial Statements, Continued
If the Agritope Stock Proposal is approved, the Company will provide holders of
Epitope Medical Products and Agritope common stock separate financial statements
prepared in accordance with generally accepted accounting principles,
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
(representing direct and indirect production costs) or estimated market.
Harvested crops and frozen strawberry inventories (included in finished goods)
are valued at the lower of average cost or market. Inventory components are
summarized as follows:
- 92 -
<PAGE>
Notes to Supplemental Financial Statements, Continued
<TABLE>
<CAPTION>
September 30 1996 1995
Epitope Medical Products
<S> <C> <C>
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
</TABLE>
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 reviews its long-lived assets for
impairment periodically 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 considered 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.
- 93 -
<PAGE>
Notes to Supplemental Financial Statements, Continued
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:
<TABLE>
<CAPTION>
1996 1995 1994
Amortization for the year ended
September 30,
<S> <C> <C> <C>
Epitope Medical Products $ 172,095 $ 130,313 $ 101,339
Agritope 42,456 23,964 13,487
--------- --------- ---------
Consolidated $ 214,551 $ 154,277 $ 114,826
Accumulated Amortization at
September 30,
Epitope Medical Products $ 621,110 $ 449,015 $ 318,702
Agritope 79,907 37,451 13,487
--------- ---------- ----------
Consolidated $ 701,017 $ 486,466 $ 332,189
</TABLE>
Fair Value of Financial Instruments. The carrying amount for cash equivalents,
marketable securities, accounts receivable, borrowings under bank line of
credit, subordinated notes, and accounts payable approximates fair value because
of the immediate or short-term maturity of these financial instruments. The
carrying amount for long-term debt and convertible notes approximates fair value
because the related interest rates are comparable to rates currently available
to the Company for debt with similar terms and maturities.
Revenue Recognition. Product revenues are recognized when the related products
are shipped. Grant and contract revenues include funds received under research
and development agreements with various entities. These grants and contracts
generally provide for progress payments as expenses are incurred and certain
research milestones are achieved. Revenue related to such grants and contracts
is recognized as research milestones are achieved.
Accounts receivable are stated net of an allowance for doubtful accounts as
follows:
<TABLE>
<CAPTION>
September 30 1996 1995
<S> <C> <C>
Epitope Medical Products $ 6,872 $ 6,872
Agritope 64,571 119,172
-------- ---------
Consolidated $ 71,443 $126,044
</TABLE>
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.
- 94 -
<PAGE>
Notes to Supplemental Financial Statements, Continued
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. 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. The termination of the S-Corporation status is not expected
to have a material impact on future results of operations. As of September 30,
1996, the Company had net operating losses of approximately $66.7 million
available to offset future federal and state taxable income, including taxable
income of A&W. See Note 7.
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. The weighted average
number of shares has been adjusted to reflect the issuance of 520,000 additional
shares issued in conjunction with the merger with A&W (see Note 13). 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
Epitope Medical Products
<S> <C> <C> <C>
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 -
Distributions to S-corporation shareholders
declared but not paid............................ 1,325,000 - -
</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.
- 95 -
<PAGE>
Notes to Supplemental Financial Statements, Continued
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 grape plant propagation
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 4 percent minority
interest in Vinifera and relinquished the majority interest to Agritope in
August 1996.
The reacquisition of Vinifera in August 1996 has been accounted for under the
purchase method. The net purchase price of $916,000 has been allocated to
tangible net assets. Vinifera's results of operations are including in the
Agritope Combined Statements of Operations and in the Consolidated Statements of
Operations through May 1995, and for the month of September 1996. The following
summarized proforma results of operations are presented as if the reacquisition
had occurred on the first day of each period shown.
