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Epitope, Inc.
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[Graphic design containing three copies of the
company's "E-Design" logo.]
EPITOPE, INC.
1996 ANNUAL REPORT
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Comparative Financial Data
Year ended September 30
(in thousands, except per share data)
Epitope Medical Products (a) 1996 1995 1994 1993 1992
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Combined operating results
Revenues................................ $ 5,594 $ 2,856 $ 2,605 $ 2,759 $ 2,985
Operating loss.......................... (5,287) (11,608) (6,284) (6,617) (5,327)
Proforma net profit (loss).............. (b) 739 (10,851) (6,048) (7,893) (5,106)
Proforma net profit (loss) per share.... .05 (.87) (.57) (.84) (.56)
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
Group equity............................ 22,532 18,035 15,661 9,280 7,178
Agritope (a)(c) 1996 1995 1994 1993 1992
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Combined operating results
Revenues................................ $63,057 $54,289 $62,918 $39,796 $30,348
Operating loss.......................... (334) (7,770) (8,106) (5,707) (2,397)
Proforma 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)
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..............(d) 3,620 3,620 4,070 4,630 5,495
Group equity (deficit).................. 6,152 5,219 4,429 (186) 1,360
Epitope, Inc. and Subsidiaries (c) 1996 1995 1994 1993 1992
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Consolidated operating results
Revenues................................ $68,650 $57,144 $65,523 $42,554 $33,333
Operating loss.......................... (5,621) (19,378) (14,390) (12,324) (7,724)
Net loss................................(b) (265) (18,874) (14,598) (13,784) (7,578)
Net loss per share...................... (.02) (1.52) (1.38) (1.47) (.83)
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..............(d) 3,620 3,620 4,070 4,630 5,495
Shareholders' equity.................... 28,684 23,254 20,089 9,095 8,539
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Notes--
(a) On April 29, 1997, 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. Combined operating results and balance
sheet data have been prepared to reflect, on a separate basis, the proforma
operating results and financial condition of the two groups.
(b) Includes $5.2 million license fee and related accrued interest.
(c) In December 1996, the company acquired Andrew & Williamson Sales Co. in
exchange for 520,000 shares of common stock of Epitope, Inc. The transaction was
a merger accounted for as a pooling-of-interests. Comparative financial data
have been restated to give effect to the merger as if it occurred on the first
day of the earliest period presented.
(d) In November 1996, $3.4 million notes were converted into 250,367 shares of
common stock of Epitope, Inc. at a reduced exchange price. Accordingly the
Company will recognize a charge to income in the first quarter of fiscal 1997 of
approximately $1.2 million representing the fair value of additional shares
issued.
The Company's financial statements and other information regarding its business
appear in the Prospectus/Proxy Statement for the 1997 annual meeting of
shareholders and the Annual Report on Form 10-K for the year ended September 30,
1996.
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1996...A Year of Transition and Accomplishment...
To Our Shareholders and Employees:
Fiscal 1996 was a year of transition and accomplishment for Epitope, Inc.
We entered the year with a leaner, more efficient organization and a number of
lofty goals. We closed the year with those goals achieved and with a strong
organization poised for an exciting future.
After years of struggling to gain FDA clearance of our primary oral
specimen-based diagnostic products, and after intense effort to open and develop
markets for these products, we can report success on both counts, resulting in
dramatically improved financial results for fiscal 1996. As restated to take
into account our December 1996 acquisition of Andrew & Williamson Sales Co.
(A&W), a California-based fruit and vegetable producer and distributor, our
fiscal year loss improved to $265,000 ($.02 per share) from $18.9 million ($1.52
per share) in 1995. We achieved cost reductions from our September 1995
restructuring program and our divestiture of an unprofitable agricultural
operation. We accomplished a 73% increase in Epitope Medical Products' sales due
to the success of our EpiScreen(TM)/OraSure(R) oral specimen collection device.
And we realized a $5.2 million payment from our marketing partner, SmithKline
Beecham plc (SB).
Strategically, we reorganized the company along clear business lines,
recognizing that we are operating in two distinct business sectors--medical
products and agriculture. After fiscal year-end, we announced plans to create
two classes of common stock. One will track our medical products business,
Epitope Medical Products. The second will track our agricultural operations,
Agritope. If approved by our shareholders at the 1997 annual meeting, this move
will allow investors to follow and invest in each business independently.
We are pleased with the achievements of both of our businesses. Among them:
EPITOPE MEDICAL PRODUCTS
Fiscal 1996 was a year of accomplishment for Epitope Medical Products. Its
foundation product is the EpiScreen/OraSure oral specimen collection device that
provides a highly accurate alternative to blood testing. The FDA-cleared device
is used by physicians and other health care professionals for HIV/AIDS
diagnosis. The device is also used by the life insurance industry for detection
of HIV status and tobacco and cocaine usage.
Financial Results. Epitope Medical Products earned a net profit of $739,000
on revenues of $5.6 million for the fiscal year ending September 30, 1996. By
comparison, Epitope Medical Products reported a loss of $10.9 million for fiscal
1995. Our 1996 performance included recognition of a one-time $5.2 million
payment from SB.
The insurance industry reacted favorably to a product that could eliminate
the expense of drawing a blood sample by utilizing an oral specimen. Insurance
industry purchases of the EpiScreen device in fiscal 1996 drove sales to $3.3
million, a more than three-fold increase over fiscal 1995 levels. Significantly,
$1.5 million of those sales occurred in the fourth quarter following FDA
clearance of the OraSure Western blot confirmatory test.
FDA Clearances. OraSure Western blot clearance was one of two FDA decisions
with an important impact on Epitope Medical Products' 1996 performance. In
April, the FDA authorized an extension of the shelf-life of the
EpiScreen/OraSure device from nine months to two years. The extension
substantially enhanced the suitability of the product for its intended
distribution channels and also triggered realization of the $5.2 million license
fee and related accrued interest from SB. Two months later, the agency cleared
our application for the OraSure Western blot HIV-1 confirmatory test. This
clearance permits both screening and confirmatory tests to be run on a single
oral specimen. Our application was based on clinical trials in which
EpiScreen/OraSure provided the correct result or triggered appropriate follow-up
testing in 3,569 out of 3,570 cases (99.97%). These clinical trial results were
published in the January 15, 1997 issue of the Journal of the American Medical
Association.
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Marketing. On August 5, SB introduced Epitope Medical Products' OraSure
HIV-1 testing system in U.S. professional markets. The product is now being
offered to physicians and other medical professionals by over 3,300 sales
representatives. SB also kicked off an advertising campaign in prominent medical
journals such as The New England Journal of Medicine and Annals of Internal
Medicine, introduced an information phone service, placed informational
materials on the Internet, and created a Physicians Referral Network for
consumers to identify doctors in their area who offer confidential HIV testing
using OraSure.
SB markets the collection device under the OraSure brand name to healthcare
professionals, primarily in the U.S. Epitope Medical Products markets the device
under the trade name EpiScreen for use by the U.S. life insurance industry and
in certain international markets. Epitope Medical Products is actively pursuing
foreign markets in Asia and South America. Recurring sales are being developed
in Thailand and South America.
Future Products. With OraSure-based products now moving into various
markets, we continue to invest in new products and in the development of
advanced diagnostic technologies.
In 1996, the FDA gave two other companies the go-ahead for sale of
blood-based over-the-counter home collection systems for HIV testing. We believe
these products will pave the way for a home collection kit based on the OraSure
oral specimen collection system. Clinical trials to support an application to
the FDA for use of OraSure as a home collection kit are currently in process.
Upon approval, Epitope would manufacture devices for marketing by SB in the U.S.
Consumers would collect their own oral specimens with the OraSure device, mail
the samples to a clinical laboratory for HIV testing and call a toll-free number
to get their results and appropriate counseling.
We are currently developing OraQuick(R) HIV, a one-step, rapid-format oral
fluid testing system designed to provide test results within minutes. We believe
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.
AGRITOPE
Fiscal 1996 was a year of progress for Agritope. During the year, we laid a
framework for a new infrastructure that will define the Company's agricultural
biotechnology unit for years to come.
Historically, Agritope has conducted a research and development program
focused on the use of genetic engineering techniques and other modern methods to
produce novel agricultural products. As our development program approached the
stage where products incorporating our technology were close to market
introduction, it became clear that vertical integration would enable Agritope to
attain the fullest economic benefit from these products and its technology.
Financial Results. Improvements in Agritope's financial results, restated
to include A&W's operations, have accompanied the strategic organizational
changes. Agritope posted a net loss of $1.0 million on revenues of $63.1 million
in fiscal 1996. By comparison, Agritope recorded a loss of $8.0 million on
revenues of $54.3 million in fiscal 1995.