<TABLE>
<CAPTION>
Year Ended September 30 1996 1995
Proforma Proforma
Supplemental Adjustments Proforma Supplemental Adjustments Proforma
<S> <C> <C> <C> <C> <C> <C>
Agritope
Revenues 63,056,604 833,949 63,890,553 54,288,661 276,588 54,565,249
Net loss (1,004,338) (1,464,002) (2,468,340) (8,022,462) (460,296) (8,482,758)
Proforma loss per share (0.15) (0.22) (0.37) (1.29) (0.07) (1.37)
Consolidated
Revenues 68,650,253 833,949 69,484,202 57,144,183 276,588 57,420,771
Net loss (264,924) (1,464,002) (1,728,926) (18,873,634) (460,296)(19,333,930)
Loss per share (0.02) (0.11) (0.13) (1.52) (0.04) (1.56)
In May 1995, Agritope's wholly owned subsidiary, Agrimax Floral Products, Inc.
(Agrimax), ceased operations as an independent entity. UAF, Limited Partnership
(UAF), in which Agrimax obtained an 18 percent interest, was formed to combine
the Agrimax operations in Charlotte, North Carolina, with those of Universal
American Flowers, Inc. in Tampa, Florida and Hammond, Louisiana. In connection
with the UAF transaction, Agrimax contributed inventory, operating assets and
the right to use its proprietary floral preservative and certain trademarks. In
May 1996, the equity interest of Agrimax was reduced to 9 percent as the result
of a recapitalization of UAF.
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 percent equity interest in Petals.
- 96 -
<PAGE>
Notes to Supplemental Financial Statements, Continued
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.
Note 4 Property and Equipment
Property and equipment are summarized as follows:
</TABLE>
<TABLE>
<CAPTION>
September 30 1996 1995
Epitope Medical Products
<S> <C> <C>
Research and development laboratory equipment............. $ 1,056,883 $ 898,716
Manufacturing equipment .................................. 1,291,546 1,296,416
Office furniture and equipment ........................... 1,899,948 2,041,897
Leasehold improvements ................................... 1,084,660 1,084,660
Construction in progress ................................. 134,557 70,961
----------- -----------
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 ..................................................... $ 420,817 $ 420,817
Buildings and improvements ............................... 717,508 717,508
Research and development laboratory equipment ............ 220,919 196,255
Manufacturing and transportation equipment ............... 2,088,669 1,789,933
Office furniture and equipment ........................... 188,251 196,119
Leasehold improvements ................................... 166,398 173,262
Construction in progress ................................. 499,980 34,650
------------ -----------
4,302,542 3,528,544
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 ............................... 717,508 717,508
Research and development laboratory equipment ............ 1,277,802 1,094,971
Manufacturing and transportation equipment ............... 3,380,215 3,086,349
Office furniture and equipment ........................... 2,088,199 2,238,016
Leasehold improvements ................................... 1,251,058 1,257,922
Construction in progress ................................. 634,537 105,611
------------ -----------
9,770,136 8,921,194
Less accumulated depreciation and amortization............ (5,568,724) (4,862,494)
------------- -------------
$ 4,201,412 $ 4,058,700
</TABLE>
- 97 -
<PAGE>
Notes to Supplemental Financial Statements, Continued
Note 5 Debt
Bank Line of Credit. At September 30, 1996, A&W 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 percent; 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.
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 percent 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 percent 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.
Long-term Debt. Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
September 30 1996 1995
Agritope
<S> <C> <C>
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 ................................ 59,824 138,976
Installment note, interest at 9.25%,
due June 1997, secured by equipment .............................. 263,717 319,973
Note payable, interest at prime,
due October 1997, unsecured ...................................... 100,000 100,000
Bank installment note, interest at prime plus
1.25%, due March 1998, secured by property ....................... 202,800 219,700
---------- ----------
626,341 828,649
Less current portion .............................................. (98,368) (196,134)
----------- ------------
$ 527,973 $ 632,515
</TABLE>
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.