Regulatory Progress. Agritope achieved two important regulatory milestones
in March 1996. First, the USDA issued a determination that allows growing and
shipping of Agritope's prototype cherry tomato anywhere in the U.S. in the same
manner as conventionally developed tomatoes. Separately, the FDA announced its
determination that the tomato prototype has not been significantly altered with
respect to food safety or nutritive value when compared to conventional
tomatoes.
Patents. Agritope continued to strengthen its proprietary position in 1996.
In December 1996, it received a second patent on its SAMase gene and a notice of
allowance of a patent application covering a promoter which regulates expression
of the gene. In January 1997, a notice of allowance was received for an
application regarding another promoter. Both promoters are in use in products
currently under development.
<PAGE>
Superior Tomato Associates. In February 1996, Agritope formed Superior
Tomato Associates, LLC (Superior Tomato). Superior Tomato is a three-way venture
of Sunseeds Company, A&W and Agritope. Sunseeds, based in Morgan Hill,
California, develops and markets a broad line of seed varieties, including
"Shady Lady," currently the leading fresh market tomato variety in California.
Superior Tomato will utilize Agritope's SAMase ethylene control technology and
Sunseeds' germplasm and breeding experience to create tomatoes with improved
postharvest storage life and other characteristics advantageous to the fresh
market tomato industry. A&W will manage production and wholesale distribution of
the tomatoes.
Andrew and Williamson. Our collaboration with A&W as participants in
Superior Tomato gave us the opportunity to get to know A&W's business and
operating style. We became convinced that A&W could play an important role in
Agritope's vertical integration strategy. A&W produces and distributes a
diversified mix of fruits and vegetables which fits well into our research and
development program. A&W is one of the largest producers and distributors of
vine ripe cherry, roma and fresh market tomatoes in the U.S. and its executives
are well-respected in the U.S. produce industry.
On December 12, 1996, we completed a merger that resulted in A&W's becoming
a wholly owned subsidiary of the Company. Of great strategic importance, the A&W
merger provides Agritope with a captive distribution channel and a vital outlet
for its science. We believe A&W will provide Agritope with the opportunity to
realize a greater return on its development work than can be achieved by
agricultural science companies that rely solely on royalty-based income.
Vinifera. In August, we acquired a majority interest in Vinifera, Inc.
Based in Petaluma, California, Vinifera propagates and grows disease resistant
grape plants. Vinifera's proprietary green-stem propagation methodology produces
field-ready disease-free plants. Vinifera is in the final stages of retrofitting
its greenhouse facilities to expand annual production capacity in order to meet
the growing demand for our high quality plants.
As a result of these strategic changes, Agritope now has three primary
operating units. Agritope itself houses the scientific resources, conducting
research and development concentrating on genetic advances in fruits and
vegetables. A&W provides production and distribution facilities for fruits and
vegetables. Vinifera conducts the Company's grape plant business.
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We enter 1997 with a full commitment to continue building our company's
revenue and profitability. We are a focused company with opportunities in two
distinctly different business areas. We believe the targeted stock concept, if
approved by our shareholders, will add value for our shareholders and refine our
management effectiveness.
Our foundation is biotechnology. Our vision for the future defines a major
corporation that develops and commercializes life-improvement science. We will
continue to invest in science and product development, and will seek to profit
from market-leading products.
We look forward to a successful 1997. Be assured your investment will
receive our total attention and best efforts.
Sincerely,
Adolph J. Ferro, Ph.D. Roger L. Pringle
President, Chief Executive Officer Chairman
March 1997
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BOARD OF DIRECTORS CORPORATE OFFICERS, CONT. SCIENTIFIC ADVISORY
BOARDS
ROGER L. PRINGLE (1,3) JOSEPH A. BOUCKAERT
Chairman of the Board President o EPITOPE MEDICAL
President, The Pringle Company Chief Executive Officer PRODUCTS
Vinifera
ADOLPH J. FERRO, PH.D. (1) DANIEL MALAMUD, PH.D.
President FRED L. WILLIAMSON Chair
Chief Executive Officer President Professor
Chief Executive Officer Department of Biochemistry
W. CHARLES ARMSTRONG (2) Andrew & Williamson School of Dental Medicine
Private Investor University of Pennsylvania
BYRON A. ALLEN, JR.
RICHARD K. DONAHUE Vice President J. RICHARD GEORGE, PH.D.
Vice Chairman Corporate Communications Vice President
Nike, Inc. Scientific Affairs
ANDREW S. GOLDSTEIN Epitope Medical Products
ANDREW S. GOLDSTEIN Secretary
Senior Vice President LESLEY M. HALLICK, PH.D.
Advanced Technology Development MARK V. ALLRED Vice President for Academic Affairs
Epitope Medical Products Controller Oregon Health Sciences University
MARGARET H. JORDAN GROUP MANAGEMENT JAMES I. MULLINS, PH.D.
President and Chief Professor of Microbiology and
Executive Officer o EPITOPE MEDICAL Medicine
Dallas Medical Resource PRODUCTS University of Washingtonn
R. DOUGLAS NORBY (2,3) ANDREW S. GOLDSTEIN
Executive Vice President Senior Vice President o AGRITOPE
Chief Financial Officer Advanced Technology Development
LSI Logic Corporation EUGENE W. NESTER, PH.D.
CHARLES E. BERGERON Chair
MICHAEL J. PAXTON Vice President Scientific Advisory Board
Chairman, President and Operations Professor and Chair
Chief Executive Officer Department of Microbiology
O'Cedar Holdings, Inc. J. RICHARD GEORGE, PH.D. University of Washington
Vice President
G. PATRICK SHEAFFER (1,2,3) Scientific Affairs RICHARD K. BESTWICK, PH.D.
Chairman, President and Chief Chief Operating Officer
Executive Officer Agritope Research and Development
Riverview Savings Bank o AGRITOPE
ROGER N. BEACHY, PH.D.
COMMITTEES OF THE BOARD FRED W. ANDREW Member and Scripps Family Chair
1. Executive Executive Vice President Head, Division of Plant Biology
2. Executive Compensation Andrew & Williamson The Scripps Research Institute
3. Audit Co-Director
KEITH ANDREW International Laboratory for Tropical
Vice President Agricultural Biotechnology
CORPORATE OFFICERS Sales
Andrew & Williamson PETER R. BRISTOW, PH.D.
ADOLPH J. FERRO, PH.D. Associate Plant Pathologist
President MATTHEW G. KRAMER Washington State University
Chief Executive Officer Vice President University of Washington
Product Development
GILBERT N. MILLER
Executive Vice President JAMES PRATT
Chief Financial Officer Vice President
Operations
JOHN H. FITCHEN, M.D. Vinifera
Chief Operating Officer
Epitope Medical Products FRED M. WILLIAMSON
Vice President
RICHARD K. BESTWICK, PH.D. Operations
Chief Operating Officer Andrew & Williamson
Agritope Research and Development
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CORPORATE
INFORMATION
CORPORATE HEADQUARTERS
Epitope, Inc.
Epitope Medical Products
Agritope
8505 S.W. Creekside Place
Beaverton, OR 97008
503.641.6115
Andrew & Williamson, Inc.
9940 Marconi Drive
San Diego, CA 92173
619.661.6004
Vinifera, Inc.
4288 Bodega Avenue
Petaluma, CA 94952
707.773.4414
TRANSFER AGENT
ChaseMellon Shareholder Services,
L.L.C.
Shareholder Relations
P.O. Box 469
Washington Bridge Station
New York, NY 10033
1.800.522.6645
TDD for hearing impaired
1.800.231.5469
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
121 S.W. Morrison Street
Suite 1800
Portland, OR 97204
GENERAL COUNSEL
Miller, Nash, Wiener, Hager &
Carlsen LLP
3500 U.S. Bancorp Tower
111 S.W. Fifth Avenue
Portland, OR 97204
STOCK INFORMATION
The Company's common stock is
traded on the Nasdaq National
Market System under the symbol
EPTO. Options in the Company's
common stock are traded on the
American Stock Exchange and on
the Chicago Board Options
Exchange.
FORM 10-K
A copy of the Company's Annual
Report on Form 10-K, filed
with the Securities and
Exchange Commission is
available without charge by
writing Mary W. Hagen,
Investor Relations Manager.
<PAGE>
EPITOPE, INC.
8505 S.W. Creekside Place
Beaverton, Oregon 97008
503.641.6115
<PAGE>
Please note that we do not publish quarterly reports. If you would like to be
on our mailing list for quarterly earnings news releases and Forms 10-Q,
indicate that on the reply card and we will add you to our mailing list.
You can obtain any of Epitope, Inc.'s recent news releases through a
fax-on-demand service by dialing 800-758-5804, extension 285632. Recent news
releases are posted on the Internet's World Wide Web at
http://www.prnewswire.com/cnoc/exec/menu?285632.
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