- 98 -
<PAGE>
Notes to Supplemental Financial Statements, Continued
<TABLE>
<CAPTION>
As of September 30, 1996, maturities for long-term debt are as follows:
Year Ending September 30
<C> <C>
1997.................................................................................................... $ 98,368
1998 ................................................................................................... 525,532
1999 ................................................................................................... 2,441
---------
$626,341
</TABLE>
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 percent. The Company intends to pay these notes in full following
the effective date of the merger. See Note 13.
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:
<TABLE>
<CAPTION>
Purpose Shares
<S> <C>
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
</TABLE>
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>
- 99 -
<PAGE>
Notes to Supplemental Financial Statements, Continued
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 percent 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 percent 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 $ 1.09-24.94 3,483,432 $ 1.09-24.94 3,052,653 $ 1.09-24.94
Granted ............... 901,379 9.81-18.13 802,050 14.94-18.88 589,850 14.38-22.94
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 $ 3.50-24.94 3,636,103 $ 1.09-24.94 3,483,432 $ 1.09-24.94
Exercisable ........... 2,302,212 $ 3.50-24.94 2,002,925 $ 1.09-24.94 1,557,505 $ 1.09-24.94
</TABLE>
- 100 -
<PAGE>
Notes to Supplemental Financial Statements, Continued
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 percent 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 percent. 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
percent 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. These net operating loss carryforwards will generally
expire from 2001 through 2011 if not used by the Company. 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.
- 101 -
<PAGE>
Notes to Supplemental Financial Statements, Continued
Significant components of the Company's deferred tax asset were as follows (in
thousands):
<TABLE>
<CAPTION>
September 30 1996 1995
<S> <C> <C>
Net operating loss carryforwards.............................. $ 24,489 $ 26,110
Deferred compensation......................................... 1,997 1,665
Research & experimentation credit carryforwards............... 1,151 1,151
Accrued expenses.............................................. 317 238
Other......................................................... 495 384
--------- --------
Gross deferred tax assets..................................... 28,449 29,548
Valuation allowance........................................... (28,449) (29,548)
--------- --------
Net deferred tax asset........................................ - -
</TABLE>
No benefit for the Company's deferred tax assets has been recognized in the
accompanying financial statements as they do not satisfy the recognition
criteria set forth in SFAS 109. The valuation allowance decreased $1.1 million
in 1996, increased $7.5 million in 1995, and increased $6.2 million in 1994. The
research and development tax credit carryforwards will generally expire from
2001 through 2010 if not used by the Company.
The expected federal statutory 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 1996 and 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 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." Expenses related to such arrangements are included under the caption
"Research and development costs." The activity related to these arrangements is
summarized as follows:
<TABLE>
<CAPTION>
Year Ended September 30
<S> <C> <C> <C>
Epitope Medical Products 1996 1995 1994
SB research projects...................................... 712,000 40,000 -
Other..................................................... 17,271 8,672 24,560
--------- -------- --------
729,271 48,672 24,560
Project related expenses.................................. 1,087,713 108,645 46,493
</TABLE>
- 102 -
<PAGE>
Notes to Supplemental Financial Statements, Continued
<TABLE>
<CAPTION>
Agritope 1996 1995 1994
<S> <C> <C> <C>
Government research grants................................ 144,987 16,358 33,642
Research projects with strategic partners................. 326,462 40,000 -
Other..................................................... 114,036 38,012 -
--------- -------- -----------
585,485 94,370 33,642
Project related expenses.................................. 461,460 318,401 35,728
</TABLE>
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. When such funds are disbursed, they will be
recognized as revenue in accordance with the Company's revenue recognition
policy. See Note 2.
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:
- 103 -
<PAGE>
Notes to Supplemental Financial Statements, Continued
<TABLE>
<CAPTION>
Epitope
Medical
Year Ending September 30 Products Agritope Consolidated
<S> <C> <C> <C>
1997 .............................................. $ 345,577 $ 399,731 $ 745,308
1998 .............................................. 345,576 317,394 662,970
1999 .............................................. 346,356 282,000 628,356
2000 .............................................. 109,992 282,000 391,992
2001 .............................................. - 182,000 182,000
------------ --------- ----------
$1,147,501 $1,463,125 $2,610,626
</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. 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 per year for
facilities leased from certain shareholders.
The Company is also contingently liable for a lease which has been assigned to
UAF and the lease of property which has been subleased to Petals in the
following amounts:
<TABLE>
<CAPTION>
Year Ending September 30
<C> <C>
1997 ............................................................................................ $ 328,953
1998 ............................................................................................ 341,304
1999 ............................................................................................ 347,184
---------
$1,017,441
</TABLE>
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 percent of an employee's basic
contribution, not to exceed 2.5 percent of an employee's compensation. The Board
of Directors has the authority to increase or decrease the 50 percent 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.
- 104 -
<PAGE>
Notes to Supplemental Financial Statements, Continued
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.
Epitope Medical Products
In thousands
<TABLE>
<CAPTION>
Geographic
Areas Revenues Operating Loss Identifiable Assets
1996 1995 1994 1996 1995 1994 1996 1995 1994
United
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
- 105 -
</TABLE>
<PAGE>
Notes to Supplemental Financial Statements, Continued
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 $1.2 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 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 percent 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 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 in the four months ended October 31, 1996, coupled with
a shortfall in sales and larger operating loss than expected at Petals 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 non-cash charge to results of operations of
approximately $1.9 million in the first quarter of fiscal 1997, reflecting the
permanent impairment in the value of its investment in affiliated companies.
- 106 -
<PAGE>
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 page of this report.
(b) Reports on Form 8-K.
None.
- 107 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this amendment to this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 12, 1997.
EPITOPE, INC.
By /s/ GILBERT N. MILLER
Gilbert N. Miller
Executive Vice President and
Chief Financial Officer
- 108 -
<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").
- 109 -
<PAGE>
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
- 110 -
<PAGE>
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 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.
10.11 Office/Warehouse lease dated as of December 12, 1996, between
Williamson and Andrew and Andrew and Williamson Sales, Co.*
10.12 Agreement dated December 9, 1987, between Registrant and
Adolph Ferro, Ph.D. Incorporated by reference to Exhibit 4.3
to the 1988 S-1.*
10.13 Amendment to Agreement of December 9, 1987, dated November 11,
1996, between Registrant and Adolph J. Ferro, Ph.D.*
10.14 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.
10.15 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.
10.16 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.
10.17 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.**
10.18 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.**
10.19 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).*
10.20 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").*
10.21 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.*
10.22 Employment Agreement dated January 28, 1990, between Gilbert
N. Miller and Registrant. Incorporated by reference to Exhibit
10.19 to the 1994 10-K.*
- 111 -
<PAGE>
10.23 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.*
10.24 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.*
10.25 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).*
10.26 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).*
10.27 Employment Agreement dated December 12, 1996, between Fred L.
Williamson and Andrew and Williamson Sales, Co.* **
10.28 Credit Agreement dated August 5, 1996, between Wells Fargo
Bank, National Association and Andrew and Williamson Sales,
Co.**
10.29 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.**
* Management contract or compensatory plan or arrangement.
** Previously filed.
- 112 -
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/A.
Price Waterhouse LLP
Portland, Oregon
March 12, 1997
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Form 10-K/A of Epitope, Inc., of our report
dated November 6, 1996, relating to the financial statements of Andrew and
Williamson Sales, Co., referenced in such Form 10-K/A.
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, 33-631067, and 33-32673), Form S-8
(Numbers 33-63220, 33-63218, 33-41712, 33-13416, 33-21545, 33-82788, and
33-60789), and Form S-4 (Number 33-15705) of Epitope, Inc., of our report.
Boros & Farrington, APC
March 10, 1997
